Is An Insured's Collateral Safe With A Bankrupt Insurer?

Big companies, who put up large collateral with their insurers to cover deductible portions of claims, could have a problem getting that money back if the carrier goes bankrupt, according to a New York State legal opinion.

But the ruling is not definitive, explained Supervising Attorney Michael Campanelli with the New York Insurance Department.

He said generally it will depend on the facts and circumstances of each case, but it is not always clear whether collateral is in a protected category or part of the general assets that can go to creditors.

Generally, collateral posting is not a common situation and is generally limited to large, sophisticated insureds, he explained.

The ruling was sought, he said, by an insurance company that sought to reassure a commercial policyholder that its collateral was untouchable. It was issued on Dec. 31, 2008.

According to the opinion, "in situations where there is a bona fide agreement between a policyholder and an insurer that specifically characterizes an asset as collateral and not part of the general assets of the insurer, such collateral will not be included in the general assets of the insurer's estate in liquidation or rehabilitation."

But, "with respect to cash collateral held on an unsegregated basis, it is not possible to state categorically in advance how such collateral would be treated. A decision regarding such assets can be made only after an examination of the particular facts and circumstances of the case.

"Nevertheless, in cases where such cash collateral does not represent premiums earned by the insurer, and where a policyholder can demonstrate that it has posted an amount of collateral with an insurer for a specific purpose, that policyholder's contractual expectations as to the use, application and return of its cash collateral will be respected even in the event of the rehabilitation or liquidation of the insurer."