A US insurer has provided notification of breach to a reinsurer for its alleged failure to provide the requisite level of collateral in the form of letters of credit (L/Cs) under an agreement between the companies.

Legislation requires certain reinsurers to provide collateral such as L/Cs to an insurance company in the event that the reinsurer defaults on its future obligation to pay claims under the reinsurance agreement.

Insufficient collateral

Penn Treaty American Corporation says that two of its subsidiaries have provided notification of breach to Imagine International Reinsurance Limited for its failure to provide the requisite level of collateral in the form of L/Cs pursuant to Imagine's obligations under its reinsurance agreement.

Penn argues that the notification of breach applies to its reinsurance agreement with Imagine for business issued prior to 2002. The company does not consider Imagine to be in breach for its obligations under its reinsurance agreements for newly issued policies.

Counter argument

Penn took this action based on verbal notification provided by Imagine that the additional L/C would not be provided.

Imagine argues it is not in breach of its obligation to the two subsidiaries, Penn Treaty Network America Insurance Company and American Network Insurance Company

Policyholders safe

Penn says that policyholders remain protected by it and are unaffected by the current actions of its reinsurer in this matter.

The insurer says it has over US$1 billion in established reserves, which it believes are sufficient for the payment of future policyholder claims.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.