California Life And Health: Communication Breakdown

The California Life and Health Insurance Guarantee Association (CLHIGA) is a state-mandated program that protects policyholders in the event of their insurance company becoming insolvent. It covers various types of insurance policies, including whole life insurance, immediate annuities, and disability insurance. However, CLHIGA does not cover self-funded plans, where employers take on the financial risk of providing healthcare benefits. As of January 6, 2025, the maximum coverage limit for healthcare was set at $672,309. While CLHIGA provides valuable protection for policyholders, there may be specific situations where communication about California life and health insurance guarantee association is challenging or prohibited due to legal or contractual reasons.

The California Life and Health Insurance Guarantee Association (CLHIGA)

CLHIGA was activated on November 30, 2024, to provide coverage to CBL and BLIC policyholders. As of January 6, 2025, the maximum coverage limit for healthcare is $672,309, although this varies depending on the insurance company, with Golden State Mutual Life Insurance Company's limit set at $465,553, SeeChange Health Insurance Company at $519,764, and Penn Treaty Network America Insurance Company and American Network Insurance Company sharing the highest limit of $560,929.

It is important to note that the protection provided by CLHIGA is not unlimited. Coverage may be subject to substantial limitations or exclusions, and it is not a substitute for consumers' careful selection of insurers. Insurance companies are prohibited by law from using the existence of CLHIGA to induce the purchase of any insurance policy. Residents of California who purchase life and health insurance and annuities should be aware that the insurance companies licensed in the state to offer these types of insurance are members of CLHIGA.

CLHIGA's sister organization is CIGA (California Insurance Guarantee Association), which handles liability, auto, and workers' compensation claims.

Protecting policyholders

The California Life and Health Insurance Guarantee Association (CLHIGA) is a state-mandated program designed to protect policyholders in the event of their insurance company becoming insolvent or unable to meet its financial obligations. CLHIGA provides a safety net to ensure that policyholders continue to receive coverage and benefits even if their insurance company fails.

CLHIGA covers various types of insurance policies, including whole life insurance, immediate annuities, and disability insurance. These policies are protected, ensuring that policyholders do not lose their coverage or benefits if their insurer encounters financial difficulties. For example, if a policyholder is receiving a regular income from an immediate annuity and the insurance company becomes insolvent, they will continue to receive payments under CLHIGA.

However, it is important to note that CLHIGA does not cover self-funded plans. Self-funded plans are arrangements where employers take on the financial risk of providing healthcare benefits to their employees, rather than paying for traditional insurance coverage. Because these plans are not considered conventional insurance, they fall outside the protections provided by CLHIGA.

The costs of CLHIGA's obligations may be met by using assets attributable to covered policies or through reimbursement pursuant to its subrogation and assignment rights. The association is not required to guarantee or assume the contractual obligations of the insolvent insurer if they do not materially affect the economic values or benefits of the covered policy.

Insolvency of insurance companies

The insolvency of insurance companies can be a worrying event for policyholders, creditors, and other stakeholders. In the state of California, the Insurance Commissioner ("Commissioner") plays a crucial role in addressing such situations. When an insurance company licensed in California becomes insolvent, the Commissioner, upon a Superior Court's order, may take over the company's operations through a process called "conservation." During conservation, the Commissioner's primary duties include conserving assets for the benefit of policyholders and creditors and examining the company's financial records to determine if it can be rehabilitated. If rehabilitation is deemed feasible, the Commissioner may continue the insurance business as appropriate.

However, if rehabilitation is not possible, the situation may progress to "liquidation." Liquidation is the process where the Commissioner, again upon a Superior Court's order, terminates the insurance company's business by canceling all policies and ceasing the issuance of new or renewal policies. The Commissioner then sells the company's assets to generate cash to pay policyholder claims and creditors. The Conservation and Liquidation Office ("CLO") is a dedicated office within California's insurance department, staffed with insurance professionals who oversee the conservation and liquidation processes.

In the event of an insurance company's insolvency, policyholders may be protected by insurance guarantee associations, such as the California Life & Health Insurance Guarantee Association. These associations provide coverage to policyholders when their insurance company becomes insolvent. There are limits to the coverage provided by these associations, and in California, the limit for the California Insurance Guarantee Association (CIGA) is $500,000, except for Workers' Compensation claims. Policyholders with valid claims exceeding these limits will receive payment based on the assets remaining in the insolvent insurance company, typically resulting in less than 100% recovery.

The insolvency of insurance companies is not an uncommon occurrence. Several dozen insurance companies in the United States, including prominent names, have faced bankruptcy in the last three decades. For example, the Executive Life Insurance Company, based in California, filed for bankruptcy in 1991 due to disastrous investments in junk bonds. AIG, a well-known insurance and financial services company, was also significantly impacted by the 2008 financial crisis, leading to leadership changes and restructuring.

Types of policies covered

The California Life and Health Insurance Guarantee Association provides protection for residents with insurance policies in the event of an insurance company insolvency. The Association covers policies issued by member insurers, including life, health, and annuity insurers licensed to write business in California.

Most life insurance policies, health insurance policies, and annuity contracts are protected, subject to specific conditions and limitations. The Guarantee Association may provide direct coverage, or a financially sound insurer may assume responsibility for continuing coverage and paying covered claims.

The following types of policies are not protected by the California Life and Health Insurance Guarantee Association: policies sold by insurers not licensed to operate in California; policies issued by medical, health, or dental care service corporations; managed care plans; self-insured employer plans; fraternal benefit society insurance certificates; policy benefits the insurer does not guarantee, such as the non-guaranteed portion of a variable life insurance contract sold by prospectus; benefits for which the individual policyholder has assumed the risk of loss; guaranteed interest rate yields that exceed the rate specified by the California Life & Health Insurance Guarantee Association Act; most unallocated annuity contracts; and charitable gift annuities.

Variable annuity contracts with general account guarantees may be eligible for guaranty association coverage, but only to the extent of these guarantees. It is important to note that the Association cannot make statements regarding the coverage of a specific policy unless it is a policy for which the Association has been activated to provide protection.

Self-funded plans

Self-funded health plans, also known as self-insurance, are an increasingly popular option for companies of all sizes. In a self-funded plan, the employer sets aside funds to pay for the healthcare needs of their employees. This is different from insured health plans, where the employer pays a premium to an insurance carrier in exchange for the carrier covering the cost of health services.

However, there are also risks associated with self-funded plans. Self-funded plans are generally not subject to state insurance laws, but they are subject to several federal laws. Employers who set up self-funded plans are responsible for paying all covered health claims, whether routine or catastrophic. While employers may purchase "stop-loss" insurance to help cover high-cost claims, they are still responsible for paying all claims until the "stop-loss" level is reached. Small employers, in particular, are advised to exercise caution when considering self-funded plans and to carefully evaluate the potential financial consequences of higher-than-expected health claims.

When deciding whether to implement a self-funded plan, employers should understand their potential exposure to high-cost health care claims. It is important to know the employer's responsibilities for funding claims, both while the plan is active and if it is discontinued, as well as how stop-loss coverage works. Employers must also be aware of federal non-discrimination rules that apply to employer-sponsored health plans, which prohibit excluding individuals from coverage or charging them higher premiums based on their health status.

Frequently asked questions