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Pre-Answer Security: Regulatory Protection for Policyholders in an Age of Insecurity

By Seth A. Tucker
February 24, 2005

When corporate policyholders sue their insurers, the roster of defendants often includes an “unauthorized” insurer, whether it be Lloyd's of London (which is licensed in only two states, though it writes as an eligible surplus lines insurer in some or all of the other states), a London Market Company, or a domestic insurer not licensed to sell insurance in the state where suit was brought. Such insurers have avoided many of the stringent state regulations that govern “authorized” insurers. But in the majority of states, those insurers are subject to a quid pro quo in exchange for enjoying relaxed regulation: Unauthorized insurers (whether foreign or domestic, “eligible” as surplus lines carriers or not) are subject to a pre-Answer security requirement. That is, before they may answer a Complaint against them, unauthorized insurers must post cash, securities, or a bond sufficient to satisfy any judgment that may be entered against them.

Although not a newly enacted requirement, the pre-Answer bond is often overlooked as policyholders and their insurers hurtle into fast-paced litigation. Because obtaining such a bond can be “good insurance” against either an insolvency or a post-judgment battle to collect, policyholders should consider enforcing their right to demand a bond when litigating against an unauthorized insurer. Indeed, this may be a rare instance in which policyholders and at least some of their insurers ' the authorized ones ' can agree, since in jurisdictions that apply the “all sums” rule a bond can help minimize the risk that the authorized insurers will be left paying the share of the judgment that would have been borne by the unauthorized insurer had the policyholder been able to collect it.

The Statutory Framework

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