Growing climate risk is straining P\&C insurers' financial stability. State-level guaranty funds are designed to protect consumers facing insolvent insurers, yet their structure and effectiveness remain understudied. Unlike the pre-funded and centralized FDIC, these guaranty funds are state-run and rely on ex-post, risk-insensitive assessments of surviving insurers. While guaranty funds are intended to increase trust in the insurance system, in practice payouts can take years to reach homeowners, leaving them with unrepaired homes as they wait for claims to be paid. Crucially, we find that their structure significantly distorts insurance supply: solvent insurers exit states following insolvencies to avoid these ``tax" assessments and to escape inheriting concentrated exposures in affected counties. Furthermore, the post-funding mechanism degrades supply quality: fragile insurers, ignoring their own insolvency costs, underprice better-capitalized rivals for fully covered policies. Other explanations of exit, such as general industry-wide declines or climate risk management do not explain these exit and pricing patterns, though they can amplify the effects of the guaranty fund. These findings highlight how the current guaranty fund design induces moral hazard and amplifies pro-cyclical supply disruptions.