by Susie Mowers

Created on: December 02, 2008   Last Updated: March 08, 2012

Just a few months ago, the looming fate of AIG had us all a little anxious about our own insurance claims. If one of the world's insurance powerhouses could teeter along the border to bankruptcy, what did that mean for other, small-town firms? Thankfully, AIG was granted an $85 billion loan and pulled from the brink of becoming broke, but the rest of us aren't quite fully resting just yet.([i]) Investments are as high as anxiety levels as some of us are wondering: What if my insurer goes bankrupt?

Looking at things in hindsight is, ironically, the best point to start answering that question. "Insurers do fail. This is why it is critical to investigate an insurer's financial strength when considering business insurance." ([ii]). But financial cycles are full of tumultuous turmoil and unpredictable trends, and sometimes even our best judgment can lead us astray. Rest somewhat assured, however, that if the unfortunate were to arise, every attempt is made to protect policyholders (though coverage does vary state to state).

"Because insurers fail, all states have enacted substantial regulatory schemes to regulate insurers to protect insureds and to regulate the financial dealings of insurers. The heads of these state regulatory bodies form the National Association of Insurance Commissioners (NAIC). On September 16, 2008, the head of the NAIC, Sandy Praeger, issued this summary of the regulators' role in the wake of the AIG crisis:

The No. 1 job of state insurance regulators is to make sure insurance companies operate on a financially sound basis. If needed, we immediately step in if it appears that an insurer will be unable to fulfill the promises made to its policyholders. This includes taking over the management of an insurer through a conservation or rehabilitation order, the goal being to get the insurer back into a strong solvency position.'" ([iii])

In California, licensed insurers are part of the California Life and Health Insurance Guaranty Association. In the unlikely event that an insurer should go under, the Association assesses its other member insurers for the money to pay the claims of the policyholders affected. Coverage is not unlimited, though, is usually contained within the limits of what was originally guaranteed by the insurance provider, and is further limited to 80% of Life and Annuity Insurance benefits outlined in the original contract between the insurer and insured.([iv])

In the case of a personal injury trial (ie, a car accident), the

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