This Mayer Brown Global Insurance bulletin includes an interesting but disturbing section on insurance insolvencies and swaps. The gist is that some states are enacting statutes which in essence give some financial creditors a preferred position ahead of insureds when an insurer becomes insolvent. The preference is granted via statues which give legal effect to set-off provisions in financial swap contracts. AIG, of course, is infamous for almost collapsing under the burden of credit default swaps it wrote.
No doubt the financial industry offers plenty of rationales for why they should be so favored. Unfortunately, a resulting reality is that preferred positions and specialized treatments tend to leave policyholders unpaid. The ongoing AMBAC insolvency, described in this post, is an example of certain assets and liabilities receiving specialized treatment, arguably to the detriment of policyholders in general. Policyholders are thus being disfavored by state legislatures. In essence, the offsets create a new class of almost secured creditors, but policyholders are not given notice of or compensation for the taking of their rights. A cynic might argue that due process and takings clauses are being ignored when it comes to policyholder rights and insurance.
Hat tip to Lexology for broadcasting this news of the subpart of the bulletin.