Appeal Bonds for Insurance Companies
You represent an insurance company and just received an adverse judgement. They want to appeal, but what about staying enforcement of the judgment? This is article will address this and many other related questions we commonly hear from attorneys.
The first step with any case is to review the policy language to determine the insurers’ obligations. An excellent article addressing this topic was published in the October 2017 edition of DRI’s For the Defense titled, “Examining Insurers’ Obligations to Their Insureds Post-Verdict.” As part of the article, the author, Susan Knell Bumbalo, looks at the costs the insurer is obligated to pay when a duty to appeal does exist.
The first area examined is whether the insurer is required to furnish the appeal bond to stay enforcement of the judgment. As the article points out, “The 1973 ISO primary policy form expressly required that the insurer pay for appeal bonds as part of the Supplementary Payments. When amended in 1985, standard ISO CGL policies removed that express requirement; but many excess policies include a provision in the Supplementary Payments section of the policy form obligating the insurer to pay the premium on appeal bond, but the provision will not require that the insurer actually furnish the bond.”
When it is found that insurers are required by the policy to furnish the bond, the following questions need to be addressed.
Does the jurisdiction require the insurer to provide an appeal bond in order to stay enforcement of the judgment?
In most jurisdictions, insurers do need to post security with the court in order to stay enforcement. While there are exceptions like the state of Michigan that allow insurers to post the policy with the court as security (MCL 500.3036), most require insurers to put security with the court just like any other appellant.
Most commonly insurers will provide appeal bonds rather than use other forms of security like cash, because it can affect their capital requirements from a regulatory standpoint. Furthermore, most insurers can qualify for bonds at competitive premium rates.
Can the insurer bond the judgment themselves?
In order for an insurer to provide their own bond, they need to be licensed to transact surety business. According to the Insurance Information Institute, there were 2,538 property casualty insurers in the United States in 2016, and there are less than 200 of those insurers licensed and approved to transact surety according to the Federal Department of Treasury Listing of Certified Companies. As a result, most insurers do not have the ability to transact surety business, and therefore, need to obtain an appeal bond from a licensed third-party surety company.
What if the judgement is in excess of the insurance coverage?
As further addressed in Ms. Bumbalo’s article, “Examining Insurers’ Obligations to Their Insureds Post-Verdict”, “the majority of courts have concluded, logically, that insurer’s responsibility for a bond extends only to the limits of the policy…”
In those instances when a judgment is in excess of the insurance coverage provided by the insurer, the insurer will typically provide an appeal bond up to their policy limit. In order for the insured to stay enforcement of the judgment in excess of the policy limit, the insured will have to provide a separate appeal bond for the difference.
How do surety companies qualify insurers?
When surety companies underwrite insurers for an appeal bond, they essentially want to ensure that the insurer has the financial wherewithal and stability to pay the judgement if it is upheld on appeal.
The surety’s review will include the AM Best rating of the insurer, if applicable, and possibly the most recent financial statement, which is usually publicly available as insurers are required to file statements with their state regulatory agency.
The surety companies specifically examine the size of the judgment relative to the insurer’s capital base, their length of time in business, and their record of profitability.
What is the process and how long does it take?
Approving appeal bonds for most insurers is a relatively quick process that takes as little as a few hours to a couple days depending on the insurer’s financial strength. All that is required to begin is to know the name of the insurer, the amount of the bond required, and to obtain copies of the court complaint and judgment if it has been entered.
Once approved, an authorized officer of the insurer will have to sign the surety’s indemnity agreement, pay the surety’s premium, and the appeal bond can be issued.
For insurers that need appeal bonds on a somewhat regular basis, a bond program can be established whereby bonds up to a certain dollar amount are pre-approved and can be issued instantaneously.
What are some of the common challenges that can arise?
Challenges can arise with insurers that are not rated by AM Best, are thinly capitalized relative to the bond amount and/or have an inconsistent track record with profitability. Insurers that are domiciled and hold their assets outside of US can add to the complexity of underwriting. These issues are by no means insurmountable, but it may increase the time frame or terms required for securing the bond.
In the words of Abraham Lincoln, “Time is everything…” and this is particularly true when it comes to securing appeal bonds for insurers. We encourage all the attorneys and insurers we work with to start the process early even if the judgment has not been entered. Much of the preliminary leg work can be done with just a ballpark estimate of the bond amount potentially required.