Here's What Happens if Your Pet Insurance Company Fails

The insurance industry, like banking, is heavily regulated. When big insurance companies run into financial difficulty, the U.S. government will typically swoop in to bail them out. But what happens when small insurers -- like some pet insurance companies -- falter? Who steps in to ensure policyholders get money on their claims?

What happens if your pet insurance company fails?

Pet insurance companies are protected by state guaranty associations. If an insurance company becomes insolvent, these associations will pay claimants up to a certain amount -- usually $300,000 per individual -- for claims filed before the insurance company failed.

All 50 states, plus the District of Columbia and Puerto Rico, have guaranty associations. Wherever a pet insurance company is headquartered, it must become a member of that state's guaranty.

Insolvencies are rare. But when they happen, a state guaranty association will typically do several things:

• Put the company in receivership. The guaranty association will try to prevent the company from becoming insolvent. If this fails, the guaranty will move on to the next three steps.
• Transfer policies to another insurance company. Much like the FDIC auctions off the deposits of failing banks, the state guaranty will look for other insurance companies to pick up policies.
• Sell the insurance company's assets. This money will be used to pay back claims that were filed before the company became insolvent.
• Dip into the state guaranty's funds. State guaranty associations are nonprofits and are funded by insurance companies themselves. If an insurance company's assets cannot pay back claims, the state guaranty will dip into its funds to pay policyholders up to a certain amount.

Will you get the full payout for your pet insurance claims?

Unless you're performing heart surgery on a humpback whale, then, yes, you'll likely get the full payout that your policy allows.

Most state guarantees will give a maximum of $300,000 for property and casualty claims, which pet insurance, like auto and homeowners insurance, falls under. That's enough to cover the average unexpected vet bill for both a dog ($1,270 to $2,803) and a cat ($961 and $2,487).

That said, you'll only get the full payout if you filed your claim before the insurance company went insolvent. If you filed after the company failed, your state's guaranty association cannot promise your claim will be paid.

How to avoid risky insurance companies

Before picking a pet insurance company, take a look at its credit rating to assess its financial strength. These ratings range from A to C or D, and you can usually find them on the company's website. Alternatively, you can search for the company's profile on the websites of the following five major credit rating agencies:

• AM Best
• Fitch
• Kroll Bond Rating Agency
• Moody's
• Standard & Poor's

A rating of A or higher (A++, AAA, Aaa) indicates that the crediting agency has confidence in the insurer's ability to pay policyholders and meet its own financial obligations. Ratings of C or D, however, means the rating agency lacks faith in the insurance company's financial commitments.

Even if a company has a good financial standing, it can be downgraded to a lower rating over time. A good practice, then, is to check your pet insurance company's financial standing the day before your policy renews. If the company is still financially strong, you can continue your policy. Otherwise, you might want to pick a better pet insurance company if your current insurer's finances have declined.