OGC Op. No. 04-10-16

The Office of General Counsel issued the following opinion on October 20, 2004, representing the position of the New York State Insurance Department.

Re: Letters of Credit / Regulation 133


Where several of an insurer’s subsidiaries require security from an insured in connection with a number of separate insurance contracts, may the insurer require the insured to name several of the insurer’s subsidiaries as beneficiaries on each of the letters of credit provided by the insured?


In the case of a group of affiliated insurance subsidiaries that belong to a pooled group, where each report their receivables from the insurance programs in question on a pooled basis, the Department’s regulations governing the use of Letters of Credit do not prohibit the parent insurer from requiring an insured to name several subsidiaries as beneficiaries on the letters of credit provided by the insured.


The inquirer’s organization ("Company") provides insurance programs for large commercial insureds ("Insureds"). These programs involve policies for more than one kind of insurance, and the different kinds of coverage are obtained from different corporate subsidiaries of Company. Insureds thus generally obtain coverage from several different subsidiaries of the Company.

Certain of the insurance programs forming the basis for the inquiry have high deductible limits. The Company’s subsidiaries will generally pay out on claims and will recoup the deductible from the Insureds. Given this arrangement, the Company has required that Insureds provide it with letters of credit ("LOCs") as security for payment of the deductibles. In connection with the LOCs that will be required in the course of all of the programs, Company wants each LOC to list several of its subsidiaries, irrespective of whether or not a particular Insured is securing coverage from each named subsidiary. This practice is done for administrative convenience, as the requirements of programs in question may lead to the addition/subtraction of various subsidiaries from the programs from time to time. One Insured has raised objections to the Department regarding this practice and would prefer that each LOC name as beneficiary only the subsidiary or subsidiaries to whom it is providing security under each respective program of insurance coverage.

The inquirer’s office has informed the Department, by letter dated September 13, 2004, that the subsidiaries participating in the programs in question are members of the commercial pool, and reflect the balance sheet caption "Amounts Receivable Under High Deductible Policies" on a pooled basis among each of the subsidiaries.


The use of LOCs is generally subject to Regulation 133, N.Y. Comp. Codes R. & Regs. tit. 11, §79.1 et seq. (1995) in cases in which the letters of credit are required in order to satisfy a statutory or regulatory requirement, and/or where there is a financial statement implication. N.Y. Comp. Codes R. & Regs. tit. 11, § 79.1 (1995) sets forth the definitions of terms used in Regulation 133, and provides, in pertinent part, as follows:

(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 (1995).

This Office previously concluded that the practice insisted upon by the Company, i.e., requiring the names of many of its subsidiaries as beneficiaries on all of the LOCs provided by the insured, was an illogical application of the definition of beneficiary. Upon reconsideration of the particular situation at issue herein and the provision of additional detail regarding the operation of programs, the Department concludes that the practice is not unreasonable under the circumstances presented, i.e., where each subsidiary is part of a pooled group, the members of which report their receivables from the insurance programs on a pooled basis. In such a situation, the financial statement implication of the use of the LOCs in question is not adversely impacted by the naming of additional subsidiaries. Thus, the chief focus of Regulation 133 is not implicated by the practice in the instant case, and as such the practice is not prohibited by the regulation.

For further information one may contact Supervising Attorney Michael Campanelli at the New York City Office.