Letter of Credit
1. Insured pays a premium to Capital Security (“CSL”) Ltd.
2. CSL issues a policy to the Insured covering the collateral needed.
3. CSL has a Letter of Credit sent, to the issuing carrier, from an approved U.S. bank.
- U.S. Insurance carriers frequently require collateral when issuing policies where the insured assumes a significant amount of the risk. This is to protect themselves against insured failure to pay these claims obligations
- Most carriers require a Letter of Credit (LOC) or a Trust arrangement since cash is subject to attachment by bankruptcy courts
- LOC’s are most commonly use due to ease of use, protection against creditors, and Trust restrictions
- Insured’s normally draw down on Lines of Credit, which can be expensive and not the intended purpose of the line; or, they have their bank issue on LOC (in effect a loan)
In either case it becomes a Balance Sheet liability which can “stack” up on the Balance Sheet over the years with the usual annual ???????