Indiana Law Review


The Indiana Insurance Guaranty Association Act: More
Problems than Protection

James W. Hehner*
Mark R. Smith**

I. Indiana Insurance Guaranty Association v. Kiner*

Although the Indiana Insurance Guaranty Association Law of 197P
has been in effect for 16 years, the first judicial decision construing

the substantive provisions of the Act was not handed down until
February 12, 1987. The lack of cases interpreting the Act is difficult

to understand, considering the lack of clarity of many of its provisions.
In 1974, John L. Kiner, Jr., a minor, and his mother, Cassell

Kiner, filed a lawsuit against the owners and operators of a taxicab

company for injuries sustained by John Kiner, when he was struck by
a cab. The Kiners obtained jury verdicts in their favor and, on March
24, 1982, the court entered judgment for $8,000.00 on the verdict in

favor of John Kiner, and $2,000.00 on the verdict for his mother. The

judgment defendant had liability insurance with Kenilworth Insurance

Company in Chicago, Illinois. Several days after the Indiana trial court
entered judgment in favor of the Kiners, an Illinois court declared

Kenilworth Insurance Company insolvent and entered a liquidation
order. Although the Kiners filed a claim in the liquidation proceeding

pending in the state of Illinois, they did not receive any payments to

satisfy their judgment. Thereafter, the Kiners applied to the Indiana

Insurance Guaranty Association for payment of both judgments entered

in their favor.

^

The IIGA decHned to pay the Kiners' $10,000.00 claim and argued
that it was not obligated to pay the entire amount of both judgments.
The IIGA asserted that its obligation was limited to the "reasonable
medical and hospital expenses'*^ of John L. Kiner, Jr., as well as *'any

*Associate, Jennings, Maas & Stickney, Indianapolis. B.S., Indiana University, 1980;
J.D., Indiana University School of Law-Indianapolis, 1983.

Associate, Jennings, Maas & Stickney, Indianapolis. B.A., Hanover College; J.D.,
Indiana University School of Law-Indianapolis, 1984.

•503 N.E.2d 923 (Ind. Ct. App. 1987).

^Ind. Code §§ 27-6-8-1 to -19 (1982 & Supp. 1987). Through the remainder of this
article, the Indiana Insurance Guaranty Association will be referred to as the "IIGA,"

and the Indiana Insurance Guaranty Association Law of 1971 will be referred to as the
"Act."

'Kiner, 503 N.E.2d 923.

'Id. at 924.

223



224 INDIANA LAW REVIEW [Vol. 21:223

amounts actually lost by reason of his inability to work and earn

wages. "^ The IIGA's position was based upon Indiana Code section
27-6-8-7(a)(i)(l) which states:

In the case of claims arising from bodily injury, sickness, or

disease, including death resulting therefrom, the amount for

which the association shall be obligated shall not exceed the

claimant's reasonable expenses incurred for necessary medical,

surgical. X-ray and dental services, including prosthetic devices

and necessary ambulance, hospital, professional nursing and

funeral services, and any amounts actually lost by reason of

claimant's inability to work and earn wages or salary or their

equivalent that would otherwise have been earned in the normal

course of such injured claimant's employment, to which may
be added at the discretion of the association a sum not to
exceed one thousand dollars [$1,000] for all other costs and

expense incurred by the claimant prior to the insolvency.^

The IIGA filed a summary judgment motion asserting that its
liability was limited by the provisions of Indiana Code section 27-6-

8-7(a)(i)(l). In denying the IIGA's motion for summary judgment, the
trial court interpreted the word "claims" in Indiana Code section 27-

6-8-7(a)(i)(l) to mean only "unpaid claims" and decided that this section
of the Act did not apply to a judgment. The court believed that the

limitations on damages outlined in Indiana Code section 27-6-8-7(a)(i)(l)
did not apply to the judgments which were previously entered by the

trial court in the Kiners' tort action.^ Thereafter, the court granted

summary judgment on the Kiners' claims against the IIGA and found
that the association was obligated to pay the full amount of the Kiners'
two judgments totalling $10,000.00, plus costs. ^ The Indiana Court of
Appeals reversed the trial court's grant of summary judgment in favor
of the Kiners and against the IIGA, and held that a genuine issue of

material fact existed concerning whether the Kiners "fall within the

class of persons protected by the guaranty law."^ In addition to holding

'Id.

*1nd. Code § 27-6-8-7(a)(i)(l) (1982). It is not clear from the Kiner decision what
evidence was presented at trial relating to John Kiner's medical and hospital expenses or

lost wages. Additionally, it is uncertain what evidence was presented to support the jury's

verdict of $2,000.00 in favor of John Kiner's mother. As a result, it is not possible from
the decision to determine what amounts other than medical expenses and lost wages might

have been included in the jury's verdict totaling $10,000.00.

'Kiner, 503 N.E.2d at 924-25.

'Id. at 925.

'Id.



1988] GUARANTY ASSOCIATION ACT 225

that the Kiners failed to establish that they fall within the class of

persons protected by the Act, the appellate court provided a substantial

discussion clarifying the meaning and application of the limitations

contained in Indiana Code section 27-6-8-7. ^^

A. The Kiners Failed to Establish Whether They Fall Within the

Class of Persons Protected by the Act

The court of appeals reversed the trial court's judgment in favor
of the Kiners, in part, upon a determination that a genuine issue of
material fact existed concerning applicability of the Act to the Kiners.

The court carefully pointed out that a claimant bears all responsibility
for demonstrating that he falls within the class of persons intended to

be afforded protection or coverage by an insurance guaranty act. A
claimant must demonstrate both that he has met all requirements of

the guaranty law and that he has complied with any conditions precedent

to asserting a claim. As a prerequisite to claiming coverage under the
Act, an individual must demonstrate that he has a

*

'covered claim"

within the meaning of Indiana Code section 27-6-8-4(4). ^^

"M A "covered claim" is defined as:
(A)n unpaid claim or judgment which arises out of and is within the coverage

and not in excess of the applicable limits of an insurance pohcy to which this

chapter applies issued by an insurer, if the insurer becomes an insolvent insurer

after the effective date (January 1, 1972) of this chapter and (a) the claimant

or insured is a resident of this state at the time of the insured event or (b) the

property from which the claim arises is permanently located in this state. "Covered

claim" shall be limited as provided in section 7 [27-6-8-7] of this chapter, and

shall not include (1) any amount due any reinsurer, insurer, insurance pool, or

underwriting association, as subrogation recoveries or otherwise; provided, that

a claim for any such amount, asserted against a person insured under a policy

issued by an insurer which has become an insolvent insurer, which if it were

not a claim by or for the benefit of a reinsurer, insurer, insurance pool or

underwriting association, would be a "covered claim" may be filed directly with
the receiver or liquidator of the insolvent insurer, but in no event may any
such claim be asserted in any legal action against the insured of such insolvent

insurer; nor (2) any supplementary obhgation including but not limited to

adjustment fees and expenses, attorney fees and expenses, court costs, interest

and bond premiums, whether arising as a policy benefit or otherwise, prior to
the appointment of a liquidator; nor (3) any unpaid claim or judgment not filed

timely or properly in the liquidation proceedings in accordance with the provisions

of IC 27-1-4 [repealed] if the insolvent insurer is a domestic insurer or in

accordance with the applicable provisions of the law of the state of domicile

if the insolvent insurer is not a domestic insurer. All covered claims filed timely

and properly in the liquidation proceedings shall be referred immediately to the

association by the liquidator for processing as provided in this chapter.

IND. Code § 27-6-8-4(4) (1982).



226 INDIANA LAW REVIEW [Vol. 21:223

The definition of "covered claim" contains mandatory requirements

which must be established by the claimant as a prerequisite of the

assertion of any such claim. Additionally, the definition contains ex-

clusionary language which specifically eliminates certain claims which

would otherwise be covered but for the exclusionary language contained

in the definition. •^

The court of appeals in Kiner held that the Kiners failed to establish

that the judgment which they obtained against the cab company "was
within the coverage and not in excess of the applicable limits of the

Kenilworth insurance policy; that the Kenilworth insurance policy was

one to which this chapter applies; nor that the claimant or the insured

was a resident of Indiana at the time of the accident. "^^ Moreover,

Indiana Code section 27-6-8-11 requires a claimant to exhaust his rights
against all other applicable guaranty associations or insurance policies

before asserting his claims against the IIGA. Any recoveries from other
applicable insurance policies or guaranty associations shall be applied

as a setoff or reduction to any amounts ultimately recovered from the

IIGA.'"^ The court of appeals held that the Kiners failed to demonstrate

that they had exhausted their rights to recover from other guaranty

associations or appHcable insurance policies as required by Indiana

Code section 27-6-8-11. '^

B, All Covered Claims Under the Act are Limited by All

Provisions of Indiana Code Section 27-6-8-7

The court of appeals decision in Kiner clarifies the applicability
of the limitations outlined in Indiana Code section 27-6-8-7. The IIGA

'^IND. Code § 27-6-8-4(4) (1982).
'^Kiner, 503 N.E.2d at 925 (footnote omitted from quotation).

'"Ind. Code § 27-6-8-11 (1982) provides:
(a) Any person having a claim against an insurer under any provision in

an insurance policy other than a policy of an insolvent insurer which is also a

covered claim, shall be required to exhaust first his right under the policy. Any
amount payable on a covered claim under this chapter shall be reduced by the

amount of recovery under the insurance policy.

(b) Any person having a claim which may be recovered under more than
one [1] insurance guaranty association or its equivalent shall seek recovery first

from the association of the place of residence of the insured except that if it

is a first party claim for damage to property with a permanent location, he

shall seek recovery first from the association of the location of the property,

and if it is a workmen's compensation claim, he shall seek recovery first from

the association of the residence of the claimant. Any recovery under this chapter
shall be reduced by the amount of recovery from any other insurance guaranty

association or its equivalent. [IC 27-6-8-11, as added by Acts 1971, P.L. 390,

§ 1.]

''Kiner, 503 N.E.2d at 925-26.



1988] GUARANTY ASSOCIATION ACT 111

claimed that regardless of the amount of the verdicts rendered by the
jury in the trial court, the IIGA's liability to the Kiners was hmited

to John Kiner's reasonable medical and hospital expenses and lost

income pursuant to Indiana Code section 27-6-8-7(a)(i)(l).^^ The trial
court determined that the limitations outlined in Indiana Code section
27-6-8-7(a)(i)(l) appHed only to '^unpaid claims" asserted against the

IIGA and were not applicable to the judgments entered in favor of
Mrs. Kiner and her son, John. The court of appeals determined that

Indiana Code section 27-6-8-7(a)(i)(l) applies equally to unpaid claims
as well as judgments, and held that ''[a]ll covered claims are limited

by all of section 7."^^ The court reasoned that the definition of a
'^covered claim" specifically states that covered claims are limited as

provided in Indiana Code section 27-6-8-7. The court held that *'the
plain meaning of this provision is that a covered claim is limited by

all of section 7. The provision does not state that judgments are exempt

from this limitation. Nor does any other provision of the Guaranty
Law.">«

The court emphasized that its holding on this issue is consistent

with the insurance guaranty laws of other states and that other juris-

dictions do not treat judgments any differently than they do unpaid

claims.*^ Thus, the limitations outlined in Indiana Code section 27-6-
8-7 apply equally to all claims which meet the definition of a "covered

claim" as outlined by Indiana Code section 27-6-8-4(4), whether such
claim arises through a judgment or otherwise. As the court held in
Kiner:

Even if the Kiners are able to show that they fall within the
class of persons protected by the statute, their recovery from

the Association is Hmited to John Kiner's reasonable medical

and hospital expenses and any amounts actually lost by reason

of his inability to work and earn wages. ^^

II. The IIGA—A General Overview
All fifty states and the District of Columbia have enacted some

form of a property/casualty guaranty association act.^^ The majority

^^Id. at 928. See supra text accompanying note 6.
'^503 N.E.2d at 927 (emphasis in original).

'^/of. (emphasis in original).

"/cf. The court discussed two cases from Illinois and one Florida decision relating

to the guaranty laws of those states. See Florida Ins. Guar. Ass'n v. Dolan, 355 So.2d

141 (Fla. App. 1978); Nianick v. Edgewater Beach Hotel, 28 111. App. 3d 33, 328 N.E.2d

82 (1975); Lucas v. Illinois Guaranty Fund, 52 III. App. 3d 237, 10 111. Dec. 81, 367

N.E.2d 469 (1977).
^°503 N.E.2d at 928.

^'Ala. Code § 27-42-1 to -20 (1986); Alaska Stat. § 21.80.010 to .190 (1984 &



228 INDIANA LAW REVIEW [Vol. 21:223

of guaranty associations laws were enacted during the early 1970's in

response to growing concern over the financial failure of insurance

companies, and their resulting inability to discharge defense^^ and

indemnity^^ obligations to their poUcyholders.

The Indiana Insurance Guaranty Association Law was enacted in
1971 24 jj^g IIGA is comprised of all persons^^ who are duly authorized

Supp. 1987); Ariz. Rev. Stat. Ann. § 20-661 to -680 (West 1975 & Supp. 1986); Ark.
Code § 23-90-101 to -123 (1987); Cal. Ins. Code § 1063 to 1063.14 (West 1972 & Supp.
1987); Colo. Rev. Stat. § 10-4-501 to -502 (1973 & Supp. 1986); Conn. Gen. Stat.
Ann. § 38-273 to -289 (West 1987); Del. Code Ann. tit. 18, § 4201 to 4221 (1974 &
Supp. 1986); D.C. Code Ann. § 35-1901 to -1917 (1981); Fla. Stat. Ann. § 631.50 to
.70 (West 1984 & Supp. 1987); Ga. Code Ann. § 33-36-1 to -18 (1982 & Supp. 1987);
Haw. Rev. Stat. § 431D-1 to -18 (1985); Idaho Code § 41-3601 to -3621 (1977 & Supp.
1987); III. Ann. Stat. ch. 73, para. 1065.82 to .103 (Smith-Hurd Supp. 1987); Ind.

Code § 27-6-8-1 to -19 (1982 «fe Supp. 1987); Iowa Code Ann. § 515B.1 to .18 (Supp.

1987); Kan. Stat. Ann.§ 40-2901 to -2919 (1981); Ky. Rev. Stat. Ann. § 304-36-010 to

170 (Michie Bobbs-Merrill 1981 & Supp. 1986); La. Rev. Stat. Ann. § 22:1375 to -94
(West 1978 & Supp. 1987); Me. Rev. Stat. Ann. 24-A, § 4431-51 (1964 & Supp. 1986);
Md. Ins. Code Ann. 48A-501 to -519 (1986 & Supp. 1987); Mass. Gen. Laws Ann. Ch.
175D, § 1-16 (West 1987); Mich. Comp. Laws Ann. § 500.7901 to .7949 (West 1983 &
Supp. 1987); Minn. Stat. Ann. § 60C.01 to .20 (West 1986); Miss. Code Ann. § 83-

23-101 to -137 (1972 & Supp. 1987); Mo. Ann. Stat. § 375.785 (Vernon Supp. 1987);
Mont. Code Ann. § 33-10-101 to -117 (1987); Neb. Rev. Stat. § 44-2401 to -2418 (1984);
Nev. Rev. Stat. § 687A.010 to .160 (1985); N.H. Rev. Stat. Ann. § 404-B:l to :18

(1983); N.J. Stat. Ann. § 17:30A-1 to -20 (West 1985); N.M. Stat. Ann. § 59A-43-1

to -18 (1984); N.Y. Ins. Law § 7601 to 764 (McKinney 1985 & Supp. 1987); N.C. Gen.
Stat. § 58-155.41 to .60 (1982 & Supp. 1987); N.D. Cent. Code § 26.1-42-01 to -15
(Supp. 1987); Ohio Rev. Code Ann. § 3955.01 to .21 (Anderson 1971 & Supp. 1986);
Okla. Stat. tit. 36, § 2001 to 2020 (Supp. 1987); Or. Rev. Stat. § 734.510 to .710

(1985); Pa. Stat. Ann. tit. 40. § 1701.101 to .605 (Purdon 1971 & Supp. 1987); R.I. Gen.
Laws § 27-34-1 to -18 (1979 & Supp. 1987); S.C. Code Ann. § 38-19-10 to -180 (Law
Co-op. 1976 & Supp. 1986); S.D. Codified Laws Ann. § 58-29A-1 to -53 (1978 & Supp.
1987); Tenn. Code Ann. § 56-12-101 to -119 (1980 & Supp. 1987); Tex. Ins. Code Ann.
§§ 21.28-C to -22 (Vernon 1981 & Supp. 1987); Utah Code Ann. § 31A-28-201 to -220
(1986); Vt. Stat. Ann. tit. 8, § 3611 to 3626 (1984); Va. Code Ann. § 38.2-1600 to -

1623 (1986 & Supp. 1987); Wash. Rev. Code Ann. § 48.32.010 to .930 (1984); W. Va.
Code § 33-26-1 to -18 (1982 & Supp. 1987); Wis. Stat. Ann. § 646.01 to .73 (West
1980 & Supp. 1987); Wyo. Stat. § 26-31-101 to -117 (1977).

"Most liability policies contain a provision obligating the insurance company to
provide a defense to the insured for any claim or suit covered by the policy. See, e.g.,

Cincinnati Insurance Co. v. Mallon, 409 N.E.2d 1100 (Ind. Ct. App. 1980).

^^The duty to indemnify can arise in either the first-party or third-party context. In

the first-party context {i.e., fire insurance, uninsured motorist), the insurer agrees to

indemnify the insured for any injury or damage suffered by the insured. In the third-

party context {i.e., automobile liability coverage), the insurer agrees to indemnify the

insured for any sums which the insured is legally obligated to pay another person (the

third-party claimant) as a result of the insured's conduct or lack thereof.

^IND. Code § 27-6-8-1 to -19 (1982 & Supp. 1987).
"Ind. Code § 27-6-8-4(8) (1982) defines "person" to mean "an individual, cor-



1988] GUARANTY ASSOCIATION ACT 229

to transact certain types of insurance^^ in Indiana. Upon the insolvency
of any member insurer, the IIGA stands in the shoes of the insolvent
insurer, subject to all rights, duties and obligations of the insolvent

insurer's policy as modified by certain terms and conditions of the

Act. 2^ Any costs incurred by the IIGA in defending any insured under
a Hability poHcy, all payment of

*

'covered claims" by IIGA to any
insured or third-party claimant, together with all administration costs

are reimbursed by the remaining solvent member insurers through a
periodic assessment. ^^

The purpose of the Act was expressed by the legislature as follows:

The purpose of this chapter is to provide a mechanism for the

payment of claims under certain insurance policies to avoid

excessive delay in payment and to avoid excessive financial loss

to claimants or policyholders because of the insolvency of an

insurer, to assist in the detection and prevention of insurer

insolvencies, and to provide an association to assess the cost

of this protection among insurers. ^^

Despite this stated purpose, the Indiana Legislature has enacted one

of the most restrictive guaranty association acts in the country, both

from the standpoint of policyholder and third-party claimant protection.

A . IIGA *s Limit of Liability

Indiana and Colorado stand alone as having the most restrictive

Hability Umit provisions in their respective guaranty association laws.

Both statutes provide that the guaranty association's maximum liability
per claim is the lesser of: (1) the policy limits of the insolvent insurer;

or (2) the sum of $50,000.00 less $100.00 statutory deductible. ^o

poration, partnership, reciprocal or inter-insurance exchange, association or voluntary

organization."

2*Ind. Code § 27-6-8-3 (1982) restricts the scope of the Act "to all kinds of direct
insurance except life, title, surety, disability, accident and sickness, health care, credit,

mortgage guaranty, and ocean marine insurance." Ind. Code § 27-6-8-4(6) (1982) further
excludes from the Act "farmers mutual insurance companies organized and operating

pursuant to I.C. § 27-5 other than I.C. § 27-5-3 and I.C. § 27-5-4-2." "Direct insurance"

has been defined by one court as "an insurance contract between the insured and the
insurer which has accepted the risk of a designated loss to such insured, which relationship

is direct and uninterrupted by the presence of another insurer." Zinke-Smith, Inc. v.

Florida Ins. Guar. Ass'n, Inc., 304 So.2d 507, 508 (Fla. App. 1974).

"Ind. Code § 27-6-8-7(a)(iii) (1982).
^IND. Code § 27-6-8-7(a)(ii) (1982).
2'lND. Code § 27-6-8-2 (1982).
'°CoLO. Rev. Stat. § 10-4-508(l)(a) (1973); Ind. Code § 27-6-8-7(a)(i) (1982).



230 INDIANA LAW REVIEW [Vol. 21:223

A review of the limits of liability language contained in other
jurisdictions' property/casualty guaranty association acts reveals that

one jurisdiction has limits of $1,000,000.00 per claim;^* one jurisdiction

has limits of $500,000.00 per claim;^^ thirty-two jurisdictions have limits

of $300,000.00 per claim;" four jurisdictions have Hmits of $150,000.00

per claim;^"* seven jurisdictions have limits of $100,000.00 per claim;^^

and two jurisdictions limit the association's liability solely to the limits

contained in the policy of the insolvent insurance company.^^

In addition to this low "per claim" Hmit of liability, the Indiana

Act expressly provides that the association's Hability is limited to

$100,000.00 for all claims arising out of a single occurrence. ^^ Thus,

Indiana's "per occurrence" limit of Hability is substantially less than

the majority of other jurisdictions' "per claim" limits of liability. This

^'R.I. Gen. Laws § 27-34-6 (1979 & Supp. 1987).
32CAL. Ins. Code § 1063.1(c)(6) (West 1972 & Supp. 1987).
"Alaska Stat. § 21.80.060(a)(1) (1987); Ark. Code § 23-90-101 to -123 (1987);

Conn. Gen. Stat. Ann. § 38-278(1 )(a)(ii) (West 1987); Del. Code Ann. tit. 18, § 4208(a)(1)

(1975); D.C. Code Ann. § 35-1906(a)(l) (1981); Fla. Stat. Ann. § 631.57(l)(a)(3) (West

1984); Hawah Rev. Stat. § 431D-8(a)(l) (1985); Idaho Code § 41-3608(l)(a) (1977 &
Supp. 1987); Iowa Code Ann. § 515B.5(l)(a) (Supp. 1987); Kan. Stat. Ann. § 40-

2906(a)(1) (1981); Me. Rev. Stat. Ann. tit. 24-A, § 4438(l)(a) (1964 & Supp. 1986); Md.
Ann. Code art. 48A, § 508(a)(1) (1986 & Supp. 1987); Mass. Gen. Laws Ann. ch.
175D, § 5(l)(a) (West 1987); Minn. Stat. Ann. § 60C.09(2) (West 1986); Miss. Code
Ann. § 83-23-1 15(l)(a) (1973); Mo. Ann. Stat. § 375.785(4)(a) (Vernon Supp. 1987);
Mont. Code Ann. § 33-10-105(l)(a) (1987); Neb. Rev. Stat. § 44-2406(1) (1984); Nev.
Rev. Stat. § 687A.060(l)(a) (1985); N.H. Rev. Stat. Ann. § 404-B:8(l)(a) (1983);
N.D. Cent. Code § 26.1 -42-05(l)(a) (1960 & Supp. 1987); Omo Rev. Code Ann. §
3955.01(B)(1) (Anderson 1971 & Supp. 1986); Or. Rev. Stat. § 734.570(1) (1977); Pa.
Stat. Ann. tit. 40, § 1701.201(b)(l)(i) (1971); S.C. Code Ann. § 38-19-60(l)(a) (Law.
Co-op. 1985); S.D. Codified Laws Ann. § 58-29A-16 (1978); Utah Code Ann. § 31A-
28-207(l)(a) (1974); Vt. Stat. Ann. tit. 8 § 3615(a)(1) (1984); Va. Code Ann. § 38.2-

1606(A)(l)(ii) (1986 «& Supp. 1987); Wash. Rev. Code Ann. § 48.32.060(l)(a) (1984); W.
Va. Code § 33-26-8(l)(a) (1982 & Supp. 1987); Wis. Stat. Ann. § 646.31(4) (West 1980
& Supp. 1987).

^^Ala. Code § 27-42-8(a)(l) (1986); III. Ann. Stat. ch. 73, § 1065.87-2 (Smith-
Hurd 1965 & Supp. 1987); La. Rev. Stat. Ann. § 22:1382(l)(a) (West 1978 & Supp.
1987); Okla Stat. Ann. tit. 36, § 2007(A)(1)(c) (West 1976 & Supp. 1987).

'^Ariz. Rev. Stat. Ann. § 20-664(A)(l) (1975); Ga. Code Ann. § 33-36-3(2)(E);
Ky. Rev. Stat. Ann. § 304.36-080(l)(a) (Michie/Bobbs-Merrill 1981 & Supp. 1986); N.M.
Stat. Ann. § 59A-43-4(C) (1984); Tenn. Code Ann. § 56-12-107(a)(l) (1980); Tex. Ins.
Code Ann. § 21.28-C(5)(2) (West Supp. 1987); Wyo. Stat. § 26-31-106(a)(i) (1983).

^^MicH. CoMP. Laws Ann. § 500.7925(c)(4) (West 1983); N.Y. Ins. Law § 7608(c)
(McKinney 1985 & Supp. 1987).

"Ind. Code § 27-6-8-7(a)(l) (1982) provides that "in no event shall the association
be obligated to a policy holder or claimant in an amount in excess of the applicable
limits provided in the policy from which the claim arises; nor shall the association be

obligated in an amount in excess of One Hundred Thousand Dollars [$1(X),000] for all
claims arising out of a single occurrence . . . ."



1 988] GUARANTY ASSOCIA TION ACT 23

1

disparity raises numerous questions concerning Indiana's commitment

to providing fair and reasonable compensation to policyholders and

third-party claimants upon the insolvency of an insurance company.

1. Property Damage Claims.—Property damage claims under the
Act can arise in both first and third party contexts. ^^ In the third-

party context, the per claim and per occurrence limits of liability should

not raise significant concern over the adequacy of compensation to

property damage victims. On those occasions where the IIGA's limits
are insufficient to fully compensate the property damage suffered, the

injured party should have access to additional coverage under his own
policy of insurance. ^^ In fact, the property damage victim in most

instances will have an affirmative duty under the Act to initially exhaust

the coverage available under his own policy of insurance as a condition
precedent to his right to pursue a claim against the IIGA."^^

A more immediate concern over the IIGA's ability to fully com-
pensate insured policyholders arises in the first party context, partic-

ularly in claims involving the destruction of residences and businesses

by accidental fire or other means. Homeowner's and multi-peril com-

mercial insurance would fall within the category of direct insurance

subject to the Act.^^ If a homeowner's fire insurer was insolvent at

the time that an accidental fire destroys the home, the $49,900.00 limit

of liability under the Indiana Act may be insufficient to repay the
equity in the home. This could be particularly ruinous to the typical

class of homeowners (the elderly and retired) who have built up the
most equity in their homes.

Of equal concern would be the potential financial impact upon the
mortgage company who will be named in most instances as an additional
insured in the homeowner's policy under the standard mortgage clause.

Under Indiana law, the standard mortgage clause contained in the

homeowner's policy would be construed to create a separate policy of

^*In the first-party context, the IIGA would take the place of the injured party's

insolvent carrier for purposes of compensating the injured party's property damage. In

the third-party context, the IIGA would take the place of the third-party tortfeasor's

insolvent carrier for purposes of defending and indemnifying the tortfeasor for liability

arising out of damage to the injured party's property.

''For example, in those rare automobile property damage cases exceeding $49,900.00,

the automobile owner should have available to him collision or comprehensive coverage

in his own automobile insurance policy. Additionedly, in those cases involving property
damage to homes, businesses, and inventory or contents, the property owner should have

his own homeowner's or multi-peril business insurance policy to provide additional coverage.
*^See infra text accompanying notes 140-81.

"'IND. Code § 27-6-8-3 (1982). In Hardester v. Eubanks, 731 S.W.2d 780 (Ark.

1987), a fire insurance policy was considered a "covered claim" under language similar

to Indiana's act.



232 INDIANA LAW REVIEW [Vol. 21:223

insurance for the benefit of the mortgage company ."^^ xhus, the mortgage
company should have a separate claim under the Act, with protection

to a maximum of $49,900.00. Unless the mortgage company has also
insured its interest in the property under another policy, the money
recovered from the IIGA could be insufficient to cover the existing
mortgage debt. Under these circumstances, the homeowner could be
faced with a foreclosure action initiated by the mortgage company, as

well as the possibility of a deficiency judgment.

This prospect is even more alarming in the context of an accidental

fire destroying a business whose insurance company becomes insolvent.
Most businesses purchase comprehensive insurance covering the build-

ing, the contents, and also insuring against business interruption or

lost profits. If it is assumed that property damage to the building,
contents and lost profits constitute three separate claims under the

Act,"*^ the $100,000.00 per occurrence Hmitation would be applicable.'*'^

Even in the "mom and pop" operation, it is not hard to imagine the
situation where the IIGA's $100,000.00 Umit would not cover the equity

in the business' structure, contents, and any profits which were nec-

essarily lost during reconstruction.

This problem of inadequate compensation would be equally ap-

pHcable to a financial institution holding a mortgage on the business'

building. To the extent that the mortgage holder has not insured its
interest under another policy, its maximum recovery of $49,900.00 from
the IIGA could be insufficient to satisfy the outstanding mortgage
debt. Once again, it is not hard to imagine the scenario of the business

owner facing a foreclosure action by the mortgage company, along

with the prospects of a deficiency judgment.

2. Bodily Injury Claims.—Under Indiana law, recoverable damages
in a personal injury action include: (1) the reasonable expense of

necessary past and future medical care, treatment and services;"*^ (2)
the permanency of the injuries suffered;"*^ (3) past and future physical

pain and suffering;"*^ (4) past and future mental pain, suffering and

"federal Nat. Mtg. Ass'n v. Great American Ins. Co., 300 N.E.2d 117, 119 (Ind.

App. 1973).

"In this, and many other contexts, an issue will arise as to how many "claims"
are being presented against the IIGA. Under the assumed facts, the insured has purchased

three separate coverages, and has paid a premium for each separate coverage applicable

to the building, contents, and lost profits. Thus, the assumption is made that three separate
claims arose out of the same fire, thereby triggering the per occurrence limits of the Act.

^IND. Code § 27-6-8-7(a)(i) (1982).
^^Kavanagh v. Butorac, 140 Ind. App. 139, 144, 221 N.E.2d 824, 828 (1966).

^^Town of Elkhart v. Ritter, 66 Ind. 136, 141 (1879); Giles v. Fortune, 156 Ind.

App. 664, 667-68, 298 N.E.2d 34, 36 (1973).

"^City of Evansville v. Rinehart, 142 Ind. App. 164, 170, 233 N.E.2d 495, 499 (1968);
Giles 156 Ind. App. at 667-8, 298 N.E.2d at 36.



1988] GUARANTY ASSOCIATION ACT 233

anguish;"*® (5) the aggravation of a previous injury, disease or condi-

tion;"*^ (6) disfigurement and/or deformity resulting from the injuries;^"

(7) the value of lost wages or earnings;^' and (8) loss of future earning

capacity." Indiana is one of only four states which preclude an injured

party from recovering a majority of the damages identified above."

Only Missouri,^"* Nebraska,^^ and Tennessee^^ contain similar res-

trictions in their respective guaranty association acts. These states'

"^Posey County v. Chamness, 438 N.E.2d 1041, 1050 (Ind. Ct. App. 1982).

"'Dunkelbarger Const. Co. v. Watts, 488 N.E.2d 355, 358 (Ind. Ct. App. 1986);

Johnson v. Bender, 174 Ind. App. 638, 644-45, 369 N.E.2d 936, 940 (1977).

^°New York, C. & St. L. R.R. v. Henderson, 237 Ind. 456, 477, 146 N.E.2d 531,
543-44 (1957); Harrod v. Bisson, 48 Ind. App. 549, 560-61, 93 N.E. 1093, 1097 (1911).

''Reith-Riley Const. Co. v. McCarrell, 163 Ind. App. 613, 618, 325 N.E.2d 844,

848 (1975).

"State V. Totty, 423 N.E.2d 637, 646 (Ind. Ct. App. 1981); Duchane v. Johnson,

400 N.E.2d 193, 196 (Ind. Ct. App. 1980); Reith-Riley, 103 Ind. App. at 618, 325 N.E.2d

at 848.

"See infra notes 54-57 and accompanying text.

In the case of claims arising from bodily injury, sickness, or disease, including

death resulting therefrom, the amount for which the association shall be obligated

shall not exceed the claimant's reasonable expenses incurred for necessary medical,

surgical, X-ray and dental services, including prosthetic devices and necessary

ambulance, hospital, professional nursing and funeral services, and any amounts

actually lost by reason of claimant's inability to work and earn wages or salary

or their equivalent that would otherwise have been earned in the normal course

of such injured claimant's employment, to which may be added at the discretion
of the association a sum not to exceed one thousand dollars [$1,000] for all
other costs and expense incurred by the claimant prior to the insolvency. In

the case of a claim for wrongful death, the foregoing obligation of the association

shall be subject to the limitations provided by the wrongful death statutes of

the state of Indiana. Such amounts which are legally payable because of the

death of a claimant shall be paid to his estate, or father or mother or guardian

or to the surviving spouse or children or next of kin as set out in IC 34-1-1-

2 and IC 34-1-1-8. The amount for which the association shall be obligated

may also include payments in fact made to others, not members of claimant's
household, which were reasonably incurred to obtain from such other persons

ordinary and necessary services for the production of income in lieu of those

services the claimant would have performed for himself had he not been injured.

Ind. Code § 27-6-8-7(a)(i)(l) (1982).
^"Mo. Ann. Stat. § 375.785(4)(l)(a)b (1972) provides:

In the case of claims arising from bodily injury, sickness or disease, the amount

of any such award shall not exceed the claimant's reasonable expenses incurred

for necessary medical, surgical, x-ray, dental services and comparable services

for individuals who, in the exercise of their constitutional rights, rely on spiritual

means alone for healing in accordance with the tenets and practice of a recognized

church or religious denomination by a duly accredited practitioner thereof,

including prosthetic devices and necessary ambulance, hospital, professional nurs-

ing, and any amounts lost or to be lost by reason of claimant's inability to



234 INDIANA LAW REVIEW [Vol. 21:223

guaranty association acts, however, provide for a much higher Umit
of Hability^'^ than does Indiana's Act.

work and earn wages or salary or their equivalent, except that the association

shall pay the full amount of any covered claim arising out of a workers'

compensation policy. Such award may also include payments in fact made to
others, not members of claimant's household, which were reasonably incurred

to obtain from such other persons ordinary and necessary services for the

production of income in lieu of those services the claimant would have performed

for himself had he not been injured. Verdicts as respects only those civil actions

as may be brought to recover damages as provided in this subsection shall
specifically set out the sums applicable to each item in this subsection for which

an award may be made.
"Neb. Rev. Stat. § 44-2406(3) (Supp. 1986) provides:

In the case of claims arising from bodily injury, sickness or disease, including

death resulting therefrom, the amount of any such award shall not exceed the

claimant's reasonable expenses incurred for necessary medical, surgical, X-ray,

and dental services, including prosthetic devices and necessary ambulance, hos-

pital, professional nursing, and funeral services, and any amounts actually lost

by reason of claimant's inability to work and earn wages or salary or their

equivalent, but not other income, that would otherwise have been earned in the

normal course of such injured claimant's employment. Such award may also
include payments in fact made to others, not members of claimant's household,
which were reasonably incurred to obtain from such other persons ordinary and

necessary services for the production of income in lieu of those services the

claimant would have performed for himself or herself had he or she not been

injured. The amount of any such award under this subsection shall be reduced

by the amount the claimant is entitled to receive as the beneficiary under any

health, accident, or disability insurance, or under any salary or wage continuation

program under which he or she is entitled to benefits, or from his or her

employer in the form of workers' compensation benefits, or any other such

benefits to which the claimant is legally entitled, and any claimant who inten-
tionally fails to correctly disclose his or her rights to any such benefits shall

forfeit all rights which he or she may have by the provisions of the Nebraska
Property and Liability Insurance Guaranty Association Act.

'^Tenn. Code Ann. § 56- 12- 107(a)(1) (1980) provides:
In the case of claims other than workmen's compensation arising from bodily

injury, sickness or disease, including death resulting therefrom, the amount for

which the association shall be obligated shall not exceed the claimant's reasonable

expenses incurred for necessary medical, surgical. X-ray and dental services,

including prosthetic devices and necessary ambulance, hospital, professional nurs-

ing and funeral services, and any amounts actually lost by reason of claimant's

inability to work and earn wages or salary or their equivalent that would otherwise

have been earned in the normal course of such injured claimant's employment,

to which may be added at the discretion of the association an additional sum
as compensation for permanent physical impairment if said payment can be

made within the policy limits.
"Missouri's act provides coverage of $300,000.00, less a $200.00 deductible. Mo.

Ann. Stat. § 375.785(4)(l)(a) (1982). Nebraska's act provides coverage of $300,000.00.
Neb. Rev. Stat. § 44-2406(1) (Supp. 1986). Tennessee's act provides coverage of $100,000.00,

less a $100.00 deductible. Tenn. Code Ann. § 56- 12- 107(a)(1) (1980).



1988] GUARANTY ASSOCIATION ACT 235

Even a cursory review of Indiana's Act reveals that the Act provides

no coverage for some of the most devastating damages associated with
personal injury. While under appropriate circumstances the Act would

pay for a surgeon's medical bill to repair severe lacerations, the Act

does not permit recovery of damages for the permanent scarring that

the injured party will be required to live with for the rest of his life.

While the Act may pay for a surgeon's bill to set a badly broken leg,
it in no way provides any compensation for the fact that the injured
party will walk with a limp for the rest of his life, and can no longer

participate in physical activities from which he or she derived enjoyment

prior to the accident. While the Act may pay for the services of a
rehabilitative therapist, it in no way compensates the injured person
for the severe agony and pain which was suffered during the accident,

during rehabilitation, or which will be suffered in the future.

Of equal concern is the Indiana Act's $49,900.00 limit of liability,
particularly in light of rising medical costs. Any type of serious personal
injury can quickly result in the injured party incurring more than
$49,900.00 in medical expenses. To the extent that the injured party
does not have health insurance or any other type of collateral insurance,

the IIGA's maximum Hability of $49,900.00 may not satisfy the injured
party's medical obligations, which could have been otherwise satisfied

if the tortfeasor had higher bodily injury limits.

B. The IIGA *s Limit of Liability is Applicable to Workmen 's
Compensation Claims

Indiana's Act joins the majority of other jurisdictions to provide

coverage for claims against a workmen's compensation carrier which

has become insolvent. ^^ Of the forty-four jurisdictions whose guaranty
association acts cover workmen's compensation insurance, thirty-seven
of the jurisdictions include language in their statutes to the effect that

the limitation of liability does not apply to workmen's compensation
claims or that the guaranty association is required to pay the full

amount of any covered claim arising out of a workmen's compensation
policy. 5^ Indiana is one of only seven jurisdictions whose limits of

^^The only states which exclude workmen's compensation claims from their property/

casualty guaranty association acts are Arizona, Massachusetts, New Jersey, North Carolina,
Pennsylvania, Washington, and West Virginia. Ariz. Rev. Stat. Ann. § 20-661(6) (West

1975); Mass. Gen. Laws Ann. ch. 175D § 2 (West 1987); N.J. Rev. Stat. Ann. §
17:30A-2(b) (West 1985); N.C. Gen. Stat. § 58-155.43 (1982); Pa. Stat. Ann. tit. 40 §
1701.103(3)(vii) (Purdon 1971); Wash. Rev. Code Ann. § 48.32.020 (West 1984); W. Va.
Code § 33-26-3 (1982).

''Jurisdictions which specify that the full amount of any workmen's compensation



236 INDIANA LAW REVIEW [Vol. 21:223

liability are applicable to any claim under a workmen's compensation

policy.^ Indiana's limit of liability of $49,900.00, however, is sub-

stantially lower than the limits of liability which would be applicable

to workmen's compensation claims in the six other jurisdictions. Five

jurisdictions provide coverage up to $300,000.00 for workmen's com-

pensation claims,^^ while one jurisdiction provides that workmen's com-

pensation payments cannot exceed policy limits."

As previously noted, Indiana's Guaranty Association Act restricts
recovery thereunder to medical expenses and lost income." This re-

claim shall be paid include Alabama, Ala. Code § 27-42-8(1) (1986); Alaska, Alaska
Stat. § 21.80.060 (1984); California, Cal. Ins. Code § 1063.1(6) (West 1987); Colorado,
Colo. Rev. Stat. § 10-4-508(l)(a) (Supp. 1986); Connecticut, Conn. Gen. Stat. Ann.

§ 38-278(l)(a)(ii) (West 1987); Delaware, Del. Code Ann. tit. 18 § 4208(a)(1) (1975); the
District of Columbia, D.C. Code Ann. § 35-1906(a)(l) (1981); Florida, Fla. Stat. Ann.

§ 631.57(l)(a)(3) (West 1984); Georgia, Ga. Code Ann. § 33-36-3(2)(E) (Supp. 1987);
Hawaii, Haw. Rev. Stat. § 431D-8(a)(l) (1985); Idaho, Idaho Code § 41-3608(a) (Supp.
1987); Illinois, III. Ann. Stat. Ch. 73 § 1065-87-2 (Smith-Hurd Supp. 1987); Iowa, Iowa

Code Ann., 515 B.5(l)(a) (Supp. 1987); Kansas, Kan. Stat. Ann. § 40-2906(a)(l) (1981);
Kentucky, Ky. Rev. Stat. Ann. § 304.36-080(l)(a) (Michie/Bobbs-Merrill 1981); Louisiana,

La. Stat. Ann. § 22:1382(l)(a) (Supp. 1987); Maine, Me. Rev. Stat. Ann. tit. 24-A §
4438(1)(A) (Supp. 1987); Maryland, Md. Ins. Code Ann. art. 48A § 501-19; Michigan,
Mich. CoMP. Laws Ann. § 500.7901-7949 (1983 & Supp. 1987); Minnesota, Minn. Stat.
Ann. (1983 Supp. 1987) § 60C.09(2) (West 1986); Mississippi, Miss. Code Ann. § 83-23-

115(l)(a) (1972); Missouri, Vernon Ann. 375.785(4)(a) (Vernon Supp. 1987); Montana,
Mont. Code Ann. § 33-10-105(l)(a) (1987); Nebraska, Neb. Rev. Stat. § 44-2406(1)

(1984); New Hampshire, N.H. Rev. Stat. Ann. § 404-B:8(l)(a) (1983); New Mexico,
N.M. Stat Ann. § 21.28-C(5)(2) (West Supp. 1987); Oklahoma, Okla. Stat. Ann. tit.

36 § 2007(A)(1)(a) (Supp. 1987); Oregon, Or. Rev. Stat. § 734.570(1) (1985); Rhode

Island, R.I. Gen. Laws § 27-34-6 (Supp. 1987); South Carolina, S.C. Code Ann. § 38-
19-60(l)(a) (Law. Co-op. 1985); South Dakota, S.D. Codified Laws § 58-29A-16 (1978);
Tennessee, Tenn. Code Ann. § 56-12-107(1) (Michie 1980); Texas, Tex. Ins. Code Ann.

§ 21.28-C(5)(2) (West Supp. 1987); Utah, Utah Code Ann. § 31A-28-207(l)(a) (1986);
Vermont, Vt. Stat. Ann. tit. 8 § 3615(a)(1) (1984); Virginia, Va. Code Ann. § 38.2-

1606(l)(i) (Supp. 1987); and Wyoming, Wyo. Stat. § 26-31-106(a)(i)(A) (1977).
^'Arkansas, Ark. Code § 23-90-103 (1987); Indiana, Ind. Code § 27-6-8-3 (1982);

Nevada, Nev. Rev. Stat. § 687 A.033 (1985); New York, N.Y. Ins. Law § 7603(D)
(McKinney 1985); North Dakota, N.D. Cent. Code § 26.1-42-01 (Supp. 1987); Ohio,
Ohio ^ev. Code Ann. § 3955.01 (Anderson Supp. 1986); Wisconsin, Wis. Stat. Ann.

§ 646.01(1) (West Supp. 1987) are the only states whose limits of liability are applicable

to any claims under a workmen's compensation policy.

^'Arkansas, Ark. Code § 23-90-103(2) (1987); Nevada, Nev. Rev. Stat. § 687
A.060(l)(a) (1985); North Dakota, N.D. Cent. Code § 26.1-42'05(l)(a) (Supp. 1987);
Wisconsin, Wis. Stat. Ann. § 646.31(4) (West Supp. 1987) have a $300,000.00 limit of

liabiHty.

^^New York, N.Y. Ins. Law § 7608(a) (McKinney 1985) and Ohio, Ohio Rev. Code
Ann. 3955.08(A)(1) (Anderson Supp. 1986) provide that any payment for workmen's

compensation cannot exceed the policy limits of the insolvent' insurer.

"5ee supra note 45.



1988] GUARANTY ASSOCIATION ACT 237

striction, together with the $49,900.00 hmitation of liabihty apphcable

to workmen's compensation claims may create an irreconcilable conflict
between the IIGA Act and the Indiana Workmen's Compensation Act.

The Indiana Workmen's Compensation Act was enacted in order
to afford an expeditious remedy for work-induced injury or death

which the worker or his dependents could pursue with a minimum of
legal procedure. ^"^ In lieu of requiring the employee to successfully

maintain a suit against the employer, the Act merely requires that the

employee or his dependents demonstrate
*

'personal injury or death by

accident arising out of and in the course of employment. "^^ In order

to balance the effects of this "no-fault" legislation, the rights and

remedies of the employee and dependents under the Workmen's Com-
pensation Act constitute the exclusive remedy available against the

employer.^^

The Indiana Workmen's Compensation Act provides for certain
mandatory benefits which must be awarded for a claim subject to the

Act. These benefits include the payment of medical, surgical, hospital

and nurse services,^^ temporary partial disability,^^ temporary total

disability, ^^ permanent impairment and/or disfigurement, "^^ death ben-

efits, "'^ and burial expenses.''^ A comparison of the benefits available
under the Indiana Workmen's Compensation Act and the IIGA Act
reveals several inconsistencies that would arise in the event of a claim

against the IIGA by virtue of a workmen's compensation insurer's
insolvency.

First, as long as medical expenses are incurred within two years

from the last day for which compensation was paid under an original

award,^^ there is no limitation on the amount of medical expenses
which an injured employee may be paid under the Workmen's Com-
pensation Act.'^'* By contrast, the IIGA Act precludes the recovery of
medical expenses beyond the limit of liability of $49,900.00.^^

Second, an award for ''impairment" under the Indiana Workmen's
Compensation Act strictly refers to the partial or total loss of function

^Thompson v. A.J. Thompson Stone Co., 81 Ind. App. 442, 144 N.E. 150 (1924).
^^IND. Code § 22-3-2-5 (Supp. 1987).
<^IND. Code § 22-3-2-6 (1982).
^'Id. § 22-3-3-4.

««M § 22-3-3-9.

''Id. § 22-3-3-8.

^"IND. Code § 22-3-3-10 (Supp. 1987).
''Ind. Code §§ 22-3-3-16, -17 (1982 & Supp. 1987).
'^IND. Code § 22-3-3-21 (Supp. 1987).
'Ud. § 22-3-3-27(c).

''Id. § 22-3-3-4.

''Id. § 27-6-8-7(a)(l) (1982).



238 INDIANA LAW REVIEW [Vol. 21:223

of a part of the body or of the body as a whole, and not an impairment

of wage earning powers. ^^ By restricting recovery to medical expenses
and lost income, the Act appears to preclude an injured employee's

recovery of damages for impairment if the workmen's compensation

carrier has become insolvent. "^"^

As previously noted, an overwhelming majority of other jurisdic-
tions, noting the restrictive nature of the Workmen's Compensation
Act, have expressly provided that any limits of liability language in

the Guaranty Association Act would not be applicable to a claim arising

under a workmen's compensation act, and that the association would

be required to satisfy in full any workmen's compensation claim. ''^ It

remains to be seen whether Indiana courts will permit the rights and

remedies mandated under the Workmen's Compensation Act to be
removed from coverage under the IIGA Act.

Of additional concern is the fact that the $49,900.00 limit of liability
under the IIGA Act may in some circumstances be less than the amount
which could be awarded under a workmen's compensation claim. Once

again, the Indiana courts will presumably be required to determine

whether the legislature can use the IIGA Act to place a lower limit
of liability than that mandated by the Indiana Workmen's Compensation
Act.

C IIGA's Treatment of Subrogation Claims
The Act expressly requires any person having a claim against the

IIGA to first exhaust his right under any other insurance policy pro-
viding coverage for a "covered claim. ""^^ In most instances, this ex-

^^White V. Woolery Stone Co., 181 Ind. App. 532, 396 N.E.2d 137 (1979); Perez

V. United States Steel Corp., 172 Ind. App. 242, 359 N.E.2d 925 (1977); Runion v. Indiana

Glass Co., 98 Ind. App. 453, 16 N.E.2d 961 (1938); Sumpter v. Colvin, 98 Ind. App.

453, 190 N.E. 66 (1934).

"The Missouri Court of Appeals creatively side-stepped this issue in the decision of

Hankins Const, v. Missouri Ins. Guar. Ass'n., 724 S.W.2d 583 (Mo. App. 1986). The

MIGA argued that an award for "permanent partial disability" was not a covered claim
since the award was not directly traceable to either medical expenses or lost wages as

required by the Missouri Act. The Hankins court, while recognizing that an award for

permanent partial disability could be made even though an injury would have no affect

upon the employee's earning capacity, nonetheless found that an award of permanent

partial disability constituted "lost income" under the Missouri Act. The Hankins court

further rejected the MIGA's suggestion that a separate hearing or judicial determination
should be required in order to determine what amount of the permanent partial disability

award was attributable to lost earnings. Id. at 588.

^^See supra note 60.

^'IND. Code § 27-6-8-1 1(a) (1982) provides:
Any person having a claim against an insurer under any provision in an insurance



1988] GUARANTY ASSOCIATION ACT 239

haustion requirement will result in the injured party pursuing a first-

party claim against his uninsured motorist coverage. ^^ The majority of

uninsured motorist provisions contain express contractual language per-

mitting the carrier, to the extent of payment, to become subrogated

to the rights of the injured party against a third-party tortfeasor.®'

The IIGA Act expressly provides that *'any amount due any re-
insurer, insurer, insurance pool, or underwriting association, as sub-

rogation recoveries or otherwise" is not a "covered claim" under the

Act.®2 Rather, the insurance company's only avenue through which to

enforce its subrogation rights is to assert a claim as a creditor directly

with the receiver or Hquidator of the insolvent insurer. ^^ Furthermore,

the Indiana Act expressly precludes a solvent insurer from pursuing

its subrogation rights against the insured of an insolvent insurer. ^'^

1. Constitutionality.—Only five jurisdictions permit a subrogated
insurance carrier to recover some, or all, of its subrogation claim

against the guaranty association.®^ The remaining jurisdictions, similar

policy other than a policy of an insolvent insurer which is also a covered claim,

shall be required to exhaust first his right under the policy. Any amount payable
on a covered claim under this chapter shall be reduced by the amount of recovery

under the insurance policy.

^°See infra text accompanying notes 153-70.

*'The policy or endorsement affording the coverage specified in this chapter

may also provide that payment to any person of sums as damages under such
coverage shall operate to subrogate the insurer to any cause of action in tort

which such person may have against any other person or organization legally
responsible for the bodily injury or death, or property damage, because of which

such payment is made, and the insurer shall be subrogated to the extent of

such payment, to the proceeds of any settlement or judgment that may later
result from the exercise of any rights of recovery of such person against any

person or organization legally responsible for said bodily injury or death, or

property damage, for which payment is made by the insurer. Such insurer may
enforce such rights in its own name or in the name of the person to whom
payment has been made, as in their interest may appear, by proper action in
any court of competent jurisdiction.

IND. Code § 27-7-5-6 (Supp. 1987).
«2lND. Code § 27-6-8-4(4) (1982).
*^[A] claim for any such amount [subrogation recovery or otherwise], asserted

against a person insured under a policy issued by an insurer which has become

an insolvent insurer, which if it were not a claim by or for the benefit of a

reinsurer, insurer, insurance pool or underwriting association, would be a 'covered

claim' may be filed directly with the receiver or liquidator of the insolvent
insurer ....

Id.

*^The Act states: "[I]n no event may any such claim [subrogation recovery or
otherwise] be asserted in any legal action against the insured of such insolvent insurer

. . .
." Id.

"California's Act provides that:



240 INDIANA LAW REVIEW [Vol. 21:223

to Indiana, expressly exclude subrogation claims from the definition

of "covered claims" under the guaranty association statute.

The constitutionality of such an exclusion was recently challenged

in the decision of California Union Insurance Co. v. Central National

Insurance Co. of Omaha. ^^ In concluding that such an exclusion was
constitutional, the California Court of Appeals noted:

The Legislature chose to provide a limited form of protection
for the public, not a fund for the protection of other insurance

companies from the insolvencies of fellow members. In com-

ments upon a similar provision, excluding from coverage the

claims of other insurers by subrogation or otherwise, the drafters

of the National Association of Insurance Commissioners In-

surance Guaranty Association Model Bill stated, '*the subcom-
mittee does not feel that coverage should be extended to elements

of the insurance industry which know or reasonably can be
expected to know the financial condition of various companies."
The Legislature's choice to provide coverage only to the original

claimant under the policy is rational and constitutional.^''

2. Other Subrogation Rights or Liens.—The Act carefully re-
stricted the subrogation exclusion to '*any reinsurer, insurer, insurance

pool, or underwriting association."^^ Thus, other subrogation and lien

provisions in federal®^ and state^*^ statutes and regulations apparently

A member insurer may recover in subrogation from the association only one-
half of any amount paid by such insurer under uninsured motorist coverage for

bodily injury or wrongful death (and nothing for a payment for anything else),

in those cases where the injured person insured by such an insurer has proceeded

under his or her uninsured motorist coverage on the ground that the tortfeasor

is uninsured as a result of the insolvency of his or her liability insurer ...

provided that such member insurer shall waive all rights of subrogation against
such tortfeasor.

Cal. Ins. Code § 1063.2(c)(1) (West Supp. 1987). Georgia allows subrogation if the

subrogation insurer has net worth of less than $3,000,000.00. Ga. Code Ann. § 3-36-

3(2)(F) (Supp. 1987). Michigan permits subrogation if the net worth of the member insurer
is less than 1/10 of 1 percent of aggregate premiums written by member insurers during

the preceding calendar year. Mich. Comp. Laws Ann. § 500.7925(3) (West 1983). Both
New York and Wisconsin contain no language in their statutes prohibiting subrogation.

«*117 Cal. App. 3d 729, 172 Cal. Rptr. 35 (1981).

^'Id. at 734.

««lND. Code § 27-6-8-4(4) (1982).
^^See, e.g., 42 U.S.C. § 1395(y)(b)(l) (1983) (subrogating the United States to the

extent of any payments made under Medicare to the recipient's cause of action against
any liable third party); 38 U.S.C. § 629 (1983) (subrogating the United States to the

extent of any payment made to a veteran to the extent of the veteran's rights against a
third-party tortfeasor); 5U.S.C. §8131 (1983) (subrogating the United States to the extent



1 988] GUARANTY ASSOCIA TION ACT 241

were not intended to be included within the exclusion. Once again, it

will be up to the Indiana courts to determine whether the federal

government, state government and other private individuals may pursue
subrogation claims under the IIGA for medical-related and wage benefits
provided to injured parties.

3. Subrogation Rights Against the Insured of the Insolvent In-

surer.—Finally, Indiana's Act expressly precludes an insurer from en-
forcing its subrogation rights directly against an insured of an insolvent

insurance company.^* Other jurisdictions have reached a similar con-

clusion, either through express statutory language in the Guaranty

Association Act^^ or by judicial fiat.^^ The statutes and judicial decisions

are problematic because they provide a negligent tortfeasor with ad-

ditional protection which was not present under his original insurance

policy.

In choosing the bodily injury and property damage limits in a
liability policy, the insured determines the dollar value of risk for which

he will carry insurance, as well as the dollar value of risk which he

will self insure. Unless the insured can demonstrate that the insurer

of any medical benefits paid to an injured employee to the employee's rights against a

third-party tortfeasor); 42 U.S.C. § 2651 (1983) (creating subrogation rights in the United

States to cover all instances in which the United States is authorized or required by law

to furnish hospital, medical, surgical or dental care and treatment to a person who is
injured or suffers a disease under circumstances creating a tort Uability upon some third

person).

^See, e.g., Ind. Code § 12-1-7-24.6 (1982) (providing the Indiana State Department
of Public Welfare with a lien, to the extent of Medicaid benefits paid, on any recovery

from a third-party tortfeasor or insurance company); Ind. Code § 32-8-26-3 (Supp. 1987)
providing that any private or state-owned hospital has a lien for all reasonable and

necessary charges for hospital care, treatment, or maintenance of a patient upon any cause

of action, suit, or claim accruing to the patient, that necessitated the hospital care,

treatment or maintenance; Ind. Code § 32-8-38-2 (Supp. 1987) (creating in an emergency
ambulance service a lien for all reasonable and necessary charges upon any action, suit

or claim accruing to the patient because of illness or injuries that gave rise to the cause

of action, and necessitated the provisions of emergency ambulance services); Ind. Code

§ 12-5-6-9 (Supp. 1987) (creating subrogation rights in the State Department of Public

Welfare for any hospital care afforded to indigents against any other person who is liable
for the illness or injury for which assistance was granted); Ind. Code § 16-7-3. 6-8(c)

(1984) (subrogating the State of Indiana to the extent of any payment made under the
Compensation for Victims of Violent Crimes Fund to the rights of the victim against the

perpetrator of the crime or any person liable for the pecuniary loss resulting from the

crime).

"Ind. Code § 27-6-8-4(4) (1982).
^^See, e.g., Fla. Stat. Ann. § 631.54(3) (West 1984) (providing that "Member

insurers shall have no right of subrogation against the insured of any insolvent member.");

Ohio Rev. Code Ann. § 3955.01(B)(2) (Supp. 1986).
''Sandson's Bakery v. Glover, 162 N.J. Super. 225, 392 A.2d 640 (1978).



242 INDIANA LAW REVIEW [Vol. 21:223

was guilty of negligence or bad faith in its settlement attempts,^'* any

judgment in excess of the insurer's policy Umits will be the financial

responsibility of the insured. This personal financial responsibility ex-

tends to both original claims by injured persons, as well as the sub-

rogation claims of insurance companies who have been forced to provide
coverage to the injured parties due to the tortfeasor's conduct.

The Indiana Act's preclusion of subrogation actions against an

insured of an insolvent carrier insulates the insured from personal

liability vis-a-vis subrogated insurance companies. This, in turn, affords

the insured much greater protection than was afforded, or even con-
templated under his insurance policy.

A logical alternative to Indiana's approach could be to permit
subrogation actions against the insured to the extent that the claim is

outside of the coverage limits afforded by the policy issued by the

insolvent insurer. This type of approach has been embraced within the

Iowa Guaranty Association Act.^^ This would protect the tortfeasor to

the same extent as the insurance policy which he purchased, and would

also protect subrogated insurance companies from bearing the brunt

of another carrier's insolvency.

D. The Medical Malpractice Act

IIGA's limit of liability and restriction of recoverable damages also

raises serious questions concerning a medical malpractice claim against

a qualified health care provider whose insurance carrier has become
insolvent. The Indiana Medical Malpractice Act^^ provides that a health

care provider can become qualified under the Act by paying the ap-
plicable surcharge and by filing proof of financial responsibility with

the Commissioner of Insurance, which can include proof that the health

care provider is insured by a pohcy of malpractice liability insurance

in the minimum amount of $100,000.00 per occurrence, and an annual
aggregate which is dependent upon the function performed by the

health care provider.^^ A qualified health care provider's liability for

'"Under Indiana law, "a liability insurer, having assumed control of the right of

settlement of claims against the insured, may become liable in excess of its policy limit
if it fails to exercise due care in representing its insured." Bennett v. Slater, 154 Ind.

App. 67, 70, 289 N»E.2d 144, 146 (1972).

''The Iowa Act provides that there can be no subrogation actions against the insured

"except to the extent that the claim is outside the coverage of the pohcy issued by the

insolvent insurer." Iowa Code Ann. § 5 15(B). 3 (Supp. 1987).
'^IND. Code § 16-9.5-1-1 to -10-4 (1982 & Supp. 1987).
'^ND. Code § 16-9.5-2-1, 16-9.5-2-6(a)(l) (1982 & Supp. 1986).



1988] GUARANTY ASSOCIATION ACT 243

an occurrence of malpractice is limited to $100,000.00.^^ Any judgment
or settlement, which is in excess of the health care provider's liability

of $100,000.00, is then recoverable from the patient's compensation

fund.^^ The patient's compensation statute, in turn, provides that no
damages can be recovered thereunder until the health care provider or

its insurer has paid its policy limits of $100,000.00,^^^ or its annual

aggregate has been exhausted. '^^

Neither the Medical Malpractice Act nor the IIGA Act offer any
guidance whatsoever concerning how a claim should be handled against
a qualified health care provider where that provider's medical mal-

practice carrier becomes insolvent. Technically, a health care provider

is deemed qualified upon providing proof of malpractice insurance in
the minimum amount of $100,000.00 per claim. ^^^ Does that health
care provider remain qualified under the Act and subject to maximum
liability of $100,000.00 if his medical malpractice insurer becomes

insolvent? Alternatively, does the carrier's insolvency remove the health

care provider from '^qualified" status, thereby subjecting him to un-

limited liability?

Given the Act's stated purpose of avoiding excessive financial loss

to policyholders because of the insolvency of an insurer, a persuasive

argument could be made that the health care provider should remain
qualified under the Indiana Act. If this is the correct interpretation,

does the Act's limit of liability of $49,900.00 preclude an injured party

from ever gaining access to the patient's compensation fund, which

under certain circumstances could involve a potential recovery of an

additional $400,000.00? ^^^ After all, access to the patient's compensation

fund is strictly limited to those situations where a qualified health care

provider has paid $100,000.00, or the annual aggregate limit has been

exhausted. ^^'^

Completely blocking an injured patient's access to the patient's

compensation fund would appear contrary to the stated purpose of the

IIGA Act to avoid excessive financial loss to claimants because of the
insolvency of an insurer. If the courts determine that the $49,900.00

^»Ind. Code § 16-9.5-2-2(b) (1982). The Act further provides, however, that in the
event that the annual aggregate has been paid by or on behalf of the qualified health

care providers, all sums which may thereafter become due and payable to a claimant
arising out of an act of malpractice shall be paid during that year from the Patients

Compensation Fund. Ind. Code § 16-9.5-2-7 (1982).
''IND. Code § 16-9.5-2-2(c) (1982).
'°°lND. Code § 16-9.5-4-3 (1982).
"»IND. Code § 16-9.5-2-7 (1982).
'"^IND. Code § 16-9.5-2-6 (Supp. 1987).
'^'See Ind. Code § 16-9.5-2-2 (1982).
^^See supra notes 98-101 and accompanying text.



244 INDIANA LAW REVIEW [Vol. 21:223

limit under the Act does not preclude an injured patient's access to

the patient's compensation fund, at what dollar level does the com-

pensation fund become operable? Subject to the $500,000.00 limita-

tion, ^^^ does the patient's compensation fund become operable upon
the IIGA's payment of $49,900.00 to the injured patient? The resolution

of these issues will likewise require Indiana courts to carefully scrutinize

the stated goal and purpose behind both the IIGA Act and the Medical
Malpractice Act.

III. Presentation of Covered Claim Under the Act

To determine whether the Act will afford protection to a particular
claimant, it is necessary to determine whether the asserted claim falls

within the definition of a "covered claim" outlined in Indiana Code
section 27-6-8-4(4). The claimant should also review the exclusionary

language of that definition which eliminates certain claims from cov-

erage under the Act even though they otherwise fall within the definition

of a **covered claim. "'^^ Once it is determined that a particular claim

is covered by the Act, it is extremely important to assure that the

claim is properly filed in the liquidation proceeding of the insolvent

insurer. The Act states that a '^covered claim" within the meaning of

the Act shall not include:

[A]ny unpaid claim or judgment not filed timely or properly

in the liquidation proceedings in accordance with the provisions

of IC 27-1-4 [repealed] '°'' if the insolvent insurer is a domestic

insurer or in accordance with the applicable provisions of the

law of the state of domicile if the insolvent insurer is not a

domestic insurer. ^^^

As a result, the Act specifically excludes from the definition of a
*

'covered claim" any claims which are not properly filed. Therefore,

it is important to comply with any and all requirements for the filing

of claims relating to insolvent insurers. Every practitioner should care-

fully review and assure compliance with all current statutory require-

ments which might relate to the filing of such claims. It is necessary

not only to comply with Indiana's statutes concerning the filing of

'"^ND. Code § 16-9.5-2-2 (1982).
"^IND. Code § 27-6-8-4(4) (1982).
'"This chapter, concerning rehabilitation, liquidation and conservation, was repealed

by Acts 1979, P.L. 255, § 3. For present provisions, see Ind. Code § 27-9-1-1 to 27-9-

4-10 (1982 & Supp. 1986).
'°«Ind. Code § 27-6-8-4(4) (1982).



1988] GUARANTY ASSOCIATION ACT 245

such claims, '^^ but it is also necessary to comply with all applicable

provisions of the law of the state of domicile of the insolvent insurer

if the insolvent insurer is not a domestic insurer. •'^

Upon entry of an order of liquidation of a domestic insurer/'^ the
liquidator appointed by the court, unless otherwise directed, is required

to give notice by first class mail as soon as possible to all persons

known or reasonably expected to have claims against the insurer, at
their last known address as indicated by the records of the insurer. ''^

The liquidator is also required to provide notice of the liquidation as

soon as possible by ^^publication in a newspaper of general circulation

in the county in which the insurer has its principal place of business

and all other locations the liquidator considers appropriate. ''"'^ The

notice to potential claimants shall require the claimants to file, along

with proper proof, their claims and shall state a deadline for the filing

of such claims. ^^"^ Proof of all claims must be filed with the liquidator

on or before the last date for filing specified in the notice.''^ Claims

which are filed after the deadline set by the liquidator and identified

in the notice are assigned a lower priority for the distribution of assets

from the insurer's estate than are claims which are filed on time.'^^

Any third party alleging a cause of action against the insured of
an insurer in liquidation may file a claim with the liquidator."^ However,
whether the third party files such a claim, the insured against whom
such claims are asserted may file a claim on his own behalf in the
Hquidation proceedings.''^

^'^See supra note 108 and accompanying text. See also Ind. Code § 27-6-8-7(a)(i)(2)

(1982). For Indiana's statutory requirements relating to the assertion of such a claim, see

Ind. Code §§ 27-9-3-10, 27-9-3-33, and 27-9-3-34 (1982).
>'°IND. Code § 27-6-8-4(4) (1982). See also Ind. Code §§ 27-9-4-3(c), 27-9-4-7 (1982).

'''See Ind. Code § 27-9-3-6, to -7 (1982). An order to liquidate the business of a
domestic insurer must appoint the Commissioner of Insurance (and his successors in office)

as liquidator. Ind. Code § 27-9-3-7(a)(l) (1982).
"^IND. Code § 27-9-3-10(a)(4) (1982).
"'Id. § 27-9-3-10(a)(6) (1982). See also §§ 27-6-8-9(b)(i), 27-6-8-7(a)(v) (1982).

"'Id. § 27-9-3-10(b).

"'Id. § 27-9-3-33(a). See also Middleton v. Imperial Insurance Co., 34 Cal. 3d 134,

193 Cal. Rptr. 144, 666 P.2d 1 (1983), holding that a liquidator who failed to give notice
of the time for filing claims, as required by statute, is estopped from asserting the time

limitation contained in the notice against late filers who did not receive the required
notice.

"'See Ind. Code §§ 27-9-3-40(3) (timely filed claims), § 27-9-3-40(6) (1982) (claims
filed late).

"'Id. § 27-9-3-36(a).

"'Id. § 27-9-3-36(b).



246 INDIANA LAW REVIEW [Vol. 21:223

A proper proof of claim must contain certain specific information
and must be signed by the claimant. ^'^ At a minimum, the proof of
claim must include the following information:

1. The particulars of the claim including the consideration
given for it.

2. The identity and amount of the security on the claim.

3. The payments made on the debt, if any.

4. That the sum claimed is justly owed and that there is no
setoff, counterclaim, or defense to the claim.

5. Any right of priority of payment or other specific right
asserted by the claimants.

6. A copy of written instrument that is the foundation of the
claim.

7. The name and address of the claimant and the attorney
who represents him, if any.^^°

The liquidator may require that additional information or documents
be provided by the claimant. ^^^ In addition, the liquidator may require
that claims be asserted on a prescribed form.'^^ After receiving a

properly filed claim from a third party having a covered claim against

any insured of the insolvent insurer, the liquidator must immediately

forward the claim to the IIGA for processing in accordance with the
provisions of the Act.'^^

In the event of the insolvency of an insurer who is not domiciled
in the state of Indiana, the Commissioner of Insurance may file a
petition requesting his appointment as an ancillary liquidator '^'^ if the

Commissioner finds that * 'there are sufficient assets of the insurer

located in Indiana to justify the appointment of an ancillary liquidator

and the protection of the creditors or policyholders in Indiana requires

such appointment. "^25 i^ ^]^q event of the appointment of an ancillary

receiver within the state of Indiana, Indiana claimants may file their
claims either with the ancillary receiver in Indiana or with the appointed

"'M § 27-9-3-34.
'2°M § 27-9-3-34(a)(l)-(7).

'^'M § 27-9-3-34(b).

'^^IND. Code § 27-6-8-7(a)(i)(2) (1982).
'^See IND. Code § 27-9-l-2(a) and (o) (1982).
•"/c?. § 27-9-4-4(a).



1988] GUARANTY ASSOCIATION ACT 247

liquidator in the liquidation proceeding in the reciprocal state. '^^ Such

claims must be filed on or before the last date fixed for the filing of

such claims in the liquidation proceedings of the domiciliary state. ^^^

If no ancillary receiver has been appointed within the state of Indiana

relative to the liquidation of an insurer not domiciled in the state of

Indiana, it would appear necessary to assert claims pursuant to the

laws of the state of domicile of the insolvent insurer or the laws of

the state where any liquidation proceeding is pending.

The Act requires a claimant to exhaust his rights under applicable

policies of insurance other than the insolvent insurer. '^^ Any amounts
payable as a covered claim pursuant to the Act shall be reduced by

the amount of recovery from such other insurance policies. '^^ For this

reason, it is important for a claimant to carefully examine the possible

existence of any other appHcable insurance coverage and assert timely

claims against that coverage. '^^ The Act also requires that under certain

situations a claimant must first assert claims against the guaranty

associations of other states. '^^ If a claimant fails to timely assert his

claims against other applicable guaranty associations or insurance pol-

icies, he runs the risk of voiding any applicable coverage which might

be afforded by the Act.

'^M § 27-9-4-7(a). A reciprocal state is defined by Ind. Code § 27-9-l-2(p) (1982)
as:

any state other than Indiana in which:

(1) in substance and effect IC 27-9-3-7(a), IC 27-9-4-3, IC 27-9-4-4, and IC 27-

9-4-6 through IC 27-9-4-8 are in force;

(2) provisions are in force requiring that the commissioner (or equivalent official)

be the receiver of a delinquent insurer; and

(3) some provision exists for the avoidance of fraudulent conveyances and

preferential transfers.

^^^Id. § 27-9-4-7(a). Domiciliary state is defined as "the state in which an insurer is

incorporated or organized, or, in the case of an ahen insurer, its state of entry." Id. §
27-9-i-2(f).

•2«lND. Code § 27-6-8-1 1(a) (1982).
'^^Id.

^^°See supra text accompanying notes 39-40, and infra text accompanying notes 140-

170.

'^'Any person having a claim which may be recovered under more than one (1)
insurance guaranty association or its equivalent shall seek recovery first from

the association of the place of residence of the insured except that if it is a

first party claim for damage to property with a permanent location, he shall

seek recovery first from the association of the location of the property, and if

it is a workmen's compensation claim, he shall seek recovery first from the

association of the residence of the claimant. Any recovery under this chapter
shall be reduced by the amount of recovery from any other insurance guaranty

association or its equivalent.

Ind. Code § 27-6-8-1 1(b) (1982).



248 INDIANA LAW REVIEW [Vol. 21:223

The Act allows for a stay of any action pending in a court of the

state of Indiana in all proceedings in which the insolvent insurer is a

party or is obligated to defend a party. '^^ The language of this statute
allowing for a stay is mandatory and provides an automatic right to

a stay of at least six months. The Act defines an insolvent insurer as:

a member insurer holding a valid certificate of authority to
transact insurance in this state either at the time the pohcy

was issued or when the insured event occurred and (b) against
whom a final order of liquidation, with a finding of insolvency,
to which there is no further right of appeal, has been entered

by a court of competent jurisdiction in the company's state of
domicile. '"

Based upon this definition of an ''insolvent insurer," the automatic

stay is available in all actions pending in Indiana courts regardless of

whether the liquidation proceeding against the insolvent insurer is pend-

ing within the state of Indiana or some other state.
In addition to the automatic stay, the Act specifically authorizes

the IIGA to petition the court to set aside "any decision, verdict or
finding based on the default of the insolvent insurer or its failure to

defend an insured ... ."^^^ The Act states that upon the filing of a
petition by the IIGA to set aside such a default judgment, the association
''shall be permitted to defend against the claim on the merits. "'^^

Similarly, the statute relating to the filing of a proof of claim in the

liquidation proceeding states that "[a] judgment or order against an

insured or the insurer entered at any time by default or by collusion" ^^^

need not "be considered as evidence of liability or the measure of

damages. "'^^ The same statute mandates that "[a] judgment or order

against an insured or the insurer entered not more than four [4] months
before the filing of the petition [for liquidation]"*^^ need not be con-

'^^All proceedings in which the insolvent insurer is a party or is obligated to

defend a party in court in this state shall be stayed for up to six [6] months

and such additional time thereafter as may be determined by the court from
the date the insolvency is determined or an ancillary proceeding is instituted in

the state whichever is later to permit proper defense by the association of all

pending causes of action.

Id. § 27-6-8-17 (emphasis added). See also Ind. Code § 27-9-4-4 (1982) (relating to the
institution of ancillary proceedings for insolvent insurers which are not domiciled in

Indiana).

'"Ind. Code § 27-6-8-4(5) (1982) (emphasis added).
•3^lND. Code § 27-6-8-17 (1982).
'"M (emphasis added).
'^*IND. Code § 27-9-3-34(d)(2) (1982).
'"M § 27-9-3-34(d).
•^«M § 27-9-3-34(d)(3).



1988] GUARANTY ASSOCIATION ACT 249

sidered as evidence of liability or the measure of damages. As a result,

any judgment against the insolvent insurer or its insured is of little

value if the judgment was obtained by default or within four months

prior to the filing of the liquidation petition.

IV. A Closer Look at Specific Problems Under the Act

As noted by the Kiner court, due to substantial similarities between
Indiana's Act and the guaranty association acts of other jurisdictions,

the Indiana courts will look to the case law of other jurisdictions for

guidance in construing the Indiana Act.^^^ Numerous decisions from
other jurisdictions will lend helpful guidance to the Indiana courts in

addressing various issues which will arise under the Indiana Act.

A. Exhaustion of Remedies Under Other Insurance Policies

The Kiner court noted that *'[t]he Insurance Guaranty Law also
requires that a claimant or policyholder first exhaust his rights against

any other applicable insurance policies or guaranty associations . . .
"140 jj^g exhaustion of remedies provisions of the Indiana Act provide

as follows:

Any person having a claim against an insurer under any pro-
vision in an insurance policy other than a policy of an insolvent

insurer which is also a covered claim, shall be required to

exhaust first his right under the policy. Any amount payable
on a covered claim under this chapter shall be reduced by the

amount of recovery under the insurance policy. '"^^

Two concepts arise out of this provision. First, the exhaustion
requirements are limited to claims arising under a provision in an

insurance policy. As will become apparent, this limitation will have
important ramifications, from the standpoint of both first-party and

third-party claims. Second, the exhaustion requirements are expressly

restricted to the notion of a **covered claim." A '^covered claim" must
arise out of an insurance policy to which the Act applies. Thus, the

exhaustion of remedies requirements will not be applicable to those

kinds of insurance which are excluded from the Act: '*life, title, surety,

disability, accident and sickness, health care, credit, mortgage guaranty,

and ocean marine insurance. "^'^

•"Indiana Ins. Guar. Ass'n v. Kiner, 503 N.E.2d 923, 925 n.4 (Ind. Ct. App. 1987).

""•/a?, at 925.

'^'IND. Code § 27-6-8-1 1(a) (1982).
''^Id. § 27-6-8-3.



250 INDIANA LAW REVIEW " [Vol. 21:223

In addressing questions concerning the exhaustion of remedies re-

quirement of the Act, it is recommended that a three-step approach
be utiHzed:

(1) First, identify the parties involved and the nature of

their claims against the IIGA. In the third-party context, the

tortfeasor/insured will be making a claim against the IIGA to
satisfy his insolvent carrier's duty to defend and indemnify;

the injured third party will be making a claim against the
tortfeasor/insured, in an attempt to invoke the IIGA's indem-

nity obligations on behalf of the tortfeasor. In the first-party
context, the injured insured will be making a claim against the
IIGA to satisfy the indemnity obligations that the insolvent
carrier owed directly to the insured;

(2) Second, identify whether the party would be making a
claim against a collateral source in his capacity as a named or
additional insured under another policy of insurance. If this

is the case, then the other policy of insurance would be subject
to the exhaustion requirement. If, on the other hand, the party
is a stranger to the collateral insurance policy and would be
pursuing a claim against a third party who is an insured under
the collateral insurance, then the exhaustion requirement would
not be applicable;'"*^ and

(3) Third, if a claim under an insurance policy is involved,

is the type of insurance involved subject to the purview of the

Act? If the collateral insurance involves life, title, surety, dis-

ability, accident and sickness, health care, credit, mortgage

guaranty, or ocean marine insurance, the exhaustion require-

ments would not be applicable. ''*'*

7. Third-Party Claim—Tortfeasor's Exhaustion Requirements.—
As previously noted, in the third-party context, the tortfeasor/insured's
claim against the IIGA is to enforce the insolvent carrier's defense and
indemnity obUgations under his policy of insurance. The IIGA is re-
quired to step into the shoes of the insolvent insurer and to defend

and indemnify the tortfeasor/insured for the '^covered claim" of the

injured third-party.'"*^

'''See id. § 27-6-8-1 1(a).

'""See id. §§ 27-6-8-3, -11(a).

""IND. Code § 27-6-8-7(a)(ii) (1982), provides that the IIGA shall:
Be deemed the insurer to the extent of its obligation on the covered claims as

limited by this chapter and to this extent shall have all rights, duties, and

obligations of the insolvent insurer as if the insurer had not become insolvent,

including those relating to reinsurance contracts and treaties entered into by the



1988] GUARANTY ASSOCIATION ACT 251

Thus, the only collateral insurance which the tortfeasor/insured

would be required to exhaust under the Act would be under any

secondary insurance which would provide defense and indemnification

to the tortfeasor for purposes of the covered claim of the injured third-

party.

This scenario will not arise in the context of a true **excess" or

"umbrella" policy, since those policies specifically exclude any liability

below a specified retained limit. The situations will arise, however,

where the tortfeasor is concurrently covered by two or more different

insurance policies, and one of the carriers becomes insolvent.

The decision of Ross v. Canadian Indemnity Insurance CoJ"^^ ad-

dresses this type of situation. In Ross, the plaintiff suffered personal

injuries when he was loading drums of acid onto a truck. The plaintiff
sued the property owner. At the time of the accident, the property

owner's premises were insured through Signal/Imperial Insurance. The

property owner was also named as an additional insured in the truck-
owner's policy with Canadian Indemnity for * injuries occurring during

the loading and unloading of the vehicle. "^"^^

Pursuant to the California Insurance Code, the premises insurer

provided primary coverage, while the truck-owner's insurer provided

excess coverage. Before the resolution of the underlying action, the

premises insurer became insolvent. The tortfeasor then requested that

the truck-owner's insurer tender a defense to it, arguing that that policy

became primary upon the insolvency of the premises insurer. When
the truck-owner's insurer refused to tender a defense, the California

Guaranty Association undertook the defense, and entered into a stip-

ulated judgment in favor of the plaintiff in the amount of $50,000.00.
The tortfeasor and the California Guaranty Association then assigned

to the plaintiff their rights against the truck-owner's insurer. The
plaintiff then initiated suit against the truck-owner's insurer, claiming

third-party beneficiary status as a result of the agreement. '"^^

The Ross court concluded:

[W]hen a secondary insurer is available in the event of an

insolvent primary insurer, the secondary insurer should be re-

sponsible in the absence of specific language to the contrary.

insolvent insurer. However, the association's obligation to defend any insured

of the insolvent insurer or to indemnify against the costs of such defense

terminates as soon as the claimant or claimants have been paid all benefits that

they are entitled to under this chapter.

''H42 Cal. App. 3d 3%, 191 Cal. Rptr. 89 (1983).
'''Id. at 399, 191 Cal. Rptr. at 100.

'*^Id. at 399-400, 191 Cal. Rptr. at 100-01.



252 INDrANA LAW REVIEW [Vol. 21:223

The secondary insurer has received a premium for the risk and
thus the secondary insurer, and not CIGA [California Insurance
Guaranty Association], should be responsible for the coverage

of the loss. 1^9

A similar situation which is also ripe for controversy in this context
will involve commercial vehicles subject to a leasing agreement, where

the lessee and lessor each carry liability insurance providing coverage

to the leased vehicle. '^^ One would expect this to be a recurring problem,
especially in Hght of the increased use of trip-lease agreements in the

commercial community.'^*

2. Third-Party Liability—Injured Party's Exhaustion Require-
ments.—In this context, the injured party is pursuing a third-party
claim against a tortfeasor/insured whose liability insurance company
has become insolvent. There is apparently widespread confusion con-

cerning what other insurance, if any, the injured party must initially

exhaust as a condition precedent to gaining access to the IIGA's duty

to indemnify the tortfeasor/insured of the insolvent carrier.

a. Uninsured Motorist Coverage

Numerous decisions from other jurisdictions have concluded that
an injured party must first exhaust the coverage available under the

uninsured motorist provisions of his own insurance policy, prior to
proceeding against the guaranty association.'" In Kentucky Insurance

Guaranty Association Mutual v. State Farm Automobile Insurance
Co.,'^^ plaintiffs who suffered injuries in an automobile accident filed
suit against the driver of the other vehicle. The other driver's insurance
company was adjudged to be insolvent by an Illinois court. The Ken-
tucky Guaranty Association demanded that the plaintiffs initially ex-
haust the limits of the uninsured motorist coverage provided by their

own policy before they could pursue any claim under the Kentucky

''''Id. at 404, 191 Cal. Rptr. at 104.

'sopor a discussion concerning which insurance carrier provides primary coverage to

the leased vehicle, see Ryder Truck Lines v. Carolina Cas. Ins. Co., 270 Ind. 315, 385

N.E.2d 449 (1979); American Underwriters, Inc. v. Auto-Owners Mut. Ins. Co., 454

N.E.2d 876 (Ind. Ct. App. 1983); Ind. Code §§ 27-8-9-7 to -9 (Supp. 1987).

'''See Redieks Exp., Inc. v. Maple, 491 N.E.2d 1006, 1010-11 (Ind. Ct. App. 1986).

''^See, e.g.. King v. Jordan, 601 P.2d 273 (Alaska 1979); Spearman v. State Sec.

Ins. Co., 57 111. App. 3d 393, 372 N.E.2d 1008 (1978); Kentucky Ins. Guar. Ass'n v.

State Farm Auto Ins. Co., 689 S.W.2d 32 (Ky. Ct. App. 1985); Vokey v. Massachusetts

Insurers Insolvency Fund, 381 Mass. 386, 409 N.E.2d 783 (1980); Henninger v. Riley,

317 Pa. Super. 570, 464 A.2d 469 (1983); Sands v. Pennsylvania Ins. Guar. Ass'n, 283

Pa. Super 217, 423 A.2d 1224 (1980); Prutzman v. Armstrong, 90 Wash. 2d 118, 579

P.2d 359 (1978).

'"689 S.W.2d 32 (Ky. Ct. App. 1985).



1988] GUARANTY ASSOCIATION ACT 253

Insurance Guaranty Association Act. The plaintiffs' insurance company
denied that it was liable to provide plaintiffs uninsured motorist cov-

erage.*^'*

The court initially noted that the plaintiffs' policy of insurance

defined an uninsured motor vehicle to include ''[a] land motor vehicle

. . . with respect to which there is a bodily injury liability bond or

insurance policy appUcable at the time of the accident but the company
writing the same ... is or becomes insolvent. "'^^ This policy language

was substantially identical to the Kentucky uninsured motorist statute

which provided that "an 'uninsured motor vehicle' shall be deemed

to include any insured motor vehicle the liability insurer of which

cannot pay a legal liability due to insolvency. "'^^

The court then considered the exhaustion of remedies language in

the Kentucky Insurance Guaranty Association Act which provided that

'*[a]ny person having a claim against his insurer under any provision

in his insurance policy which is also a covered claim shall be required

to exhaust first his right under such policy. "*^^ The court concluded

that such language was intended to require insureds to exhaust their

right to recover sums due under the uninsured motorist coverage portion

of their own liability insurance policy as a condition precedent to
pursuing a ''covered claim" against the association.'^^

A similar result was reached by the Superior Court of Pennsylvania
in the decision of Henninger v. Riley. ^^^ The Henninger court construed

an "exhaustion of remedies" provision in the Pennsylvania Insurance

Guaranty Association Act which is identical to the exhaustion of rem-

edies provision in Indiana's Act. Construing this provision, the Hen-

ninger court concluded that the Pennsylvania Guaranty Association Act

required the plaintiffs to first exhaust their rights under the uninsured

motorist coverage afforded by their policy before proceeding against

the guaranty association. The Henninger court further stressed that the
exhaustion of benefits under the uninsured motorist coverage precedes

the creation of any obligation on the part of the guaranty association

to step into the shoes of the insolvent insurer. *^°

It is also important to note that the entire limits of the uninsured

motorist coverage
|

must be exhausted as a condition precedent to pur-

suing a claim under the Guaranty Association Act. In Prutzman v.

'«M at 33-34.
'"M at 34.
''"•Id.

'''Id. at 35.

'""Id.

.59317 Pa. Super 570, 464 A.2d 469 (1983)

'«'M at 675-77, 464 A.2d at 472-73.



254 INDIANA LAW REVIEW [Vol. 21:223

Armstrong, ^^^ the plaintiff was injured in an automobile accident. She

initiated suit against the other driver, such suit resulting in a settlement

for the other driver's bodily injury limits of $15,000.00. After receiving

notice of the insolvency of the other driver's carrier, the plaintiff and

other driver nonetheless proceeded to submit a stipulated judgment for

$15,000.00 which was approved by the court. '^^

Thereafter, the plaintiff instituted a declaratory judgment action

against her insurance company, which had issued uninsured motorist

coverage with a $15,000.00 limit, and the Washington Insurance Guar-

anty Association. 1^3 The trial court determined that the plaintiff could

accept $12,600.00 from her insurance carrier and recover the $2,400.00

difference (less the $100.00 deductible) from the Washington Insurance

Guaranty Association. ^^"^ On appeal, the Prutzman court determined
that plaintiff's settlement for less than the policy limits of her uninsured

motorist coverage was inadequate to constitute exhaustion under the

Insurance Guaranty Association Act.^^^

Louisiana stands alone as the only jurisdiction which does not

require an exhaustion of uninsured motorist benefits before an injured

party can proceed against the guaranty association. In Hickerson v.

Protective National Insurance Co.,^^^ the Louisiana Supreme Court

determined that since the Louisiana Guaranty Association Law provided
coverage in lieu of the insolvent insurer, the insured could not be

considered "uninsured" for purposes of the plaintiff's uninsured mo-
torist coverage. ^^"^ The Hickerson court stated that this conclusion was

necessary in order to afford some protection to the insured of the
insolvent carrier, who otherwise would have been subject to liability
for the subrogation claims of the solvent insurer which had paid the

uninsured motorist claim. '^^

It is anticipated that Indiana will Hkely align itself with the majority

of other jurisdictions requiring an injured party to initially exhaust his

uninsured motorist coverage prior to proceeding against the IIGA.

Indiana's uninsured motorist statute specifically provides that an '"un-

insured motor vehicle' . . . includes an insured motor vehicle where

the liability insurer of the vehicle is unable to make payment with
respect to the legal liability of its insured within the limits specified

'^'90 Wash. 2d 118, 579 P.2d 359 (1978).

'«M at 119-21), 579 P.2d at 361.

'^Id. at 120, 579 P. 2d at 361.

'''Id. at 122, 579 P.2d at 362.

"^383 So. 2d 377 (La. 1980).

'^'Id. at 379-80.

"^»M at 379.



1988] GUARANTY ASSOCIATION ACT 255

in IC 9-2-1-15 because of insolvency. "'^^ Furthermore, the concerns

expressed by the Hickerson court would not be present in Indiana,

since the IIGA Act specifically precludes an insurer from enforcing a
subrogation claim directly against the insured of the insolvent carrier. '^^

b. Workmen's Compensation Claim

The Indiana Workmen's Compensation Act permits an injured
employee to bring an action against a third-party, subject to the sub-

rogation rights or lien of an employer who has paid benefits.'^' If the
third-party tortfeasor's carrier becomes insolvent, will the injured em-

ployee be required to exhaust the full extent of workmen's compensation

benefits from his employer?

Resolution of this issue requires an analysis of the second prong

of the three-part test previously enumerated. '^^ Would the employee
be making a claim against the workmen's compensation carrier in his

capacity as a named or additional insured under the workmen's com-
pensation policy?

A workmen's compensation policy is issued to the employer as the
named insured. By the terms of a workmen's compensation policy, the
carrier agrees, inter alia, to pay on the employer's behalf any benefits

which the employer is required to pay employees under the workmen's

compensation law. The employee is neither a named nor additional
insured under the workmen's compensation policy. '^^

Indiana law has consistently recognized that a third-party stranger

to an insurance policy, who is neither a named nor additional insured
thereunder, possesses no rights under the insurance policy and cannot

maintain a direct action against the insurance company. '^'^ This type

of rationale has been expressly extended to the context of an employee,

vis-a-vis a workmen's compensation pohcy.'^^ Thus, the injured em-

'*«Ind. Code § 27-7-5-4(a) (1982 & Supp. 1987) (1987 supplement version effective
Jan. 1, 1988).

'™lNp. Code § 27-6-8-4(4) (1982) (providing that "in no event may any such claim
[subrogation claim of insurer] be asserted in any legal action against the insured of such

insolvent insurer").

•^'IND. Code § 22-3-2-13 (1982).
^^^See supra discussion in text p. 231.

"'See Baker v. American States Ins. Co., 428 N.E.2d 1342 (Ind. Ct. App. 1981).

In Baker, the court noted that an employee was not a third-party beneficiary of an

insurance policy issued by a workmen's compensation carrier to the employer. Id. at 1347.

"'^Eichler v. Scott Pools, Inc., 513 N.E.2d 665 (Ind. Ct. App. 1987); Winchell v.

Aetna Life & Casualty Insurance Co., 182 Ind. App. 261, 394 N.E.2d 1114 (1979); Bennett
V. Slater, 154 Ind. App. 62, 289 N.E.2d 144 (1972); Spicklemeir v. T.H. Mastin & Co.,
107 Ind. App. 350, 24 N.E.2d 797 (1940).

'''Baker, 428 N.E.2d 1342 (Ind. Ct. App. 1981).



256 INDIANA LAW REVIEW [Vol. 21:223

ployee would not have a claim as an insured under the employer's

workmen's compensation policy. Rather, the injured employee would

have a third-party claim against the employer under the Workmen's
Compensation Act. Accordingly, the injured employee would not be
required under the IIGA Act to exhaust his remedies under his em-
ployer's workmen's compensation coverage precedent to pursuing his

claim against the negligent tortfeasor under the IIGA Act.

c. Injured Party's Claim Against Two or More Defendants, One
of Whose Liability Insurance Carrier Becomes Insolvent

The situation often arises where an injured party has a cause of

action against two or more joint tortfeasors. If the carrier of the first

joint tortfeasor becomes insolvent, will the injured party be required

to exhaust the policy limits of the second tortfeasor with the solvent

carrier prior to proceeding under the Act?

Applying the second prong of the three-part test previously de-

nominated, this question must be answered in the negative. '"^^ The
injured party is not a named or additional insured under the policy
of insurance issued to the second tortfeasor by the solvent insurance

carrier. Since the injured party has no right to assert a direct action

against that insurance company, he should not be required to exhaust

the limits of that policy prior to gaining access to the guaranty as-

sociation fund vis-a-vis the first tortfeasor's insolvent insurer.

This conclusion is supported by the opinion of the Pennsylvania

Superior Court in the decision of Sands v. Pennsylvania Insurance

Guaranty Association.^'''^ In Sands, a passenger suffered personal injury

as a result of an automobile collision. The injured party filed an
uninsured motorist claim with the carrier providing coverage to the

driver of his vehicle, and was paid the full amount of uninsured motorist
benefits. The insured passenger also filed an uninsured motorist claim
under his own policy and obtained a judgment for the full amount
of that coverage. Thereafter, the passenger's insurer became insolvent.

The passenger then applied to the Pennsylvania Insurance Guaranty
Association for the payment of the amount of his judgment against
his insurance company. The guaranty association refused payment,
claiming that the passenger had failed to exhaust the insurance coverage

available to him vis-a-vis the liability coverage carried by the driver

of the vehicle in which the injured party was a passenger at the time

of the accident.'"'^

'^*See supra discussion in text p. 231.

'"283 Pa. Super. 217, 423 A.2d 1224 (1980).

''^Id. at 221, 423 A.2d at 1225.



1988] GUARANTY ASSOCIATION ACT 257

The Sands court rejected this argument, noting that while the injured

party may have had a claim against the driver, the injured party was
not a person having a claim against the driver's insurance company.

The court further noted that any claim that the injured party might

have had against his driver's insurer under the liability policy would

not have been a covered claim, because the claim would not have

resulted from the insolvency of the carrier, but from the negligence

of the driver. ^^^

d. Injured Party *s Health Care Coverage

The typical injured third-party will have some form of health care
coverage which could pay for medical expenses and hospital costs

associated with injuries caused by the tortfeasor/insured of the insolvent

insurance company. Under these circumstances, will the injured third-

party be required to exhaust the coverage that is available under this

health care policy as a condition precedent to gaining access to the

IIGA?

The second prong of the three-part analysis previously enumerated

would be satisfied, ^^° since the injured party would be making a claim

as a named or additional insured under his own health care policy.
The third prong, however, would not be satisfied because a claim

against a health care policy is not a '^covered claim" under the Act.'^^

As such, the injured third-party would not be required to exhaust the
coverage available under his health care policy as a condition precedent

to gaining access to the IIGA.

3. First-Party Context.—In the first-party context, the injured
insured will be making a direct claim for benefits under his own
insurance policy. If the injured insured's insurance company becomes
insolvent, the IIGA steps into the shoes of the insolvent carrier to the
extent of obligations under the insurance policy, subject to the res-

trictions of the Act. ^^2

a. Identical Secondary Coverage

Exhaustion requirements may be applicable in the first-party context
where the injured insured had a second policy of insurance available

to him as a named or additional insured. For example, a passenger
who suffers injuries in an automobile accident between a vehicle being
operated by the host driver, and a vehicle being operated by an un-

''•"Id. at 224, 423 A.2d at 1227.

'*°5ee supra discussion in text p. 231.

'®'Ind, Code § 27-6-8-3 (1982) (excepts from coverage health care insurance).
•«^lND. Code § 27-6-8-7(a)(2)(ii) (1982).



258 INDIANA LAW REVIEW [Vol. 21:223

insured tortfeasor, would most likely have an uninsured motorist claim

under his own policy of insurance, '^^ as well as the host driver's
insurance policy. '^"^ If the passenger's insurance company becomes in-
solvent, will he be required to exhaust the uninsured motorist coverage

available under the host driver's policy as a condition precedent to

gaining access to the IIGA?

Resolution of this issue will involve the second and third prongs

of the three-part test previously enumerated. '^^ The passenger would
be making a claim as an "additional insured" under the host driver's

policy of insurance. Furthermore, an uninsured motorist claim under

the host driver's insurance policy would be a "covered claim" under

the Act. Thus, the injured passenger would be required to initially

exhaust the host driver's uninsured motorist coverage prior to gaining

access to the IIGA.^^^

A similar situation would be presented by a mortgage company
which carried its own insurance on the mortgaged property, and which
was also denominated as an additional insured under a standard mort-

gage clause in the homeowner's policy. If the mortgage company's

insurer became insolvent, would the mortgage company be required to
exhaust its rights under the homeowner's policy prior to gaining access

to the IIGA? Such a claim would be presented by the mortgage
company as an insured under the homeowner's policy to the extent of
the mortgage debt.^^^ Additionally, the claim under the homeowner's

'"The normal insuring agreement in an uninsured motorist coverage provides that:

We will pay damages which a covered person is legally entitled to recover from
the owner or operator of an uninsured motor vehicle because of bodily injury:

1. sustained by a covered person; and

2. caused by an accident.

The owner's or operator's liability for these damages must arise out of the

ownership, maintenance or use of the uninsured motor vehicle. ISU Personal

Auto Policy, Form PP-00-1 (Ed. 6/80).
^^*See notes 128-29. The term "covered person" is normally defined to include "any

other person occupying your covered auto," and would thus qualify the passenger as a

"covered person" for purposes of the host driver's uninsured motorists coverage. See ISO

Personal Auto Policy, Form PP-OO-1 (Ed. 6/80).
^^^See supra discussion in text p. 231.
'*^ This conclusion seems to have been implicitly reached by the Pennsylvania Superior

Court in the decision of Sands v. Pennsylvania Ins. Guar. Ass'n, 283 Pa. Super. 217,

423 A.2d 1224 (1980), on facts identical with the hypothetical presented in the text. The

Sands court noted that the passenger was a "person having a claim against [the host

driver's solvent insurance company], so far as [the host driver's insurance company],

provided uninsured motorist coverage." Id. at 223, 423 A.2d at 1227. The Sands court

concluded that the passenger did "exhaust his rights under such pohcy" as a result of

the host driver's insurer's payment of the uninsured motorist limits of $10,000.00. Id. at

223, 423 A.2d at 1227.

'*^The standard mortgage clause operates to create a separate and independent insurance



1988] GUARANTY ASSOCIATION ACT 259

policy would be a
*

'covered claim" under the Act.'*^ As such, the
mortgage company would be required to first exhaust its rights under
the homeowner's standard mortgage clause as a condition precedent

to gaining access to the IIGA.

b. Tortfeasor's Liability Coverage

Assume that a third-party operated his vehicle negligently, lost
control of the same and caused extensive property damage to a hom-
eowner's residence. The homeowner submits a claim under his hom-
eowner's policy and that insurance company becomes insolvent. Will
the homeowner be required to exhaust his rights against the negligent
tortfeasor's automobile property damage coverage as a condition prec-
edent to gaining access to the IIGA?

Once again, this question must be answered in the negative. The

homeowner's claim would be against the negligent tortfeasor, and not

as a named or additional insured under the tortfeasor's policy. Thus,
the exhaustion requirements would not be applicable.

c. Health Care Coverage

Assume the situation where an injured passenger is making a claim
under his uninsured motorist coverage. If the passenger's automobile

insurer becomes insolvent, will the passenger be required to exhaust

his rights under his health care policy as a condition precedent to

gaining access to the IIGA?
Again, the answer is '*no". The claim of the passenger would be

presented in his capacity as an ''insured" or "additional insured"

under his health care policy. However, the claim under the health care

policy falls outside the scope of a "covered claim" under the Act.'^^

Accordingly, the injured passenger would not be required to exhaust
coverage available under his health care policy as a condition precedent

to gaining access to the IIGA.

B. Setoff

As a corollary to its "exhaustion of remedies" provisions, the Act
also provides that "any amount payable on a covered claim under this
chapter shall be reduced by the amount of recovery under the insurance
policy. "^^ The term "insurance policy" is modified by the "exhaustion

policy between the mortgagee and the insurance company of the homeowner. Federal Nat.
Mtg. Ass'n V. Great American Ins. Co., 157 Ind. App. 347, 300 N.E.2d 117 (1973).

'8«See Hardester v. Eugands, 731 S.W.2d 780 (Ark. 1987), where the Arkansas Property

and Casualty Insurance Guaranty Act was applied to a claim under a fire insurance policy.

'«^lND. Code § 27-6-8-3 (1982).
'^IND. Code § 27-6-8-1 1(a) (1982).



260 INDIANA LAW REVIEW [Vol. 21:223

of remedies" language and is thereby subject to the three-part analysis

previously adduced.'^' In order for the setoff provisions to be applicable,

the IIGA must demonstrate as follows: first, that the recovery resulted
from a direct claim by an insured against the insured's policy, either

from the standpoint of a direct payment to the insured in the first-

party setting, or in the form of a tender of defense and indemnification

in the third-party setting; and second, that the payment was made
under an insurance policy subject to the Act, and thus arose out of

a "covered claim. "'^^

L Third-Party Context—Tortfeasor.—In this context, the tort-
feasor's carrier has become insolvent and is, thus, unable to tender a
defense or indemnify the tortfeasor for any sums for which he may
become liable to the injured party. Thus, the tortfeasor's claim against

the guaranty association would in essence request that the IIGA stand
in the shoes of the insolvent insurer, tender a defense to the tortfeasor

and indemnify the tortfeasor up to the extent of the policy limits, or

$49,900.00, whichever is less.'^^

Under the express setoff language in Indiana's Act, setoff vis-a-

vis the tortfeasor would be limited to those situations where the tort-

feasor has additional insurance which would be considered secondary

insurance upon the insolvency of his primary carrier. '^"^ If, for example,
the tortfeasor was identified as an additional insured on another policy

of insurance, any defense and indemnification rights that the tortfeasor

would have under that policy could be set off against the defense and

indemnity obligation owed under the Act.'^^
By contrast, if a co-defendant is indemnified by a separate insurance

policy which does not inure to the benefit of the tortfeasor of the

insolvent carrier, any payment made on the co-defendant's behalf should
not be set off against the defense and indemnity obligation that the

IIGA owes to the tortfeasor of the insolvent insurer. Such a payment
would inure exclusively to the benefit of the co-defendant, and would

in no way discharge either the duty to defend or duty to indemnify
the tortfeasor of the insolvent insurance company.

Additionally, any true excess insurance coverage which the tort-

feasor of the insolvent insurer may have would not operate as a setoff
against IIGA's obligations under the Act. In the situation of a true

''excess" or "umbrella" policy, the insurer's duty to defend and in-

'"5ee supra discussion in text p. 231.

"2lND. Code § 27-6-8-3 (1982).
'''Id. § 27-6-8-7(a)(i)-(ii).

'^Id. § 27-6-8-1 1(a).

'''See, e.g., Ross v. Canadian Indem. Ins. Co., 142 Cal. App. 3d 396, 191 Cal.

Rptr. 99 (1983).



1988] GUARANTY ASSOCIATION ACT 261

demnify would become operative only upon the exhaustion of the
underlying insurance's retained limits. Upon the insolvency of the
underlying coverage, such limits would not be exhausted and an express

precondition of the policy would not be met.

2. Third-Party Context—Injured Party.—This appears to be the
most frequent area where questions arise concerning the application of

the setoff clause. In this situation, an injured party is bringing a suit

against a tortfeasor whose carrier has become insolvent. If a collateral

source has paid part or all of the injured party's medical expenses

and/or loss of income, to what extent can such payments be set off

against the obligations of the IIGA under the Act?
Once again, a three-part analysis is suggested. ^^^ The first prong

has already been answered, since we know that the injured party is
pursuing a third-party claim against a tortfeasor whose liability carrier

has become insolvent. Thus, in order to avail itself of the setoff

provisions, the IIGA must establish initially that the payment resulted
from a direct claim by the injured party as an insured under a policy

of insurance. ^^"^ Second, the IIGA must establish that the payment arose
under an insurance policy which is subject to the Act, and thus was

a "covered claim. "'^^

Thus, any payment received by an injured party from a workmen's

compensation carrier would not be available to the IIGA for purposes
of setoff. Any such payment would result from the employee's claim
against the employer and not as a result of any direct claim under

the workmen's compensation policy. ^^^

The same result, but different considerations, attach to the situation
where the injured party has had part or all of his medical expenses

paid by his health care provider. Any such payment would result from
the injured party's status as an insured under his health care policy,

and would thus satisfy the first condition of the setoff requirement.

However, any such payment would arise under the injured party's

health care policy, a type of direct insurance expressly excluded from

coverage under the Act.^°^ As such, any such payment would not be

^^See supra discussion in text p. 231.

^^''See supra discussion in text p. 231.

"«lND. Code § 27-6-8-3 (1982).
"^C/. See cases cited supra note 152. Senac v. Sandefer, 418 So. 2d 543 (La. 1982),

in which the court used a different analysis to reach a similar conclusion. The Senac

court concluded that a party who had received workers' compensation disability benefits
would not receive a double recovery if he were permitted to recover general damages

which did not include lost wages or medical expenses from the guaranty association.

^"'IND. Code § 27-6^8-3 (1982).



262 INDIANA LAW REVIEW [Vol. 21:223

a "covered claim'* within the parameters of the Act, and therefore,

would not be available to the IIGA for purposes of setoff. ^^^

Finally, a different result is reached with respect to any payments

which the injured party has received in the form of uninsured motorist

benefits from his own carrier. Any such payment would result from
a direct claim by the injured party against the uninsured motorist

provisions in his own policy, and would thus satisfy the first part of
the setoff requirement. Second, the claim would be presented under

an automobile liability policy, a form of direct insurance which is not

excluded from the operation of the Act. Thus, any payment received

under uninsured motorist coverage would appear to be available for

purposes of the Act's setoff provisions. ^^^

5. First-Party Context.—In the first-party context, the injured
party will be seeking to recover benefits which are due him as an
insured under his insurance policy. Typical claims will involve uninsured

motorist coverage and claims under fire policies. To the extent that
the insured's carrier has become insolvent, questions of setoff may
arise with respect to payments which the insured has received from

collateral sources. Once again, a two-part analysis should be followed:

first, whether the payment resulted from the injured party's claim as

an insured under an insurance policy; and second, whether the payment

resulted from a "covered claim" under the Act.

In most instances, setoff probably will not be available in the first-

party context. For example, any funds which the injured party has

received from the tortfeasor's carrier are not claims under a policy of

direct insurance and, thus, would not be subject to the setoff provisions.

Similarly, any recovery which the injured party made under his health
care policy would not constitute a recovery as a result of a "covered

claim" since health care policies are specifically excluded from the

Act. 203

Setoff, however, would be available in the first-party context where

the injured party had secondary insurance available to him as a named

^'See, e.g., Pritchett v. Clifton, 687 F. Supp. 644 (W.D. Mo. 1984), aff'd, 738
F.2d 319 (8th Cir. 1984); Harris v. Lee, 387 So. 2cl 1145 (La. 1980); Bullock v. Pariser,

311 Pa. Super. 487, 457 A.2d 1287 (1983). All of these cases recognize that where a

certain type of insurance is specifically excluded from the insurance guaranty association

law, the setoff provisions would not be applicable to payments by such excluded insurers.

^^For cases holding that uninsured motorist benefits received by the injured party

are available to the guaranty association under similar setoff provisions, see King v. Jordan,

601 P.2d 273 (Alaska 1979); Lucas v. IlUnois Guaranty Association, 52 111. App. 3d 237,

367 N.E.2d 469 (1977); Vokey v. Massachusetts Insurers Etc., 409 N.E.2d 783 (Mass.

1980); Prutzman v. Armstrong, 90 Wash. 2d 89, 579 P.2d 359 (1978).

^"Hnd. Code § 27-6-8-3 (1982).



1988] GUARANTY ASSOCIATION ACT 263

or additional insured. ^^^"^ Thus, where the injured party has two separate

policies under which he qualifies as an insured for purposes of uninsured

motorist coverage, the IIGA should be able to set off any uninsured
motorist benefits which the injured party received from the solvent

insurer from the IIGA's uninsured motorist obligations on behalf of

the insolvent insurer.

A similar conclusion would be reached in the context of a mortgage
company which carries its own insurance on the mortgaged property,
and that was also denominated as an additional insured in the standard

mortgage clause under the homeowner's policy. If either the hom-
eowner's or mortgage company's insurer became insolvent, the mortgage

company would be required to exhaust its rights under the solvent
carrier's policy prior to proceeding against the guaranty association.

Additionally, the IIGA should be able to set off any recovery from
the solvent carrier against the obligations which it owes under the Act

on behalf of the insolvent insurer. ^^^

4. Setoff of Uninsured Motorist Benefits—How Much?—A com-
plicated issue that the Indiana courts will be required to address is

what portion of a payment received under an uninsured motorist cov-

erage will be considered a "covered claim," subject to the setoff

provisions of the Act. This issue arises since uninsured motorist benefits

include all elements of bodily injury damages which an injured party

can recover, while Indiana's Act restricts a "covered claim" to medical

expenses and lost income.^°^ Theoretically, only that portion of an

uninsured motorist payment which can be directly attributed to medical

expenses and lost income would constitute a "covered claim" under

the Act, available for setoff.

One can imagine a number of perplexing problems which the Indiana
courts will be required to address in attempting to allocate a portion

of an uninsured motorist payment to medical expenses and lost income

(and thus a "covered claim" subject to the setoff provision) and to

other elements of damage such as pain and suffering, impairment, etc.
(not a "covered claim," and thus not subject to the setoff provision). ^^^

It is not hard to imagine the injured party taking the position that

the majority of benefits paid under the uninsured motorist provisions

are allocable to pain and suffering, impairment, disfigurement, etc.,

and the IIGA taking the position that the uninsured motorists benefits
should be allocated to medical expenses and lost income.^^^

^See supra discussion in text p. 231.

^'Id.

^°*IND. Code § 27-6-8-7(a)(i)(l) (1982).
"^'Id. § 27-6-8-4(4).

^See supra notes 45-52. In Rodgers v. Missouri Ins. Guar. Ass'n, 656 F. Supp. 902



264 INDIANA LAW REVIEW [Vol. 21:223

Under Kiner, the injured party, as a precondition to recovery, will

be required to demonstrate the exhaustion of remedies under other

applicable insurance. ^^^ As such, it would appear consistent with the
exhaustion of remedies provisions to allocate to the injured party the

burden of proving what amount of any uninsured motorist payment

is attributable to medical expenses and lost income, and what amount
is attributable to such damages as pain and suffering, impairment, and

disfigurement, and thus not subject to the setoff provisions. ^^^

C. ''Covered Claim''

The IIGA Act defines a "covered claim" as follows:

The term ''covered claim" means an unpaid claim or judgment

which arises out of and is within the coverage and not in excess

of the applicable Hmits of an insurance policy to which this

chapter applies issued by an insurer, if the insurer becomes an

insolvent insurer after the effective date (January 1, 1972) of

this chapter and (a) the claimant or insured is a resident of

this state at the time of the insured event or (b) the property

from which the claim arises is permanently located in this state.

(E.D, Mo. 1987), the court addressed an analogous problem. The plaintiffs brought a
civil rights action against a sheriff alleging a violation of the Fourth, Fifth, and Fourteenth

Amendments of the United States Constitution, and 42 U.S.C. § 1983, as a result of the

alleged wrongful repossession of two automobiles belonging to the plaintiffs. At the time

of the incident, the defendant sheriff was insured under a liability policy issued by Ideal

Mutual Insurance Company. The plaintiffs requested compensatory damages in the amount

of $200,000.00, and punitive damages in the amount of $100,000.00. Following the

insolvency of Ideal, the court entered a summary judgment in favor of the plaintiffs in

the amount of $100,000.00. The court, however, did not specify what portion of the

damages, if any, were for punitive damages. Thereafter, the plaintiffs filed proofs of

claim with the Missouri Insurance Guaranty Association. The Rodgers court noted that

the judgment represented a "covered claim" only to the extent it assessed actual damages,

and that the court was thus required to segregate the judgment between actual damages

and punitive damages. The court noted: "[IJacking more specific guidance, the Court will

construe the judgment of the Western District to award plaintiffs actual and punitive

damages in the same proportions as plaintiffs requested [in their Complaint] or in a ratio

of 2:1." Id. at 905.

^•^Indiana Insurance Guaranty Association v. Kiner, 503 N.E.2d 923 (Ind. Ct. App.

1982).

^'°The Indiana Legislature may also wish to consider including a provision in the Act
similar to that provided for in Missouri's Act. Missouri's Act contains a similar restriction

to the amount of recoverable damages under a "covered claim." See supra note 55. The

Missouri Act further provides that "verdicts as respects only those civil actions as may
be brought to recover damages as provided in this subsection shall specifically set out

the sums applicable to each item in this subsection for which an award may be made."
Mo. Ann. Stat. § 375.785(4)(l)(a)(b) (Vernon Supp. 1987).



1988] GUARANTY ASSOCIATION ACT 265

'^Covered claim" shall be limited as provided in section 7 [27-

6-8-7] of this chapter, and shall not include (1) any amount

due any reinsurer, insurer, insurance pool, or underwriting

association, as subrogation recoveries or otherwise; . . . nor (2)

any supplementary obligation including but not limited to ad-

justment fees and expenses, attorney fees and expenses, court

costs, interest and bond premiums, whether arising as a policy

benefit or otherwise, prior to the appointment of a liquidator;

nor (3) any unpaid claim or judgment not filed timely or

properly in the liquidation proceedings in accordance with the

provisions of IC 27-1-4 [repealed] if the insolvent insurer is a

domestic insurer or in accordance with the applicable provisions

of the law of the state of domicile if the insolvent insurer is

not a domestic insurer. All covered claims filed timely and

properly in the liquidation proceedings shall be referred im-

mediately to the association by the liquidator for processing

as provided in this chapter. ^^^

Apparently recognizing the Hmited applicability of the setoff provisions

to payments received by an injured party from a collateral source, the

courts of other jurisdictions have found creative ways to accomplish

a "setoff" under statutes similar to Indiana's Act by construction of

the term **unpaid claim," as well as the term "insurer subrogation."

7. Unpaid Claim or Judgment.—The IIGA Act specifically pro-
vides that a covered claim must be an "unpaid claim or judgment. "^^^

In construing this language, the Indiana court will likely be called upon
to determine when a "claim" or "judgment" is deemed paid under
the Act.

In Florida Insurance Guaranty Association v. Dolan,^^^ a plaintiff

suffered personal injuries while on the premises of the Gatlinburg Ski

Corporation (GSC). Thereafter, the plaintiff sued GSC, which was
defended by GSC's liability carrier. Following a $70,000.00 judgment
in favor of the plaintiff, GSC's carrier was declared insolvent. In order
to induce the plaintiff not to levy execution on the premises of GSC,
one of GSC's operators entered into an agreement which provided for

absolute, unconditional payment of the $70,000.00, being secured by

a cashier's check under an escrow agreement. Thereafter, the plaintiff

filed a claim against the Florida Insurance Guaranty Association. ^•'*

2"lND. Code § 27-6-8-4(4) (1982).

^'^355 So. 2d 141 (Fla. Dist. Ct. App.), cert, denied, 361 So. 2d 831 (Fla. 1978).

^'^M at 141-42.



266 INDIANA LAW REVIEW [Vol. 21:223

The Florida Act defined
*

'covered claim" as an *' unpaid claim."

The Dolan court concluded that the plaintiff's claim was not a covered
claim because the claim had been paid as a result of the unconditional

guaranty of the insured's operator to satisfy the judgment, secured by

a cashier's check under an escrow agreement.^'^

2. Insurer's Subrogation Claim.—Of equal importance is the Mas-
sachusetts Court of Appeals decision of Ferrari v. Toto.^^^ In Ferrari,

the plaintiff, while in the course of his employment was struck by an

automobile negligently driven by the third-party tortfeasor, and suffered

injuries. The plaintiff received over $35,000.00 in workmen's compen-

sation benefits, and then filed suit against the tortfeasor for damages

arising out of the accident. At the time of the accident, the tortfeasor

carried liability insurance with per claim limits of $20,000.00. Subse-

quent to the filing of suit, the tortfeasor's carrier was adjudged in-

solvent. The Massachusetts Guaranty Association denied liability for
the reason that the plaintiff had already recovered workmen's com-

pensation benefits in excess of the limits of the tortfeasor's liability

policy. 2^^

The Ferrari court advanced two separate reasons in support of its

conclusion that the plaintiff's claim was not a "covered claim" under

the Massachusetts Guaranty Association Act. First, since the full extent

of the Association's obligation under the Act (the $20,000.00 policy

limits) had been provided by the workmen's compensation carrier, the

claim had been *'paid" under the Guaranty Association's Act.^^^ Second,

the Massachusetts Worker's Compensation Act contained a provision

providing that any sum recovered by the employee in an action against
a third party would be for the benefit of the workmen's compensation

insurer. 219 Thus, the Ferrari court reasoned that the employee's claim

was in reality a subrogation claim of an insurance company, which

was precluded under subrogation provisions that were identical to

Indiana's Act.^^^

^''Id. at 142.

^'«9 Mass. App. Ct. 483, 402 N.E.2d 107 (1980), aff'd, 383 Mass. 36, 417 N.E.2d

427 (1981).

'"Id. at 484-5, 402 N.E.2d at 108.

^'«M at 487, 402 N.E.2d at 109.

'''Id. at 488, 402 N.E.2d at 110.
22opj.JQj. {Q ^i^g passage of the Indiana Comparative Fault Act, Ind. Code §§ 34-4-

33-1 to -14 (West Supp. 1987), this type of argument could have been attacked on the

basis that the insurance company's right of subrogation did not exist until the insured

had been fully compensated, and that the tortfeasor's carrier's insolvency prevented complete

compensation. See, e.g., Willard v. Auto. Underwriters, Inc., 407 N.E.2d 1192 (Ind. Ct.

App. 1980); Capps v. Klebs, 178 Ind. App. 293, 382 N.E.2d 947 (1979). The continuing

validity of the rule against "pro tanto subrogation" may be brought into question under



1988] GUARANTY ASSOCIATION ACT 267

A different conclusion was reached by the New Jersey Superior
Court under similar circumstances in the decision of Arnone v. Murphy.^^^

In Arnone, the insured had received workmen's compensation benefits,

and subsequently sued the tortfeasor. When the tortfeasor's insurer
became insolvent, a claim was filed with the New Jersey Guaranty
Association.222

The court concluded that the guaranty association was liable to

the claimant even though the insurance proceeds were subject to the

lien of a workmen's compensation carrier. The Arnone court reasoned
that the claim was that of the injured party, not that of the insurer.

Although the term
*

'covered claim" in the New Jersey statute excluded
any claim of an insurer, the court reasoned that the workmen's com-

pensation carrier's interest was a "lien," rather than a **claim." The

court further noted that since workmen's compensation was expressly

exempted from the New Jersey Guaranty Association Act, the payment
to the employee would not "result in the shuffling of funds among
member insurers. "^^^

To the extent that the distinction between the principles advanced
in Ferrari and Arnone is a logical one vis-a-vis the capacity in which
the injured party is pursuing recovery of a claim against the guaranty

association, considerable problems arise in applying the rationale ad-

vanced to a claimant under the Indiana Act who has received workmen's
compensation benefits. On one hand, if the claimant has received

the provisions of Indiana Code sections 34-4-33-12, and -14. Indiana Code section 34-4-

33-12 (Supp. 1987) provides:

If a subrogation claim or other lien or claim, other than a lien under I.C. 22-

3-2-13 or I.C. 22-3-7-36, that arose out of the payment of medical expenses or

other benefits exists in respect to a claim for personal injuries or death and

the claimant's recovery is diminished:

(1) by comparative fault; or

(2) by reason of the uncollectability of the full value of the claim for

personal injuries or death resulting from limited liability insurance or from

any other cause

the lien or claim shall be diminished in the same proportion as the claimant's

recovery is diminished.

IND. Code § 34-4-33-12 (Supp. 1987). Ind. Code § 34-4-33-14 (Supp. 1987), on the other
hand, provides:

In any action tried under this chapter, any subrogation or lien for collateral

benefits received by the prevailing party shall be reduced by the ratio of the

lower of the prevailing party's judgment or collected judgment to the amount

of damages the trier of fact found the prevailing party to have sustained.

Id.

22453 N.J. Super. 584, 380 A.2d 734 (1977).

2"M at 588-89, 380 A.2d at 736-37.
2"M at 594, 380 A.2d at 739.



268 INDIANA LAW REVIEW [Vol. 21:223

workmen's compensation benefits and then obtains a settlement or

judgment against the tortfeasor, Indiana Code section 22-3-2-13 provides
that "from the amount received by the employee . . . there shall be
paid to the employer or the employer's compensation insurance carrier,

. . . the amount of compensation paid to the employee . . . plus medical,
surgical, hospital ... ." Since workmen's compensation insurance is

covered by the Act, this would result in the shuffling of funds among
"member insurers. "^^"^

The same provision of the Indiana Workmen's Compensation Act
also provides that "the employer's compensation insurance carrier shall

have a lien upon any settlement award, judgment, or fund out of
which the employee might be compensated from the third party. "^^^

It will be left to the Indiana courts to address these provisions of the

Indiana Workmen's Compensation Act, vis-a-vis the subrogation pro-
visions of the IIGA Act and the rationale of Ferrari and Arnone.

The same type of issue may arise with respect to language in many
health care policies, providing that to the extent of payment under the

policy, the insurer is subrogated to all rights of recovery against the

alleged tortfeasor. ^^^ If the Indiana courts adopt the reasoning of Ferrari

that the "real party" pursing the claim is the insurance company, any

recovery could be precluded under the Act's prohibition against insurer

recovery from the guaranty fund.^^^ If, on the other hand, the Indiana

courts adopt the reasoning of Arnone^ recovery under the Act would

^"Ind. Code § 22-3-2-13 (1981). Both the insolvent liability carrier of the tortfeasor
and the workmen's compensation carrier would be member insurers under the Act. Ind.
Code § 27-6-8-4(6) (1982).

^^'IND. Code § 22-3-2-13 (1982).
226For example, in Mutual Hosp. Ins., Inc. v. MacGregor, 174 Ind. App. 550, 368

N.E.2d 1376 (1977), the following provision of a Blue Cross-Blue Shield policy was at

issue:

In the event of any payment for services under this Policy, Blue Cross-Blue

Shield shall, to the extent of such payment, be subrogated to all the rights of

recovery of the Member or Dependent arising out of any claim or cause of
action which may accrue because of the alleged negligent conduct of a third
party. Any such Member or Dependent hereby agrees to reimburse Blue Cross-
Blue Shield, for any benefits so paid hereunder, out of any monies recovered

from such third party as the result of judgment, settlement or otherwise; and

such Member or Dependent hereby agrees to take such action, to furnish such
information and assistance, and to execute and deliver all necessary instruments

as Blue Cross-Blue Shield may require to facilitate the enforcement of their
rights. This provision shall not apply, however, to a recovery obtained by a

Member or Dependent from any insurance company on a policy under which
said Member or Dependent is entitled to indemnity as a named insured person.

Id. at 1377.

^"IND. Code § 27-6-8-4(4) (1982).



1988] GUARANTY ASSOCIATION ACT 269

not be precluded, since any payment to the injured party would not

inure to the benefit of a member insurer.

D. Subrogation of IIGA

One important point must be made with respect to a first-party
claim against the IIGA as a result of the insured's carrier becoming
insolvent. In this context, the insured is pursuing a direct claim against

the IIGA, who is standing in the shoes of the insured's insolvent
carrier. The insured is bound by all terms and conditions of the original
insurance policy, ^^^ including the duty to cooperate, and the subrogation

and "hold in trust" provisions of the policy. In fact, the Indiana Act

expressly provides that any party receiving payment shall be deemed

to have assigned his rights under the policy to IIGA, to the extent of

payment by the IIGA.^^^

As such, special care should be given to any settlement with a
tortfeasor or his insurance carrier so as not to impair IIGA's subrogation

rights. There is a substantial body of case law in Indiana indicating

that the insured's general release of a tortfeasor will destroy the in-

surance company's subrogation rights and preclude the insured from

making any claim under the insurance policy. ^^^ This type of reasoning

could be equally appHcable to deny an injured party access to the

IIGA if he has destroyed IIGA's subrogation rights via a general release
of the tortfeasor. 231

E. IIGA 's Duty to Defend

Some interesting case law has developed in other jurisdictions in
the third-party context concerning IIGA's duty to defend the tortfeasor

of the insolvent insurer.

1. Pre-Insohency Attorney Fees.—The Act specifically provides
that a "covered claim" does not include "attorney's fees and expenses,

court costs, interest, bond premiums, whether arising as a policy benefit

^^«See Pannell v. Missouri Ins. Guar. Ass'n, 595 S.W.2d 339 (Mo. Ct. App. 1980)

(insured is required to comply with conditions of policy of insolvent insurer).

22'lND. Code § 27-6-8-10(a) (1982).
"°5ee, e.g., Allstate Ins. Co. v. Meek, 489 N.E.2d 530 (Ind. Ct. App. 1986); Dravet

V. Vernon Fire & Casualty Ins. Co., 454 N.E.2d 440 (Ind. Ct. App. 1983); Hockelberg
V. Farm Bureau Ins. Co., 407 N.E.2d 1160 (Ind. Ct. App. 1980). But see National Mut.

Ins. Co., 454 N.E.2d 1386 (Ind. Ct. App. 1981).

^^'See, e.g., Hemisphere Nat. Bank v. District of Columbia, 412 A.2d 31 (D.C. App.

1980) (if the claimant takes actions which prejudice subrogation rights to which the guaranty

association would be entitled, the claimant is barred to the extent that the guaranty

association rights were prejudiced).



270 INDIANA LAW REVIEW [Vol. 21:223

or Otherwise, prior to the appointment of a liquidator. "^^^ Similar

provisions have been construed by the courts of other jurisdictions to

indicate that a guaranty association was not obligated to pay attorney

fees incurred by the insurer in tendering a defense to the insured

tortfeasor before the carrier became insolvent.^" Thus, a law firm
which has undertaken the defense of an insured at the request of a

carrier who becomes insolvent cannot recover pre-insolvency attorney
fees from the guaranty association. Rather, its sole remedy is to file

a claim with the liquidator. ^^^

2. Bad Faith,—Numerous decisions from other jurisdictions have
addressed the issue of whether a guaranty association can be held liable

for the insolvent insurer's bad faith refusal to settle a claim within

policy limits prior to insolvency. The courts have uniformly concluded
that the guaranty association was not vicariously liable for its members'

torts. 235

Additionally, cases have also addressed the issue of whether the

guaranty association can be held Hable on a bad faith basis for itself

refusing to accept an offer to settle a personal injury claim within the

limits of the policy of an insolvent insurer. The courts have likewise
concluded that no bad faith action can be maintained against the
guaranty association for a failure to settle within policy limits. ^^^

3. Breach of Duty to Defend.—One additional decision merits
review concerning the guaranty association's duty to defend. In Car-

rousel Concessions, Inc. v. Florida Insurance Guaranty Association, ^^^

the insured tortfeasor brought an action against the guaranty association

claiming that an inadequate defense had been provided. The Florida
Court of Appeals agreed with the insured's contentions, and determined

that the guaranty association was obligated to provide an
*

'adequate

defense." The court further held that if an inadequate defense was
provided, the guaranty association could be sued for a breach of the

^"IND. Code § 27-6-8-4(4) (1982).
^"See, e.g., Maguire, Ward, Maguire & Eldredge v. Idaho Ins. Guar. Ass'n, 112

Idaho 166, 730 P.2d 1086 (Idaho Ct. App. 1986); Metry, Metry, Sanom and Ashare v.
Michigan Prop. & Cas. Guar. Ass'n, 403 Mich. 117, 267 N.W.2d 695 (1978); Ohio Ins.
Guar. Ass'n v. Simpson, 1 Ohio App. 3d. 112, 439 N.E.2d 1257 (1981); Greenfield v.

Pennsylvania Ins. Guar. Ass'n, 256 Pa. Super. 136, 389 A.2d 638 (1978).

'''See IND. Code § 27-9-1-1 to -4-10 (1982).
'''See, e.g., Rivera v. South Am. Fire Ins. Co., 361 So. 2d 193, (Fla. Ct. App.

1978), cert, denied, 368 So. 2d 1372 (Fla. 1979); Vaughn v. Vaughn, 23 Wash. App. 527,
597 P.2d 932 (1979).

"^See, e.g.. Interstate Fire & Cas. Ins. Co. v. California Ins. Guar. Ass'n, 125 Cal.
App. 3d 904, 178 Cal. Rptr. 673 (1981); Fernandez v. Florida Ins. Guar. Ass'n, 383 So.

2d 974 (Fla. Ct. App.), 389 So. 2d. 1109 (Fla. 1980).
^"483 So. 2d 513 (Fla. App. 1986).



1 988] GUARANTY ASSOCIA TION ACT 27

1

duty to defend the insured. Under such circumstances, the injured

insured may be entitled to recover attorney fees and costs if he can
estabUsh that the defense suppHed by the guaranty association was

inadequate, and that it was reasonable for the insured to engage his

own attorney in order to provide a defense to the action. ^^s

V. Conclusion

The stated purpose of the Indiana Guaranty Association Act is,

inter alia, *'to avoid excessive financial loss to claimants or policyholders

because of the insolvency of an insurer. "^^^ Despite the stated purpose,

the Indiana Legislature has enacted one of the most restrictive property/

casualty guaranty association acts in the country, joining Colorado as

the only two jurisdictions limiting per claim liability to $49,400. 00. ^"^^

Additionally, Indiana is one of only four jurisdictions which limit an

injured party's recovery under the Guaranty Association Act to essen-

tially medical expenses and lost wages, thereby precluding, by legislative

fiat, an injured party's ability to recover common law damages for
pain and suffering, disfigurement and/or deformity, etc.^'^^

The Indiana Guaranty Association Act has remained relatively un-

changed since its passage in 1971. During the recent sunset audit of

the Indiana Department of Insurance, the legislature addressed, inter

alia, the current state of affairs of the Indiana Guaranty Association. ^^^^

It is hoped that the Indiana Legislature will follow the lead of other

jurisdictions which have recognized that soaring medical costs will

require a reassessment of the per claim/per occurrence limits of liability

currently provided for in the Indiana Act. It is further hoped that the

Indiana Legislature will consider and address the inherent conflicts

which currently exist between the Indiana Guaranty Association Act,

and other acts which are subject to its jurisdiction, such as the Indiana

Workmen's Compensation Act, and the Indiana Medical Malpractice
Act.

"«/</. at 517.

"'IND. Code § 27-6-8-2 (1982).
^See supra note 30.

^^See supra notes 53-56 and accompanying text.

Indiana Underwriter (October 1987), p.l.