Glossary

Securities Deposited with Others Coverage Form J (CR 00 11) is an Insurance Services Office, Inc. (ISO), crime form that insures against theft, disappearance, or destruction of securities deposited with stockbrokers, financial institutions, or others.

The Securities Exchange Act of 1934 and its accompanying rules were enacted to protect investors in connection with the trading of securities already issued and outstanding. The most important components of the Act are Section 10(b) and Securities and Exchange Commission Rule 10b-5, which prohibits manipulative or deceptive acts in connection with the purchase or sale of a security. Corporate directors and officers are frequently the targets of lawsuits brought under these antifraud provisions.

A securities insuring agreement is a provision of the SAA Financial Institution Bond No. 24 that provides coverage to banks and other financial institutions for loss resulting from certain types of forgeries and counterfeit securities. It provides coverage to banks and other financial institutions for loss resulting from alteration or forgery of a signature on specified types of securities (such as those typically accepted as collateral for loans), from counterfeit securities of specified types, and from guaranteeing or witnessing signature of certain types of securities and financial documents. This coverage may be removed from the bond by attaching a rider to the bond.

A securities valuation reserve is a reserve required of life insurers to reduce the risks associated with market declines in the values of investments. The reserve is built through annual accruals out of income.

Securitization refers to the process whereby periodic cash flows from a given source are pooled, packaged, and sold to investors, usually in the form of bonds. Between 2003 and 2006, large numbers of subprime mortgage loans were pooled in this manner and then sold to investors who, in return for paying an up-front principal amount, received periodic payments (usually quarterly) in the same manner as bondholders. By 2006, approximately 63 percent of all subprime loans were being sold and packaged in this fashion. When a wave of subprime mortgage loan defaults began in 2007, the value of the bonds began to plummet because the cash flows that "securitized" the bonds (i.e., the periodic monthly payments from the subprime loans) were substantially lower than anticipated, given massive numbers of loan defaults, and were therefore insufficient to pay the interest required by the bonds. This, in turn, triggered huge losses for the investors who bought these bonds. As a result, the investors brought literally hundreds of class action lawsuits against the directors and officers of both the banks that made the subprime loans and the investment bankers who packaged the loans into bonds.

Securitization of risk is the practice of converting known potential risk scenarios, such as the potential for a hurricane, into a marketable security. The best example to date is the "cat bond," a bond future (commodity) traded on the Chicago Board of Trade.

The security holder exclusion is an exclusion in directors and officers liability policy forms for claims brought by stockholders of the organization with the assistance, or on the urging, of any director or officer. The intent of the exclusion is to prevent so-called infighting claims in which a director/officer sues another director/officer by using a security holder in the organization as a "front."

Security requirements are the obligation to provide acceptable financial resources to cover self-insurance or reinsurance liabilities. They may be based on the ceding company's statutory requirement to secure nonadmitted balances or on the cedent's or regulatory authority's concern regarding the self-insured or reinsurer's credit risk. They are also known as collateral.

Seedsmen's errors and omissions liability insurance is a coverage purchased by seed dealers, growers, wholesalers, and others who grow, sell, or distribute seed. The policies are designed to cover an insured's liability for claims such as failure to germinate, errors in germination tests, and mislabeling. The policies are a form of product guarantee insurance that complements the products liability coverage available under a commercial general liability (CGL) policy form. The CGL policy form is intended to cover any damage to property, other than to the seed itself, and any bodily injury that results from that seed. In contrast, the seedsmen's errors and omissions form covers the failure of the product to perform and the consequent economic losses (e.g., loss of a season's crop) that result from that failure.

A segregated cell captive is a special purpose insurer (typically operating as a rental captive) that establishes legally segregated cells or underwriting accounts. The objective is to ensure that assets in one underwriting account may not be used to satisfy liabilities in another underwriting account nor the general (noncellular) liabilities of the SCC. Noncellular assets may or may not be available to satisfy cellular liabilities. This may also be called a segregated portfolio company (SPC), protected cell company, or a separate account company (SAC).