5.6 Hawaii Insurance Guaranty Association (HIGA): Covered Claims, Limits & Claim Handling (HRS Chapter 431, Article 16)

5.6 Hawaii Insurance Guaranty Association (HIGA): Covered Claims, Limits & Claim Handling (HRS Chapter 431, Article 16)

The Hawaii adjuster outline lists guaranty associations (HRS §§ 431:16-101 through 117) in both the general and adjuster-specific Hawaii law sections. When a property and casualty insurer is liquidated, adjusters may handle claims for the Hawaii Insurance Guaranty Association (HIGA) — directly, for a servicing insurer, or for an insured whose carrier failed. HIGA's rules differ from the original policy in limits, exclusions and order of payment.

What HIGA Is

• HIGA is a nonprofit unincorporated legal entity created by statute (§ 431:16-106). Its plan of operation dates to 1971.
• Membership is mandatory. Every insurer that writes a covered kind of insurance and is licensed in Hawaii must be and remain a member as a condition of its authority to transact insurance (§§ 431:16-105, 16-106).
• It operates under a plan of operation approved by the commissioner, through a board of directors (§§ 431:16-107, 16-109).
• The commissioner notifies HIGA of an insolvency within three days after receiving notice of it, and may require HIGA to notify insureds (§ 431:16-110).
• HIGA is subject to examination by the commissioner and files an annual financial report (§ 431:2-304).
• Life, annuity and health insurers are protected by a separate association, the Hawaii Life and Disability Insurance Guaranty Association.

Lines Covered and Excluded (§ 431:16-103)

HIGA applies to all kinds of direct insurance except:

• life, annuity, and accident and health or sickness insurance;
• mortgage guaranty, financial guaranty and other investment-risk insurance;
• fidelity or surety bonds and other bonding obligations;
• credit insurance, vendors' single interest and collateral protection insurance;
• warranty and service contract insurance;
• title insurance;
• ocean marine insurance;
• transactions that transfer investment or credit risk without insurance risk; and
• insurance provided or guaranteed by government.

Because only licensed (authorized) insurers can be "insolvent insurers" under the article, surplus lines policies are not protected (5.2).

Covered Claims (§ 431:16-105)

A covered claim is an unpaid claim, including one for unearned premium, that arises out of and is within the coverage and limits of a covered policy issued by an insurer that became insolvent, and where:

• the claimant or insured was a Hawaii resident at the time of the insured event (for an entity, its principal place of business); or
• the claim is a first-party claim for damage to property with a permanent location in Hawaii.

An insolvent insurer is an insurer licensed in Hawaii when the policy was issued or when the insured event occurred, against which a final order of liquidation with a finding of insolvency has been entered by a court in its state of domicile.

Not Covered Claims

A covered claim does not include:

• punitive or exemplary damages;
• return of premium under a retrospective rating plan;
• amounts owed to a reinsurer, insurer, insurance pool or underwriting association as subrogation, reinsurance, contribution or indemnification;
• first-party claims by an insured whose net worth exceeds $25 million on December 31 of the year before the insolvency (consolidated with subsidiaries);
• first-party claims by an affiliate of the insolvent insurer;
• fees of attorneys or vendors retained by the insolvent insurer or an insured before the insolvency, or retained to pursue claims against HIGA;
• claims for interest; and
• claims for incurred-but-not-reported loss protection.

When Coverage Ends: The 30-Day Window (§ 431:16-108(a)(1))

HIGA is obligated for covered claims existing before the order of liquidation and those arising within 30 days after the order. The window closes sooner if the policy expires within those 30 days, or if the insured replaces or cancels the policy within them. Example: an insurer is ordered liquidated on May 1. A covered auto accident on May 20 is a covered claim, but one on June 5 is not, because the insured needed replacement coverage by May 31. A claim filed after the court's final claim-filing deadline is not a covered claim.

Claim Limits (§ 431:16-108(a)(1))

There is no HIGA deductible in the statute. HIGA's duty to defend ends when it pays or tenders the lesser of its claim limit or the policy limit.

Applying the $300,000 Limit

A covered fire destroys a Hilo warehouse insured by a now-insolvent insurer under a $1,000,000 commercial property policy, with a $520,000 adjusted loss. HIGA pays up to $300,000. The remaining $220,000 is a claim against the insolvent insurer's estate in liquidation. A workers' compensation claimant of the same insurer receives full statutory benefits under chapter 386 for as long as they are owed.

HIGA's Powers and Duties (§ 431:16-108)

HIGA:

• is deemed the insurer to the extent of its obligation on covered claims. It has the insolvent insurer's rights, duties and obligations, including the right to pursue and keep salvage and subrogation on claims it pays;
• investigates, adjusts, compromises, settles and pays covered claims and denies all others. It may review settlements, releases and judgments involving the insolvent insurer to decide whether to contest them;
• may appoint, substitute and direct defense counsel for covered liability claims. In Finley v. Home Insurance Co. (Haw. 1998), a HIGA defense under a reservation of rights did not entitle the insured to independent counsel at HIGA's expense (see 4.3);
• may handle claims through its own employees or through designated servicing facilities (member insurers or others approved by the commissioner); and
• assesses member insurers to pay its obligations. Assessments are proportional to each member's net direct written premiums for the preceding year, capped at 2% of those premiums per year, with at least 30 days' notice before the assessment is due.

Rules for Claimants and Insureds

• Exhaustion of other insurance (§ 431:16-112). A claimant with a claim under another insurance policy — including health or disability coverage, or the policy of a jointly liable tortfeasor — must first exhaust that coverage. The HIGA payment is reduced by the recovery. If several guaranty associations could apply, the claimant first seeks recovery from the association where the insured resides. For a first-party property claim, it is the association where the property is permanently located, and for workers' compensation, the association where the claimant resides.
• Effect of paid claims (§ 431:16-111). A person who recovers from HIGA is deemed to have assigned their policy rights to HIGA to the extent of the recovery, and must cooperate with HIGA as with the original insurer. HIGA may recover amounts paid on behalf of an insured with a net worth over $50 million and from affiliates of the insolvent insurer.
• Stay of proceedings (§ 431:16-117). Lawsuits in which the insolvent insurer is a party or must defend are stayed for up to six months (longer if the court allows) so HIGA can prepare a defense. HIGA may also seek to set aside default judgments taken because the insolvent insurer failed to defend.

Funding and Recoupment

HIGA has no taxpayer funding; it relies on post-insolvency assessments. Member insurers recoup assessments through a uniform-percentage surcharge on premiums, under a recoupment plan approved by the commissioner. The surcharge is separately stated on billings and is not treated as premium for premium tax or commissions (§ 431:16-115). A member that fails to pay an assessment may have its certificate of authority suspended or revoked, or be fined up to 5% of the unpaid assessment per month, with a minimum of $100 per month (§ 431:16-110(b)(2)).

Immunity

There is no liability, and no cause of action arises, against member insurers, HIGA, its agents or employees, its board, or the commissioner for actions taken in performing their duties under the article (§ 431:16-116). The Hawaii Supreme Court has applied this immunity to bar bad faith and emotional distress claims based on HIGA's handling of an underinsured motorist claim.