Ken Stoller, American Insurance Association senior counsel, said that it made sense that guaranty fund should be paid, “particularly since the guaranty fund's payment is what triggered the subsequent reimbursement.”

Failure to properly provide the guaranty fund with the policyholder reimbursement would mean the guaranty funds would need to raise additional funds through increased insurer assessments. “Ultimately, such increased assessments would be borne by individual policyholders,” Mr. Stoller said.

Advocates of the Delaware proposal argue that the term “large deductible” is actually a misnomer since the policies in question provide first dollar coverage with a right of reimbursement later.

Treating loss reimbursements as assets of the estate is consistent with the broad body of bankruptcy and insolvency law that recognizes an insolvency estate has the same property interest in a debtor's assets that the debtor had immediately prior the start of insolvency proceeding, they contend.

Under the plan guaranty funds would provided with “early access” to the reimbursement funds.

But Mr. Stoller said the guaranty funds needed immediate payment without the “strings attached” of the early access procedure.

He also noted that five states – Pennsylvania, Illinois, California, Texas and Michigan – have adopted laws embracing the Arkansas approach.

“The real battle will be in the state legislatures,” he said. “And there in all the states that have looked at this issue have adopted the Arkansas approach.”

The proposal now sits with the Financial Condition Committee and will ultimately face approval by the full NAIC body.