If Maryland's insurance guaranty fund ran out of money to pay claims against a failed insurance company, was the state on the hook to cover the shortfall?

Plain-English summary

A state senator asked the Attorney General to clarify Maryland's legal relationship to the Maryland Insurance Guaranty Association ("MIGA"), the fund that protects policyholders when their insurer becomes insolvent. Three questions were on the table: whether the State was financially on the hook if MIGA's own funds ran short, whether MIGA counted as a "State agency," and whether the fact that the Insurance Commissioner appoints MIGA's board mattered to either answer.

The Attorney General concluded that Maryland bore no financial liability for MIGA's claims. The statute funded MIGA entirely through assessments on its member insurers, and if those assessments and MIGA's own assets were not enough in a given year, the law simply required prorating and delayed payment, not a draw on state funds; any state guarantee would also have run into a constitutional ban on lending the state's credit to a private entity. On MIGA's status, the opinion concluded there was no single answer: prior case law had already found MIGA to be a state instrumentality for open-records purposes but not a "unit of State government" for the purpose of a rule restricting the hiring of outside lawyers, and the outcome would keep depending on which specific statute was being applied. The Commissioner's power to appoint MIGA's board mattered to that agency-status question but had no bearing at all on the separate question of the State's financial liability.

Currency note

This opinion was issued in 1986. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

If a Maryland insurance company went bankrupt in the 1980s and the guaranty fund couldn't cover all the claims, would state taxpayers have to make up the difference?
No, according to this opinion. The Attorney General concluded the State had no financial liability for claims against MIGA, since the statute funded the association solely through assessments on member insurers and provided for prorated, delayed payment rather than a state bailout if funds ran short.

Was the Maryland Insurance Guaranty Association legally a state government agency?
The opinion concluded that question had no single answer. MIGA had already been found to be a state instrumentality for purposes of the Public Information Act but not a "unit of State government" for purposes of a rule limiting the hiring of private counsel, and its status for any other purpose would depend on the specific law being applied.

Did the fact that Maryland's Insurance Commissioner appointed MIGA's board of directors mean the state was financially responsible for MIGA's debts?
No. The opinion concluded that the appointment power was relevant to determining MIGA's state-agency status for particular legal purposes, but had no bearing whatsoever on the separate question of the State's financial liability for MIGA's claims.

Background and statutory framework

The Maryland Insurance Guaranty Association was created by Chapter 703, Laws of Maryland 1971, and codified at Article 48A, §§504 through 519, to protect policyholders and claimants from losses caused by an insurer's insolvency and to help detect and prevent such insolvencies. Nearly all insurers writing property and casualty-type coverage in Maryland were required to be MIGA members, and the statute designated MIGA a "non-profit unincorporated legal entity" whose board was appointed by the Insurance Commissioner. MIGA was funded entirely by assessments on its member insurers across six separate accounts; the statute made no provision for state appropriations, and if assessed funds plus MIGA's own assets fell short in a given account, the statute simply directed that available funds be prorated with the unpaid balance paid later as funds became available.

The opinion reasoned that any state financial liability had to be expressly stated, whether by constitution, statute, or contract, and that Article 48A contained no such pledge; on the contrary, it affirmatively routed the funding obligation to member insurers. The opinion also noted that even an express state pledge of unconditional liability would likely run afoul of Article III, §34 of the Maryland Constitution, which bars the state from lending its credit to aid a private entity. On MIGA's agency status, the opinion applied the Court of Appeals' "no single test" approach from A.S. Abell Pub. Co. v. Mezzanotte, which required examining the full relationship between the state and the entity in light of the specific purpose at issue, and reconciled the seemingly different outcomes in two prior determinations (MIGA as a state instrumentality under the Public Information Act, but not a state government unit for outside-counsel purposes) as consistent applications of that purpose-specific test rather than a contradiction.

Citations

Statutes:

• Article 48A, §504(a) and §504(b) (MIGA's purpose and mandatory insurer membership)
• Article 48A, §506 (MIGA's legal status as a non-profit unincorporated entity; six-account structure)
• Article 48A, §507 (Insurance Commissioner's appointment of MIGA's board of directors)
• Article 48A, §508(a)(3) (assessment, allocation, and prorating/delayed-payment mechanism)
• §13-120 and §13-152(a)(1) of the Financial Institutions Article (examples of express state financial liability provisions)
• Article III, §34 of the Maryland Constitution (prohibition on lending the state's credit to a private entity)
• Chapter 703, Laws of Maryland 1971 (creating MIGA)
• Chapter 161, Laws of Maryland 1986 (later legislation clarifying MIGA's relationship to the state, noted in the opinion's Editor's Note)

Cases:

• Rogan v. B & O R.R. Co., 188 Md. 44, 55 (1946)
• Maryland Industrial Development Financing Auth. v. Meadow-Croft, 243 Md. 515, 523 (1966)
• Development Credit Corp. v. McKean, 248 Md. 572, 576-77 (1968)
• Johns Hopkins University v. Williams, 199 Md. 382, 401 (1952)
• Maryland Industrial Development Financing Auth. v. Helfrich, 250 Md. 602, 614-15 (1968)
• National Grange Mut. Ins. v. Pinkney, 284 Md. 694, 703-04 (1979)
• In re James D., 295 Md. 314, 327 (1983)
• A.S. Abell Pub. Co. v. Mezzanotte, 297 Md. 26, 35 (1983)
• Board of Trustees v. John K. Ruff, Inc., 278 Md. 580, 588 (1976)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1986/Volume71_1986.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

MARYLAND INSURANCE GUARANTY ASSOCIATION

State Funds—State Agencies—The State Has No Financial Liability For Claims Raised Against MIGA, Which Is Considered A State Agency For Some Purposes But Not Others.

March 3, 1986

The Honorable Howard A. Denis
Senate of Maryland

You have requested our opinion on three issues pertaining to the Maryland Insurance Guaranty Association ("MIGA"):

1. whether the State of Maryland is financially liable for claims against MIGA;

2. whether MIGA is a State agency or entity; and

3. whether appointment of the MIGA board of directors by the State Insurance Commissioner is an important factor in the above two determinations.

For the reasons given below, we conclude that:

1. The State has no financial liability for claims raised against MIGA.

2. MIGA is properly considered a State agency for some purposes but not for others.

3. The appointment of MIGA's board of directors by the Insurance Commissioner may well be a factor in determining MIGA's status as a State agency but has no bearing whatsoever on the issue of State liability.1

I
Background

The Maryland Insurance Guaranty Association was established by Chapter 703, Laws of Maryland 1971. The law governing MIGA is codified in Article 48A, §§504 through 519 of the Maryland Code.

As you have noted, the purpose of MIGA is to protect the public by (i) providing a mechanism to avoid financial loss to policyholders and claimants resulting from the insolvency of insurers and (ii) assisting in the detection and prevention of insurer insolvencies. Article 48A, §504(a). To that end, all insurers providing insurance (other than life and health insurance and annuities) must be members of MIGA as a condition of their authorization to transact business in Maryland. Article 48A, §§504(b) and 506.2

MIGA is designated as a "non-profit unincorporated legal entity." Article 48A, §506. Members of its board of directors are appointed by the Insurance Commissioner. Article 48A, §507.

MIGA uses no public funds. On the contrary, the Association is statutorily required to "[a]llocate claims paid and expenses incurred among the six accounts separately, and assess member insurers separately for each account in amounts necessary to pay the obligation of the Association ... subsequent to an insolvency, the cost of examinations ... and other expenses authorized by this subtitle." Article 48A, §508(a)(3). Even if MIGA's own funds prove insufficient in any given year, no provision is made for resort to State funds. Rather, the statute specifically requires that if the maximum assessment against members, taken together with other MIGA assets, does not comprise a sufficient amount in any account to make all necessary payments from that account, "the funds available shall be prorated and the unpaid portion shall be paid as soon thereafter as funds become available." Article 48A, §508(a)(3).

II
State Liability for Claims Against MIGA

In general terms, any assumption of financial liability by the State must be expressly stated. This may occur by authorization in the Constitution, by statute, or by express contract with the State. See, e.g., §§13-120 and 13-152(a)(1) of the Financial Institutions Article. In the absence of such express authorization, the State cannot be held liable, as all rights "asserted against the State must be clearly defined, and cannot be raised by inference or presumption." Rogan v. B & O R.R. Co., 188 Md. 44, 55 (1946). See also 81A C.J.S. States §194 (1977); 72 Am.Jur.2d. States, Territories, and Dependencies §88 (1974).

Even where express statutory or other authorization does exist, an enactment does not amount to a pledge of the faith and credit of the State unless it provides for wholly unconditional governmental liability for the payment of a debt. Thus, in Maryland Industrial Development Financing Auth. v. Meadow-Croft, 243 Md. 515, 523 (1966), the Court of Appeals held that a statute purporting to pledge the State's faith and credit was "of no legal force or effect" because limitations on the pledge prevented it from being binding in and of itself.

Finally, any financial obligation of the State must accord with Article III, §34 of the Constitution. This section provides in pertinent part that "[t]he credit of the State shall not in any manner be given, or loaned to, or in aid of any individual association or corporation."3 The Court of Appeals has interpreted this prohibition as "directed against the guaranty by a state of the debt of another and is not a limitation on the creation of an indebtedness for which a state is primarily liable." Development Credit Corp. v. McKean, 248 Md. 572, 576-77 (1968). Thus, the State may make grants or loans to private entities from the proceeds of the State's own borrowing, if the purpose of such grant or loan is public or semipublic; it may not, however, directly pledge its own faith and credit to guaranty the debt of another entity. Johns Hopkins University v. Williams, 199 Md. 382, 401 (1952); Maryland Industrial Development Financing Auth. v. Helfrich, 250 Md. 602, 614-15 (1968); McKean, 248 Md. at 576.

Applying these general principles to your question about MIGA, we conclude that the State has absolutely no financial liability for claims against MIGA. Article 48A makes no provision for financial liability of the State to MIGA. The statute neither appropriates State funds nor pledges the credit of the State for that or any other purpose. Instead, as discussed in Part I above, the statute specifically allocates MIGA claims and expenses among the separate MIGA accounts, all of which are funded by assessments on member insurers. Article 48A, §508(a)(3). Furthermore, in the event that MIGA funds do not meet its obligations in any given year, the statute provides for a procedure of prorating and delayed payment from those same accounts. Article 48A, §508(a)(3).4

In short, the State has never expressly assumed liability for claims against MIGA. On the contrary, the pertinent provisions of Article 48A makes clear that the obligation rests solely on the member insurers from whose assessments MIGA is funded. See National Grange Mut. Ins. v. Pinkney, 284 Md. 694, 703-04 (1979) (MIGA is not "maintained by the State," but instead allocates claims and expenses among its authorized accounts).5

Given the clear language of Article 48A, there is no question that the statute fails to provide for wholly unconditional governmental liability for payment of MIGA's debts. This is not, as in Meadow-Croft, due to limitations in a statutory pledge of faith and credit. In this case, there is no pledge whatsoever, the requirement of unconditional liability obviously has not been met where no liability at all is undertaken.6

Finally, even if the State had expressly and unconditionally assumed liability for MIGA's obligations, which it has not, such action would probably violate Article III, §34 of the Constitution. As we have already discussed, the State could make a grant or loan to MIGA from the proceeds of its own borrowing, but it could not explicitly pledge its faith and credit to guaranty claims against MIGA. See generally 70 Opinions of the Attorney General at 198-201. Thus, to hold the State financially liable for claims covered by MIGA would not only extend the meaning of the statute beyond its stated terms, but would construe it in such a way as to make it potentially unconstitutional. Cf. In re James D., 295 Md. 314, 327 (1983) (statutes are to be construed to avoid constitutional questions whenever "reasonably possible").

III
MIGA's Status As A State Agency

As the Court of Appeals observed in A.S. Abell Pub. Co. v. Mezzanotte, 297 Md. 26, 35 (1983), "there is no single test for determining whether a statutorily-established entity is an agency or instrumentality of the State for a particular purpose. All aspects of the interrelationship between the State and the statutorily-established entity must be examined in order to determine its status." In examining MIGA's status for the purpose of the State's Public Information Act, the Court of Appeals found in A.S. Abell that MIGA's existence depends upon the General Assembly; it serves a public purpose; its management is selected by the Insurance Commissioner, and is not self-perpetuating; it does not independently manage its affairs or enforce its regulations; its decisions may be reversed by the Insurance Commissioner; and it enjoys a special tax and liability status. The Court of Appeals accordingly held that while the State does not exercise control over all aspects of MIGA's operation, the total relationship between the State and the Association is such as to make MIGA an instrumentality of the State within the scope of the Public Information Act. 297 Md. at 38-39.

Taking full account of the holding in A.S. Abell, this office subsequently considered MIGA's status as a "unit of the State government" for purposes of the statutory ban against retaining private counsel. 70 Opinions of the Attorney General 30 (1985). In making our determination, we noted that: MIGA is a "non-profit unincorporated legal entity" whose primary duties require it to operate much as a private insurance pool; the General Assembly intended it to operate in most respects as a private entity in the day-to-day handling of its claims and cases; its needs for legal counsel are the same as those of any private insurance pool and could best be met by privately-retained attorneys who specialize in insurance practice; and the long-standing practice, accepted by MIGA, the Insurance Commissioner, and the Attorney General, was for MIGA to be represented by privately-retained counsel. Considering all these factors, we found that MIGA was not a unit of State government for the purpose of the statutory ban and could therefore continue to retain private counsel. 70 Opinions of the Attorney General at 32.

There is no discrepancy between the Court of Appeals' holding in A.S. Abell and the determination made in 70 Opinions of the Attorney General 30. It is well-established that an entity may be considered an agency, unit, or instrumentality of government for one purpose, but not for another. 70 Opinions of the Attorney General at 32 (citing examples of the Maryland Legal Services Corporation, county boards of education, and the American Red Cross). The factors to be considered in making this inquiry, as well as its ultimate outcome, are to a great extent determined by the purpose for which the inquiry is made. Thus, some or all of the factors mentioned above, and potentially other factors as well, might be pertinent, depending upon the particular inquiry. It is not possible to make an across-the-board determination of MIGA's status as a State agency.7

IV
Appointment of MIGA's Board of Directors

The State Insurance Commissioner appoints the members of the MIGA board of directors from member insurers. You have asked whether this fact is an important consideration in answering your previous two questions.

The power of appointment by a state official has no bearing whatsoever on the State's financial liability for claims against MIGA. As we have discussed in Part II above, that question depends on the language and construction of MIGA's statute, which clearly puts no obligation on the State to guaranty the association. The manner in which MIGA's board is appointed is wholly irrelevant to the issue.

On the other hand, State control over the board of directors would likely be one pertinent factor in determining MIGA's status as a State agency for some specified purpose. Indeed, as we have noted, appointment by the Commissioner was one of the factors considered by the Court of Appeals in determining that MIGA was a State instrumentality for the purposes of the Public Information Act. A.S. Abell, 297 Md. at 38.

V
Conclusion

In summary, it is our conclusion that the State bears no financial liability for claims against MIGA. MIGA is properly considered a State agency for some purposes but not for others. While the appointment of its board of directors may have some bearing on MIGA's status in this regard, it is wholly irrelevant to the issue of the State's financial obligation.

Stephen H. Sachs
Attorney General
Laurie Burton-Graham
Staff Attorney

Jack Schwartz
Chief Counsel
Opinions and Advice

Editor's Note: The legislation referred to in notes 5 and 7 of this opinion was enacted. Chapter 161, Laws of Maryland 1986. MIGA is now known as the Property and Casualty Guaranty Corporation.

1 In a letter of advice to Senate President Melvin A. Steinberg and Senate Finance Committee Chairman Dennis F. Rasmussen (February 17, 1986), Assistant Attorney General Robert A. Zarnoch reached essentially the same conclusions as are set forth here. That letter also set out various possible changes to MIGA's statute to further clarify MIGA's relationship to the State.

2 For purposes of administration and assessment against member insurers, MIGA is divided into six separate accounts: title insurance, surety insurance, wet marine and transportation insurance, motor vehicle insurance, workmen's compensation, and all other insurance to which the statute applies. Article 48A, §506.

3 A comma after the word "individual" was omitted, apparently without substantive intent, in the 1867 Constitution. The language of Article III, §34 has been construed to bar gifts or loans of the State's credit to individuals as well as to associations and corporations. See 70 Opinions of the Attorney General 180 (1985) at 199 n. 18.

4 The origins of MIGA are described in 57 Opinions of the Attorney General 306 (1972). As this opinion observed, a main purpose of MIGA is to spread the costs resulting from an insurer's insolvency "throughout a large segment of the industry since assessments are made against all insurers in the appropriate category under [Article 48A, §506]." 57 Opinions of the Attorney General at 316. Nothing in the legislative history, as recounted in this opinion, suggests that any part of the costs were to be borne by the State.

5 We note that Senate Bill 813, currently before the General Assembly, proposes to amend Article 48A to clarify the relationship between MIGA and the State. Among other changes, the bill would add a provision that payment of covered MIGA claims "is neither guaranteed nor insured by the State of Maryland." Proposed Article 48A, §504(a)(2). It is our opinion that this express denial of any State guaranty only confirms existing law.

6 Moreover, the State's underlying sovereign immunity has not been "expressly waived" by the MIGA statute or "by a necessary inference from such legislative enactment." Board of Trustees v. John K. Ruff, Inc., 278 Md. 580, 588 (1976). In addition, no State funds have been appropriated for the payment of judgments arising out of claims against MIGA. 278 Md. at 591.

7 Among the amendments to Article 48A proposed in Senate Bill 813 (see note 5 above) is a provision that expressly denies that MIGA is an instrumentality of the State of Maryland.