How to Collect Insurance on Default Bond
Insurance companies issue bond insurance contracts to protect investors from the consequences of default. These companies are typically called monoline insurers. The bond insurance contract pays out a claim if the bond enters default, which means that the borrower has fallen behind significantly on paying the yield.
Bond insurance is most common for municipal bonds, which are issued by state and local governments to pay for special projects or regular expenditures. Monoline insurance companies send payment to your account soon after an insured bond defaults.
4 Steps to Collect Insurance on Default Bond
1. Look at the insured bond through the quote system provided by your brokerage.
The fact of whether or not a bond is insured is displayed in a special column in most quote systems. Contact the customer service department of your brokerage if you have trouble figuring this out.
The insurance company will pay claims for any missing yield payments and the principal of the bond, in case of default.
2. Examine the credit rating of the bond insurer.
This will assist you in discovering whether or not the insurance company is sufficiently solvent to make the insurance payments. While, historically, monoline insurance company defaults are rare, the problems of bond insurers like AMBAC and MBIA have made it prudent for investors to pay attention to the financial health of these companies.
You can find the credit rating and more information about the insurance company covering your bond through the corporate credit rating bureau websites at Moody’s, Fitch’s and Standard & Poor’s. If the company has a credit rating of BBB or lower, it may experience difficulties paying claims on defaulted bonds.
3. Call a customer service representative from your insurance company if you fail to receive an insurance claim payment soon after an insured bond in your portfolio defaults.
Wait at least 30 days after the default event before contacting the company. The monoline insurer signed a contract with the issuing company of the bond to pay claims in the case of default.
If the company has a strong credit rating with the agencies, there should be no reason for a delay in receiving claims payments.
4. Contact the Securities and Exchange Commission (SEC) Complaint Center if the insurance company never responds to your contacts and avoids sending you repayment in a reasonable amount of time.
If the insurance company is insolvent, it may be impossible to recover the insurance payment you were promised. In most cases, however, even insolvent insurance companies are purchased by others, and the contracts should be honored.
Municipal bond defaults are rare and typically isolated events. Insured bonds are usually not much more expensive than those without insurance.
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