On 22 June 2011, the New York Assembly passed Senate Bill 2713A/ Assembly Bill 6603A which, if signed by the Governor, will add provisions to the New York Insurance Law regarding the treatment of qualified financial contracts in an insurance insolvency proceeding.
“Qualified financial contracts” include derivatives, securities lending, repurchase agreements, futures contracts and other financial instruments. These contracts are typically documented under master agreements providing for netting of obligations between the parties. The agreements also establish a right of the non-defaulting party to close out, liquidate and terminate the agreements immediately upon the insolvency of the other party and provide for collateralization of obligations on a net, rather than gross, basis.
Although the U.S. Bankruptcy Code (governing the insolvency of most U.S. companies) and the Federal Deposit Insurance Act (governing the insolvency of U.S. banks) contain provisions exempting qualified financial contracts and netting agreements from the automatic stay mechanism, most state insurance codes governing the insolvency of insurance companies have historically not included such provisions, creating significant uncertainty for counterparties of insurance companies.
The Insurance Receivership Model Act (“IRMA”), adopted by the National Association of Insurance Commissioners in 2005, did include such provisions, and over time more and more states have been enacting those provisions into law. During the five-year period prior to 2010, only six states did so (Connecticut, Iowa, Maryland, Michigan, Texas and Utah), but that picture has changed substantially as ten more states have enacted the IRMA provisions in 2010 and thus far in 2011 (Arizona, Delaware, Illinois, Indiana, Maine, Massachusetts, Minnesota, Missouri, Nebraska and Virginia). If Governor Cuomo signs the recently passed New York bill, New York will become the 17th state to provide greater certainty for parties that enter into qualified financial contracts with insurance companies.
For more detail on this subject, please see our prior article, “Treatment of Swap Agreements Under Insurance Insolvencies” from our November 2010 bulletin.