The Trouble with Securing Collateral

Policyholders routinely post collateral in connection with their captive insurance operations, deductible reimbursement programs and workers compensation policies. At its most basic level, the collateral is used to secure obligations that the policyholder must perform. If the policyholder fulfills its obligations, the collateral should remain secure and untouched. That, however, is not always the case.

Some insurance companies have seized the policyholder’s collateral improperly-often on the basis that claims reserves require greater capital infusions to secure pending claims or claims estimates. Policyholders have also fought with state regulators regarding the treatment and disposition of collateral they have posted with insurance companies that are later rendered insolvent, resulting in liquidation or rehabilitation. These perils all point to the need for carefully drafted agreements that define the handling and purpose of the policyholder’s collateral.