When companies liquidate through bankruptcy, the battle among creditors for collateral can be fierce. We tend to think of lenders, including debtor-inpossession lenders, who generally enjoy a priority lien on debtors’ assets, as those who have an interest in collateral. Insurance companies, however, also often take collateral—particularly, to secure an insured’s obligation to reimburse an insurer for amounts within deductibles. As Duane Morris partner Taylor explains: “Losses covered by an insurance program develop over time so insurance agreements often require an insured to post collateral at the onset of the insurance program and to provide additional collateral over time if necessary. Typically, those agreements also provide that the insurer may retain that collateral until all claims covered by the insurance program are fully and finally closed and cannot be reopened.”

According to Duane Morris partner Simkulak, “The amount of collateral that is necessary is generally based upon actuarial calculations and financial factors.” As such, the amount of an insurer’s claim can be estimated at any given time, but the valuations thereof can vary depending on what information is available and how it is assessed. However, the value of the collateral that an insurer actually holds at any given time is normally not disputable, as it is most often in the form of a letter of credit or cash. Thus, an insurer’s claim and collateral present similar yet in some ways, polar-opposite issues than those of other secured creditors. As Simkulak explains: “Most creditors have claims for liquidated amounts but the value of their collateral (e.g., real property or inventory) needs to be estimated; whereas, insurers have collateral in finite amounts but claims that need to be, at least in part, estimated.” Thus, when challenges arise regarding the amount of collateral that an insurer is holding or when an insurer asserts that its claim is in excess of the amount of collateral it holds, there is often a battle of actuarial and financial experts. In most recent cases, Simkulak and Taylor agree, the courts have understood the carriers’ needs to hold collateral and have prevented other parties-in-interest from getting to the insurance companies’ collateral.