The Michigan Property and Casualty Guaranty Association and Surplus Lines
When a property or casualty insurer is declared insolvent, policyholders and injured claimants still have claims to be paid. In Michigan the property and casualty guaranty association pays covered claims out of money assessed on the other insurers (MCL 500.7901 to 500.7949). Surplus lines insurance, under chapter 19, sits outside that safety net.
Who Belongs and Who Is Protected
Every insurer authorized to transact insurance in Michigan other than life or disability insurance must be a member of the association as a condition of keeping its authority. The Michigan basic property insurance association is excepted, and so are life and disability insurers, which have their own association (MCL 500.7911(1), 500.7911a). An insurer that is in Michigan only through chapter 19 is not an authorized insurer for this purpose (MCL 500.7911(2)). So a surplus lines policy carries no guaranty protection.
A board of seven governors, five from member insurers and two from the public, manages the association under a plan of operation the Director of the Department of Insurance and Financial Services (DIFS) must approve (MCL 500.7912(1), 500.7914(1)).
What Counts as a Covered Claim
The association is triggered by an insolvent insurer, meaning a member against which a court in the insurer’s home state has entered a final order of liquidation with a finding of insolvency (MCL 500.7921(a)). A claim is then covered only if it meets every one of six tests (MCL 500.7925(1)):
- It arises from a policy issued to a Michigan resident, or is payable to a resident on behalf of an insured.
- It was unpaid by the insolvent insurer.
- It was presented to the receiver in Michigan or to the association by the last date set for filing claims in the home-state proceeding.
- It was incurred or existed before, at the time of, or within 30 days after the date the receiver was appointed.
- It arises from any kind of insurance except life and disability.
- It arises from a policy issued on or before the last date the insurer was a member.
Claims that are not covered
Several kinds of claim are removed.
| Excluded | Citation |
|---|---|
| Unearned premium refunds beyond a small statutory first amount, which is adjusted each year for the cost of living | MCL 500.7925(2)(a) |
| Obligations incurred after the policy expired, was replaced or was canceled by the association | MCL 500.7925(2)(b) |
| Obligations under sections 2001 to 2050 or similar laws elsewhere | MCL 500.7925(2)(c) |
| Amounts owed to a reinsurer, insurer, pool or underwriting association as subrogation, contribution or indemnification | MCL 500.7925(3) |
| First-party and third-party claims by or against an insured whose consolidated net worth exceeded a statutory figure, adjusted each year, at the end of the year before the insolvency | MCL 500.7925(4) |
| Any part of a claim above the policy’s own limit | MCL 500.7925(5) |
| The part of a claim above the claim cap, other than workers’ compensation and personal protection insurance claims under section 3107 | MCL 500.7925(6) |
| Fees, costs, interest and bond premiums the insolvent insurer incurred before the receiver’s appointment | MCL 500.7925(7) |
The claim cap is a per-claim dollar amount adjusted each January 1 for the consumer price index, and the cap in effect when a claim is paid applies (MCL 500.7925(6)).
How Claims Are Paid
The association may pay claims itself, through a servicing facility, or through a member insurer that takes over the liabilities (MCL 500.7931(1)). It becomes a party in interest in every proceeding on a covered claim, with the insolvent insurer’s rights to defend, settle and appeal (MCL 500.7931(2)). Michigan court proceedings involving the insolvent insurer are stayed for 6 months after the receiver is appointed, and longer if the court so orders (MCL 500.7945(1)).
Other recoveries come off first
Damages or benefits recoverable under another insurer’s policy or a self-insured program are a credit against the covered claim, and the claimant must first exhaust that coverage (MCL 500.7931(3)). The association’s obligation shrinks, and so does the insured’s liability to the extent of the credit.
Suppose a claimant has a covered claim of $300,000 against an insolvent liability insurer and can recover $120,000 under another insurer’s policy. The credit reduces the claim, and the association owes $300,000 - $120,000 = $180,000. The exception is a disability or life policy the claimant owns or paid for, which does not count as a credit.
What happens to policies in force
Coverage on policies in force when the receiver was appointed continues until the policy expires, the insured replaces it, or the association cancels it, but never more than 30 days after the appointment (MCL 500.7931(4)). The association may cancel on 10 days’ written notice, despite any statute or policy provision (MCL 500.7931(5)). If the receiver is appointed October 1, the latest end date is October 31, and a loss on October 20 is within the 30 days, while one on November 5 is not. A notice mailed October 10 can cancel as of October 20, so a producer has days, not weeks, to place a replacement.
How the Association Is Funded
The association levies assessments on member insurers to pay covered claims and its own costs. It sorts claims and costs into five categories and assesses each separately, in proportion to each member’s net direct premiums written in that category (MCL 500.7941(1), (2)):
- Workers’ compensation
- Automobile
- Title
- Fire, allied lines, farm owners multiple peril, homeowners multiple peril, inland marine, earthquake and credit
- All other kinds except life and disability
The rate is a uniform percentage of premiums, and members must get at least 30 days’ written notice. Suppose the fire and homeowners category needs $9,000,000 and members wrote $3,000,000,000 of premium in it. The rate is $9,000,000 / $3,000,000,000 = 0.3%. A member that wrote $60,000,000 in the category pays $60,000,000 x 0.3% = $180,000. No member can be assessed in a year for more than 1% of its prior-year net direct Michigan premiums (MCL 500.7941(3)), so a member with $80,000,000 in total prior-year premiums cannot be assessed above $800,000. Rate-making recognizes assessments as it does expenses and premium taxes (MCL 500.7941(4)).
Surplus Lines
Surplus lines insurance is insurance in Michigan procured from, or continued or renewed with, an unauthorized insurer (MCL 500.1903(1)(d)).
The license
A person may not solicit, bind or act as agent or broker in a surplus lines transaction without a license under chapter 19 and section 1206a (MCL 500.1905(1)). To obtain one, the applicant files an application, completes an examination if the Director requires one, complies with MCL 500.1204 to 500.1206, and agrees to file sworn semiannual statements by February 15 and August 15 covering the six months ending December 31 and June 30, paying with them a 2% tax and a 0.5% regulatory fee on premiums written (MCL 500.1905(3)). On $10,000 of surplus lines premium the tax is $10,000 x 2% = $200 and the fee is $10,000 x 0.5% = $50. A fee on a surplus lines policy must be reasonable and kept out of the premium. For a personal lines policy it cannot exceed the greater of $100 or 10% of the premium, and any fee must be disclosed in writing before the sale (MCL 500.1915(1), (2)). On a $600 policy 10% is $60, so the cap is $100. On a $2,400 policy it is $240.
The diligent search
Insurance cannot be placed with an unauthorized insurer if the coverage is available from an authorized one (MCL 500.1910(1)). Some coverages carry a rebuttable presumption that they are available: required no-fault insurance, private passenger auto physical damage, homeowners and property insurance on an owner-occupied dwelling worth less than the Michigan basic property insurance association’s maximum, workers’ compensation for an employer that is not partially self-insured, and any coverage readily available from 3 or more authorized insurers unless they quote noncompetitive premium and terms (MCL 500.1910(2)). Coverage is rebuttably presumed unavailable if one part of a risk is acceptable but another is not, or if the licensee cannot obtain it after a diligent search among authorized insurers (MCL 500.1910(3)).
Eligible insurers and disclosures
The Director recognizes an eligible surplus lines insurer only if it keeps capital and surplus of at least $1,500,000 (MCL 500.1920(4)). To be an eligible unauthorized insurer it must also deposit at least $75,000 for Michigan policyholders or keep a trust fund of at least $1,000,000 in the United States, and appoint the Director as its agent for service of process (MCL 500.1921).
Before placement the licensee must tell the insured that coverage is with an insurer not licensed in Michigan and that payment of loss may not be guaranteed if it becomes insolvent (MCL 500.1905(5)). Every policy or cover note must carry, in red ink, at least 10-point type, on its face: “This insurance has been placed with an insurer that is not licensed by the state of Michigan. In case of insolvency, payment of claims may not be guaranteed” (MCL 500.1922). Written evidence of the insurance is due within 30 days after the risk is bound or the insured is told it will be (MCL 500.1912).
An insured that buys unauthorized insurance without a licensee must report it to the Director within 30 days and pay the same 2% tax and 0.5% fee (MCL 500.1951).
Lesson summary
- Every authorized property and casualty insurer, except the Michigan basic property insurance association, belongs to the association. Surplus lines insurers do not, so a policy placed through chapter 19 has no guaranty protection.
- A covered claim must pass six tests: resident, unpaid, timely filed, incurred within the time window, not life or disability, and under a policy issued while the insurer was a member.
- Several things are excluded, including unearned premium above a small base, claims by large-net-worth insureds, subrogation claims, amounts over the policy limit and amounts over the annual claim cap, which does not apply to workers’ compensation or PIP.
- Other recoveries are a credit against a covered claim, so the association pays only what remains.
- Coverage continues no more than 30 days after the receiver is appointed, and the association may cancel on 10 days’ notice.
- Assessments are made in five categories in proportion to premiums, limited each year to 1% of a member’s prior-year Michigan premiums.
- A surplus lines licensee may not place coverage available from an authorized insurer. It must disclose that the insurer is unlicensed, put the red notice on the policy and pay a 2% tax and 0.5% fee on premiums written.