What is Buyback Insurance?
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Asked December 3, 2012
Insurance companies have procedures in place to manage claims disputes in a way that is agreeable to all parties. One method is to use a buyback agreement. Buyback agreements allow the insurance company to terminate the policy, and the policyholder receives a lump sum cash payment. The insurance company buys the policy back, nullifying the policy as though it never existed.
For the insurance company, the benefit of a buyback agreement is that it can get "out from under" a policy which has the potential to lead to future costs or other liabilities. They can make a single payment which accounts for the premiums and value built up by the policy, satisfying their financial obligations, rather than endure the additional costs which could be incurred by further disputes over the claim.
For the policyholder, a buyback agreement makes them self-insured and therefore responsible for the cost of the disputed claim. The policyholder then pays the costs involved out of pocket, typically from upfront payment made by the insurance company. This satisfies the claim, if the costs are lower than the amount received, the balance can be considered a return on the original policy value.
Buyback agreements do not have include complete termination of the policy, but this type of buyback is more common in commercial liability cases, where the buyback may be limited to a particular site or location, or to other factors such as environmental insurability concerns or limiting the buyback to litigation related to the claim.
Policy buybacks do not eliminate responsibility for other claims not involved in the dispute which are already in progress. The insurance company will continue any other settlements which had begun before the time of the policy buyback, but will not be responsible for claims made after the buyback unless such coverage is specified by the policy buyback agreement or previous contractual obligations.
Some states have anti-annulment statutes which prevent insurance companies from using a buyback agreement to its full extent. These statutes typically apply to cases involving death or serious bodily injury, and have been put in place to prevent insurance companies from removing themselves from potentially costly claims which would otherwise have resulted in higher than expected costs on the policy.
Contact the department of insurance in your state find out whether it has such statutes and how they are applied. In some cases, the laws may only apply to auto or home insurance, which other states have enacted statutes of this type on all policy annulment practices.
Answered December 3, 2012 by Anonymous