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Fred M Haskins, Esq.
(515) 283-2147


In a very typical investment situation, such as with a Qualified Financial Contract, the issuer will make enforceable promises, creating obligations, to an insurance company. To secure these obligations the issuer will provide collateral to the insurer. When the obligations are met by the issuer, the collateral will be returned by the insurer to the issuer. But, what if, before the obligations are fully met, and the collateral is still being held by the insurer, the insurer becomes insolvent and the subject of delinquency proceedings by the insurance commissioner? Is the issuer still obligated to continue to perform, even though the collateral it has given has been frozen and most likely will never be returned (the issuer being only a general, unsecured, creditor) or does the issuer have some remedy? The National Association of Insurance Commissioners' Model Insurers' Supervision, Rehabilitation, and Liquidation Act provides an answer.1 The "lien avoidance" power of an insurer's receiver under the Model is well established. And those provisions further confer authority governing executory contracts.2

But, as to a "qualified financial contract," there is the correlative power possessed by an issuer to terminate and denounce it and walk away. This power is set forth as follows:

1. Notwithstanding any other provision of this chapter to the contrary, including any other provision of this chapter permitting the modification of contracts, or other law of a state, a person shall not be stayed or prohibited from exercising any of the following:

a. A contractual right to terminate, liquidate, or close out any netting agreement or qualified financial contract with an insurer because of any of the following:

1. The insolvency, financial condition, or default of the insurer at any time, provided that the right is enforceable under applicable law other than this chapter.3

A "security" is an extraordinarily broad concept as set forth in the model state securities law: It means "a note; stock; treasury stock; security feature; bond; debenture; evidence of indebtedness; certificate of interest or participation in a profit sharing agreement."4 Under the Model Act, a "qualified financial contract" is broadly defined to include a "security contract."5 The only requirement for a "qualified financial contract" to exist is that the investing party (here, the insurer) must have an interest in the investment.6

The qualified financial contract section's primary purpose is to prevent "clawbacks" by insurance company receivers of the kind of collateral flows back and forth to and from an insurer involved in a qualified financial contract, according to the New York Senate Report on the Model language.7 Otherwise, these kinds of payments, to the extent they arise from issuer and are made to the insurer, could be the subject of a receiver's preference avoidance power.

On the other hand, under the qualified financial contract code language, the issuer could repudiate the qualified financial contract when a delinquency proceeding is filed and provide no further investment returns to the insurer. It logically follows that, if it chooses to remain on the contract with the insurer, it could condition its staying upon the receiver setting aside from the insurer's assets collateral scheduled and otherwise due to be returned upon expected fulfillment by the issuer of its obligations as to the rate of return, etc.

Nor does anything in the language preclude the issuer of the qualified financial contract from setting a reasonable deadline by which the receiver must either agree to set aside the issuer's remaining collateral in its possession and let the issuer continue to perform or simply let the issuer repudiate and walk away from its long-term obligations under the contract.

To conclude, while an insurance receiver has considerable general power to repudiate existing contracts, including recovery of transference of funds which an insolvent insurer has made (under its authority to void preferences), the issuer of a qualified financial contract has a vast correlative power to not only keep what collateral has already been returned by the insurer but also to walk away from the contract it has made, and avoid having to put forward further collateral. It could also compel the receiver to agree to set aside the collateral due back to the issuer but not yet repaid due to the freezing effect of the filing of the receivership. In this sense, "turnabout is fair play."8

1. Iowa has the Model. The Model has been superseded by NAIC's Insurance Receive Model Act ("IRMA"). Only a few states have adopted IRMA but it does contain the "qualified financial contract" provision. See, e.g., Ind. Code Sec. 443.261; Ariz. Rev. Stat. Ch. 46 (HB 2113, Laws 2011).

2. Iowa Code Sec. 507C.28 (Model); Ind. Code sec. 443.013 (IRMA).

3. See, e.g., Iowa Code §507C.28A; Mo, Rev. Stat. §375.1152; N.Y. Ins. Law §7437.

4. See, e.g. Iowa Code 502, 102 (28) - part of Uniform Securities Act. 

5. See, e.g., Iowa Code 507C.2(19).

6. According to one Court, Colonial Sav., F.A., v. Public Service Employees, 2009 WL 1039820 CD. Colo. 2009.

7. (2010). See also, SB 777 (2010).

8. Cambridge Idioms Dictionary (2006).