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Note: Pride National Insurance Company (Reinsurer/Applicant) entered into a quota share reinsurance agreement with CorePoint Insurance (Insurer/Beneficiary) under which Reinsurer/Applicant reinsured 25% of Insurer/Beneficiary’s risk and received 25% of the collected net premiums. In return, Reinsurer/Applicant was responsible for paying Insurer/Beneficiary 25% of the net liability.

To assure payment under the reinsurance agreement, Fifth Third Bank (Issuer) issued a standby letter of credit in favor of Insurer/Beneficiary for USD 250,000 at the request of Reinsurer/Applicant with an expiration date of 14 Sept 2013. However, the standby provided for automatic extension for one year unless Issuer notified Insurer/Beneficiary of non-extension at least 60 days before the then current expiration date. Reinsurer/Applicant provided “a first priority security interest in its savings account at [Issuer]” to collateralize the standby.

Subsequently, John D. Doak, Insurance Commissioner of Oklahoma (Receiver), obtained an order that placed Reinsurer/Applicant into receivership. The order granted Receiver all of Reinsurer/Applicant’s property, including Reinsurer/Applicant’s collateral. Receiver then appointed Donna Wilson as Assistant Receiver (Assistant Receiver), and moved for a liquidation order, which the trial court granted.

Assistant Receiver cancelled all Reinsurer/Applicant’s direct insurance policies, but Assistant Receiver sent an email to Issuer’s president stating that the standby serving as collateral was not to be terminated. Without a notice of non-extension from Issuer, the standby was extended automatically on 14 September 2013. However, three days later, Assistant Receiver directed Issuer not to extend the standby. Subsequently, Insurer/Beneficiary drew on the standby for the full amount. After notifying Assistant Receiver of the drawing, Issuer paid Insurer/Beneficiary the full amount demanded on the standby.

Issuer then moved for “relief from the stay of litigation and the liquidation order to allow it to offset the cash collateral against the amount due from [Reinsurer/Applicant] under the pledge agreement”. Receiver subsequently moved to compel Issuer to return Applicant’s deposit of USD 250,000. Receiver argued that its liquidation order barred Issuer from recovering from any claim against Reinsurer/Applicant after the liquidation started. The District Court of Oklahoma County, Swinton, J., denied Issuer’s motion for an injunction and ordered Issuer to return the USD 250,000 held in Reinsurer/Applicant’s account to Receiver. On appeal, the Court of Civil Appeals of Oklahoma, Division 1, Goree, J., reversed the trial court’s decision and granted the injunction to Issuer.

The Appellate Judge noted that when Receiver missed the deadline to ask Issuer to send a notice of non-extension, the standby was extended for another year and Issuer was required to make payment on a complying presentation. The Appellate Judge also pointed out that Issuer’s obligations under the standby became enforceable when it issued the standby to Insurer/Beneficiary, because Issuer’s obligation to pay Insurer/Beneficiary was independent of the contract between Reinsurer/Applicant and Insurer/Beneficiary. The Appellate Judge ruled that neither Issuer nor Reinsurer/Applicant could unilaterally modify the standby after the deadline for non-renewal without Insurer/Beneficiary’s consent. Since Receiver lacked Insurer/Beneficiary’s directive to close the standby, Issuer rightfully honored Insurer/Beneficiary’s presentation.

Comment by IIBLP:

1. “non-renewal”

The opinion uses the word “non-renewal” instead of “non-extension,” presumably because the text of the study did and probably did because the Insurance Commissioner’s form used this term. As pointed out in ISP98 Model Form 2 Endnote 3 (Automatic Extension), “renewed” focuses on the amount and not the extension of time.

[JWC]

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