When Words Speak Louder Than Actions: Perfecting a Security Interest in Unearned Insurance Premiums
October 19, 2006
Karen Gossman - Chicago
Premium finance corporations take note: whether your security interest in unearned insurance premiums is perfected depends upon the language of your premium financing agreement, not on whether you filed a financing statement.
In In re JII Liquidating, Inc., 05 B 25909, the United States Bankruptcy Court for the Northern District of Illinois held that a party’s interest in unearned insurance premiums is not governed by the Illinois Uniform Commercial Code. Instead, the Court held that perfection arises out of the terms of the parties’ premium financing agreement.
JII Liquidating, Inc. involved a premium financing agreement between the Jernberg Companies (JII Liquidating, Inc.’s predecessor) and Premium Assignment Corporation (PAC). In March 2005, PAC assisted Jernberg Companies in purchasing three insurance policies by financing approximately $271,000 in insurance premiums. In return, Jernberg Companies signed a premium finance agreement providing PAC with a security interest in all unearned premiums under the insurance policies, in addition to granting PAC an irrevocable limited power of attorney to cancel the insurance policies upon Jernberg’s default in payment.
In September 2005, while Jernberg was in bankruptcy, it stopped making payments pursuant to the financing agreement. PAC brought a motion seeking to lift the automatic stay so that it could cancel the insurance policies and recover the unearned insurance premiums. The bankruptcy trustee objected to PAC’s motion arguing, inter alia, that PAC did not have a perfected security interest in the unearned premiums because it had not filed a UCC-1 financing statement.
Concurring with other jurisdictions that have considered this issue, the Court rejected the trustee’s argument and held that unearned insurance premiums are not subject to the Uniform Commercial Code. The perfection of security interest in unearned insurance premiums, therefore, does not arise from the filing of a financing statement, but comes from the terms of the premium finance agreement itself.
To perfect a security interest in unearned insurance premiums in Illinois, a premium finance agreement must: (1) assign the insured’s right to unearned premiums; and (2) assign the insured’s right to cancel the insurance policies in the event of nonpayment. No specific language granting a security interest is necessary, but the agreement must effectively assign both the insured’s rights to premiums and the right to cancel to the premium financing company.
What’s the Point?
Security interests in unearned insurance premiums are not governed by the Illinois Uniform Commercial Code. Liens on such property can only be obtained through the parties’ premium financing agreement. If the agreement effectively assigns the insured’s rights to unearned premiums and cancels the insurance policies to the premium finance company, a valid security interest will be created.
For more information, e-mail Karen Gossman at karen.gossman@hklaw.com or call toll free, 1-888-688-8500.