The Office of General Counsel issued the following opinion on December 31, 2008 representing the position of the New York State Insurance Department.

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Certain policyholders are concerned that in the event an insurer is placed into rehabilitation or liquidation, any cash collateral provided by the policyholder would become a general asset of the insurer’s estate and could be applied by the liquidator or rehabilitator for purposes other than those intended by the agreement between the policyholder and insurer.

This inquiry involves the proper treatment of an insurer’s assets in cases where the insurer is under the control of the receiver.

Unlike certain statutes enacted in other states, nothing in Article 74 of the New York Insurance Law specifically addresses the treatment of cash collateral.

Cash collateral, unlike other collateral vehicles, can be difficult for a liquidator or rehabilitator to categorize.

Because of the inherently fungible nature of cash, when it is held on an unsegregated basis it usually is presumed to be part of an insurer’s general assets.

That presumption, however, may be overcome if sufficient evidence is presented that a given amount of cash is being held as collateral and is not in fact simply part of the general assets of the insurer.New York Insurance Law § 7408 (Mc Kinney 2006), which sets forth the definitions used in New York’s adaptation of the Uniform Insurer’s Liquidation Act, is instructive.Many of the commercial property/casualty insurers in a corporate holding company system enter into various kinds of insurance agreements pursuant to which the policyholders provide collateral to the insurer in order to secure future obligations to pay losses.The collateral requirements are typically set forth in a separate payment agreement governing the entire insurance program with the insured.The collateral consists of letters of credit, funds or securities held in trust, and cash collateral held by the insurer on an unsegregated basis.Cash collateral is reported as an asset on the insurer’s balance sheet with an offsetting liability.