The Office of General Counsel issued the following opinion on March 17, 2005, representing the position of the New York State Insurance Department.
Re: Letters of Credit
May a reinsurer, when providing security to three related ceding insurers, provide a single letter of credit that names all three different legal entities?
No, a letter of credit used in connection with a reinsurance transaction should have only one beneficiary.
A property casualty insurer places treaty reinsurance with unauthorized reinsurers. The reinsurance is obtained for business written by three different legal entities (each of which is domiciled in a different state, specifically, New York, Illinois and Connecticut). One of the reinsurers has asked whether it would be permissible for it to provide security with a single letter of credit covering all three entities.
N.Y. Comp. Codes R. & Regs. tit. 11, § 79 (2003) (Regulation 133) governs the use of letters of credit, and provides the following definitions:
(a) Applicant means the party who applies for and causes the bank or trust company to issue the letter of credit.
(b) Beneficiary means the insurer in favor of which the letter of credit or its confirmation is established and shall include any successor by operation of law of any named beneficiary including, without limitation, any liquidator, rehabilitator, receiver or conservator.
(c) Clean and unconditional letter of credit or clean and unconditional confirmation means a letter of credit or confirmation which:
(1) makes no reference to any other agreement, document or entity; and
(2) provides that a beneficiary need only draw a sight draft under the letter of credit or confirmation and present it to promptly obtain funds and that no other document need be presented.
N.Y. Comp. Codes R. & Regs. tit. 11, § 79.1 (2003).
With regard to the use of letters of credit in the specific context of a reinsurance transaction, Regulation 133 provides, in pertinent part, as follows:
(a) When a letter of credit is obtained in conjunction with a reinsurance agreement, then such reinsurance agreement must contain provisions which:
(1) Require the reinsurer to be the applicant for and to provide letters of credit to the ceding insurer and specify what recoverables and/or reserves are covered;
(2) Stipulate that the reinsurer and the ceding insurer agree that the letters of credit provided by the reinsurer pursuant to the provisions of the reinsurance agreement may be drawn upon at any time, notwithstanding any other provisions of the reinsurance agreement, and be utilized by the ceding insurer
. . . .
(c) When a letter of credit is obtained in connection with a reinsurance agreement covering risks other than life, annuities and accident and health then such reinsurance agreement may, in lieu of the provisions required by paragraph (a)(2) of this section, require that the ceding insurer and reinsurer enter into a letter of credit trust agreement that shall conform in substance to section 79.9(d) of this Part. In lieu of entering into such an agreement, the ceding insurer and the reinsurer may incorporate the agreements terms and conditions into such reinsurance agreement.
N.Y. Comp. Codes R. & Regs. tit. 11, § 79.5 (1996).
The above-quoted provisions of the regulation governing the use of letters of credit in the context of reinsurance refer to "ceding insurer" and "beneficiary" exclusively in the singular. Thus, the regulation clearly contemplates that each letter of credit would have only one beneficiary. Although the reinsurer in this case may have contractual privity with each of several related ceding insurers, the practice of naming several beneficiaries on one letter of credit could be problematic. A letter of credit is often utilized to protect the financial interests of a ceding insurer in connection with a reinsurance agreement. The naming of several insurers on a single letter of credit could result in one of the ceding insurers drawing down the letter of credit to the exclusion of the other named beneficiaries. Accordingly, in the situation described above, it is the Departments view that where a letter of credit is required in connection with a reinsurance agreement with a ceding insurer, it should only name as beneficiary a single ceding insurer.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.