Note: Williams Servicing Group, LLC (Insurance Servicing Group) contracted with four insurance companies for more than 45 workman's compensation and general liability policies. These policies were purchased by National Union First Insurance Co. of Pittsburg, Pa. (Insurer). The parties agreed that in exchange for a premium of US$ 3,800,000, Insurer would provide coverage for claims of up to $ 4,200,000 but that Insurance Servicing Group would be liable for claims in excess of that limit and was also responsible for a deductible. Insurance Servicing Group provided standby letters of credit in favor of Insurer as collateral for its obligations.

In 1999, payments under the policies exceeded the maximum but Insurer did not bill Insurance Servicing Group until October 2009. Insurance Servicing Company failed to reimburse Insurer and sued it for negligently supervising several claims and overpayments. Insurer counterclaimed for more than $ 2 million in unpaid claims. On cross motions for summary judgment, the US District Court for the Northern District of Georgia, Thrash, J., entered partial summary judgment in favor of Insurance Servicing Group. The Judge ruled that certain claims were barred by the applicable statute of limitations.

Insurer claimed that it was nonetheless entitled to draw under the standby letters of credit since the debt that they were intended to cover was not extinguished by the statute of limitations but only the remedy. The Judge ruled that to the extent that drawings on the standbys sought to recover amounts barred by the statute of limitations, rights to draw under the standbys were similarly barred.

The Judge distinguished Hahn Automotive Warehouse v. American Zurich Insurance Co. (2011 N.Y. App. Div. Lexis 960 (Feb. 10, 2011) [U.S.A.] (2012 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW AND PRACTICE), in which the statute of limitations on the underlying transaction was ruled not to bar recovery on the standby. The basis for the distinction was that in Hahn, the standby expressly provided that the insurer could apply it to any debt. In respect to the Insurance Servicing Group, the Judge stated that "the [Insurer's] right to draw on the letters of credit arises from the Program Agreements, not the letters of credit themselves" and "the letters of credit create no such independent remedy...Indeed, the letters of credit do not provide that they are security for any of [Insurance Servicing Company's] debts. Rather, the Program Agreements establish the [Insurer's] right and the [Insurer's] remedy."


The Judge here provides practically no grounds for his determination that the Insurer's right to draw on the LCs arises from the underlying agreement, the Program Agreements. This differs vastly from normal LC practice in which LCs are inherently independent from their underlying transactions. A more accurate ruling in this area of law can be found in Hahn Automotive Warehouse, Inc. v. American Zurich Insurance Co., 81 A.D.3d 131 (N.Y. App. Div. 2011) [U.S.A.], noted at 2012 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW AND PRACTICE, at 425.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.