                                 CODE OF VIRGINIA

PROHIBITION OF HYPOTHECATION (§ 38.2-1446)

A. Every domestic insurer subject to the provisions of this chapter shall at all
times have and maintain free and unencumbered admitted assets in an amount equal
to the sum total of its reserve liabilities and minimum capital and surplus, and
no such insurer shall pledge, hypothecate, or otherwise encumber its assets in
an amount in excess of the amount of its surplus to policyholders; nor shall
such insurer pledge, hypothecate or otherwise encumber more than five percent of
its admitted assets. However, the Commission, upon written application, may
approve the hypothecation or encumbrance of any of the assets of such an insurer
in any amount upon a determination that such hypothecation or encumbrance will
not adversely affect the solvency of such insurer.

B. Any such insurer which pledges, hypothecates, or otherwise encumbers any of
its assets shall within ten days thereafter report in writing to the Commission
the amount and identity of the assets so pledged, hypothecated, or encumbered
and the terms and conditions of such transaction. In addition, each such insurer
shall annually, or more often if required by the Commission, file with the
Commission a statement sworn to by an executive officer of the insurer that (i)
title to assets in an amount equal to the reserve liability and minimum capital
and surplus of the insurer that are not pledged, hypothecated or otherwise
encumbered is vested in the insurer, (ii) the only assets of the insurer that
are pledged, hypothecated or otherwise encumbered are as identified and reported
in the sworn statement and no other assets of the insurer are pledged,
hypothecated or otherwise encumbered, and (iii) the terms and limitations of any
such transaction of pledge, hypothecation or encumbrance are as reported in the
sworn statement.

C. Any person who accepts a pledge, hypothecation or encumbrance of any asset of
a domestic insurer as security for a debt or other obligation of such insurer
not in accordance with the terms and limitations of this article shall be deemed
to have accepted such asset subject to a superior, preferential and
automatically perfected lien in favor of claimants; however, such superior,
preferential and automatically perfected lien in favor of claimants shall not
apply to assets of a company in receivership pursuant to Chapter 15 (&#xA7;
38.2-1500 et seq.) of this title, if the receiver approves the pledge,
hypothecation or encumbrance of such assets.

D. In the event of involuntary or voluntary liquidation of any domestic insurer
subject to this chapter, claimants of such insurer shall have a prior and
preferential claim against all assets of the insurer except those that have been
pledged, hypothecated or encumbered in accordance with the terms and limitations
of this article. All claimants shall have equal status and their prior and
preferential claim shall be superior to any claim or cause of action against the
insurer by any person, corporation, association or legal entity.

HISTORY: 1992, c. 588; 2002, c. 147.