Underwriting Property Preservation Security Insurance for Cross Border Claims
Property preservation security insurance requires onshore Chinese guarantees backed by enforceable offshore bank collateral to mitigate cross-border subrogation risks.
Counter-Security Instrument
Meaning
Security provision provided to a guarantor to protect them against the risk of the primary applicant defaulting on an obligation is essential for high-value transactions. This counter-security instrument is often required by insurance companies before they issue a litigation guarantee or a performance bond. It ensures that the guarantor has a source of recovery if they are forced to pay a claim on behalf of the applicant.
The form of the security can range from cash deposits to corporate guarantees.
Collateral Type
The choice of asset used to back the guarantee affects the speed of the transaction. A counter-security instrument may consist of a fixed deposit in a bank account that is pledged to the insurer. Other options include mortgages on real property or the assignment of receivables.
The guarantor evaluates the liquidity and value of the collateral before accepting it.
Risk Mitigation
The primary function of the arrangement is to shield the guarantor from financial loss. By holding a counter-security instrument, the insurer reduces its exposure to the credit risk of the applicant. If the applicant fails to reimburse the insurer after a payout, the insurer can liquidate the collateral.
This mechanism allows companies with limited cash flow to obtain the guarantees they need for court proceedings.
Legal Recourse
The rights of the guarantor are defined by the terms of the security agreement. This counter-security instrument must be enforceable under PRC law to provide real protection. If the collateral is a third-party guarantee, the guarantor must verify the financial capacity of that third party.
The instrument is released only when the primary guarantee is cancelled or the underlying risk expires.