Life Insurance Collateral in New York

“Life Insurance Policies as Collateral in New York” By Steven J. Glaser 05-10-11 In this modern legal era, a creditor who wishes to take a life insurance policy as collateral presents counsel with issues that cannot be resolved by consulting Article 9 of the New York Uniform Commercial Code (UCC) (or other statutes which regulate security interests and their perfection for items of collateral), since Article 9 of the UCC expressly excludes security interests in insurance policies.1 Instead, counsel must go back in time to pre-UCC law to find answers. Creation of Security Interest In general, institutional lenders seek to obtain a security interest in a life insurance policy by a debtor's delivery of a written collateral assignment of the policy. Counsel will deliver the collateral assignment (or a copy) to the insurer for its endorsement and recording on its records. However, such endorsement and recording are not necessary to create the security interest and may create rights only against the insurer.2 The owner's physical delivery of a policy to a creditor may also create a security interest.3 Notwithstanding Section 5-701(a)(9) of the General Obligations Law, which requires a written assignment of insurance policy and voids an oral assignment, a pledge by physical delivery of the original policy need not be accompanied by a written assignment.4 Hence, counsel should obtain both a collateral assignment of the policy to be pledged as well as the actual policy itself. Priority of Competing Liens Suppose the debtor has delivered a prior collateral assignment of the policy (or delivered the original policy in pledge). Since, in the case of a written collateral assignment, recording the assignment on the insurer's books is not the equivalent of perfecting a security interest under the UCC by filing and, in the case of a physical delivery of a policy in pledge there may also be no public notice, which lien will have priority? A life insurance policy is a chose in...