Self liquidating bilateral lines
Right to Reimbursement for Defense Fees The reservation of rights letter may provide the insurer with the right to seek reimbursement for defense costs it pays if it later establishes that those costs were incurred in defending non-covered claims, although whether such a provision is enforceable varies from jurisdiction to jurisdiction.
1 In many jurisdictions, a reservation of rights to recoup defense costs is only enforceable if it is later determined that there was no duty to defend; courts in those jurisdictions will not allow apportionment of defense costs between covered and non-covered claims.
Credit equivalent amounts are used to determine the potential credit exposure of off-balance sheet instruments.
The process for determining the credit equivalent amounts of derivative instruments is covered in sections 4.1 and 4.2.
The second measure focuses on risk faced by the institution.
Coverage Defense A coverage defense is one by which the liability insurer asserts that a given claim is or may not be covered by its policy.
Policy Defense A policy defense is one by which the liability insurer admits coverage of the claim but asserts that the policy is not enforceable due to the breach of a policy condition by the insured. An example would be a breach of a policy condition such as late notice or voluntary payments.
For off-balance sheet activities not covered in sections 4.1 and 4.2, to approximate the potential credit exposure, the face amount of the instrument must be multiplied by a credit conversion factor to derive a credit equivalent amount (refer to sections 4.3 and 4.4).
The resulting credit equivalent amounts are then assigned the credit risk factor appropriate to the counterparty (refer to section 3.1) or, if relevant, the factor for the collateral (refer to section 3.2) or the guarantor (refer to section 3.3).
The aim is to promote trade by using non-standard security; it is usually used in high value transactions in bi-lateral trading relationships.