For attorneys and their clients, the post-judgment phase often presents a financial challenge. With the rise of “nuclear verdicts” and a volatile economic climate, the requirement to post collateral to secure an appeal bond (supersedeas bond) can place a strain on a client’s cash flow and/or borrowing capacity that they may need for ongoing business purposes.
While cash and bank letters of credit remain the most common forms of collateral accepted by surety companies, they are not always the most strategic use of a client’s assets. For High-Net-Worth Individuals and business owners, tying up millions in liquid cash can often impede operations or result in lost investment opportunities.
One sophisticated, albeit niche, option available to clients is utilizing the Cash Surrender Value (CSV) of a permanent life insurance policy. The primary advantage of leveraging a life insurance policy is liquidity preservation. This option allows the appellant to secure an appeal bond without liquidating investments or tying up existing lines of credit. By activating what is often a “dormant” asset intended for estate planning, clients can maintain their cash reserves for business operations. Furthermore, using the CSV of the policy will generally avoid the taxable events associated with liquidating an asset to raise cash.
The Underwriting Process and Valuation
When evaluating a life insurance policy for collateral, the surety will review the most current Policy Statement and an Inforce Illustration. This helps them determine the collateral value that they can assign to the policy. The surety will not look at the death benefit, but focus strictly on the Cash Surrender Value (CSV). The underwriter typically calculates the collateral value by assuming the client may stop paying the insurance premiums for the duration of the appeal. They then apply a percentage discount, often around 10%, to the projected remaining cash value to account for potential market fluctuations. This adjusted figure becomes the maximum collateral value the surety will accept towards the appeal bond.
Market Availability and Costs
It is important to reiterate that this form of collateral is a niche product. Currently, out of the 30-plus surety carriers we work with, only one actively accepts the assignment of the Cash Surrender Value as collateral. Because of its complexity and scarcity, the premium rates for appeal bonds secured by life insurance are higher than those secured by full cash or bank letters of credit. However, the effective cost may be lower for the client when factoring in the opportunity cost or possible tax consequences of liquidating high-yield investments to use as collateral.
The Hybrid Approach
Using only one form of collateral does not need to be an “all or nothing” proposition. One of the strengths of this option is its flexibility. We have successfully structured hybrid collateral packages for clients who may not have enough Cash Surrender Value to cover the entire bond amount. For example, a client might secure a bond using a combination of Life Insurance Cash Surrender Value, and any other acceptable form of collateral.
Conclusion
Because this is a specialized option involving specific actuarial illustrations and legal assignments, generalist surety agents are often unaware it exists or how to execute it. At Court Surety Bond Agency, we understand the nuances of all collateral options and have the expertise to guide your clients through the process of obtaining an appeal bond.
