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What Are Pre-Answer Security Laws?

August 1, 2002

What Are Pre-Answer Security Laws?

August 1, 2002

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Practices

Before unauthorized foreign or alien insurers are allowed to defend insurance-related lawsuits on the merits, almost every state in the Union, including Wisconsin, requires them to post security sufficient to satisfy any judgment that ultimately may be entered against them. These “pre-answer security” laws are effective tools for plaintiffs but impose a significant burden on defendants. Insurance companies may love these laws when they are pursuing claims against their reinsurers but hate them when they are being pursued by policyholders. It is all a matter of perspective.

Although most pre-answer security laws, including Wisconsin’s, do not specify whether they apply to reinsurers, courts generally have found that reinsurers have the same security obligations as insurers. Thus, ceding insurers have obtained a significant advantage in legal disputes with their foreign reinsurers, who in some cases have been required to post multi-million dollar bonds just to defend themselves. Failure to comply can result in the striking of a responsive pleading and the entry of a default judgment.

Other than becoming licensed in the state at issue, there is little that insurers or reinsurers can do to avoid the application of these laws. Constitutional challenges and statutory interpretation arguments generally have failed. The key is simply torecognize that these laws exist and to be prepared to pay the entire amount in dispute up-front.

History

Pre-answer security laws arise out of a model statute adopted by the National Association of Insurance Commissioners in 1948. The model statute sought to provide policyholders with assistance in resolving disputes with insurers located far from their home states. It did so in two ways. First, it helped to establish personal jurisdiction over unlicensed foreign or alien insurers by deeming the state insurance commissioner to be their agent for service of process. Second, the model statute required insurers to post security before raising any defenses on the merits. These two provisions remain the focus of pre-answer security laws today. Approximately forty-five states have adopted such laws. Wisconsin first adopted its version in 1971. There have been no judicial decisions addressing it.

Common Provisions

Under typical pre-answer security laws, any insured that is a resident of the state or that is authorized to do business in the state can ask the court to require the defendant to post security in any action arising out of an insurance contract. The defendant then must put up money, a bond or other security before filing a responsive pleading.

Wisconsin’s pre-answer security law, Wis. Stat. § 618.47, provides:

(1) Conditions for filing. No pleading, notice, order or process in any court action or in any administrative proceeding before the commissioner instituted against an unauthorized person under ss. 601.72 or 601.73 may be filed by or on behalf of the unauthorized person unless the person either:

(a) Deposits with the clerk of the court in which the action or proceeding is pending, or with the commissioner in administrative proceedings before the commissioner, bond with sureties in an amount fixed by the court or the commissioner, sufficient to secure the payment of any probable final judgment or order. The court, or the commissioner in administrative proceedings before the commissioner, may make an order dispensing with a deposit or bond where the person makes a satisfactory showing that in a state of the United States he or she maintains funds or securities, in trust or otherwise, sufficient and available to satisfy any probable final judgment or order; or

(b) Procures proper authorization to do an insurance business in this state.

(2) Postponement. The court in any such action or proceeding, or the commissioner in any administrative proceeding before the commissioner, may order any postponement necessary to afford the unauthorized person reasonable opportunity to comply with sub. (1).

(3) Exception. Subsection (1) does not prevent an unauthorized person from filing a motion to quash a writ or to set aside service on the ground that he or she has not done an insurance business in this state.


Plaintiffs can even wait until after the defendant has filed a responsive pleading to ask the court to enforce the security requirements. Defendants have had no success in arguing that plaintiffs waive their right to security by not requesting it until after the defendant has responded to the lawsuit.

Wisconsin’s pre-answer security statute allows defendants, however, to try to avoid the posting requirements by showing that they have sufficient funds or securities in another state. Thus, Wisconsin’s statute may have the most effect on overseas insurers who do not keep funds in this country.

Application to Reinsurers

A few states, like Pennsylvania and Oregon, specifically exempt reinsurers from pre-answer security laws. See Pa. Stat. Ann. tit. 40, § 46(e)(3)(2001); Or. Rev. Stat. § 746.360 (1999). In most states, however, laws do not address whether reinsurers are covered and courts have been left to answer this question. Reinsurers have argued that they are not subject to pre-answer security laws, contending that reinsurance contracts are not insurance policies and that these laws were not intended to give a ceding insurer leverage over its reinsurers.These arguments have not prevailed; courts have routinely required foreign reinsurers to post security. See generally Christopher Hitchcock and Peter J. Biging, Tactical Use of State Laws Requiring Unauthorized Insurers to Post Preanswer Security, 31 Tort & Ins. L.J. 767 (Spring 1996); see also Kirill P. Strounnikov, Pre-Appearance Security Requirements for Unlicensed Reinsurers in the United States, 7 Conn. Ins. L.J. 465 (2000-01). Ceding insurers have even been successful in convincing courts to require reinsurers to post security in matters that ultimately are sent to arbitration.

Constitutional Challenges

Insurers have challenged pre-answer security laws as unconstitutional in a number of situations, but without success. Most recently, the United States Court of Appeals for the Second Circuit in British International Insurance Company Limited v. Seguros La Republica, S.A., 212 F.3d 138 (2nd Cir. 2000), rejected a due process challenge to New York’s pre-answer security law. The defendant argued that a pre-answer security requirement amounts to a prejudgment attachment and therefore violates the right to due process. Although the Second Circuit acknowledged that the security requirement is equivalent to an attachment, it explained that the state’s interest in requiring pre-answer security is “far more substantial than that involved in the enactment and enforcement of traditional prejudgment attachment statutes.” Because New York and other states have such a strong interest in ensuring that insurers have sufficient funds to pay each individual claim, the law passed constitutional muster.

In short, insurance and reinsurance attorneys should be aware of pre-answer security laws so that the client can enjoy the benefits of these laws or prepare to defend against their burdens.

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