<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997 Commission File No. 1-12449
SCPIE HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4557980
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9441 West Olympic Boulevard, Beverly Hills, 90212-4015
California
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 551-5900
Securities registered pursuant Name of Exchange on which registered
to Section 12(b) of the Act
Common Stock, par value $0.0001 per share
(Title of Class) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act
NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant at March 16, 1998, was approximately
$396,001,337 (based upon the closing sales price of such date, as reported by
the Wall Street Journal).
At March 16, 1998, the Registrant had issued and outstanding an aggregate of
12,776,691 shares of its Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy statement for the Annual Meeting of Stockholders of Registrant to be
held on May 14, 1998 (only portions of which are incorporated by reference).
- --------------------------------------------------------------------------------
<PAGE> 2
PART I
ITEM 1. BUSINESS
SCPIE Holdings Inc. is the parent company of a group of insurance and
insurance-related companies conducting business principally in California. It
began operating as an independent publicly held company on January 29, 1997, as
the result of the merger of Southern California Physicians Insurance Exchange
("SCPIE" or the "Exchange") into SCPIE Indemnity Company, a California domiciled
insurance company and subsidiary of the Company ("SCPIE Indemnity"), and the
issuance of 9,994,652 shares of common stock of the Company to approximately
10,400 members of the Exchange in exchange for their membership interests in
SCPIE and 500,000 shares to SCPIE Indemnity (the "Reorganization"). On January
30, 1997, the Company sold an additional 2,300,000 shares in a public offering
of its common stock (the "Offering"). The common stock is listed on the New York
Stock Exchange ("NYSE") under the trading symbol "SKP."
For purposes of this Form 10-K report, the "Company" refers, at all times
prior to January 29, 1997, the effective date of the Reorganization, to the
Exchange and its subsidiaries, collectively, and at all times on or after such
effective date, to SCPIE Holdings Inc. and its subsidiaries, collectively; the
term "SCPIE Holdings" refers at all times to SCPIE Holdings Inc., excluding its
subsidiaries.
SCPIE Holdings was organized in February 1996, as a Delaware corporation. The
Company principally engages in conducting the business of its predecessor, the
Exchange, through its subsidiaries. The insurance company subsidiaries of SCPIE
Holdings include SCPIE Indemnity, American Healthcare Indemnity Company ("AHI")
and American Healthcare Specialty Insurance Company ("AHSIC"). AHI and AHSIC
were inactive insurance companies acquired by the Company in 1996 to expand the
Company's operations outside California. AHI, domiciled in Delaware, is licensed
to transact insurance in 46 states and the District of Columbia, and AHSIC,
domiciled in Arkansas, is authorized to issue policies as an excess and surplus
line insurer in four states. During 1997, SCPIE Holdings contributed $25.0
million and $23.0 million to the capital and surplus of AHI and AHSIC,
respectively. The other subsidiaries of SCPIE include SCPIE Insurance Services,
Inc., a California licensed insurance agency, and two companies providing
management services. The term "Insurance Subsidiaries" refers to SCPIE
Indemnity, AHI and AHSIC.
OVERVIEW
The Company is a leading provider of medical malpractice insurance in
California. The Company currently insures more than 9,000 California physicians
and oral and maxillofacial surgeons practicing alone or in medical groups or
clinics or other healthcare organizations. The Company also insures a variety of
other healthcare providers, including hospitals, emergency department
facilities, outpatient surgery centers and hemodialysis, clinical and pathology
laboratories.
The Company's total revenues and net income were $183.7 million and $32.2
million, respectively, for the year ended December 31, 1997 and were $173.4
million and $30.2 million, respectively, for the year ended December 31, 1996.
As of December 31, 1997, the Company had $888.4 million of total assets and
$361.1 million of total stockholders' equity.
Medical malpractice insurance, or medical professional liability insurance,
insures the physician, hospital or other healthcare provider against liabilities
arising from the rendering of, or failure to render professional medical
services. Under the typical medical malpractice insurance policy, the insurer
also defends the insured against potentially covered claims. Based on data
compiled by A.M. Best & Co. ("A.M. Best"), in 1996, total medical malpractice
premiums in the United States were approximately $6.0 billion. In California,
the second largest market for medical malpractice insurance based on direct
premiums written, approximately $623.7 million of medical malpractice premiums
were written in 1996. The Company's share of the medical malpractice premiums
written in California in 1996 was approximately 20%. The Company's market share
is substantially higher in Southern California where more than 95% of the
Company's insureds are located.
The Company believes that its considerable market share for medical
malpractice insurance in California is in large part due to the loyalty of its
insured physicians. The Company attributes this loyalty to the high quality,
personalized service it provides and its traditional focus on the California
physician marketplace. Ten county medical associations and several specialty
societies in California have endorsed the medical malpractice insurance offered
by the Company.
The Company believes that the growth in managed healthcare and the emergence of
multi-state integrated healthcare providers and delivery systems will lead to
major changes in the medical malpractice insurance industry. Practice management
organizations,
2
<PAGE> 3
hospitals, administrators of large group practices and managed care
organizations have an increasing influence over the purchasing decision for the
medical malpractice insurance coverages of their affiliated physicians. As the
consolidation of healthcare providers continues, the number of physicians
insured through such organizations will increase and the Company believes that
such organizations increasingly will seek well-capitalized medical malpractice
insurers that can provide a full range of products and a high level of service
in each state in which such organizations conduct business.
BUSINESS STRATEGY
To position the Company to compete and grow its business successfully in this
changing environment, the Company has adopted a strategy that includes: (i)
expanding the Company's product offerings, particularly to meet the liability
insurance needs of larger, more diverse healthcare entities; (ii) diversifying
geographically by increasing writings of medical malpractice insurance in states
other than California; (iii) positioning the Company to take advantage of
acquisition and consolidation opportunities relating to medical malpractice
insurance; (iv) maintaining the Company's relationship with its primary
policyholder base of California physician and medical group insureds; and (v)
maintaining sufficient capital to take advantage of future market opportunities
and to retain strong insurance ratings.
While professional liability insurance for physicians is the principal product
offered by the Company, the Company believes that providing insurance to
hospitals and other healthcare entities continues to represent a significant
area for further growth of its insurance business. As a result, the Company has
undertaken to develop other insurance products necessitated by changes in the
healthcare industry and began writing medical malpractice insurance for
hospitals, directors and officers liability insurance for healthcare entities,
and errors and omissions coverage for managed care organizations. The Company
presently intends to continue its efforts to develop insurance products designed
to meet the needs of customers in the healthcare market.
In addition to its traditional direct insurance operations, the Company
assumes reinsurance of medical malpractice insurance and participates in excess
medical malpractice insurance programs. The Company believes that these lines of
business will become an increasingly important aspect of its operations as
healthcare entities become larger and obtain higher policy limits.
To further enable it to grow, the Company has begun to expand its operations
beyond California. As part of this expansion, the Company entered into an
exclusive marketing agreement with a leading hospital malpractice insurance
broker in August 1995. Under the agreement, this insurance broker had the
exclusive right to market the Company's malpractice coverage for hospitals in
all states, and the Company recognized this insurance broker as the exclusive
broker for medical group coverage in all states other than California. In
December 1996, this insurance broker filed for bankruptcy in the United States
Bankruptcy Court, Central District of California, and another insurance company
acquired its assets in September 1997 in a court-approved transaction. Effective
October 1, 1997, the Company and this insurance broker mutually agreed to
terminate their exclusive marketing agreement. The Company now actively markets
its hospital policies under a new program directly and through regional and
local brokers, and must compete with this broker and a number of insurance
companies in the underwriting of hospital malpractice policies. At December 31,
1997, the Company insured 88 hospitals, of which 52 were located in California.
AHI has formed a relationship with Poe & Brown, Inc. ("Poe & Brown"), one of
the nation's top independent insurance agency organizations, to provide
professional liability insurance to physicians commencing January 1, 1998. This
coverage is offered to solo physicians and medical groups in eight states, the
largest being Connecticut, Florida and Georgia. This replaces an existing
program Poe & Brown had established with another insurance company. There is no
assurance, however, that the Company will successfully retain or expand this
business through Poe & Brown or that it will ultimately be profitable. Pending
completion of a definitive agreement with Poe & Brown and the obtaining of
certain regulatory approvals, the Company is providing this coverage through a
reinsurance arrangement with the insurer of the existing program.
AHI has acquired the medical malpractice insurance business of Fremont
Indemnity Company ("Fremont") through a purchase agreement effective January 1,
1998. Simultaneously, a 100% quota-share agreement went into effect, making
SCPIE Indemnity, an affiliate of AHI, the reinsurer for the Fremont policies
pending regulatory approval of AHI to write this business directly. The Fremont
policies are written through brokers in 10 states, with the vast majority in
California and Arizona. At December 31, 1997, Fremont insured approximately
2,000 physicians, chiropractors, podiatrists and other healthcare providers.
There is no assurance that the Company will successfully maintain the Fremont
brokerage relationship or retain the existing insureds under the Fremont
program.
3
<PAGE> 4
The Company believes that the medical malpractice insurance industry in
California and other states is currently experiencing a "soft insurance market,"
that is, an insurance market in which the underwriting capacity exceeds current
demand and premium rates are relatively low. The Company believes that its
strategy will position it to expand premium writings and market share when the
market "hardens," that is, when demand coincides more closely with capacity, and
premium rates increase to more appropriate levels.
PRODUCTS
The Company underwrites professional and related liability policy coverages
for physicians (including oral and maxillofacial surgeons), physician medical
groups and clinics, hospitals, managed care organizations and other providers in
the healthcare industry. The following table summarizes, by product, the direct
premiums written by the Company for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Physician and medical group
liability:
Physician and medical group
standard professional
liability ................. $109,393 $117,679 $116,894
Special risk physicians ...... 1,700 1,398 674
Emergency medicine program ... 1,589 628 596
Urgent care centers .......... 277 262 224
-------- -------- --------
Subtotal medical liability 112,959 119,967 118,388
Excess personal liability .... 756 829 877
-------- -------- --------
Subtotal physician and
medical group liability . 113,715 120,796 119,265
Hospital liability ............. 8,475 3,487 2,103
Healthcare provider liability .. 800 792 757
Managed care organization errors
and omissions ................ 668 347 105
Directors and officers
liability .................... 252 213 47
-------- -------- --------
Total ........................ $123,910 $125,635 $122,277
======== ======== ========
</TABLE>
Through its insurance agency subsidiary, the Company meets a wide range of
insurance needs of its customers by offering, on a brokerage basis, coverages
not underwritten by the Company, including a comprehensive property protection
program and stop loss insurance related to the provision of managed care
services. The Company intends, in the future, to directly underwrite its own
property lines as part of its overall strategy to meet the principal insurance
needs of healthcare providers.
Physician and Medical Group Liability. The Company offers separate policy
forms for physicians who are sole practitioners and for those who practice as
part of a medical group or clinic. The policy issued to sole practitioners
includes coverage for professional liability that arises in the medical practice
and also for certain other "premises" liabilities that may arise in the
non-professional operations of the medical practice, such as slip and fall
accidents, and a limited defense reimbursement benefit for proceedings by
governmental disciplinary boards. The professional liability insurance for sole
practitioners and for medical groups provides protection against the legal
liability of the insureds for such things as injury caused by or as a result of
the performance of patient treatment, failure to treat and failure to diagnose a
patient.
The policy issued to medical groups and their physician members includes not
only professional liability coverage and defense reimbursement benefits, but
also substantially more comprehensive coverages for commercial general liability
and employee benefit program liability and also provides a small medical payment
benefit to injured persons. The comprehensive general liability coverage
included in the medical group policy does not exclude coverage for certain
employment-related liabilities and for pollution, which are normally excluded
under a standard commercial general liability form. The Company also offers, as
part of its standard policy forms for both sole and group practitioners,
optional excess personal liability for the insured physicians. Excess personal
liability insurance provides coverage to the physician for personal liabilities
in excess of amounts covered under the physician's homeowners and automobile
policies.
4
<PAGE> 5
The professional liability coverages are issued primarily on a "claims made and
reported" basis. Coverage is provided for claims reported to the Company during
the policy period arising from incidents that occurred at any time the insured
was covered by the policy. The Company also offers "tail coverage" for claims
reported after the expiration of the policy for occurrences during the coverage
period. The price of the tail coverage is based on the length of time the
insured has been covered under the Company's claims made and reported form. The
Company provides free tail coverage for insured physicians who die or become
disabled during the coverage period of the policy and those who have been
insured by the Company for at least five consecutive years and retire completely
from the practice of medicine. Free tail coverage is automatically provided to
physicians with at least five consecutive years of coverage and who are also at
least 65 years old.
Comprehensive general liability coverage for medical groups and clinics and
the excess personal liability insurance is underwritten on an occurrence basis.
Under occurrence coverage, the coverage is provided for incidents that occur at
any time the policy is in effect, regardless of when the claim is reported. With
occurrence coverage, there is no need to purchase tail coverage.
The Company offers limits of insurance up to $5.0 million per claim or
occurrence, with up to a $10.0 million aggregate policy limit for all claims
reported or occurrences for each calendar year or other 12-month policy period.
The most common limit is $1.0 million per claim or occurrence, subject to a $3.0
million aggregate policy limit. The Company's limit of liability under the
excess personal liability insurance coverage is $1.0 million per occurrence with
no aggregate limit. The defense reimbursement benefit for governmental
disciplinary proceedings is $25,000, and the medical payments benefit for
persons injured in non-professional activities is $10,000.
The following table summarizes the Company's physician and medical group
professional liability direct premiums written for the year ended December 31,
1997:
<TABLE>
<CAPTION>
DIRECT
PREMIUMS PERCENTAGE
GROUP SIZE WRITTEN OF TOTAL
---------- ------- --------
(IN THOUSANDS)
<S> <C> <C>
Sole practitioner physicians ............ $ 71,479 62.8%
Group with less than five physicians 17,463 15.4
Group with five through eight
physicians .............................. 9,477 8.3
Group with nine or more physicians ...... 15,340 13.5
-------- -----
Total ......................... $113,759 100.0%
======== =====
</TABLE>
Hospital Liability. The Company writes liability insurance on both a claims
made and reported basis and a modified occurrence basis that in effect includes
tail coverage for up to seven years after the policy terminates. The policy
issued to hospitals provides protection for professional liabilities related to
the operation of a hospital and its various staff committees, together with the
same comprehensive general liability, medical payments and employee benefit
program liability coverages included in the policy for large medical groups.
Prior to October 1, 1997, the limits of coverage under the hospital policies
issued by the Company, net of reinsurance, were $500,000 for each claim or
occurrence, with no aggregate limit. Since October 1, 1997, the Company has
offered primary limits of $1.0 million for each claim or occurrence and excess
limits up to $50.0 million with no aggregate limit. The Company reinsures 90%
of the excess limits of coverage.
Healthcare Provider Liability. The Company offers its professional liability
coverage to a variety of specialty provider organizations, including hospital
emergency departments, outpatient surgery centers, medical urgent care
facilities and hemodialysis, clinical and pathology laboratories. These policies
include the standard professional liability coverage provided to physicians and
medical groups, with certain modifications to meet the special needs of these
healthcare providers. The policies are generally issued on a claims made and
reported basis with the limits of liability up to those offered to larger
medical groups. The limits of coverage under the current healthcare provider
policies issued by the Company are between $1.0 million and $5.0 million per
incident, subject to $3.0 million to $10.0 million aggregate policy limits.
The Company plans to extend this coverage to extended care and other
healthcare facilities and to other miscellaneous providers of healthcare and
therapeutic related services.
Managed Care Organization Errors and Omissions. The Company has recently
introduced a policy for managed care organizations that provides coverage for
liability arising from the errors and omissions in managed care operations, for
the vicarious liability of a managed care organization for the acts or omissions
of non-employed physician providers and for liability of directors and officers
5
<PAGE> 6
of a managed care organization. These policies are generally issued on a claims
made and reported basis. The annual aggregate limits of coverage under the
current managed care organization policies issued by the Company are between
$1.0 million and $5.0 million.
Directors and Officers Liability. The Company historically has brokered
directors and officers liability coverage through its insurance agency
subsidiary. In 1996, the Company began to directly write renewals of these
policies previously underwritten by other companies, accounting for
approximately $213,000 in direct premiums written in 1996 and $252,000 in 1997.
The directors and officers liability policies are generally issued on a claims
made and reported basis. The limits of coverage on directors and officers
liability policies written by the Company are between $1.0 million and $5.0
million.
MARKETING AND POLICYHOLDER SERVICES
The Company historically marketed its physician professional liability
policies directly to the insured physicians and medical groups and issued
policies only infrequently through brokers to a few large medical group
accounts. The Company actively marketed hospital policies through brokers when
it commenced offering this coverage in 1994, and has recently begun utilizing
brokers for physician and medical group policies in its Poe & Brown and Fremont
arrangements.
The Company's direct marketing organization has approximately 25 employees
providing sales solicitation and communications services. The Company markets to
sole practitioner physicians and other prospective policyholders through its
relationships with medical associations, referrals by existing policyholders,
advertisements in medical journals, the presentation of seminars on timely
topics for physicians, telemarketing and direct mail solicitation to licensed
physicians and members of specialty group organizations. The Company attracts
new physicians through special rates for medical residents and discounts for
physicians just entering medical practice. In addition, the Company participates
as a sponsor and participant in various medical group and hospital
administrators' programs, medical association and specialty society conventions
and similar programs. The Company believes that this personal, comprehensive
approach to marketing is essential to providing professional liability
insurance, where special knowledge and experience is a prerequisite.
The Company maintains marketing offices in Dallas, Texas and Boca Raton,
Florida, principally to solicit hospital accounts both directly and through
brokers, and has one principal brokerage relationship in California that
accounts for 30 of the 52 hospitals insured by the Company in that state.
Ten Southern California county medical associations and the statewide
associations of oral and maxillofacial surgeons and osteopathic physicians
endorse the Company's professional liability program. The Company considers
these endorsements to be helpful in its marketing efforts. The county medical
associations also perform certain limited information verification services for
the Company.
The Company is in the process of finalizing its arrangement with Poe & Brown.
Under that arrangement, Poe & Brown will market the Company's professional
liability policies on an exclusive basis to individual physicians and medical
groups of fewer than 20 physicians, while the Company will have the right to
market these policies directly to larger groups. The exclusive arrangement will
be effective only in designated states, initially Connecticut, Florida, Georgia
and Louisiana. Poe & Brown is a large national brokerage firm, with an
established physicians medical malpractice program in these states that it
offers its customers and through a large network of local and regional brokers.
The arrangement went into effect on January 1, 1998.
The Company also has a policyholder services department that provides account
information to all insureds and maintains relationships with the small medical
groups and sole practitioners insured by the Company. Each of these smaller
insureds has a designated client service representative who can answer most
inquiries and, in other instances, can provide the insured with immediate access
to the person with expertise in a particular department. For hospitals and large
and mid-size medical groups, the Company has an account manager assigned to each
group who heads a service team comprised of underwriting, risk management and
claims management representatives, each of whom may be contacted directly by the
policyholder for prompt response. The Company also provides online computer
access to the large groups and hospitals so that loss and loss adjustment
expense ("LAE") information can be accessed immediately.
The Company provides comprehensive risk management services designed to
heighten its insureds' awareness of situations giving rise to potential loss
exposures, to educate its insureds as to ways to improve their medical practice
procedures, and to assist its insureds in implementing risk modification
measures. The Company maintains a 24-hour hotline to provide immediate access to
its
6
<PAGE> 7
risk management personnel. The Company conducts surveys for hospitals and large
medical groups both to review their practice procedures generally and to focus
on specific areas in which there may be some concern. Complete reports that
specify areas of the insured's medical practice that may need attention are
provided to the policyholder. The Company also provides an annual program review
for each of its medical groups. The Company presents periodic seminars and
evening "town hall" meetings at medical societies at which pertinent subjects
are presented. In addition, the Company conducts two seminars annually with its
sponsoring oral and maxillofacial surgeon association that are designed to
educate insureds on loss issues and reduce claims. The Company's risk management
representatives also regularly participate in programs presented by
healthcare-related societies. These educational offerings are designed to
increase risk awareness and the effectiveness of various healthcare
professionals. Additionally, the Company provides risk management and claims
administration services to certain entities on a fee-for-service basis.
UNDERWRITING
The underwriting department consists of a vice president in charge of
underwriting, three divisional underwriting managers, 14 underwriters and 13
technical and administrative assistants. Certain of these underwriters
specialize in underwriting hospitals, managed care organizations and directors
and officers liability products. The Company's underwriting department is
responsible for the evaluation of applicants for professional liability and
other coverages, the issuance of policies and the establishment and
implementation of underwriting standards for all of the coverages underwritten
by the Company.
The Company follows a strict procedure with respect to the issuance of all
physician professional liability policies. Each applicant or member of an
applicant medical group is required to complete a detailed application that
provides a personal and professional history, the type and nature of the
applicant's professional practice, certain information relating to specific
practice procedures, hospital and professional affiliations and a complete
history of any prior claims and incidents. The application may be forwarded to
the county medical association for verification of educational and professional
information. The Company performs its own independent verification of these
matters and conducts an investigation to determine if there are any lawsuits
that may not have been disclosed in the application.
The Company performs a continuous process of reunderwriting its insured
physicians. Information concerning physicians with large losses, a high
frequency of claims or unusual practice characteristics is developed through
online claims and risk management reports.
The underwriting department submits recommendations for premium surcharges or
non-renewal of physicians or medical groups to the physicians'underwriting
committee of the Company, which is comprised solely of physicians, many of whom
are insureds or retired insureds of the Company, and members of the Board of
Directors. Members of the committee are not employees of the Company, but
receive compensation for their services on the committee. Physicians have the
right to seek reconsideration of surcharges from the committee. The Company has
found that physician interchange with the committee is often helpful in
improving the practice characteristics of the insured.
The Company makes all underwriting and rating decisions on this and all of its
direct business. Except as set forth below, each hospital is required to submit
an application that provides detailed information on operations, financial
position and risk factors. The Company reviews loss experience for at least the
past five years, prior insurance policies and endorsements, financial reports
and reports from the principal accreditation agencies for the hospital industry.
Risk management surveys are performed as needed to supplement this information.
For hospitals that were formerly insured by the Company through its
relationship with a large insurance broker that encountered financial
difficulties, the Company has generally issued its policies utilizing schedules
of coverage, limits, rating factors and other pertinent information supplied to
the Company by the broker. The Company is now developing its own rating
experience with these insureds.
Poe & Brown will perform most of the underwriting functions with respect to
policies issued by AHI under its arrangement with Poe & Brown. Poe & Brown has
an experienced, fully staffed underwriting department that has underwritten the
program for a number of years. The Company has coordinated with Poe & Brown to
provide assurance that the underwriting standards and their application are
consistent.
7
<PAGE> 8
RATES
The Company establishes, through its own actuarial staff and independent
actuaries, rates and rating classifications for its physician and medical group
insureds based on the loss and LAE experience it has developed over the past 20
years and upon rates charged by its competitors. The Company has various rating
classifications based on practice, location, medical specialty, limits and other
factors. The Company utilizes various discounts, including discounts for
part-time practice, physicians just entering medical practice and large medical
groups. The Company has developed a special risk program for physicians who have
unfavorable loss history or practice characteristics, but whom the Company
considers insurable. Policies issued in this program have significant
surcharges. The Company has established its premium rates and rating
classifications for hospitals and managed care organizations utilizing data
publicly filed by other insurers. The data for managed care organization errors
and omissions liability is extremely limited, as tort exposures for these
organizations are only recently beginning to develop. The rates for directors'
and officers liability are developed using historical data publicly filed by
other insureds, financial analysis and loss history. All rates for liability
insurance in California are subject to the prior approval of the Insurance
Commissioner.
Between 1993 and 1997, the Company instituted annual overall rate increases
ranging from 4.4% to 9.2% on its physician professional liability policies in
order to improve its underwriting results. These rate increases were higher than
those implemented by most of its competitors. The number of policyholders
insured by the Company has declined by a small percentage in each of these
years, in part due to these rate increases, but the Company has realized a
modest increase in its premium volume and has improved its underwriting results.
The Company partially offset the effect of these rate increases through the
payment of dividends to the members of the Exchange in the form of premium
credits based on the actual results of prior policy years. In 1996, the Board of
Governors of the Exchange declared a final dividend of approximately $9.0
million to members of the Exchange of record on November 5, 1996, which was paid
in the form of premium credits during 1997. The Company has ceased paying such
premium credit dividends to its policyholders, and may find it more difficult to
compete with other insurance companies offering such dividends.
The Company has instituted no rate increases for 1998, which may offset the
elimination of dividends to policyholders and somewhat improve its competitive
position.
CLAIMS
The claims department of the Company is responsible for claims investigation,
establishment of appropriate case reserves for loss and LAE, defense planning
and coordination, control of attorneys engaged by the Company to defend a claim
and negotiation of the settlement or other disposition of a claim. Under most of
the Company's policies, except managed care organization errors and omissions
policies and directors and officers liability policies, the Company is obligated
to defend its insureds, which is in addition to the limit of liability under the
policy. Medical malpractice claims often involve the evaluation of highly
technical medical issues, severe injuries and conflicting expert opinions. In
almost all cases, the person bringing the claim against the physician is already
represented by legal counsel when the Company learns of the potential claim.
The claims department staff includes managers, litigation supervisors,
investigators and other experienced professionals trained in the evaluation and
resolution of medical professional liability and general liability claims. The
claims department staff consists of approximately 55 employees, including
14 clerical personnel. The Company has five unit managers and three branch
managers responsible for specific geographic areas, and additional units for
specialty areas such as hospitals, birth injuries and policy coverage issues.
The Company also occasionally uses independent claims adjusters, primarily to
investigate claims in remote locations. The Company selects legal counsel from
among a group of law firms in the geographic area in which the action is filed.
California has adopted a standard of judicial administration that requires its
trial courts to set goals to dispose of 90% of all cases within 12 months after
filing and 100% of cases within 24 months. The courts in the various counties in
which the Company defends claims have sought to comply with these "fast-track"
standards during the past few years. The effect of this change has been
significant. Before this requirement was implemented, cases in certain counties
did not proceed to trial for many years after filing. The claims department
staff now must make earlier evaluations and reserve estimates, authorize
discovery expenses early in the litigation process and be prepared to settle the
case or proceed to trial within one year.
The Company emphasizes early evaluation and aggressive management of claims.
Claims department professionals complete a full evaluation and reserving of
claims under "fast-track" within six months of the filing of a claim and on all
other cases within 12 months after filing. The Company has established different
levels of authority within the claims department for approval of
8
<PAGE> 9
reserves and settlement of claims. The Company has a claims committee comprised
solely of physicians which meets bi-monthly with the vice president in charge of
claims and other claims managers to consider and evaluate cases that have
complex medical issues and subject the Company to large exposures. At December
31, 1997, the Company had 2,837 open claims.
The Company vigorously defends its insureds against claims, but seeks to
resolve expediently cases with high exposure potential. The defense of a medical
professional liability claim requires significant cooperation between the
litigation supervisor or claims department manager responsible for the claim and
the insured physician. California law requires that a medical professional
liability claim cannot be settled for an amount in excess of $30,000 without the
consent of the physician insured. California law further requires that the
insurer report all such settlements to a medical disciplinary board, and Federal
law requires that any claim payment, regardless of amount, be reported to a
national data bank which can be accessed by various state licensing and
disciplinary boards and medical peer evaluation committees. Thus, the physician
is often placed in a difficult position of knowing that a settlement may result
in the initiation of a disciplinary proceeding or some other impediment to the
physician's ability to practice. The claims department supervisor must be able
to fully evaluate considerations of settlement or trial and to communicate
effectively the Company's recommendation to its insured. If the insured will not
consent to a settlement offer, the Company may be exposed to a larger judgment
if the case proceeds to trial.
The claims department staff utilizes structured settlements to resolve certain
large claims. In a structured settlement, the Company will typically purchase an
annuity from another insurance company that will satisfy periodic payments owed
to the claimant as part of the settlement. The Company typically obtains a
release from the claimant for its insured and itself and assigns the annuity to
a third party for payment. The Company purchased annuities during the early
1980s from a life insurance company that subsequently became insolvent and could
not satisfy its obligations. In some instances, the Company has concluded that
it is obligated to satisfy any shortfall in these periodic payments and is
making these shortfall payments. The Company has established a reserve to cover
these expected shortfall obligations. See Note 8 of Notes to Consolidated
Financial Statements.
LOSS AND LAE RESERVES
The determination of loss reserves is a projection of ultimate losses through
an actuarial analysis of the claims history of the Company and other
professional liability insurers, subject to adjustments deemed appropriate by
the Company due to changing circumstances. Included in its claims history are
losses and LAE paid by the Company in prior periods and case reserves for
anticipated losses and LAE developed by the Company's claims department as
claims are reported and investigated. Actuaries rely primarily on such
historical loss experience in determining reserve levels on the assumption that
historical loss experience provides a good indication of future loss experience
despite the uncertainties in loss cost trends and the delays in reporting and
settling claims. As additional information becomes available, the estimates
reflected in earlier loss reserves may be revised. Any increase in the amount of
reserves, including reserves for insured events of prior years, could have an
adverse effect on the Company's results for the period in which the adjustments
are made.
The uncertainties inherent in estimating ultimate losses on the basis of past
experience have grown significantly in recent years principally as a result of
judicial expansion of liability standards and expansive interpretations of
insurance contracts. These uncertainties may be further affected by, among other
factors, changes in the rate of inflation and changes in the propensities of
individuals to file claims. The inherent uncertainty of establishing reserves is
relatively greater for companies writing long-tail casualty insurance, including
medical malpractice insurance, due primarily to the longer-term nature of the
resolution of claims. There can be no assurance that the ultimate liability of
the Company will not exceed the amounts reserved.
The Company utilizes both its internal actuarial staff and independent
actuaries in establishing its reserves. The Company's independent actuaries
review the Company's reserves for losses and LAE at the end of each fiscal year
and prepare a report that includes a recommended level of reserves. The Company
considers this recommendation as well as other factors, such as known,
anticipated or estimated changes in frequency and severity of claims, loss
retention levels and premium rates, in establishing the amount of its reserves
for losses and LAE. The Company continually refines reserve estimates as
experience develops and further claims are reported and settled. The Company
reflects adjustments to reserves in the results of the periods in which such
adjustments are made. Since medical malpractice insurance is a long-tail line of
business for which the initial loss and LAE estimates may be adversely impacted
by events occurring long after the reporting of the claim, such as sudden severe
inflation or adverse judicial or legislative decisions, the Company has
attempted to establish its loss and LAE reserves at the upper end of a
reasonable range of reserve estimates.
9
<PAGE> 10
The Company's loss reserve experience is shown in the following table, which
sets forth a reconciliation of beginning and ending reserves for unpaid losses
and LAE for the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Reserves for losses and LAE at beginning
of year ................................... $ 459,567 $ 466,187 $ 468,743
Less reinsurance recoverables ............. 19,266 19,560 19,177
--------- --------- ---------
Reserves for losses and LAE, net of related
reinsurance recoverable, at
beginning of year ......................... 440,301 446,627 449,566
--------- --------- ---------
Provision for losses and LAE for claims
occurring in the current year, net of
reinsurance ............................... 176,586 168,545 175,856
Decrease in estimated losses and LAE for
claims occurring in prior years, net of
reinsurance ............................... (53,209) (59,748) (57,833)
--------- --------- ---------
Incurred losses during the year, net of
reinsurance ............................... 123,377 108,797 118,023
--------- --------- ---------
Deduct losses and LAE payments for
claims, net of reinsurance, occurring
during:
Current year ............................ 11,814 13,274 11,481
Prior years ............................. 118,424 101,849 109,481
--------- --------- ---------
130,238 115,123 120,962
--------- --------- ---------
Reserve for losses and LAE, net of
related reinsurance recoverable, at
end of year ............................... 433,440 440,301 446,627
Reinsurance recoverable for losses
and LAE, at end of year ................... 21,531 19,266 19,560
--------- --------- ---------
Reserves for losses and LAE, gross
of reinsurance recoverable, at end
of year ................................... $ 454,971 $ 459,567 $ 466,187
========= ========= =========
</TABLE>
- ------------
The following table reflects the development of losses and LAE reserves for
the periods indicated at the end of that year and each subsequent year. The line
entitled "Loss and LAE reserves" reflects the reserves, net of reinsurance
recoverables, as originally reported at the end of the stated year. Each
calendar year-end reserve includes the estimated unpaid liabilities for that
report or accident year and for all prior report or accident years. The section
under the caption "Liability reestimated as of" shows the original recorded
reserve as adjusted as of the end of each subsequent year to reflect the
cumulative amounts paid and all other facts and circumstances discovered during
each year. The line "Cumulative redundancy" reflects the difference between the
latest reestimated reserve amount and the reserve amount as originally
established. The section under the caption "Cumulative amount of liability paid
through" shows the cumulative amounts paid related to the reserve as of the end
of each subsequent year.
10
<PAGE> 11
In evaluating the information in the table below, it should be noted that each
amount includes the effects of all changes in amounts of prior periods. For
example, if a loss determined in 1993 to be $100,000 was first reserved in 1987
at $150,000, the $50,000 redundancy (original estimate minus actual loss) would
be included in the cumulative redundancy in each of the years 1987
through 1997 shown below. This table presents development data by calendar year
and does not relate the data to the year in which the claim was reported or the
incident actually occurred. Conditions and trends that have affected the
development of these reserves in the past will not necessarily recur in the
future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss and LAE
reserves .......... $329,369 $389,404 $412,679 $427,049 $439,908 $465,423 $472,129 $449,566 $446,627 $440,301 $433,440
Liability reestimated
as of:
One year later .... 327,627 362,058 375,764 401,878 409,966 421,994 411,915 391,733 386,879 387,092
Two years later ... 312,956 337,901 348,781 368,124 364,105 368,521 363,562 337,441 337,760
Three years later . 295,438 315,718 320,319 324,370 316,220 325,073 315,712 304,063
Four years later .. 278,339 299,308 294,992 284,628 282,291 292,801 293,711
Five years later .. 267,880 284,972 266,649 264,582 261,344 274,304
Six years later ... 260,544 266,423 256,900 251,335 252,077
Seven years later . 249,644 262,642 247,678 245,745
Eight years later . 248,595 257,731 244,863
Nine years later .. 246,267 256,354
Ten years later ... 245,780
Cumulative
redundancy ........ 83,589 133,050 167,816 181,304 187,831 191,119 178,418 145,503 108,867 53,209
Cumulative
amount of
liability paid
through:
One year later .... 78,951 93,607 85,771 103,983 101,001 105,678 121,106 109,481 101,844
Two years later ... 147,865 155,505 162,264 171,327 171,429 184,883 192,519 170,603 170,932
Three years later . 188,038 206,413 204,129 206,499 205,829 219,649 217,484 202,660
Four years later .. 220,575 232,777 221,479 221,654 221,884 232,379 231,794
Five years later .. 233,807 242,140 228,922 230,606 227,692 237,879
Six years later ... 236,809 244,587 234,202 232,410 231,277
Seven years later . 238,105 248,319 235,274 232,912
Eight years later . 239,652 248,993 235,362
Nine years later .. 239,896 249,122
Ten years later ... 239,940
Net reserves--
December 31 ....... $472,129 $449,566 $446,627 $440,301 $433,440
Reinsurance
recoverables ...... 18,644 19,177 19,560 19,266 21,531
-------- -------- -------- -------- --------
Gross reserves ...... $490,773 $468,743 $466,187 $459,567 $454,971
======== ======== ======== ======== ========
</TABLE>
The Company has historically experienced favorable loss and LAE reserve
development. The Company believes that the favorable loss and LAE reserve
development since 1987 has resulted from four factors: (i) the Company's
conservative approach to establishing reserves for medical malpractice insurance
losses and LAE; (ii) the continuing benefits from the Medical Injury
Compensation Reform Act ("MICRA"), the California tort reform legislation that
was declared constitutional in a series of decisions by the California Supreme
Court in the mid-1980s; (iii) benefits from California legislation requiring
matters in litigation to proceed more expeditiously to trial; and (iv) improved
results from a restructuring of the Company's internal claims process. See "--
Regulation -- Medical Malpractice Tort Reform" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- General." The
Company believes, based on its analysis of annual statements filed with state
regulatory authorities, that its principal California competitors have
experienced similar favorable loss and LAE reserve development in past years.
General liability losses have been less than 3.2% of medical malpractice
losses in the last five years. The Company does not have material reserves for
pollution claims and the Company's claims experience for pollution coverage has
been negligible.
11
<PAGE> 12
While the Company believes that its reserves for losses and LAE are adequate,
there can be no assurance that the Company's ultimate losses and LAE will not
deviate, perhaps substantially, from the estimates reflected in the Company's
financial statements. If the Company's reserves should prove inadequate, the
Company will be required to increase reserves, which could have a material
adverse effect on the Company's financial condition or results of operation.
REINSURANCE
Reinsurance Ceded. The Company follows customary industry practice by
reinsuring a portion of its risks. The Company cedes to reinsurers a portion of
its risks and pays a fee based upon premiums received on all policies subject to
such reinsurance. Insurance is ceded principally to reduce net liability on
individual risks and to provide protection against large losses. Although
reinsurance does not legally discharge the ceding insurer from its primary
liability for the full amount of the policies reinsured, it does make the
reinsurer liable to the insurer to the extent of the reinsurance ceded. The
Company determines how much reinsurance to purchase based upon its evaluation of
the risks it has insured, consultations with its reinsurance brokers and market
conditions, including the availability and pricing of reinsurance. In 1997, the
Company ceded $5.0 million of its earned premiums to reinsurers.
The Company's reinsurance arrangements are generally placed through its
exclusive reinsurance broker, Guy Carpenter & Company, Inc. (formerly Willcox
Incorporated Reinsurance Intermediaries). The Company retains the first $1.0
million of loss incurred per incident for its physician and medical group
policies and has various reinsurance treaties covering losses in excess of $1.0
million up to $20.0 million per incident for physicians. The Company often has
more than one insured named as a defendant in a lawsuit or claim arising from
the same incident, and, therefore, multiple policies and limits of liability may
be involved. The Company retains losses in excess of $20.0 million. The
Company's reinsurance program is purchased in several layers, the limits of
which may be reinstated under certain circumstances at the Company's option
subject to the payment of additional premium. The Company also reinsures a
portion of the reinstatement premiums under a separate treaty, together with
certain other miscellaneous liability exposures, including retroactive liability
for two insurance layers from several past years and aggregate extension
coverage which provides additional aggregate loss limits for the layer $1.0
million excess of $1.0 million, each occurrence, for specified years. The
reinsurers also bear their proportionate share of loss expenses for claims in
which they have an indemnity obligation.
For its hospital policies, the Company retains the first $1.0 million of loss
incurred per incident and has various reinsurance treaties covering 90% of all
losses in excess of $1.0 million up to $50.0 million.
The Company has a separate quota share reinsurance treaty for 1997 with
respect to its managed care organization errors and omissions policies and any
directors and officers liability policies it may write. Under this treaty, the
reinsurers bear 80% of all losses and LAE incurred under these policies. All
losses and LAE incurred greater than $1.0 million but not ceded under the quota
share agreement are subject to ceding under the excess of loss treaties above.
Reinsurance is placed under reinsurance treaties and agreements with a number
of individual companies and syndicates at Lloyd's of London ("Lloyd's") to avoid
concentrations of credit risk. The following table identifies the Company's most
significant reinsurers, their percentage participation in the Company's
aggregate reinsured risk based upon premiums paid by the Company and their
rating as of December 31, 1997. No other single reinsurer's percentage
participation in 1997 exceeded 5% of total reinsurance premiums.
<TABLE>
<CAPTION>
PREMIUMS CEDED PERCENTAGE OF TOTAL
FOR YEAR ENDED REINSURANCE
DECEMBER 31, 1997 RATING(1) PREMIUMS
----------------- --------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Hannover Ruckversicherungs......... $ 1,435 A+ 29.1
Lloyd's of London Syndicates....... 2,152 NR 43.6
Unionamerica Insurance Co.......... 412 A 8.3
CNA International Reinsurance Co... 309 A 6.3
GIO, Ltd........................... 290 A 5.9
-----
93.2
</TABLE>
- ------------
(1) All ratings are assigned by A.M. Best. The Company's minimum requirement
for ratings of its reinsurers is B or better from A.M. Best.
12
<PAGE> 13
The Company analyzes the credit quality of its reinsurers and relies on its
brokers and intermediaries to assist it in such analysis. To date, the Company
has not experienced any material difficulties in collecting reinsurance
recoverables. No assurance can be given, however, regarding the future ability
of any of the Company's reinsurers to meet their obligations. Among the
reinsurers to which the Company cedes reinsurance are certain Lloyd's
syndicates. In recent years, Lloyd's has reported substantial aggregate losses
that have had adverse effects on Lloyd's in general and on certain syndicates in
particular. In addition, there has been a decrease in the underwriting capacity
of Lloyd's syndicates in recent years. The substantial losses and other adverse
developments could affect the ability of certain syndicates to continue to trade
and the ability of insureds to continue to place business with particular
syndicates. It is not possible to predict what effects the circumstances
described above may have on Lloyd's and the Company's contractual relationship
with Lloyd's syndicates in future years. The Company understands that Lloyd's
syndicates have created new trust funds to hold reserves for reinsurance
purchased by United States reinsureds gross of outward reinsurance. This
arrangement applies to all purchases on or after August 1, 1995.
Reinsurance and Excess Liability Insurance Assumed. The Company assumes a
small amount of reinsurance covering medical professional liability risks
primarily in the United States. The principal reinsurance treaty, which has been
in effect since 1988, is with a Lloyd's syndicate. Under this surplus share
treaty, the Company assumes 50% of one or more layers of coverage above $1.0
million, which must be retained by the primary insurer. The reinsured receives a
ceding commission and a profit share. The maximum amount of the Company's
liability for any one risk is $500,000, and the Company does not participate as
a reinsurer in any of its own policies. The annual premiums earned under this
treaty have ranged from $160,000 in 1989 to $1.1 million in 1997. In 1997, this
treaty also included reinsurance of excess layers of workers' compensation and
clash casualty liability risks. The Company's liability for any one risk is
limited to $500,000 above a $1.5 million layer assumed by other members of the
syndicate.
The Company also entered into a reinsurance treaty for 1995 and 1996 with
Hannover Ruckversicherungs ("Hannover Re"). The treaty is a quota share treaty,
under which the Company reinsures up to $500,000 for each physician medical
malpractice claim and up to $750,000 for each hospital professional liability
claim on policies or contracts with limits in excess of $2.0 million. The
reinsured receives an override commission and is required to retain not less
than 20% of the risk, subject to a minimum retention of $1.0 million. Premiums
earned under this treaty were approximately $8,000 for 1997.
The Company has an indirect quota share participation in a reinsurance program
of Hannover Re that provides high layer excess of loss property catastrophe
coverage for international risks, other than in the United States and Japan. The
Company has participated in this program since 1994 through the purchase of a
$5.0 million Credit Note issued by a limited liability company organized by
Hannover Re to underwrite a portion of this coverage. The Company purchased this
note through the issuance of a letter of credit, which can be drawn to cover the
Company's proportionate share of losses in this program. Interest on the note is
based upon profits, if any, of the limited liability company. The Company, in
its investment portfolio, holds the outstanding Credit Note, and the amount of
the letter of credit is included in Other Liabilities in the Consolidated
Balance Sheets. See "-- Investment Portfolio."
The Company participates indirectly in another reinsurance program of Hannover
Re similar to the one described above through a swap agreement arranged by
Citibank, N.A. Under the swap agreement, the Company has issued a letter of
credit, which can be drawn to cover the Company's proportionate share of losses
in this program. The Company will share proportionately the underwriting profit
of this program and interest income on premium receipts, and its aggregate
maximum share of losses is $5.0 million.
The Company intends to seek additional assumed reinsurance arrangements in
future years. The Company believes that as more managed care organizations and
integrated healthcare delivery systems retain a larger part of their own
exposure directly or through captive insurance arrangements, they will need to
obtain excess insurance or reinsurance for the potentially larger losses.
INVESTMENT PORTFOLIO
An important component of the Company's operating results has been the return
on its invested assets. Investments of the Company are made by investment
managers under policies established and supervised by the Board. The Company's
investment policy has placed primary emphasis on investment grade, fixed
maturity securities and maximization of after-tax yields. The investment manager
since 1978 for the portfolio of fixed maturity securities is Brown Brothers
Harriman & Co., and the investment manager for the equity securities portion of
the portfolio is Hotchkis & Wiley.
13
<PAGE> 14
All of the fixed maturity securities are classified as available-for-sale and
carried at estimated fair value. For these securities, temporary unrealized
gains and losses, net of tax, are reported directly through stockholders'
equity, and have no effect on net income. The following table sets forth the
composition of the investment portfolio of the Company at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- --------------------- ---------------------
COST OR COST OR COST OR
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturity securities:
Bonds:
U.S. Government and
Agencies ................. $290,028 $298,073 $272,315 $276,929 $304,091 $319,119
State, municipalities and
political subdivisions ... 327,273 335,156 300,347 303,461 149,693 155,118
Mortgage-backed securities,
U.S. Government .......... 68,161 68,290 83,031 82,850 80,279 81,898
Corporate .................. 7,256 7,248 5,027 5,027 46,951 48,889
Other ...................... 93 93 100 100 105 105
-------- -------- -------- -------- -------- --------
Total bonds ........... 692,811 708,860 660,820 668,367 581,119 605,129
Redeemable preferred stock ... -- -- -- -- 996 1,026
-------- -------- -------- -------- -------- --------
Total fixed maturity
securities .......... 692,811 708,860 660,820 668,367 582,115 606,155
-------- -------- -------- -------- -------- --------
Equity securities:
Common stock ................. 17,052 23,523 15,555 19,977 49,396 61,083
-------- -------- -------- -------- -------- --------
Total equity securities 17,052 23,523 15,555 19,977 49,396 61,083
-------- -------- -------- -------- -------- --------
Total .......................... $709,863 $732,383 $676,375 $688,344 $631,511 $667,238
======== ======== ======== ======== ======== ========
</TABLE>
The Company's current policy is to limit its investment in equity securities
and real estate to no more than 8% of the total market value of its investments.
Accordingly, the Company's portfolio of unaffiliated equity securities was
reduced from $61.1 million at December 31, 1995 to $23.5 million at December 31,
1997.
The Company's investment portfolio of fixed maturity securities consists
primarily of intermediate-term, investment-grade securities. The Company's
investment policy provides that fixed maturity investments are limited to
purchases of investment-grade securities or unrated securities which, in the
opinion of a national investment advisor, should qualify for such rating. The
table below contains additional information concerning the investment ratings of
the Company's fixed maturity investments at December 31, 1997:
<TABLE>
<CAPTION>
AMORTIZED FAIR PERCENTAGE OF
TYPE/RATING OF INVESTMENT(1) COST VALUE FAIR VALUE
---------------------------- --------- ----- -------------
(IN THOUSANDS)
AAA (including U.S. Government and
<S> <C> <C> <C>
Agencies)..................... $ 491,538 $ 503,187 71.0%
AA.............................. 145,763 148,774 21.0
A............................... 50,417 51,806 7.3
Non rated(2).................... 5,093 5,093 0.7
--------- --------- -----
$ 692,811 $ 708,860 100.0%
========= ========= =====
</TABLE>
- ------------
(1) The ratings set forth above are based on the ratings, if any, assigned by
Standard & Poor's Corporation ("S&P"). If S&P's ratings were unavailable,
the equivalent ratings supplied by Moody's Investors Services, Inc. were
used.
(2) Includes a credit note received from a catastrophe reinsurance limited
liability company controlled by Hannover Re with an amortized cost and fair
value of $5.0 million. See "--Reinsurance."
14
<PAGE> 15
The following table sets forth certain information concerning the maturities
of fixed maturity securities in the Company's investment portfolio as of
December 31, 1997:
<TABLE>
<CAPTION>
AMORTIZED FAIR PERCENTAGE OF
COST VALUE FAIR VALUE
--------- ----- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Years to maturity:
One or less........... $ 2,349 $ 2,341 0.3%
After one through five 89,663 91,519 12.9
After five through ten 241,715 249,699 35.3
After ten............. 290,923 297,011 41.9
Mortgage-backed securities 68,161 68,290 9.6
--------- --------- -----
Totals $ 692,811 $ 708,860 100.0%
========= ========= =====
</TABLE>
The average maturity of the securities in the Company's fixed maturity
portfolio as of December 31, 1997 was 5.6 years. The average duration of the
Company's fixed maturity portfolio as of December 31, 1997 was 4.6 years.
The Company also maintains cash and highly liquid short-term investments,
which at December 31, 1997 totaled $66.5 million.
The following table summarizes the Company's investment results for the three
years ended December 31:
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
FIXED MATURITY SECURITIES:
Average invested assets (includes short-
term cash investments)(1) ............ $ 718,239 $ 650,090 $ 614,492
Net investment income:
Before income taxes .................. 39,926 40,594 36,987
After income taxes ................... 30,731 29,706 26,481
Average annual return on investments:
Before income taxes .................. 5.56% 6.24% 6.02%
After income taxes ................... 4.28% 4.57% 4.31%
Net realized investment gains after
income tax ........................... $ 1,909 $ 351 $ 2,202
Net increase (decrease) in unrealized
gains on all fixed maturity
investments after income taxes ....... 5,526 (10,720) 34,366
EQUITY SECURITIES:
Average invested assets(2) ............. $ 21,750 $ 37,695 $ 50,927
Net investment income:
Before income taxes .................. 840 994 1,627
After income taxes ................... 777 854 1,189
Average annual return on investments:
Before income taxes .................. 3.86% 2.64% 3.19%
After income taxes ................... 3.57% 2.27% 2.33%
Net realized investment gains after
income tax ........................... $ 2,382 $ 7,279 $ 2,965
Net increase (decrease) in unrealized
gains on all equity investments after
income taxes ......................... 1,333 (4,742) 5,548
</TABLE>
- ------------
(1) Fixed maturity securities at cost.
(2) Equities at market.
15
<PAGE> 16
COMPETITION
The physician professional liability insurance market in California is highly
competitive. The Company competes principally with three physician-owned mutual
or reciprocal insurance companies, Norcal Mutual Insurance Company, The Doctors'
Company and Medical Insurance Exchange of California, with several commercial
insurers, including CNA Insurance Companies, and also with a physicians' mutual
protection trust. The physician-owned insurance companies were organized at
approximately the same time as the Company and all of these companies have
expanded their operations in California. Each of these companies is actively
engaged in soliciting insureds in Southern California, the Company's primary
area of operations, and each has offered assessments or premiums at very
competitive rates during the past few years. The Company believes that the
principal competitive factors, in addition to pricing, include dividend policy,
financial stability, breadth and flexibility of coverage and the quality and
level of services provided. In addition, commercial insurance companies such as
Farmers Group, Inc. and MMI Companies, Inc. now actively compete for larger
medical groups in the California market, and companies endorsed by specialty
medical societies are also entering the market.
The hospital professional liability insurance market is also extremely
competitive. Most of the Company's principal insurance company competitors for
physicians and medical groups, as well as a hospital industry sponsored captive
insurance company, actively compete in the hospital professional liability
insurance market. The largest writer of malpractice insurance for hospitals in
California is an affiliate of Farmers Group, Inc. The Company actively markets
its hospital policies through brokers and directly under a new program and
competes not only with Farmers Group, Inc. affiliates but also with MMI
Companies, Inc., Executive Risk Inc. and a number of other insurance companies
in the underwriting of hospital malpractice policies.
The Company expects to encounter similar competition from local doctor-owned
insurance companies and commercial companies in other states as it carries out
its expansion plans. The Company plans to compete in other states principally
through independent agents and brokers, such as its relationship with Poe &
Brown, and by offering superior policyholder services. The Company also intends
to expand its business through business combinations with medical professional
liability insurers, such as its purchase of the medical malpractice insurance
business of Fremont. All markets in which the Company now writes insurance and
in which it expects to enter have certain competitors with pre-existing
relationships with prospective customers, name recognition in those states and
in many cases greater financial and operating resources than the Company.
Marketing efforts in states other than California will take substantial time and
resources in order for prospective customers to become familiar with the Company
and its insurance products.
REGULATION
General. Insurance companies are regulated by government agencies in states in
which they transact insurance. The extent of regulation varies by state, but
such regulation usually includes: (i) regulating premium rates and policy forms;
(ii) setting minimum capital and surplus requirements; (iii) regulating guaranty
fund assessments; (iv) licensing companies and agents; (v) approving accounting
methods and methods of setting statutory loss and expense reserves; (vi) setting
requirements for and limiting the types and amounts of investments; (vii)
establishing requirements for the filing of annual statements and other
financial reports; (viii) conducting periodic statutory examinations of the
affairs of insurance companies; (ix) approving proposed changes of control; and
(x) limiting the amounts of dividends that may be paid without prior regulatory
approval. Such regulation and supervision are primarily for the benefit and
protection of policyholders and not for the benefit of investors.
Most of the Company's policies are written in California where SCPIE Indemnity
is domiciled. California laws and regulations, including the tort liability
laws, and laws relating to professional liability exposures and reports, have
the most significant impact on the Company and its operations.
Insurance Guaranty Associations. Most states, including California, require
admitted property and casualty insurers to become members of insolvency funds or
associations that generally protect policyholders against the insolvency of such
insurers. Members of the fund or association must contribute to the payment of
certain claims made against insolvent insurers. Maximum contributions required
by law in any one year vary by state, and California permits a maximum
assessment of 1% of annual premiums written by a member in that state during the
preceding year. The largest assessment paid by the Company was $697,000 in 1994.
However, such payments are recoverable through policy surcharges.
Holding Company Regulation. SCPIE Holdings is subject to the California
Insurance Holding Company System Regulatory Act (the "Holding Company Act"). The
Holding Company Act requires the Company periodically to file information with
the California
16
<PAGE> 17
Department and other state regulatory authorities, including information
relating to its capital structure, ownership, financial condition and general
business operations. Certain transactions between an insurance company and its
affiliates, including sales, loans or investments which in any twelve-month
period aggregate at least 3% of its admitted assets or 25% of its statutory
capital and surplus, whichever is less, also are subject to prior approval by
the California Department. Recently, legislation was adopted in California,
which requires 30 days advance notice to the California Department of a material
transaction, rather than prior approval, and increases the types of transactions
subject to the notice requirement.
The Holding Company Act also provides that the acquisition or change of
"control" of a California insurance company or of any person or entity that
controls such an insurance company cannot be consummated without the prior
approval of the California insurance commissioner. In general, a presumption of
"control" arises from the ownership of voting securities and securities that are
convertible into voting securities, which in the aggregate constitute 10% or
more of the voting securities of a California insurance company or of a person
or entity that controls a California insurance company, such as SCPIE Holdings.
A person or entity seeking to acquire "control," directly or indirectly, of the
Company is generally required to file with the Insurance Commissioner an
application for change of control containing certain information required by
statute and published regulations and provide a copy of the application to the
Company. The Holding Company Act also effectively restricts the Company from
consummating certain reorganizations or mergers without prior regulatory
approval.
The Company will also be subject to insurance holding company laws in other
states that contain similar provisions and restrictions.
Regulation of Dividends from Insurance Subsidiaries. The Holding Company Act
also limits the ability of SCPIE Indemnity to pay dividends to the Company.
Without prior notice to and approval of the Insurance Commissioner, SCPIE
Indemnity may not declare or pay an extraordinary dividend, which is defined as
any dividend or distribution of cash or other property whose fair market value
together with other dividends or distributions made within the preceding twelve
months exceeds the greater of such subsidiary's statutory net income of the
preceding calendar year or 10% of statutory surplus as of the preceding December
31. Applicable regulations further require that an insurer's statutory surplus
following a dividend or other distribution be reasonable in relation to its
outstanding liabilities and adequate to meet its financial needs, and permit the
payment of dividends only out of statutory earned (unassigned) surplus unless
the payment out of other funds is approved by the Insurance Commissioner. In
addition, an insurance company is required to give the California Department of
Insurance notice of any dividend after declaration, but prior to payment.
The other Insurance Subsidiaries are subject to similar provisions and
restrictions under the insurance holding company laws of other states.
Risk-Based Capital. The National Association of Insurance Commissioners
("NAIC") has developed a new methodology for assessing the adequacy of statutory
surplus of property and casualty insurers which includes a risk-based capital
("RBC") formula that attempts to measure statutory capital and surplus needs
based on the risks in a company's mix of products and investment portfolio. The
formula is designed to allow state insurance regulators to identify potentially
under-capitalized companies. Under the formula, a company determines its RBC by
taking into account certain risks related to the insurer's assets (including
risks related to its investment portfolio and ceded reinsurance) and the
insurer's liabilities (including underwriting risks related to the nature and
experience of its insurance business). The RBC rules provide for different
levels of regulatory attention depending on the ratio of a company's total
adjusted capital to its "authorized control level" of RBC. At December 31, 1997,
each of the Insurance Subsidiaries' RBC exceeded the threshold requiring the
least regulatory attention.
Regulation of Investments. The Insurance Subsidiaries are subject to state
laws and regulations that require diversification of their investment portfolios
and limit the amount of investments in certain investment categories such as
below investment grade fixed income securities, real estate and equity
investments. Failure to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as nonadmitted assets
for purposes of measuring statutory surplus and, in some instances, would
require divestiture of such non-qualifying investments over specified time
periods unless otherwise permitted by the state insurance authority under
certain conditions.
Prior Approval of Rates and Policies. Pursuant to the California Insurance
Code, the Company must submit rating plans, rates, policies and endorsements to
the Insurance Commissioner for prior approval. The possibility exists that the
Company may be unable to implement desired rates, policies, endorsements, forms
or manuals if the Insurance Commissioner does not approve such items. In the
past, all of the Company's rate applications have been approved in the normal
course of review. AHI and AHSIC are similarly
17
<PAGE> 18
required to make certain policy form and rate filings in most of the other
states to permit the Company to write medical malpractice insurance in these
states.
Medical Malpractice Tort Reform. MICRA, enacted in 1975, has been one of the
most comprehensive medical malpractice tort reform measures in the United
States. MICRA currently provides for limitations on damages for pain and
suffering of $250,000, limitations on fees for plaintiffs' attorneys according
to a specified formula, periodic payment of medical malpractice judgments and
the introduction of evidence of collateral source benefits payable to the
injured plaintiff. The Company believes that this legislation has brought
stability to the medical malpractice insurance marketplace in California by
making it more feasible for insurers to assess the risks involved in
underwriting this line of business.
The constitutionality of the various provisions of MICRA was judicially
challenged soon after its enactment, and California trial courts and
intermediate appellate courts reached conflicting decisions. The California
Supreme Court, in a series of decisions rendered during 1984 and 1985, upheld
the constitutionality of MICRA. Bills have been introduced in the California
Legislature from time to time to modify or limit certain of the tort reform
benefits provided to physicians and other healthcare providers by MICRA. In
1987, the principal proponents and opponents of MICRA signed an agreement under
which the parties agreed to a five-year moratorium on amendments to MICRA,
except for an increase in the limits on plaintiffs' attorneys' fees, which was
enacted at the time of this agreement. This moratorium expired by its terms on
December 31, 1992. Neither the proponents nor opponents have been able to enact
significant changes since that time. The Company cannot predict what changes, if
any, to MICRA may be enacted during the next few years or what effect such
changes might have on the Company's medical malpractice insurance operations.
Medical Malpractice Reports. The Company has been required to report detailed
information with regard to settlements or judgments against its California
physician insureds in excess of $30,000 to the Medical Board of California,
which has responsibility for investigations and initiation of proceedings
relating to professional medical conduct in California. Since January 1, 1998,
all judgments, regardless of amount, must be reported to the Medical Board,
which now publishes on the Internet all judgments reported after January 1,
1993. In addition, all payments must also be reported to the Federal National
Practitioners' Data Bank and such reports are accessible by state licensing and
disciplinary authorities, hospital and other peer review committees and other
providers of medical care. A California statute also requires that defendant
physicians must consent to all medical professional liability settlements in
excess of $30,000, unless the physician waives this requirement. The Company
policy provides the physician with the right to consent to any such settlement,
regardless of the amount, but that either party may submit the matter of consent
to a county medical review board. In virtually all instances, the Company must
obtain the consent of the insured physician prior to any settlement.
A.M. BEST RATING
A.M. Best, which rates insurance companies based on factors of concern to
policyholders, currently assigns the Company an "A (Excellent)" rating. Such
rating is the third highest rating of 15 ratings that A.M. Best assigns to
insurance companies, which currently range from "A++ (Superior)" to "F (In
Liquidation)." Publications of A.M. Best indicate that the A rating is assigned
to those companies that in A.M. Best's opinion have a strong ability to meet
their obligations to policyholders over a long period of time. In evaluating a
company's financial and operating performance, A.M. Best reviews the company's
profitability, leverage and liquidity, as well as its book of business, the
adequacy and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its loss reserves, the adequacy of its
surplus, its capital structure, the experience and competence of its management
and its market presence. A.M. Best's ratings reflect its opinion of an insurance
company's financial strength, operating performance and ability to meet its
obligations to policyholders and are not evaluations directed to purchasers of
an insurance company's securities.
The Insurance Subsidiaries have entered into a pooling arrangement and each of
the Insurance Subsidiaries has been assigned the same "pooled" "A (Excellent)"
A.M. Best rating based on their consolidated performance.
EMPLOYEES
As of December 31, 1997, the Company employed 188 persons. None of the employees
is covered by a collective bargaining agreement. The Company believes that its
employee relations are good.
18
<PAGE> 19
EXECUTIVE OFFICERS
The Executive Officers of the Company and their ages as of March 17, 1998 are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Donald J. Zuk 61 President, Chief Executive Officer and
Director
Patrick S. Grant 55 Senior Vice President, Marketing
Joseph P. Henkes 48 Secretary and Senior Vice President,
Operations and Actuarial Services
Patrick T. Lo 45 Vice President and Chief Financial Officer
</TABLE>
Donald J. Zuk has been President and Chief Executive Officer of SCPIE
Management Company since 1989. Prior to joining SCPIE Management Company, he
served 22 years with Johnson & Higgins, insurance brokers. His last position
there was Senior Vice President in charge of its Los Angeles Healthcare
operations, which included the operations of SCPIE under a contract that then
existed with SCPIE Management Company.
Patrick S. Grant has been with SCPIE since 1990 serving initially as Vice
President, Marketing. He was named Senior Vice President, Marketing in 1992.
Prior to that time, he spent almost 20 years with the insurance brokerage firm
of Johnson & Higgins. His last position there was Vice President, Professional
Liability. Mr. Grant has worked on the Company operations since 1976.
Joseph P. Henkes has been with the Company since 1990 serving initially as
Vice President, Operations and Actuarial Services. He was named Senior Vice
President, Operations and Actuarial Services in 1992. Prior to that time he
spent almost five years with Johnson & Higgins, where his services were devoted
primarily to the Company. He has been an Associate of the Casualty Actuarial
Society since 1975 and a member of the American Academy of Actuaries since 1980.
Patrick T. Lo has been Vice President and Chief Financial Officer of the
Company since 1993. From 1990 to 1993 he served as Vice President and Controller
of the Company. Prior to that time, he spent nine years as Assistant Controller,
Assistant Vice President and Vice President at The Doctors' Company, a
California medical malpractice insurance company.
RISK FACTORS
Certain statements in this Form 10-K that are not historical fact constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results of the Company to be materially different from historical results or
from any results expressed or implied by such forward-looking statements. Such
risks, uncertainties and other factors include, but are not limited to, the
following risks:
CONCENTRATION OF BUSINESS
Substantially all of the Company's premiums written are generated from medical
malpractice insurance policies issued to physicians and medical groups. As a
result, negative developments in the economic, competitive or regulatory
conditions affecting the medical malpractice insurance industry, particularly as
such developments might affect medical malpractice insurance for physicians,
could have a material adverse effect on the Company's results of operations.
Substantially all of the Company's direct premiums written are generated in
Southern California. The revenues and profitability of the Company are therefore
subject to prevailing regulatory, economic and other conditions in Southern
California. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations."
The Company's strategy includes expanding and diversifying its insurance
products and geographic operations. There can be no assurance that the Company
will be successful in implementing this strategy. See "-- Entry into New
Markets"
19
<PAGE> 20
INDUSTRY FACTORS
Many factors influence the financial results of the medical malpractice
insurance industry, several of which are beyond the control of the Company.
These factors include, among other things: changes in severity and frequency of
claims; changes in applicable law and regulatory reform; changes in judicial
attitudes toward liability claims; and changes in inflation, interest rates and
general economic conditions.
The availability of medical malpractice insurance, or the industry's
underwriting capacity, is determined principally by the industry's level of
capitalization, historical underwriting results, returns on investment and
perceived premium rate adequacy. Historically, the financial performance of the
medical malpractice industry has tended to fluctuate in cyclical patterns
characterized by periods of greater competition in pricing and underwriting
terms and conditions (a "soft insurance market") followed by periods of capital
shortage and lesser competition (a "hard insurance market"). In a soft insurance
market, competitive conditions could result in premium rates and underwriting
terms and conditions which may be below profitable levels. For a number of
years, the medical malpractice insurance industry in California and nationally
has faced a soft insurance market. There can be no assurance as to whether or
when industry conditions will improve or the extent to which any improvement in
industry conditions may improve the Company's results of operations.
COMPETITION
The Company competes with numerous insurance companies in the California
market. The Company's principal competitors for physicians and medical groups
consist of three physician-owned mutual or reciprocal insurance companies,
several commercial companies and a physicians' mutual protection trust, which
levies assessments primarily on a "claims paid" basis. In addition, commercial
insurance companies such as Farmers Group, Inc., Executive Risk Inc. and MMI
Companies, Inc. compete for the medical malpractice insurance business of larger
medical groups, hospitals and other healthcare providers. Several of these
competitors have greater financial resources than the Company. Between 1993 and
1997, the Company has increased premium rates, while most of its competitors
have maintained their rates or instituted smaller increases. The Company has
lost some of its policyholders, in part due to its rate increases, but has
realized a modest increase in its premium volume and improved its underwriting
results. See "Business - Rates."
In addition to pricing, competitive factors may include dividend policy,
financial stability, breadth and flexibility of coverage and the quality and
level of services provided. The Company paid dividends to its members of $9.0
million and $9.9 million in 1997 and 1996, respectively. Such dividends were
paid primarily to insureds who were members of the Exchange in 1990 and prior
policy years and were based primarily on underwriting results in such years. The
Company has ceased paying dividends and may find it more difficult to compete
with other insurance companies offering such dividends.
The Company has instituted no rate increases for 1998, which may offset the
elimination of dividends to policyholders and somewhat improve its competitive
position.
The competitive environment could also result in lower premium rates and fees,
reduced profitability and loss of market share. As the Company expands into new
product lines and new geographic markets, it will need to compete with
established companies in such markets, many of which will have existing
relationships with the doctors and medical groups that the Company will be
seeking to insure. See "Business -- Competition."
LOSS AND LAE RESERVES
The reserves for losses and loss adjustment expenses established by the
Company are estimates of amounts needed to pay reported and unreported claims
and related LAE. The estimates are based on assumptions related to the ultimate
cost of settling such claims based on facts and interpretation of circumstances
then known, predictions of future events, estimates of future trends in claims
frequency and severity and judicial theories of liability, legislative activity
and other factors. However, establishment of appropriate reserves is an
inherently uncertain process involving estimates of future losses and there can
be no assurance that currently established reserves will prove adequate in light
of subsequent actual experience. The inherent uncertainty is greater for certain
types of insurance, such as medical malpractice, where a longer period may
elapse before a definite determination of ultimate liability is made, and where
the judicial, political and regulatory climates are changing. Medical
malpractice claims and expenses may be paid over a period of 10 or more years,
which is longer than most property and casualty claims. Trends in losses on
long-tail lines of business such as medical malpractice may be slow to appear,
and accordingly, the Company's reaction in terms of modifying underwriting
practices and changing premium rates may lag underlying loss trends. In
addition, emerging changes in the practice of medicine, such
20
<PAGE> 21
as the emergence of new, larger medical groups that do not have an established
claims history and additional claims resulting from restrictions on treatment by
managed care organizations, may require the Company to adjust its underwriting
and reserving practices. See "-- Changes in Healthcare." While the Company
believes that its reserves for losses and LAE are adequate, there can be no
assurance that the Company's ultimate losses and LAE will not deviate, perhaps
substantially, from the estimates reflected in the Company's financial
statements. If the Company's reserves should prove inadequate, the Company will
be required to increase reserves, which could have a material adverse effect on
the Company's financial condition or results of operations.
The Company believes it has been conservative in establishing loss and LAE
reserves. In recent years, the Company has revised estimates of loss severity
and determined that certain of its reserves were redundant. Redundant reserves,
which have been released in every year since 1985, contributed significantly to
reported earnings in 1997, 1996 and 1995. The Company reduced reserves for prior
years by $53.2 million, $59.7 million and $57.8 million in the years ending
December 31, 1997, 1996 and 1995, respectively. See Note 3 of Notes to
Consolidated Financial Statements. The Company cannot predict whether similar
redundancies will be experienced in future years. The Company continues to
establish its loss and LAE reserves at what it believes is the upper end of a
reasonable range of reserve estimates, but there is no assurance that such
reserves will ultimately prove to be redundant. If reserves ultimately prove
redundant, then the redundant amount will become income in the period such
amount is released from reserves and will be included in stockholders' equity.
If such redundancies do not occur or loss and LAE experience does not improve,
the Company's net income could be significantly reduced or a net loss could
occur. To the extent that reserves prove to be inadequate in the future, the
Company would have to increase such reserves and incur a charge to earnings in
the period that such reserves are increased, which could have a material adverse
effect on the Company's results of operations and financial condition. See
"Business - Loss and LAE Reserves."
CHANGES IN HEALTHCARE
Significant attention has recently been focused on reforming the healthcare
system at both the Federal and state levels. A broad range of healthcare reform
measures has been suggested, and public discussion of such measures will likely
continue in the future. Proposals have included, among others, spending limits,
price controls, limits on increases in insurance premiums, limits on the
liability of doctors and hospitals for tort claims and changes in the healthcare
insurance system. The Company cannot predict which, if any, reform proposals
will be adopted, when they may be adopted or what impact they may have on the
Company. While some of these proposals could be beneficial to the Company, the
adoption of others could have a material adverse effect on the Company's
financial condition or results of operations.
In addition to regulatory and legislative efforts, there have been significant
market driven changes in the healthcare environment. In recent years, a number
of factors related to the emergence of "managed care" have negatively impacted
or threatened to impact the medical practice and economic independence of
physicians. Physicians have found it more difficult to conduct a traditional fee
for service practice and many have been driven to join or contractually
affiliate with managed care organizations, healthcare delivery systems or
practice management organizations. This consolidation could result in the
elimination or significant decrease in the role of the physician and the medical
group from the medical professional liability purchasing decision. In addition,
the consolidation could reduce primary medical malpractice insurance premiums
paid by healthcare systems, as larger healthcare systems generally retain more
risk by accepting higher deductibles and self-insured retentions or form their
own captive insurance companies.
ENTRY INTO NEW MARKETS
The Company's strategy is to expand and diversify its products and operations
to meet the insurance needs of large healthcare organizations, while maintaining
its traditional personalized service for physicians and medical groups, both
large and small. The Company has recently introduced policies providing hospital
professional liability, managed care organization errors and omissions and
directors and officers liability insurance for healthcare organizations. The
Company has also participated in recent years as a reinsurer in the excess
medical professional liability market. There is no assurance, however, that this
diversification will be successful.
In August 1995, SCPIE entered into a marketing agreement with a leading
healthcare insurance broker in the Western United States. Under the agreement,
the broker had the exclusive right to market SCPIE's malpractice coverage for
hospitals in all states, and the Company recognizes the broker as the exclusive
broker for medical group coverage in all states other than California. In
December 1996, the broker filed for bankruptcy, and another insurance company
acquired its assets in September 1997 in a court-approved transaction. Effective
October 1, 1997, the Company and this insurance broker mutually agreed to
terminate their exclusive
21
<PAGE> 22
marketing agreement. The Company now actively markets its hospital policies
under a new program directly and through regional and local brokers, and must
compete with that broker and a number of insurance companies in the underwriting
of hospital malpractice policies.
AHI has formed a relationship with Poe & Brown, one of the nation's top
independent insurance agency organizations, to provide professional liability
insurance to physicians commencing January 1, 1998. This program replaces an
existing program Poe & Brown had established with another insurance company. The
contracts for this program are being finalized. There is no assurance, however,
that the Company will successfully retain or expand this business through Poe &
Brown or that it will ultimately be profitable.
AHI acquired the medical malpractice insurance business of Fremont effective
January 1, 1998. The Fremont insureds include chiropractors, podiatrist and
other healthcare providers that have not been regularly insured by the Company
in the past and include a number of insureds, particularly outside California,
who do not qualify for the Company's standard risk program. In addition, the
Fremont business is written almost entirely through brokers, not only in
California but also in a number of other states in which the Company does not
have prior operating experience. There is no assurance that the Company will be
able to retain this business or the broker relationships or that the business
will be profitable.
PHYSICIAN AND MEDICAL ASSOCIATION RELATIONSHIPS
The Exchange was organized in 1976 by physicians, received the exclusive
endorsement and active support of a number of local county medical associations
in building its physician and medical group policyholder base and, as a
reciprocal insurance company, has been wholly owned and governed by its members.
The Exchange has relied on its relationship with physicians and medical
associations in marketing its policies in competition with commercial insurance
companies and other physician-owned companies. The Company will endeavor to
maintain its medical association endorsements and to continue its close
relationship with physicians and medical groups through personalized service.
There can be no assurance that the Company will be able to maintain these
relationships.
IMPORTANCE OF RATINGS
Ratings have become an increasingly important factor in establishing the
competitive position of insurance companies. The Company is rated "A
(Excellent)" by A.M. Best, the third highest rating of 15 ratings assigned to
insurance companies, which currently range from "A++ (Superior)" to "F (In
Liquidation)." A.M. Best's ratings reflect its opinion of an insurance company's
financial strength, operating performance and ability to meet its obligations to
policyholders and are not evaluations directed to purchasers of an insurance
company's securities. In June 1996, A.M. Best reduced the Company's rating from
"A+ (Superior)," citing significant uncertainty in the medical malpractice
marketplace, caused, in part, by evolving managed care issues, the Company's
narrow product line and geographic concentration, and intense competition and
weakening premium rates in the medical malpractice industry. A.M. Best similarly
reduced the ratings of three other medical malpractice insurance companies
domiciled in California and several other medical malpractice companies
domiciled in states other than California. The Company's ability to maintain or
improve its rating by A.M. Best may depend on its ability to implement
successfully its business strategy. See "Business -- A.M. Best Rating." If A.M.
Best materially reduces the Company's rating from its current level, the
Company's results of operations could be adversely affected. The Insurance
Subsidiaries have entered into a reinsurance pooling arrangement and each of the
Insurance Subsidiaries has been assigned the same "pooled" "A (Excellent)" A.M.
Best rating based on their consolidated performance.
REINSURANCE
The amount and cost of reinsurance available to companies specializing in
medical professional liability insurance are subject, in large part, to
prevailing market conditions beyond the control of the Company. The Company's
ability to provide professional liability insurance at competitive premium rates
and coverage limits on a continuing basis will depend in part upon its ability
to secure adequate reinsurance in amounts and at rates that are commercially
reasonable. Although the Company anticipates that it will continue to be able to
obtain such reinsurance, there can be no assurance that this will be the case.
Further, the Company is subject to a credit risk with respect to its reinsurers
because reinsurance does not relieve the Company of liability to its insureds
for the risks ceded to reinsurers. Although the Company places its reinsurance
with reinsurers it believes to be financially stable, a significant reinsurer's
inability to make payment under the terms of a reinsurance treaty could have a
material adverse effect on the Company. See "Business -- Reinsurance."
22
<PAGE> 23
HOLDING COMPANY STRUCTURE; LIMITATION ON DIVIDENDS
SCPIE Holdings is an insurance holding company whose assets consist of all of
the outstanding capital stock of the Insurance Subsidiaries and, following the
Offering, will include a portion of the net proceeds of the Offering. As an
insurance holding company, SCPIE Holdings' ability to meet its obligations and
to pay dividends, if any, may depend upon the receipt of sufficient funds from
its subsidiaries. The payment of dividends to SCPIE Holdings by the Insurance
Subsidiaries is subject to general limitations imposed by applicable insurance
laws. See "Business -- Regulation -- Regulation of Dividends from Insurance
Subsidiaries."
ANTI-TAKEOVER PROVISIONS
SCPIE Holdings' amended and restated certificate of incorporation (the
"Restated Certificate") and amended and restated bylaws (the "Bylaws") include
provisions that may be deemed to have anti-takeover effects and may delay, defer
or prevent a takeover attempt that stockholders may consider to be in their best
interests. These provisions include: a Board of Directors consisting of three
classes; authorization to issue up to 5,000,000 shares of preferred stock, par
value $1.00 per share (the "Preferred Stock"), in one or more series with such
rights, obligations, powers and preferences as the Board of Directors of SCPIE
Holdings (the "SCPIE Holdings Board") may provide; a limitation which permits
only the SCPIE Holdings Board, or the Chairman or the President of SCPIE
Holdings to call a special meeting of stockholders; a prohibition against
stockholders acting by written consent; provisions which provide that directors
may be removed only for cause and only by the affirmative vote of holders of
two-thirds (66 2/3%) of the outstanding shares of voting securities; provisions
which provide that the SCPIE Holdings Board may increase the size of the Board
and may fill vacancies and newly created directorships; and certain advance
notice procedures for nominating candidates for election to the SCPIE Holdings
Board and for proposing business before a meeting of stockholders. In addition,
state insurance holding company laws applicable to the Company in general
provide that no person may acquire control of SCPIE Holdings without the prior
approval of appropriate insurance regulatory authorities. See "Business --
Regulation -- Holding Company Regulation."
REGULATORY AND RELATED MATTERS
Insurance companies are subject to supervision and regulation by the state
insurance authority in each state in which they transact business. Such
supervision and regulation relate to numerous aspects of an insurance company's
business and financial condition, including limitations on lines of business,
underwriting limitations, the setting of premium rates, the establishment of
standards of solvency, statutory surplus requirements, the licensing of insurers
and agents, concentration of investments, levels of reserves, the payment of
dividends, transactions with affiliates, changes of control and the approval of
policy forms. Such regulation is concerned primarily with the protection of
policyholders' interests rather than stockholders' interests. See "Business --
Regulation."
State regulatory oversight and various proposals at the Federal level may in
the future adversely affect the Company's results of operations. In recent
years, the state insurance regulatory framework has come under increased Federal
scrutiny, and certain state legislatures have considered or enacted laws that
alter and, in many cases, increase state authority to regulate insurance
companies and insurance holding company systems. Further, the NAIC and state
insurance regulators are reexamining existing laws and regulations, which in
many states has resulted in the adoption of certain laws that specifically focus
on insurance company investments, issues relating to the solvency of insurance
companies, RBC guidelines, interpretations of existing laws, the development of
new laws and the definition of extraordinary dividends. See "Business --
Regulation -- Regulation of Dividends from Insurance Subsidiaries," "--
Risk-Based Capital" and "-- Regulation of Investments."
ITEM 2. PROPERTIES
The Company is the owner of two office buildings, both located in Beverly
Hills, California. One building contains approximately 25,000 square feet of
office space and is used by the Company as a home office. The other office
building contains approximately 24,000 square feet, of which the Company
occupies approximately 17,000 square feet and the remaining 7,000 square feet of
space in this office building is leased to unaffiliated persons. Both office
buildings are currently unencumbered.
The Company is in the process of seeking leased space to replace its existing
facilities. The Company has no commitments for such space to date.
The Company also leases office space for a claims office in San Diego,
California, a sales office in Sacramento, California and marketing offices in
Dallas, Texas and Boca Raton, Florida.
23
<PAGE> 24
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in an action brought by the bankruptcy estate of an
uninsured physician. The bankruptcy estate alleged that the Company had an
undisclosed conflict of interest when it provided the physician with a free
courtesy defense by an attorney who had represented the interests of the
Company's insureds in other cases. The jury awarded compensatory damages of
$4.2 million and punitive damages were reduced to $14.0 million by the trial
judge. The Company believes that the action is entirely without merit and plans
to aggressively pursue its rights on appeal. However, the ultimate resolution of
this matter cannot be determined at this time and could result in a loss to the
Company.
The Company is named as defendant in various legal actions primarily arising
from claims made under insurance policies and contracts. These actions are
considered by the Company in estimating the loss and loss adjustment expense
reserves. The Company's management believes that the resolution of these actions
will not have a material adverse effect on the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
24
<PAGE> 25
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company did not have an established public trading market for its Common
Stock during fiscal year 1996. The Company's Common Stock became publicly
tradable on the NYSE on January 30, 1997 under the symbol "SKP." The following
table shows the price ranges per share in each quarter since that date:
<TABLE>
<CAPTION>
HIGH Low
---- ---
<S> <C> <C>
1997
First quarter (since January 30) 24.63 19.50
Second quarter 27.81 19.25
Third quarter 31.56 24.50
Fourth quarter 32.00 26.94
1998
First quarter (January 1 - March 16) 31.63 27.31
</TABLE>
On March 16, 1998, the closing price of the Company's common stock was $31.13.
STOCKHOLDERS OF RECORD
The approximate number of stockholders of record of the Company's Common Stock
as of March 16, 1998 was 8,110. Approximately 114 of such stockholders' of
record held the Company's common stock for an additional 2,301 beneficial
holders according to ChaseMellon Shareholder Services, the Company's transfer
agent.
DIVIDENDS
The SCPIE Holdings' Board of Directors (the "Board") declared a cash dividend
of $0.05 per share on its common stock each quarter of 1997. On February 25,
1998, the Board declared a $0.06 quarterly dividend payable on March 31, 1998,
to stockholders of record on March 16, 1998. The Company expects to continue the
payment of quarterly dividends to its stockholders. The continued payment and
amount of cash dividends will depend upon, among other factors, the Company's
operating results, overall financial condition, capital requirements and general
business conditions.
As a holding company, SCPIE Holdings is largely dependent upon dividends from
its subsidiaries to pay dividends to its stockholders. These subsidiaries are
subject to state laws that restrict their ability to distribute dividends. State
law permits payment of dividends and advances within any twelve month period
without any prior regulatory approval in an amount up to the greater of 10% of
statutory earned surplus at the preceding December 31 or net income for the
calendar year preceding the date the dividend is paid. Under these restrictions,
the principal insurance subsidiary of the Company is entitled to pay dividends
to SCPIE Holdings during 1998 up to approximately $27.5 million. See Note 6 of
the Notes to Consolidated Financial Statements and "Business Regulation --
Regulation of Dividends from Insurance Subsidiaries."
25
<PAGE> 26
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial and operating data for the
Company.
SELECTED FINANCIAL AND OPERATING DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993
- ---------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1):
Direct premiums written ................... $123,910 $125,635 $122,277 $120,024 $112,459
======== ======== ======== ======== ========
Premiums earned ........................... $133,866 $120,484 $116,354 $111,659 $113,194
Net investment income ..................... 42,716 40,769 40,424 39,663 39,738
Realized investment gains
and other revenue ....................... 7,153 12,113 8,231 755 16,254
-------- -------- -------- -------- --------
Total revenues ........................ 183,735 173,366 165,009 152,077 169,186
-------- -------- -------- -------- --------
Losses and loss adjustment
expenses ................................ 123,377 108,797 118,023 108,720 125,354
Other operating expenses .................. 17,987 14,276 12,561 11,844 9,734
-------- -------- -------- -------- --------
Total expenses ........................ 141,364 123,073 130,584 120,564 135,088
-------- -------- -------- -------- --------
Income before policyholder
dividends and
federal income taxes .................... 42,371 50,293 34,425 31,513 34,098
Policyholder dividends(2) ................. -- 8,436 -- -- --
Federal income taxes ...................... 10,195 11,665 10,056 9,212 8,618
-------- -------- -------- -------- --------
Net income .............................. $ 32,176 $ 30,192 $ 24,369 $ 22,301 $ 25,480
======== ======== ======== ======== ========
BALANCE SHEET DATA(1):
Total investments ......................... $785,664 $717,910 $695,021 $636,909 $679,257
Total assets .............................. 888,449 805,155 781,358 751,605 775,667
Total liabilities ......................... 527,334 516,588 507,539 542,069 548,268
Total stockholders' equity ................ 361,115 288,567 273,819 209,536 227,399
ADDITIONAL DATA(1):
Basic earnings per share of common stock(3) $ 2.66 $ 3.02 $ 2.44 $ 2.23 $ 2.55
Dividends per share of common stock ....... 0.20 -- -- -- --
Book value per share(3) ................... 29.41 28.86 27.38 20.95 22.74
GAAP ratios:
Loss ratio .............................. 92.2% 90.3% 101.4% 97.4% 110.7%
Expense ratio ........................... 13.4 11.8 10.8 10.6 8.6
Combined ratio .......................... 105.6 102.1 112.2 108.0 119.3
Statutory capital and surplus ............. $321,289 $251,958 $235,352 $187,299 $171,589
</TABLE>
(1) Financial data as of and for the years ended December 31, 1995, 1994 and
1993 are derived from the combined financial statements of the Southern
California Physicians Insurance Exchange (the Exchange) and an affiliated
non-profit corporation that was liquidated into the Exchange on July 12,
1996. Financial data as of and for the year ended December 31, 1996 are
derived from the consolidated financial statements of the Exchange and its
wholly-owned subsidiaries. Financial data as of and for the year ended
December 31, 1997 are derived from the financial statements of SCPIE
Holdings Inc. and its wholly-owned subsidiaries.
(2) In the second quarter of 1996, the Company estimated an additional $9.0
million of policyholder dividends (offset by a $0.6 million credit for
forfeited dividends declared in 1995) would be paid due to favorable loss
experience related to policy years 1987 through 1992. This policyholder
dividend was paid to members of the Exchange in the form of premium credits
during 1997. The Company has ceased paying such dividends to its
policyholders.
(3) Basic earnings per share of common stock at December 31, 1997 is computed
using the weighted average number of common shares outstanding during the
year of 12,108,330. All other periods give effect to the Reorganization
completed on January 29, 1997, including the allocation of approximately
10,000,000 shares of common stock to members of the Exchange in connection
therewith. The adoption of Statement of Financial Accounting Standards No.
128 (Statement 128), "Earnings per Share" had no impact on the calculation
of basic earnings per share amounts. For further discussion of basic
earnings per share and Statement 128 see the notes to the consolidated
financial statements beginning on page 42.
26
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the related notes thereto appearing elsewhere in this Form 10-K.
The financial statements for 1997 include the accounts and operations of SCPIE
Holdings Inc. and its wholly-owned subsidiaries. The financial statements for
1996 and prior years include the accounts and operations of the Southern
California Physicians Insurance Exchange (the Exchange) and its wholly-owned
subsidiaries and certain affiliates.
For purposes of this Form 10-K, the terms "SCPIE" and the "Company" refer, at
all times prior to January 29, 1997, to the Exchange and its subsidiaries,
collectively, and at all times on or after such date, to SCPIE Holdings Inc. and
its subsidiaries, collectively; and the term "SCPIE Holdings" refers at all
times to SCPIE Holdings Inc., excluding its subsidiaries.
GENERAL
On January 29, 1997, SCPIE consummated its reorganization from a reciprocal
insurance company to a stock insurance company by merging with and into SCPIE
Indemnity Company (the Reorganization). In connection with the Reorganization,
9,994,652 shares of the Company's common stock were issued to members of the
Exchange in exchange for their membership interests in SCPIE, and 500,000 shares
of common stock were issued to SCPIE Indemnity.
On January 30, 1997, the Company made an initial public offering of 2,300,000
shares of its common stock. The net proceeds of approximately $36.4 million of
the common stock offering were used to capitalize the Company's insurance
company subsidiaries, to facilitate geographic expansion, and for general
corporate purposes.
Certain statements in the following discussion that are not historical in fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements regarding
the Company, its business, prospects and results of operations are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors are
discussed below and under "Business--Risk Factors" and in periodic filings with
the Securities and Exchange Commission.
CYCLICAL NATURE OF MEDICAL MALPRACTICE INSURANCE INDUSTRY Many factors
influence the financial results of the medical malpractice insurance industry,
several of which are beyond the control of the Company. These factors include,
among other things, changes in severity and frequency of claims; changes in
applicable law and regulatory reform; changes in judicial attitudes toward
liability claims; and changes in inflation, interest rates and general economic
conditions.
The availability of medical malpractice insurance, or the industry's
underwriting capacity, is determined principally by the industry's level of
capitalization, historical underwriting results, returns on investment and
perceived premium rate adequacy. Historically, the financial performance of the
medical malpractice industry has tended to fluctuate between a soft insurance
market and a hard insurance market. In a soft insurance market, competitive
conditions could result in premium rates and underwriting terms and conditions
that may be below profitable levels. For a number of years, the medical
malpractice insurance industry in California has faced a soft insurance market.
There can be no assurance as to whether or when industry conditions will improve
or the extent to which any improvement in industry conditions may improve the
Company's financial condition and results of operations.
CHANGING NATURE OF THE BUSINESS The vast majority of the Company's business is
professional liability insurance for physicians written on a claims made and
reported basis. The Company believes that the integration of healthcare delivery
in recent years, particularly in California, will result in the growing
importance of large medical groups and other healthcare entities, and a
corresponding change in the entities that make professional liability purchasing
decisions. The Company believes that these changes have created a need for the
Company to further diversify. As a result, the Company has adopted a strategy
for growth that includes expanding the type of products offered by the Company
and diversifying geographically by offering products in states other than
California. The Company began to implement its strategy in 1994 by offering
professional liability insurance to hospitals in California and, in 1995, began
offering errors and omissions coverage for managed care organizations.
In August 1995, the Company entered into a marketing arrangement with Sullivan,
Kelly & Associates (SKA) to expand its business to other states. Under the
agreement, SKA had the exclusive right to market the Company's malpractice
coverage for
27
<PAGE> 28
hospitals in all states, and the Company recognized SKA as the exclusive broker
for medical group coverage in all states other than California. In December
1996, SKA filed for bankruptcy in the United States Bankruptcy Court, Central
District of California, and its assets were acquired by another insurance
company in September 1997 in a court-approved transaction. Effective October 1,
1997, the Company and SKA mutually agreed to terminate their exclusive marketing
agreement. The Company now actively markets its hospital policies under a new
program directly and through regional and local brokers, and must compete with
SKA and a number of insurance companies in the underwriting of hospital
malpractice policies.
American Healthcare Indemnity Company (AHI), a subsidiary of SCPIE Holdings,
has formed a relationship with Poe & Brown, Inc. (Poe & Brown) one of the
nation's top independent insurance agency organizations, to provide professional
liability insurance to physicians commencing January 1, 1998. This coverage is
offered to solo physicians and medical groups in eight states, the largest being
Connecticut, Florida and Georgia. This replaces an existing program Poe & Brown
had established with another insurance company. There is no assurance, however,
that the Company will successfully retain or expand this business through Poe &
Brown or that it will ultimately be profitable.
In addition, AHI has acquired the medical malpractice insurance business of
Fremont Indemnity Company (Fremont) through a purchase agreement effective
January 1, 1998. Simultaneously, a 100% quota-share reinsurance agreement went
into effect, making SCPIE Indemnity the reinsurer for the Fremont policies
pending regulatory approval of AHI to write this business directly. The Fremont
policies are written through brokers in 10 states the vast majority in
California and Arizona.
COMPETITIVE ENVIRONMENT The California medical malpractice insurance market for
medical groups and physicians, in which the company principally operates, has
become extremely competitive in recent years. The Company's principal
competitors are three physician-owned companies and a physicians' mutual
protection trust. In addition, commercial insurance companies have recently
returned to the California market to insure medical groups and physicians.
In the late 1980s, many medical malpractice insurance companies began to
experience significantly improved claims cost trends and attempted to attract
medical groups and physicians insured by other companies by reducing premium
rates. Beginning in 1990, the Company implemented annual rate decreases
aggregating more than 25% during the next three years, which resulted in a
reduction in premium volume to approximately $107.1 million in 1992, and a
deterioration of underwriting results. Between 1993 and 1997, however, SCPIE
instituted annual overall rate increases ranging from 4.4% to 9.2% in order to
improve its underwriting results. These rate increases were higher than those
implemented by most of its competitors. As a result, the Company has lost some
of its policyholders, in part due to these rate increases, but realized a modest
increase in its premium volume and has improved its underwriting results.
The Company partially offset the effect of these rate increases through the
payment of dividends to the members of the Exchange in the form of premium
credits based on the actual results of prior policy years.
In 1996, the Board of Governors of the Exchange declared a final dividend to
members of the Exchange of record on November 5, 1996, which was paid in the
form of premium credits in 1997. This dividend of approximately $9.0 million
(offset by a $0.6 million credit for forfeited dividends declared in 1995) was
reflected as an expense in the year ended December 31, 1996. The Company has
ceased paying such premium credit dividends to its policyholders. Therefore, the
Company may find it more difficult to compete with other insurance companies
offering such dividends.
The Company has instituted no rate increases for 1998, which may offset the
elimination of dividends to policyholders and somewhat improve its competitive
position.
LOSS AND LAE RESERVES Medical malpractice and other property and casualty loss
and loss adjustment expense (LAE) reserves are established based on known facts
and interpretation of circumstances, including the Company's experience with
similar cases and historical trends involving claim payment patterns, loss
payments and pending levels of unpaid claims, as well as court decisions and
economic conditions. The effects of inflation are considered in the reserving
process. Establishment of appropriate reserves is an inherently uncertain
process, and there can be no assurance that currently established reserves will
prove adequate in light of subsequent actual experience. The Company follows a
practice of conservatively estimating its future liabilities relating to
losses already incurred and has attempted to establish its loss and LAE reserves
at the upper end of a reasonable range of reserve
28
<PAGE> 29
estimates. The Company believes that it has been particularly difficult to make
such estimates for medical malpractice claims in California because of the
uncertain benefits of tort reform measures and more recently a change in the
judicial process.
The Company believes that a combination of these and other factors have
contributed to the recent redundancies in reserves established by SCPIE for
prior years. The original reserves were established without full knowledge of
the effect of these factors. Redundant reserves, which have been released in
every year since 1985, have contributed significantly to reported earnings in
recent years. The Company reduced reserves for prior years by $53.2 million,
$59.7 million, and $57.8 million in the years ended December 31, 1997, 1996 and
1995, respectively. The Company cannot predict whether similar redundancies will
be experienced in future years. The Company continues to establish its loss and
LAE reserves at what it believes is the upper end of a reasonable range of
reserve estimates, but there is no assurance that such reserves will ultimately
prove to be redundant. The Company believes that some reduction in the amount of
the redundancies recently experienced is reasonably likely. If such redundancies
do not occur or loss and LAE experience does not improve, the Company's net
income could be significantly reduced or a net loss could occur.
OPERATING EXPENSES With its continued expansion into other states and markets,
the Company has experienced an increase in its operating expense levels to
achieve and service this expansion. Commissions for policies that are sold
through agents and brokers typically range from 7.5% to 17.5% of premiums,
whereas the Company does not incur commissions on products sold directly.
Hospital and other healthcare provider policies are typically sold through
brokers, as are physicians and medical group policies sold through Poe & Brown
and in the program acquired from Fremont. To the extent that these policies
represent an increased percentage of the Company's business in the future,
expense ratios will increase.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
PREMIUMS EARNED Premiums earned increased approximately $13.4 million, or 11.1%,
to $133.9 million in 1997 from $120.5 million in 1996. The increase was due to a
$5.7 million increase in hospital medical malpractice premiums and an increase
of $9.1 million in assumed reinsurance. Medical malpractice premiums from
physicians and medical groups were approximately $111.4 million in 1997 compared
to $112.7 million in 1996. An average 5.0% increase in premium rates in effect
during 1997 was offset by a 4.1% decrease in the average number of policies in
force during 1997 as compared to 1996. Hospital medical malpractice premiums
were approximately $8.0 million in 1997 compared to $2.3 million in 1996.
Assumed reinsurance premiums were approximately $13.6 million, which includes
$6.5 million of assumed hospital premiums in 1997 compared to less than $4.5
million in 1996.
NET INVESTMENT INCOME Net investment income increased approximately $1.9
million, or 4.8%, to $42.7 million in 1997 from $40.8 million in 1996. Invested
assets increased $67.8 million to $785.7 million in 1997 from $717.9 million at
December 31, 1996. The average pretax yield on the investment portfolio
decreased to 5.6% in 1997 compared to 6.1% in 1996 primarily due to
lower-yielding, tax-exempt bonds.
REALIZED INVESTMENT GAINS AND OTHER REVENUE Realized investment gains were
approximately $6.6 million in 1997 compared to $11.7 million in 1996.
Approximately $11.2 million of the gains from 1996 resulted from the sale of
equity securities in connection with the Company's decision in the first quarter
of 1996 to increase the focus of its investment portfolio on fixed-maturity
securities. In 1997 sales were made in the fixed-maturity portion of the
investment portfolio to reposition the portfolio by increasing the percentage of
tax-exempt securities.
LOSSES AND LAE Losses and LAE increased $14.6 million, or 13.4%, to $123.4
million in 1997 from $108.8 million in 1996. As a percentage of premiums earned,
losses and LAE increased to 92.2% in 1997 from 90.3% for the same period in
1996. For 1997, the Company reduced loss and LAE reserves incurred in prior
policy years approximately $53.2 million as compared to a reserve reduction of
$59.7 million for 1996 for claims incurred in prior policy years.
OTHER OPERATING EXPENSES Other operating expenses increased $3.7 million, or
26.0%, to $18.0 million in 1997 from $14.3 million in 1996. This increase was
principally attributable to increases in policy acquisition expenses,
payroll/benefit expenses, and legal and consultation fees of $1.1 million, $0.7
million, and $1.2 million, respectively. The ratio of other operating expenses
to premiums earned is referred to as the expense ratio, which was 13.4% in 1997
and 11.8% in 1996.
29
<PAGE> 30
POLICYHOLDER DIVIDENDS The governing board of the Exchange declared a final
dividend to members of the Exchange of record on November 5, 1996, who were also
members of the Exchange during policy years 1987 through 1992. Such dividend was
paid in the form of premium credits during 1997. This dividend of $9.0 million
(offset by a $0.6 million credit for forfeited dividends declared in 1995) was
reflected as an expense for the year ended December 31, 1996.
FEDERAL INCOME TAXES Federal income taxes decreased $1.5 million, or 12.6%, to
$10.2 million in 1997 from $11.7 million in 1996. The effective tax rate
decreased to 24.1% in 1997 from 27.9% in 1996, due primarily to an increase in
tax-exempt interest in 1997.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
PREMIUMS EARNED Premiums earned increased approximately $4.1 million, or 3.5%,
to $120.5 million in 1996 from $116.4 million in 1995. The increase was
principally due to a $3.5 million increase in assumed reinsurance premiums.
Medical malpractice premiums from physicians and medical groups were
approximately $112.7 million in 1996 compared to $113.3 million in 1995. An
average 4.4% increase in premium rates in effect during 1996 was offset by a
4.2% decrease in the average number of policies in force during 1996 as compared
to 1995. Hospital medical malpractice premiums were approximately $2.3 million
in 1996 compared to $1.3 million in 1995. Assumed reinsurance premiums were
approximately $4.5 million in 1996 compared to less than $1.0 million in 1995.
NET INVESTMENT INCOME Net investment income, after a $0.4 million interest
expense accrual for a federal income tax settlement, increased approximately
$0.4 million, or 1.0%, to $40.8 million in 1996 from $40.4 million in 1995.
Invested assets increased $22.9 million to $717.9 million in 1996 from $695.0
million at December 31, 1995. The average pretax yield on the investment
portfolio increased to 6.1% in 1996 compared to 5.9% in 1995.
REALIZED INVESTMENT GAINS AND OTHER REVENUE Realized investment gains were
approximately $11.7 million in 1996 compared to $8.0 million in 1995.
Approximately $11.2 million of the gains from 1996 resulted from the sale of
equity securities in connection with the Company's decision in the first quarter
of 1996 to increase the focus of its investment portfolio on fixed-maturity
securities. The remainder was attributable to sales made in the fixed-maturity
portion of the investment portfolio to take advantage of more favorable yields
or to reposition the maturity of the portfolio.
LOSSES AND LAE Losses and LAE decreased $9.2 million, or 7.8%, to $108.8 million
in 1996 from $118.0 million in 1995. As a percentage of premiums earned, losses
and LAE decreased to 90.3% in 1996 from 101.4% for the same period in 1995. For
1996, the Company reduced loss and LAE reserves incurred in prior policy years
approximately $59.7 million as compared to a reserve reduction of $81.7 million
for 1995 for claims incurred in prior policy years. This reserve reduction of
$81.7 million was offset by a $23.9 million reserve increase for free tail
coverage to be provided by the Company to currently insured physicians at the
time of their death, disability or retirement. This increase was the result of a
refinement in the actuarial methodology used to calculate this reserve.
OTHER OPERATING EXPENSES Other operating expenses increased $1.7 million, or
13.7%, to $14.3 million in 1996 from $12.6 million in 1995. This increase was
principally attributable to increases in policy acquisition expenses and
payroll/benefit expenses of $0.6 million and $1.3 million, respectively, offset
partially by lower legal fees of $0.7 million. The expense ratio was 11.8% in
1996 and 10.8% in 1995.
POLICYHOLDER DIVIDENDS A final dividend to members of the Exchange of $9.0
million (offset by a $0.6 million credit for forfeited dividends declared in
1995) was reflected as an expense for the year ended December 31, 1996.
Dividends declared in prior years have been accrued as an expense for the period
in which the related premiums were earned and not the year paid or declared.
Accordingly, there is no expense reflected in 1995.
FEDERAL INCOME TAXES Federal income taxes increased $1.6 million, or 16.0%, to
$11.7 million in 1996 from $10.1 million in 1995. The effective tax rate
decreased to 27.9% in 1996 from 29.2% in 1995, due primarily to an increase in
tax-exempt interest in 1996.
30
<PAGE> 31
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of the Company's liquidity are insurance premiums, net
investment income, recoveries from reinsurers and proceeds from the maturity or
sale of invested assets. Funds are used to pay losses, LAE, operating expenses,
reinsurance premiums and taxes. The Company has also paid significant dividends,
in the form of premium credits, to its members in each year since 1980. The
Company paid $9.0 million and $9.9 million of such dividends during the years
ended December 31, 1997 and 1996, respectively. The Company has now ceased
paying such premium credit dividends to its policyholders.
SCPIE has consistently experienced positive cash flow from operations. Because
of uncertainty related to the timing of the payment of claims, cash from
operations for a property and casualty insurance company can vary substantially
from year to year. Cash provided by operating activities for SCPIE, before the
payment of dividends to policyholders, was $13.5 million in 1997 compared to
$39.8 million in 1996. The higher amount of cash flow from operations in 1996
was due to a refund of federal income tax and interest of $25.9 million in
settlement of a tax dispute for the 1985 through 1988 tax years.
The Company invests its positive cash flow from operations in both
fixed-maturity securities and equity securities. The Company's current policy is
to limit its investment in equity securities and real estate to no more than
8.0% of the total market value of its investments. Accordingly, the Company's
portfolio of unaffiliated equity securities was reduced from $61.1 million at
December 31, 1995, to $23.5 million at December 31, 1997. The Company plans to
continue this focus on fixed-maturity securities for the indefinite future. The
Company has made limited investments in real estate, which has been used almost
entirely in the Company's operating activities, with the remainder leased to
third parties.
The Company maintains a portion of its investment portfolio in high-quality,
short-term securities to meet short-term operating liquidity requirements,
including the payment of losses and LAE. Short-term investments totaled $53.3
million, or 6.8% of invested assets, at December 31, 1997. The Company believes
that all of its short-term and fixed-maturity securities are readily marketable.
SCPIE Holdings is an insurance holding company whose assets primarily consist
of all of the capital stock of its insurance company subsidiaries and
approximately $36.4 million of net proceeds from a January 1997 common stock
offering. In 1997, along with the net proceeds from the common stock offering,
and dividends from its insurance subsidiaries, SCPIE has contributed $25.0
million to American Healthcare Specialty Insurance Company and another $23.0
million to AHI. Its principal sources of funds are dividends from its
subsidiaries and proceeds from the issuance of debt and equity securities. The
insurance company subsidiaries are restricted by state regulation in the amount
of dividends they can pay in relation to earnings or surplus, without the
consent of the applicable state regulatory authority, principally the California
Department of Insurance. SCPIE Holdings' principal insurance company subsidiary
may pay dividends to SCPIE Holdings in any year, without regulatory approval, to
the extent such dividends do not exceed the greater of (i) 10% of its statutory
surplus at the end of the preceding year or (ii) its net income for the
preceding year. Applicable regulations further require that an insurer's
statutory surplus following a dividend or other distribution be reasonable in
relation to its outstanding liabilities and adequate to meet its financial
needs, and permit the payment of dividends only out of statutory earned
(unassigned) surplus unless the payment out of other funds receives regulatory
approval. The amount of dividends that the insurance company subsidiaries are
able to pay to SCPIE Holdings during 1998 without prior regulatory approval is
approximately $27.5 million. Dividends of $20.0 million were paid during 1997.
Common stock dividends paid to stockholders were $0.20 per share in 1997.
These dividends are funded through dividends from the Company's insurance
subsidiaries. The Company expects to pay dividends in the future. However,
payment of dividends is subject to Board approval, earnings and the financial
condition of the Company.
The Company has received a commitment from a large lender for a bank facility
in the amount of $50.0 million. The commitment is subject to certain terms and
conditions as well as negotiation and completion of all documentation. The
Company expects to use this facility for general corporate purposes.
Based on historical trends, market conditions and its business plans, the
Company believes that its sources of funds will be sufficient to meet its
liquidity needs over the next 18 months and beyond. However, because economic,
market and regulatory conditions may change, there can be no assurance that the
Company's sources of funds will be sufficient to meet these liquidity needs. The
short- and long-term liquidity requirements of the Company may vary because of
the uncertainties regarding the settlement dates for unpaid claims.
31
<PAGE> 32
The Company is in the process of seeking leased space for its operations. The
Company has not entered into any commitments to date. The Company expects to use
its cash flow from current operations to pay for any additional space and
capital equipment.
During May 1997, the Board of Directors authorized the repurchase of up to
1,000,000 shares of its common stock in the open market. The repurchase may
begin at any time and continue until May 1998. During 1997, 15,400 shares were
repurchased. Subsequent to December 31, 1997, an additional 55,800 shares were
repurchased.
IMPACT OF YEAR 2000
Based on our assessments in prior years, the Company has determined
modification of significant portions of its software were required so that its
computer systems would function properly with respect to dates in the year 2000
and thereafter. The Company has utilized internal resources to reprogram, or
replace and test, the software for Year 2000 modifications. The Company
estimates that approximately 85% of the most important changes have been made
and anticipates completing the entire project by December 31, 1998. The total
cost of the Year 2000 project since its inception in 1995 is estimated at $1.8
million, of which approximately $734,000 was incurred through December 31, 1997.
There can be no assurance, however, that there will not be a delay in or
increased costs associated with the completion and implementation of such
changes, and the Company's inability to implement such changes could have an
adverse effect on future results of operations.
The Company has initiated formal communications with its significant suppliers
to determine the extent to which the Company's interface systems are vulnerable
to those third parties' failure to remediate their own Year 2000 issues.
However, there can be no assurance that the systems of other companies on which
the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's systems.
EFFECT OF INFLATION
The primary effect of inflation on the Company is considered in pricing and
estimating reserves for unpaid losses and LAE for claims in which there is a
long period between reporting and settlement, such as medical malpractice
claims. The actual effect of inflation on the Company's results cannot be
accurately known until claims are ultimately settled. Based on actual results to
date, the Company believes that loss and LAE reserve levels and the Company's
ratemaking process adequately incorporate the effects of inflation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and related notes, including
supplementary data, are set forth in the "Index" on page 37 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Directors of the Company is incorporated by reference to
the section entitled "Election of Directors" in the Company's definitive proxy
statement to be filed with the SEC in connection with the Annual Meeting of
Stockholders to be held on May 14, 1998 (the "Proxy Statement"). Information
regarding Executive Officers is set forth in Item 1 of Part I of this Form 10-K
report under the caption "Executive Officers."
32
<PAGE> 33
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Stock Ownership of Directors and Executive
Officers."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Relationships and Related
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a)(1) and (a)(2) and (d) FINANCIAL STATEMENTS AND SCHEDULE. Reference is
made to the "Index--Financial Statements and
Financial Statement Schedule--Annual Report on Form
10-K" filed on page 37 of this Form 10-K report.
(a) (3) Exhibits:
<TABLE>
<CAPTION>
NUMBER DOCUMENT
------ --------
<S> <C>
2. Amended and Restated Plan and Agreement of Merger by
and among SCPIE Holdings Inc., SCPIE Indemnity Company and Southern
California Physicians Insurance Exchange dated August 8, 1996, as
amended December 19, 1996.**
3.1 Amended and Restated Certificate of Incorporation.**
3.2 Amended and Restated Bylaws.**
10.1 Amended and Restated Employment Agreement dated
January 2, 1998, between SCPIE Management Company and
Donald J. Zuk.
10.2 Letter of Credit Agreement dated February 11, 1998 between Union
Bank of California, N.A. and American Healthcare Indemnity Company
in the amount of $7,674,561.
10.3 Letter of Credit Agreement dated February 11, 1998 between Union
Bank of California, N.A. and American Healthcare Indemnity Company
in the amount of $1,000,000.
10.4 Letter of Credit Agreement dated January 11, 1995 between First
Interstate Bank and Southern California Physicians Insurance
Exchange in the amount of $27,368,087.**
10.5 Letter of Credit Agreement dated January 26, 1995 between
First Interstate Bank and Southern California Physicians
Insurance Exchange for a $5,000,000 Secured Standby
Letter of Credit Facility.**
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
NUMBER DOCUMENT
------ --------
<S> <C>
10.6 First Excess of Loss Treaty No. 01-95-0020 with various
subscribing reinsurers.**
10.7 Second Excess of Loss Treaty No. 01-95-0021 with various
subscribing reinsurers.**
10.8 Third Excess of Loss Treaty No. 01-95-0022 with various
subscribing reinsurers.**
10.9 Fourth Excess of Loss Treaty No. 01-95-0599 with various
subscribing reinsurers.**
10.10 Per Policy Excess of Loss Treaty No. 01-94-0365 with
various subscribing reinsurers.**
10.11 Reinstatement/Retroactive/Aggregate Extension Excess of
Loss Treaty No. 01-95-0879 with various subscribing
reinsurers.**
10.12 Medical Malpractice Surplus Reinsurance Treaty between SCPIE and
Lloyd's Syndicate No. 1010 and Syndicates Comprising 1007 Group
underwritten for by CW Spreckley, Esq. and others, effective date
January 1, 1996, Treaty No.
01-95-0374.**
10.13 Physician Medical Malpractice/Hospital Professional Liability Quota
Share Reinsurance Agreement between Hannover Ruckversicherungs,
Aktiengesellschaft/Eisen Und Stahl
Ruckversicherungs-Aktiengesellschaft, Hannover, Germany, and
various subscribing reinsurers, effective date January 1, 1995,
Treaty No. 01-95-0694.**
10.14 First Excess of Loss Treaty No. 01-96-0020 with various
subscribing reinsurers.**
10.15 Second Excess of Loss Treaty No. 01-96-0021 with various
subscribing reinsurers.**
10.16 Third Excess of Loss Treaty No. 01-96-0022 with various
subscribing reinsurers.**
10.17 Fourth Excess of Loss Treaty No. 01-96-0599 with various
subscribing reinsurers.**
10.18 Per Policy Excess of Loss Treaty No. 01-96-0365 with
various subscribing reinsurers, reference is made to Exhibit
10.9.**
10.19 Addendum No. 1 to the
Reinstatement/Retroactive/Aggregate Extension Excess of
Loss Treaty No. 01-96-0879 with various subscribing
reinsurers, reference is made to Exhibit 10.11.**
10.20 Quota Share Reinsurance Agreement Treaty No. 01-96-
0922.**
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
NUMBER DOCUMENT
------ --------
<S> <C>
10.21 First Excess of Loss Treaty No. 01-97-0020 with various
subscribing reinsurers.
10.22 Second Excess of Loss Treaty No. 01-97-0021 with various
subscribing reinsurers.
10.23 Third Excess of Loss Treaty No. 01-97-0022 with various
subscribing reinsurers.
10.24 Fourth Excess of Loss Treaty No. 01-97-0599 with various
subscribing reinsurers.
10.25 Per Policy Excess of Loss Treaty No. 01-97-0365 with
various subscribing reinsurers.
10.26 Addendum No. 2 to the
Reinstatement/Retroactive/Aggregate Extension Excess of
Loss Treaty No. 01-97-0879 with various subscribing
reinsurers, reference is made to Exhibit 10.11.
10.27 Quota Share Reinsurance Treaty No. 1-97-0922.
10.28 Allocated Loss Adjustment Expense Excess of Loss Treaty
No. 01-97-1154 with various subscribing reinsurers.
10.29 Cover Note for First Excess of Loss Reinsurance Treaty No.
01-97-1134 with various subscribing reinsurers.
10.30 Cover Note for Second Excess of Loss Reinsurance Treaty
No. 01-97-1135 with various subscribing reinsurers.
10.31 Cover Note for First Excess of Loss Reinsurance Treaty No.
01-98-0020 with various subscribing reinsurers.
10.32 Cover Note for Second Excess of Loss Reinsurance Treaty
No. 01-98-0021 with various subscribing reinsurers.
10.33 Cover Note for Third Excess of Loss Reinsurance Treaty No.
01-98-0022 with various subscribing reinsurers.
10.34 Cover Note for Fourth Excess of Loss Reinsurance Treaty
No. 01-98-0023 with various subscribing reinsurers.
10.35 Cover Note for Quota Share Reinsurance Treaty No. 1-98-
0922.
10.36 SCPIE Management Company Retirement Income Plan, as amended and
restated, effective January 1, 1989.**
10.37 Supplemental Employee Retirement Plan for Selected
Employees of SCPIE Management Company dated January
1, 1995.**
10.38 Retirement Plan for Outside Governors and Affiliated
Directors, effective January 1, 1994 as amended.**
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
NUMBER DOCUMENT
------ --------
<S> <C>
10.39 The SMC Cash Accumulation Plan, dated July 1, 1991, as
amended.**
10.40 Inter-Company Pooling Agreement effective January 1,
1997.
10.41 SCPIE Holdings Inc. and subsidiaries Consolidated Federal
Income Tax Liability Allocation Agreement effective
January 1, 1996.
10.42 The 1997 Equity Participation Plan of SCPIE Holdings Inc.
10.43 Form of Indemnification Agreement.**
11.1 Statement re: computation of per share earnings.
21.1 Subsidiaries of the registrant.
27.1 Financial Data Schedule.
</TABLE>
- ------------
(**) Previously filed as Exhibits to the Company's Registration Statement on
Form S-1 (No. 33-4450), declared effective by the SEC on January 29, 1997
and incorporated herein by this reference.
(b) Reports on Form 8-K:
None.
36
<PAGE> 37
SCPIE HOLDINGS INC.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
ANNUAL REPORT ON FORM 10-K
---------------
INDEX
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Auditors...................................... 38
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996 39
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995................................ 40
Statements of Changes in Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995................................ 40
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995................................ 41
Notes to Consolidated Financial Statements 42
Schedule II - Condensed Financial Information of Registrant 53
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
37
<PAGE> 38
Report of Independent Auditors
Board of Directors
SCPIE Holdings Inc.
We have audited the accompanying consolidated balance sheets of SCPIE Holdings
Inc. and subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SCPIE Holdings
Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
February 23, 1998
38
<PAGE> 39
SCPIE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ------------ -------- --------
<S> <C> <C>
ASSETS
Securities available for sale (Note 2):
Fixed-maturity investments, at fair value
(amortized cost: 1997 - $692,811; 1996 - $660,820) $ 708,860 $ 668,367
Equity investments, at fair value
(cost: 1997 - $17,052; 1996 - $15,555) 23,523 19,977
--------- ---------
Total securities available for sale 732,383 688,344
Short-term investments 53,281 29,566
--------- ---------
Total investments 785,664 717,910
Cash 13,252 4,212
Accrued investment income 12,202 11,198
Reinsurance recoverable (Note 4) 21,531 19,266
Deferred federal income taxes (Note 5) 16,158 20,221
Deferred acquisition costs 520 591
Property and equipment, net 19,534 19,084
Other assets 19,588 12,673
--------- ---------
Total assets $ 888,449 $ 805,155
========= =========
LIABILITIES
Reserves:
Losses and loss adjustment expenses (Note 3) $ 454,971 $ 459,567
Unearned premiums 22,072 25,297
--------- ---------
Total reserves 477,043 484,864
Policyholders' dividends payable -- 7,723
Other liabilities 50,291 24,001
--------- ---------
Total liabilities 527,334 516,588
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY
Preferred stock - par value $0.0001, 5,000,000 shares
authorized, no shares issued or outstanding -- --
Common stock - par value $0.0001, 30,000,000 shares
authorized 12,792,091 shares issued,
12,276,691 shares outstanding 1 --
Additional paid-in capital 36,386 --
Retained earnings 310,506 280,788
Treasury stock, at cost (15,400 shares) (416) --
Net unrealized appreciation on securities
available for sale, net of deferred taxes 14,638 7,779
--------- ---------
Total stockholders' equity 361,115 288,567
--------- ---------
Total liabilities and stockholders' equity $ 888,449 $ 805,155
========= =========
</TABLE>
See accompanying notes.
39
<PAGE> 40
SCPIE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------- --------- --------- ---------
<S> <C> <C> <C>
REVENUES
Premiums earned (Note 4) $ 133,866 $ 120,484 $ 116,354
Net investment income (Note 2) 42,716 40,769 40,424
Realized investment gains (Note 2) 6,602 11,738 7,950
Other revenue 551 375 281
--------- --------- ---------
Total revenues 183,735 173,366 165,009
EXPENSES
Losses and loss adjustment expenses (Note 3) 123,377 108,797 118,023
Other operating expenses 17,987 14,276 12,561
--------- --------- ---------
Total expenses 141,364 123,073 130,584
--------- --------- ---------
Income before policyholder dividends
and federal income taxes 42,371 50,293 34,425
Policyholder dividends -- 8,436 --
Federal income taxes (Note 5) 10,195 11,665 10,056
--------- --------- ---------
Net income $ 32,176 $ 30,192 $ 24,369
========= ========= =========
Basic earnings per share of common stock (Note 1) $ 2.66 $ 3.02 $ 2.44
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
ADDITIONAL (DEPRECIATION) TOTAL
PREFERRED COMMON PAID-IN RETAINED TREASURY ON SECURITIES, STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK NET EQUITY
--------- ------- ---------- --------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 .. $ -- $ -- $ -- $ 226,227 $ -- ($ 16,691) $ 209,536
Net income ................ -- -- -- 24,369 -- -- 24,369
Net unrealized appreciation -- -- -- -- -- 39,914 39,914
------ ------- --------- --------- -------- --------- ---------
Balance at December 31, 1995 -- -- -- 250,596 -- 23,223 273,819
Net income ................ -- -- -- 30,192 -- -- 30,192
Net unrealized depreciation -- -- -- -- -- (15,444) (15,444)
------ ------- --------- --------- -------- --------- ---------
Balance at December 31, 1996 -- -- -- 280,788 -- 7,779 288,567
Net income ................ -- -- -- 32,176 -- -- 32,176
Issuance of common stock .. -- 1 36,386 -- -- -- 36,387
Purchase of treasury stock -- -- -- -- (416) -- (416)
Cash dividends ............ -- -- -- (2,458) -- -- (2,458)
Net unrealized appreciation -- -- -- -- -- 6,859 6,859
------ ------- --------- --------- -------- --------- ---------
Balance at December 31, 1997 $ -- $ 1 $ 36,386 $ 310,506 $ (416) $ 14,638 $ 361,115
====== ======= ========= ========= ======== ========= =========
</TABLE>
See accompanying notes.
40
<PAGE> 41
SCPIE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------- --------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ..................................... $ 32,176 $ 30,192 $ 24,369
Adjustments to reconcile net income to net
cash provided by operating activities:
Unpaid losses and loss adjustment expenses,
and reinsurance recoverables ............. (12,950) (6,301) (2,796)
Accrued investment income .................. (1,004) (1,363) 1,301
Provision for deferred federal income taxes 370 80 158
Unearned premiums .......................... (3,225) 5,381 (2,012)
Policyholders' dividends payable ........... (7,723) (923) (9,501)
Realized investment gains .................. (6,602) (11,738) (7,950)
Provisions for amortization and depreciation 4,938 2,837 4,504
Changes in other liabilities ............... 579 11,212 430
Changes in other assets .................... (755) 9,468 3,029
--------- --------- ---------
Net cash provided by operating activities ...... 5,804 38,845 11,532
INVESTING ACTIVITIES
Purchases - fixed maturities ................... (410,381) (480,401) (269,149)
Sales - fixed maturities ....................... 335,210 375,877 235,332
Maturities - fixed maturities .................. 38,073 23,571 15,909
Purchases - equities ........................... (7,692) (5,445) (37,033)
Sales - equities ............................... 10,312 50,495 37,510
Change in short-term investments, net .......... 4,201 (1,783) 3,772
--------- --------- ---------
Net cash used in investing activities .......... (30,277) (37,686) (13,659)
FINANCING ACTIVITIES
Issuance of common stock, net of expenses ...... 36,387 -- --
Purchase of treasury stock .................... (416) -- --
Cash dividends ................................. (2,458) -- --
--------- --------- ---------
Net cash provided by financing activities ...... 33,513 -- --
Increase (decrease) in cash .................... 9,040 1,159 (2,127)
Cash at beginning of year ...................... 4,212 3,053 5,180
--------- --------- ---------
Cash at end of year ............................ $ 13,252 $ 4,212 $ 3,053
========= ========= =========
</TABLE>
See accompanying notes.
41
<PAGE> 42
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying 1997 financial statements include the accounts and operations,
after intercompany eliminations, of SCPIE Holdings Inc. (SCPIE Holdings) and its
wholly-owned subsidiaries, principally SCPIE Indemnity Company (SCPIE
Indemnity), American Healthcare Indemnity Company (AHI), American Healthcare
Specialty Insurance Company (AHSIC) and SCPIE Management Company (SMC),
collectively, the Company.
On January 29, 1997, the Southern California Physicians Insurance Exchange
(the Exchange) consummated its plan and agreement of merger (the Merger
Agreement) whereby the Exchange reorganized from a reciprocal insurer to a stock
insurance company and became a wholly-owned subsidiary of SCPIE Holdings (the
Reorganization). Pursuant to the Reorganization, the Exchange merged with and
into SCPIE Indemnity, a California stock insurance company and a wholly-owned
subsidiary of SCPIE Holdings, the surviving corporation of the Reorganization.
The assets and liabilities of the Exchange that were merged into SCPIE Indemnity
were accounted for at historical cost in a manner similar to that in a pooling
of interests.
The principal purpose of the Reorganization was to improve SCPIE's access to
the capital markets and to raise capital to permit the growth of existing
business and develop new business opportunities in the professional liability
insurance industry. The Reorganization also provided members of the Exchange
with shares of common stock in SCPIE Holdings.
Concurrent with the Reorganization, SCPIE Holdings completed an initial public
offering, which generated net proceeds to SCPIE Holdings of approximately $36.4
million.
SCPIE Holdings acquired the outstanding stock of AHI (formerly FG Insurance
Corporation) and AHSIC (formerly FG Casualty Company), both inactive
property/casualty insurance companies for $12.5 million in March 1996. The
transaction was accounted for as a purchase and the excess of the purchase price
over the net book value ($5.9 million) was recorded as goodwill and amortized
over a period of 10 years. SCPIE Holdings has utilized these companies to enter
geographic markets outside California.
The accompanying 1996 financial statements include the accounts and
operations, after intercompany eliminations, of the Exchange and its
wholly-owned subsidiaries, principally SCPIE Holdings, SCPIE Indemnity, AHI,
AHSIC, and SMC.
The 1995 financial statements have been combined using the consolidated
balance sheets and results of operations of the Exchange and the Organization of
Southern California Physicians (OSCAP). OSCAP was the holding company of SMC,
the Exchange's attorney-in-fact. All transactions between the Exchange and OSCAP
have been eliminated in the preparation of the combined financial statements. On
July 12, 1996, OSCAP was liquidated into the Exchange, and SMC and its
subsidiaries became subsidiaries of the Exchange.
The Company principally writes professional liability insurance for
physicians, oral and maxillofacial surgeons, hospitals and other healthcare
providers. Substantially all of the Company's coverage is written on a "claims
made and reported" basis. Generally, coverage is provided only for claims that
are first reported to the Company during the insured's coverage period and which
arise from occurrences during the insured's coverage period. The Company also
makes "tail" coverage available for purchase by policyholders in order to cover
claims that arise from occurrences during the insured's coverage period, but
which are first reported to the Company after the insured's coverage period and
during the term of the applicable tail coverage.
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known that could impact
the amounts reported and disclosed herein.
42
<PAGE> 43
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which differ from statutory accounting
practices prescribed or permitted by regulatory authorities. The significant
accounting policies followed by the Company that materially affect financial
reporting are summarized below:
INVESTMENTS
Recognizing the need for the ability to respond to changes in market conditions
and in tax positions, the Company has designated its entire investment portfolio
as available-for-sale. The Company has no securities classified as "trading" or
"held-to-maturity." Transfers between categories are severely restricted.
Changes in fair values of available-for-sale securities, after adjustment of
deferred income taxes, are reported as unrealized appreciation or depreciation
directly in stockholders' equity and, accordingly, have no effect on net income.
For the mortgage-backed bond portion of the fixed-maturity securities
portfolio, the Company recognizes income using a constant effective yield based
on anticipated prepayments and the estimated economic life of securities. When
actual prepayments differ significantly from anticipated prepayments, the
effective yield is recalculated to reflect actual payments to date and
anticipated future payments. The net investment in the security is adjusted to
the amount that would have existed had the new effective yield been applied
since the acquisition of the security. That adjustment is included in net
investment income.
Premiums and discounts on investments are amortized to investment income using
the interest method over the contractual lives of the investments. Short-term
investments are carried at cost, which approximates fair value. Realized
investment gains and losses are included as a component of revenues based on
specific identification of the investment sold.
DEFERRED ACQUISITION COSTS
Premium taxes are capitalized and amortized as premiums are earned over the
terms of the related policies. The deferred acquisition costs are amortized over
the effective period of the related policies.
PREMIUMS
Premiums are recognized as earned on a pro rata basis over the terms of the
respective policies.
UNEARNED PREMIUMS
Unearned premiums are calculated using the monthly pro rata basis over the terms
of the respective policies.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses (LAE) represent the estimated
liability for reported claims plus those incurred but not yet reported and the
related estimated adjustment expenses. The reserve for unpaid claims and related
adjustment expenses is determined using case-basis evaluations and statistical
analysis and represents estimates of the ultimate cost of all unpaid losses
incurred through December 31 of each year. Although considerable variability is
inherent in such estimates, management believes that the reserve for unpaid
losses and related LAE is adequate. The estimates are continually reviewed and
adjusted as necessary; such adjustments are included in current operations and
are accounted for as changes in estimates.
REINSURANCE
Reinsurance premiums, losses and loss adjustment expenses are accounted for on
bases consistent with those used in accounting for the original policies issued
and the terms of the reinsurance contracts.
DIVIDENDS TO POLICYHOLDERS
Dividends to policyholders are accrued during the period in which the related
premiums are earned. Estimates of policyholder dividends are reviewed and
adjusted as necessary; such adjustments are included in current operations and
accounted for as changes in
43
<PAGE> 44
estimates. In the second quarter of 1996, the Company estimated an additional
$9.0 million of policyholder dividends would be paid due to favorable loss
experience related to policy years 1987 through 1992. Except for this final
dividend, after the Reorganization, the Company has ceased paying such dividends
to its policyholders.
PROPERTY AND EQUIPMENT
Property and equipment, principally the Company's home office building, are
recorded at cost and depreciated principally under the straight-line method over
the useful life of the assets.
CREDIT RISK
Financial instruments, that potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and fixed
maturities. The Company places its temporary cash investments with high-credit
quality financial institutions and limits the amounts of credit exposure to any
one financial institution. Concentrations of credit risk with respect to fixed
maturities are limited due to the large number of such investments and their
distributions across many different industries and geographics.
Reinsurance is placed with a number of individual companies and syndicates at
Lloyd's of London to avoid concentration of credit risk. For the year ended
December 31, 1997, approximately 62% of total reinsurance premiums ceded were
placed with reinsurance companies with an A.M. Best or Insurance Solvency
International rating of A or better, including 38% with Hannover
Ruickversicherungs, and between 2% to 8% primarily among five other reinsurers.
Of the remaining reinsurance companies, Lloyds of London syndicates'
participation is 34%.
CREDIT FACILITY
The Company has received a commitment from a large lender for a bank facility in
the amount of $50.0 million. The commitment is subject to certain terms and
conditions as well as negotiations and completion of all documentation.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings Per Share" (FASB 128) which is effective for
quarters ending after December 15, 1997. Under FASB 128, primary earnings per
share will be replaced by basic earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Fully diluted earnings per share would not
change significantly but would be renamed diluted earnings per share. All
previously recorded earnings per share amounts require restatement to conform to
the new standard. The adoption of FASB 128 did not have an impact on any of the
Company's earnings per share calculations as it only has common stock
outstanding.
In June 1997, FASB issued Statement No. 130 "Reporting Comprehensive Income"
(FASB 130). FASB 130 establishes new rules for the reporting and display of
comprehensive income and its components. However, adoption in the first quarter
of 1998 will have no impact on the Company's net income or stockholders' equity.
FASB 130 requires unrealized gains or losses on the Company's available-for sale
securities, which are currently reported in stockholders' equity to be included
in other comprehensive income and the disclosure of total comprehensive income.
SEGMENT INFORMATION
The Company operates in the United States of America and in only one reportable
industry segment, that provides professional liability insurance for physicians,
oral and maxillofacial surgeons, hospitals and other healthcare providers
principally in California.
EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share of common stock for the year ended December 31, 1997 is
computed using the weighted average number of common shares outstanding during
the year of 12,108,330. Basic earnings per share of common stock for the years
ended December 31, 1996 and 1995 gives effect to the Reorganization and the
allocation of 10,000,000 shares of common stock to eligible members of the
Exchange.
44
<PAGE> 45
NOTE 2. INVESTMENTS
The Company's investments in available-for-sale securities are summarized as
follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
- --------------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C>
December 31, 1997
Fixed-maturity securities:
Bonds:
U.S. Government and Agencies $290,028 $ 8,182 $ 137 $298,073
State, municipalities and
political subdivisions ... 327,273 8,003 120 335,156
Mortgage-backed securities,
U.S. Government .......... 68,161 574 445 68,290
Corporate .................. 7,256 -- 8 7,248
Other ...................... 93 -- -- 93
-------- -------- -------- --------
Total fixed-maturity securities 692,811 16,759 710 708,860
Common stocks .................. 17,052 6,759 288 23,523
-------- -------- -------- --------
Total .......................... $709,863 $ 23,518 $ 998 $732,383
======== ======== ======== ========
December 31, 1996
Fixed-maturity securities:
Bonds:
U.S. Government and Agencies $272,315 $ 6,576 $ 1,962 $276,929
State, municipalities and
political subdivisions ... 300,347 4,788 1,674 303,461
Mortgage-backed securities,
U.S. Government .......... 83,031 593 774 82,850
Corporate .................. 5,027 -- -- 5,027
Other ...................... 100 -- -- 100
-------- -------- -------- --------
Total fixed-maturity securities 660,820 11,957 4,410 668,367
Common stocks .................. 15,555 4,864 442 19,977
-------- -------- -------- --------
Total .......................... $676,375 $ 16,821 $ 4,852 $688,344
======== ======== ======== ========
</TABLE>
The fair values for fixed-maturity securities are based on quoted market prices,
where available. For fixed-maturity securities not actively traded, fair values
are estimated using values obtained from independent pricing services. The fair
values for equity securities are based on quoted market prices.
The amortized cost and fair value of the Company's investments in
fixed-maturity securities at December 31, 1997, are summarized by stated
maturities as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
(IN THOUSANDS) COST VALUE
- -------------- ---------- ---------
<S> <C> <C>
Years to maturity:
One or less $ 2,349 $ 2,341
After one through five 89,663 91,519
After five through ten 241,715 249,699
After ten 290,923 297,011
Mortgage-backed securities 68,161 68,290
---------- ----------
Totals $ 692,811 $ 708,860
========= ==========
</TABLE>
The foregoing data is based on the stated maturities of the securities. Actual
maturities will differ for some securities because borrowers may have the right
to call or prepay obligations.
45
<PAGE> 46
The ratings of the Company's fixed-maturity securities at December 31, 1997,
using Moody's and Standard & Poor's rating services, are summarized as follows:
<TABLE>
<S> <C>
AAA 71.0%
AA 21.0%
A 7.3%
Not rated 0.7%
------
100.0%
======
</TABLE>
Major categories of the Company's investment income are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Fixed-maturity investments $ 39,926 $ 40,594 $ 36,987
Equity investments 840 994 1,627
Other 4,329 1,213 4,250
-------- -------- --------
Total investment income 45,095 42,801 42,864
Investment expenses 2,379 2,032 2,440
-------- -------- --------
Net investment income $ 42,716 $ 40,769 $ 40,424
======== ======== ========
</TABLE>
Realized gains and losses from sales of investments are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Fixed-maturity investments:
Gross realized gains $ 4,959 $ 6,419 $ 4,946
Gross realized losses 2,022 5,880 1,558
-------- -------- --------
Net realized gains $ 2,937 $ 539 $ 3,388
======== ======== ========
Equity investments:
Gross realized gains $ 3,854 $ 13,028 $ 6,649
Gross realized losses 189 1,829 2,087
-------- -------- --------
Net realized gains $ 3,665 $ 11,199 $ 4,562
======== ======== ========
</TABLE>
The change in the Company's unrealized appreciation (depreciation) on
fixed-maturity securities was $8.5 million, ($16.5 million) and $52.9 million
for the years ended December 31, 1997, 1996 and 1995, respectively; the
corresponding amounts for equity securities were $2.0 million, ($7.3 million),
and $8.5 million.
At December 31, 1997, the Company's investments in fixed-maturity securities
with a carrying amount of $22.0 million were on deposit with state insurance
departments to satisfy regulatory requirements.
No investment in any person or its affiliates exceeded 10% of the Company's
stockholders' equity at December 31, 1997.
46
<PAGE> 47
NOTE 3. LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and ending
reserve balances, net of reinsurance recoverable, for 1997, 1996 and 1995.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
- -------------- --------- --------- ---------
<S> <C> <C> <C>
Reserve for losses and LAE, net of related
reinsurance recoverable, at beginning of year $ 440,301 $ 446,627 $ 449,566
Provision for losses and LAE for claims occurring
in the current year, net of reinsurance 176,586 168,545 175,856
Decrease in estimated losses and LAE for claims
occurring in prior years, net of reinsurance (53,209) (59,748) (57,833)
--------- --------- ---------
Incurred losses during the year, net of reinsurance 123,377 108,797 118,023
Deduct losses and LAE payments for claims,
net of reinsurance, occurring during:
Current year 11,814 13,274 11,481
Prior years 118,424 101,849 109,481
--------- --------- ---------
130,238 115,123 120,962
Reserve for losses and LAE, net of related
reinsurance recoverable, at end of year 433,440 440,301 446,627
Reinsurance recoverable for losses and LAE,
at end of year 21,531 19,266 19,560
--------- --------- ---------
Reserves for losses and LAE, gross of
reinsurance recoverable, at end of year $ 454,971 $ 459,567 $ 466,187
========= ========= =========
</TABLE>
The Company's reserves for unpaid losses and LAE, net of related reinsurance
recoverable, at December 31, 1996, 1995 and 1994, were decreased in the
following year by $53.2 million, $59.7million, and $57.8 million, respectively,
for claims that had occurred on or prior to those balance sheet dates. Those
redundancies resulted primarily from settling case-basis reserves established in
prior years for amounts that were less than expected. The 1995 redundancies were
offset, in part, by a $23.9 million increase in the loss reserves carried for
physicians who receive free tail coverage in the event of death, disability or
retirement from the medical profession. The increase was the result of a
refinement in the actuarial methodology used to calculate the reserve for this
tail coverage.
The anticipated effect of inflation is implicitly considered when estimating
liabilities for losses and LAE. While anticipated price increases due to
inflation are considered in estimating the ultimate claim costs, the increase in
average severities of claims is caused by a number of factors that vary with the
individual type of insurance written. Future average severities are projected
based on historical trends adjusted for implemented changes in underwriting
standards, policy provisions, and general economic trends. Those anticipated
trends are monitored based on actual development and are modified if necessary.
47
<PAGE> 48
NOTE 4. REINSURANCE
Certain premiums and benefits are ceded to other insurance companies under
various reinsurance agreements. These reinsurance agreements provide the Company
with increased capacity to write additional risks and maintain its exposure to
loss within its capital resources. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policy. Some of these agreements include terms whereby the Company
earns a profit sharing commission if the reinsurer's experience is favorable.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. The failure of reinsurers to honor their obligations could result
in losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. The Company evaluates the financial condition and economic
characteristics of its reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies.
The effect of assumed and ceded reinsurance on premiums is summarized in the
following table.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
--------------------- --------------------- ---------------------
YEAR ENDED DECEMBER 31, WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
- ----------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct $123,910 $125,289 $125,289 $124,281 $124,281 $124,118
Assumed 11,673 13,603 8,922 4,497 780 780
Ceded 4,941 5,026 8,239 8,294 8,544 8,544
-------- -------- -------- -------- -------- --------
Net premiums $130,642 $133,866 $126,318 $120,484 $114,513 $116,354
======== ======== ======== ======== ======== ========
</TABLE>
Reinsurance ceded reduced losses and loss adjustment expenses incurred by $5.4
million, $0.9 million and $1.4 million in 1997, 1996 and 1995, respectively.
The Company retains the first $1.0 million of losses incurred per incident and
has various reinsurance up to $20.0 million per incident for its physician
coverage and up to $45.0 million for its hospital coverage. The Company assumes
a small amount of reinsurance covering medical professional liability risks,
primarily in the United States, as well as participating in high-layer excess of
loss property catastrophe reinsurance for U.S. and international risks.
In November 1996, the Company entered into a six-year agreement with a third
party whereby the Company provided a $5.5 million letter of credit in exchange
for future gains or losses based on the underwriting index of a reinsurance
portfolio. The portfolio is composed of worldwide geographically dispersed
catastrophe excess of loss treaty reinsurance business. The Company will also
receive semiannual payments based on its notional amount ($5.0 million) at a
rate determined annually. On an annual basis, if the combined ratio of the
portfolio is below a stipulated underwriting index amount, the Company will
recognize a gain; if the combined ratio is between two stipulated underwriting
index amounts, the Company will not recognize a gain or loss; and, if the
combined ratio is greater than a stipulated underwriting index amount, the
Company will recognize a loss limited to its notional value plus any interest
earned during the agreement. At December 31, 1997, the amounts recorded in the
financial statements related to this agreement are not material.
The Company has acquired the medical malpractice insurance business of Fremont
Indemnity Company (Fremont) effective January 1, 1998 for $14.0 million. As part
of this transaction, the Company will assume $42.0 million in loss and LAE
reserves outstanding, and other net liabilities. In December 1997, the Company
received $28.0 million in investments related to this transaction, which has
been reflected in short-term investments and other liabilities at December 31,
1997. The Company entered into a 100% quota-share reinsurance agreement, making
SCPIE Indemnity the reinsurer for the Fremont policies pending regulatory
approval to write them directly. The Fremont policies are written in 10 states,
with the vast majority in California and Arizona.
48
<PAGE> 49
NOTE 5. FEDERAL INCOME TAXES
The components of the federal income tax provision in the accompanying
consolidated statements of income are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Current $ 9,825 $11,585 $ 9,898
Deferred 370 80 158
------- ------- -------
Total $10,195 $11,665 $10,056
======= ======= =======
</TABLE>
A reconciliation of income tax computed at the federal statutory tax rate to
total income tax expense is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Federal income tax at 35% $14,830 $14,650 $12,049
Increase (decrease) in taxes resulting from:
Tax-exempt interest (4,775) (3,124) 2,125)
Dividends received deduction (136) (139) (216)
Goodwill 220 148 --
Other 56 130 348
------- ------- -------
Total federal income tax expense $10,195 $11,665 $10,056
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR ENDED DECEMBER 31, 1997 1996
- -------------------------------------------- ------- -------
<S> <C> <C>
Deferred tax assets:
Discounting of loss reserves $22,122 $22,306
Unearned premium 1,545 1,771
Other 557 540
-------- -------
Total deferred tax assets 24,224 24,617
Deferred tax liabilities:
Deferred policy acquisition costs 182 207
Unrealized investment gains 7,882 4,189
Other 2 --
-------- --------
Total deferred tax liabilities 8,066 4,396
-------- --------
Net deferred tax assets $16,158 $20,221
======== =======
</TABLE>
Federal income taxes paid during 1997, 1996, and 1995 were $11.0 million,
$14.8 million and $9.9 million, respectively.
49
<PAGE> 50
NOTE 6. STATUTORY ACCOUNTING PRACTICES
SCPIE Indemnity, AHI and AHSIC are domiciled in California, Delaware and
Arkansas, respectively, and prepare their statutory- basis financial statements
in accordance with accounting practices prescribed or permitted by the
respective insurance departments. Currently, "prescribed" statutory accounting
practices include state laws, regulations, and general administrative rules, as
well as a variety of publications of the National Association of Insurance
Commissioners (NAIC). "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state, and may
change in the future. The NAIC is in the process of codifying statutory
accounting practices ("Codification"). Codification would likely change, to some
extent, prescribed statutory accounting practices and may result in changes to
the accounting practices that the Companies' insurance subsidiaries use to
prepare their statutory-basis financial statements. Codification, which is
expected to be approved by the NAIC in 1998, will require adoption by the
various states before it becomes the prescribed statutory basis of accounting
for insurance companies domesticated within those states. At this time, it is
unclear whether the states of California, Delaware and Arkansas will adopt
Codification. However, based on current draft guidance, management believes that
the impact of Codification will not be material to the statutory basis financial
statements of SCPIE Indemnity, AHI and AHSIC. Policyholders' surplus and net
income, as reported to the domiciliary state insurance department in accordance
with its prescribed or permitted statutory accounting practices, for the
insurance subsidiaries are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
- -------------- ---------- ----------- -----------
<S> <C> <C> <C>
Statutory net income for the year $ 32,239 $ 32,703 $ 24,393
Statutory capital and surplus at year end 321,289 254,679 235,352
</TABLE>
SCPIE Indemnity offers its insureds free tail coverage in the event of death,
total and permanent disability, and complete and permanent retirement. In 1993,
the NAIC published guidelines for establishing a reserve for future free tail
policies when the claims- made policy includes a provision for waiving a premium
charge in the event of death, disability or retirement of the insured. Based on
the NAIC guidelines, this reserve should be recorded as an unearned premium
reserve. Alternatively, it can be considered an unpaid loss with the permission
of the insurance entity's state insurance department. In 1997, SCPIE Indemnity
received written approval from the California Department of Insurance to record
this reserve as an unpaid loss. SCPIE Indemnity's statutory surplus would be
unaffected if the California Department of Insurance were to rescind its
permission for this treatment.
The maximum amount of dividends that may be paid by property/casualty
insurance companies without prior approval of the California Insurance
Commissioner is subject to restrictions relating to statutory surplus and net
income. In 1998, dividends of $27.5 million may be distributed from SCPIE
Indemnity to SCPIE Holdings without prior approval of the California Insurance
Commissioner.
50
<PAGE> 51
NOTE 7. BENEFIT PLANS
The Company has a 401(k) defined contribution plan and a noncontributory defined
benefit plan, which provide retirement benefits to all its employees. Under the
401(k) plan, the Company presently matches the employee's contribution. The
contribution expense for the 401(k) plan was $479,000, $418,000 and $389,000 for
the years ended December 31, 1997, 1996 and 1995, respectively. An additional
defined contribution plan that no longer accepts contributions will remain with
the trustee as funded at December 31, 1989, until retirement or termination of
all employees vested in the plan.
The Company also maintains a defined benefit pension plan whose benefits are
based on years of service and salary levels. The Company's policy is to fund the
pension plan up to the maximum deductible contributions the federal laws and
regulations permit.
Plan assets consist of investment funds and cash held in a bank money market
account.
Net pension expense consists of the following components:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR ENDED DECEMBER 31 1997 1996 1995
- ---------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 323 $ 291 $ 223
Interest on projected benefit obligation 161 123 73
Actual return on plan assets (527) (240) (282)
Net amortization and deferral 352 115 201
------ ------ ------
Net pension expense $ 309 $ 289 $ 215
====== ====== ======
</TABLE>
The following table sets forth the funding status of the plan:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31 1997 1996
- ------------------------------------------------------ -------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $1,559,000 in 1997 and $988,000 in 1996 $(2,000) $(1,378)
======= =======
Projected benefit obligation $(2,501) $(1,764)
Plan assets 2,758 1,966
------- -------
Plan assets in excess of
projected benefit obligations 257 202
Unrecognized net loss from past experience
different from that assumed (27) (31)
Unrecognized past service cost (12) (13)
Unrecognized net asset at January 1 (159) (76)
------- -------
Prepaid pension expense $ 59 $ 82
======= =======
</TABLE>
The projected benefit obligation for 1997, 1996 and 1995 was determined using an
assumed discount rate of 7%, 7.25% and 7%, respectively, and an assumed rate of
compensation increase of 5% for 1997, 1996 and 1995. The expected long-term rate
of return on plan assets was 8% in 1997, 1996 and 1995.
The Company also has enacted a nonqualified supplemental employee retirement
agreement for selected employees which provides benefits retroactively from
January 1, 1990. At December 31, 1996 and 1995, the projected benefit obligation
for this unfunded plan was $2.7 million and $2.1 million, respectively, of which
the accumulated benefit obligation of $1.8 million and $1.2 million,
respectively, is accrued as a liability in the consolidated balance sheets.
Pension expense for this plan was approximately $394,000, $349,000 and $258,000
in 1997, 1996 and 1995, respectively.
51
<PAGE> 52
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in an action brought by the bankruptcy estate of an
uninsured physician. The bankruptcy estate alleged that the Company had an
undisclosed conflict of interest when it provided the physician with a free
courtesy defense by an attorney who had represented the interests of the
Company's insureds in other cases. The jury awarded compensatory damages of $4.2
million, and punitive damages were reduced to $14.0 million by the trial judge.
The Company believes that the action is entirely without merit and plans to
aggressively pursue its rights on appeal. However, the ultimate resolution of
this matter cannot be determined at this time and could result in a loss to the
Company.
Since 1981, the Company has purchased annuities from life insurance companies
to fund obligations under structured settlement agreements with certain medical
malpractice claimants. Annuities having an aggregate purchase price of
approximately $12.3 million were purchased from Executive Life Insurance Company
(ELIC), which was placed in conservatorship during 1991 the California Insurance
Commissioner. Substantially all of the assets of ELIC have been transferred to
another insurer, which has assumed the restructured annuities and is obligated
to pay varying percentages of the original annuity benefits as they become due.
The Company has determined that it is contractually obligated for the shortfall
amounts under certain of these annuities. At December 31, 1997, a reserve of
$4.0 million (net of expected reinsurance recoveries of $3.0 million) was
recorded to cover these expected shortfall payments. The Company believes that
the amount of its obligations in excess of the existing reserves, if any, is not
material to its financial positions or results of operations.
The Company is named as defendant in various legal actions primarily arising
from claims made under insurance policies and contracts. These actions are
considered by the Company in estimating the loss and loss adjustment expense
reserves. The Company's management believes that the resolution of these actions
will not have a material adverse effect on the Company's financial position or
results of operations.
NOTE 9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for 1997 and 1996 are summarized
as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------- ------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
- ------------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums earned and other revenues $ 36,563 $ 32,837 $ 33,126 $ 31,891 $ 31,505 $ 29,714 $ 29,071 $ 30,569
Net investment income 10,572 10,637 10,798 10,709 10,561 10,409 10,245 9,554
Realized investment gains (losses) 1,212 1,975 989 2,426 12,804 (1,308) 58 184
Net income 8,121 8,004 7,320 8,731 13,744 333 5,772 10,343
Basic earnings per share of common stock (1) $ 0.70 $ 0.65 $ 0.60 $ 0.71 $ 1.38 $ 0.03 $ 0.58 $ 1.03
</TABLE>
(1) Gives effect in all periods to the Reorganization and the allocation of
10,000,000 shares of common stock to eligible members of the Exchange.
52
<PAGE> 53
Schedule II - Condensed Financial Information of Registrant
SCPIE Holdings Inc.
Condensed Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Investments
Available for sale fixed maturity investments,
at fair value (amortized cost: 1997 - $3,004) $ 2,994 $ --
Short-term investments 272 --
Investment in subsidiaries 356,179 13,489
--------- ---------
Total investments 359,445 13,489
Cash 227 417
Due from subsidiaries 74 --
Other 1,241 433
--------- ---------
Total assets $ 360,987 $ 14,339
========= =========
LIABILITIES
Due to affiliates $ -- $ 403
Other (128) 6
--------- ---------
Total liabilities (128) 409
Stockholders' equity:
Preferred stock - par value $0.0001,
5,000,000 shares authorized,
no shares issued or outstanding -- --
Common stock par value $0.0001,
30,000,000 shares authorized, 12,792,091
shares issued, 12,276,691 shares outstanding 1 --
Additional paid-in capital 36,386 13,999
Retained earnings (deficit) 310,506 (69)
Treasury stock, at cost (15,400 shares) (416) --
Net unrealized appreciation on securities
available for sale, net of deferred taxes 14,638 --
--------- ---------
Total stockholders' equity 361,115 13,930
--------- ---------
Total liabilities and stockholders' equity $ 360,987 $ 14,339
========= =========
</TABLE>
See accompanying notes.
53
<PAGE> 54
Schedule II - Condensed Financial Information of Registrant (continued)
SCPIE Holdings Inc.
Condensed Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
TWELVE
MONTHS TEN MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Dividend from subsidiary $ 20,000 $ --
Net investment income 804 16
Realized investment losses (10) --
Other expenses (1,287) (1)
-------- --------
Earnings before federal income taxes and
equity in income (loss) of subsidiaries 19,507 15
Federal income taxes 37 (5)
-------- --------
Earnings before equity in income (loss) of
subsidiaries 19,470 10
Equity in income (loss) of subsidiaries 12,706 (79)
-------- --------
Net income (loss) $ 32,176 $ (69)
======== ========
</TABLE>
Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
TWELVE MONTHS TEN MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 32,176 $ (69)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Realized investment losses 10 --
Due to affiliates -- 403
Due from subsidiaries (74) --
Changes in other assets and liabilities (1,345) (427)
Equity in undistributed (income) loss of subsidiaries (12,706) 79
-------- --------
Net cash provided by (used in) operating activities 18,061 (14)
INVESTING ACTIVITIES
Purchase of subsidiaries -- (12,119)
Purchases - fixed maturities (22,881) --
Sales - fixed maturities 19,389 --
Change in short-term investments (272) --
Capital contribution to subsidiaries (48,000) (1,050)
-------- --------
Cash used in investing activities (51,764) (13,169)
FINANCING ACTIVITIES
Issuance of common stock, net of expenses 36,387 --
Purchase of treasury stock (416) --
Cash dividends (2,458) --
Capital contribution from parent -- 13,000
-------- --------
Cash provided by financing activities 33,513 13,000
Decrease in cash (190) (183)
Cash at beginning of period 417 600
-------- --------
Cash at end of period $ 227 $ 417
======== ========
</TABLE>
See accompanying notes.
54
<PAGE> 55
Schedule II - Condensed Financial Information of Registrant (continued)
SCPIE Holdings Inc.
Notes to Condensed Financial Statements
December 31, 1997
1. REORGANIZATION
On January 29, 1997, the Exchange consummated its plan and agreement of merger
whereby the Exchange reorganized from a reciprocal insurer to a stock insurance
company and became a wholly owned subsidiary of SCPIE Holdings (the
Reorganization). SCPIE Holdings has no historic operations and was organized in
February 1996, as part of the Exchange's plan to reorganize its corporate
structure. Pursuant to the Reorganization, the Exchange merged with and into
SCPIE Indemnity, a California stock insurance company and a wholly owned
subsidiary of SCPIE Holdings, the surviving corporation of the Reorganization.
2. BASIS OF PRESENTATION
In the SCPIE Holdings' financial statements, investment in subsidiaries is
stated at cost plus equity in undistributed earnings of subsidiaries since date
of acquisition. The SCPIE Holdings' financial statements should be read in
conjunction with the consolidated financial statements.
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SCPIE HOLDINGS, INC.,
By /s/ DONALD J. ZUK
-------------------------------------
Donald J. Zuk
President and Chief Executive Officer
March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report to be signed on its behalf of the Registrant and in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ DONALD J. ZUK President, Chief Executive Officer
- ----------------------------- and Director (Principal Executive
Donald J. Zuk Officer) March 31, 1998
/s/ PATRICK T. LO Vice President, Chief Financial
- ----------------------------- Officer and Chief Accounting
Patrick T. Lo Officer (Principal Financial
Officer and Principal Accounting
Officer) March 31, 1998
/s/ MITCHELL S. KARLAN, M.D. Chairman of the Board and
- ----------------------------- Director
Mitchell S. Karlan, M.D. March 31, 1998
/s/ JACK E. McCLEARY, M.D. Director and Treasurer March 31, 1998
- -----------------------------
Jack E. McCleary, M.D.
/s/ ALLAN K. BRINEY, M.D. Director March 31, 1998
- -----------------------------
Allan K. Briney, M.D.
/s/ WILLIS T. KING, JR. Director March 31, 1998
- -----------------------------
Willis T. King, Jr.
/s/ CHARLES B. McELWEE, M.D. Director March 31, 1998
- -----------------------------
Charles B. McElwee, M.D.
/s/ WENDELL L. MOSELEY, M.D. Director March 31, 1998
- -----------------------------
Wendell L. Moseley, M.D.
/s/ DONALD P. NEWELL Director March 31, 1998
- -----------------------------
Donald P. Newell
/s/ HARRIET M. OPFELL, M.D. Director March 31, 1998
- -----------------------------
Harriet M. Opfell
/s/ WILLIAM A. RENERT, M.D. Director March 31, 1998
- -----------------------------
William A. Renert, M.D.
/s/ HENRY L STOUTZ, M.D. Director March 31, 1998
- -----------------------------
Henry L Stoutz, M.D.
/s/ REINHOLD A. ULLRICH, M.D. Director March 31, 1998
- -----------------------------
Reinhold A. Ullrich, M.D.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is hereby made
and entered into this 2nd day of January, 1998, between SCPIE MANAGEMENT COMPANY
(formerly named Physicians Insurance Management, Inc.), a California corporation
("SCPIE Management"), and DONALD J. ZUK ("Executive").
RECITALS
A. Executive is and has been employed for a number of years in
a senior capacity in the administration of casualty insurance, including
particularly medical professional liability insurance. Through such employment
he has acquired outstanding experience and special skills and abilities in the
management and administration of professional liability insurance programs,
including the marketing, underwriting, loss prevention and claims management
aspects of such business.
B. Because of the unique nature of the employment position
involved and the experience, skills, abilities, background and knowledge of
Executive, SCPIE Management desires to continue to retain the services of
Executive for the term of this Agreement on the terms and conditions set forth
in this Agreement. Executive desires to remain in the employ of SCPIE Management
and is willing to accept such employment on the terms and conditions set forth
in this Agreement.
C. Executive originally served as the President and Chief
Executive Officer of SCPIE Management pursuant to the terms of an Employment
Agreement dated as of April 28, 1988, which was replaced by a new Employment
Agreement dated as of December 3, 1991 (the "December 1991 Agreement"). The
December 1991 Agreement was amended and restated each subsequent year to extend
the term and termination provisions for a period of one additional
<PAGE> 2
year, and most recently on January 2, 1997, SCPIE Management and Executive
further amended and restated the Agreement to extend the term and termination
provisions for an additional period of one year (the "1997 Amended and Restated
Agreement"). SCPIE Management and Executive desire to further amend and restate
the 1997 Amended and Restated Agreement to extend the term and termination
provisions for an additional period of one year.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing Recitals and
the mutual promises and covenants set forth herein, SCPIE Management and
Executive agree as follows:
1. Employment, Duties and Term.
SCPIE Management hereby hires and employs Executive,
and Executive agrees to serve as an executive of SCPIE Management under and
subject to all of the terms, conditions and provisions hereof, for the period
commencing December 3, 1991 and terminating on December 31, 2002, unless earlier
terminated pursuant to paragraph 3 hereof. Executive agrees to serve as
President and Chief Executive Officer of SCPIE Management, and in such other
positions as may be determined by the Board of Directors of SCPIE Management.
Executive's duties shall be as designated by SCPIE Management's Board of
Directors and shall be subject to such policies and directives as may be
established or given by such Board of Directors from time to time. Executive
agrees that, as an officer of SCPIE Management, he will faithfully serve in such
capacities during the term of this Agreement, except as herein otherwise
provided. Executive further agrees to devote his best efforts and his entire
attention and energy to such service.
2
<PAGE> 3
2. Compensation and Benefits.
(a) SCPIE Management agrees to pay to Executive,
for his services to SCPIE Management hereunder, compensation at the initial rate
of $344,800 per annum commencing December 9, 1991. Said compensation shall be
payable in bi-weekly payments. During the term hereof, Executive's yearly
compensation rate under this paragraph 2(a) shall be increased annually
(commencing as of January 1, 1992 and continuing as of each succeeding January
1) by a percentage equal to the percentage increase (if any) in the United
States Department of Labor, Bureau of Labor Statistics Consumer Price Index for
All Items, All Urban Consumers (CPI-U), for the Los Angeles area, for the
preceding calendar year. In the event that such Index (or a successor Index) is
not available, a reliable governmental publication evaluating the information
theretofore used in determining the Index shall be used in lieu of such Index.
(Pursuant to the terms of this provision, Executive's yearly compensation rate
was increased to $435,200.00 as of January 1, 1997, and was also increased by
the Board of Directors of SCPIE Management as of January 1, 1998 to $475,000.00
before inclusion of the CPI-U adjustment of the 1997 salary level.)
(b) Annually during the term hereof, the Board of
Directors of SCPIE Management will consider whether to provide bonuses to
Executive and additional increases in Executive's compensation rate; provided,
however, that during the time that SCPIE Management is a wholly-owned subsidiary
of SCPIE Holdings Inc. ("SCPIE Holdings"), SCPIE Management shall not provide
any bonuses or additional increases in Executive's compensation rate under this
paragraph unless such bonus or increase has been specifically approved in
writing by SCPIE Holdings. Additional increases in Executive's compensation rate
which are made pursuant to this paragraph (if any) and which are in effect at
the time this Agreement is terminated, shall,
3
<PAGE> 4
for the purposes of paragraphs 3(a)(i) or (ii), 3(c)(ii) or 3(e)(ii), be
considered to be included in the compensation rate in effect under paragraph
2(a) at the date of such termination.
(c) During the term hereof, Executive shall be
entitled to participate in such medical, dental, life and disability insurance
programs, pension and other retirement programs and other benefits as are now
and may from time to time become generally available to executives of SCPIE
Management in accordance with the then existing personnel policies of SCPIE
Management. During the term hereof, Executive shall also be entitled to one
month of annual vacation, the dates to be selected each year by Executive.
(d) During the term hereof, SCPIE Management shall
pay for or reimburse Executive for amounts incurred or advanced by him (as
membership fees, initiation fees and monthly dues) in obtaining and maintaining
a membership at the Jonathan Club, Los Angeles, California. SCPIE Management
shall also pay for or reimburse Executive for such ordinary and necessary
business expenses as Executive shall from time to time incur or advance in the
performance of his duties hereunder.
(e) During the term hereof, SCPIE Management
shall provide to Executive an automobile allowance consistent with such
allowance as is furnished to executives of SCPIE Management.
(f) With respect to the payment of counsel fees
for Executive, SCPIE Management agrees to pay for such fees in connection with
the drafting of this Agreement.
3. Termination of Service.
(a) SCPIE Management may terminate this Agreement
at any time, with or without cause, by giving 60 days' written notice to
Executive. In the event of such termination under this paragraph 3(a), SCPIE
Management shall be under no obligation except
4
<PAGE> 5
to pay to Executive his accrued and unpaid prorated compensation up to and
including the date of such termination, including earned but unused vacation,
plus either (i) in the event this Agreement is so terminated on or prior to
December 31, 2000, additional compensation equal to the amount payable to
Executive hereunder for two years at the rate in effect under paragraph 2(a)
hereof at the date of such termination, or (ii) in the event this Agreement is
so terminated after December 31, 2000, additional compensation equal to the
amount payable to Executive hereunder for one year at the rate in effect under
paragraph 2(a) hereof at the date of such termination. Such amount (if any)
payable under this paragraph 3(a) shall be payable between the 60th day after
the date of such termination and the 30th day after the first anniversary of the
date of such termination in such installments as Executive shall specify by
written notice given to SCPIE Management within ten days after the date of such
termination; provided, however, that if Executive does not give such written
notice within said ten-day period, such amount (if any) payable under this
paragraph 3(a) shall be payable in full on the 60th day after the date of such
termination.
(b) This Agreement also shall be terminated by the
death of Executive. In the event of the death of Executive during the term of
this Agreement, SCPIE Management shall be under no obligation except to pay to
the Executive's personal representative the Executive's accrued but unpaid
prorated compensation up to and including the date of his death, including
earned but unused vacation.
(c) This Agreement shall also be terminated at such
time as Executive becomes disabled (as hereinafter defined) from performing his
duties under this Agreement in his normal and regular manner. In the event this
Agreement is terminated by such disability, SCPIE Management shall be under no
obligation except to pay to Executive (i) his accrued but
5
<PAGE> 6
unpaid prorated compensation up to and including the date of such termination
including earned but unused vacation, plus (ii) additional compensation equal to
the amount payable to Executive hereunder for six months, at the rate in effect
under paragraph 2(a) hereof at the date of such termination. Such amount (if
any) payable under paragraph 3(c)(ii) shall be payable in equal bi-weekly
payments. Executive shall be considered "disabled" if, at the end of any month,
Executive then is and has been, either for the four consecutive full calendar
months then ending or on sixty percent or more of his normal working days during
the six consecutive full calendar months then ending, unable due to mental or
physical illness or injury to perform his duties under this Agreement in his
normal and regular manner.
(d) Executive may terminate this Agreement at any
time, with or without cause, by giving 90 days' written notice to SCPIE
Management. In the event of such termination under this paragraph 3(d), SCPIE
Management shall be under no obligation except to pay Executive his accrued but
unpaid prorated compensation up to and including the date of such termination,
including earned but unused vacation.
(e) Unless this Agreement is terminated earlier
pursuant to any of the foregoing subparagraphs of this paragraph 3, this
Agreement shall automatically terminate on December 31, 2002, and, in the event
of such termination on such date, SCPIE Management shall be under no obligation
except to pay to Executive (i) his accrued and unpaid prorated compensation up
to and including such date, including earned but unused vacation, plus (ii)
additional compensation equal to the amount payable to Executive hereunder for
one year at the rate in effect under paragraph 2(a) hereof on December 31, 2002.
Such amount (if any) payable under paragraph 3(e)(ii) shall be payable between
March 1, 2003 and January 10, 2004 in such installments as Executive shall
specify by written notice given to SCPIE Management on or
6
<PAGE> 7
before January 10, 2003; provided, however, that if Executive does not give such
written notice on or before January 10, 2003, such amount (if any) payable under
paragraph 3(e)(ii) shall be payable in full on March 1, 2003.
(f) In the event that Executive's services
hereunder are terminated under any of the provisions of this Agreement (except
by death), Executive agrees that if at that time he is President of SCPIE
Management, he will, promptly upon the written request of the Board of Directors
of SCPIE Management, deliver his written resignation as such President to the
Board of Directors, such resignation to become effective immediately.
4. Assignment and Binding Effect.
This Agreement shall not be transferable or assignable
by Executive or SCPIE Management, nor shall Executive's or SCPIE Management's
interest herein be transferred or assigned by operation of law, and any
assignment or attempted assignment, transfer, mortgage, hypothecation, or pledge
of this Agreement or of his interest herein by Executive or SCPIE Management
shall be null and void. This provision, however, shall have no application to
transfers made by reason of the death of the Executive.
5. Arbitration.
Any controversy or claim arising out of or relating to
this Employment Agreement shall be settled by arbitration in accordance with the
Rules of the American Arbitration Association, and judgment upon the award
rendered by the Arbitrators may be entered in any Court having jurisdiction
thereof. If a controversy or claim results in an award, that award shall also
provide that the prevailing party be reimbursed by the non-prevailing party for
the prevailing party's reasonable attorneys' fees and costs incurred in
connection with the arbitration.
7
<PAGE> 8
6. Notices.
Any notice required or permitted to be given under
this Agreement by one party hereto to the other shall be sufficient if given or
confirmed in writing, first class mail, postage prepaid, or by telegraph
addressed as respectively indicated: To SCPIE Management: SCPIE Management
Company 9441 W. Olympic Boulevard Beverly Hills, CA 90212 Attn: Chairman of the
Board
To SCPIE Management: SCPIE Management Company
9441 W. Olympic Boulevard
Beverly Hills, CA 90212
Attn: Chairman of the Board
To Executive: Donald J. Zuk
c/o SCPIE Management Company
9441 W. Olympic Boulevard
Beverly Hills, CA 90212
or to such other address as the respective parties may designate in writing to
the other designate.
7. Unique Nature of Executive's Services.
Executive is obligated under this Agreement to render
services of special, unusual, extraordinary and intellectual character, thereby
giving his Agreement peculiar value, so that the loss thereof could not be
reasonably or adequately compensated in damages or an action of law. In addition
to other remedies provided by law, SCPIE Management shall have the right during
the term of this Agreement to compel specific performance hereof by Executive
and/or to obtain injunctive relief against the performance of services elsewhere
by Executive.
8. Withholdings.
All payments made by SCPIE Management under any
provision of this Agreement shall be subject to any deductions and withholdings
required by applicable law.
9. Governing Law.
This Agreement shall be governed by the laws of the
State of California.
8
<PAGE> 9
10. Amendment of the December 1991 Agreement.
The 1997 Amended and Restated Agreement between
Executive and SCPIE Management is hereby amended and restated in its entirety by
this Amended and Restated Employment Agreement.
IN WITNESS WHEREOF, SCPIE Management has caused this Agreement
to be executed by its officer thereunto duly authorized and Executive has
executed this instrument, all as of the day and year first above written.
SCPIE MANAGEMENT COMPANY
By: /s/ JOSEPH P. HENKES
-------------------------------
Its: Senior V.P. & Secretary
EXECUTIVE:
/s/ DONALD J. ZUK
------------------------------------
Donald J. Zuk
9
<PAGE> 10
GUARANTY
1. FOR VALUE RECEIVED and in consideration for, and as an
inducement to Donald J. Zuk (the "Executive") concurrently entering into an
Amended and Restated Employment Agreement dated as of January 2, 1998, in place
of the Amended and Restated Employment Agreement made and entered into as of
January 2, 1997 with SCPIE Management Company, SCPIE Holdings Inc. ("SCPIE
Holdings") guarantees to Executive, and his successors and assigns, the full
payment by SCPIE Management Company to Executive of the compensation required to
be paid by SCPIE Management Company to Executive under paragraph 2 and
paragraphs 3(a)(i) or (ii), 3(c)(ii) or 3(e)(ii) of said Agreement on the terms
and conditions set forth in said Agreement.
2. This Guaranty cannot otherwise be terminated or modified
without the written consent of Mr. Donald J. Zuk.
3. If any dispute arises pertaining to this Guaranty, such dispute
will be submitted to binding arbitration in accordance with the Rules of the
American Arbitration Association, and judgment upon such award rendered by the
Arbitrators may be entered in any court having jurisdiction. If the controversy
or claim results in an award, that award shall provide the prevailing party be
reimbursed by the non-prevailing party for the prevailing party's reasonable
attorneys' fees and costs incurred in connection with the Arbitration.
Executed in Los Angeles, California, as of January 2, 1998.
SCPIE HOLDINGS INC.
By: /s/ JOSEPH P. HENKES
--------------------------------
Its: Senior V.P. & Secretary
<PAGE> 1
EXHIBIT 10.2
SOUTHERN CALIFORNIA Irrevocable Standby Letter
INTERNATIONAL OPERATIONS CENTER of Credit No. 306S231013
1980 Saturn Street, VO1-519
Monterey Park, California 91755-7417
Attention: Standby Letter of Credit Section
Date: February 11, 1998
BENEFICIARY APPLICANT
RELIANCE INSURANCE COMPANY AMERICAN HEALTHCARE
77 Water Street INDEMNITY COMPANY
New York, New York 10005 9441 W. Olympic Blvd.
Beverly Hills, California 90212-4541
Currency : USD
Amount : 7,674,561.00 (SEVEN MILLION SIX HUNDRED SEVENTY FOUR
THOUSAND FIVE HUNDRED SIXTY-ONE AND NO/100 U.S. DOLLARS).
Available by : PAYMENT AT THIS OFFICE.
Final Expiry Date : DECEMBER 31, 1998 or any automatically extended date as
herein set forth at the close of business of this office
in MONTEREY PARK, CALIFORNIA.
Ladies/Gentlemen:
We hereby issue our Irrevocable Standby Letter of Credit No. 306S231013 ("Letter
of Credit") in your favor. This Letter of Credit is effective from December 31,
1997. This Letter of Credit is available by sight payment with ourselves only
against presentation at this office of the following documentation:
1. A sight draft drawn on us purportedly signed by an authorized
representative or officer of the Beneficiary, marked: "DRAWN UNDER UNION
BANK OF CALIFORNIA, N.A., IRREVOCABLE STANDBY LETTER OF CREDIT NO.
306S231013, DATED FEBRUARY 11, 1998."
The term "Beneficiary" includes any successor by operation of law of the named
beneficiary including, without limitation, any liquidator, any rehabilitator,
receiver or conservator.
o This Letter of Credit shall be deemed automatically extended without an
amendment for a one year period beginning on the present expiration date
hereof, DECEMBER 31, 1998, and upon each anniversary of such date, unless
at least thirty (30) days prior to any such expiration date we have sent
you written notice by courier service or overnight mail that we elect not
to permit this Letter of Credit to be so extended beyond its then current
expiration date.
-Continued-
<PAGE> 2
Our Reference: No. 306S231013
Page 2
- --------------------------------------------------------------------------------
This Letter of Credit sets forth in full the terms of our undertaking, and such
terms shall not be modified, amended or amplified by any document, instrument or
agreement referred to in this Letter of Credit, in which this Letter of Credit
is referred to or to which this Letter of Credit relates.
Except as stated herein, this Letter of Credit is not subject to any condition
or qualification and is our individual obligation which is in no way contingent
upon reimbursement.
SPECIAL INSTRUCTIONS:
The original of this Letter of Credit must be presented together with the above
documents in order to endorse the amount of each drawing on the reserve side.
All banking charges under this Letter of Credit other than the Issuing Bank's,
except as noted herein, are for the account of the Applicant.
An interbank transfer fee of USD20.00 will be deducted from the proceeds if
settlement is to be remitted to an account at another bank.
We hereby agree with you that drafts drawn under and in compliance with the
terms of this Letter of Credit will be duly honored upon presentation and
delivery to Union Bank of California, N.A., at the address above. Documents are
to be sent in one lot by courier service, overnight mail or hand delivery.
This Letter of Credit is subject to and Governed by the Laws of the State of
California and the "Uniform Customs and Practice for Documentary Credits (1993
Revision)", International Chamber of Commerce Publication No. 500 except that in
the event we are closed on the date of expiration for reasons specified in
Article 17 thereof, we hereby specifically agree that drafts drawn under and in
compliance with the terms of this credit will be duly honored upon presentation
and delivery to Union Bank of California, N.A.,, at the address above, if
presented within thirty (30) days after the resumption of business. In the event
of any conflict, the Laws of the State of California will control.
UNION BANK OF CALIFORNIA, N.A.
International Operations Center
/s/ Grace Huang
- -------------------------------
Authorized Signature
<PAGE> 1
EXHIBIT 10.3
SOUTHERN CALIFORNIA Irrevocable Standby Letter
INTERNATIONAL OPERATIONS CENTER of Credit No. 306S231012
1980 Saturn Street, VO1-519
Monterey Park, California 91755-7417
Attention: Standby Letter of Credit Section
Date: February 11, 1998
BENEFICIARY APPLICANT
INSURANCE COMPANY OF THE WEST AMERICAN HEALTHCARE
11455 El Camino Real INDEMNITY COMPANY
SanDiego, California 92130-2045 9441 W. Olympic Blvd.
Beverly Hills, California 90212-4541
Currency : USD
Amount : 1,000,000.00 (ONE MILLION AND NO/100 U.S. DOLLARS).
Available by : PAYMENT AT THIS OFFICE.
Final Expiry Date : DECEMBER 31, 1998 or any automatically extended
date as herein set forth at the close of business
of this office in MONTEREY PARK, CALIFORNIA.
Ladies/Gentlemen:
We hereby issue our Irrevocable Standby Letter of Credit No. 306S231012 ("Letter
of Credit") in your favor. This Letter of Credit is effective from December 31,
1997. This Letter of Credit is available by sight payment with ourselves only
against presentation at this office of the following documentation:
1. A sight draft drawn on us purportedly signed by an authorized
representative or officer of the Beneficiary, marked: "DRAWN UNDER UNION
BANK OF CALIFORNIA, N.A., IRREVOCABLE STANDBY LETTER OF CREDIT NO.
306S231012, DATED FEBRUARY 11, 1998."
The term "Beneficiary" includes any successor by operation of law of the named
beneficiary including, without limitation, any liquidator, any rehabilitator,
receiver or conservator.
o This Letter of Credit shall be deemed automatically extended without an
amendment for a one year period beginning on the present expiration date
hereof, DECEMBER 31, 1998, and upon each anniversary of such date, unless
at least thirty (30) days prior to any such expiration date we have sent
you written notice by courier service or overnight mail that we elect not
to permit this Letter of Credit to be so extended beyond its then current
expiration date.
-Continued-
<PAGE> 2
Our Reference: No. 306S231012
Page 2
- --------------------------------------------------------------------------------
This Letter of Credit sets forth in full the terms of our undertaking, and such
terms shall not be modified, amended or amplified by any document, instrument or
agreement referred to in this Letter of Credit, in which this Letter of Credit
is referred to or to which this Letter of Credit relates.
Except as stated herein, this Letter of Credit is not subject to any condition
or qualification and is our individual obligation which is in no way contingent
upon reimbursement.
SPECIAL INSTRUCTIONS:
The original of this Letter of Credit must be presented together with the above
documents in order to endorse the amount of each drawing on the reserve side.
All banking charges under this Letter of Credit other than the Issuing Bank's,
except as noted herein, are for the account of the Applicant.
An interbank transfer fee of USD20.00 will be deducted from the proceeds if
settlement is to be remitted to an account at another bank.
We hereby agree with you that drafts drawn under and in compliance with the
terms of this Letter of Credit will be duly honored upon presentation and
delivery to Union Bank of California, N.A., at the address above. Documents are
to be sent in one lot by courier service, overnight mail or hand delivery.
This Letter of Credit is subject to and Governed by the Laws of the State of
California and the "Uniform Customs and Practice for Documentary Credits (1993
Revision)", International Chamber of Commerce Publication No. 500 except that in
the event we are closed on the date of expiration for reasons specified in
Article 17 thereof, we hereby specifically agree that drafts drawn under and in
compliance with the terms of this credit will be duly honored upon presentation
and delivery to Union Bank of California, N.A.,, at the address above, if
presented within thirty (30) days after the resumption of business. In the event
of any conflict, the Laws of the State of California will control.
UNION BANK OF CALIFORNIA, N.A.
International Operations Center
/s/ Grace Huang
- --------------------------------
Authorized Signature
<PAGE> 1
EXHIBIT 10.21
FIRST EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
The Subscribing Reinsurer(s) executing the
Interests and Liabilities Contract(s)
attached to and forming a part
of this Agreement
(hereinafter referred to as the "Reinsurer")
WITNESSETH:
The Reinsurer hereby reinsures the Company to the extent and the terms
and conditions subject to the exceptions, exclusions and limitations hereinafter
set forth and nothing hereinafter shall in any manner create any obligations or
establish any rights against the Reinsurer in favor of any third parties or any
persons not parties to this Agreement.
ARTICLE I.
BUSINESS COVERED:
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amount of ultimate net loss which the Company may pay as the
result of claims made during the term of this Agreement under the Company's
Physicians and Surgeons Comprehensive Professional and Business Liability
policies, including Clinics and Clinical Laboratories, Professional and Business
Liability policies for Hospitals and Errors and Omissions Liability policies for
Managed Care Organizations which are in force or may hereinafter come into force
during the term of this Agreement, except as excluded under the Exclusions
Article subject to the limitations set forth in the Limits of Cover Article.
Page 1 of 15
<PAGE> 2
ARTICLE II.
EXCLUSIONS:
This Agreement specifically excludes:
1. All liability of the Company arising by contract, operation of
law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund. "Insolvency
Fund" includes any guaranty fund, plan, pool, association, fund
or other arrangement, howsoever denominated, established or
governed which provides for any assessment of or payment or
assumption by the Company of part or all of any claim, debt,
charge, fee or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority
to be insolvent, or which is otherwise deemed unable to meet any
claim, debt, charge, fee or other obligation in whole or in
part.
2. Loss or Liability excluded by the provisions of the attached
"Nuclear Incident Exclusion Clause - Liability - Reinsurance".
3. All Assumed Reinsurance.
ARTICLE III.
TERM:
A. Except as provided in paragraph C. below, this Agreement shall apply to
claims made during the twelve (12) month period beginning January 1, 1997. In
the event a loss, as defined in the Definitions Article, involves a loss or
losses covered under the current Agreement Year and a prior Agreement Year(s) no
recovery shall be made hereunder in respect of any loss which occurred prior to:
1. January 1, 1979 as regards Extra Contractual Obligations (as
provided for in the Extra Contractual Obligations Clause
Article)
2. January 1, 1976 as regards all other business.
B. It is understood however, that in respect of Personal Liability and Discovery
Period coverage for Deceased, Disabled, Retired and Withdrawing Physicians and
for Physicians ceasing Medical Practice within the State, this Agreement covers
claims made during the period of this Reinsurance Agreement. In the event this
Agreement is not renewed, all such liability shall be assumed by the Company
with effect from the date of cancellation.
C. The provisions of paragraphs A. and B. notwithstanding, the Company may, at
its option, elect to continue to cover the in force portfolio of liability on
the date of expiration for a further period of twelve (12) months. Should the
Company exercise this option, the Company shall give the Reinsurer notice prior
to expiration that they wish to exercise this option. The Company shall pay to
the Reinsurer an additional premium thereon as set forth in the Premium Article.
Page 2 of 15
<PAGE> 3
D. If any law or regulation of the Federal, State or Local Government or any
jurisdiction in which the Company is doing business shall render illegal the
arrangements made herein, this Agreement can be terminated immediately insofar
as it applies to such jurisdiction by the Company giving notice to the Reinsurer
to such effect.
E. Notwithstanding the expiration of this Agreement as hereinabove provided, the
provisions of this Agreement shall continue to apply to all unfinished business
hereunder to the end that all obligations and liabilities incurred by each party
hereunder prior to such termination shall be fully performed and discharged.
ARTICLE IV.
ATTACHMENT OF LIABILITY:
A. For purposes of determining the attachment of the Reinsurer's liability
hereunder as respects any one loss, all losses (including Discovery Period
Losses) involving one or more Original Insureds, arising from the same medical
incident, and in which First Notice of Claim or Circumstance is notified to the
Company during the term of this Agreement shall be covered hereunder. Where
First Notice falls in Agreement Years prior to January 1, 1992 paragraph D.
(Interlocking Clause) of the Limits of Cover Article below, shall apply hereon
for Physicians and Surgeons Comprehensive Professional Liability policies only.
B. The date of loss hereunder shall be the earliest date, within the term of
this Agreement, that the Company has received First Notice of Claim or
Circumstance.
ARTICLE V.
LIMITS OF COVER:
A. The Company shall retain for its own account and pay under one or more of the
Company's policies the first $1,000,000 ultimate net loss, each and every loss
and the Reinsurer agrees to reimburse the Company for the amount of ultimate net
loss paid in excess of $1,000,000, each and every loss, but the Reinsurer's
maximum liability shall not exceed $1,000,000 resulting from each and every
loss.
B. Notwithstanding the foregoing, it is a condition hereto that an Annual
Aggregate Deductible of losses otherwise recoverable hereunder equal to 1% of
GNEPI shall first be deducted before any liability attaches to the Reinsurer
hereon.
C. The Reinsurer's maximum liability from all losses during the term of this
Agreement shall not exceed $8,500,000 or 182.5% of the Company's Reinsurance
Premiums Earned during the period, whichever is greater. It is further agreed
that the Reinsurer's maximum liability, as respects any elected run off period,
shall be limited to $8,500,000 or 182.5% of the Company's Reinsurance Premiums
Earned, whichever is greater, for said run-off period.
D. (This paragraph shall apply only to those claims where first notice of claim
or circumstance falls in Agreement Years prior to January 1, 1992.) As respects
each and every loss where this Agreement responds on a claims made basis, and
more than one insured or policy
Page 3 of 15
<PAGE> 4
is covered under this Agreement period with claims made dates falling in more
than one reinsurance agreement period, the limit and retention as respects
claims covered under this Agreement shall be the percentage of the Limit and
Retention under this Agreement that the amount of covered claim or claims
hereunder bears to the total of all covered claims from the same loss.
ARTICLE VI.
WARRANTY:
A. The Company warrants that as respects Professional and Business Liability
policies for Hospitals written on or after January 1, 1996, policy limits
greater than $500,000 reinsured elsewhere on an Excess of Loss basis or so
deemed.
B. The Company further warrants that as respects Professional and Business
Liability policies for Hospitals written prior to January 1, 1996, policy limits
greater than $5,000,000 reinsured elsewhere on an Excess of Loss basis or so
deemed.
ARTICLE VII.
DEFINITIONS:
A. The term "each and every loss" shall mean the happening of one or a series of
related acts, errors, or omissions to act, accidents or occurrences arising out
of one event.
B. The term "Gross Net Earned Premium Income" shall mean the gross earned
premium on business the subject matter hereof less cancellations and return
premiums and less premiums paid for reinsurance recoveries under which would
inure to the benefit of the Reinsurer.
Such Premium Income shall be understood to include:
1. that content of pre-paid premiums under policies in respect of
Deceased, Disabled and Retired Insureds, the coverage for which
becomes effective during the Agreement period.
2. the premium transferred internally by the Company from a prior
Agreement year or years, in respect of Deceased, Disabled and
Retired Insureds and in respect of other withdrawing Insureds who
have purchased extended coverage under Reporting Endorsements.
C. The term "claims made" as used herein shall mean (A) In respect of Claims
Made Policies, claims first notified to the Company during the term of this
Agreement on any in force policy or reporting endorsement arising out of
incidents subsequent to the retroactive date of said policy as the result of the
rendering of or failure to render a professional service or the reporting of
losses which arise from the insured premises and operations incidental to the
practice of a physician, hospital or managed care organization and/or (B) In
respect of Occurrence Policies, claims or losses first notified to the Company
during the term of this Agreement.
Page 4 of 15
<PAGE> 5
ARTICLE VIII.
NET RETAINED LINES:
A. This Agreement applies to only that portion of any insurance which the
Company retains net for its own account; and in calculating the amount of any
loss hereunder and also in computing the amount or amounts in excess of which
this Agreement attaches, only loss or losses in respect of that portion of any
insurance which the Company retains net for its own account shall be included.
B. The amount of the Reinsurer's liability hereunder in respect of any loss or
losses shall not be increased by reason of the inability of the Company to
collect from any other underwriters, whether specific or general, any amount
which may become due from them, whether such inability arises from the
insolvency of such other underwriters or otherwise.
ARTICLE IX.
ULTIMATE NET LOSS:
A. The term "ultimate net loss" as used herein shall be understood to mean the
sum actually paid by the Company in settlement of losses for which it is held
liable, including pre judgment interest when made part of the award or judgment,
80% of Extra Contractual Obligations and 100% of loss in Excess of Original
Policy Limits as provided in the respectively captioned Articles, after making
proper deductions for all recoveries, salvages, and claims upon other
reinsurances and insurances which inure to the benefit of the Reinsurer under
this Agreement, whether collectible or not, and shall exclude all loss
adjustment expenses (which shall be separately allocated and paid as provided in
paragraph B. below); provided, however, that in the event of the insolvency of
the Company, "ultimate net loss" shall mean the amount of loss which the Company
has incurred or for which it is liable, and payment by the Reinsurer shall be
made to the liquidator, receiver or statutory successor of the Company in
accordance with the provisions of the Insolvency Article in this Agreement.
Nothing in this clause, however, shall be construed to mean that losses under
this Agreement are not recoverable until the ultimate net loss of the Company
has been ascertained.
B. All loss adjustment expenses incurred in investigation, adjustment and
litigation, defense and settlement of claims made against the Company under its
original policies reinsured hereunder, including pre judgment interest when not
part of an award or judgment and post judgment interest, shall be apportioned in
proportion to the respective interests of the parties hereto in the ultimate net
loss. Office expenses and salaries of officials and employees not classified as
loss adjusters are not chargeable as expenses for the purpose of this paragraph.
C. In the event a verdict or judgment is reduced by an appeal or a settlement,
subsequent to the entry of a judgment, resulting in an ultimate saving on such
verdict or judgment, or a judgment is reversed outright, the expense incurred in
securing such final reduction or reversal shall (1) be prorated between the
Reinsurer and the Company in proportion that each benefits from such reduction
or reversal and the expense incurred up to the time of the original verdict or
judgment shall be prorated in proportion to each party's interest in such
verdict or judgment; or (2) when the terms and conditions of the Company's
original policies reinsured hereunder include expenses as part of the policy
limit, be added to the Company's ultimate net loss.
Page 5 of 15
<PAGE> 6
ARTICLE X.
PROFIT COMMISSION:
A. The Reinsurer shall make a Profit Commission allowance of 90% to the Company
on the net profits accruing to the Reinsurer under this Agreement period
(January 1, 1997 through December 31, 1997), computed as follows.
INCOME
1. Premiums earned by the Reinsurer during the Agreement period.
OUTGO
1. Losses and loss adjustment expenses incurred by the Reinsurer
during the Agreement period.
2. Allowance for Reinsurer's management expenses during the Agreement
period of 25% on the reinsurance premiums earned during the
Agreement period.
3. Deficit or underwriting loss, if any, brought forward from the
preceding Agreement period.
The amount by which INCOME exceeds OUTGO is profit.
The amount by which OUTGO exceeds INCOME is deficit.
B. The first calculation of Profit Commission shall be computed as of December
31, 1997, and annually thereafter, and the first and final payment of any Profit
Commission shall be made by the Reinsurers to the Company as of December 31,
2001. The Company agrees that Payment of any Profit Commission shall be subject
to complete commutation as respects all losses known and unknown within the
Profit Commission period. Payment of any Profit Commission by the Reinsurers
shall constitute full and final release from all further loss development.
C. For the purposes of this Article the phrase "losses incurred" means losses
paid plus loss adjustment expenses paid less salvages recovered in respect of
claims made during the period for which computation is being made, plus the
reserve for unpaid outstanding losses and loss adjustment expenses at the close
of the period, in respect of claims made during the period.
ARTICLE XI.
EXCESS OF ORIGINAL POLICY LIMITS:
A. This Agreement shall protect the Company, within the limits hereof, in
connection with any loss in excess of the limit of its original policy, such
loss in excess of the limit having been incurred because of failure by it to
settle within the policy limit, or by reason of alleged or actual negligence,
fraud or bad faith in rejecting an offer of settlement or in the preparation of
the defense or in the trial of any action against its insured or in the
preparation or prosecution of an appeal consequent upon such action.
Page 6 of 15
<PAGE> 7
B. However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
C. For the purposes of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original policy.
ARTICLE XII.
EXTRA CONTRACTUAL OBLIGATIONS CLAUSE:
A. This Agreement shall protect the Company within the limits hereof, where the
ultimate net loss includes Extra Contractual Obligations. "Extra Contractual
Obligations" are defined as those liabilities not covered under any other
provision of this Agreement and which arise from handling of any claim on
business covered hereunder, such liabilities arising because of, but not limited
to the following: failure by the Company to settle within the policy limit, or
by reason of alleged or actual negligence, fraud or bad faith in rejecting an
offer of settlement or in the preparation of the defense or in the trial of any
action against its insured or reinsured or in the preparation or prosecution of
an appeal consequent upon such action.
B. The date on which an Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original accident,
casualty, disaster or loss and furthermore, for the purposes hereof be deemed to
follow the claims made provisions of this Agreement, subject always to the
provisions of the Term Article.
C. However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
ARTICLE XIII.
CLAIMS:
A. In the event of a claim arising hereunder which either results in or appears
to be of serious enough nature as probably to result in a loss involving this
Agreement, the Company shall give notice as soon as reasonably practicable to
Reinsurers and the Company shall keep the Reinsurer advised of all subsequent
developments in connection therewith.
B. The Company shall also promptly notify the Reinsurers of all incidents
involving the following injuries for which the Company has established an
indemnity reserve of $550,000 or greater and with policy limits to affect
Reinsurers:-
1. Death of high wage earner with two or more dependents.
2. Brain Injury.
Page 7 of 15
<PAGE> 8
3. Nerve Injury.
4. Paralysis - cord injury.
5. Amputations.
6. Internal injuries which require continuous treatment (e.g.
Dialysis, Hyperalimentation, failure to diagnose).
7. Blindness.
C. All loss settlements made by the Company provided they are within the terms
of the Company's original policies and of this Agreement, shall be
unconditionally binding upon Reinsurer and amounts falling to the share of the
Reinsurer shall be payable to the Company in accordance with the provisions set
forth in paragraph C. of the Reports and Remittances Article.
ARTICLE XIV.
COMMUTATION CLAUSE:
The Company or the Reinsurer may, at any time express their desire to the
other party to commute all losses which are applicable to any Agreement year and
which are still unsettled. In such event the Company and the Reinsurer shall
mutually determine and evaluate such losses and the payment by the Reinsurer of
their proportion of the amount so ascertained and mutually agreed to be the
value of such losses shall relieve them of all further liability, in respect of
that Agreement year both in respect of known or unknown losses.
ARTICLE XV.
PREMIUM:
A. The Company shall pay to the Reinsurer a deposit premium of $3,450,000
payable in equal quarterly installments of $862,500 on January 1st, April 1st,
July 1st and October 1st, 1997. In the event the Company elects to run off its
policies in force until natural expiration, not to exceed twelve (12) months
from the expiration date hereon, the Company shall pay to the Reinsurer a
run-off premium equal to 50% of the Actual Earned Reinsurance Premium, as set
forth in paragraph B. The run-off premium shall be paid in equal quarterly
installments on January 1st, April 1st, July 1st and October 1st, 1998.
B. As soon as practicable after expiration of this Agreement, the Company shall
calculate the premium due the Reinsurer based on a rate of 2.88% of the Gross
Net Earned Premium Income accounted for by the Company during the term of this
Agreement on all business subject matter of the Agreement, subject to a minimum
premium of $2,760,000. In the event the premium due hereunder is greater than
the deposit premium paid, the difference shall be paid to the Reinsurer
forthwith. If the actual premium is less then the deposit premium paid, the
difference shall be refunded to the Company, subject to the minimum premium.
Page 8 of 15
<PAGE> 9
ARTICLE XVI.
REPORTS AND REMITTANCES:
A. The Company will provide the Reinsurer within forty-five (45) days at the end
of each quarter, all necessary data respecting premiums and losses, including
reserves thereon, as at dates and on forms mutually acceptable to the Company
and the Reinsurer.
B. Payments of deposit premium, provisional premium and adjusted premium shall
be made in accordance with the provisions of the Premium Article.
C. Payment by the Reinsurer of its portion of loss and loss expenses paid by the
Company will be made by the Reinsurer to the Company as soon as possible, but
not later than sixty (60) days after proof of payment by the Company is received
by the Reinsurer.
ARTICLE XVII.
OFFSET:
The Company and the Reinsurer shall have the right to offset any balance
or amounts due from one party to the other under the terms of this Agreement.
The party asserting the right of offset may exercise such right any time whether
the balances due are on account of premiums or losses or otherwise.
ARTICLE XVIII.
CONFIDENTIALITY CLAUSE:
A. This Agreement and the pre Agreement documentation may contain confidential
or proprietary information of either party to this Agreement. All parties shall
maintain the confidentiality of this information and shall not disclose these to
any third party without both parties approval.
B. Notwithstanding the above, any party may disclose such information without
further approval from the other party in answer to interrogations, subpoenas or
other legal/arbitration process as well as to the Company's reinsurance
intermediary hereon, the Reinsurer's retrocessionaires or in response to
requests by governmental and regulatory agencies. In addition the parties may
disclose such information to their accountants and outside legal counsel as may
be necessary.
ARTICLE XIX.
CURRENCY:
Premiums shall be payable by the Company and losses shall be paid to the
Company in United States currency.
Page 9 of 15
<PAGE> 10
ARTICLE XX.
FEDERAL EXCISE TAX:
(Applicable to those Reinsurers, excepting Underwriters at Lloyd's, London and
other Reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow, for the purpose of paying the Federal
Excise Tax, the applicable percentage of the premium payable hereon (as imposed
under Section 4371 of the Internal Revenue Service Code) to the extent such
premium is subject to the Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the Reinsurer
will deduct the aforesaid percentage from the return premium payable hereon and
the Company or its agent should take steps to recover the tax from the United
States government.
ARTICLE XXI.
ERRORS AND OMISSIONS:
Any inadvertent delay, omission or error shall not be held to relieve
either party hereto from any liability which would attach to it hereunder if
such delay, omission or error had not been made, provided such delay, omission
or error is rectified immediately upon discovery; provided, however, this
Article is not to override retroactive dates specified in the Term Article.
ARTICLE XXII.
ACCESS TO RECORDS:
A. The Company shall place at the disposal of the Reinsurer at all reasonable
times, and the Reinsurer shall have the right to inspect, through its authorized
representatives, all books, records and papers of the Company in connection with
this reinsurance hereunder or the subject matter thereof.
B. The Reinsurer shall be afforded the opportunity, at its own expense to
appoint an attorney of its own choice to assess the Company's claims procedures
who shall report to the Reinsurer the results of such.
ARTICLE XXIII.
FUNDING:
(This clause is only applicable to those Reinsurer(s) who cannot qualify for
credit by the State having jurisdiction over the Company's loss reserves.)
A. As regards policies or bonds issued by the Company coming within the scope of
this Agreement, the Company agrees that, when it shall file with the Insurance
Department or set up on its books reserves for losses covered hereunder which it
shall be required by law to set up, it will forward to the Reinsurer a statement
showing the proportion of such loss reserves which
Page 10 of 15
<PAGE> 11
is applicable to the Reinsurer. The Reinsurer hereby agrees that it will apply
for and secure delivery to the Company of a clean, irrevocable and unconditional
Letter of Credit, issued by a bank which is acceptable to the regulatory
authority(ies) having jurisdiction over the Company's loss reserves in an amount
equal to the Reinsurer's proportion of reserves in respect of known outstanding
losses that have been reported to the Reinsurer and allocated loss expenses
relating thereto, plus reserves for losses incurred but not reported, as shown
in the statement prepared by the Company.
B. The Letter of Credit shall be issued for a period of not less than one (1)
year, and shall be automatically extended for one (1) year from its date of
expiration or any future expiration date unless thirty (30) days prior to any
expiration date the issuing bank shall notify the Company by registered mail
that the bank elects not to consider the Letter of Credit extended for any
additional period. An issuing bank, not a member of the Federal Reserve System
or not chartered in New York State shall provide sixty (60) days notice to the
Company prior to any expiration in the event of non-extension.
C. Notwithstanding any other provision of this Agreement, the Company or its
successors in interest may draw upon such credit at any time without diminution
because of the insolvency of the Company or of the Reinsurer for one or more of
the following purposes only:
1. To pay the Reinsurer's share or to reimburse the Company for the
Reinsurer's share of any loss reinsured by this Agreement, the
payment of which has been agreed by the Reinsurer and which has
not been otherwise paid.
2. To make refund of any sum which is in excess of the actual amount
required to pay the Reinsurer's share of any liability reinsured
by this Agreement.
3. In the event of expiration of the Letter of Credit as provided for
above, to establish deposit of the Reinsurer's share of known and
reported outstanding losses and allocated expenses relating
thereto under this Agreement. Such cash deposit shall be held in
an interest bearing account separate from the Company's other
assets, and interest thereon shall accrue to the benefit of the
Reinsurer.
D. The issuing bank shall have no responsibility whatsoever in connection with
the propriety of withdrawals made by the Company or the disposition of funds
withdrawn, except to ensure that withdrawals are made only upon the order of
properly authorized representatives of the Company.
E. At annual intervals, or more frequently as agreed but never more frequently
than quarterly, the Company shall prepare a specific statement, for the sole
purpose of amending the Letter of Credit, of the Reinsurer's share of known and
reported outstanding losses and allocated expenses relating thereto, plus
reserves for losses incurred but not reported. If the statement shows that
Reinsurer's share of such losses and allocated loss expenses exceeds the balance
of credit as of the statement date, the Reinsurer shall, within thirty (30) days
after receipt of notice of such excess, secure delivery to the Company of an
amendment of the Letter of Credit increasing the amount of credit by the amount
of such difference. If, however, the statement shows that the Reinsurer's share
of known and reported outstanding losses plus allocated loss
Page 11 of 15
<PAGE> 12
expenses relating thereto, plus reserves for losses incurred but not reported is
less than the balance of credit as of the statement date, the Company shall,
within thirty (30) days after receipt of written request from the Reinsurer,
release such excess credit by agreeing to secure an amendment to the Letter of
Credit reducing the amount of credit available by the amount of such excess
credit.
ARTICLE XXIV.
SPECIAL FUNDING CLAUSE:
A. If, during the period of this Agreement and thereafter, as respects any
outstanding liabilities hereunder, the Reinsurer shall fail to pay any loss
payable hereunder within the time prescribed, the Reinsurer agrees that it will
fund uncollected paid losses and loss adjustment expenses within thirty (30)
days from the date of written demand by the Company to so fund. Such demand
shall not be made unless balances are sixty (60) days or more past the due date
of payment specified in this Agreement.
B. The Reinsurer shall have the sole option of determining the method of funding
referred to above, provided it is acceptable to the insurance regulatory
authorities involved. If the Reinsurer elects to fund the aforesaid loss by a
Letter of Credit, the procedures set forth in the Funding Article in respect of
Letters of Credit shall apply. If the Reinsurer has already funded obligations
hereunder in accordance with the Funding Article in this Agreement, it agrees
that such funds as are required to pay overdue losses may immediately be drawn
down by the Company.
C. The phrase "any loss payable" as used in paragraph A. above shall mean any
ultimate net loss subject to recovery under this Agreement wherein the Reinsurer
has not disputed said loss in writing within the due date for payment.
D. The Company will provide the Reinsurer with a reinsurance proof of loss and
such other substantive loss material reflecting the nature of the settlement
(i.e., applicable Proofs of Loss, Releases, adjuster's reports, etc.). If,
subsequent to receipt of this material, the information supplied is insufficient
or not in accordance with the contractual conditions, then the payment due date
as defined in the Reports and Remittances Article, will be deemed to be the date
upon which the Reinsurer received such additional substantive material necessary
to approve payment of the claim, or the date the claim is presented in a manner
acceptable to the Reinsurer.
ARTICLE XXV.
ARBITRATION:
A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Agreement,
including the formation or validity thereof, shall be submitted for decision to
a panel of three arbitrators. Notice requesting arbitration will be in writing
and sent certified or registered mail, return receipt requested.
Page 12 of 15
<PAGE> 13
B. One arbitrator shall be chosen by each party and the two arbitrators shall,
before instituting the hearing, choose an impartial third arbitrator who shall
preside at the hearing. If either party fails to appoint its arbitrator within
thirty (30) days after being requested to do so by the other party, the latter,
after ten (10) days notice by certified or registered mail of its intention to
do so, may appoint the second arbitrator.
C. If the two arbitrators are unable to agree upon the third arbitrator within
thirty (30) days of their appointment, the deficiency shall be supplied on the
application of the party requesting arbitration by an appointment made by the
American Arbitration Association. Notwithstanding the appointment of any third
Arbitrator by the American Arbitration Association, the arbitration proceedings
shall not be governed by the American Arbitration Association's commercial
arbitration rules.
D. All arbitrators shall be disinterested active or former executive officers of
insurance or reinsurance companies or Underwriters at Lloyd's, London.
E. Within thirty (30) days after notice of appointment of all arbitrators, the
panel shall meet and determine timely periods for briefs, discovery procedures
and schedules for hearings.
F. The panel shall be relieved of all judicial formality and shall not be bound
by the strict rules of procedure and evidence. Unless the panel agrees
otherwise, arbitration shall take place in Beverly Hills, California, but the
venue may be changed when deemed by the panel to be in the best interest of the
arbitration proceeding. Insofar as the arbitration panel looks to substantive
law, it shall consider the law of the State of California. The decision of any
two arbitrators when rendered in writing shall be final and binding. The panel
is empowered to grant interim relief as it may deem appropriate.
G. The panel shall interpret this Agreement as if it were an honorable
engagement rather than as merely a legal obligation and shall make its decision
considering the custom and practice of the applicable insurance and reinsurance
business within sixty (60) days following the termination of the hearings.
Judgment upon the award may be entered in any court having jurisdiction thereof.
H. Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the cost of the third arbitrator. The
remaining costs of the arbitration shall be allocated by the panel. The panel
may, at its discretion, award such further costs and expenses as it considers
appropriate, including but not limited to attorneys fees, to the extent
permitted by law.
ARTICLE XXVI.
SERVICE OF SUIT CLAUSE (U.S.A.):
A. It is agreed that in the event of the failure of the Reinsurer hereon to pay
any amount claimed to be due hereunder, the Reinsurer hereon, at the request of
the Company, will submit to the jurisdiction of a Court of competent
jurisdiction within the United States. Nothing in this
Page 13 of 15
<PAGE> 14
Clause constitutes or should be understood to constitute a waiver of the
Reinsurer's rights to commence an action in any Court of competent jurisdiction
in the United States, to remove an action to a United States District Court, or
to seek a transfer of a case to another Court as permitted by the laws of the
United States or of any State in the United States. It is further agreed that
service of process in such suit may be made upon Messrs. Mendes & Mount, 725
South Figueroa, Suite 1990, Los Angeles, CA 90017, and that in any suit
instituted, the Reinsurer will abide by the final decision of such Court or of
any Appellate Court in the event of an appeal.
B. The above-named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of the Company
to give written undertaking to the Company that they will enter a general
appearance upon the Reinsurer's behalf in the event such a suit shall be
instituted.
C. Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefor, the Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be served
any lawful process in action, suit or proceeding instituted by or on behalf of
the Company or any beneficiary hereunder arising out of this Agreement, and
hereby designate the above-named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE XXVII.
INSOLVENCY:
A. The portion of any risk or obligation assumed by the Reinsurer, when such
portion is ascertained, shall be payable on demand of the Company at the same
time as the Company shall pay its net retained portion of such risk or
obligation, with reasonable provision for verification before payment, and the
reinsurance shall be payable by the Reinsurer, on the basis of the liability of
the Company under the policy or policies reinsured without diminution because of
the insolvency of the Company.
B. In the event of the insolvency of one or more than one of the Companies,
reinsurance under this Agreement shall be payable immediately on demand, with
reasonable provision for verification, on the basis of claims allowed against
the insolvent Company(ies) by any court of competent jurisdiction or by any
liquidator, receiver, or statutory successor of the Company(ies) having
authority to allow such claims, without diminution because of such insolvency or
because such liquidator, receiver, or statutory successor has failed to pay all
or a portion of any claims. Such payments by the Reinsurer shall be made
directly to the Company or its liquidator, receiver or statutory successor,
except where the contract of insurance or reinsurance provides another payee of
such reinsurance in the event of the insolvency of the Company(ies).
Page 14 of 15
<PAGE> 15
C. It is agreed, however, that the liquidator or receiver or statutory successor
of the insolvent Company(ies) will give written notice to the Reinsurer of the
pendency of a claim against the insolvent Company(ies) on the policy or policies
reinsured within a reasonable time after such claim is filed in the insolvency
proceeding and that during the pendency of such claim the Reinsurer may
investigate such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated any defense or defenses which it may deem
available to the Company(ies) or its liquidator or receiver or statutory
successor. The expense thus incurred by the Reinsurer will be chargeable,
subject to court approval, against the insolvent Company(ies) as part of the
expense of liquidation to the extent of a proportionate share of the benefit
which may accrue to the Company(ies) solely as a result of the defense
undertaken by the Reinsurer.
D. Where two or more reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense will be
apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the insolvent Company(ies).
ARTICLE XXVIII.
INTERMEDIARY:
Willcox Incorporated Reinsurance Intermediaries is hereby recognized as
the Intermediary negotiating this Agreement for all business hereunder. All
communications (including but not limited to notices, statements, premium,
return premium, commissions, taxes, losses, loss adjustment expense, salvages
and loss settlements) relating thereto shall be transmitted to the Company or
the Reinsurer through Willcox Incorporated Reinsurance Intermediaries, 180
Maiden Lane, New York, New York 10038-4993. Payments by the Company to the
Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by
the Reinsurer to the Intermediary shall be deemed to constitute payment to the
Company only to the extent that such payments are actually received by the
Company.
ARTICLE XXIX.
GOVERNING LAW:
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of California, U.S.A.
ARTICLE XXX.
SEVERAL LIABILITY NOTICE:
The subscribing reinsurers' obligations under contracts of reinsurance to
which they subscribe are several and not joint and are limited solely to the
extent of their individual subscriptions. The subscribing reinsurers are not
responsible for the subscription of any co-subscribing reinsurer who for any
reason does not satisfy all or part of its obligations.
Page 15 of 15
<PAGE> 16
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
FIRST EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a __% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled First Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the participation
of other subscribing reinsurers, and the Subscribing Reinsurer shall under no
circumstances participate in the Interests and Liabilities, if any, of the other
subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer __% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach on January 1, 1997 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
Page 1 of 2
<PAGE> 17
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of August , 1997
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
By: /s/ DONALD J. ZUK
------------------------------
Signed in
this day of , 199
Page 2 of 2
<PAGE> 18
MEMORANDUM OF CHANGES
to the
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE, et al
FIRST EXCESS OF LOSS REINSURANCE AGREEMENT
The following changes have been effected from the expiring First Excess
of Loss Reinsurance Agreement Number 01-96-0020 as per the cover note/placement
slip:
1. The list of Companies hereon, collectively referred to as the "Company",
has been revised.
2. Article III, "Term", the dates have been amended, in this and all other
applicable Articles, for the current term.
3. Article XV, "Premium",
- the deposit premium decreased from $3,780,000 to $3,450,000.
- the minimum premium decreased from $3,024,000 to $2,760,000.
- the rate decreased from 3.15% to 2.88%.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
Page 1 of 1
<PAGE> 1
EXHIBIT 10.22
SECOND EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
The Subscribing Reinsurer(s) executing the
Interests and Liabilities Contract(s)
attached to and forming a part
of this Agreement
(hereinafter referred to as the "Reinsurer")
WITNESSETH:
The Reinsurer hereby reinsures the Company to the extent and the terms
and conditions subject to the exceptions, exclusions and limitations hereinafter
set forth and nothing hereinafter shall in any manner create any obligations or
establish any rights against the Reinsurer in favor of any third parties or any
persons not parties to this Agreement.
ARTICLE I.
BUSINESS COVERED:
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amount of ultimate net loss which the Company may pay as the
result of claims made during the term of this Agreement under the Company's
Physicians and Surgeons Comprehensive Professional and Business Liability
policies, including Clinics and Clinical Laboratories, Professional and Business
Liability policies for Hospitals and Errors and Omissions Liability policies for
Managed Care Organizations with respect to 1) claims made during the term of
this Agreement under subject policies which are in force or may hereinafter come
into force during the term of this Agreement, and 2) losses which were first
reported to the Company during the period January 1, 1986 to December 31, 1991
and are first reported to the Reinsurer during the term of this Agreement,
except as excluded under the Exclusions Article subject to the limitations set
forth in the Limits of Cover Article.
Page 1 of 16
<PAGE> 2
ARTICLE II.
EXCLUSIONS:
This Agreement specifically excludes:
1. All liability of the Company arising by contract, operation of
law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund. "Insolvency
Fund" includes any guaranty fund, plan, pool, association, fund
or other arrangement, howsoever denominated, established or
governed which provides for any assessment of or payment or
assumption by the Company of part or all of any claim, debt,
charge, fee or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority
to be insolvent, or which is otherwise deemed unable to meet any
claim, debt, charge, fee or other obligation in whole or in
part.
2. Loss or Liability excluded by the provisions of the attached
"Nuclear Incident Exclusion Clause - Liability - Reinsurance."
3. All Assumed Reinsurance.
ARTICLE III.
TERM:
A. Except as provided in paragraph C. below, this Agreement shall apply to
claims made during the twelve (12) month period beginning January 1, 1997. In
the event a loss, as defined in the Definitions Article, involves a loss or
losses covered under the current Agreement Year and a prior Agreement Year(s) no
recovery shall be made hereunder in respect of any loss which occurred prior to:
1. January 1st, 1979 as regards Extra Contractual Obligations (as
provided for in the Extra Contractual Obligations Clause
Article)
2. January 1st, 1976 as regards all other business.
B. It is understood however that, in respect of Personal Liability and Discovery
Period coverage for Deceased, Disabled, Retired and Withdrawing Physicians and
for Physicians ceasing Medical Practice within the State, this Agreement covers
claims made during the period of this Reinsurance Agreement. In the event this
Agreement is not renewed, all such liability shall be assumed by the Company
with effect from the date of cancellation.
C. The provisions of paragraphs A. and B. notwithstanding, the Company may, at
its option, elect to continue to cover the in force portfolio of liability
covered under Sections A.1. and A.3. of the Limits of Cover Article of this
Agreement on the date of expiration for a further period of twelve (12) months.
Should the Company exercise this option, the Company shall give the Reinsurer
notice prior to expiration that they wish to exercise this option. The Company
shall pay to the Reinsurer an additional premium thereon as set forth in the
Premium Article.
Page 2 of 16
<PAGE> 3
D. If any law or regulation of the Federal, State or Local Government or any
jurisdiction in which the Company is doing business shall render illegal the
arrangements made herein, this Agreement can be terminated immediately insofar
as it applies to such jurisdiction by the Company giving notice to the Reinsurer
to such effect.
E. Notwithstanding the expiration of this Agreement as hereinabove provided, the
provisions of this Agreement shall continue to apply to all unfinished business
hereunder to the end that all obligations and liabilities incurred by each party
hereunder prior to such termination shall be fully performed and discharged.
ARTICLE IV.
ATTACHMENT OF LIABILITY:
A. For purposes of determining the attachment of the Reinsurer's liability
hereunder as respects any one loss, all losses (including Discovery Period
Losses) involving one or more Original Insureds, arising from the same medical
incident, and in which First Notice of Claim or Circumstance is notified to the
Company during the term of this Agreement shall be covered hereunder. Where
First Notice falls in Agreement Years incepting prior to January 1, 1992
paragraph B. (Interlocking Clause) of the Limits of Cover Article below, shall
apply hereon for Physicians and Surgeons Comprehensive Professional Liability
policies only.
B. The date of a loss hereunder shall be the earliest date, within the term of
this Agreement, that the Company has received First Notice of Claim or
Circumstance.
ARTICLE V.
LIMITS OF COVER:
A.1. As respects policies in force during the term of this Agreement, the
Company shall retain for its own account and pay under one or more of the
Company's policies the first $2,000,000 ultimate net loss, each and every loss
and the Reinsurer agrees to reimburse the Company for the amount of ultimate net
loss paid in excess of $2,000,000, each and every loss, but the Reinsurer's
maximum liability shall not exceed $3,000,000 resulting from each and every
loss.
A.2. As respects losses which were first reported to the Company during the
period January 1, 1986 to December 31, 1991 and are first reported to the
Reinsurer during the term of this Agreement, the Company shall retain for its
own account and pay under one or more of the Company's policies the first
$2,000,000 ultimate net loss, each and every loss and the Reinsurer agrees to
reimburse the Company for the amount of ultimate net loss paid in excess of
$2,000,000, each and every loss, but the Reinsurer's maximum liability shall not
exceed $3,000,000 resulting from each and every loss. The coverage provided
hereunder shall be no narrower nor broader in scope than that which was provided
to the Company under their Second Excess of Loss Reinsurance Agreement in force
for the same period (see attached Cover Note Numbers 10710-003/86, 01-87-0021,
01-88-0021, 01-89-0021, 01-90-0021 and 01-91-0021).
Page 3 of 16
<PAGE> 4
A.3. As respects policies in force during the term of this Agreement covering
losses from Professional and Business Liability policies for Hospitals and
Errors and Omissions Liability policies for Managed Care Organizations, the
Company shall retain for its own account and pay under one or more of the
Company's policies the first $2,000,000 ultimate net loss, each and every loss
each policy and the Reinsurer agrees to reimburse the Company for the amount of
ultimate net loss paid in excess of $2,000,000, each and every loss each policy,
but the Reinsurer's maximum liability shall not exceed $3,000,000 resulting from
each and every loss each policy.
It is understood that the Maximum Annual Aggregate Amount recoverable
under A.1., A.2. and A.3. combined is $9,000,000 in all during the period of
this Agreement.
B. (This paragraph shall apply only to those claims where first notice of claim
or circumstance falls in Agreement Years prior to January 1, 1992.) As respects
each and every loss where this Agreement responds on a claims made basis, and
more than one insured or policy is covered under this Agreement period with
claims made dates falling in more than one reinsurance agreement period, the
limit and retention as respects claims covered under this Agreement shall be the
percentage of the Limit and Retention under this Agreement that the amount of
covered claim or claims hereunder bears to the total of all covered claims from
the same loss.
C. With respect to Sections A.1. and A.2. the Company warrants that maximum
original policy limits shall not exceed $10,000,000 subject to inuring
protection of $8,000,000 excess of $2,000,000 or so deemed.
D. With respect to Section A.3. the Company warrants the following:
1. In respect of Professional and Business Liability policies for
Hospitals written on or after January 1, 1996, policy limits greater than
$500,000 shall be reinsured elsewhere on an Excess of Loss basis or so
deemed.
2. In respect of Professional and Business Liability policies for
Hospitals written prior to January 1, 1996, policy limits greater than
$5,000,000 shall be reinsured elsewhere on an Excess of Loss basis or so
deemed.
3. In respect of Errors and Omissions Liability policies for Managed Care
Organization, maximum original policy limit shall not exceed $5,000,000.
ARTICLE VI.
DEFINITIONS:
A. The term "each and every loss" shall mean the happening of one or a series of
related acts, errors, or omissions to act, accidents or occurrences arising out
of one event.
Page 4 of 16
<PAGE> 5
B. The term "Gross Net Earned Premium Income" shall mean the gross earned
premium on business the subject matter hereof less cancellations and return
premiums and less premiums paid for reinsurance recoveries under which would
inure to the benefit of the Reinsurer.
Such Premium Income shall be understood to include:
1. that content of pre-paid premiums under policies in respect of
Deceased, Disabled and Retired Insureds, the coverage for which
becomes effective during the Agreement period.
2. the premium transferred internally by the Company from a prior
Agreement year or years, in respect of Deceased, Disabled and
Retired Insureds and in respect of other withdrawing Insureds who
have purchased extended coverage under Reporting Endorsements.
C.1. With respect to recoveries made under Sections A.1. and A.3. of the Limits
of Cover Article, the term "claims made" as used herein shall mean (A) In
respect of Claims Made Policies, claims first notified to the Company during the
term of this Agreement on any in force policy or reporting endorsement arising
out of incidents subsequent to the retroactive date of said policy as the result
of the rendering of or failure to render a professional service or the reporting
of losses which arise from the insured premises and operations incidental to the
practice of a physician, hospital or managed care organization and/or (B) In
respect of Occurrence Policies, claims or losses first notified to the Company
during the term of this Agreement.
C.2. With respect to recoveries made under Section A.2. of the Limits of Cover
Article, the term "claims made" as used herein shall mean claims first reported
to the Company during the period January 1, 1986 to December 31, 1991 and first
reported to the Reinsurer during the term of this Agreement.
ARTICLE VII.
NET RETAINED LINES:
A. This Agreement applies to only that portion of any insurance which the
Company retains net for its own account; and in calculating the amount of any
loss hereunder and also in computing the amount or amounts in excess of which
this Agreement attaches, only loss or losses in respect of that portion of any
insurance which the Company retains net for its own account shall be included.
B. The amount of the Reinsurer's liability hereunder in respect of any loss or
losses shall not be increased by reason of the inability of the Company to
collect from any other underwriters, whether specific or general, any amount
which may become due from them, whether such inability arises from the
insolvency of such other underwriters or otherwise.
Page 5 of 16
<PAGE> 6
ARTICLE VIII.
ULTIMATE NET LOSS:
A. The term "ultimate net loss" as used herein shall be understood to mean the
sum actually paid by the Company in settlement of losses for which it is held
liable, including pre judgment interest when made part of the award or judgment,
80% of Extra Contractual Obligations and 100% of loss in Excess of Original
Policy Limits as provided in the respectively captioned Articles, after making
proper deductions for all recoveries, salvages, and claims upon other
reinsurances and insurances which inure to the benefit of the Reinsurer under
this Agreement, whether collectible or not, and shall exclude all loss
adjustment expenses (which shall be separately allocated and paid as provided in
paragraph B. below); provided, however, that in the event of the insolvency of
the Company, "ultimate net loss" shall mean the amount of loss which the Company
has incurred or for which it is liable, and payment by the Reinsurer shall be
made to the liquidator, receiver or statutory successor of the Company in
accordance with the provisions of the Insolvency Article in this Agreement.
Nothing in this clause, however, shall be construed to mean that losses under
this Agreement are not recoverable until the ultimate net loss of the Company
has been ascertained.
B. All loss adjustment expenses incurred in investigation, adjustment and
litigation, defense and settlement of claims made against the Company under its
original policies reinsured hereunder, including pre judgment interest when not
part of an award or judgment and post judgment interest, shall be apportioned in
proportion to the respective interests of the parties hereto in the ultimate net
loss. Office expenses and salaries of officials and employees not classified as
loss adjusters are not chargeable as expenses for the purpose of this paragraph.
C. In the event a verdict or judgment is reduced by an appeal or a settlement,
subsequent to the entry of a judgment, resulting in an ultimate saving on such
verdict or judgment, or a judgment is reversed outright, the expense incurred in
securing such final reduction or reversal shall (1) be prorated between the
Reinsurer and the Company in proportion that each benefits from such reduction
or reversal and the expense incurred up to the time of the original verdict or
judgment shall be prorated in proportion to each party's interest in such
verdict or judgment; or (2) when the terms and conditions of the Company's
original policies reinsured hereunder include expenses as part of the policy
limit, be added to the Company's ultimate net loss.
D. It is understood that the Company has in effect a First Excess of Loss
Reinsurance Agreement and recoveries thereunder will be for the sole benefit of
the Company and will be disregarded when computing the ultimate net loss of the
Company.
ARTICLE IX.
EXCESS OF ORIGINAL POLICY LIMITS:
A. This Agreement shall protect the Company, within the limits hereof, in
connection with any loss in excess of the limit of its original policy, such
loss in excess of the limit having been incurred because of failure by it to
settle within the policy limit, or by reason of alleged or actual negligence,
fraud or bad faith in rejecting an offer of settlement or in the preparation of
the defense or in the trial of any action against its insured or in the
preparation or prosecution of an appeal consequent upon such action.
Page 6 of 16
<PAGE> 7
B. However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
C. For the purposes of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original policy.
ARTICLE X.
EXTRA CONTRACTUAL OBLIGATIONS CLAUSE:
A. This Agreement shall protect the Company within the limits hereof, where the
ultimate net loss includes Extra Contractual Obligations. "Extra Contractual
Obligations" are defined as those liabilities not covered under any other
provision of this Agreement and which arise from handling of any claim on
business covered hereunder, such liabilities arising because of, but not limited
to the following: failure by the Company to settle within the policy limit, or
by reason of alleged or actual negligence, fraud or bad faith in rejecting an
offer of settlement or in the preparation of the defense or in the trial of any
action against its insured or reinsured or in the preparation or prosecution of
an appeal consequent upon such action.
B. The date on which an Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original accident,
casualty, disaster or loss and furthermore, for the purposes hereof be deemed to
follow the claims made provisions of this Agreement, subject always to the
provisions of the Term Article.
C. However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
ARTICLE XI.
CLAIMS:
A. In the event of a claim of $1,500,000 or greater arising hereunder which
either results in or appears to be of serious enough nature as probably to
result in a loss involving this Agreement, the Company shall give notice as soon
as reasonably practicable to Reinsurers and the Company shall keep the Reinsurer
advised of all subsequent developments in connection therewith.
B. All loss settlements made by the Company provided they are within the terms
of the Company's original policies and of this Agreement, shall be
unconditionally binding upon Reinsurer and amounts falling to the share of the
Reinsurer shall be payable to the Company in accordance with the provisions set
forth in paragraph C. of the Reports and Remittances Article.
Page 7 of 16
<PAGE> 8
ARTICLE XII.
COMMUTATION CLAUSE:
The Company or the Reinsurer may, at any time express their desire to the
other party to commute all losses which are applicable to any Agreement year and
which are still unsettled. In such event the Company and the Reinsurer shall
mutually determine and evaluate such losses and the payment by the Reinsurer of
their proportion of the amount so ascertained and mutually agreed to be the
value of such losses shall relieve them of all further liability, in respect of
that Agreement year both in respect of known or unknown losses.
ARTICLE XIII.
PREMIUM:
A. The Company shall pay to the Reinsurer a deposit premium of $1,080,000
payable in equal quarterly installments of $270,000 on January 1st, April 1st,
July 1st and October 1st, 1997. In the event the Company elects to run off its
policies in force until natural expiration, not to exceed twelve (12) months
from the expiration date hereon, the Company shall pay to the Reinsurer a
run-off premium equal to 50% of the Actual Earned Reinsurance Premium, as set
forth in paragraph B. The run-off premium shall be paid in equal quarterly
installments on January 1st, April 1st, July 1st and October 1st, 1998.
B. As soon as practicable after expiration of this Agreement, the Company shall
calculate the premium due the Reinsurer based on a rate of .900% of the Gross
Net Earned Premium Income accounted for by the Company during the term of this
Agreement on all business subject matter of this Agreement, subject to a minimum
premium of $864,000. In the event the premium due hereunder is greater than the
deposit premium paid, the difference shall be paid to the Reinsurer forthwith.
If the actual premium is less then the deposit premium paid, the difference
shall be refunded to the Company, subject to the minimum premium.
ARTICLE XIV.
REINSTATEMENT:
A.1. As respects Sections A.1. and A.3. of the Limits of Cover Article:
1. In the event of any portion of the coverage under this Agreement being
depleted or exhausted by loss, the amount so depleted or exhausted may,
at the option of the Company, be reinstated from the time claim is first
made and the Company will pay the Reinsurer for such reinstatement an
additional premium calculated as follows:
a. For the first reinstatement, 150% of the annual
reinsurance premium pro rated as to the amount so
reinstated;
b. For the second reinstatement, 200% of the annual
reinsurance premium pro rated as to the amount so
reinstated.
Page 8 of 16
<PAGE> 9
2. All calculations of reinstatement premiums shall be based on paid
losses only. The decision of the Company to exercise its reinstatement
option must be relayed to Reinsurers within three (3) months from the
time any reserve invades this Agreement.
Plus,
A.2. As respects Section A.2. of Article V:
1. In the event of a paid loss arising under this Section, additional to
the reinstatement premium payable above, a further reinstatement premium
shall be payable to the Reinsurer, to be calculated at pro rata as
respects amount reinstated and 100% as respects premium based on an
annual premium of $450,000 if First Reinstatement, and based on an annual
premium of $675,000 if Second Reinstatement.
2. It is understood and agreed that the payment of reinstatement premiums
arising from losses recoverable under Section A.2. above shall be
mandatory and not at the option of the Company.
B. Nevertheless, the Reinsurer's liability will never be more than $3,000,000 in
respect of any claim made nor more than the Maximum Annual Aggregate Amount
Recoverable under Sections A.1., A.2. and A.3. combined of $9,000,000 in all
during the term of the Agreement.
ARTICLE XV.
REPORTS AND REMITTANCES:
A. The Company will provide the Reinsurer within forty-five (45) days at the end
of each quarter, all necessary data respecting premiums and losses, including
reserves thereon, as at dates and on forms mutually acceptable to the Company
and the Reinsurer.
B. Payments of deposit premium and annual adjustments shall be made in
accordance with the provisions of the Premium Article.
C. Payment by the Reinsurer of its portion of loss and loss expenses paid by the
Company will be made by the Reinsurer to the Company as soon as possible, but
not later than sixty (60) days after proof of payment by the Company is received
by the Reinsurer.
ARTICLE XVI.
OFFSET:
The Company and the Reinsurer shall have the right to offset any balance
or amounts due from one party to the other under the terms of this Agreement.
The party asserting the right of offset may exercise such right any time whether
the balances due are on account of premiums or losses or otherwise.
Page 9 of 16
<PAGE> 10
ARTICLE XVII.
CONFIDENTIALITY:
A. This Agreement and the pre Agreement documentation may contain confidential
or proprietary information of either party to this Agreement. All parties shall
maintain the confidentiality of this information and shall not disclose these to
any third party without both parties approval.
B. Notwithstanding the above, any party may disclose such information without
further approval from the other party in answer to interrogations, subpoenas or
other legal/arbitration process as well as to the Company's reinsurance
intermediary hereon, the Reinsurer's retrocessionaires or in response to
requests by governmental and regulatory agencies. In addition the parties may
disclose such information to their accountants and outside legal counsel as may
be necessary.
ARTICLE XVIII.
CURRENCY:
Premiums shall be payable by the Company and losses shall be paid to the
Company in United States currency.
ARTICLE XIX.
FEDERAL EXCISE TAX:
(Applicable to those Reinsurers, excepting Underwriters at Lloyd's, London and
other Reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow, for the purpose of paying the Federal
Excise Tax, the applicable percentage of the premium payable hereon (as imposed
under Section 4371 of the Internal Revenue Service Code) to the extent such
premium is subject to the Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the Reinsurer
will deduct the aforesaid percentage from the return premium payable hereon and
the Company or its agent should take steps to recover the tax from the United
States government.
ARTICLE XX.
ERRORS AND OMISSIONS:
Any inadvertent delay, omission or error shall not be held to relieve
either party hereto from any liability which would attach to it hereunder if
such delay, omission or error had not been made, provided such delay, omission
or error is rectified immediately upon discovery; provided, however, this
Article is not to override retroactive dates specified in the Term Article.
Page 10 of 16
<PAGE> 11
ARTICLE XXI.
ACCESS TO RECORDS:
A. The Company shall place at the disposal of the Reinsurer at all reasonable
times, and the Reinsurer shall have the right to inspect, through its authorized
representatives, all books, records and papers of the Company in connection with
this reinsurance hereunder or the subject matter thereof.
B. The Reinsurer shall be afforded the opportunity, at its own expense to
appoint an attorney of its own choice to assess the Company's claims procedures
who shall report to the Reinsurer the results of such.
ARTICLE XXII.
FUNDING:
(This clause is only applicable to those Reinsurer(s) who cannot qualify for
credit by the State having jurisdiction over the Company's loss reserves.)
A. As regards policies or bonds issued by the Company coming within the scope of
this Agreement, the Company agrees that, when it shall file with the Insurance
Department or set up on its books reserves for losses covered hereunder which it
shall be required by law to set up, it will forward to the Reinsurer a statement
showing the proportion of such loss reserves which is applicable to the
Reinsurer. The Reinsurer hereby agrees that it will apply for and secure
delivery to the Company of a clean, irrevocable and unconditional Letter of
Credit, issued by a bank which is acceptable to the regulatory authority(ies)
having jurisdiction over the Company's loss reserves in an amount equal to the
Reinsurer's proportion of reserves in respect of known outstanding losses that
have been reported to the Reinsurer and allocated loss expenses relating
thereto, plus reserves for losses incurred but not reported, as shown in the
statement prepared by the Company.
B. The Letter of Credit shall be issued for a period of not less than one (1)
year, and shall be automatically extended for one (1) year from its date of
expiration or any future expiration date unless thirty (30) days prior to any
expiration date the issuing bank shall notify the Company by registered mail
that the bank elects not to consider the Letter of Credit extended for any
additional period. An issuing bank, not a member of the Federal Reserve System
or not chartered in New York State shall provide sixty (60) days notice to the
Company prior to any expiration in the event of non-extension.
C. Notwithstanding any other provision of this Agreement, the Company or its
successors in interest may draw upon such credit at any time without diminution
because of the insolvency of the Company or of the Reinsurer for one or more of
the following purposes only:
1. To pay the Reinsurer's share or to reimburse the Company for the
Reinsurer's share of any loss reinsured by this Agreement, the
payment of which has been agreed by the Reinsurer and which has
not been otherwise paid.
Page 11 of 16
<PAGE> 12
2. To make refund of any sum which is in excess of the actual amount
required to pay the Reinsurer's share of any liability reinsured
by this Agreement.
3. In the event of expiration of the Letter of Credit as provided for
above, to establish deposit of the Reinsurer's share of known and
reported outstanding losses and allocated expenses relating
thereto under this Agreement. Such cash deposit shall be held in
an interest bearing account separate from the Company's other
assets, and interest thereon shall accrue to the benefit of the
Reinsurer.
D. The issuing bank shall have no responsibility whatsoever in connection with
the propriety of withdrawals made by the Company or the disposition of funds
withdrawn, except to ensure that withdrawals are made only upon the order of
properly authorized representatives of the Company.
E. At annual intervals, or more frequently as agreed but never more frequently
than quarterly, the Company shall prepare a specific statement, for the sole
purpose of amending the Letter of Credit, of the Reinsurer's share of known and
reported outstanding losses and allocated expenses relating thereto, plus
reserves for losses incurred but not reported. If the statement shows that
Reinsurer's share of such losses and allocated loss expenses exceeds the balance
of credit as of the statement date, the Reinsurer shall, within thirty (30) days
after receipt of notice of such excess, secure delivery to the Company of an
amendment of the Letter of Credit increasing the amount of credit by the amount
of such difference. If, however, the statement shows that the Reinsurer's share
of known and reported outstanding losses plus allocated loss expenses relating
thereto, plus reserves for losses incurred but not reported is less than the
balance of credit as of the statement date, the Company shall, within thirty
(30) days after receipt of written request from the Reinsurer, release such
excess credit by agreeing to secure an amendment to the Letter of Credit
reducing the amount of credit available by the amount of such excess credit.
ARTICLE XXIII.
SPECIAL FUNDING CLAUSE:
A. If, during the period of this Agreement and thereafter, as respects any
outstanding liabilities hereunder, the Reinsurer shall fail to pay any loss
payable hereunder within the time prescribed, the Reinsurer agrees that it will
fund uncollected paid losses and loss adjustment expenses within thirty (30)
days from the date of written demand by the Company to so fund. Such demand
shall not be made unless balances are sixty (60) days or more past the due date
of payment specified in this Agreement.
B. The Reinsurer shall have the sole option of determining the method of funding
referred to above, provided it is acceptable to the insurance regulatory
authorities involved. If the Reinsurer elects to fund the aforesaid loss by a
Letter of Credit, the procedures set forth in the Funding Article in respect of
Letters of Credit shall apply. If the Reinsurer has already funded obligations
hereunder in accordance with the Funding Article in this Agreement, it agrees
that such funds as are required to pay overdue losses may immediately be drawn
down by the Company.
Page 12 of 16
<PAGE> 13
C. The phrase "any loss payable" as used in paragraph A. above shall mean any
ultimate net loss subject to recovery under this Agreement wherein the Reinsurer
has not disputed said loss in writing within the due date for payment.
D. The Company will provide the Reinsurer with a reinsurance proof of loss and
such other substantive loss material reflecting the nature of the settlement
(i.e., applicable Proofs of Loss, Releases, adjuster's reports, etc.). If,
subsequent to receipt of this material, the information supplied is insufficient
or not in accordance with the contractual conditions, then the payment due date
as defined in the Reports and Remittances Article, will be deemed to be the date
upon which the Reinsurer received such additional substantive material necessary
to approve payment of the claim, or the date the claim is presented in a manner
acceptable to the Reinsurer.
ARTICLE XXIV.
ARBITRATION:
A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Agreement,
including the formation or validity thereof, shall be submitted for decision to
a panel of three arbitrators. Notice requesting arbitration will be in writing
and sent certified or registered mail, return receipt requested.
B. One arbitrator shall be chosen by each party and the two arbitrators shall,
before instituting the hearing, choose an impartial third arbitrator who shall
preside at the hearing. If either party fails to appoint its arbitrator within
thirty (30) days after being requested to do so by the other party, the latter,
after ten (10) days notice by certified or registered mail of its intention to
do so, may appoint the second arbitrator.
C. If the two arbitrators are unable to agree upon the third arbitrator within
thirty (30) days of their appointment, the deficiency shall be supplied on the
application of the party requesting arbitration by an appointment made by the
American Arbitration Association. Notwithstanding the appointment of any third
Arbitrator by the American Arbitration Association, the arbitration proceedings
shall not be governed by the American Arbitration Association's commercial
arbitration rules.
D. All arbitrators shall be disinterested active or former executive officers of
insurance or reinsurance companies or Underwriters at Lloyd's, London.
E. Within thirty (30) days after notice of appointment of all arbitrators, the
panel shall meet and determine timely periods for briefs, discovery procedures
and schedules for hearings.
F. The panel shall be relieved of all judicial formality and shall not be bound
by the strict rules of procedure and evidence. Unless the panel agrees
otherwise, arbitration shall take place in Beverly Hills, California, but the
venue may be changed when deemed by the panel to be in the best interest of the
arbitration proceeding. Insofar as the arbitration panel looks to substantive
law, it shall consider the law of the State of California. The decision of any
two arbitrators when rendered in writing shall be final and binding. The panel
is empowered to grant interim relief as it may deem appropriate.
Page 13 of 16
<PAGE> 14
G. The panel shall interpret this Agreement as if it were an honorable
engagement rather than as merely a legal obligation and shall make its decision
considering the custom and practice of the applicable insurance and reinsurance
business within sixty (60) days following the termination of the hearings.
Judgment upon the award may be entered in any court having jurisdiction thereof.
H. Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the cost of the third arbitrator. The
remaining costs of the arbitration shall be allocated by the panel. The panel
may, at its discretion, award such further costs and expenses as it considers
appropriate, including but not limited to attorneys fees, to the extent
permitted by law.
ARTICLE XXV.
SERVICE OF SUIT CLAUSE (U.S.A.):
A. It is agreed that in the event of the failure of the Reinsurer hereon to pay
any amount claimed to be due hereunder, the Reinsurer hereon, at the request of
the Company, will submit to the jurisdiction of a Court of competent
jurisdiction within the United States. Nothing in this Clause constitutes or
should be understood to constitute a waiver of the Reinsurer's rights to
commence an action in any Court of competent jurisdiction in the United States,
to remove an action to a United States District Court, or to seek a transfer of
a case to another Court as permitted by the laws of the United States or of any
State in the United States. It is further agreed that service of process in such
suit may be made upon Messrs. Mendes & Mount, 725 South Figueroa, Suite 1990,
Los Angeles, CA 90017, and that in any suit instituted, the Reinsurer will abide
by the final decision of such Court or of any Appellate Court in the event of an
appeal.
B. The above-named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of the Company
to give written undertaking to the Company that they will enter a general
appearance upon the Reinsurer's behalf in the event such a suit shall be
instituted.
C. Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefor, the Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be served
any lawful process in action, suit or proceeding instituted by or on behalf of
the Company or any beneficiary hereunder arising out of this Agreement, and
hereby designate the above-named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
Page 14 of 16
<PAGE> 15
ARTICLE XXVI.
INSOLVENCY:
A. The portion of any risk or obligation assumed by the Reinsurer, when such
portion is ascertained, shall be payable on demand of the Company at the same
time as the Company shall pay its net retained portion of such risk or
obligation, with reasonable provision for verification before payment, and the
reinsurance shall be payable by the Reinsurer, on the basis of the liability of
the Company under the policy or policies reinsured without diminution because of
the insolvency of the Company.
B. In the event of the insolvency of one or more than one of the Companies,
reinsurance under this Agreement shall be payable immediately on demand, with
reasonable provision for verification, on the basis of claims allowed against
the insolvent Company(ies) by any court of competent jurisdiction or by any
liquidator, receiver, or statutory successor of the Company(ies) having
authority to allow such claims, without diminution because of such insolvency or
because such liquidator, receiver, or statutory successor has failed to pay all
or a portion of any claims. Such payments by the Reinsurer shall be made
directly to the Company or its liquidator, receiver or statutory successor,
except where the contract of insurance or reinsurance provides another payee of
such reinsurance in the event of the insolvency of the Company(ies).
C. It is agreed, however, that the liquidator or receiver or statutory successor
of the insolvent Company(ies) will give written notice to the Reinsurer of the
pendency of a claim against the insolvent Company(ies) on the policy or policies
reinsured within a reasonable time after such claim is filed in the insolvency
proceeding and that during the pendency of such claim the Reinsurer may
investigate such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated any defense or defenses which it may deem
available to the Company(ies) or its liquidator or receiver or statutory
successor. The expense thus incurred by the Reinsurer will be chargeable,
subject to court approval, against the insolvent Company(ies) as part of the
expense of liquidation to the extent of a proportionate share of the benefit
which may accrue to the Company(ies) solely as a result of the defense
undertaken by the Reinsurer.
D. Where two or more reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense will be
apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the insolvent Company(ies).
ARTICLE XXVII.
INTERMEDIARY:
Willcox Incorporated Reinsurance Intermediaries is hereby recognized as
the Intermediary negotiating this Agreement for all business hereunder. All
communications (including but not limited to notices, statements, premium,
return premium, commissions, taxes, losses, loss adjustment expense, salvages
and loss settlements) relating thereto shall be transmitted to the Company or
the Reinsurer through Willcox Incorporated Reinsurance Intermediaries, 180
Maiden Lane, New York, New York 10038-4993. Payments by the Company to the
Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by
the Reinsurer to the Intermediary shall be deemed to constitute payment to the
Company only to the extent that such payments are actually received by the
Company.
Page 15 of 16
<PAGE> 16
ARTICLE XXVIII.
GOVERNING LAW:
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of California, U.S.A.
ARTICLE XXIX.
SEVERAL LIABILITY NOTICE:
The subscribing reinsurers' obligations under contracts of reinsurance to
which they subscribe are several and not joint and are limited solely to the
extent of their individual subscriptions. The subscribing reinsurers are not
responsible for the subscription of any co-subscribing reinsurer who for any
reason does not satisfy all or part of its obligations.
Page 16 of 16
<PAGE> 17
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
SECOND EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a __% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Second Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the participation
of other subscribing reinsurers, and the Subscribing Reinsurer shall under no
circumstances participate in the Interests and Liabilities, if any, of the other
subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer __% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach on January 1, 1997 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
Page 1 of 2
<PAGE> 18
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of August , 1997
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
By: /s/ DONALD J. ZUK
--------------------------------
Signed in
this day of , 199
Page 2 of 2
<PAGE> 19
MEMORANDUM OF CHANGES
to the
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE, et al
SECOND EXCESS OF LOSS REINSURANCE AGREEMENT
The following changes have been effected from the expiring Second Excess
of Loss Reinsurance Agreement Number 01-96-0021 as per the cover note/placement
slip:
1. The list of Companies hereon, collectively referred to as the "Company",
has been revised.
2. Article I, "Business Covered",
- the sunrise provision has been extended to include the 1991
underwriting year, in this and all other applicable Articles.
- the sunset provision has been deleted and reference to same has
been deleted from all other applicable Articles.
3. Article III, "Term", the dates have been amended, in this and all other
applicable Articles, for the current term.
4. Article XIII, "Premium",
- the deposit premium decreased from $1,170,000 to $1,080,000.
- the minimum premium decreased from $935,000 to $864,000.
- the rate decreased from .975% to .900%.
5. Article XIV, "Reinstatement", the specified amount of additional premium
the Company will pay the Reinsurer for the first reinstatement as
respects Sections A.1. and A.3. of the Limits of Cover Article has been
increased from 125% to 150% of the annual reinsurance premium.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
Page 1 of 1
<PAGE> 1
EXHIBIT 10.23
THIRD EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
The Subscribing Reinsurer(s) executing the
Interests and Liabilities Contract(s)
attached to and forming a part
of this Agreement
(hereinafter referred to as the "Reinsurer")
WITNESSETH:
The Reinsurer hereby reinsures the Company to the extent and the terms
and conditions subject to the exceptions, exclusions and limitations hereinafter
set forth and nothing hereinafter shall in any manner create any obligations or
establish any rights against the Reinsurer in favor of any third parties or any
persons not parties to this Agreement.
ARTICLE I.
BUSINESS COVERED:
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amount of ultimate net loss which the Company may pay as the
result of claims made during the term of this Agreement under the Company's
Physicians and Surgeons Comprehensive Professional and Business Liability
policies, including Clinics and Clinical Laboratories, Professional and Business
Liability policies for Hospitals and Errors and Omissions Liability policies for
Managed Care Organizations with respect to 1) claims made during the term of
this Agreement under subject policies which are in force or may hereinafter come
into force during the term of this Agreement, and 2) losses which were first
reported to the Company during the period January 1, 1987 to December 31, 1991
and are first reported to the Reinsurer during the term of this Agreement,
except as excluded under the Exclusions Article subject to the limitations set
forth in the Limits of Cover Article.
Page 1 of 15
<PAGE> 2
ARTICLE II.
EXCLUSIONS:
This Agreement specifically excludes:
1. All liability of the Company arising by contract, operation of
law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund. "Insolvency
Fund" includes any guaranty fund, plan, pool, association, fund
or other arrangement, howsoever denominated, established or
governed which provides for any assessment of or payment or
assumption by the Company of part or all of any claim, debt,
charge, fee or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority
to be insolvent, or which is otherwise deemed unable to meet any
claim, debt, charge, fee or other obligation in whole or in
part.
2. Loss or Liability excluded by the provisions of the attached
"Nuclear Incident Exclusion Clause - Liability - Reinsurance".
3. All Assumed Reinsurance.
ARTICLE III.
TERM:
A. Except as provided in paragraph C. below, this Agreement shall apply to
claims made during the twelve (12) month period beginning January 1, 1997. In
the event a loss, as defined in the Definitions Article, involves a loss or
losses covered under the current Agreement Year and a prior Agreement Year(s) no
recovery shall be made hereunder in respect of any loss which occurred prior to:
1. January 1st, 1979 as regards Extra Contractual Obligations (as
provided for in the Extra Contractual Obligations Clause
Article)
2. January 1st, 1976 as regards all other business.
B. It is understood however, that in respect of Personal Liability and Discovery
Period coverage for Deceased, Disabled, Retired and Withdrawing Physicians and
for Physicians ceasing Medical Practice within the State, this Agreement covers
claims made during the period of this Reinsurance Agreement. In the event this
Agreement is not renewed, all such liability shall be assumed by the Company
with effect from the date of cancellation.
C. The provisions of paragraphs A. and B. notwithstanding, the Company may, at
its option, elect to continue to cover the in force portfolio of liability
covered under Section A.1. of the Limits of Cover Article of this Agreement on
the date of expiration for a further period of twelve (12) months. Should the
Company exercise this option, the Company shall give the Reinsurer notice prior
to expiration that they wish to exercise this option. The Company shall pay to
the Reinsurer an additional premium thereon as set forth in the Premium Article.
Page 2 of 15
<PAGE> 3
D. If any law or regulation of the Federal, State or Local Government or any
jurisdiction in which the Company is doing business shall render illegal the
arrangements made herein, this Agreement can be terminated immediately insofar
as it applies to such jurisdiction by the Company giving notice to the Reinsurer
to such effect.
E. Notwithstanding the expiration of this Agreement as hereinabove provided, the
provisions of this Agreement shall continue to apply to all unfinished business
hereunder to the end that all obligations and liabilities incurred by each party
hereunder prior to such termination shall be fully performed and discharged.
ARTICLE IV.
ATTACHMENT OF LIABILITY:
A. For purposes of determining the attachment of the Reinsurer's liability
hereunder as respects any one loss, all losses (including Discovery Period
Losses) involving one or more Original Insureds, arising from the same medical
incident, and in which First Notice of Claim or Circumstance is notified to the
Company during the term of this Agreement shall be covered hereunder. Where
First Notice falls in Agreement Years incepting prior to January 1, 1992
paragraph B. (Interlocking Clause) of the Limits of Cover Article below, shall
apply hereon for Physicians and Surgeons Comprehensive Professional Liability
policies only.
B. The date of a loss hereunder shall be the earliest date, within the term of
this Agreement, that the Company has received First Notice of Claim or
Circumstance.
ARTICLE V.
LIMITS OF COVER:
A.1. As respects policies in force during the term of this Agreement, the
Company shall retain for its own account and pay under one or more of the
Company's policies the first $5,000,000 ultimate net loss, each and every loss
and the Reinsurer agrees to reimburse the Company for the amount of ultimate net
loss paid in excess of $5,000,000, each and every loss, but the Reinsurer's
maximum liability shall not exceed $5,000,000 resulting from each and every
loss.
A.2. As respects losses which were first reported to the Company during the
period January 1, 1987 to December 31, 1991 and are first reported to the
Reinsurer during the term of this Agreement, the Company shall retain for its
own account and pay under one or more of the Company's policies the first
$5,000,000 ultimate net loss, each and every loss and the Reinsurer agrees to
reimburse the Company for the amount of ultimate net loss paid in excess of
$5,000,000, each and every loss, but the Reinsurer's maximum liability shall not
exceed $5,000,000 resulting from each and every loss. The coverage provided
hereunder shall be no narrower nor broader in scope than that which was provided
to the Company under their Third Excess of Loss Reinsurance Agreement in force
for the same period (see attached Cover Note Numbers 01-87-0022, 01-88-0022,
01-89-0022, 01-90-0022 and 01-91-0022).
Page 3 of 15
<PAGE> 4
It is understood that the Maximum Annual Aggregate Amount recoverable
under A.1. and A.2. combined is $10,000,000 in all during the period of this
Agreement.
B. (This paragraph shall apply only to those claims where first notice of claim
or circumstance falls in Agreement Years prior to January 1, 1992.) As respects
each and every loss where this Agreement responds on a claims made basis, and
more than one insured or policy is covered under this Agreement period with
claims made dates falling in more than one reinsurance agreement period, the
limit and retention as respects claims covered under this Agreement shall be the
percentage of the Limit and Retention under this Agreement that the amount of
covered claim or claims hereunder bears to the total of all covered claims from
the same loss.
C. The Company warrants the following in respect of the business covered
hereunder:
1. In respect of Physicians and Surgeons Comprehensive Professional
and Business Liability policies, including Clinics and Clinical
Laboratories, the Company warrants the maximum original policy
limits shall not exceed $10,000,000 subject to inuring protection
of $8,000,000 excess of $2,000,000 or so deemed.
2. In respect of Professional and Business Liability policies for
Hospitals written on or after January 1, 1996, policy limits
greater than $500,000 shall be reinsured elsewhere on an excess of
loss basis or so deemed.
3. In respect of Professional and Business Liability policies for
Hospitals written prior to January 1, 1996, policy limits greater
than $5,000,000 shall be reinsured elsewhere on an excess of loss
basis or so deemed.
4. In respect of Errors and Omissions Liability policies for Managed
Care Organizations, the maximum original policy limit is
$5,000,000.
ARTICLE VI.
DEFINITIONS:
A. The term "each and every loss" shall mean the happening of one or a series of
related acts, errors, or omissions to act, accidents or occurrences arising out
of one event.
B. The term "Gross Net Earned Premium Income" shall mean the gross earned
premium on business the subject matter hereof less cancellations and return
premiums and less premiums paid for reinsurance recoveries under which would
inure to the benefit of the Reinsurer.
Such Premium Income shall be understood to include:
1. that content of pre-paid premiums under policies in respect of
Deceased, Disabled and Retired Insureds, the coverage for which
becomes effective during the Agreement period.
Page 4 of 15
<PAGE> 5
2. the premium transferred internally by the Company from a prior
Agreement year or years, in respect of Deceased, Disabled and
Retired Insureds and in respect of other withdrawing Insureds who
have purchased extended coverage under Reporting Endorsements.
C.1. With respect to recoveries made under Section A.1. of the Limits of Cover
Article, the term "claims made" as used herein shall mean (A) In respect of
Claims Made Policies, claims first notified to the Company during the term of
this Agreement on any in force policy or reporting endorsement arising out of
incidents subsequent to the retroactive date of said policy as the result of the
rendering of or failure to render a professional service or the reporting of
losses which arise from the insured premises and operations incidental to the
practice of a physician, hospital or managed care organization and/or (B) In
respect of Occurrence Policies, claims or losses first notified to the Company
during the term of this Agreement.
C.2. With respect to recoveries made under Section A.2. of the Limits of Cover
Article, the term "claims made" as used herein shall mean claims first reported
to the Company during the period January 1, 1987 to December 31, 1991 and first
reported to the Reinsurer during the term of this Agreement.
ARTICLE VII.
NET RETAINED LINES:
A. This Agreement applies to only that portion of any insurance which the
Company retains net for its own account; and in calculating the amount of any
loss hereunder and also in computing the amount or amounts in excess of which
this Agreement attaches, only loss or losses in respect of that portion of any
insurance which the Company retains net for its own account shall be included.
B. The amount of the Reinsurer's liability hereunder in respect of any loss or
losses shall not be increased by reason of the inability of the Company to
collect from any other underwriters, whether specific or general, any amount
which may become due from them, whether such inability arises from the
insolvency of such other underwriters or otherwise.
ARTICLE VIII.
ULTIMATE NET LOSS:
A. The term "ultimate net loss" as used herein shall be understood to mean the
sum actually paid by the Company in settlement of losses for which it is held
liable, including pre judgment interest when made part of the award or judgment,
80% of Extra Contractual Obligations and 100% of loss in Excess of Original
Policy Limits as provided in the respectively captioned Articles, after making
proper deductions for all recoveries, salvages, and claims upon other
reinsurances and insurances which inure to the benefit of the Reinsurer under
this Agreement, whether collectible or not, and shall exclude all loss
adjustment expenses (which shall be separately allocated and paid as provided in
paragraph B. below); provided, however, that in the
Page 5 of 15
<PAGE> 6
event of the insolvency of the Company, "ultimate net loss" shall mean the
amount of loss which the Company has incurred or for which it is liable, and
payment by the Reinsurer shall be made to the liquidator, receiver or statutory
successor of the Company in accordance with the provisions of the Insolvency
Article in this Agreement. Nothing in this clause, however, shall be construed
to mean that losses under this Agreement are not recoverable until the ultimate
net loss of the Company has been ascertained.
B. All loss adjustment expenses incurred in investigation, adjustment and
litigation, defense and settlement of claims made against the Company under its
original policies reinsured hereunder, including pre judgment interest when not
part of an award or judgment and post judgment interest, shall be apportioned in
proportion to the respective interests of the parties hereto in the ultimate net
loss. Office expenses and salaries of officials and employees not classified as
loss adjusters are not chargeable as expenses for the purpose of this paragraph.
C. In the event a verdict or judgment is reduced by an appeal or a settlement,
subsequent to the entry of a judgment, resulting in an ultimate saving on such
verdict or judgment, or a judgment is reversed outright, the expense incurred in
securing such final reduction or reversal shall (1) be prorated between the
Reinsurer and the Company in proportion that each benefits from such reduction
or reversal and the expense incurred up to the time of the original verdict or
judgment shall be prorated in proportion to each party's interest in such
verdict or judgment; or (2) when the terms and conditions of the Company's
original policies reinsured hereunder include expenses as part of the policy
limit, be added to the Company's ultimate net loss.
D. It is understood that the Company has in effect First and Second Excess of
Loss Reinsurance Agreements and recoveries thereunder will be for the sole
benefit of the Company and will be disregarded when computing the ultimate net
loss of the Company.
ARTICLE IX.
EXCESS OF ORIGINAL POLICY LIMITS:
A. This Agreement shall protect the Company, within the limits hereof, in
connection with any loss in excess of the limit of its original policy, such
loss in excess of the limit having been incurred because of failure by it to
settle within the policy limit, or by reason of alleged or actual negligence,
fraud or bad faith in rejecting an offer of settlement or in the preparation of
the defense or in the trial of any action against its insured or in the
preparation or prosecution of an appeal consequent upon such action.
B. However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
C. For the purposes of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original policy.
Page 6 of 15
<PAGE> 7
ARTICLE X.
EXTRA CONTRACTUAL OBLIGATIONS CLAUSE:
A. This Agreement shall protect the Company within the limits hereof, where the
ultimate net loss includes Extra Contractual Obligations. "Extra Contractual
Obligations" are defined as those liabilities not covered under any other
provision of this Agreement and which arise from handling of any claim on
business covered hereunder, such liabilities arising because of, but not limited
to the following: failure by the Company to settle within the policy limit, or
by reason of alleged or actual negligence, fraud or bad faith in rejecting an
offer of settlement or in the preparation of the defense or in the trial of any
action against its insured or reinsured or in the preparation or prosecution of
an appeal consequent upon such action.
B. The date on which an Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original accident,
casualty, disaster or loss and furthermore, for the purposes hereof be deemed to
follow the claims made provisions of this Agreement, subject always to the
provisions of the Term Article.
C. However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
ARTICLE XI.
CLAIMS:
A. In the event of a claim of $3,000,000 or greater arising hereunder which
either results in or appears to be of serious enough nature as probably to
result in a loss involving this Agreement, the Company shall give notice as soon
as reasonably practicable to Reinsurers and the Company shall keep the Reinsurer
advised of all subsequent developments in connection therewith.
B. All loss settlements made by the Company provided they are within the terms
of the Company's original policies and of this Agreement, shall be
unconditionally binding upon Reinsurer and amounts falling to the share of the
Reinsurer shall be payable to the Company in accordance with the provisions set
forth in paragraph C. of the Reports and Remittances Article.
ARTICLE XII.
COMMUTATION CLAUSE:
The Company or the Reinsurer may, at any time express their desire to the
other party to commute all losses which are applicable to any Agreement year and
which are still unsettled. In such event the Company and the Reinsurer shall
mutually determine and evaluate such losses and the payment by the Reinsurer of
their proportion of the amount so ascertained and mutually agreed to be the
value of such losses shall relieve them of all further liability, in respect of
that Agreement year both in respect of known or unknown losses.
Page 7 of 15
<PAGE> 8
ARTICLE XIII.
PREMIUM:
A. The Company shall pay to the Reinsurer a minimum and deposit premium of
$400,000 payable in equal quarterly installments of $100,000 on January 1st,
April 1st, July 1st and October 1st, 1997. In the event the Company elects to
run off its policies in force until natural expiration, not to exceed twelve
(12) months from the expiration date hereon, the Company shall pay to the
Reinsurer a run-off premium equal to 50% of the Actual Earned Reinsurance
Premium, as set forth in paragraph B. The run-off premium shall be paid in equal
quarterly installments on January 1st, April 1st, July 1st and October 1st,
1998.
B. As soon as practicable after expiration of this Agreement, the Company shall
calculate the premium due the Reinsurer based on a rate of .333% of the Gross
Net Earned Premium Income accounted for by the Company during the term of this
Agreement on all business subject matter of the Agreement. In the event the
premium due hereunder is greater than the minimum and deposit premium paid,the
difference shall be paid to the Reinsurer forthwith.
ARTICLE XIV.
REINSTATEMENT:
A.1. As respects Section A.1. of the Limits of Cover Article:
1. In the event of any portion of the coverage under this Agreement being
depleted or exhausted by loss, the amount so depleted or exhausted may,
at the option of the Company, be reinstated from the time claim is first
made and the Company will pay to the Reinsurer for such reinstatement an
additional premium calculated at 100% of the annual reinsurance premium
pro rated as to the amount so reinstated.
2. All calculations of reinstatement premium shall be based on paid
losses only. The decision of the Company to exercise its reinstatement
option must be relayed to Reinsurers within three (3) months from the
time any reserve invades this Agreement.
Plus,
A.2. As respects Section A.2. of the Limits of Cover Article:
1. In the event of a paid loss arising under this Section, additional to
the reinstatement premium payable above, a further reinstatement premium
shall be payable to the Reinsurer, to be calculated at pro rata as
respects amount reinstated and 100% as respects premium based on an
annual premium of $125,000.
2. It is understood and agreed that the payment of reinstatement premiums
arising from losses recoverable under Section A.2. above shall be
mandatory and not at the option of the Company.
B. Nevertheless, the Reinsurer's liability will never be more than $5,000,000 in
respect of any claim made nor more than the Maximum Annual Aggregate Amount
Recoverable under Sections A.1. and A.2. combined of $10,000,000 in all during
the term of the Agreement.
Page 8 of 15
<PAGE> 9
ARTICLE XV.
REPORTS AND REMITTANCES:
A. The Company will provide the Reinsurer within forty-five (45) days at the end
of each quarter, all necessary data respecting premiums and losses, including
reserves thereon, as at dates and on forms mutually acceptable to the Company
and the Reinsurer.
B. Payments of deposit premium and annual adjustments shall be made in
accordance with the provisions of the Premium Article.
C. Payment by the Reinsurer of its portion of loss and loss expenses paid by the
Company will be made by the Reinsurer to the Company as soon as possible, but
not later than sixty (60) days after proof of payment by the Company is received
by the Reinsurer.
ARTICLE XVI.
OFFSET:
The Company and the Reinsurer shall have the right to offset any balance
or amounts due from one party to the other under the terms of this Agreement.
The party asserting the right of offset may exercise such right any time whether
the balances due are on account of premiums or losses or otherwise.
ARTICLE XVII.
CONFIDENTIALITY:
A. This Agreement and the pre Agreement documentation may contain confidential
or proprietary information of either party to this Agreement. All parties shall
maintain the confidentiality of this information and shall not disclose these to
any third party without both parties approval.
B. Notwithstanding the above, any party may disclose such information without
further approval from the other party in answer to interrogations, subpoenas or
other legal/arbitration process as well as to the Company's reinsurance
intermediary hereon, the Reinsurer's retrocessionaires or in response to
requests by governmental and regulatory agencies. In addition the parties may
disclose such information to their accountants and outside legal counsel as may
be necessary.
ARTICLE XVIII.
CURRENCY:
Premiums shall be payable by the Company and losses shall be paid to the
Company in United States currency.
Page 9 of 15
<PAGE> 10
ARTICLE XIX.
FEDERAL EXCISE TAX:
(Applicable to those Reinsurers, excepting Underwriters at Lloyd's, London and
other Reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow, for the purpose of paying the Federal
Excise Tax, the applicable percentage of the premium payable hereon (as imposed
under Section 4371 of the Internal Revenue Service Code) to the extent such
premium is subject to the Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the Reinsurer
will deduct the aforesaid percentage from the return premium payable hereon and
the Company or its agent should take steps to recover the tax from the United
States government.
ARTICLE XX.
ERRORS AND OMISSIONS:
Any inadvertent delay, omission or error shall not be held to relieve
either party hereto from any liability which would attach to it hereunder if
such delay, omission or error had not been made, provided such delay, omission
or error is rectified immediately upon discovery; provided, however, this
Article is not to override retroactive dates specified in the Term Article.
ARTICLE XXI.
ACCESS TO RECORDS:
A. The Company shall place at the disposal of the Reinsurer at all reasonable
times, and the Reinsurer shall have the right to inspect, through its authorized
representatives, all books, records and papers of the Company in connection with
this reinsurance hereunder or the subject matter thereof.
B. The Reinsurer shall be afforded the opportunity, at its own expense to
appoint an attorney of its own choice to assess the Company's claims procedures
who shall report to the Reinsurer the results of such.
ARTICLE XXII.
FUNDING:
(This clause is only applicable to those Reinsurer(s) who cannot qualify for
credit by the State having jurisdiction over the Company's loss reserves.)
A. As regards policies or bonds issued by the Company coming within the scope of
this Agreement, the Company agrees that, when it shall file with the Insurance
Department or set up on its books reserves for losses covered hereunder which it
shall be required by law to set up, it will forward to the Reinsurer a statement
showing the proportion of such loss reserves which
Page 10 of 15
<PAGE> 11
is applicable to the Reinsurer. The Reinsurer hereby agrees that it will apply
for and secure delivery to the Company of a clean, irrevocable and unconditional
Letter of Credit, issued by a bank which is acceptable to the regulatory
authority(ies) having jurisdiction over the Company's loss reserves in an amount
equal to the Reinsurer's proportion of reserves in respect of known outstanding
losses that have been reported to the Reinsurer and allocated loss expenses
relating thereto, plus reserves for losses incurred but not reported, as shown
in the statement prepared by the Company.
B. The Letter of Credit shall be issued for a period of not less than one (1)
year, and shall be automatically extended for one (1) year from its date of
expiration or any future expiration date unless thirty (30) days prior to any
expiration date the issuing bank shall notify the Company by registered mail
that the bank elects not to consider the Letter of Credit extended for any
additional period. An issuing bank, not a member of the Federal Reserve System
or not chartered in New York State shall provide sixty (60) days notice to the
Company prior to any expiration in the event of non-extension.
C. Notwithstanding any other provision of this Agreement, the Company or its
successors in interest may draw upon such credit at any time without diminution
because of the insolvency of the Company or of the Reinsurer for one or more of
the following purposes only:
1. To pay the Reinsurer's share or to reimburse the Company for the
Reinsurer's share of any loss reinsured by this Agreement, the
payment of which has been agreed by the Reinsurer and which has
not been otherwise paid.
2. To make refund of any sum which is in excess of the actual amount
required to pay the Reinsurer's share of any liability reinsured
by this Agreement.
3. In the event of expiration of the Letter of Credit as provided for
above, to establish deposit of the Reinsurer's share of known and
reported outstanding losses and allocated expenses relating
thereto under this Agreement. Such cash deposit shall be held in
an interest bearing account separate from the Company's other
assets, and interest thereon shall accrue to the benefit of the
Reinsurer.
D. The issuing bank shall have no responsibility whatsoever in connection with
the propriety of withdrawals made by the Company or the disposition of funds
withdrawn, except to ensure that withdrawals are made only upon the order of
properly authorized representatives of the Company.
E. At annual intervals, or more frequently as agreed but never more frequently
than quarterly, the Company shall prepare a specific statement, for the sole
purpose of amending the Letter of Credit, of the Reinsurer's share of known and
reported outstanding losses and allocated expenses relating thereto, plus
reserves for losses incurred but not reported. If the statement shows that
Reinsurer's share of such losses and allocated loss expenses exceeds the balance
of credit as of the statement date, the Reinsurer shall, within thirty (30) days
after receipt of notice of such excess, secure delivery to the Company of an
amendment of the Letter of Credit increasing the amount of credit by the amount
of such difference. If, however, the statement
Page 11 of 15
<PAGE> 12
shows that the Reinsurer's share of known and reported outstanding losses plus
allocated loss expenses relating thereto, plus reserves for losses incurred but
not reported is less than the balance of credit as of the statement date, the
Company shall, within thirty (30) days after receipt of written request from the
Reinsurer, release such excess credit by agreeing to secure an amendment to the
Letter of Credit reducing the amount of credit available by the amount of such
excess credit.
ARTICLE XXIII.
SPECIAL FUNDING CLAUSE:
A. If, during the period of this Agreement and thereafter, as respects any
outstanding liabilities hereunder, the Reinsurer shall fail to pay any loss
payable hereunder within the time prescribed, the Reinsurer agrees that it will
fund uncollected paid losses and loss adjustment expenses within thirty (30)
days from the date of written demand by the Company to so fund. Such demand
shall not be made unless balances are sixty (60) days or more past the due date
of payment specified in this Agreement.
B. The Reinsurer shall have the sole option of determining the method of funding
referred to above, provided it is acceptable to the insurance regulatory
authorities involved. If the Reinsurer elects to fund the aforesaid loss by a
Letter of Credit, the procedures set forth in the Funding Article in respect of
Letters of Credit shall apply. If the Reinsurer has already funded obligations
hereunder in accordance with the Funding Article in this Agreement, it agrees
that such funds as are required to pay overdue losses may immediately be drawn
down by the Company.
C. The phrase "any loss payable" as used in paragraph A. above shall mean any
ultimate net loss subject to recovery under this Agreement wherein the Reinsurer
has not disputed said loss in writing within the due date for payment.
D. The Company will provide the Reinsurer with a reinsurance proof of loss and
such other substantive loss material reflecting the nature of the settlement
(i.e., applicable Proofs of Loss, Releases, adjuster's reports, etc.). If,
subsequent to receipt of this material, the information supplied is insufficient
or not in accordance with the contractual conditions, then the payment due date
as defined in the Reports and Remittances Article, will be deemed to be the date
upon which the Reinsurer received such additional substantive material necessary
to approve payment of the claim, or the date the claim is presented in a manner
acceptable to the Reinsurer.
ARTICLE XXIV.
ARBITRATION:
A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Agreement,
including the formation or validity thereof, shall be submitted for decision to
a panel of three arbitrators. Notice requesting arbitration will be in writing
and sent certified or registered mail, return receipt requested.
Page 12 of 15
<PAGE> 13
B. One arbitrator shall be chosen by each party and the two arbitrators shall,
before instituting the hearing, choose an impartial third arbitrator who shall
preside at the hearing. If either party fails to appoint its arbitrator within
thirty (30) days after being requested to do so by the other party, the latter,
after ten (10) days notice by certified or registered mail of its intention to
do so, may appoint the second arbitrator.
C. If the two arbitrators are unable to agree upon the third arbitrator within
thirty (30) days of their appointment, the deficiency shall be supplied on the
application of the party requesting arbitration by an appointment made by the
American Arbitration Association. Notwithstanding the appointment of any third
Arbitrator by the American Arbitration Association, the arbitration proceedings
shall not be governed by the American Arbitration Association's commercial
arbitration rules.
D. All arbitrators shall be disinterested active or former executive officers of
insurance or reinsurance companies or Underwriters at Lloyd's, London.
E. Within thirty (30) days after notice of appointment of all arbitrators, the
panel shall meet and determine timely periods for briefs, discovery procedures
and schedules for hearings.
F. The panel shall be relieved of all judicial formality and shall not be bound
by the strict rules of procedure and evidence. Unless the panel agrees
otherwise, arbitration shall take place in Beverly Hills, California, but the
venue may be changed when deemed by the panel to be in the best interest of the
arbitration proceeding. Insofar as the arbitration panel looks to substantive
law, it shall consider the law of the State of California. The decision of any
two arbitrators when rendered in writing shall be final and binding. The panel
is empowered to grant interim relief as it may deem appropriate.
G. The panel shall interpret this Agreement as if it were an honorable
engagement rather than as merely a legal obligation and shall make its decision
considering the custom and practice of the applicable insurance and reinsurance
business within sixty (60) days following the termination of the hearings.
Judgment upon the award may be entered in any court having jurisdiction thereof.
H. Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the cost of the third arbitrator. The
remaining costs of the arbitration shall be allocated by the panel. The panel
may, at its discretion, award such further costs and expenses as it considers
appropriate, including but not limited to attorneys fees, to the extent
permitted by law.
ARTICLE XXV.
SERVICE OF SUIT CLAUSE (U.S.A.):
A. It is agreed that in the event of the failure of the Reinsurer hereon to pay
any amount claimed to be due hereunder, the Reinsurer hereon, at the request of
the Company, will submit to the jurisdiction of a Court of competent
jurisdiction within the United States. Nothing in this Clause constitutes or
should be understood to constitute a waiver of the Reinsurer's rights to
commence an action in any Court of competent jurisdiction in the United States,
to remove an
Page 13 of 15
<PAGE> 14
action to a United States District Court, or to seek a transfer of a case to
another Court as permitted by the laws of the United States or of any State in
the United States. It is further agreed that service of process in such suit may
be made upon Messrs. Mendes & Mount, 725 South Figueroa, Suite 1990, Los
Angeles, CA 90017, and that in any suit instituted, the Reinsurer will abide by
the final decision of such Court or of any Appellate Court in the event of an
appeal.
B. The above-named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of the Company
to give written undertaking to the Company that they will enter a general
appearance upon the Reinsurer's behalf in the event such a suit shall be
instituted.
C. Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefor, the Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be served
any lawful process in action, suit or proceeding instituted by or on behalf of
the Company or any beneficiary hereunder arising out of this Agreement, and
hereby designate the above-named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE XXVI.
INSOLVENCY:
A. The portion of any risk or obligation assumed by the Reinsurer, when such
portion is ascertained, shall be payable on demand of the Company at the same
time as the Company shall pay its net retained portion of such risk or
obligation, with reasonable provision for verification before payment, and the
reinsurance shall be payable by the Reinsurer, on the basis of the liability of
the Company under the policy or policies reinsured without diminution because of
the insolvency of the Company.
B. In the event of the insolvency of one or more than one of the Companies,
reinsurance under this Agreement shall be payable immediately on demand, with
reasonable provision for verification, on the basis of claims allowed against
the insolvent Company(ies) by any court of competent jurisdiction or by any
liquidator, receiver, or statutory successor of the Company(ies) having
authority to allow such claims, without diminution because of such insolvency or
because such liquidator, receiver, or statutory successor has failed to pay all
or a portion of any claims. Such payments by the Reinsurer shall be made
directly to the Company or its liquidator, receiver or statutory successor,
except where the contract of insurance or reinsurance provides another payee of
such reinsurance in the event of the insolvency of the Company(ies).
C. It is agreed, however, that the liquidator or receiver or statutory successor
of the insolvent Company(ies) will give written notice to the Reinsurer of the
pendency of a claim against the insolvent Company(ies) on the policy or policies
reinsured within a reasonable time after such claim is filed in the insolvency
proceeding and that during the pendency of such claim the Reinsurer may
investigate such claim and interpose, at its own expense, in the proceeding
where
Page 14 of 15
<PAGE> 15
such claim is to be adjudicated any defense or defenses which it may deem
available to the Company(ies) or its liquidator or receiver or statutory
successor. The expense thus incurred by the Reinsurer will be chargeable,
subject to court approval, against the insolvent Company(ies) as part of the
expense of liquidation to the extent of a proportionate share of the benefit
which may accrue to the Company(ies) solely as a result of the defense
undertaken by the Reinsurer.
D. Where two or more reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense will be
apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the insolvent Company(ies).
ARTICLE XXVII.
INTERMEDIARY:
Willcox Incorporated Reinsurance Intermediaries is hereby recognized as
the Intermediary negotiating this Agreement for all business hereunder. All
communications (including but not limited to notices, statements, premium,
return premium, commissions, taxes, losses, loss adjustment expense, salvages
and loss settlements) relating thereto shall be transmitted to the Company or
the Reinsurer through Willcox Incorporated Reinsurance Intermediaries, 180
Maiden Lane, New York, New York 10038-4993. Payments by the Company to the
Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by
the Reinsurer to the Intermediary shall be deemed to constitute payment to the
Company only to the extent that such payments are actually received by the
Company.
ARTICLE XXVIII.
GOVERNING LAW:
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of California, U.S.A.
ARTICLE XXIX.
SEVERAL LIABILITY NOTICE:
The subscribing reinsurers' obligations under contracts of reinsurance to
which they subscribe are several and not joint and are limited solely to the
extent of their individual subscriptions. The subscribing reinsurers are not
responsible for the subscription of any co-subscribing reinsurer who for any
reason does not satisfy all or part of its obligations.
Page 15 of 15
<PAGE> 16
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
THIRD EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a % participation in the Interests and
Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Third Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the participation
of other subscribing reinsurers, and the Subscribing Reinsurer shall under no
circumstances participate in the Interests and Liabilities, if any, of the other
subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer % of all premiums due
or which may become due the Reinsurer in accordance with the provisions of the
Agreement attached.
This Contract shall attach on January 1, 1997, and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
Page 1 of 2
<PAGE> 17
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of August , 1997
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
By: /s/ DONALD J. ZUK
------------------------
Signed in
this day of , 199
Page 2 of 2
<PAGE> 18
MEMORANDUM OF CHANGES
to the
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE, et al
THIRD EXCESS OF LOSS REINSURANCE AGREEMENT
The following changes have been effected from the expiring Third Excess
of Loss Reinsurance Agreement Number 01-96-0022 as per the cover note/placement
slip:
1. The list of Companies hereon, collectively referred to as the "Company",
has been revised.
2. Article I, "Business Covered",
- the sunrise provision has been revised to apply to the 1987 to
1991 underwriting years, in this and all other applicable
Articles.
- the sunset provision has been deleted and reference to same has
been deleted from all other applicable Articles.
3. Article III, "Term", the dates have been amended, in this and all other
applicable Articles, for the current term.
4. Article XIII, "Premium",
- the minimum and deposit premium decreased from $440,000 to
$400,000.
- the rate decreased from .357% to .333%.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
Page 1 of 1
<PAGE> 1
EXHIBIT 10.24
FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
The Subscribing Reinsurer(s) executing the
Interests and Liabilities Contract(s)
attached to and forming a part
of this Agreement
(hereinafter referred to as the "Reinsurer")
WITNESSETH:
The Reinsurer hereby reinsures the Company to the extent and the terms
and conditions subject to the exceptions, exclusions and limitations hereinafter
set forth and nothing hereinafter shall in any manner create any obligations or
establish any rights against the Reinsurer in favor of any third parties or any
persons not parties to this Agreement.
ARTICLE I.
BUSINESS COVERED:
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amount of ultimate net loss which the Company may pay as the
result of claims made during the term of this Agreement under the Company's
Physicians and Surgeons Comprehensive Professional and Business Liability
policies, including Clinics and Clinical Laboratories, Professional and Business
Liability policies for Hospitals and Errors and Omissions Liability policies for
Managed Care Organizations, which are in force or may hereinafter come into
force during the term of this Agreement, except as excluded under the Exclusions
Article subject to the limitations set forth in the Limits of Cover Article.
Page 1 of 14
<PAGE> 2
ARTICLE II.
EXCLUSIONS:
This Agreement specifically excludes:
1. All liability of the Company arising by contract, operation of
law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund. "Insolvency
Fund" includes any guaranty fund, plan, pool, association, fund
or other arrangement, howsoever denominated, established or
governed which provides for any assessment of or payment or
assumption by the Company of part or all of any claim, debt,
charge, fee or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority
to be insolvent, or which is otherwise deemed unable to meet any
claim, debt, charge, fee or other obligation in whole or in
part.
2. Loss or Liability excluded by the provisions of the attached
"Nuclear Incident Exclusion Clause - Liability - Reinsurance".
3. All Assumed Reinsurance.
ARTICLE III.
TERM:
A. Except as provided in paragraph C. below, this Agreement shall apply to
claims made during the twelve (12) month period beginning January 1, 1997. In
the event a loss, as defined in Definitions Article, involves a loss or losses
covered under the current Agreement Year and a prior Agreement Year(s) no
recovery shall be made hereunder in respect of any loss which occurred prior to:
1. January 1st, 1979 as regards Extra Contractual Obligations (as
provided for in the Extra Contractual Obligations Clause
Article)
2. January 1st, 1976 as regards all other business.
B. It is understood however, that in respect of Personal Liability and Discovery
Period coverage for Deceased, Disabled, Retired and Withdrawing Physicians and
for Physicians ceasing Medical Practice within the State, this Agreement covers
claims made during the period of this Reinsurance Agreement. In the event this
Agreement is not renewed, all such liability shall be assumed by the Company
with effect from the date of cancellation.
C. The provisions of paragraphs A. and B. notwithstanding, the Company may, at
its option, elect to continue to cover the in force portfolio of liability on
the date of expiration for a further period of twelve (12) months. Should the
Company exercise this option, the Company shall give the Reinsurer notice prior
to expiration that they wish to exercise this option. The Company shall pay to
the Reinsurer an additional premium thereon as set forth in the Premium Article.
Page 2 of 14
<PAGE> 3
D. If any law or regulation of the Federal, State or Local Government or any
jurisdiction in which the Company is doing business shall render illegal the
arrangements made herein, this Agreement can be terminated immediately insofar
as it applies to such jurisdiction by the Company giving notice to the Reinsurer
to such effect.
E. Notwithstanding the expiration of this Agreement as hereinabove provided, the
provisions of this Agreement shall continue to apply to all unfinished business
hereunder to the end that all obligations and liabilities incurred by each party
hereunder prior to such termination shall be fully performed and discharged.
ARTICLE IV.
ATTACHMENT OF LIABILITY:
A. For purposes of determining the attachment of the Reinsurer's liability
hereunder as respects any one loss, all losses (including Discovery Period
Losses) involving one or more Original Insureds, arising from the same medical
incident, and in which First Notice of Claim or Circumstance is notified to the
Company during the term of this Agreement shall be covered hereunder. Where
first notice falls in Agreement Years incepting prior to January 1, 1992
paragraph B. (Interlocking Clause) of the Limits of Cover Article below, shall
apply hereon for Physicians and Surgeons comprehensive Professional Liability
policies only.
B. The date of a loss hereunder shall be the earliest date, within the term of
this Agreement, that the Company has received First Notice of Claim or
Circumstance.
ARTICLE V.
LIMITS OF COVER:
A. The Company shall retain for its own account and pay under one or more of the
Company's policies the first $10,000,000 ultimate net loss, each and every loss
and the Reinsurer agrees to reimburse the Company for the amount of ultimate net
loss paid in excess of $10,000,000, each and every loss, but the Reinsurer's
maximum liability shall not exceed $10,000,000 resulting from each and every
loss; subject further to a maximum liability of the Reinsurer of $20,000,000 in
the aggregate for all losses during the period of this Agreement.
B. (This paragraph shall apply only to those claims where first notice of claim
or circumstance falls in Agreement Years prior to January 1, 1992.) As respects
each and every loss where this Agreement responds on a claims made basis, and
more than one insured or policy is covered under this Agreement period with
claims made dates falling in more than one reinsurance agreement period, the
limit and retention as respects claims covered under this Agreement shall be the
percentage of the Limit and Retention under this Agreement that the amount of
covered claim or claims hereunder bears to the total of all covered claims from
the same loss.
Page 3 of 14
<PAGE> 4
C. The Company warrants the following in respect of the business covered
hereunder:
1. In respect of Physicians and Surgeons Comprehensive Professional
and Business Liability policies, including Clinics and Clinical
Laboratories, the Company warrants the maximum original policy
limits shall not exceed $10,000,000 subject to inuring protection
of $8,000,000 excess of $2,000,000 or so deemed.
2. In respect of Professional and Business Liability policies for
Hospitals written on or after January 1, 1996, policy limits
greater than $500,000 shall be reinsured elsewhere on an excess of
loss basis or so deemed.
3. In respect of Professional and Business Liability policies for
Hospitals written prior to January 1, 1996, policy limits greater
than $5,000,000 shall be reinsured elsewhere on an excess of loss
basis or so deemed.
4. In respect of Errors and Omissions Liability policies for Managed
Care Organizations, the maximum original policy limit is
$5,000,000.
ARTICLE VI.
DEFINITIONS:
A. The term "each and every loss" shall mean the happening of one or a series of
related acts, errors, or omissions to act, accidents or occurrences arising out
of one event.
B. The term "Gross Net Earned Premium Income" shall mean the gross earned
premium on business the subject matter hereof less cancellations and return
premiums and less premiums paid for reinsurance recoveries under which would
inure to the benefit of the Reinsurer.
Such Premium Income shall be understood to include:
1. that content of pre-paid premiums under policies in respect of
Deceased, Disabled and Retired Insureds, the coverage for which
becomes effective during the Agreement period.
2. the premium transferred internally by the Company from a prior
Agreement year or years, in respect of Deceased, Disabled and
Retired Insureds and in respect of other withdrawing Insureds who
have purchased extended coverage under Reporting Endorsements.
C. The term "claims made" as used herein shall mean (A) In respect of Claims
Made Policies, claims first notified to the Company during the term of this
Agreement on any in force policy or reporting endorsement arising out of
incidents subsequent to the retroactive date of said policy as the result of the
rendering of or failure to render a professional service or the reporting of
losses which arise from the insured premises and operations incidental to the
practice of a physician, hospital or managed care organization and/or (B) In
respect of Occurrence Policies, claims or losses first notified to the Company
during the term of this Agreement.
Page 4 of 14
<PAGE> 5
ARTICLE VII.
NET RETAINED LINES:
A. This Agreement applies to only that portion of any insurance which the
Company retains net for its own account; and in calculating the amount of any
loss hereunder and also in computing the amount or amounts in excess of which
this Agreement attaches, only loss or losses in respect of that portion of any
insurance which the Company retains net for its own account shall be included.
B. The amount of the Reinsurer's liability hereunder in respect of any loss or
losses shall not be increased by reason of the inability of the Company to
collect from any other underwriters, whether specific or general, any amount
which may become due from them, whether such inability arises from the
insolvency of such other underwriters or otherwise.
ARTICLE VIII.
ULTIMATE NET LOSS:
A. The term "ultimate net loss" as used herein shall be understood to mean the
sum actually paid by the Company in settlement of losses for which it is held
liable, including pre judgment interest when made part of the award or judgment,
80% of Extra Contractual Obligations and 100% of loss in Excess of Original
Policy Limits as provided in the respectively captioned Articles, after making
proper deductions for all recoveries, salvages, and claims upon other
reinsurances and insurances which inure to the benefit of the Reinsurer under
this Agreement, whether collectible or not, and shall exclude all loss
adjustment expenses (which shall be separately allocated and paid as provided in
paragraph B. below); provided, however, that in the event of the insolvency of
the Company, "ultimate net loss" shall mean the amount of loss which the Company
has incurred or for which it is liable, and payment by the Reinsurer shall be
made to the liquidator, receiver or statutory successor of the Company in
accordance with the provisions of the Insolvency Article in this Agreement.
Nothing in this clause, however, shall be construed to mean that losses under
this Agreement are not recoverable until the ultimate net loss of the Company
has been ascertained.
B. All loss adjustment expenses incurred in investigation, adjustment and
litigation, defense and settlement of claims made against the Company under its
original policies reinsured hereunder, including pre judgment interest when not
part of an award or judgment and post judgment interest, shall be apportioned in
proportion to the respective interests of the parties hereto in the ultimate net
loss. Office expenses and salaries of officials and employees not classified as
loss adjusters are not chargeable as expenses for the purpose of this paragraph.
C. In the event a verdict or judgment is reduced by an appeal or a settlement,
subsequent to the entry of a judgment, resulting in an ultimate saving on such
verdict or judgment, or a judgment is reversed outright, the expense incurred in
securing such final reduction or reversal shall (1) be prorated between the
Reinsurer and the Company in proportion that each benefits from such reduction
or reversal and the expense incurred up to the time of the original verdict or
judgment shall be prorated in proportion to each party's interest in such
verdict or judgment; or (2) when the terms and conditions of the Company's
original policies reinsured hereunder include expenses as part of the policy
limit, be added to the Company's ultimate net loss.
Page 5 of 14
<PAGE> 6
D. It is understood that the Company has in effect First, Second and Third
Excess of Loss Reinsurance Agreements and recoveries thereunder will be for the
sole benefit of the Company and will be disregarded when computing the ultimate
net loss of the Company.
ARTICLE IX.
EXCESS OF ORIGINAL POLICY LIMITS:
A. This Agreement shall protect the Company, within the limits hereof, in
connection with any loss in excess of the limit of its original policy, such
loss in excess of the limit having been incurred because of failure by it to
settle within the policy limit, or by reason of alleged or actual negligence,
fraud or bad faith in rejecting an offer of settlement or in the preparation of
the defense or in the trial of any action against its insured or in the
preparation or prosecution of an appeal consequent upon such action.
B. However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
C. For the purposes of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original policy.
ARTICLE X.
EXTRA CONTRACTUAL OBLIGATIONS CLAUSE:
A. This Agreement shall protect the Company within the limits hereof, where the
ultimate net loss includes Extra Contractual Obligations. "Extra Contractual
Obligations" are defined as those liabilities not covered under any other
provision of this Agreement and which arise from handling of any claim on
business covered hereunder, such liabilities arising because of, but not limited
to the following: failure by the Company to settle within the policy limit, or
by reason of alleged or actual negligence, fraud or bad faith in rejecting an
offer of settlement or in the preparation of the defense or in the trial of any
action against its insured or reinsured or in the preparation or prosecution of
an appeal consequent upon such action.
B. The date on which an Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original accident,
casualty, disaster or loss and furthermore, for the purposes hereof be deemed to
follow the claims made provisions of this Agreement, subject always to the
provisions of the Term Article.
C. However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
Page 6 of 14
<PAGE> 7
ARTICLE XI.
CLAIMS:
A. In the event of a claim of $3,000,000 or greater arising hereunder which
either results in or appears to be of serious enough nature as probably to
result in a loss involving this Agreement, the Company shall give notice as soon
as reasonably practicable to Reinsurers and the Company shall keep the Reinsurer
advised of all subsequent developments in connection therewith.
B. All loss settlements made by the Company provided they are within the terms
of the Company's original policies and of this Agreement, shall be
unconditionally binding upon Reinsurer and amounts falling to the share of the
Reinsurer shall be payable to the Company in accordance with the provisions set
forth in paragraph C. of the Reports and Remittances Article.
ARTICLE XII.
COMMUTATION CLAUSE:
The Company or the Reinsurer may, at any time express their desire to the
other party to commute all losses which are applicable to any Agreement year and
which are still unsettled. In such event the Company and the Reinsurer shall
mutually determine and evaluate such losses and the payment by the Reinsurer of
their proportion of the amount so ascertained and mutually agreed to be the
value of such losses shall relieve them of all further liability, in respect of
that Agreement year both in respect of known or unknown losses.
ARTICLE XIII.
PREMIUM:
A. The Company shall pay to the Reinsurer a minimum and deposit premium of
$500,000 payable in equal quarterly installments of $125,000 on January 1st,
April 1st, July 1st and October 1st, 1997. In the event the Company elects to
run off its policies in force until natural expiration, not to exceed twelve
(12) months from the expiration date hereon, the Company shall pay to the
Reinsurer a run-off premium equal to 50% of the Actual Earned Reinsurance
Premium, as set forth in paragraph B. The run-off premium shall be paid in equal
quarterly installments on January 1st, April 1st, July 1st and October 1st,
1998.
B. As soon as practicable after expiration of this Agreement, the Company shall
calculate the premium due the Reinsurer based on a rate of .445% of the Gross
Net Earned Premium Income accounted for by the Company during the term of this
Agreement on all business subject matter of the Agreement. In the event the
premium due hereunder is greater than the minimum and deposit premium paid, the
difference shall be paid to the Reinsurer forthwith.
Page 7 of 14
<PAGE> 8
ARTICLE XIV.
REINSTATEMENT:
A. In the event of any portion of the coverage under this Agreement being
depleted or exhausted by loss, the amount so depleted or exhausted may, at the
option of the Company, be reinstated from the time claim is first made and the
Company will pay to the Reinsurer for such reinstatement an additional premium
calculated at 100% of the annual reinsurance premium pro rated as to the amount
so reinstated. Nevertheless, the Reinsurer's liability will never be more than
$10,000,000 in respect of any one claim made nor more than $20,000,000 in all
during the term of this Agreement.
B. All calculations of reinstatement premium shall be based on paid losses only.
The decision of the Company to exercise its reinstatement option must be relayed
to Reinsurers within three (3) months from the time any reserve invades this
Agreement.
ARTICLE XV.
REPORTS AND REMITTANCES:
A. The Company will provide the Reinsurer within forty-five (45) days at the end
of each quarter, all necessary data respecting premiums and losses, including
reserves thereon, as at dates and on forms mutually acceptable to the Company
and the Reinsurer.
B. Payments of deposit premium and annual adjustments shall be made in
accordance with the provisions of the Premium Article.
C. Payment by the Reinsurer of its portion of loss and loss expenses paid by the
Company will be made by the Reinsurer to the Company as soon as possible, but
not later than sixty (60) days after proof of payment by the Company is received
by the Reinsurer.
ARTICLE XVI.
OFFSET:
The Company and the Reinsurer shall have the right to offset any balance
or amounts due from one party to the other under the terms of this Agreement.
The party asserting the right of offset may exercise such right any time whether
the balances due are on account of premiums or losses or otherwise.
ARTICLE XVII.
CONFIDENTIALITY:
A. This Agreement and the pre Agreement documentation may contain confidential
or proprietary information of either party to this Agreement. All parties shall
maintain the confidentiality of this information and shall not disclose these to
any third party without both parties approval.
Page 8 of 14
<PAGE> 9
B. Notwithstanding the above, any party may disclose such information without
further approval from the other party in answer to interrogations, subpoenas or
other legal/arbitration process as well as to the Company's reinsurance
intermediary hereon, the Reinsurer's retrocessionaires or in response to
requests by governmental and regulatory agencies. In addition the parties may
disclose such information to their accountants and outside legal counsel as may
be necessary.
ARTICLE XVIII.
CURRENCY:
Premiums shall be payable by the Company and losses shall be paid to the
Company in United States currency.
ARTICLE XIX.
FEDERAL EXCISE TAX:
(Applicable to those Reinsurers, excepting Underwriters at Lloyd's, London and
other Reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow, for the purpose of paying the Federal
Excise Tax, the applicable percentage of the premium payable hereon (as imposed
under Section 4371 of the Internal Revenue Service Code) to the extent such
premium is subject to the Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the Reinsurer
will deduct the aforesaid percentage from the return premium payable hereon and
the Company or its agent should take steps to recover the tax from the United
States government.
ARTICLE XX.
ERRORS AND OMISSIONS:
Any inadvertent delay, omission or error shall not be held to relieve
either party hereto from any liability which would attach to it hereunder if
such delay, omission or error had not been made, provided such delay, omission
or error is rectified immediately upon discovery; provided, however, this
Article is not to override retroactive dates specified in the Term Article.
ARTICLE XXI.
ACCESS TO RECORDS:
A. The Company shall place at the disposal of the Reinsurer at all reasonable
times, and the Reinsurer shall have the right to inspect, through its authorized
representatives, all books, records and papers of the Company in connection with
this reinsurance hereunder or the subject matter thereof.
Page 9 of 14
<PAGE> 10
B. The Reinsurer shall be afforded the opportunity, at its own expense to
appoint an attorney of its own choice to assess the Company's claims procedures
who shall report to the Reinsurer the results of such.
ARTICLE XXII.
FUNDING:
(This clause is only applicable to those Reinsurer(s) who cannot qualify for
credit by the State having jurisdiction over the Company's loss reserves.)
A. As regards policies or bonds issued by the Company coming within the scope of
this Agreement, the Company agrees that, when it shall file with the Insurance
Department or set up on its books reserves for losses covered hereunder which it
shall be required by law to set up, it will forward to the Reinsurer a statement
showing the proportion of such loss reserves which is applicable to the
Reinsurer. The Reinsurer hereby agrees that it will apply for and secure
delivery to the Company of a clean, irrevocable and unconditional Letter of
Credit, issued by a bank which is acceptable to the regulatory authority(ies)
having jurisdiction over the Company's loss reserves in an amount equal to the
Reinsurer's proportion of reserves in respect of known outstanding losses that
have been reported to the Reinsurer and allocated loss expenses relating
thereto, plus reserves for losses incurred but not reported, as shown in the
statement prepared by the Company.
B. The Letter of Credit shall be issued for a period of not less than one (1)
year, and shall be automatically extended for one (1) year from its date of
expiration or any future expiration date unless thirty (30) days prior to any
expiration date the issuing bank shall notify the Company by registered mail
that the bank elects not to consider the Letter of Credit extended for any
additional period. An issuing bank, not a member of the Federal Reserve System
or not chartered in New York State shall provide sixty (60) days notice to the
Company prior to any expiration in the event of non-extension.
C. Notwithstanding any other provision of this Agreement, the Company or its
successors in interest may draw upon such credit at any time without diminution
because of the insolvency of the Company or of the Reinsurer for one or more of
the following purposes only:
1. To pay the Reinsurer's share or to reimburse the Company for the
Reinsurer's share of any loss reinsured by this Agreement, the
payment of which has been agreed by the Reinsurer and which has
not been otherwise paid.
2. To make refund of any sum which is in excess of the actual amount
required to pay the Reinsurer's share of any liability reinsured
by this Agreement.
3. In the event of expiration of the Letter of Credit as provided for
above, to establish deposit of the Reinsurer's share of known and
reported outstanding losses and allocated expenses relating
thereto under this Agreement. Such cash deposit shall be held in
an interest bearing account separate from the Company's other
assets, and interest thereon shall accrue to the benefit of the
Reinsurer.
Page 10 of 14
<PAGE> 11
D. The issuing bank shall have no responsibility whatsoever in connection with
the propriety of withdrawals made by the Company or the disposition of funds
withdrawn, except to ensure that withdrawals are made only upon the order of
properly authorized representatives of the Company.
E. At annual intervals, or more frequently as agreed but never more frequently
than quarterly, the Company shall prepare a specific statement, for the sole
purpose of amending the Letter of Credit, of the Reinsurer's share of known and
reported outstanding losses and allocated expenses relating thereto, plus
reserves for losses incurred but not reported. If the statement shows that
Reinsurer's share of such losses and allocated loss expenses exceeds the balance
of credit as of the statement date, the Reinsurer shall, within thirty (30) days
after receipt of notice of such excess, secure delivery to the Company of an
amendment of the Letter of Credit increasing the amount of credit by the amount
of such difference. If, however, the statement shows that the Reinsurer's share
of known and reported outstanding losses plus allocated loss expenses relating
thereto, plus reserves for losses incurred but not reported is less than the
balance of credit as of the statement date, the Company shall, within thirty
(30) days after receipt of written request from the Reinsurer, release such
excess credit by agreeing to secure an amendment to the Letter of Credit
reducing the amount of credit available by the amount of such excess credit.
ARTICLE XXIII.
SPECIAL FUNDING CLAUSE:
A. If, during the period of this Agreement and thereafter, as respects any
outstanding liabilities hereunder, the Reinsurer shall fail to pay any loss
payable hereunder within the time prescribed, the Reinsurer agrees that it will
fund uncollected paid losses and loss adjustment expenses within thirty (30)
days from the date of written demand by the Company to so fund. Such demand
shall not be made unless balances are sixty (60) days or more past the due date
of payment specified in this Agreement.
B. The Reinsurer shall have the sole option of determining the method of funding
referred to above, provided it is acceptable to the insurance regulatory
authorities involved. If the Reinsurer elects to fund the aforesaid loss by a
Letter of Credit, the procedures set forth in the Funding Article in respect of
Letters of Credit shall apply. If the Reinsurer has already funded obligations
hereunder in accordance with the Funding Article in this Agreement, it agrees
that such funds as are required to pay overdue losses may immediately be drawn
down by the Company.
C. The phrase "any loss payable" as used in paragraph A. above shall mean any
ultimate net loss subject to recovery under this Agreement wherein the Reinsurer
has not disputed said loss in writing within the due date for payment.
D. The Company will provide the Reinsurer with a reinsurance proof of loss and
such other substantive loss material reflecting the nature of the settlement
(i.e., applicable Proofs of Loss, Releases, adjuster's reports, etc.). If,
subsequent to receipt of this material, the information supplied is insufficient
or not in accordance with the contractual conditions, then the payment due date
as defined in the Reports and Remittances Article, will be deemed to be the date
upon which the Reinsurer received such additional substantive material necessary
to approve payment of the claim, or the date the claim is presented in a manner
acceptable to the Reinsurer.
Page 11 of 14
<PAGE> 12
ARTICLE XXIV.
ARBITRATION:
A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Agreement,
including the formation or validity thereof, shall be submitted for decision to
a panel of three arbitrators. Notice requesting arbitration will be in writing
and sent certified or registered mail, return receipt requested.
B. One arbitrator shall be chosen by each party and the two arbitrators shall,
before instituting the hearing, choose an impartial third arbitrator who shall
preside at the hearing. If either party fails to appoint its arbitrator within
thirty (30) days after being requested to do so by the other party, the latter,
after ten (10) days notice by certified or registered mail of its intention to
do so, may appoint the second arbitrator.
C. If the two arbitrators are unable to agree upon the third arbitrator within
thirty (30) days of their appointment, the deficiency shall be supplied on the
application of the party requesting arbitration by an appointment made by the
American Arbitration Association. Notwithstanding the appointment of any third
Arbitrator by the American Arbitration Association, the arbitration proceedings
shall not be governed by the American Arbitration Association's commercial
arbitration rules.
D. All arbitrators shall be disinterested active or former executive officers of
insurance or reinsurance companies or Underwriters at Lloyd's, London.
E. Within thirty (30) days after notice of appointment of all arbitrators, the
panel shall meet and determine timely periods for briefs, discovery procedures
and schedules for hearings.
F. The panel shall be relieved of all judicial formality and shall not be bound
by the strict rules of procedure and evidence. Unless the panel agrees
otherwise, arbitration shall take place in Beverly Hills, California, but the
venue may be changed when deemed by the panel to be in the best interest of the
arbitration proceeding. Insofar as the arbitration panel looks to substantive
law, it shall consider the law of the State of California. The decision of any
two arbitrators when rendered in writing shall be final and binding. The panel
is empowered to grant interim relief as it may deem appropriate.
G. The panel shall interpret this Agreement as if it were an honorable
engagement rather than as merely a legal obligation and shall make its decision
considering the custom and practice of the applicable insurance and reinsurance
business within sixty (60) days following the termination of the hearings.
Judgment upon the award may be entered in any court having jurisdiction thereof.
H. Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the cost of the third arbitrator. The
remaining costs of the arbitration shall be allocated by the panel. The panel
may, at its discretion, award such further costs and expenses as it considers
appropriate, including but not limited to attorneys fees, to the extent
permitted by law.
Page 12 of 14
<PAGE> 13
ARTICLE XXV.
SERVICE OF SUIT CLAUSE (U.S.A.):
A. It is agreed that in the event of the failure of the Reinsurer hereon to pay
any amount claimed to be due hereunder, the Reinsurer hereon, at the request of
the Company, will submit to the jurisdiction of a Court of competent
jurisdiction within the United States. Nothing in this Clause constitutes or
should be understood to constitute a waiver of the Reinsurer's rights to
commence an action in any Court of competent jurisdiction in the United States,
to remove an action to a United States District Court, or to seek a transfer of
a case to another Court as permitted by the laws of the United States or of any
State in the United States. It is further agreed that service of process in such
suit may be made upon Messrs. Mendes & Mount, 725 South Figueroa, Suite 1990,
Los Angeles, CA 90017, and that in any suit instituted, the Reinsurer will abide
by the final decision of such Court or of any Appellate Court in the event of an
appeal.
B. The above-named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of the Company
to give written undertaking to the Company that they will enter a general
appearance upon the Reinsurer's behalf in the event such a suit shall be
instituted.
C. Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefor, the Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be served
any lawful process in action, suit or proceeding instituted by or on behalf of
the Company or any beneficiary hereunder arising out of this Agreement, and
hereby designate the above-named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE XXVI.
INSOLVENCY:
A. The portion of any risk or obligation assumed by the Reinsurer, when such
portion is ascertained, shall be payable on demand of the Company at the same
time as the Company shall pay its net retained portion of such risk or
obligation, with reasonable provision for verification before payment, and the
reinsurance shall be payable by the Reinsurer, on the basis of the liability of
the Company under the policy or policies reinsured without diminution because of
the insolvency of the Company.
B. In the event of the insolvency of one or more than one of the Companies,
reinsurance under this Agreement shall be payable immediately on demand, with
reasonable provision for verification, on the basis of claims allowed against
the insolvent Company(ies) by any court of competent jurisdiction or by any
liquidator, receiver, or statutory successor of the Company(ies) having
authority to allow such claims, without diminution because of such insolvency or
because such liquidator, receiver, or statutory successor has failed to pay all
or a portion of any claims. Such payments by the Reinsurer shall be made
directly to the Company or its liquidator, receiver or statutory successor,
except where the contract of insurance or reinsurance provides another payee of
such reinsurance in the event of the insolvency of the Company(ies).
Page 13 of 14
<PAGE> 14
C. It is agreed, however, that the liquidator or receiver or statutory successor
of the insolvent Company(ies) will give written notice to the Reinsurer of the
pendency of a claim against the insolvent Company(ies) on the policy or policies
reinsured within a reasonable time after such claim is filed in the insolvency
proceeding and that during the pendency of such claim the Reinsurer may
investigate such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated any defense or defenses which it may deem
available to the Company(ies) or its liquidator or receiver or statutory
successor. The expense thus incurred by the Reinsurer will be chargeable,
subject to court approval, against the insolvent Company(ies) as part of the
expense of liquidation to the extent of a proportionate share of the benefit
which may accrue to the Company(ies) solely as a result of the defense
undertaken by the Reinsurer.
D. Where two or more reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense will be
apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the insolvent Company(ies).
ARTICLE XXVII.
INTERMEDIARY:
Willcox Incorporated Reinsurance Intermediaries is hereby recognized as
the Intermediary negotiating this Agreement for all business hereunder. All
communications (including but not limited to notices, statements, premium,
return premium, commissions, taxes, losses, loss adjustment expense, salvages
and loss settlements) relating thereto shall be transmitted to the Company or
the Reinsurer through Willcox Incorporated Reinsurance Intermediaries, 180
Maiden Lane, New York, New York 10038-4993. Payments by the Company to the
Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by
the Reinsurer to the Intermediary shall be deemed to constitute payment to the
Company only to the extent that such payments are actually received by the
Company.
ARTICLE XXVIII.
GOVERNING LAW:
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of California, U.S.A.
ARTICLE XXIX.
SEVERAL LIABILITY NOTICE:
The subscribing reinsurers' obligations under contracts of reinsurance to
which they subscribe are several and not joint and are limited solely to the
extent of their individual subscriptions. The subscribing reinsurers are not
responsible for the subscription of any co-subscribing reinsurer who for any
reason does not satisfy all or part of its obligations.
Page 14 of 14
<PAGE> 15
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a ___% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Fourth Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the participation
of other subscribing reinsurers, and the Subscribing Reinsurer shall under no
circumstances participate in the Interests and Liabilities, if any, of the other
subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer ___% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach on January 1, 1997, and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
Page 1 of 2
<PAGE> 16
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of August , 1997
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
By: /s/ DONALD J. ZUK
------------------------
Signed in
this day of , 199
Page 2 of 2
<PAGE> 17
MEMORANDUM OF CHANGES
to the
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE, et al
FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT
The following changes have been effected from the expiring Fourth Excess
of Loss Reinsurance Agreement Number 01-96-0599 as per the cover note/placement
slip:
1. The list of Companies hereon, collectively referred to as the "Company",
has been revised.
2. Article I, "Business Covered", the sunset provision has been deleted and
reference to same has been deleted from all other applicable Articles.
3. Article III, "Term", the dates have been amended, in this and all other
applicable Articles, for the current term.
4. Article XIII, "Premium", the rate decreased from .48% to .445%.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
Page 1 of 1
<PAGE> 1
EXHIBIT 10.25
PER POLICY EXCESS OF LOSS REINSURANCE AGREEMENT
entered into by and between
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
The Subscribing Reinsurer(s) executing the
Interests and Liabilities Contract(s)
attached to and forming a part
of this Agreement
(hereinafter referred to as the "Reinsurer")
WITNESSETH:
The Reinsurer hereby reinsures the Company to the extent and the terms
and conditions subject to the exceptions, exclusions and limitations hereinafter
set forth and nothing hereinafter shall in any manner create any obligations or
establish any rights against the Reinsurer in favor of any third parties or any
persons not parties to this Agreement.
ARTICLE I.
BUSINESS COVERED:
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amount of ultimate net loss which the Company may pay as the
result of claims made during the term of this Agreement under the Southern
California Physician's Insurance Exchange's Physicians and Surgeons
Comprehensive Professional and Business Liability policies, including Clinical
Laboratories, which are in force or may hereinafter come into force during the
term of this Agreement, except as excluded under the Exclusions Article subject
to the limitations set forth in the Limits of Cover Article.
Page 1 of 13
<PAGE> 2
ARTICLE II.
EXCLUSIONS:
This Agreement specifically excludes:
1. All liability of the Company arising by contract, operation of
law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund. "Insolvency
Fund" includes any guaranty fund, plan, pool, association, fund
or other arrangement, howsoever denominated, established or
governed which provides for any assessment of or payment or
assumption by the Company of part or all of any claim, debt,
charge, fee or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority
to be insolvent, or which is otherwise deemed unable to meet any
claim, debt, charge, fee or other obligation in whole or in
part.
2. Loss or Liability excluded by the provisions of the Nuclear
Incident Exclusion Clause - Liability - Reinsurance, as per
clause attached hereto.
3. All Assumed Reinsurance.
ARTICLE III.
TERM:
A. Except as provided in paragraph B. below, this Agreement shall apply to
claims made, on policies in force, issued or renewed, during the thirty-six (36)
month period beginning January 1, 1997 and ending December 31, 1999.
B. It is understood and agreed that if the Reinsurers loss ratio (i.e. the ratio
of the Reinsurers losses and loss adjustment expenses incurred to the Company's
reinsurance premiums earned net of ceding commission) exceeds 115%, subject to
one hundred twenty (120) days notice to any December 31, the terms and
conditions can be amended subject to mutual agreement between the parties
hereto.
C. It is further understood and agreed that the Company shall declare to the
Reinsurers hereunder all policies issued providing limits greater than
$5,000,000/$5,000,000 per physician, per occurrence. Upon review of such
policies should the Reinsurers deem the exposure under this Agreement to be
measurably altered then the terms and conditions hereunder can be amended
subject to mutual agreement between the parties hereto.
D. It is specially agreed that in such case the Company will refrain from ceding
any new policies for limits greater than $5,000,000/$5,000,000 per physician,
per occurrence until such mutual agreement has been attained.
E. Notwithstanding the expiration of this Agreement as hereinabove provided, the
provisions of this Agreement shall continue to apply to all unfinished business
hereunder to the end that all obligations and liabilities incurred by each party
hereunder prior to such termination shall be fully performed and discharged.
Page 2 of 13
<PAGE> 3
ARTICLE IV.
LIMITS OF COVER:
A. The Company shall retain for its own account the first $2,000,000 ultimate
net loss, each and every loss occurrence each policy and the Reinsurer agrees to
reimburse the Company for the amount of ultimate net loss paid in excess of
$2,000,000, each and every loss occurrence each policy, but the Reinsurer's
maximum liability shall not exceed $8,000,000 resulting from each and every loss
occurrence each policy.
B. In addition to the limits set forth above, the Reinsurer's maximum liability
from all occurrences under this Agreement shall be $8,000,000 during each twelve
(12) months period and 175% of Reinsurance Premiums Earned hereunder or
$10,000,000 (losses plus loss adjustment expenses), whichever is the greater, in
all during the Agreement term.
ARTICLE V.
DEFINITIONS:
A. The term "loss occurrence" shall mean the happening of one or a series of
related acts, errors, or omissions to act, accidents or occurrences arising out
of one event.
B. The term "losses and loss adjustment expense incurred" shall mean the total
of losses and loss adjustment expense paid by the Reinsurer under this Agreement
as respects claims made during the term of the Agreement plus a reserve for
outstanding losses and loss adjustment expenses thereon which claims were made
during the period of this Agreement.
C. The term "Company's Reinsurance Premium Earned" shall mean the total of the
net premiums written (i.e., gross premiums, deposits plus additions less
premiums ceded for reinsurance which inures to the benefit of the Reinsurer) by
the Company on the business covered hereunder during the period for which the
calculation is being made.
ARTICLE VI.
NET RETAINED LINES:
A. This Agreement applies to only that portion of any insurance or any Extra
Contractual Obligations the Company retains net for its own account; and in
calculating the amount of any loss hereunder and also in computing the amount or
amounts in excess of which this Agreement attaches, only loss or losses in
respect of that portion of any insurance or any Extra Contractual Obligations
which the Company retains net for its own account shall be included.
B. The amount of the Reinsurer's liability hereunder in respect of any loss or
losses shall not be increased by reason of the inability of the Company to
collect from any other underwriters, whether specific or general, any amount
which may become due from them, whether such inability arises from the
insolvency of such other underwriters or otherwise.
Page 3 of 13
<PAGE> 4
ARTICLE VII.
ULTIMATE NET LOSS:
A. The term "ultimate net loss" as used herein shall be understood to mean the
sum actually paid by the Company in settlement of losses for which it is held
liable, including interest accrued prior to judgment, 80% of Extra Contractual
Obligations and 100% of loss in Excess of Original Policy Limits as provided in
the respectively captioned Articles, after making proper deductions for all
recoveries, salvages, and claims upon other reinsurances and insurances which
inure to the benefit of the Reinsurer under this Agreement, whether collectible
or not, and shall exclude all loss adjustment expenses (which shall be
separately allocated and paid as provided in paragraph B. below); provided,
however, that in the event of the insolvency of the Company, "ultimate net loss"
shall mean the amount of loss which the Company has incurred or for which it is
liable, and payment by the Reinsurer shall be made to the liquidator, receiver
or statutory successor of the Company in accordance with the provisions of the
Insolvency Article in this Agreement. Nothing in this clause, however, shall be
construed to mean that losses under this Agreement are not recoverable until the
ultimate net loss of the Company has been ascertained.
B. All loss adjustment expenses incurred in investigation, adjustment and
litigation, defense and settlement of claims made against the Company under its
original policies reinsured hereunder, shall be apportioned in proportion to the
respective interests of the parties hereto in the ultimate net loss.
C. In the event a verdict or judgment is reduced by an appeal or a settlement,
subsequent to the entry of a judgment, resulting in an ultimate saving on such
verdict or judgment, or a judgment is reversed outright, the expense incurred in
securing such final reduction or reversal shall (1) be prorated between the
Reinsurer and the Company in proportion that each benefits from such reduction
or reversal and the expense incurred up to the time of the original verdict or
judgment shall be prorated in proportion to each party's interest in such
verdict or judgment; or (2) when the terms and conditions of the Company's
original policies reinsured hereunder include expenses as part of the policy
limit, be added to the Company's ultimate net loss.
ARTICLE VIII.
EXCESS OF ORIGINAL POLICY LIMITS:
A. This Agreement shall protect the Company, within the limits hereof, in
connection with any loss in excess of the limit of its original policy, such
loss in excess of the limit having been incurred because of failure by it to
settle within the policy limit or by reason of alleged or actual negligence,
fraud or bad faith in rejecting an offer of settlement or in the preparation of
the defense or in the trial of any action against its insured or reinsured or in
the preparation or prosecution of an appeal consequent upon such action.
Page 4 of 13
<PAGE> 5
B. However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
C. For the purposes of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original policy.
ARTICLE IX.
EXTRA CONTRACTUAL OBLIGATIONS CLAUSE:
A. This Agreement shall protect the Company within the limits hereof, where the
ultimate net loss includes Extra Contractual Obligations. "Extra Contractual
Obligations" are defined as those liabilities not covered under any other
provision of this Agreement and which arise from handling of any claim on
business covered hereunder, such liabilities arising because of, but not limited
to the following: failure by the Company to settle within the policy limit, or
by reason of alleged or actual negligence, fraud or bad faith in rejecting an
offer of settlement or in the preparation of the defense or in the trial of any
action against its insured or reinsured or in the preparation or prosecution of
an appeal consequent upon such action.
B. The date on which an Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original accident,
casualty, disaster or loss occurrence and furthermore, for the purposes hereof
be deemed to follow the Claims Made provisions of this Agreement, subject always
to the provisions of the Term Article.
C. However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
ARTICLE X.
CLAIMS:
A. In the event of a claim arising hereunder which either results in or appears
to be of serious enough nature as probably to result in a loss involving this
Agreement, the Company shall give notice as soon as reasonably practicable to
Reinsurers and the Company shall keep the Reinsurer advised of all subsequent
developments in connection therewith.
B. All loss settlements made by the Company provided they are within the terms
of the Company's original policies and of this Agreement, shall be
unconditionally binding upon Reinsurer and amounts falling to the share of the
Reinsurer shall be payable upon reasonable evidence of the amount paid being
given by the Company in accordance with provisions set forth in the Reports and
Remittances Article
Page 5 of 13
<PAGE> 6
ARTICLE XI.
COMMUTATION CLAUSE:
The Company or the Reinsurer may, at any time express their desire to the
other party to commute all losses which are applicable to any Agreement year and
which are still unsettled. In such event the Company and the Reinsurer shall
mutually determine and evaluate such losses and the payment by the Reinsurer of
their proportion of the amount so ascertained and mutually agreed to be the
value of such losses shall relieve them of all further liability, in respect of
that Agreement year both in respect of known or unknown losses.
ARTICLE XII.
PREMIUM:
A. The Company shall pay to the Reinsurer an annual minimum and deposit premium
of $950,000 payable in installments of $237,500 as of each January 1st, April
1st, July 1st and October 1st, during the term of this Agreement, subject to
adjustment at each December 31st.
B. Within sixty (60) days after each December 31st, the Company shall calculate
the actual original gross premium charged by the Company for policy limits in
excess of $2,000,000, as respects policies issued or renewed during each twelve
(12) months period January 1st to December 31st during the term of this
Agreement. If the premium calculation is greater than the minimum and deposit
premium paid during the twelve (12) months period, the Company shall promptly
remit the difference to the Reinsurer.
ARTICLE XIII.
CEDING COMMISSION:
A. The Reinsurer shall make a commission allowance of 15% to the Company on the
premiums ceded under this Agreement. On all return premiums the Company shall
return to the Reinsurer the commission allowance of 15%.
B. The commission allowance which the Reinsurer makes to the Company on the
business transacted under this Agreement includes provision for all taxes,
assessments and any other expenses whatsoever, except loss adjustment expenses.
ARTICLE XIV.
PROFIT COMMISSION:
A. The Company shall receive a profit commission equal to 80% of the net profit
accruing to the Reinsurers during the term of this Agreement computed as
follows:
1. Reinsurance Premiums Earned;
Page 6 of 13
<PAGE> 7
2. Less: Losses and Loss Adjustment Expenses Incurred;
3. Less: Ceding Commission of 15% of the Reinsurance Premiums
Earned as in (1) above;
4. Less: Management expenses of 23.5% of Reinsurance Premiums
Earned as in (1) above;
unlimited deficit carry forward to next Agreement period.
B. The term "Agreement" shall mean the three (3) year period commencing January
1, 1997 and ending December 31, 1999 both days inclusive. It is further agreed
that the first calculation of profit commission shall be computed as of December
31, 1999, and annually thereafter until all losses hereunder are settled or
commuted. No payment of any profit commission shall be made prior to December
31, 2001. The Company agrees that payment of any profit commission shall be
contingent upon complete commutation as respects all losses arising during the
term of this Agreement. Commutation of losses and payment thereof, together with
payment of any profit commission by the Reinsurers shall constitute full and
final release from all further liability under this Agreement.
ARTICLE XV.
REPORTS AND REMITTANCES:
A. The Company will provide the Reinsurer with all necessary data respecting
premiums and losses, including reserves thereon, as at dates and on forms
mutually acceptable to the Company and the Reinsurer.
B. Payments of minimum deposit premium shall be made within sixty (60) days of
respective due date and in accordance with the provisions of the Premium
Article.
C. Payment by the Reinsurer of its portion of loss and loss expenses paid by the
Company will be made by the Reinsurer to the Company as soon as possible, but
not later than sixty (60) days after proof of payment by the Company is received
by the Reinsurer.
ARTICLE XVI.
CONFIDENTIALITY CLAUSE:
All terms and conditions of this Agreement and any materials provided in
the course of inspection shall be kept confidential by the Reinsurer as against
third parties, subject to disclosure pursuant to process of law, unless the
Reinsurer has obtained the Company's prior written consent to divulge the
information to third parties who will provide a written confirmation agreeing to
maintain the confidentiality of the materials provided. Said confirmation shall
be subject to the satisfaction of the Company.
Page 7 of 13
<PAGE> 8
ARTICLE XVII.
CURRENCY:
Premiums shall be payable by the Company and losses shall be paid to the
Company in United States currency.
ARTICLE XVIII.
FEDERAL EXCISE TAX:
(Applicable to those Reinsurers, excepting Underwriters at Lloyd's, London and
other Reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow, for the purpose of paying the Federal
Excise Tax, the applicable percentage of the premium payable hereon (as imposed
under Section 4371 of the Internal Revenue Service Code) to the extent such
premium is subject to the Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the Reinsurer
will deduct the aforesaid percentage from the return premium payable hereon and
the Company or its agent should take steps to recover the tax from the United
States government.
ARTICLE XIX.
ERRORS AND OMISSIONS:
Any inadvertent delay, omission or error shall not be held to relieve
either party hereto from any liability which would attach to it hereunder if
such delay, omission or error had not been made, provided such delay, omission
or error is rectified immediately upon discovery.
ARTICLE XX.
ACCESS TO RECORDS
A. The Company shall place at the disposal of the Reinsurer at all reasonable
times, and the Reinsurer shall have the right to inspect, through its authorized
representatives, all books, records and papers of the Company in connection with
this reinsurance hereunder or the subject matter thereof.
B. The Reinsurer shall be afforded the opportunity, at its own expense to
appoint an attorney of its own choice to assess the Company's claims procedures
who shall report to the Reinsurer the results of such.
Page 8 of 13
<PAGE> 9
ARTICLE XXI.
UNAUTHORIZED REINSURANCE:
(Applies only to a Reinsurer who does not qualify for full credit with any
insurance regulatory authority having jurisdiction over the Company's reserves.)
A. As regards policies or bonds issued by the Company coming within the scope of
this Agreement, the Company agrees that when it shall file with the insurance
regulatory authority or set up on its books reserves for losses covered
hereunder which it shall be required by law to set up, it will forward to the
Reinsurer a statement showing the proportion of such reserves which is
applicable to the Reinsurer. The Reinsurer hereby agrees to fund such reserves
in respect of known outstanding losses that have been reported to the Reinsurer
and allocated loss adjustment expense relating thereto, losses and allocated
loss adjustment expense paid by the Company but not recovered from the
Reinsurer, plus reserves for losses incurred but not reported, as shown in the
statement prepared by the Company (hereinafter referred to as "Reinsurer's
Obligations") by funds withheld, cash advances or a Letter of Credit. The
Reinsurer shall have the option of determining the method of funding provided it
is acceptable to the insurance regulatory authorities having jurisdiction over
the Company's reserves.
B. When funding by a Letter of Credit, the Reinsurer agrees to apply for and
secure timely delivery to the Company of a clean, irrevocable and unconditional
Letter of Credit issued by a bank and containing provisions acceptable to the
insurance regulatory authorities having jurisdiction over the Company's reserves
in an amount equal to the Reinsurer's proportion of said reserves. Such Letter
of Credit shall be issued for a period of not less than one (1) year, and shall
be automatically extended for one (1) year from its date of expiration or any
future expiration date unless thirty (30) days (sixty (60) days where required
by insurance regulatory authorities) prior to any expiration date the issuing
bank shall notify the Company by certified or registered mail that the issuing
bank elects not to consider the Letter of Credit extended for any additional
period.
C. The Reinsurer and Company agree that the Letters of Credit provided by the
Reinsurer pursuant to the provisions of this Agreement may be drawn upon at any
time, notwithstanding any other provision of this Agreement, and be utilized by
the Company or any successor, by operation of law, of the Company including,
without limitation, any liquidator, rehabilitator, receiver or conservator of
the Company for the following purposes, unless otherwise provided for in a
separate Trust Agreement:
1. to reimburse the Company for the Reinsurer's Obligations, the
payment of which is due under the terms of this Agreement and
which has not been otherwise paid;
2. to make refund of any sum which is in excess of the actual
amount required to pay the Reinsurer's Obligations under this
Agreement;
3. to fund an account with the Company for the Reinsurer's
Obligations. Such cash deposit shall be held in an interest
bearing account separate from the Company's other assets, and
interest thereon not in excess of the prime rate shall accrue to
the benefit of the Reinsurer;
Page 9 of 13
<PAGE> 10
4. to pay the Reinsurer's share of any other amounts the Company
claims are due under this Agreement.
D. In the event the amount drawn by the Company on any Letter of Credit is in
excess of the actual amount required for 1. or 3., or in the case of 4., the
actual amount determined to be due, the Company shall promptly return to the
Reinsurer the excess amount so drawn. All of the foregoing shall be applied
without diminution because of insolvency on the part of the Company or the
Reinsurer.
E. The issuing bank shall have no responsibility whatsoever in connection with
the propriety of withdrawals made by the Company or the disposition of funds
withdrawn, except to ensure that withdrawals are made only upon the order of
properly authorized representatives of the Company.
F. At annual intervals, or more frequently as agreed but never more frequently
than quarterly, the Company shall prepare a specific statement of the
Reinsurer's Obligations, for the sole purpose of amending the Letter of Credit,
in the following manner:
1. If the statement shows that the Reinsurer's Obligations exceed the
balance of credit as of the statement date, the Reinsurer shall,
within thirty (30) days after receipt of notice of such excess,
secure delivery to the Company of an amendment to the Letter of
Credit increasing the amount of credit by the amount of such
difference.
2. If, however, the statement shows that the Reinsurer's Obligations
are less than the balance of credit as of the statement date, the
Company shall, within thirty (30) days after receipt of written
request from the Reinsurer, release such excess credit by agreeing
to secure an amendment to the Letter of Credit reducing the amount
of credit available by the amount of such excess credit.
ARTICLE XXII.
SPECIAL FUNDING CLAUSE:
A. If, during the period of this Agreement and thereafter, as respects any
outstanding liabilities hereunder, the Reinsurer shall fail to pay any loss
payable hereunder within the time prescribed, the Reinsurer agrees that it will
fund uncollected paid losses and loss adjustment expenses within thirty (30)
days from the date of written demand by the Company to so fund. Such demand
shall not be made unless balances are sixty (60) days or more past the due date
of payment specified in this Agreement.
B. The Reinsurer shall have the sole option of determining the method of funding
referred to above, provided it is acceptable to the insurance regulatory
authorities involved. If the Reinsurer elects to fund the aforesaid loss by a
Letter of Credit, the procedures set forth in the Funding Article in respect of
Letters of Credit shall apply. If the Reinsurer has already funded obligations
hereunder in accordance with the Funding Article in this Agreement, it agrees
that such funds as are required to pay overdue losses may immediately be drawn
down by the Company.
Page 10 of 13
<PAGE> 11
C. The phrase "any loss payable" as used in paragraph A. above shall mean any
ultimate net loss subject to recovery under this Agreement wherein the Reinsurer
has not disputed said loss in writing within the due date for payment.
D. The Company will provide the Reinsurer with a reinsurance proof of loss and
such other substantive loss material reflecting the nature of the settlement
(i.e., applicable Proofs of Loss, Releases, adjuster's reports, etc.). If,
subsequent to receipt of this material, the information supplied is insufficient
or not in accordance with the contractual conditions, then the payment due date
as defined in the Reports and Remittances Article, will be deemed to be the date
upon which the Reinsurer received such additional substantive material necessary
to approve payment of the claim, or the date the claim is presented in a manner
acceptable to the Reinsurer.
ARTICLE XXIII.
SERVICE OF SUIT CLAUSE (U.S.A.):
A. It is agreed that in the event of the failure of the Reinsurer hereon to pay
any amount claimed to be due hereunder, the Reinsurer hereon, at the request of
the Company, will submit to the jurisdiction of a Court of competent
jurisdiction within the United States. Nothing in this Clause constitutes or
should be understood to constitute a waiver of the Reinsurer's rights to
commence an action in any Court of competent jurisdiction in the United States,
to remove an action to a United States District Court, or to seek a transfer of
a case to another Court as permitted by the laws of the United States or of any
State in the United States. It is further agreed that service of process in such
suit may be made upon Messrs. Mendes & Mount, 725 South Figueroa, Suite 1990,
Los Angeles, CA 90017, and that in any suit instituted, the Reinsurer will abide
by the final decision of such Court or of any Appellate Court in the event of an
appeal.
B. The above-named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of the Company
to give written undertaking to the Company that they will enter a general
appearance upon Reinsurer's behalf in the event such a suit shall be instituted.
C. Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefor, the Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be served
any lawful process in action, suit or proceeding instituted by or on behalf of
the Company or any beneficiary hereunder arising out of this agreement, and
hereby designate the above-named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE XXIV.
INSOLVENCY:
A. The portion of any risk or obligation assumed by the Reinsurer, when such
portion is ascertained, shall be payable on demand of the Company at the same
time as the Company shall pay its net retained portion of such risk or
obligation, with reasonable provision for verification
Page 11 of 13
<PAGE> 12
before payment, and the reinsurance shall be payable by the Reinsurer, on the
basis of the liability of the Company under the policy or policies reinsured
without diminution because of the insolvency of the Company.
B. In the event of the insolvency of one or more than one of the Companies,
reinsurance under this Agreement shall be payable immediately on demand, with
reasonable provision for verification, on the basis of claims allowed against
the insolvent Company(ies) by any court of competent jurisdiction or by any
liquidator, receiver, or statutory successor of the Company(ies) having
authority to allow such claims, without diminution because of such insolvency or
because such liquidator, receiver, or statutory successor has failed to pay all
or a portion of any claims. Such payments by the Reinsurer shall be made
directly to the Company or its liquidator, receiver or statutory successor.
C. It is agreed, however, that the liquidator or receiver or statutory successor
of the insolvent Company(ies) will give written notice to the Reinsurer of the
pendency of a claim against the insolvent Company(ies) on the policy or policies
reinsured within a reasonable time after such claim is filed in the insolvency
proceeding and that during the pendency of such claim the Reinsurer may
investigate such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated any defense or defenses which it may deem
available to the Company(ies) or its liquidator or receiver or statutory
successor. The expense thus incurred by the Reinsurer will be chargeable,
subject to court approval, against the insolvent Company(ies) as part of the
expense of liquidation to the extent of a proportionate share of the benefit
which may accrue to the Company(ies) solely as a result of the defense
undertaken by the Reinsurer.
D. Where two or more reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense will be
apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the insolvent Company(ies).
ARTICLE XXV.
ARBITRATION:
A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Agreement,
including the formation or validity thereof, shall be submitted for decision to
a panel of three arbitrators. Notice requesting arbitration will be in writing
and sent certified or registered mail, return receipt requested.
B. One arbitrator shall be chosen by each party and the two arbitrators shall,
before instituting the hearing, choose an impartial third arbitrator who shall
preside at the hearing. If either party fails to appoint its arbitrator within
thirty (30) days after being requested to do so by the other party, the latter,
after ten (10) days notice by certified or registered mail of its intention to
do so, may appoint the second arbitrator.
C. If the two arbitrators are unable to agree upon the third arbitrator within
thirty (30) days of their appointment, the third arbitrator shall be selected
from a list of six individuals (three named by each arbitrator) by a judge of
the federal district court having jurisdiction over the geographical area in
which the arbitration is to take place, or if the federal court declines to act,
the state court having general jurisdiction in such area.
Page 12 of 13
<PAGE> 13
D. All arbitrators shall be disinterested active or former executive officers of
insurance or reinsurance companies or Underwriters at Lloyd's, London.
E. Within thirty (30) days after notice of appointment of all arbitrators, the
panel shall meet and determine timely periods for briefs, discovery procedures
and schedules for hearings.
F. The panel shall be relieved of all judicial formality and shall not be bound
by the strict rules of procedure and evidence. Unless the panel agrees
otherwise, arbitration shall take place in Beverly Hills, California, but the
venue may be changed when deemed by the panel to be in the best interest of the
arbitration proceeding. Insofar as the arbitration panel looks to substantive
law, it shall consider the law of the State of California. The decision of any
two arbitrators when rendered in writing shall be final and binding. The panel
is empowered to grant interim relief as it may deem appropriate.
G. The panel shall interpret this Agreement as if it were an honorable
engagement rather than as merely a legal obligation and shall make its decision
considering the custom and practice of the applicable insurance and reinsurance
business within sixty (60) days following the termination of the hearings.
Judgment upon the award may be entered in any court having jurisdiction thereof.
H. Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the cost of the third arbitrator. The
remaining costs of the arbitration shall be allocated by the panel. The panel
may, at its discretion, award such further costs and expenses as it considers
appropriate, including but not limited to attorneys fees, to the extent
permitted by law.
ARTICLE XXVI.
INTERMEDIARY:
Willcox Incorporated Reinsurance Intermediaries is hereby recognized as
the Intermediary negotiating this Agreement for all business hereunder. All
communications (including but not limited to notices, statements, premium,
return premium, commissions, taxes, losses, loss adjustment expense, salvages
and loss settlements) relating thereto shall be transmitted to the Company or
the Reinsurer through Willcox Incorporated Reinsurance Intermediaries, 180
Maiden Lane, New York, New York 10038-4993. Payments by the Company to the
Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by
the Reinsurer to the Intermediary shall be deemed to constitute payment to the
Company only to the extent that such payments are actually received by the
Company.
ARTICLE XXVII.
GOVERNING LAW:
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of California, U.S.A.
Page 13 of 13
<PAGE> 14
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
PER POLICY EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
HANNOVER RUCKVERSICHERUNGS - AKTIENGESELLSCHAFT
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 100% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Per Policy Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the participation
of other subscribing reinsurers, and the Subscribing Reinsurer shall under no
circumstances participate in the Interests and Liabilities, if any, of the other
subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 100% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach at January 1, 1997 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
Page 1 of 2
<PAGE> 15
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of August , 1997
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
By: /s/ DONALD J. ZUK
-------------------------
Signed in
this day of , 199
HANNOVER RUCKVERSICHERUNGS - AKTIENGESELLSCHAFT
By:_________________________________________
Page 2 of 2
<PAGE> 16
MEMORANDUM OF CHANGES
to the
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE, et al
PER POLICY EXCESS OF LOSS REINSURANCE AGREEMENT
The following changes have been effected from the expiring Per Policy
Excess of Loss Reinsurance Agreement Number 01-94-0365:
1. The list of Companies hereon, collectively referred to as the "Company",
has been revised per the cover note/placement slip.
2. Article III, "Term", the dates have been changed, in this and all other
applicable Articles, for the current term.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
Page 1 of 1
<PAGE> 1
EXHIBIT 10.26
ADDENDUM NUMBER 2
This Addendum attaches to and forms a part of the
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
REINSTATEMENT/RETROACTIVE/AGGREGATE EXTENSION
EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
HANNOVER RUCKVERSICHERUNGS - AKTIENGESELLSCHAFT
(hereinafter referred to as the "Subscribing Reinsurer")
IT IS HEREBY AGREED that the Agreement attached to this Contract entitled
Reinstatement/Retroactive/Aggregate Extension Excess of Loss Reinsurance
Agreement shall be amended in accordance with the provisions of the attached
Endorsement Number 2, effective as
specified therein.
Page 1 of 2
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this Addendum Number 2
to be signed in duplicate by their duly authorized representatives.
Signed in Beverly Hills, California
this day of , 199
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
By: /s/ DONALD J. ZUK
------------------------------
Signed in
this day of , 199
HANNOVER RUCKVERSICHERUNGS - AKTIENGESELLSCHAFT
By:_________________________________________
Page 2 of 2
(
<PAGE> 3
ENDORSEMENT NUMBER 2
This Endorsement attaches to and forms a part of the
REINSTATEMENT/RETROACTIVE/AGGREGATE EXTENSION
EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
while acting on behalf of:
S.C.P.I.E. MANAGEMENT COMPANY
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
The Subscribing Reinsurer(s) executing the
Interests and Liabilities Contract(s)
attached to and forming a part
of this Agreement
(hereinafter referred to as the "Reinsurer")
IT IS HEREBY AGREED that, effective December 31, 1996, Pacific Standard
Time, this Agreement will be amended as follows:
1. The named Companies hereon, collectively referred to as the "Company",
shall be revised as follows:
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
Page 1 of 6
<PAGE> 4
2. Article V, "Limits", shall be revised as follows:
ARTICLE V
LIMITS:
A. The Reinsurance coverage provided hereunder is in three Sections,
Section (A), Section (B) and Section (C), as follows:
Section (A): Reinstatement Premium Protection:
The Company has purchased Excess of Loss Reinsurance for
limits of $3,000,000 excess of $2,000,000, each occurrence,
$5,000,000 excess of $5,000,000 each occurrence, and $10,000,000
excess of $10,000,000 each occurrence. In the event of a loss, and
the Company elects reinstatement thereunder, the Company must pay
to the Reinsurers on said covers an additional premium as called
for under the original contracts. In the event of such a
contingency, the Reinsurer hereunder shall reimburse the Company
the reinstatement premiums paid under said original contracts up
to the following maximum amounts:
<TABLE>
<CAPTION>
$3,000,000 $5,000,000 $10,000,000
XS XS XS
Year: Reinstatement: $2,000,000: $5,000,000: $10,000,000
----- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1987 1st $1,862,696 $ 509,137 Nil
2nd $2,794,043 Nil Nil
1988 1st $2,118,125 $ 578,954 Nil
2nd $3,262,500 Nil Nil
1989 1st $2,175,000 $ 594,500 Nil
2nd $3,262,500 Nil Nil
1990 1st $1,687,896 $ 500,000 Nil
2nd $2,531,844 Nil Nil
1991 1st $1,533,062 $ 500,000 Nil
2nd $2,299,592 Nil Nil
1992 1st $1,462,500 $ 425,000 $450,000
2nd $2,193,750 Nil Nil
1993 1st $1,672,391 $ 450,000 $557,463
2nd $2,508,586 Nil Nil
</TABLE>
Page 2 of 6
<PAGE> 5
<TABLE>
<CAPTION>
$3,000,000 $5,000,000 $10,000,000
XS XS XS
Year: Reinstatement: $2,000,000: $5,000,000: $10,000,000
----- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1994 1st $1,791,639 $ 450,000 $581,504
2nd $2,687,459 Nil Nil
1995 1st $1,771,431 $ 450,000 $610,838
2nd $2,834,290 Nil Nil
1996 1st $1,471,706 $440,000 $579,626
2nd $2,354,730 Nil Nil
</TABLE>
Section (B): Retroactive Liability:
In consideration for the premium set forth in the Premium
Article, as respects this Section, the Reinsurer agrees to assume
retroactively for the years 1989, 1990, 1991 and 1992, the limits
of $1,000,000 excess of $1,000,000 each occurrence and for the
years 1987 through 1993 the limits of $3,000,000 each occurrence,
each policy in excess of $2,000,000 each occurrence, each policy;
subject to a maximum amount recoverable under this Section of
$10,000,000 in all during the term of this Agreement.
Section (C): First Excess Aggregate Extension:
In consideration for the premium set forth in the Premium
Article, the Reinsurer agrees to provide the Company with an
additional aggregate extension limit for the layer $1,000,000
excess of $1,000,000, each occurrence, separately for the years
1991, 1992, 1993, 1994, 1995 and 1996, such additional limit being
$5,000,000 excess of $8,500,000 or 182.5% of the Gross Reinsurance
Premium Earned during each Agreement term, whichever is the
greater, subject to a maximum amount recoverable under this
Section of $10,000,000 in all during the term of this Agreement.
B. Notwithstanding the individual limitations set forth in each Section
outlined above, the maximum amount recoverable hereunder shall not exceed
$35,000,000 in all during the term of this Agreement.
C. With the exception of the coverage provided under Section (B), the
Company deems to have carried the following additional reinsurances:
1987 - $1,000,000 excess of $1,000,000, each occurrence.
1988 - $1,000,000 excess of $1,000,000, each occurrence.
1989 - $1,000,000 excess of $1,000,000, each occurrence
(commuted as of December 31, 1993).
Page 3 of 6
<PAGE> 6
1990 - $1,000,000 excess of $1,000,000, each occurrence.
(Commuted as of December 31, 1994).
1991 - $1,000,000 excess of $1,000,000, each occurrence.
(Commuted as of December 31, 1995).
$8,000,000 excess of $2,000,000 each occurrence, each policy.
(Commuted as of December 31, 1995).
1992 - $1,000,000 excess of $1,000,000, each occurrence.
$8,000,000 excess of $2,000,000 each occurrence, each policy.
(Commuted as of December 31, 1995).
1993 - $1,000,000 excess of $1,000,000, each occurrence.
$8,000,000 excess of $2,000,000 each occurrence, each policy.
(Commuted as of December 31, 1995).
1994 - $1,000,000 excess of $1,000,000, each occurrence.
$8,000,000 excess of $2,000,000 each occurrence, each policy.
1995 - $1,000,000 excess of $1,000,000, each occurrence.
$8,000,000 excess of $2,000,000 each occurrence, each policy.
1996 - $1,000,000 excess of $1,000,000, each occurrence.
$8,000,000 excess of $2,000,000 each occurrence, each policy.
3. Article XIII, "Premium", shall be revised as follows:
ARTICLE XIII
PREMIUM:
A. The Company shall pay to the Reinsurer in full as of January 1, 1995,
December 31, 1995 and December 31, 1996, the following reinsurance
premium, in respect of the various Sections covered hereunder:
<TABLE>
<CAPTION>
1/1/95 12/31/95 12/31/96
------ -------- ---------
<S> <C> <C> <C>
Section (A) $2,983,071 $1,821,299 $1,705,669
Section (B) $1,847,218 $1,129,205 $1,057,514
Section (C) $1,132,166 $ 692,094 $ 648,154
</TABLE>
subject to additional premium as set forth in paragraph B. below.
Page 4 of 6
<PAGE> 7
B. In the event that the Reinsurer's payment of its liabilities under one
or more of the Sections in this Agreement as of any December 31 exceed
$14,000,000 the Company shall pay, as additional premium to the
Reinsurer, 60% of the difference between such paid amount and 100% of the
premium payable hereunder as of January 1, 1995, December 31, 1995 and
December 31, 1996 combined.
4. Article XIV, "Profit Commission", shall be revised as follows:
ARTICLE XIV
PROFIT COMMISSION:
A. As of December 31, 1996 and annually thereafter the Reinsurer shall
allow the Company a profit commission on the results under this Agreement
in accordance with the following formula:
Income:
1. 95% of the reinsurance premiums paid or payable under Sections
(A), (B) and (C) of the Premium Article, including additional
premium, if any as of January 1, 1995 and December 31, 1995 and
94.9% of premiums payable as of December 31, 1996; plus
2. Interest Credit computed at 6.25% annual interest rate on Net
Cash held by the Reinsurer from January 1, 1995 and 5.50% annual
interest rate on Net Cash held by the Reinsurer from December 31,
1995. The term "Net Cash" shall mean 95% of premiums paid as of
January 1, 1995 and December 31, 1995, and 94.9% of premiums
payable as of December 31, 1996 hereunder, less payments under the
provisions of Sections (A), (B) and (C) and less any provisional
profit commission paid in previous calculations.
Outgo:
100% of all paid and outstanding liabilities under Sections (A),
(B) and (C) as at the date of calculation.
The amount by which Income exceeds Outgo is profit.
The amount by which Outgo exceeds Income is deficit.
Page 5 of 6
<PAGE> 8
B. It is understood and agreed that payment of Profit Commission to the
Company shall be as of December 31, 1999 and shall be subject to a full
and final release of the Reinsurer's liability under this Agreement.
However, notwithstanding the foregoing, the Company, at its option, can
elect to receive as of any December 31 an annual provisional payment of
20% of the expected total Profit Commission hereunder. Should the
provisional Profit Commission calculation result in a deficit, then any
previous provisional payment of Profit Commission paid to the Company
shall be returned to the Reinsurer to the extent required to eliminate
any deficit. Likewise, for purposes of all Profit Commission calculations
hereunder any allocation under "Outgo" for incurred but not reported loss
reserves shall be subject to mutual agreement of the parties hereto.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
Page 6 of 6
<PAGE> 9
MEMORANDUM OF CHANGES
to the
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE, et al
PER POLICY EXCESS OF LOSS REINSURANCE AGREEMENT
This Endorsement Number 2, effective December 31, 1996, contains the
following revisions to the attached Agreement Number 01-95-0879 as per the cover
note/placement slip:
1. The list of Companies hereon, collectively referred to as the "Company",
has been revised.
2. Article V, "Limits", has been revised.
3. Article XIII, "Premium", has been revised.
4. Article XIV, "Profit Commission", has been revised.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
Page 1 of 1
<PAGE> 1
EXHIBIT 10.27
QUOTA SHARE REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
The Subscribing Reinsurer(s) executing the
Interests and Liabilities Contract(s)
attached to and forming a part
of this Agreement
(hereinafter referred to as the "Reinsurer")
WITNESSETH:
The Reinsurer hereby reinsures the Company to the extent and the terms
and conditions subject to the exceptions, exclusions and limitations hereinafter
set forth and nothing hereinafter shall in any manner create any obligations or
establish any rights against the Reinsurer in favor of any third parties or any
persons not parties to this Agreement.
ARTICLE I.
BUSINESS COVERED:
A. The Company shall cede to the Reinsurer and the Reinsurer shall accept from
the Company an 80% quota share participation of the net retained insurance
liability of the Company on each risk insured under new and renewal policies
becoming effective on and after January 1, 1997, as respects losses occurring on
and after said date, covering business classified by the Company as:
1. Directors and Officers Liability for the following type(s) of
Original Insureds:
a. Physician Groups and/or Clinics.
b. Managed Care Organizations.
c. Association of California Hospital Districts - Program
Beta.
Page 1 of 12
<PAGE> 2
2. Errors and Omissions Liability for the following type(s) of Original
Insureds:
Managed Care Organizations.
B. The term "policies" means the Company's binders, policies and contracts
providing insurance on the business covered under this Agreement.
ARTICLE II.
EXCLUSIONS:
This Agreement specifically excludes:
1. All liability of the Company arising by contract, operation of
law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund. "Insolvency
Fund" includes any guaranty fund, plan, pool, association, fund
or other arrangement, howsoever denominated, established or
governed which provides for any assessment of or payment or
assumption by the Company of part or all of any claim, debt,
charge, fee or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority
to be insolvent, or which is otherwise deemed unable to meet any
claim, debt, charge, fee or other obligation in whole or in
part.
2. Loss or Liability excluded by the provisions of the attached
"Nuclear Incident Exclusion Clause - Liability - Reinsurance".
3. All Assumed Reinsurance.
4. As per the Company's original policies.
ARTICLE III.
TERRITORY:
The territorial limits of this Agreement shall be identical with those of
the Company's policies.
ARTICLE IV.
TERM:
A. This Agreement shall apply to claims made and first reported on risks
attaching during the twelve (12) month period from January 1, 1997 through
December 31, 1997, both days inclusive.
B. If any law or regulation of the Federal, State or Local Government or any
jurisdiction in which the Company is doing business shall render illegal the
arrangements made herein, this Agreement can be terminated immediately insofar
as it applies to such jurisdiction by the Company giving notice to the Reinsurer
to such effect.
Page 2 of 12
<PAGE> 3
C. Notwithstanding the expiration of this Agreement as hereinabove provided, the
provisions of this Agreement shall continue to apply to all unfinished business
hereunder to the end that all obligations and liabilities incurred by each party
hereunder prior to such termination shall be fully performed and discharged.
ARTICLE V.
LIMITS OF COVER:
A. With respect to business classified as Directors and Officers Liability:
The liability of the Reinsurer shall not exceed $4,000,000 per policy in
the aggregate and/or coverage part (i.e., 80% of $5,000,000).
B. With respect to business classified as Errors and Omissions Liability:
The liability of the Reinsurer shall not exceed $800,000 per policy in
the aggregate and/or coverage part (i.e., 80% of $1,000,000).
C. This Agreement is extended to protect the Company for loss in Excess of
Original Policy Limits and 80% of any Extra Contractual Obligations as defined
in the Articles of that title herein; provided, however, the contractual loss
and the Excess of Original Policy Limits and Extra Contractual Obligations
loss(es) combined shall not exceed the limits in paragraphs A. and B. above.
ARTICLE VI.
COMPANY RETENTION:
The Company shall retain net for its own account the remaining 20% of its
net retained insurance liability on each risk reinsured under this Agreement.
ARTICLE VII.
DEFINITIONS:
A. The term "net retained insurance liability" as used herein means the
remaining portion of the Company's gross liability on each risk reinsured under
this Agreement after deducting recoveries from all reinsurance, other than the
reinsurance provided.
B. The term "original gross premiums" as used herein means gross premiums and
additional premiums.
Page 3 of 12
<PAGE> 4
ARTICLE VIII.
ORIGINAL CONDITIONS:
All reinsurance coming within the terms of this Agreement shall be
subject to the same terms, rates, conditions and waivers and to the same
modifications and alterations as the respective policies of the Company, except
as modified by the terms of this Agreement.
ARTICLE IX.
EXCESS OF ORIGINAL POLICY LIMITS:
A. This Agreement shall protect the Company, within the limits hereof, in
connection with loss in excess of the limit of its original policy, such loss in
excess of the limit having been incurred because of failure by it to settle
within the policy limit or by reason of alleged or actual negligence, fraud, or
bad faith in rejecting an offer of settlement or in the preparation of the
defense or in the trial of any action against its insured or reinsured or in the
preparation or prosecution of an appeal consequent upon such action.
B. However, this Article shall not apply where the loss has been incurred due to
fraud by a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
C. For the purpose of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original policy.
ARTICLE X.
EXTRA CONTRACTUAL OBLIGATIONS:
A. This Agreement shall protect the Company for any Extra Contractual
Obligations within the limits hereof. The term "Extra Contractual Obligations"
is defined as those liabilities not covered under any other provision of this
Agreement and which arise from the handling of any claim on business covered
hereunder, such liabilities arising because of, but not limited to, the
following: failure by the Company to settle within the policy limit, or by
reason of alleged or actual negligence, fraud, or bad faith in rejecting an
offer of settlement or in the preparation of the defense or in the trial of any
action against its insured or reinsured or in the preparation or prosecution of
an appeal consequent upon such action.
B. The date on which any Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original disaster
and/or casualty.
C. However, this Article shall not apply where the loss has been incurred due to
fraud by a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
Page 4 of 12
<PAGE> 5
ARTICLE XI.
LOSSES, LOSS ADJUSTMENT EXPENSES AND SALVAGES:
A. The Company shall settle all loss claims under its policies and the Reinsurer
shall pay to the Company its pro rata share of such loss claims as payable by
the Company.
B. The Reinsurer shall also bear its pro rata share of loss adjustment expenses
incurred by the Company under policies subject hereto, such loss adjustment
expenses being within the limit of the Company's original policies.
C. The Reinsurer shall benefit pro rata in all salvages, discounts and other
recoveries.
D. The term "loss adjustment expense" as used herein shall follow the
definitions contained in the Company's original policies.
ARTICLE XII.
REINSURANCE PREMIUM:
The Company shall pay to the Reinsurer 80% of the Company's original
gross premiums received by the Company on business covered hereunder.
ARTICLE XIII.
COMMISSION:
The Reinsurer shall make a commission allowance equal to the original
acquisition cost plus 15% not to exceed 25% in all to the Company on the
premiums ceded under this Agreement. On all return premiums the Company shall
return to the Reinsurer the commission allowed thereon.
ARTICLE XIV.
REPORTS AND REMITTANCES:
A. The Company will provide the Reinsurer with all necessary data respecting
premiums and losses, including reserves thereon, as at dates and on forms
mutually acceptable to the Company and the Reinsurer.
B. The Company shall render a quarterly account within forty-five (45) days
after the end of each quarter summarizing the following information relating to
reinsurance covered under this Agreement during the said quarter:
1. Statement of premiums;
2. Statement of losses and loss expenses paid and salvages recovered;
Page 5 of 12
<PAGE> 6
3. Account Current summarizing premiums, commissions, losses and loss
expenses paid and salvages recovered;
and any balance due the Reinsurer from the Company, as indicated by the
aforesaid Account Current, shall be remitted to the Reinsurer with the quarterly
account. Any balance due the Company from the Reinsurer shall be remitted to the
Company within sixty (60) days after the close of said quarterly account.
ARTICLE XV.
COMMUTATION CLAUSE:
The Company or the Reinsurer may, at any time express their desire to the
other party to commute all losses which are applicable to any Agreement year and
which are still unsettled. In such event the Company and the Reinsurer shall
mutually determine and evaluate such losses and the payment by the Reinsurer of
their proportion of the amount so ascertained and mutually agreed to be the
value of such losses shall relieve them of all further liability, in respect of
that Agreement year both in respect of known or unknown losses.
ARTICLE XVI.
OFFSET:
The Company and the Reinsurer shall have the right to offset any balance
or amounts due from one party to the other under the terms of this Agreement.
The party asserting the right of offset may exercise such right any time whether
the balances due are on account of premiums or losses or otherwise.
ARTICLE XVII.
CONFIDENTIALITY CLAUSE:
A. This Agreement and the pre Agreement documentation may contain confidential
or proprietary information of either party to this Agreement. All parties shall
maintain the confidentiality of this information and shall not disclose these to
any third party without both parties approval.
B. Notwithstanding the above, any party may disclose such information without
further approval from the other party in answer to interrogations, subpoenas or
other legal/arbitration process as well as to the Company's reinsurance
intermediary hereon, the Reinsurer's retrocessionaires or in response to
requests by governmental and regulatory agencies. In addition the parties may
disclose such information to their accountants and outside legal counsel as may
be necessary.
Page 6 of 12
<PAGE> 7
ARTICLE XVIII.
CURRENCY:
Premiums shall be payable by the Company and losses shall be paid to the
Company in United States currency.
ARTICLE XIX.
FEDERAL EXCISE TAX:
(Applicable to those Reinsurers, excepting Underwriters at Lloyd's, London and
other Reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow, for the purpose of paying the Federal
Excise Tax, the applicable percentage of the premium payable hereon (as imposed
under Section 4371 of the Internal Revenue Service Code) to the extent such
premium is subject to the Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the Reinsurer
will deduct the aforesaid percentage from the return premium payable hereon and
the Company or its agent should take steps to recover the tax from the United
States government.
ARTICLE XX.
ERRORS AND OMISSIONS:
Any inadvertent delay, omission or error shall not be held to relieve
either party hereto from any liability which would attach to it hereunder if
such delay, omission or error had not been made, provided such delay, omission
or error is rectified immediately upon discovery; provided, however, this
Article is not to override retroactive dates specified in the Term Article.
ARTICLE XXI.
ACCESS TO RECORDS:
A. The Company shall place at the disposal of the Reinsurer at all reasonable
times, and the Reinsurer shall have the right to inspect, through its authorized
representatives, all books, records and papers of the Company in connection with
this reinsurance hereunder or the subject matter thereof.
B. The Reinsurer shall be afforded the opportunity, at its own expense to
appoint an attorney of its own choice to assess the Company's claims procedures
who shall report to the Reinsurer the results of such.
Page 7 of 12
<PAGE> 8
ARTICLE XXII.
FUNDING:
(This clause is only applicable to those Reinsurer(s) who cannot qualify for
credit by the State having jurisdiction over the Company's loss reserves.)
A. As regards policies or bonds issued by the Company coming within the scope of
this Agreement, the Company agrees that, when it shall file with the Insurance
Department or set up on its books reserves for losses covered hereunder which it
shall be required by law to set up, it will forward to the Reinsurer a statement
showing the proportion of such loss reserves which is applicable to the
Reinsurer. The Reinsurer hereby agrees that it will apply for and secure
delivery to the Company of a clean, irrevocable and unconditional Letter of
Credit, issued by a bank which is acceptable to the regulatory authority(ies)
having jurisdiction over the Company's loss reserves in an amount equal to the
Reinsurer's proportion of reserves in respect of known outstanding losses that
have been reported to the Reinsurer and allocated loss expenses relating
thereto, plus reserves for losses incurred but not reported, as shown in the
statement prepared by the Company.
B. The Letter of Credit shall be issued for a period of not less than one (1)
year, and shall be automatically extended for one (1) year from its date of
expiration or any future expiration date unless thirty (30) days prior to any
expiration date the issuing bank shall notify the Company by registered mail
that the bank elects not to consider the Letter of Credit extended for any
additional period. An issuing bank, not a member of the Federal Reserve System
or not chartered in New York State shall provide sixty (60) days notice to the
Company prior to any expiration in the event of non-extension.
C. Notwithstanding any other provision of this Agreement, the Company or its
successors in interest may draw upon such credit at any time without diminution
because of the insolvency of the Company or of the Reinsurer for one or more of
the following purposes only:
1. To pay the Reinsurer's share or to reimburse the Company for the
Reinsurer's share of any loss reinsured by this Agreement, the
payment of which has been agreed by the Reinsurer and which has
not been otherwise paid.
2. To make refund of any sum which is in excess of the actual amount
required to pay the Reinsurer's share of any liability reinsured
by this Agreement.
3. In the event of expiration of the Letter of Credit as provided for
above, to establish deposit of the Reinsurer's share of known and
reported outstanding losses and allocated expenses relating
thereto under this Agreement. Such cash deposit shall be held in
an interest bearing account separate from the Company's other
assets, and interest thereon shall accrue to the benefit of the
Reinsurer.
D. The issuing bank shall have no responsibility whatsoever in connection with
the propriety of withdrawals made by the Company or the disposition of funds
withdrawn, except to ensure that withdrawals are made only upon the order of
properly authorized representatives of the Company.
Page 8 of 12
<PAGE> 9
E. At annual intervals, or more frequently as agreed but never more frequently
than quarterly, the Company shall prepare a specific statement, for the sole
purpose of amending the Letter of Credit, of the Reinsurer's share of known and
reported outstanding losses and allocated expenses relating thereto, plus
reserves for losses incurred but not reported. If the statement shows that
Reinsurer's share of such losses and allocated loss expenses exceeds the balance
of credit as of the statement date, the Reinsurer shall, within thirty (30) days
after receipt of notice of such excess, secure delivery to the Company of an
amendment of the Letter of Credit increasing the amount of credit by the amount
of such difference. If, however, the statement shows that the Reinsurer's share
of known and reported outstanding losses plus allocated loss expenses relating
thereto, plus reserves for losses incurred but not reported is less than the
balance of credit as of the statement date, the Company shall, within thirty
(30) days after receipt of written request from the Reinsurer, release such
excess credit by agreeing to secure an amendment to the Letter of Credit
reducing the amount of credit available by the amount of such excess credit.
ARTICLE XXIII.
SPECIAL FUNDING CLAUSE:
A. If, during the period of this Agreement and thereafter, as respects any
outstanding liabilities hereunder, the Reinsurer shall fail to pay any loss
payable hereunder within the time prescribed, the Reinsurer agrees that it will
fund uncollected paid losses and loss adjustment expenses within thirty (30)
days from the date of written demand by the Company to so fund. Such demand
shall not be made unless balances are sixty (60) days or more past the due date
of payment specified in this Agreement.
B. The Reinsurer shall have the sole option of determining the method of funding
referred to above, provided it is acceptable to the insurance regulatory
authorities involved. If the Reinsurer elects to fund the aforesaid loss by a
Letter of Credit, the procedures set forth in the Funding Article in respect of
Letters of Credit shall apply. If the Reinsurer has already funded obligations
hereunder in accordance with the Funding Article in this Agreement, it agrees
that such funds as are required to pay overdue losses may immediately be drawn
down by the Company.
C. The phrase "any loss payable" as used in paragraph A. above shall mean any
net loss subject to recovery under this Agreement wherein the Reinsurer has not
disputed said loss in writing within the due date for payment.
D. The Company will provide the Reinsurer with a reinsurance proof of loss and
such other substantive loss material reflecting the nature of the settlement
(i.e., applicable Proofs of Loss, Releases, adjuster's reports, etc.). If,
subsequent to receipt of this material, the information supplied is insufficient
or not in accordance with the contractual conditions, then the payment due date
as defined in the Reports and Remittances Article, will be deemed to be the date
upon which the Reinsurer received such additional substantive material necessary
to approve payment of the claim, or the date the claim is presented in a manner
acceptable to the Reinsurer.
Page 9 of 12
<PAGE> 10
ARTICLE XXIV.
ARBITRATION:
A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Agreement,
including the formation or validity thereof, shall be submitted for decision to
a panel of three arbitrators. Notice requesting arbitration will be in writing
and sent certified or registered mail, return receipt requested.
B. One arbitrator shall be chosen by each party and the two arbitrators shall,
before instituting the hearing, choose an impartial third arbitrator who shall
preside at the hearing. If either party fails to appoint its arbitrator within
thirty (30) days after being requested to do so by the other party, the latter,
after ten (10) days notice by certified or registered mail of its intention to
do so, may appoint the second arbitrator.
C. If the two arbitrators are unable to agree upon the third arbitrator within
thirty (30) days of their appointment, the deficiency shall be supplied on the
application of the party requesting arbitration by an appointment made by the
American Arbitration Association. Notwithstanding the appointment of any third
Arbitrator by the American Arbitration Association, the arbitration proceedings
shall not be governed by the American Arbitration Association's commercial
arbitration rules.
D. All arbitrators shall be disinterested active or former executive officers of
insurance or reinsurance companies or Underwriters at Lloyd's, London.
E. Within thirty (30) days after notice of appointment of all arbitrators, the
panel shall meet and determine timely periods for briefs, discovery procedures
and schedules for hearings.
F. The panel shall be relieved of all judicial formality and shall not be bound
by the strict rules of procedure and evidence. Unless the panel agrees
otherwise, arbitration shall take place in Beverly Hills, California, but the
venue may be changed when deemed by the panel to be in the best interest of the
arbitration proceeding. Insofar as the arbitration panel looks to substantive
law, it shall consider the law of the State of California. The decision of any
two arbitrators when rendered in writing shall be final and binding. The panel
is empowered to grant interim relief as it may deem appropriate.
G. The panel shall interpret this Agreement as if it were an honorable
engagement rather than as merely a legal obligation and shall make its decision
considering the custom and practice of the applicable insurance and reinsurance
business within sixty (60) days following the termination of the hearings.
Judgment upon the award may be entered in any court having jurisdiction thereof.
H. Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the cost of the third arbitrator. The
remaining costs of the arbitration shall be allocated by the panel. The panel
may, at its discretion, award such further costs and expenses as it considers
appropriate, including but not limited to attorneys fees, to the extent
permitted by law.
Page 10 of 12
<PAGE> 11
ARTICLE XXV.
SERVICE OF SUIT CLAUSE (U.S.A.):
A. It is agreed that in the event of the failure of the Reinsurer hereon to pay
any amount claimed to be due hereunder, the Reinsurer hereon, at the request of
the Company, will submit to the jurisdiction of a Court of competent
jurisdiction within the United States. Nothing in this Clause constitutes or
should be understood to constitute a waiver of the Reinsurer's rights to
commence an action in any Court of competent jurisdiction in the United States,
to remove an action to a United States District Court, or to seek a transfer of
a case to another Court as permitted by the laws of the United States or of any
State in the United States. It is further agreed that service of process in such
suit may be made upon Messrs. Mendes & Mount, 725 South Figueroa, Suite 1990,
Los Angeles, CA 90017, and that in any suit instituted, the Reinsurer will abide
by the final decision of such Court or of any Appellate Court in the event of an
appeal.
B. The above-named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of the Company
to give written undertaking to the Company that they will enter a general
appearance upon the Reinsurer's behalf in the event such a suit shall be
instituted.
C. Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefor, the Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be served
any lawful process in action, suit or proceeding instituted by or on behalf of
the Company or any beneficiary hereunder arising out of this Agreement, and
hereby designate the above-named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE XXVI.
INSOLVENCY:
A. The portion of any risk or obligation assumed by the Reinsurer, when such
portion is ascertained, shall be payable on demand of the Company at the same
time as the Company shall pay its net retained portion of such risk or
obligation, with reasonable provision for verification before payment, and the
reinsurance shall be payable by the Reinsurer, on the basis of the liability of
the Company under the policy or policies reinsured without diminution because of
the insolvency of the Company.
B. In the event of the insolvency of one or more than one of the Companies,
reinsurance under this Agreement shall be payable immediately on demand, with
reasonable provision for verification, on the basis of claims allowed against
the insolvent Company(ies) by any court of competent jurisdiction or by any
liquidator, receiver, or statutory successor of the Company(ies) having
authority to allow such claims, without diminution because of such insolvency or
because such liquidator, receiver, or statutory successor has failed to pay all
or a portion of any claims.
Page 11 of 12
<PAGE> 12
Such payments by the Reinsurer shall be made directly to the Company or its
liquidator, receiver or statutory successor, except where the contract of
insurance or reinsurance provides another payee of such reinsurance in the event
of the insolvency of the Company(ies).
C. It is agreed, however, that the liquidator or receiver or statutory successor
of the insolvent Company(ies) will give written notice to the Reinsurer of the
pendency of a claim against the insolvent Company(ies) on the policy or policies
reinsured within a reasonable time after such claim is filed in the insolvency
proceeding and that during the pendency of such claim the Reinsurer may
investigate such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated any defense or defenses which it may deem
available to the Company(ies) or its liquidator or receiver or statutory
successor. The expense thus incurred by the Reinsurer will be chargeable,
subject to court approval, against the insolvent Company(ies) as part of the
expense of liquidation to the extent of a proportionate share of the benefit
which may accrue to the Company(ies) solely as a result of the defense
undertaken by the Reinsurer.
D. Where two or more reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense will be
apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the insolvent Company(ies).
ARTICLE XXVII.
INTERMEDIARY:
Willcox Incorporated Reinsurance Intermediaries is hereby recognized as
the Intermediary negotiating this Agreement for all business hereunder. All
communications (including but not limited to notices, statements, premium,
return premium, commissions, taxes, losses, loss adjustment expense, salvages
and loss settlements) relating thereto shall be transmitted to the Company or
the Reinsurer through Willcox Incorporated Reinsurance Intermediaries, 180
Maiden Lane, New York, New York 10038-4993. Payments by the Company to the
Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by
the Reinsurer to the Intermediary shall be deemed to constitute payment to the
Company only to the extent that such payments are actually received by the
Company.
ARTICLE XXVIII.
GOVERNING LAW:
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of California, U.S.A.
ARTICLE XXIX.
SEVERAL LIABILITY NOTICE:
The subscribing reinsurers' obligations under contracts of reinsurance to
which they subscribe are several and not joint and are limited solely to the
extent of their individual subscriptions. The subscribing reinsurers are not
responsible for the subscription of any co-subscribing reinsurer who for any
reason does not satisfy all or part of its obligations.
Page 12 of 12
<PAGE> 13
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
QUOTA SHARE REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a ___% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Quota Share Reinsurance Agreement.
Such participation shall be several and not joint with the participation
of other subscribing reinsurers, and the Subscribing Reinsurer shall under no
circumstances participate in the Interests and Liabilities, if any, of the other
subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer ___% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach on January 1, 1997 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
Page 1 of 2
<PAGE> 14
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Beverly Hills, California
this day of August , 1997
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
Beverly Hills, California
By: /s/ DONALD J. ZUK
-----------------------
Signed in
this day of , 199
Page 2 of 2
<PAGE> 15
MEMORANDUM OF CHANGES
to the
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE, et al
QUOTA SHARE REINSURANCE AGREEMENT
The following changes have been effected from the expiring Quota Share
Reinsurance Agreement Number 01-96-0922:
1. The list of Companies hereon, collectively referred to as the "Company",
has been revised per the cover note/placement slip.
2. Article IV, "Term", the dates have been changed, in this and all other
applicable Articles, for the current term.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
Page 1 of 1
<PAGE> 1
EXHIBIT 10.28
ALLOCATED LOSS ADJUSTMENT EXPENSE EXCESS OF LOSS
REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
The Subscribing Reinsurer(s) executing the
Interests and Liabilities Contract(s)
attached to and forming a part
of this Agreement
(hereinafter referred to as the "Reinsurer")
WITNESSETH:
The Reinsurer hereby reinsures the Company to the extent and the terms
and conditions subject to the exceptions, exclusions and limitations hereinafter
set forth and nothing hereinafter shall in any manner create any obligations or
establish any rights against the Reinsurer in favor of any third parties or any
persons not parties to this Agreement.
ARTICLE I.
BUSINESS COVERED:
The Reinsurer agrees to reimburse the Company, on an excess of loss
basis, for the amounts of ultimate net loss in respect of allocated loss
adjustment expenses which the Company may pay as the result of claims made
during the term of this Agreement under the Company's Physicians and Surgeons
Comprehensive Professional and Business Liability policies, including Clinics
and Clinical Laboratories, which are in force or may hereinafter come into force
during the term of this Agreement, except as excluded under the Exclusions
Article subject to the limitations set forth in the Limits of Cover Article.
Page 1 of 11
<PAGE> 2
ARTICLE II.
EXCLUSIONS:
This Agreement specifically excludes:
1. All liability of the Company arising by contract, operation of
law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund. "Insolvency
Fund" includes any guaranty fund, plan, pool, association, fund
or other arrangement, howsoever denominated, established or
governed which provides for any assessment of or payment or
assumption by the Company of part or all of any claim, debt,
charge, fee or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority
to be insolvent, or which is otherwise deemed unable to meet any
claim, debt, charge, fee or other obligation in whole or in
part.
2. Loss or Liability excluded by the provisions of the attached
"Nuclear Incident Exclusion Clause - Liability - Reinsurance".
3. All Assumed Reinsurance.
ARTICLE III.
TERM:
A. This Agreement shall apply to claims made during the twelve (12) month period
beginning January 1, 1997. In the event a loss, as defined in the Definitions
Article, involves a loss or losses covered under the current Agreement Year and
a prior Agreement Year(s) no recovery shall be made hereunder in respect of any
loss which occurred prior to January 1, 1976.
B. If any law or regulation of the Federal, State or Local Government or any
jurisdiction in which the Company is doing business shall render illegal the
arrangements made herein, this Agreement can be terminated immediately insofar
as it applies to such jurisdiction by the Company giving notice to the Reinsurer
to such effect.
C. Notwithstanding the expiration of this Agreement as hereinabove provided, the
provisions of this Agreement shall continue to apply to all unfinished business
hereunder to the end that all obligations and liabilities incurred by each party
hereunder prior to such termination shall be fully performed and discharged.
Page 2 of 11
<PAGE> 3
ARTICLE IV.
LIMITS OF COVER:
A. The Company shall retain for its own account and pay under one or more of the
Company's policies the first $500,000 ultimate net loss of allocated loss
adjustment expenses per medical incident during the term of this Agreement and
the Reinsurer agrees to reimburse the Company for the amount of ultimate net
loss in excess of $500,000 of allocated loss adjustment expenses per medical
incident during the term of this Agreement, but the Reinsurer's maximum
liability shall not exceed 100% of $2,500,000 of allocated loss adjustment
expenses per medical incident during the term of this Agreement.
B. The Reinsurer's maximum liability from all losses during the term of this
Agreement shall not exceed $5,000,000.
C. It is understood and agreed that this reinsurance shall apply net of any
inuring reinsurance protection(s) carried by the Company where allocated loss
adjustment expenses are recoverable pro rata in addition to limit.
ARTICLE V.
DEFINITIONS:
A. The term "claims made" as used herein shall mean (A) In respect of Claims
Made Policies, claims first notified to the Company during the term of this
Agreement on any in force policy or reporting endorsement arising out of
incidents subsequent to the retroactive date of said policy as the result of the
rendering of or failure to render a professional service or the reporting of
losses which arise from the insured premises and operations incidental to the
practice of a physician, and/or (B) In respect of Occurrence Policies, claims or
losses first notified to the Company during the term of this Agreement.
B. The term "medical incident" as used herein shall mean all original Physicians
and Surgeons Comprehensive Professional and Business Liability Policies,
including Clinics and Clinical Laboratories, written by the Company for which a
defense must be provided under each policy by the Company and which arise out of
the same common loss event.
C. The term "allocated loss adjustment expense" as used herein shall include all
loss adjustment expenses incurred in investigation, adjustment and litigation,
defense and settlement of claims made against the Company under its original
policies reinsured hereunder, including pre judgement interest when not part of
an award or judgement and post judgement interest. Office expenses and salaries
of officials and employees not classified as loss adjusters are not chargeable
as expenses for the purpose of coverage hereunder.
Page 3 of 11
<PAGE> 4
ARTICLE VI.
NET RETAINED LINES:
A. This Agreement applies only to that portion of any policy which the Company
retains net for its own account, and in calculating the amount of any loss
hereunder and also in computing the amount or amounts in excess of which this
Agreement attaches, only loss or losses in respect of that portion of any policy
which the Company retains net for its own account shall be included.
B. The amount of the Reinsurer's liability hereunder in respect of any loss or
losses shall not be increased by reason of the inability of the Company to
collect from any other reinsurer(s), whether specific or general, any amounts
which may have become due from such reinsurer(s), whether such inability arises
from the insolvency of such other reinsurer(s) or otherwise.
ARTICLE VII.
ULTIMATE NET LOSS:
The term "ultimate net loss" means the actual loss adjustment expenses,
paid or to be paid by the Company on its net retained liability after making
deductions for all recoveries, salvages, subrogations and all claims on inuring
reinsurance, whether collectible or not; provided, however, that in the event of
the insolvency of the Company, payment by the Reinsurer shall be made in
accordance with the provisions of the Insolvency Article. Nothing herein shall
be construed to mean that losses under this Agreement are not recoverable until
the Company's ultimate net loss has been ascertained.
ARTICLE VIII.
NOTICE OF LOSS AND LOSS SETTLEMENTS:
A. In the event of a claim arising hereunder which either results in or appears
to be of serious enough nature as probably to result in a loss involving this
Agreement, the Company shall give notice as soon as reasonably practicable to
Reinsurers and the Company shall keep the Reinsurer advised of all subsequent
developments in connection therewith.
B. All loss settlements made by the Company provided they are within the terms
of the Company's original policies and of this Agreement, shall be
unconditionally binding upon Reinsurer and amounts falling to the share of the
Reinsurer shall be payable to the Company in accordance with the provisions set
forth in paragraph C. of the Reports and Remittances Article.
ARTICLE IX.
PREMIUM:
The Company shall pay to the Reinsurer a premium of $1,000,000 payable in
equal quarterly installments of $250,000 on January 1st, April 1st, July 1st and
October 1st, 1997.
Page 4 of 11
<PAGE> 5
ARTICLE X.
REPORTS AND REMITTANCES:
A. The Company will provide the Reinsurer within forty-five (45) days at the end
of each quarter, all necessary data respecting premiums and losses, including
reserves thereon, as at dates and on forms mutually acceptable to the Company
and the Reinsurer.
B. Payments of premium shall be made in accordance with the provisions of the
Premium Article.
C. Payment by the Reinsurer of its portion of loss expenses paid by the Company
will be made by the Reinsurer to the Company as soon as possible, but not later
than sixty (60) days after proof of payment by the Company is received by the
Reinsurer.
ARTICLE XI.
OFFSET:
The Company and the Reinsurer shall have the right to offset any balance
or amounts due from one party to the other under the terms of this Agreement.
The party asserting the right of offset may exercise such right any time whether
the balances due are on account of premiums or losses or otherwise.
ARTICLE XII.
COMMUTATION CLAUSE:
The Company or the Reinsurer may, at any time express their desire to the
other party to commute all losses which are applicable to any Agreement year and
which are still unsettled. In such event the Company and the Reinsurer shall
mutually determine and evaluate such losses and the payment by the Reinsurer of
their proportion of the amount so ascertained and mutually agreed to be the
value of such losses shall relieve them of all further liability, in respect of
that Agreement year both in respect of known or unknown losses.
ARTICLE XIII.
CONFIDENTIALITY CLAUSE:
A. This Agreement and the pre Agreement documentation may contain confidential
or proprietary information of either party to this Agreement. All parties shall
maintain the confidentiality of this information and shall not disclose such
information to any third party without both parties approval.
Page 5 of 11
<PAGE> 6
B. Notwithstanding the above, any party may disclose such information without
further approval from the other party in answer to interrogations, subpoenas or
other legal/arbitration process as well as to the Company's reinsurance
intermediary hereon, the Reinsurer's retrocessionaires or in response to
requests by governmental and regulatory agencies. In addition the parties may
disclose such information to their accountants and outside legal counsel as may
be necessary.
ARTICLE XIV.
CURRENCY:
Premiums shall be payable by the Company and losses shall be paid to the
Company in United States currency.
ARTICLE XV.
FEDERAL EXCISE TAX:
(Applicable to those Reinsurers, excepting Underwriters at Lloyd's, London and
other Reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow, for the purpose of paying the Federal
Excise Tax, the applicable percentage of the premium payable hereon (as imposed
under Section 4371 of the Internal Revenue Service Code) to the extent such
premium is subject to the Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the Reinsurer
will deduct the aforesaid percentage from the return premium payable hereon and
the Company or its agent should take steps to recover the tax from the United
States government.
ARTICLE XVI.
ERRORS AND OMISSIONS:
Any inadvertent delay, omission or error shall not be held to relieve
either party hereto from any liability which would attach to it hereunder if
such delay, omission or error had not been made, provided such delay, omission
or error is rectified immediately upon discovery; provided, however, this
Article is not to override retroactive dates specified in the Term Article.
ARTICLE XVII.
ACCESS TO RECORDS:
A. The Company shall place at the disposal of the Reinsurer at all reasonable
times, and the Reinsurer shall have the right to inspect, through its authorized
representatives, all books, records and papers of the Company in connection with
this reinsurance hereunder or the subject matter thereof.
Page 6 of 11
<PAGE> 7
B. The Reinsurer shall be afforded the opportunity, at its own expense to
appoint an attorney of its own choice to assess the Company's claims procedures
who shall report to the Reinsurer the results of such.
ARTICLE XVIII.
FUNDING:
(This clause is only applicable to those Reinsurer(s) who cannot qualify for
credit by the State having jurisdiction over the Company's loss reserves.)
A. As regards policies or bonds issued by the Company coming within the scope of
this Agreement, the Company agrees that, when it shall file with the Insurance
Department or set up on its books reserves for losses covered hereunder which it
shall be required by law to set up, it will forward to the Reinsurer a statement
showing the proportion of such loss reserves which is applicable to the
Reinsurer. The Reinsurer hereby agrees that it will apply for and secure
delivery to the Company of a clean, irrevocable and unconditional Letter of
Credit, issued by a bank which is acceptable to the regulatory authority(ies)
having jurisdiction over the Company's loss reserves in an amount equal to the
Reinsurer's proportion of reserves in respect of known outstanding losses that
have been reported to the Reinsurer and allocated loss expenses relating
thereto, plus reserves for losses incurred but not reported, as shown in the
statement prepared by the Company.
B. The Letter of Credit shall be issued for a period of not less than one (1)
year, and shall be automatically extended for one (1) year from its date of
expiration or any future expiration date unless thirty (30) days prior to any
expiration date the issuing bank shall notify the Company by registered mail
that the bank elects not to consider the Letter of Credit extended for any
additional period. An issuing bank, not a member of the Federal Reserve System
or not chartered in New York State shall provide sixty (60) days notice to the
Company prior to any expiration in the event of non-extension.
C. Notwithstanding any other provision of this Agreement, the Company or its
successors in interest may draw upon such credit at any time without diminution
because of the insolvency of the Company or of the Reinsurer for one or more of
the following purposes only:
1. To pay the Reinsurer's share or to reimburse the Company for the
Reinsurer's share of any loss reinsured by this Agreement, the
payment of which has been agreed by the Reinsurer and which has
not been otherwise paid.
2. To make refund of any sum which is in excess of the actual amount
required to pay the Reinsurer's share of any liability reinsured
by this Agreement.
3. In the event of expiration of the Letter of Credit as provided for
above, to establish deposit of the Reinsurer's share of known and
reported outstanding losses and allocated expenses relating
thereto under this Agreement. Such cash deposit shall be held in
an interest bearing account separate from the Company's other
assets, and interest thereon shall accrue to the benefit of the
Reinsurer.
Page 7 of 11
<PAGE> 8
D. The issuing bank shall have no responsibility whatsoever in connection with
the propriety of withdrawals made by the Company or the disposition of funds
withdrawn, except to ensure that withdrawals are made only upon the order of
properly authorized representatives of the Company.
E. At annual intervals, or more frequently as agreed but never more frequently
than quarterly, the Company shall prepare a specific statement, for the sole
purpose of amending the Letter of Credit, of the Reinsurer's share of known and
reported outstanding losses and allocated expenses relating thereto, plus
reserves for losses incurred but not reported. If the statement shows that
Reinsurer's share of such losses and allocated loss expenses exceeds the balance
of credit as of the statement date, the Reinsurer shall, within thirty (30) days
after receipt of notice of such excess, secure delivery to the Company of an
amendment of the Letter of Credit increasing the amount of credit by the amount
of such difference. If, however, the statement shows that the Reinsurer's share
of known and reported outstanding losses plus allocated loss expenses relating
thereto, plus reserves for losses incurred but not reported is less than the
balance of credit as of the statement date, the Company shall, within thirty
(30) days after receipt of written request from the Reinsurer, release such
excess credit by agreeing to secure an amendment to the Letter of Credit
reducing the amount of credit available by the amount of such excess credit.
ARTICLE XIX.
SPECIAL FUNDING CLAUSE:
A. If, during the period of this Agreement and thereafter, as respects any
outstanding liabilities hereunder, the Reinsurer shall fail to pay any loss
payable hereunder within the time prescribed, the Reinsurer agrees that it will
fund uncollected paid losses and loss adjustment expenses within thirty (30)
days from the date of written demand by the Company to so fund. Such demand
shall not be made unless balances are sixty (60) days or more past the due date
of payment specified in this Agreement.
B. The Reinsurer shall have the sole option of determining the method of funding
referred to above, provided it is acceptable to the insurance regulatory
authorities involved. If the Reinsurer elects to fund the aforesaid loss by a
Letter of Credit, the procedures set forth in the Funding Article in respect of
Letters of Credit shall apply. If the Reinsurer has already funded obligations
hereunder in accordance with the Funding Article in this Agreement, it agrees
that such funds as are required to pay overdue losses may immediately be drawn
down by the Company.
C. The phrase "any loss payable" as used in paragraph A. above shall mean any
ultimate net loss subject to recovery under this Agreement wherein the Reinsurer
has not disputed said loss in writing within the due date for payment.
D. The Company will provide the Reinsurer with a reinsurance proof of loss and
such other substantive loss material reflecting the nature of the settlement
(i.e., applicable Proofs of Loss, Releases, adjuster's reports, etc.). If,
subsequent to receipt of this material, the information supplied is insufficient
or not in accordance with the contractual conditions, then the payment due date
as defined in the Reports and Remittances Article, will be deemed to be the date
upon which the Reinsurer received such additional substantive material necessary
to approve payment of the claim, or the date the claim is presented in a manner
acceptable to the Reinsurer.
Page 8 of 11
<PAGE> 9
ARTICLE XX.
ARBITRATION:
A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Agreement,
including the formation or validity thereof, shall be submitted for decision to
a panel of three arbitrators. Notice requesting arbitration will be in writing
and sent certified or registered mail, return receipt requested.
B. One arbitrator shall be chosen by each party and the two arbitrators shall,
before instituting the hearing, choose an impartial third arbitrator who shall
preside at the hearing. If either party fails to appoint its arbitrator within
thirty (30) days after being requested to do so by the other party, the latter,
after ten (10) days notice by certified or registered mail of its intention to
do so, may appoint the second arbitrator.
C. If the two arbitrators are unable to agree upon the third arbitrator within
thirty (30) days of their appointment, the deficiency shall be supplied on the
application of the party requesting arbitration by an appointment made by the
American Arbitration Association. Notwithstanding the appointment of any third
Arbitrator by the American Arbitration Association, the arbitration proceedings
shall not be governed by the American Arbitration Association's commercial
arbitration rules.
D. All arbitrators shall be disinterested active or former executive officers of
insurance or reinsurance companies or Underwriters at Lloyd's, London.
E. Within thirty (30) days after notice of appointment of all arbitrators, the
panel shall meet and determine timely periods for briefs, discovery procedures
and schedules for hearings.
F. The panel shall be relieved of all judicial formality and shall not be bound
by the strict rules of procedure and evidence. Unless the panel agrees
otherwise, arbitration shall take place in Beverly Hills, California, but the
venue may be changed when deemed by the panel to be in the best interest of the
arbitration proceeding. Insofar as the arbitration panel looks to substantive
law, it shall consider the law of the State of California. The decision of any
two arbitrators when rendered in writing shall be final and binding. The panel
is empowered to grant interim relief as it may deem appropriate.
G. The panel shall interpret this Agreement as if it were an honorable
engagement rather than as merely a legal obligation and shall make its decision
considering the custom and practice of the applicable insurance and reinsurance
business within sixty (60) days following the termination of the hearings.
Judgment upon the award may be entered in any court having jurisdiction thereof.
H. Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the cost of the third arbitrator. The
remaining costs of the arbitration shall be allocated by the panel. The panel
may, at its discretion, award such further costs and expenses as it considers
appropriate, including but not limited to attorneys fees, to the extent
permitted by law.
Page 9 of 11
<PAGE> 10
ARTICLE XXI.
SERVICE OF SUIT CLAUSE (U.S.A.):
A. It is agreed that in the event of the failure of the Reinsurer hereon to pay
any amount claimed to be due hereunder, the Reinsurer hereon, at the request of
the Company, will submit to the jurisdiction of a Court of competent
jurisdiction within the United States. Nothing in this Clause constitutes or
should be understood to constitute a waiver of the Reinsurer's rights to
commence an action in any Court of competent jurisdiction in the United States,
to remove an action to a United States District Court, or to seek a transfer of
a case to another Court as permitted by the laws of the United States or of any
State in the United States. It is further agreed that service of process in such
suit may be made upon Messrs. Mendes & Mount, 725 South Figueroa, Suite 1990,
Los Angeles, CA 90017, and that in any suit instituted, the Reinsurer will abide
by the final decision of such Court or of any Appellate Court in the event of an
appeal.
B. The above-named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of the Company
to give written undertaking to the Company that they will enter a general
appearance upon the Reinsurer's behalf in the event such a suit shall be
instituted.
C. Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefor, the Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be served
any lawful process in action, suit or proceeding instituted by or on behalf of
the Company or any beneficiary hereunder arising out of this Agreement, and
hereby designate the above-named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE XXII.
INSOLVENCY:
A. The portion of any risk or obligation assumed by the Reinsurer, when such
portion is ascertained, shall be payable on demand of the Company at the same
time as the Company shall pay its net retained portion of such risk or
obligation, with reasonable provision for verification before payment, and the
reinsurance shall be payable by the Reinsurer, on the basis of the liability of
the Company under the policy or policies reinsured without diminution because of
the insolvency of the Company.
B. In the event of the insolvency of one or more than one of the Companies,
reinsurance under this Agreement shall be payable immediately on demand, with
reasonable provision for verification, on the basis of claims allowed against
the insolvent Company(ies) by any court of competent jurisdiction or by any
liquidator, receiver, or statutory successor of the Company(ies) having
authority to allow such claims, without diminution because of such insolvency or
because such liquidator, receiver, or statutory successor has failed to pay all
or a portion of any claims.
Page 10 of 11
<PAGE> 11
Such payments by the Reinsurer shall be made directly to the Company or its
liquidator, receiver or statutory successor, except where the contract of
insurance or reinsurance provides another payee of such reinsurance in the event
of the insolvency of the Company(ies).
C. It is agreed, however, that the liquidator or receiver or statutory successor
of the insolvent Company(ies) will give written notice to the Reinsurer of the
pendency of a claim against the insolvent Company(ies) on the policy or policies
reinsured within a reasonable time after such claim is filed in the insolvency
proceeding and that during the pendency of such claim the Reinsurer may
investigate such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated any defense or defenses which it may deem
available to the Company(ies) or its liquidator or receiver or statutory
successor. The expense thus incurred by the Reinsurer will be chargeable,
subject to court approval, against the insolvent Company(ies) as part of the
expense of liquidation to the extent of a proportionate share of the benefit
which may accrue to the Company(ies) solely as a result of the defense
undertaken by the Reinsurer.
D. Where two or more reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense will be
apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the insolvent Company(ies).
ARTICLE XXIII.
INTERMEDIARY:
Willcox Incorporated Reinsurance Intermediaries is hereby recognized as
the Intermediary negotiating this Agreement for all business hereunder. All
communications (including but not limited to notices, statements, premium,
return premium, commissions, taxes, losses, loss adjustment expense, salvages
and loss settlements) relating thereto shall be transmitted to the Company or
the Reinsurer through Willcox Incorporated Reinsurance Intermediaries, 180
Maiden Lane, New York, New York 10038-4993. Payments by the Company to the
Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by
the Reinsurer to the Intermediary shall be deemed to constitute payment to the
Company only to the extent that such payments are actually received by the
Company.
ARTICLE XXIV.
GOVERNING LAW:
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of California, U.S.A.
ARTICLE XXV.
SEVERAL LIABILITY NOTICE:
The subscribing reinsurers' obligations under contracts of reinsurance to
which they subscribe are several and not joint and are limited solely to the
extent of their individual subscriptions. The subscribing reinsurers are not
responsible for the subscription of any co-subscribing reinsurer who for any
reason does not satisfy all or part of its obligations.
Page 11 of 11
<PAGE> 12
INTERESTS AND LIABILITIES CONTRACT
(hereinafter referred to as the "Contract")
to the
ALLOCATED LOSS ADJUSTMENT EXPENSE EXCESS OF LOSS
REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
Beverly Hills, California
(hereinafter collectively referred to as the "Company")
and
HANNOVER RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT
(hereinafter referred to as the "Subscribing Reinsurer")
that the Subscribing Reinsurer shall have a 100% participation in the Interests
and Liabilities of the Reinsurer as set forth in the Agreement attached hereto
entitled Allocated Loss Adjustment Excess of Loss Reinsurance Agreement.
Such participation shall be several and not joint with the participation
of other subscribing reinsurers, and the Subscribing Reinsurer shall under no
circumstances participate in the Interests and Liabilities, if any, of the other
subscribing reinsurers in said Agreement.
The Company shall pay to the Subscribing Reinsurer 100% of all premiums
due or which may become due the Reinsurer in accordance with the provisions of
the Agreement attached.
This Contract shall attach on January 1, 1997 and is subject to the
provisions contained in the Term Article of the attached Agreement, which are
hereby incorporated by reference into this Contract and which shall apply as
though they had been specifically provided for herein.
Page 1 of 2
<PAGE> 13
The Agreement to which this Contract is attached and therefore the
Interests and Liabilities of the Subscribing Reinsurer therein, may be changed,
altered and amended as the parties may agree, provided such change, alteration
and amendment is evidenced in writing or by Addendum to this Contract, executed
by the Company and the Subscribing Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Interests and
Liabilities Contract to be signed in duplicate by their duly authorized
representatives.
Signed in Los Angeles, California
this day of August , 1997
SOUTHERN CALIFORNIA PHYSICIANS INSURANCE EXCHANGE
and/or S.C.P.I.E. INDEMNITY COMPANY
and/or S.C.P.I.E. MANAGEMENT COMPANY
and/or AMERICAN HEALTHCARE INDEMNITY COMPANY,
and/or FG CASUALTY COMPANY,
and/or S.C.P.I.E. INSURANCE SERVICES. INC.,
and/or S.C.P.I.E. MANAGEMENT SERVICES, INC.
By: /s/ DONALD J. ZUK
-----------------------
Signed in
this day of , 199
HANNOVER RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT
By:______________________________________
Page 2 of 2
<PAGE> 1
EXHIBIT 10.29
GUY CARPENTER COVER NOTE
No. 01-97-1134
Memorandum of Reinsurance
effected through Guy Carpenter & Company, Inc.
180 Maiden Lane, New York, NY 10038-4993
REINSURED: SCPIE HOLDINGS, INC.,
AND/OR S.C.P.I.E. INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE SPECIALTY COMPANY,
AND/OR S.C.P.I.E. INSURANCE SERVICES, INC.,
AND/OR S.C.P.I.E. MANAGEMENT SERVICES, INC.
BEVERLY HILLS, CALIFORNIA
TYPE: First Excess of Loss Reinsurance.
BUSINESS The following types of policy forms
COVERED: as written by the Company:
1. Professional and Business Liability
Insurance Policy - Modified Claims Made
Coverage Hospitals and Medical Centers
(Primary and Excess).
2. Professional and Business Liability
Insurance Policy - Claims Made Coverage
Hospitals and Medical Centers (Primary
and Excess).
3. Excess Automobile Liability and Excess
Employers Liability associated with the
policy forms outlined above.
TERM: October 1, 1997 to September 30, 1998,
both days inclusive, as respects all risks
attaching during the twelve (12) month
period.
It is agreed that Modified Claims Made
Policies include an Automatic PrePaid
Extended Reporting Period for a period not
exceeding eighty four (84) months. It is
understood and agreed that, to preserve the
claims made nature of this reinsurance,
subject to availability of markets to renew
this agreement sufficiently at its expiry,
Reinsurers hereon will be relieved of all
liability for any claims not made in the
First Annual Reporting Period of each policy.
In consideration Reinsurers hereon will
release to renewing markets Premium
equivalent to 65% of the total Net Ceded
Premium (Gross Ceded Premium less applicable
ceding commission) derived from such Modified
Claims Made Policies attaching during the
term of this Agreement.
In the event of non-renewal, and at the
option of the Company, Reinsurers agree to
Run-Off Policies In Force until natural
expiration; in respect of Claims Made
Policies, such period not to exceed Twelve
(12) months plus odd time not exceeding
Twenty Four (24) months in all from the
expiration date hereon; in respect of
Modified Claims Made Policies, such period
not to exceed Ninety-Six (96) months from the
expiration date hereon.
In the event that an Original Insured's
policy is canceled or non-renewed, a further
Extended Reporting Period Endorsement for an
unlimited period may be purchased by an
Original Insured provided the purchase is
made within the
<PAGE> 2
Ninety (90) day period prior to the
expiration of the Eighty Four (84) months
Extended Reporting Period Endorsement and
subject to the payment of an Additional
Premium of 25% of the last Annual Modified
Claims Made Premium applicable prior to the
date of cancellation or non- renewal of the
Original Policy. Any such Additional Premium
shall be payable on the date that the
original Eighty Four (84) months Extended
Reporting Period Endorsement expires an shall
be deemed fully earned on that day. Any claim
reported under any further unlimited Extended
Reporting Period Endorsement shall be deemed
to have been made on the date of expiration
of the original Eighty Four (84) months
Extended Reporting Period Endorsement.
Further, at the Option of the Company,
non-renewal may be effected on a Cut-Off
basis as of the expiration date hereon and
Reinsurers shall return to the Company their
respective share of the Unearned Premium
Reserve at that time.
INFORMATION: The factors to be used in calculating the
Earned Premium as respects Modified Claims
Made risks attaching during the term of this
and subsequent agreements shall be as
follows:
Reporting Period Earned Premium Factors
---------------- ----------------------
1st 12 months 35%
2nd 12 months 15%
3rd 12 months 15%
4th 12 months 10%
5th 12 months 10%
6th 12 months 5%
7th 12 months 5%
8th 12 months 5%
TERRITORY: As per the Company's Original Policies,
Contracts or Binders.
EXCLUSIONS: 1. Insolvency Funds.
2. Nuclear Incident - Liability -
Reinsurance.
3. Assumed Reinsurance other than for
Licensing or Financial Rating purposes.
4. Other Exclusions to follow the Company's
Original Policies as interpreted by
Regulatory or Judicial Authorities.
5. Financial Guarantee Business.
LIMIT AND 100% of $9,000,000 each and every Claim Made
RETENTION: for Indemnity only during the term of this
Contract in excess of $1,000,000 each and
every Claim Made for Indemnity only during
the term of this Contract.
The term "Claim Made" shall be as defined in
the Company's Original Policies.
The Company's retention shall be the
difference between USD 1,000,000 each and
every claim made for indemnity only and the
Underlying Self Insured Retention (S.I.R.)
where applicable but always subject to a
minimum retention of USD 500,000 each and
every claim made for indemnity only.
As respects Medical Staff Members, including
any other Associated Individuals or Entities,
added by Endorsement to the Policies subject
to this Contract under a Unification Plan,
the following shall apply:
<PAGE> 3
A. When a Hospital or any of their
Insured Medical Staff Members,
including any other Associated
Individuals or Entities, are
determined by the Company to be
Jointly involved in any claim or
suit, the Total Limits of Liability
issued to the Hospital shall be
shared by the Hospital and by all
of its Insured Medical Staff
Members, including any other
Associated Individuals or Entities.
B. When a Hospital is determined by
the Company not to be involved in
any claim or suit, the Total Limits
of Liability available to all
Insured Medical Staff Members,
including any other Associated
individuals or Entities, shall be
limited to $5,000,000 each and
every loss.
The term "Unification Plan" is
understood to mean where coverage is
provided on a shared limit basis to a
Hospital or any of their Insured
Medical Staff Members, including any
other Associated Individuals or
entities for the purpose of obtaining a
common defense.
In determining if a Hospital is jointly
involved in any claim or suit, the
Hospital shall be deemed to be jointly
involved if the medical incident which
gave rise to the claim or suit
occurring on the Hospital premises,
including any Insured Affiliated
locations, or if members of the Insured
Medical Staff were acting on behalf of
the Hospital. The mere naming of the
Hospital as a Defendant in a claim or
suit shall not, in itself, determine if
the Hospital was involved in the claim
or suit.
MAXIMUM The maximum amount of losses recoverable
AGGREGATE LIMIT: hereunder during the term of this agreement
shall not exceed $50,000,000, or 400% of
Gross Premium Ceded hereunder, whichever the
greater.
CO-PARTICIPATION: The Company agrees to retain 10% net.
PREMIUM: The Company shall pay to the Reinsurers 100%
of Original Gross Excess Limit Premium and
Extended Reporting Period Endorsement premium
calculated by the Company.
The term "Original Gross Excess Limit
Premium" shall mean premiums calculated by
the Company for policy limits excess of
$1,000,000 up to $10,000,000 after
application of scheduled rating
credits/debits and experience credits only.
CEDING COMMISSION: Original acquisition cost plus 15% not to
exceed 25% in all.
ACCOUNTING: Premium:
Within 45 days after close of each Fiscal
Month the Company shall pay to Reinsurers an
amount equal to the Ceded Excess Limit
Premium less Ceding Commission.
Losses:
Payments immediately upon receipt of
satisfactory proof of loss. Outstanding
Losses reported individually as they occur.
GENERAL CONDITIONS: Loss Adjustment Expenses are excluded
hereunder.
<PAGE> 4
Excess of Original Policy Limits
Clause (90%/10% basis). Extra Contractual
Obligations Clause (90%/10% basis). Ultimate
Net Loss Clause. Notice of Loss Clause.
Loss and Unearned Premium Reserve Funding -
Including IBNR as respects Unauthorized
Reinsurers only - See attached IBNR Schedule.
Follow the Fortunes Clause
Confidentiality Clause
Commutation Clause - Mutual Agreement Only.
Federal Excise Tax Clause.
Errors and Omissions Clause.
Insolvency Clause.
Service of Suit Clause.
Arbitration Clause.
Offset Clause - this Agreement only.
Access to Records Clause.
Guy Carpenter & Company, Incorporated
Intermediary Clause.
INFORMATION: - Estimated Gross Ceded Premium: $6,750,000.
- Underwriting Information as per Guy
Carpenter package dated 8/22/97, containing
original SCPIE Claims Made and Modified
Claims Made Original Policy Forms.
REINSURERS
HEREON:
<TABLE>
<S> <C> <C> <C>
Domestic:
Odyssey Reinsurance Corporation 3.00%
Travelers Indemnity Company 3.00%
Domestic Total 6.00%
Foreign:
Australia:
Through Carpenter Bowring Australia Pty. Ltd.:
GIO Insurance Limited trading as:
GIO Reinsurance 7.50%
New Cap Reinsurance Corporation 7.50%
Limited
NIMI Limited 2.80%
-----
Australia Total 17.80%
Germany:
Hannover Ruckversichcrungs AG 10.00%
------
Germany Total 10.00%
United Kingdom:
Through Carpenter Bowring Ltd.
London, England
Underwriters at Lloyd's
SVH 1007 8.000%
DFM 435 5.625%
SJC 1003 62.00%
2003 38.00% 8.000%
JHV 376 67.89%
2376 32.11% 2.912%
ROS 227 83.00%
2227 17.00% .582%
RJH 122 1.312%
BFC 780 .728%
</TABLE>
<PAGE> 5
<TABLE>
<S> <C> <C> <C>
SJB 1212 3.786%
HGJ 205 3.495%
RAE 219 2.330%
MFN 1027 55.64%
2027 44.36% .874%
ANT 51 1.165%
SAM 727 .364%
HLM 529 1.165%
BAR 990 .873%
BHB 1.456%
MEL 2.621%
CNA International Reinsurance Co., Ltd. 8.000%
Sphere Drake Insurance PLC 2.912%
United Kingdom Total 56.20%
Domestic Total 6.00%
Foreign Total 84.00%
------
Grand Total 90.00%
======
</TABLE>
This Cover Note is to confirm the terms and conditions which have been
negotiated between Willcox Incorporated the participating Reinsurers on your
behalf. We request that you review this Cover Note with regard to the specific
placement details and subscribing Reinsurers listed herein. In the event that
any of these details do not meet with approval or security of the subscribing
Reinsurers does not meet with your requirements, please notify this office
immediately. If all is found to be in order please sign and return the enclosed
duplicate copy of this Cover Note for completion of our files.
/s/ Donald J. Zuk
- -------------------------
Signature
November 3, 1997
- ------------------------
Date
Guy Carpenter & Company, Inc.
By: /s/ Managing Director
---------------------------------
Managing Director
<PAGE> 6
LOSS FUNDING - INCLUDING IBNR
THIS IS APPLICABLE TO NON-ADMITTED REINSURERS ONLY
After consultation with their outside Actuaries, Tillinghast, Nelson & Warren
Inc., S.C.P.I.E. intends to use the following IBNR factors applied to Gross
Reinsurance Premiums for 1997/1998 Letter of Credit Funding purposes applicable
to Non-Admitted Reinsurers only:
<TABLE>
<CAPTION>
IBNR
Period Factor
------ ------
<S> <C>
Current Year 90.00%
First Development Year 70.00%
Second Development Year 50.00%
Third Development Year 40.00%
Fourth Development Year 30.00%
Fifth Development Year 25.00%
Sixth Development Year 20.00%
</TABLE>
The Letter of Credit Funding requirement for IBNR will be net of any Specific
Case Base Loss Reserves. Therefore, the factors outlined above represent the
ceiling for the sum of Specific Case Base Loss Reserves and IBNR. Further, a cap
of five times the Gross Reinsurance Premium will apply as the Lifetime IBNR
Maximum for each Treaty Year.
<PAGE> 1
EXHIBIT 10.30
GUY CARPENTER COVER NOTE
No. 01-97-1135
Memorandum of Reinsurance
effected through Guy Carpenter & Company, Inc.
180 Maiden Lane, New York, NY 10038-4993
REINSURED: SCPIE HOLDINGS, INC.,
AND/OR S.C.P.I.E. INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE SPECIALTY COMPANY,
AND/OR S.C.P.I.E. INSURANCE SERVICES, INC.,
AND/OR S.C.P.I.E. MANAGEMENT SERVICES, INC.
BEVERLY HILLS, CALIFORNIA
TYPE: Second Excess of Loss Reinsurance.
BUSINESS
COVERED: The following types of policy forms as
written by the Company:
1. Professional and Business Liability
Insurance Policy - Modified Claims Made
Coverage Hospitals and Medical Centers
(Primary and Excess).
2. Professional and Business Liability
Insurance Policy - Claims Made Coverage
Hospitals and Medical Centers (Primary
and Excess).
3. Excess Automobile Liability and Excess
Employers Liability associated with the
policy forms outlined above.
TERM: October 1, 1997 to September 30, 1998, both
days inclusive, as respects all risks
attaching during the twelve (12) month
period.
It is agreed that Modified Claims Made
Policies include an Automatic PrePaid
Extended Reporting Period for a period not
exceeding eighty four (84) months. It is
understood and agreed that, to preserve the
claims made nature of this reinsurance,
subject to availability of markets to renew
this agreement sufficiently at its expiry,
Reinsurers hereon will be relieved of all
liability for any claims not made in the
First Annual Reporting Period of each policy.
In consideration Reinsurers hereon will
release to renewing markets Premium
equivalent to 65% of the total Net Ceded
Premium (Gross Ceded Premium less applicable
ceding commission) derived from such Modified
Claims Made Policies attaching during the
term of this Agreement.
In the event of non-renewal, and at the
option of the Company, Reinsurers agree to
Run-Off Policies In Force until natural
expiration; in respect of Claims Made
Policies, such period not to exceed Twelve
(12) months plus odd time not exceeding
Twenty Four (24) months in all from the
expiration date hereon; in respect of
Modified Claims Made Policies, such period
not to exceed Ninety-Six (96) months from the
expiration date hereon.
In the event that an Original Insured's
policy is canceled or non-renewed, a further
Extended Reporting Period Endorsement for an
unlimited period may be purchased by an
Original Insured provided the purchase is
made within the Ninety (90) day period prior
to the expiration of the Eighty Four (84)
months Extended Reporting Period Endorsement
and subject to the payment of an Additional
Premium of 25% of the last Annual Modified
Claims Made
1
<PAGE> 2
Premium applicable prior to the date of
cancellation or non-renewal of the Original
Policy. Any such Additional Premium shall be
payable on the date that the original Eighty
Four (84) months Extended Reporting Period
Endorsement expires an shall be deemed fully
earned on that day. Any claim reported under
any further unlimited Extended Reporting
Period Endorsement shall be deemed to have
been made on the date of expiration of the
original Eighty Four (84) months Extended
Reporting Period Endorsement.
Further, at the option of the Company,
non-renewal may be effected on a Cut-Off
basis as of the expiration date hereon and
Reinsurers shall return to the Company their
respective share of the Unearned Premium
Reserve at that time.
INFORMATION: The factors to be used in calculating the
Earned Premium as respects Modified Claims
Made risks attaching during the term of this
and subsequent agreements shall be as
follows:
Reporting Period Earned Premium Factors
---------------- ----------------------
1st 12 months 35%
2nd 12 months 15%
3rd 12 months 15%
4th 12 months 10%
5th 12 months 10%
6th 12 months 5%
7th 12 months 5%
8th 12 months 5%
TERRITORY: As per the Company's Original Policies,
Contracts or Binders.
EXCLUSIONS: 1. Insolvency Funds.
2. Nuclear Incident - Liability -
Reinsurance.
3. Assumed Reinsurance other than for
Licensing or Financial Rating purposes.
4. Other Exclusions to follow the Company's
Original Policies as interpreted by
Regulatory or Judicial Authorities.
5. Financial Guarantee Business.
LIMIT AND
RETENTION: 100% of $40,000,000 each and every Claim Made
for Indemnity only during the term of this
Contract in excess of $10,000,000 each and
every Claim Made for Indemnity only during
the term of this Contract.
The term "Claim Made" shall be as defined in
the Company's Original Policies.
The Company's retention shall be the
difference between USD 1,000,000 each and
every claim made for indemnity only and the
underlying, Self Insured Retention (S.I.R.)
where applicable but always subject to a
minimum retention of USD 500,000 each and
every claim made for indemnity only.
As respects Medical Staff Members, including
any other Associated Individuals or Entities,
added by Endorsement to the Policies subject
to this Contract under a Unification Plan,
the following shall apply:
A. When a Hospital or any of their Insured
Medical Staff Members, including any
other Associated Individuals or
Entities, are determined by the Company
to be jointly involved in any claim or
suit, the Total Limits of Liability
issued to the Hospital shall be shared
by the Hospital and by all of its
Insured Medical Staff Members, including
any other Associated Individuals or
Entities.
2
<PAGE> 3
B. When a Hospital is determined by the
Company not to be involved in any claim
or suit, the Total Limits of Liability
available to all Insured Medical Staff
Members, including any other Associated
individuals or Entities, shall be
limited to $5,000,000 each and every
loss.
The term "Unification Plan" is understood to
mean where coverage is provided on a shared
limit basis to a Hospital or any of their
Insured Medical Staff Members, including any
other Associated Individuals or entities for
the purpose of obtaining a common defense.
In determining if a Hospital is jointly
involved in any claim or suit, the Hospital
shall be deemed to be jointly involved if the
medical incident which gave rise to the claim
or suit occurring on the Hospital premises,
including any Insured Affiliated location, or
if members of the Insured Medical Staff were
acting on behalf of the Hospital. The mere
naming of the Hospital as a Defendant in a
claim or suit shall not, in itself, determine
if the Hospital was involved in the claim or
suit.
MAXIMUM
AGGREGATE LIMIT: The maximum amount of losses recoverable
hereunder during the term of this agreement
shall not exceed $100,000,000.
C(J--PARTICIPATION: The Company agrees to retain 10% net.
PREMIUM: The Company shall pay to the Reinsurers
100% of Original Gross Excess Limit Premium
and Extended Reporting Period Endorsement
premium calculated by the Company for policy
limits excess of $10,000,000 up to
$50,000,000 as respects policies covered
hereunder.
The term "Original Gross Excess Limit
Premium" shall mean premiums calculated by
the Company for policy limits excess of
$10,000,000 up to $50,000,000 after
application of scheduled rating
credits/debits only.
CEDING COMMISSION: Original acquisition cost plus 15% not to
exceed 25% in all.
ACCOUNTING: Premium:
Within 45 days after close of each Fiscal
Month the Company shall pay to Reinsurers an
amount equal to the Ceded Excess Limit
Premium less Ceding Commission.
Losses:
Payments immediately upon receipt of
satisfactory proof of loss. Outstanding
Losses reported individually as they occur.
GENERAL
CONDITIONS: Loss Adjustment Expenses are excluded
hereunder. Excess of Original Policy Limits
Clause (90%/10% basis). Extra Contractual
Obligations Clause (90%/10% basis).
Ultimate Net Loss Clause.
Notice of Loss Clause.
Loss and Unearned Premium Reserve Funding
- Including IBNR as respects Unauthorized
Reinsurers only - See attached IBNR
Schedule. Follow the Fortunes Clause
Confidentiality Clause Commutation Clause
- Mutual Agreement Only.
Federal Excise Tax Clause.
3
<PAGE> 4
Errors and Omissions Clause.
Insolvency Clause.
Service of Suit Clause.
Arbitration Clause.
Offset Clause - this Agreement only.
Access to Records Clause.
Guy Carpenter & Company, Incorporated
Intermediary Clause.
INFORMATION: - Estimated Gross Ceded Premium: $1,750,000.
- Underwriting lnformation as per Guy
Carpenter package dated 8/22/97,
containing original SCPIE Claims Made and
Modified Claims Made Original Policy Forms.
REINSURERS
HEREON:
<TABLE>
<S> <C> <C> <C>
Domestic:
Odyssey Reinsurance Corporation 3.00%
Travelers Indemnity Company 3.00%
Domestic Total 6.00%
Foreign:
Australia:
Through Carpenter Bowring Australia Pty. Ltd.:
GIO Insurance Limited
trading as:
GIO Reinsurance 7.50%
New Cap Reinsurance Corporation Limited 7.50%
MMI Limited 3.00%
------
Australia Total 18.00%
Germany:
Hannover Ruckversicherungs AG 8.00%
------
Germany Total 8.00%
United Kingdom:
Through Carpenter Bowring Ltd.
London, England
Underwriters at Lloyd's
SVH 1007 8.000%
DFM 435 5.625%
SJC 1003 62.00%
2003 38.00% 8.000%
JHV 376 67.89%
2376 32.11% 2.948%
FRW 190 1.474%
ROS 227 83.00%
2227 17.00% .589%
RJH 122 1.328%
BFC 780 .737%
SJB 1212 3.832%
HGJ 205 3.538%
RAE 219 2.358%
MFN 1027 55.64%
2027 44.36% .884%
ANT 51 1.180%
SAM 727 .369%
HLM 529 1.179%
BAR 990 .884%
BHB 1.474%
MEL 2.653%
CNA International Reinsurance Co., Ltd. 8.000%
Sphere Drake Insurance PLC 2.948%
------
United Kingdom Total 58.00%
======
</TABLE>
4
<PAGE> 5
<TABLE>
<S> <C> <C> <C>
Domestic Total 6.00%
Foreign Total 84.00%
Grand Total 90.00%
======
</TABLE>
5
<PAGE> 6
This Cover Note is to confirm the terms and conditions which have been
negotiated between Willcox Incorporated and the participating Reinsurers on your
behalf. We request that you review this Cover Note with regard to the specific
placement details and subscribing Reinsurers listed herein. In the event that
any of these details do not meet with your approval or security of the
subscribing Reinsurers does not meet with your requirements, please notify this
office immediately. If all is found to be in order please sign and return the
enclosed duplicate copy of this Cover Note for completion of our files.
/s/ Donald J. Zuk
- --------------------------
Signature
November 3, 1997
- --------------------------
Date
Guy Carpenter & Company, Inc.
By /s/ Managing Director
--------------------------
Managing Director
6
<PAGE> 7
LOSS FUNDING - INCLUDING IBNR
THIS IS APPLICABLE TO NON-ADMITTED REINSURERS ONLY
After consultation with their outside Actuaries, Tillinghast, Nelson & Warren
Inc., S.C.P.I.E. intends to use the following IBNR factors applied to Gross
Reinsurance Premiums for 1997/1998 Letter of Credit Funding purposes applicable
to Non-Admitted Reinsurers only:
<TABLE>
<CAPTION>
IBNR
Period Factor
------ ------
<S> <C>
Current Year 90.00%
First Development Year 70.00%
Second Development Year 50.00%
Third Development Year 40.00%
Fourth Development Year 30.00%
Fifth Development Year 25.00%
Sixth Development Year 20.00%
</TABLE>
The Letter of Credit Funding requirement for IBNR will be net of any Specific
Case Base Loss Reserves. Therefore, the factors outlined above represent the
ceiling for the sum of Specific Case Base Loss Reserves and IBNR. Further, a cap
of five times the Gross Reinsurance Premium will apply as the Lifetime IBNR
Maximum for each Treaty Year.
<PAGE> 1
EXHIBIT 10.31
GUY CARPENTER COVER NOTE
No. 01-98-0020
Memorandum of Reinsurance
effected through Guy Carpenter & Company, Inc.
180 Maiden Lane, New York. NY 10038-4993
REINSURED: SCPIE HOLDINGS, INC.,
AND/OR S.C.P.I.E. INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE SPECIALTY COMPANY,
AND/OR S.C.P.I.E. INSURANCE SERVICES, INC.,
AND/OR S.C.P.I.E. MANAGEMENT SERVICES, INC.,
BEVERLY HILLS, CALIFORNIA
TYPE: FIRST EXCESS OF LOSS REINSURANCE
BUSINESS Physicians and Surgeons Comprehensive Professional and
COVERED: Business Liability Policies, including Clinics and Clinical
Laboratories. Professional and Business Liability Policies for
Hospitals and Errors and Omissions Liability Policies for
Managed Care Organizations.
TERM: January 1, 1998 to December 31, 1998 as respects claims made
during the calendar year 1998.
The term "claims made" as used herein shall mean (A) In
respect of Claims Made Policies, claims first notified to the
Company during the term of this Agreement on any inforce
policy or reporting endorsement arising out of incidents
subsequent to the retroactive date of said policy as the
result of the rendering of or failure to render a professional
service or the reporting of losses which arise from the
insured premises and operations incidental to the practice of
a physician, hospital or managed care organization and/or (B)
In respect of Occurrence Policies, claims or losses first
notified to the Company during the term of this Agreement.
Retroactive date January 1, 1976, except for Extra Contractual
Obligations which is January 1, 1979.
In the event of cancellation, and at the option of the
Reinsured, Reinsurers agree to run-off policies in force until
natural expiration not to exceed 12 months from the expiration
date hereon, subject to a Premium equal to 50% of the Actual
Earned Reinsurance Premium. TERRITORY: As per the Company's
original policies, contracts, or binders.
EXCLUSIONS: 1. Insolvency Funds.
2. Nuclear Incident - Liability - Reinsurance.
1
<PAGE> 2
LIMIT AND A. $1,000,000 each and every loss in excess of
RETENTION: $1,000,000 each and every loss as respects
Physicians and Surgeons Comprehensive
Professional and Business Liability Policies,
including Clinics and Clinical Laboratories
and/or Errors and Omissions Liability Policies
for Managed Care Organizations arising from
any one incident.
B. $500,000 each and every loss in excess of
$1,500,000 each and every loss as respects
Physicians and Surgeons Comprehensive
Professional and Business Liability Policies,
including Clinics and Clinical Laboratories
and/or Errors and Omissions Liability Policies
for Managed Care Organizations and
Professional and Business Liability Policies
for Hospitals arising from any one incident.
It is understood and agreed that Section (A)
would respond to individual Physician losses
under Physicians and Surgeons Comprehensive
Professional and Business Liability Policies
and/or Multiple Physicians losses under
Physicians and Surgeons Comprehensive
Professional and Business Liability Policies
and/or losses under Errors and Omissions
Liability Policies for Managed Care
Organizations and/or any combination thereof.
It is further agreed that Section (B) would
respond in the same fashion as Section (A)
including losses under Professional and
Business Liability Policies for Hospitals
arising from any one incident.
Notwithstanding the foregoing it is a
condition hereto that an Annual Aggregate
Deductible equal to 80% of G.N.E.P.I., shall
first be deducted before any liability
attaches to Reinsurers hereon.
WARRANTY: 1. As respects Professional and Business Liability
Policies for Hospitals written on or after January 1,
1996 and prior to October 1, 1997, Policy Limits
greater than $500,000 reinsured elsewhere on an
Excess of Loss basis or so deemed.
2. As respects Professional and Business Liability
Policies for Hospitals written prior to January 1,
1996, Policy Limits greater than $5,000,000 reinsured
elsewhere on an Excess of Loss basis or so deemed.
3. As respects Professional and Business Liability
Policies for Hospitals written on of after October 1,
1997, Policy Limits greater than $1,000,000 reinsured
elsewhere on an Excess of Loss basis or so deemed.
MAXIMUM Reinsurers maximum liability during the term of this
AGGREGATE: Contract shall be $8,500,000 or 182.3% of Reinsurance
Premiums Earned during the Contract term, whichever
is the greater.
2
<PAGE> 3
PREMIUM: 2.88% of G.N.E.P.I.
Deposit - $3,100,000, payable $775,000 quarterly.
Minimum - $2,465,000
ATTACHMENT OF (A) For purposes of determining the attachment of the
LIABILITY: Reinsurer's liability hereunder as respects any one
loss, all losses (including Discovery Period Losses)
involving one or more Original Insureds, arising from
the same medical incident, and in which First Notice
of Claim or Circumstance is notified to the Company
during the term of this Agreement shall be covered
hereunder. Where first notice falls in Agreement
Years prior to January 1, 1992 the "Interlocking
Clause" to apply hereon for Physicians and Surgeons
Comprehensive Professional Liability Policies only.
(B) The date of a loss hereunder shall be the earliest
date, within the term of this Contract, that the
Company has received First Notice of Claim or
Circumstance.
PROFIT The Company shall receive a Profit Commission equal to 90% of
COMMISSION: the net profit accruing to the Reinsurers under this Contract,
computed as follows:
1 Reinsurance Premiums Earned;
2. Less: Losses and Loss Adjustment Expenses Incurred;
3. Less: Management Expenses of 25% of Reinsurance
Premiums Earned.
Unlimited deficit carryforward to next Contract period.
The term under consideration in respect of "Profit Commission"
as above shall be the period January 1, 1998 through December
31, 1998. It is further agreed that the first calculation of
Profit Commission shall be computed as of December 31, 1998
and annually thereafter, and that the first and final payment
of any Profit Commission shall be made by the Reinsurers to
the Company as of December 31, 2002. The Company agrees that
payment of any Profit Commission shall be subject to complete
commutation as respects all losses known and unknown within
the Profit Commission period. Payment of any Profit Commission
by the Reinsurers shall constitute full and final release from
all further loss development.
ACCOUNTING: Premiums - Payments within 60 days of respective due date.
Losses - Payments within 60 days of receipt of proof of loss.
Outstanding losses reported individually as they occur.
3
<PAGE> 4
GENERAL Loss Adjustment Expenses to be Pro-Rated.
CONDITIONS: Excess of Original Policy Limits Clause.
80% Extra Contractual Obligations Clause
Ultimate Net Loss Clause including Declaratory Judgment
Expenses incurred in connection with coverage questions and
legal actions related to a specific claim.
Net Retained Lines Clause.
Notice of Loss Clause.
Loss Funding Clause - Including IBNR (See Attached).
Special Funding Clause.
Confidentiality Clause.
Commutation Clause.
Federal Excise Tax Clause.
Errors and Omissions Clause.
Insolvency Clause.
Service of Suit Clause.
Arbitration Clause.
Access to Records Clause.
Guy Carpenter & Company, Inc. Intermediary Clause.
REINSURERS
HEREON: Domestic:
<TABLE>
<S> <C> <C> <C> <C>
BCS Insurance Company 2.50%
Gulf Insurance Company 5.00%
Odyssey Reinsurance Corporation 5.00%
-----
Domestic Total 12.50%
Australia:
Through Guy Carpenter & Company, Pty. Ltd:
GIO Insurance Ltd.
trading as:
GIO Reinsurance 7.75%
Australia Total 7.75%
Germany:
Hannover Ruckversicherungs AG 22.50%
Germany Total 22.50%
</TABLE>
4
<PAGE> 5
<TABLE>
<S> <C> <C> <C> <C>
REINSURERS United Kingdom:
HEREON: Through Guy Carpenter & Company, Ltd. (UK)
(CONT'D) London, England
Underwriters at Lloyd's
SVH 1007 17.000%
DPM 435 6.000%
SJC 1003 28.00%
2003 72.00% 6.750%
JHV 376 45.80%
2376 54.20% 3.250%
FRW 190 1.500%
ROS 227 73.00%
2227 27.00% 1.500%
BFC 780 3.000%
PJG 79 5.000%
CNA International Reinsurance Co., Ltd. 8.500%
Unionamerica Insurance Company, Ltd. 4.750%
United Kingdom Total 57.250%
Domestic Total 12.500%
Foreign Total 87.500%
--------
Grand Total 100.000%
========
</TABLE>
This Cover Note is to confirm the terms and conditions which have been
negotiated between Guy Carpenter & Company, Inc. and the participating
Reinsurers on your behalf. We request that you review this Cover Note with
regard to the specific placement details and subscribing Reinsurers listed
herein. In the event that any of these details do not meet with your approval or
security of the subscribing Reinsurers does not meet with your requirements,
please notify this office immediately. If all is found to be in order please
sign and return the enclosed duplicate copy of this Cover Note for completion of
our files.
/s/ Donald J. Zuk
- ---------------------------
Signature
March 13, 1998
- ---------------------------
Date
Guy Carpenter & Company, Inc.
By /s/ Managing Director
---------------------------------
Managing Director
5
<PAGE> 1
EXHIBIT 10.32
GUY CARPENTER COVER NOTE
No. 01-98-0021
Memorandum of Reinsurance
effected through Guy Carpenter & Company, Inc.
180 Maiden Lane, New York. NY 10038-4993
REINSURED: SCPIE HOLDINGS, INC.,
AND/OR S.C.P.I.E. INDEMNITY COMPANY,
AND/OR S.C.P.I.E. HEALTHCARE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE SPECIALTY COMPANY,
AND/OR S.C.P.I.E. INSURANCE SERVICES, INC.,
AND/OR S.C.P.I.E. MANAGEMENT SERVICES, INC.
BEVERLY HILLS, CALIFORNIA
TYPE: SECOND EXCESS OF LOSS REINSURANCE
BUSINESS COVERED: Physicians and Surgeons Comprehensive
Professional and Business Liability Policies, including
Clinics and Clinical Laboratories, Professional and Business
Liability Policies for Hospitals and Errors and Omissions
Liability Policies for Managed Care Organizations.
TERM: January 1, 1998 to December 31, 1998 as respects claims made
during the calendar year 1998.
Retroactive date January 1, 1976, except for Extra Contractual
Obligations which is January 1, 1979.
In respect of recoveries made under Section A.1 and A.3:
The term "claims made" as used herein shall mean (A) In
respect of Claims Made Policies, claims first notified to the
Company during the term of this Agreement on any inforce
policy or reporting endorsement arising out of incidents
subsequent to the retroactive date of said policy as the
result of the rendering of or failure to render a professional
service or the reporting of losses which arise from the
insured premises and operations incidental to the practice of
a physician, hospital or managed care organization and/or (B)
In respect of Occurrence Policies claims or losses first
notified to the Company during the term of this Agreement.
In the event of cancellation and at the option of the
Reinsured, Reinsurers agree to run-off policies in force until
natural expiration not to exceed 12 months from the expiration
date hereon, subject to a Premium equal to 50% of the Actual
Earned Reinsurance Premium.
In respect of recoveries made unser Section A.2:
The term "claims made" shall mean claims first reported to the
Reinsured during the period January 1, 1986 to December 31,
1992 and first reported to Reinsurers during the terms of this
Agreement.
1
<PAGE> 2
TERRITORY: As per the Company's original policies, contracts, or binders.
EXCLUSIONS: 1. Insolvency Funds.
2. Nuclear Incident - Liability - Reinsurance
LIMIT AND A.1 $3,000,000 each and every loss in excess of
RETENTION: $2,000,000 each and every loss.
A.2 $3,000,000 each and every loss in excess of
$2,000,000 each and every loss covering losses
which were first reported to the Compnay
during the period January 1, 1986 to December
31, 1992 and are first reported to the
Reinsurers during the terms of this Agreement.
The coverage provided hereunder shall be no
narrower nor broarder in scope than that which
was provided to the Company under their Second
Excess of Loss Reinsurance Agreement in force
for the same period (see attached Cover Note
Nos. 10710-003/86, 01-87-0021, 01-88-0021,
01-89-0021, 01-90-0021, 01-91-0021,
01-92-0021).
A.3 $3,000,000 each and every loss in excess of
$2,000,000 each and every loss each policy
covering losses from Professional and Business
Liability Policies for Hospitals and Errors
and Omissions Liability Policies for Managed
Care Organizations
WARRANTY: 1. In respect of Physicians and Surgeons Comprehensive
Professional and Business Liability Policies,
including Clinics and Clinical Laboratories, the
Maximum Original Policy Limit is $10,000,000, subject
to inuring protection of $8,000,000 in excess of
$2,000,000 or so deemed.
2. As respects Professional and Business Liability
Policies for Hospitals written on or after January 1,
1996, and prior to October 1, 1997, Policy Limits
greater than $500,000 reinsured elsewhere on an
Excess of Loss basis or so deemed.
3. As respects Professional and Business Liability
Policies for Hospitals written prior to January 1,
1996, Policy Limits greater than $5,000,000 reinsured
elsewhere on an Excess of Loss basis or so deemed.
4. As respects Professional and Business Liability
Policies for Hospitals written on or after October 1,
1997, Policy Limits greater than $1,000,000 reinsured
elsewhere on an Excess of Loss basis or so deemed.
5. In respect of Errors and Omissions Liability Policies
for Managed Care Organizations, Maximum Original
Policy Limit $5,000,000.
PREMIUM: .900% of G.N.E.P.I.
Deposit Premium: $960,000, payable $240,000 quarterly.
Minimum - $768,000
2
<PAGE> 3
REINSTATEMENT(S): A.1. & A.3. First - Pro rata as to amount 125% as
respects premium.
Second - Pro rata as to amount 175% as
respects premium.
All calculations of reinstatement premiums shall be based on
paid losses only. The decision of the Company to exercise its
reinstatement option must be relayed to Reinsurers within
three (3) months from the time any reserve invades this
Contract.
PLUS
A. 2. In the event of a paid loss arising under this
Section, additional to the reinstatement premium
payable above, a further reinstatement premium shall
be payable, to be calculated at pro rata as respects
amount and 100% as respects premium based on annual
premium of $450,000 if First Reinstatement, $675,000
if Second Reinstatement.
It is understood and agreed that the payment of
reinstatement premiums arising from losses
recoverable under Section A.2. above shall be
mandatory and not at the option of the Company.
Maximum Annual Aggregate Amount Recoverable under A.1, A.2.
and A.3. combined is $9,000,000 in all.
ATTACHMENT OF (A) For purposes of determining the attachment of the
LIABILITY: Reinsurer's liability hereunder as respects any one
loss, all losses (including Discovery Period Losses)
involving one or more Original Insureds, arising from
the same medical incident, and in which First Notice
of Claim or Circumstance is notified to the Company
during the term of this Agreement shall be covered
hereunder. Where first notice falls in Agreement
Years prior to January 1, 1992 the "Interlocking
Clause" to apply hereon for Physicians and Surgeons
Comprehensive Professional Liability Policies only.
(B) The date of a loss hereunder shall be the earlier.
date, within the term of this Contract, that the
Company has received First Notice of Claim or
Circumstance.
GENERAL Loss Adjustment Expenses to be Pro-Rated.
CONDITIONS: Excess of Original Policy Limits Clause.
80% Extra Contractual Obligations Clause
Ultimate Net Loss Clause including Declaratory
Judgment Expenses incurred in connection with
coverage questions and legal actions related to a
specific claim.
Net Retained Lines Clause.
Notice of Loss Clause.
Loss Funding Clause - Including IBNR (See Attached).
Special Funding Clause.
Confidentiality Clause.
Commutation Clause.
Federal Excise Tax Clause.
Errors and Omissions Clause.
Insolvency Clause.
Service of Suit Clause.
Arbitration Clause.
Access to Records Clause.
3
<PAGE> 4
Guy Carpenter & Company, Inc. Intermediary Clause.
REINSURERS Domestic:
HEREON:
<TABLE>
<S> <C> <C>
BCS Insurance Company 2.50%
Gulf Insurance Company 2.50%
Odyssey Reinsurance Corporation 2.50%
-----
Domestic Total 7.50%
Australia:
Through Guy Carpenter & Company, Pty. Ltd:
GIO Insurance Ltd.
trading as:
GIO Reinsurance 7.50%
-----
Australia Total 7.50%
Germany
Hannover Ruckversicherungs AG 52.50%
-----
Germany Total 52.50%
</TABLE>
<TABLE>
<S> <C> <C> <C>
REINSURERS United Kingdom:
HEREON: Through Guy Carpenter & Company, Ltd. (UK)
(CONT'D) London, England
Underwriters at Lloyd's
SVH 1007 8.593%
DPM 435 4.196%
SJC 1003 28.00%
2003 72.00% 2.098%
RJH 122 .735%
BFC 780 .490%
SJB 1212 2.097%
GNR 570 .735%
MEL 1223 2.500%
RAS 1096 .735%
CNA International Reinsurance Co., Ltd. 4.196%
Sphere Drake Insurance PLC .735%
Unionamerica Insurance Company, Ltd. 2.940%
Zurich Reinsurance (U.K.) Ltd. 2.450%
-------
United Kingdom Total 32.500%
Domestic Total 7.500%
Foreign Total 92.500%
--------
Grand Total 100.000%
========
</TABLE>
This Cover Note is to confirm the terms and conditions which have been
negotiated between Guy Carpenter & Company, Inc. and the participating
Reinsurers on your behalf. We request that you review this Cover Note with
regard to the specific placement details and subscribing Reinsurers listed
herein. In the event that any of these details do not meet with your approval or
security of the subscribing Reinsurers does not meet with your
4
<PAGE> 5
requirements, please notify this office immediately. If all is found to be in
order please sign and return the enclosed duplicate copy of this Cover Note for
completion of our files.
/s/ Donald J. Zuk
- -------------------------------
Signature
March 13, 1998
- -------------------------------
Date
Guy Carpenter & Company, Inc.
By /s/ Managing Director
---------------------------------
Managing Director
5
<PAGE> 1
EXHIBIT 10.33
GUY CARPENTER
COVER NOTE
No. 01-98-0022
Memorandum of Reinsurance
effected through Guy Carpenter & Company, Inc.
180 Maiden Lane, New York, NY 10038-4993
REINSURED: SCPIE HOLDINGS, INC.,
AND/OR S.C.P.I.E. INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE SPECIALTY COMPANY,
AND/OR S.C.P.I.E. INSURANCE SERVICES, INC.
AND/OR S.C.P.I.E. MANAGEMENT SERVICES, INC.
BEVERLY HILLS, CALIFORNIA
TYPE: THIRD EXCESS OF LOSS REINSURANCE
BUSINESS Physicians and Surgeons Comprehensive professional and
COVERED: Business Liability Policies, including Clinics and Clinical
Laboratories, Professional and Business Liability Policies for
Hospitals and Errors and Omissions Liability Policies for
Managed Care Organizations.
TERM: January 1, 1998 to December 31, 1998 as respects claims made
during the calendar year 1998.
Retroactive date January 1. 1976, except for Extra Contractual
Obligations which is January 1, 1979,
In respect of recoveries made under Section A. 1:
The term "claims made" as used herein shall mean (A) In
respect of Claims Made Policies, claims first notified to the
Company during the term of this Agreement on any inforce
policy or reporting endorsement arising out of incidents
subsequent to the retroactive date of said policy as the
result of the rendering of or failure to render a professional
service or the reporting of losses which arise from the
insured premises and operations incidental to the practice of
a physician, hospital or managed care organization and/or (B)
In respect of Occurrence Policies. claims or losses first
notified to the Company during the term of the Agreement.
In the event of cancellation, and at the option of the
Reinsured, Reinsurers agree to run-off policies in force until
natural expiration not to exceed 12 months from the expiration
date hereon, subject to a Premium equal to 50% of the Actual
Earned Reinsurance Premium.
TERM: In respect of recoveries made under Section A. 2:
The term "claims made" shall mean claims first reported to the
Reinsured during the period January 1, 1987 to December 31,
1992 and first reported to Reinsurers during the term of this
Agreement.
TERRITORY: As per the Company's original policies, contracts or binders.
1
<PAGE> 2
EXCLUSIONS: 1. Insolvency Funds
2. Nuclear Incident - Liability -Reinsurance.
LIMIT AND
RETENTION: A.1. $5,000,000 each and every loss in excess of
$5,000,000 each and every loss.
A.2. $5,000.000 each and every loss in excess of
$5,000,000 each and every loss covering
losses which were first reported to the
Company during the period January 1, 1987 to
December 31, 1992 and are first reported to
the Reinsurers during the term of this
Agreement. The coverage provided hereunder
shall be no narrower nor broader in scope
than that which was provided to the Company
under their Third Excess of Loss Reinsurance
Agreement in force for the same period (see
attached Cover Note Nos. 01-87-0022,
01-88-0022, 01-89-0022, 01-90-0022,
01-91-0022, 01-92-0022).
WARRANTY: 1. In respect of Physicians and Surgeons Comprehensive
Professional and Business Liability Policies,
including Clinics and Clinical Laboratories, the
Maximum Original Policy Limit is $10,000,000, subject
to insuring protections of $8,000,000 in excess of
$2,000,000 or so deemed.
2. As respects Professional and Business Liability
Policies for Hospitals written on or after January 1,
1996 and prior to October 1, 1997, Policy Limits
greater than $500,000 reinsured elsewhere on an
Excess of Loss basis or so deemed.
3. As respects Professional and Business Liability
Policies for Hospitals written prior to January 1,
1996, Policy Limits greater than $5,000,000 reinsured
elsewhere on an Excess of Loss basis or so deemed.
4. As respects Professional and Business Liability
Policies for Hospitals written on or after October 1,
1997, Policy Limits greater than $1,000,000
reimbursed elsewhere on an Excess of Loss Basis or so
deemed.
5. In respect of Errors and Omissions Liability Policies
for Managed Care Organizations, Maximum Original
Policy Limit $5,000,000.
PREMIUM: .333% of G.N.E.P.I.
Deposit Premium: $355,000, payable $88,750 quarterly.
Minimum - $355,000.
2
<PAGE> 3
REINSTATEMENTS: A.1. One in all at the option of the Company computed Pro
Rata as to amount 100% as respects premium.
All calculations of reinstatement premiums shall be based on
paid losses only. The decision of the Company to exercise its
reinstatement option must be relayed to Reinsurers within
three (3) months from the time any reserve invades this
Contract.
PLUS
A.2. In the event of a paid loss arising under this
Section, additional to the reinstatement premium
payable above, a further reinstatement premium shall
be payable to be calculated at pro rata as respects
amount/100% as respects premium based on annual
premium of $125,000.
It is understood and agreed that the payment of
reinstatement premium arising from losses recoverable
under Section A.2. above shall be mandatory and not
at the option of the Company.
Maximum Annual Aggregate Amount Recoverable under (A.) 1 and 2
combined is $10,000,000 in all.
ATTACHMENT OF
LIABILITY: (A) For purposes of determining the attachment of the
Reinsurer's liability hereunder as respects any one
loss, all losses (including Discovery Period Losses)
involving one or more Original Insureds, arising from
the same medical incident, and in which First Notice
of Claim or Circumstance is notified to the Company
during the term of this Agreement, shall be covered
hereunder. Where first notice falls in Agreement
Years incepting prior to January 1, 1992 the
"Interlocking Clause" to apply hereon for Physicians
and Surgeons Comprehensive Professional Liability
Policies only.
(B) The date of loss hereunder shall be the earliest
date, within the term of this Contract, that the
company has received First Notice of Claim or
Circumstance.
GENERAL
CONDITIONS: Loss Adjustment Expenses to be Pro-Rated.
Excess of Original Policy Limits Clause.
80% Extra Contractual Obligations Clause.
Ultimate Net Loss Clause including Declaratory
Judgment Expenses incurred in connection with
coverage questions and legal actions related to a
specific claim.
Net Retained Lines Clause.
Notice of Loss Clause.
Loss Funding Clause - Including IBNR (See Attached.)
Special Funding Clause.
Confidentiality Clause.
Commutation Clause.
Federal Excise Tax Clause.
Errors and Omissions Clause.
Insolvency Clause.
3
<PAGE> 4
GENERAL Service of Suit Clause
CONDITIONS: Arbitration Clause.
(CONT'D) Access to Records Clause.
Guy Carpenter & Company, Inc. Intermediary Clause.
REINSURERS
HEREON: Domestic:
<TABLE>
<S> <C> <C>
Gulf Insurance Company 5.00%
Odessey Reinsurance Corporation 5.00%
------
Domestic Total 10.00%
Australia:
Through Guy Carpenter & Company, Pty. Ltd.:
GIO Insurance Ltd.
trading as
GIO Reinsurance 10.00%
------
Australia Total: 10.00%
------
Germany:
Hannover Ruckversicherungs AG 7.50%
------
Germany Total 7.50%
------
United Kingdom:
Through Guy Carpenter & Company, Ltd (UK)
London, England
Underwriters at Lloyd's
SVH 1007 6.716%
DPM 435 6.716%
JHV 376 45.80%
2376 54.20% 2.374%
ROS 227 73.00%
2227 27.00% 1.188%
BFC 780 1.978%
PIG 79 3.000%
SJB 1212 4.728%
GNR 570 2.374%
MEL 1223 7.914%
RAS 1096 1.187%
HGJ 205 5.478%
WEH 362 3.000%
RAE 219 4.748%
MFN 1027 30.97%
2027 69.03% 1.583%
GSC 958 0.791%
ANT 51 0.791%
CFP 314
1.583%
SAM 727 2.374%
MHE 529 2.374%
CNA International Reinsurance Co., Ltd. 4.478%
Sphere Drake Insurance PLC 2.375%
Unionamerica Insurance Company, Ltd. 4.750%
------
United Kingdom Total 72.500%
</TABLE>
4
<PAGE> 5
<TABLE>
<S> <C> <C>
Domestic Total 10.000%
Foreign Total 90.000%
-------
Grand Total 100.000%
--------
</TABLE>
This Cover Note is to confirm the terms and conditions which have been
negotiated between Guy Carpenter Company, Inc. and the participating Reinsurers
on your behalf. We request that you review this Cover Note with regard to the
specific placement details and subscribing Reinsurers listed herein. In the
event that any of these details do not meet with your approval or security of
the subscribing Reinsurers does not meet with your requirements, please notify
this office immediately. If all is found to be in order, please sign and return
the enclosed copy of this Cover Note for completion of our files.
/s/ Donald J. Zuk
- -------------------------------
Signature
March 13, 1998
- -------------------------------
Date
Guy Carpenter & Company, Inc.
By /s/ Managing Director
---------------------------------
Managing Director
5
<PAGE> 1
EXHIBIT 10.34
GUY CARPENTER
COVER NOTE
No. 01-98-0022
Memorandum of Reinsurance
effected through Guy Carpenter & Company, Inc.
180 Maiden Lane, New York, NY 10038-4993
REINSURED: SCPIE HOLDINGS, INC.,
AND/OR S.C.P.I.E. INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE SPECIALTY COMPANY,
AND/OR S.C.P.I.E. INSURANCE SERVICES, INC.
AND/OR S.C.P.I.E. MANAGEMENT SERVICES, INC.
BEVERLY HILLS, CALIFORNIA
TYPE: FOURTH EXCESS OF LOSS REINSURANCE
BUSINESS
COVERED: Physicians, and Surgeons Comprehensive Professional and
Business Liability Policies, including Clinics and Clinical
Laboratories, Professional and Business Liability Policies for
Hospitals and Errors and Omissions Liability Policies for
Managed Care Organizations.
TERM: January 1, 1998 to December 31, 1998 as respects claims made
during the calendar year 1998.
Retroactive date January 1, 1976, except for Extra Contractual
Obligations which is January 1, 1979.
In respect of recoveries made under A.1:
The term "claims made" as used herein shall mean (A) In
respect of Claims Made Policies, claims first notified to the
Company during the term of this Agreement on any inforce
policy or reporting endorsement arising out of incidents
subsequent to the retroactive date of said policy as the
result of the rendering of or failure to render a professional
service or the reporting of losses, which arise from the
insured premises and operations incidental to the practice of
a physician, hospital or managed care organization and/or (B)
In respect of Occurrence Policies, claims or losses first
notified to the Company during the term of this Agreement.
In the event of cancellation, and at the option of the
Reinsured, Reinsurers agree to run-off policies in force until
natural expiration not to exceed 12 months from the expiration
date hereon, subject to a Premium equal to exceed 50% of the
Actual Earned Reinsurance Premium.
TERM: In respect of recoveries made tinder Section A.2.
The term "claims made" shall mean claims first reported to the
Reinsured during the period January 1, 1992 to December 31,
1992 and first reported to Reinsurers during the term of this
Agreement.
<PAGE> 2
TERRITORY: As per the Company's original policies, contracts, or binders,
EXCLUSIONS: 1. Insolvency Funds.
2. Nuclear Incident - Liability - Reinsurance,
LIMIT AND
RETENTION: A.1. To pay $10,000,000 each and every loss in excess of
$10,000,000 each every loss.
A.2. $10,000,000 each and every loss in excess of
$10,000,000 each and every loss covering losses which
were first reported to the Company during the period
January 1, 1992 to December 31, 1992 and are first
reported to the Reinsurers during the term of this
Agreement. The coverage provided hereunder shall be
no narrower nor broader in scope than that which was
provided to the Company under their Fourth Excess of
Loss Reinsurance Agreement in force for the same
period (see attached Cover Note No. 01-92-0599.)
WARRANTY: 1. In respect of Physicians and Surgeons Comprehensive
Professional old Business Liability Policies,
including Clinics and Clinical Laboratories, the
Maximum Original Policy Limit is $10,000,000, subject
to inuring protection of $8,000,000 in excess of
$2,000,000 or so deemed.
2. As respects Professional and Business Liability
Policies for Hospitals written on or after January 1,
1996 and prior to October 1, 1997, Policy Limits
greater than $500,000 reinsured elsewhere on an
Excess of Loss basis or so deemed.
3. As respects Professional and Business Liability
Policies for Hospitals written prior to January 1,
1996, Policy Limits greater than $5,000,000 reinsured
elsewhere on in Excess of Loss basis or so deemed.
4. As respects Professional and Business Liability
Policies for Hospitals written on or after October 1,
1997, Policy Limits greater than $1,000,000 reinsured
elsewhere on an Excess of Loss basis or so deemed.
5. In respect of Errors and Omissions Liability Policies
for Managed Care Organizations, Maximum Original
Policy Limit $5,000,000.
PREMIUM: .445% of G.N.E.P.I.
Deposit Premium: $475,000, payable $118,750 quarterly.
Minimum - $475,000.
<PAGE> 3
REINSTATEMENT(S): A- 1. One in all at the option of the Company computed Pro
Rata as to amount 100% as to premium.
All calculations of reinstatement premiums shall be
based on paid losses only. The decision of the
Company to exercise its reinstatement option must be
relayed to Reinsurers within three (3) months from
the time any reserve invades this Contract.
PLUS
A.2. In the event of a paid loss arising under this
Section, additional to the reinstatement premium
payable above, a further reinstatement premium shall
be payable, to be calculated at pro rata as respects
amount and 100% as respects premium based on annual
premium of $120,000.
It is understood and agreed that the payment of
reinstatement premiums arising from losses
recoverable under Section A.2. above shall be
mandatory and not at the option of the Company.
Maximum Annual Aggregate Amount Recoverable under A.1. and
A.2. combined is $20,000,000 in all.
ATTACHMENT OF
LIABILITY: (A) For purposes of determining the attachment of the
Reinsurer's liability hereunder as respects any one
loss, all losses (including Discovery Period Losses)
involving one or more Original Insureds, arising from
the same medical incident, and in which First Notice
of Claim or Circumstance is notified to the Company
during the term of this Agreement shall be covered
hereunder. Where first notice falls in Agreement
Years incepting prior to January 1, 1992 the
"Interlocking Clause" to apply hereon for Physicians
and Surgeons Comprehensive Professional Liability
Policies only.
(B) The date of a loss hereunder shall be the earliest
date. within the term of this Contract that the
company has received First Notice of Claim or
Circumstance.
GENERAL
CONDITIONS: Loss Adjustment Expenses to be Pro-Rated.
Excess of Original Policy Limits Clause,
80% Extra Contractual Obligations Clause.
Ultimate Net Loss Clause including Declaratory
Judgement Expenses incurred in connection with
coverage questions and legal actions related
to a specific claim.
Net Retained Lines Clause.
Notice of Loss Clause.
Loss Funding Clause - Including IBNR (See Attached).
Special Funding Clause.
Confidentiality Clause.
Commutation Clause.
Federal Excise Tax Clause.
Errors and Omissions Clause.
Insolvency Clause.
<PAGE> 4
Service of Suit Clause.
Arbitration Clause.
Access to Records Clause.
Guy Carpenter & Company, Inc. Intermediary Clause.
REINSURERS
HEREON: Domestic:
<TABLE>
<S> <S> <C>
Gulf Insurance Company 5.00%
-----
Domestic Total 5.00%
Australia:
Through Guy Carpenter & Company, Pty. Ltd.
GIO Insurance Ltd.
trading as:
GIO Reinsurance 10.00%
------
Australia Total 10.00%
France:
Axa Reinsurance Company 5.00%
-----
France Total 5.00%
Germany:
Hannover Ruckversicherungs AG 5.00%
-----
Germany Total 5.00%
United Kingdom:
Through Guy Carpenter & Company, Ltd. (UK)
London England
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Underwriters at Lloyd's
SVH 1007 6.568%
DFM 435 10.946%
SJC 1003 28.00%
2003 72.000% 5.000%
JHV 376 45.80%
2376 54.20% 1.982%
FRW 190 3.303%
ROS 227 73.00%
2227 27.00% 0.991%
RJH 122 0.991%
BFC 780 1.651%
SJB 1212 1.982%
GNR 570 1.982%
MEL 1223 6.606%
RAS 1096 1.321%
HGJ 205 3.633%
WEH 362 5.000%
RAE 219 3.964%
MFN 1027 30.97%
2027 69.03% 1.321%
GSC 958 0.661%
ANT 51 0.991%
</TABLE>
<PAGE> 5
<TABLE>
<S> <C> <C> <C> <C>
CFP 314 0.826%
SAM 727 1.651%
MHE 529 1.321%
AFB 623 3.303%
BAR 990 0.495%
CNA International Reinsurance Co., Ltd. 4.379%
Sphere Drake Insurance PLC 1.982%
Unionamerica Insurance Company, Ltd, 2.150%
United Kingdom Total 75.000%
--------
Domestic Total 5.00%
Foreign Total 95.00%
--------
Grand Total 100.000%
</TABLE>
This Cover Note is to confirm the terms and conditions which have been
negotiated between Guy Carpenter & Company, Inc. and the participating
Reinsurers on your behalf. We request that you review this Cover Note with
regard to the specific placement details and subscribing Reinsurers listed
herein. In the event that any of these details do not meet with your approval or
security of the subscribing Reinsurers does not meet with your requirements,
please notify this office immediately. If all is found to be in order please
sign and return the enclosed duplicate copy of this Cover Note for completion of
our files.
/s/ Donald J. Zuk
- -------------------------------
Signature
March 13, 1998
- -------------------------------
Date
Guy Carpenter & Company, Inc.
By /s/ Managing Director
---------------------------------
Managing Director
<PAGE> 1
EXHIBIT 10.35
GUY CARPENTER COVER NOTE
No. 01-98-0922
Memorandum of Reinsurance
effected through Guy Carpenter & Company, Inc.
180 Maiden Lane, New York, NY 10038-4993
REINSURED: SCPIE HOLDINGS, INC.,
- --------- AND/OR S.C.P.I.E. INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE SPECIALTY COMPANY,
AND/OR S.C.P.I.E. INSURANCE SERVICES, INC.
AND/OR S.C.P.I.E. MANAGEMENT SERVICES, INC.
BEVERLY HILLS, CALIFORNIA
TYPE: QUOTA SHARE REINSURANCE TREATY
- ----
BUSINESS (A) Directors and Officers Liability of the
COVERED: following type(s) of Original Insureds:
- -------
1. Physician Groups and/or Clinics
2. Managed Care Organizations.
3. Association of California Hospital
Districts - Program Beta.
(B) Errors and Omissions Liability for the following
type(s) of Original Insureds:
1. Managed Care Organizations.
TERM: January 1, 1998 to December 31, 1998 as respects risks
- ---- attaching during the twelve (12) months period.
TERRITORY: As per the Company's original policies, contracts,
- --------- or binders.
EXCLUSIONS: 1. Insolvency Funds.
- ---------- 2. Nuclear incident - Liability - Reinsurance.
3. Assumed Reinsurance.
4. As per the Companies original policies.
LIMITS: (A) 80% of $5,000,000 ($4,000,000 maximum) per
- ------ policy in the aggregate and/or coverage part.
(B) 80% of $1,000,000 ($800,000 maximum) per policy
in the aggregate and/or coverage part.
PREMIUM: Original Gross Premiums received by the Reinsured on
- ------- business covered hereunder less Ceding Commission.
1
<PAGE> 2
CEDING Original Acquisition Cost plus 15% not to exceed
COMMISSION: 25% in all.
- ----------
ACCOUNTS: Reports within forty five (45) days and settlements
- -------- within sixty (60) days of the end of each calendar
quarter.
GENERAL Loss Adjustment Expenses are within the limit of the
CONDITIONS: original policies.
- ---------- Excess of Original Policy Limits Clause.
80% Extra Contractual Obligations Clause.
Ultimate Net Loss Clause.
Net Retained Lines Clause.
Notice of Loss Clause.
Loss and Unearned Premium Reserve Funding Clause -
Including IBNR (See Attached).
Special Funding Clause.
Confidentiality Clause.
Commutation Clause.
Federal Excise Tax Clause.
Errors and Omissions Clause.
Insolvency Clause.
Service of Suit Clause.
Arbitration Clause.
Access to Records Clause.
Guy Carpenter & Company, Inc.
Intermediary Clause.
REINSURERS
HEREON: Hannover Ruckversicherungs AG 50.00%
- ------ Through Guy Carpenter & Co., Ltd.
London, England
Underwriters at Lloyd's
Syndicate Pseudonym Syndicate No. Participation
--------- --------- ------------- -------------
Spreckley SVH 1007 12.302%
Mann DPM 435 7.937%
Jago HJG 205 5.952%
Burnhope SJB 1212 3.968%
Keeling WEH 362 5.952%
--------
Sub Total 36.111%
========
CNA International Reinsurance Co. Ltd. 7.937%
Zurich Reinsurance (U.K.) Ltd. 5.952%
--------
Sub Total 50.000%
Total 100.000%
========
This Cover Note is to confirm the terms and conditions which have been
negotiated between Guy Carpenter & Company, Incorporated and the participating
Reinsurers on your behalf. We request that you review this Cover Note with
regard to the specific placement details and subscribing Reinsurers listed
herein. In the event that any of these details do not meet with your approval
or security of the subscribing Reinsurers does not meet with your
2
<PAGE> 3
requirements, please notify this office immediately. If all is found to be in
order please sign and return the enclosed duplicate copy of this Cover Note for
completion of our files.
/s/ Donald J. Zuk
- -----------------------------
Signature
March 13, 1998
- -----------------------------
Date
Guy Carpenter & Company, Inc.
By /s/ Managing Director
-------------------------
Managing Director
3
<PAGE> 1
EXHIBIT 10.40
INTER-COMPANY POOLING AGREEMENT
("Agreement")
This Agreement is made this 5th day of February 1998, effective as of
12:01 A.M., January 1, 1997, ("Effective Date") by and between SCPIE Indemnity
Company ("SCPIE Indemnity"), and the following companies (collectively, the
"Pool Members"): American Healthcare Indemnity Company ("AHI"), formerly FG
Insurance Corporation and American Healthcare Specialty Insurance Company
("AHSIC"), formerly FG Casualty Company.
Since the effective date, Southern California Physicians Insurance
Exchange ("SCPIE") has reorganized from a reciprocal insurance company to a
stock insurance company and became a wholly owned subsidiary of SCPIE Holdings
Inc. (the Reorganization). Pursuant to the Reorganization, SCPIE merged with and
into SCPIE Indemnity, a California stock insurance company and a wholly owned
subsidiary of SCPIE Holdings Inc., the surviving corporation of the
Reorganization.
WITNESSETH:
WHEREAS, SCPIE Indemnity and the Pool Members are direct subsidiaries of
SCPIE Holdings Inc. which owns all their outstanding stock; and
WHEREAS, the parties hereto, in the interests of economy and efficiency,
desire to pool all their gross in-force, new and renewal business as well as all
their gross reported and incurred but not reported claims and losses, statutory
liabilities and assets held against them, past due balances and underwriting
expenses; and
WHEREAS, it is the intent of such pooling arrangement that the Annual
Statements of the parties shall, as respects all underwriting items, be in fixed
proportions;
NOW, THEREFORE, IT IS AGREED AS FOLLOWS:
ARTICLE I - DEFINITIONS
For purposes of this Agreement the following terms have the meanings
indicated:
A. "Expenses" shall mean all Underwriting Expenses and unallocated
loss adjustment expenses.
B. "Gross Losses" shall mean gross direct liability and allocated
loss adjustment expenses on insurance policies, contracts and
reinsurance assumed, all net of salvage, subrogation, and
facultative reinsurance, except liability assumed hereunder.
C. "Net Expenses" means gross expenses less ceding commission
allowances under reinsurance contracts that inure to the benefit
of this Agreement.
D. "Net Losses" means gross losses less salvage, subrogation and
reinsurance that inure to the benefit of this Agreement.
E. "Net Unearned Premiums" means gross unearned premiums, less
unearned reinsurance premiums.
<PAGE> 2
F. "Net Written Premiums" means gross premiums, less reinsurance
premiums effected by the Pool Members or SCPIE Indemnity, and
less return premium and cancellations.
G. "Ultimate Net Liability" means the sum or sums of each party
pays, or becomes liable to pay (1) in the settlement of claims or
suits, or (2) in satisfaction of judgements under policies of
insurance or reinsurance issued by the parties hereto.
H. "Underwriting Expenses" shall mean all expenses incurred by SCPIE
Indemnity or the Pool Members or both in the underwriting and
placing of insurance on its or their books and shall include but
shall not be limited to expenses incurred for commissions, all
other agency obligations, agency supervision, underwriting,
engineering, policy audits, advertising, supervision as it
relates to the production of business, taxes, other than federal
income taxes and such other expenses as may be mutually agreeable
to the parties.
ARTICLE II- CESSION TO POOL
Each Pool Member individually shall cede to SCPIE Indemnity and SCPIE
Indemnity shall assume from each Pool Member:
A. 100% of the Gross Losses of such Pool Member on all classes of in
force, new and renewal business wherever located which shall be
assumed by such Pool Member and becoming effective on or after
12:01 A.M., January 1, 1997, including statutory liabilities and
assets held against them, and past due balances; and
B. 100% of the Gross Unearned Premium on each and every risk in
force as of the 12:01 A.M., January 1, 1997 effective date and
100% of the Gross Written Premium on each and every risk assumed
thereafter by way of primary insurance, reinsurance and
retrocession.
C. SCPIE Indemnity shall credit Pool Members with:
(i) A ceding commission on the Gross Unearned Premium reserve
transferred in accordance with Article II B above. The ceding
commission will be an amount equal to the actual cost incurred by
the respective Pool Member for Underwriting Expenses.
(ii) 100% of the amount of all Gross Expenses paid by the Pool
Members while this Agreement is in force, except:
(a) United States Federal and any State income tax.
(b) Investment Expenses.
D. Each Pool Member shall credit SCPIE Indemnity with 100% of the
reserves on its book for unpaid expenses, excluding the reserves
for United States Federal and any State income tax and investment
expenses, outstanding on the Effective Date.
E. All reinsurance other than certain facultative reinsurance
placements in effect on or
<PAGE> 3
before January 1, 1997, and that ultimately ceded hereunder to
Pool Members shall be placed by SCPIE Indemnity on behalf of the
Pool Members and each Pool Member shall participate in such
reinsurance in proportion to its respective percentage of
participation ("Pool Share") as set forth in Article IV.
ARTICLE III - CESSION FROM POOL
Pool Members shall reinsure and SCPIE Indemnity shall cede and transfer
to Pool Members as follows:
A. SCPIE Indemnity shall add business ceded to it under Article II
to its own business thus forming a pool (called the "SCPIE Pool")
which shall then be redistributed by SCPIE Indemnity in
accordance with Pool Share.
B. Pool Members shall reinsure, and SCPIE Indemnity shall cede and
transfer to Pool Members, their respective Pool Share of the
SCPIE Pool's Ultimate Net Liability under all policies and
contracts of insurance on which the SCPIE Pool is subject to
liability and which are outstanding and in force at the Effective
Date of this Agreement.
SCPIE Indemnity hereby cedes and the Pool Members hereby assume
their respective Pool Shares of the SCPIE Pool's Ultimate Net
Liability for Net Losses payable while this agreement is in
force.
C. Premium to the Pool Members for their respective Pool Shares of
the reinsurance provided in Article III B shall be their
respective Pool Shares of the Net Unearned Premium on each and
every risk in force as of the Effective Date and their respective
Pool Shares of the Net Written Premium on each and every risk
assumed thereafter by way of primary insurance, reinsurance or
retrocession.
D. The Pool Members shall credit SCPIE Indemnity with:
(i) A ceding commission on the Net Unearned Premium reserve
transferred in accordance with Article III C above. The ceding
commission will be an amount equal to each Pool Member's
respective Pool Share of the actual cost incurred by SCPIE
Indemnity for Underwriting Expenses relating to such Net Unearned
Premium reserve.
(ii) Their respective Pool Share of the amount of all Net
Expenses incurred by SCPIE Indemnity while this Agreement is in
force, except:
(a) United States Federal and any State income tax.
(b) Investment Expenses.
E. SCPIE Indemnity shall credit the Pool Members with their
respective Pool Shares of the net pooled reserves on its books at
the Effective Date for unpaid expenses, excluding the reserves
for United States Federal and any State income tax and investment
expenses.
<PAGE> 4
ARTICLE IV - POOL SHARE
The respective percentage of participation applicable to SCPIE Indemnity
and the Pool Members shall be in accordance with the following table:
SCPIE Indemnity 80 percent
AHI 10 percent
AHSIC 10 percent
The Pool Share of SCPIE Indemnity and any individual Pool Member may be
changed at any time to be a different percentage upon mutual consent in writing
by all Pool Members and SCPIE Indemnity subject, however, to all terms and
conditions of this Agreement.
ARTICLE V - EMPOWERMENT
SCPIE Indemnity agrees to fulfill all of the obligations of each Pool
Member under the policies or contracts hereby reinsured and to adjust and pay
all claims thereunder at its own expense, and each Pool Member hereby transfers
to SCPIE Indemnity all its rights, powers and privileges under all such policies
or contracts, so that SCPIE Indemnity may act therein in all respects as if it
had itself issued said policies or contracts.
SCPIE Indemnity will accept all proofs of loss or notices that insured
may have the right to give the individual Pool Members; it being the intention
of this Agreement that SCPIE Indemnity shall take the place of the individual
Pool Member as to policies or contracts reinsured hereunder in all respects.
Notwithstanding the delegation of authority contained in this agreement,
the companies have retained the ultimate control of and responsibility for the
performance of all functions, including but not limited to underwriting and
policy cancellation, for which authority has been delegated.
SCPIE Indemnity agrees to reimburse any Pool Member for all losses, loss
adjustment expenses or underwriting expenses that such Pool Member may expend.
SCPIE Indemnity may delegate to any Pool Member the authority to perform
on its behalf the rights and powers in this Article provided.
ARTICLE VI - MUTUAL RIGHTS AND OBLIGATIONS
A. This Agreement shall be subject in all respects to the same terms,
rates, conditions, modifications, alterations and cancellations as the
respective policies of insurance or reinsurance of the parties hereto. The true
intent of this Agreement being that the parties hereto shall follow each other's
fortunes.
B. The parties hereto shall not be prejudiced in any way by inadvertent
errors or omissions, provided that such errors or omissions are corrected
immediately upon discovery.
C. This Agreement may by canceled at any time by any party giving at
least ninety (90) days written notice to the other parties at their principal
offices of its desire to do so. Any such cancellation shall be effective as of
December 31, or as may be mutually agreed.
<PAGE> 5
ARTICLE VII - PAYMENTS
A. The pool members shall furnish to SCPIE Indemnity on business covered
by Article II no later than seventy-five (75) days following the end of each
month, an account current which shall set forth Net Written Premiums, less
ceding commission thereon for the month, less Net Expenses paid and less Net
Losses paid during the month in question.
B. SCPIE Indemnity shall furnish to Pool Members on business covered by
Article III no later than seventy-five (75) days following the end of each
month, an account current which shall set forth the respective Pool Shares of
Net Written Premiums, less ceding commission thereon for the month, less Net
Expenses paid and less Net Losses paid during the month in question.
C. The net balance in accordance with paragraphs A and B of this Section
shall be paid by the debtor party as soon as possible and no later than
seventy-five days (75) following the applicable month.
D. This Agreement shall not apply to the investment operations or
liabilities for Federal and any State income taxes of the parties hereto.
E. The President and Chief Executive Officer of SCPIE Indemnity or any
officer of SCPIE Indemnity designated by the President and Chief Executive
Officer shall determine, in accordance with statutory accounting practices and
generally accepted accounting principles, the methods and procedures including
account transactions by which the terms of this Agreement shall be performed by
and on behalf of the parties hereto.
ARTICLE VIII - INSOLVENCY
Each of the Pool Members and SCPIE Indemnity agree that all reinsurance
made, ceded, renewed or otherwise becoming effective under this Agreement shall
be payable on demand of the assuming reinsurer at the same time as the ceding
insurer shall pay its net retained portion of such risk or obligations, with
reasonable provision for verification before payment, and the reinsurance shall
be payable by the assuming reinsurer, on the basis of the liability of the
ceding insurer under the policy or policies reinsured without diminution because
of the insolvency of the ceding insurer.
In the event of the insolvency of the ceding insurer, reinsurance under
this Agreement shall be payable immediately on demand, with reasonable provision
for verification, on the basis of claims allowed against the ceding insurer by
any court of competent jurisdiction or by any liquidator, receiver, or statutory
successor of the ceding insurer having authority to allow such claims, without
diminution because of such insolvency or because such liquidator, receiver or
statutory successor has failed to pay all or a portion of any claims. Such
payments by the assuming reinsurer shall be made directly to the ceding insurer
or its liquidator, receiver or statutory successor, except where the contract of
insurance or reinsurance provides another payee of such reinsurance in the event
of insolvency of the ceding insurer.
It is agreed, however, that the liquidator or receiver or statutory
successor of the ceding insurer will give written notice to the assuming
reinsurer of the pendency of a claim against the insolvent ceding insurer on the
policy or policies reinsured within a reasonable time after such claim is filed
in the insolvency proceeding and that during the pendency of such claim the
assuming reinsurer may investigate such claim and interpose, at its own expense,
in the proceeding where such claim is to be adjudicated any defense or defenses
which it may deem available to the ceding insurer
<PAGE> 6
or its liquidator or receiver or statutory successor. The expense thus incurred
by the assuming reinsurer will be chargeable, subject to court approval, against
the insolvent ceding insurer as part of the expense of liquidation to the extent
of a proportionate share of the benefit which may accrue to the ceding insurer
solely as a result of the defense undertaken by the assuming reinsurer.
Where two or more assuming reinsurers are involved in the same claim and
a majority in interest elect to interpose defense to such claim, the expense
will be apportioned in accordance with the terms of this Agreement as though
such expense had been incurred by the insolvent ceding insurer.
ARTICLE IX - GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the said parties have caused this Agreement to be
signed by their duly authorized representative.
Signed in Beverly Hills, California
this 5th day of February, 1998
SCPIE INDEMNITY COMPANY
BY: /s/ PATRICK T. LO
---------------------------------
Patrick T. Lo, Vice President and
Chief Financial Officer
Signed in Beverly Hills, California
this 5th day of February, 1998
AMERICAN HEALTHCARE INDEMNITY COMPANY
BY: /s/ PATRICK T. LO
---------------------------------
Patrick T. Lo, Vice President and
Chief Financial Officer
Signed in Beverly Hills, California
this 5th day of February, 1998
AMERICAN HEALTHCARE SPECIALTY INSURANCE COMPANY
BY: /s/ PATRICK T. LO
---------------------------------
Patrick T. Lo, Vice President and
Chief Financial Officer
<PAGE> 1
EXHIBIT 10.41
SCPIE HOLDINGS, INC. & SUBSIDIARIES
CONSOLIDATED FEDERAL INCOME TAX LIABILITY
ALLOCATION AGREEMENT
This Agreement, effective as of the first day of the consolidated return
year beginning January 1, 1996, is made by and among SCPIE Holdings, Inc.
("Parent") and Southern California Physicians Insurance Exchange, SCPIE
Management Company, SCPIE Indemnity Company, American Healthcare Indemnity, FG
Casualty Company, SCPIE Insurance Services, Inc., and SCPIE Management Services
("Subsidiaries").
WHEREAS, the parties hereto (hereinafter sometimes referred to as
"Members"; or in the singular "Member" or "party") are part of an affiliated
group ("Affiliated Group") as defined by Section 1504(a) of the Internal Revenue
Code of 1986 ("IRC"), as amended;
WHEREAS, such Affiliated Group has filed a consolidated federal income
tax return since their affiliation in accordance with IRC Section 1501 and is
required to continue filing consolidated income tax returns for years subsequent
to such year of first consolidated filing; and
WHEREAS, it is the intent and desire of the parties hereto that a method
be established for allocating the consolidated "federal income tax liability"
(as determined under Regulations Section 1.1502-2) of the Affiliated Group among
its Members (as required by IRC Section 1552(a)); for reimbursing the Parent for
payment of such tax liability; for compensating any Member for use of its "net
operating loss," "net capital loss," or "tax credits" in arriving at such tax
liability; and to provide for the allocation and payment of any refund arising
from a carryback of net operating losses, net capital losses, or tax credits
from subsequent taxable years.
NOW THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
1. A U.S. consolidated federal income tax return shall be filed by
the Parent for the taxable year ended December 31, 1996, and for
each subsequent taxable year in respect of which this Agreement
is in effect and for which the Affiliated Group is required or
permitted to file a consolidated federal income tax return.
2. The Parent and Subsidiaries have hereby elected to allocate their
federal tax liability during consolidated tax return years
encompassed by this Agreement pursuant to Regulation Section
1.1552-1(a)(2)(i) in conjunction with the election pursuant to
Regulation Section 1.1502-33(d)(3). The fixed percentage to be
used under Regulation Section 1.1502-33(d)(3)(i) shall be 100%.
3. The provisions of this Agreement shall be administered by the
Chief Financial Officer of Parent.
-1-
<PAGE> 2
4. Each Member shall reimburse the Parent for its allocated
consolidated federal income tax liability under this Agreement.
Each Member benefiting from net operating losses, net capital
losses, and tax credits shall pay to the Parent its added tax
assessment determined under paragraph 2 of this Agreement. The
Parent shall pay to each Member with a net operating loss, net
capital loss, or tax credit(s) during the taxable year its
allocable share of the total of the additional amounts due from
other Members pursuant to paragraph 2 of this Agreement.
Payments for these allocable shares are to be made no later than
thirty (30) days after the date of filing of the consolidated
federal income tax return for such taxable year. No payment
shall be made a Member for the benefit of a net operating loss,
net capital loss, or tax credit unless such net operating loss,
net capital loss, or tax credit is availed of in reducing the
consolidated federal income tax liability.
5. Notwithstanding the provisions of paragraph 2 and 4, it is
agreed as follows:
Alternative Minimum Tax ("AMT") due on the federal consolidated
tax return is, generally, to be allocated in an equitable and
consistent manner pursuant to paragraph 2, based on the separate
company's contribution to the AMT adjustments and preference
items which result in the consolidated AMT. Tax benefits from
utilization of AMT net operating losses (including, but not
limited to, amounts for negative adjusted current earnings
adjustments) and AMT credits are to be similarly allocated.
6. The Chief Financial Officer of Parent shall have the right to
assess Members their share of estimated tax payments based upon
the amount of tax estimated to be due under paragraph 2 and
currently payable to taxing authorities. Payment to the Chief
Financial Officer of Parent shall be made thirty (30) days after
such assessment. The assessment will not be made more than two
(2) days prior to the required federal income tax payment dates.
Such Member will receive credit for such prepayments in the year
end computation under paragraph 2 and 4 of this Agreement.
7. If part or all of an unused consolidated net operating loss, net
capital loss or tax credit is allocated to a Member of the
Affiliated Group pursuant to Regulations Section 1.1502-79, and
it is carried back or forward to a year in which such Member
filed a separate income tax return or a consolidated federal
income tax return with another affiliated group, any refund or
reduction in tax liability arising from the carryback or
carryover shall be retained by such Member. (If such refund or
reduction goes to some entity other than the Member, then such
entity shall pay over such amount to the Member).
Notwithstanding the above, the Parent shall determine whether an
election shall be made to forego carryback of any consolidated
net operating loss or tax credit arising in a consolidated
return year (including any portion allocated to a Member under
Regulations Section 1.1502-79) in accordance with Section
172(b)(3) or other IRC provisions which relate to tax credit
utilization.
-2-
<PAGE> 3
8. If the consolidated federal income tax liability is adjusted for
any taxable period encompassed by this Agreement, whether by
means of amended return, claim for refund, or tax audit by the
Internal Revenue Service, the liability of each Member shall be
recomputed under paragraph 2 of this Agreement to give effect to
such adjustments. In the case of a refund, the Parent shall make
payment to each Member for its share of the refund, determined
in the same manner as in paragraph 4 of this Agreement, within
thirty (30) days after the refund is received by the Parent, and
in the case of an increase in tax liability, each Member shall
pay to the Parent its allocable share of such increased tax
liability within thirty (30) days after receiving notice of such
liability from the Parent. If any interest is to be paid or
received as a result of a consolidated federal income tax
deficiency or refund, such interest shall be allocated to the
Members in the ratio each Member's change in consolidated
federal income tax liability bears to the total change in tax
liability. Any penalty or interest shall be allocated upon such
basis as the Chief Financial Officer of Parent deems just and
proper in view of all applicable circumstances.
9. Notwithstanding the above, in no instance shall Southern
California Physicians Insurance Exchange, SCPIE Indemnity
Company, American Healthcare Indemnity, and FG Casualty Company
(hereinafter referred to as "Insurance Company Members"; or in
the singular "Insurance Company Member") assume more tax
liability, make greater tax payment, or receive a lesser refund
than the Insurance Company Member would have assumed, made or
received as a taxpayer filing a separate income tax return. In
this regard, Parent hereby agrees to indemnify, defend or hold
the Insurance Company Members harmless from and against any levy
on the assets of the Insurance Company Members by the Internal
Revenue Service which results from the Insurance Company Members
having filed consolidated federal income tax returns with the
Affiliated Group pursuant to this Agreement. Such
indemnification shall be limited to the lesser of: (i) the
amount of taxes which the Insurance Company Member would have
been liable for if the Insurance Company Member filed a separate
income tax return or (ii) Insurance Company Member's allocable
share of consolidated federal income taxes paid (including
interest and penalties) as a Member of the Affiliated Group and
pursuant to this Agreement.
The Insurance Company Members agree to promptly provide Parent
written notice of any claim made on the obligation indemnified
against hereunder. Written notice to the Parent will be deemed
promptly made if such notification is made within five (5) days
following receipt, by an Insurance Company Member, of any notice
of claim by the Internal Revenue Service. Indemnity set forth
herein shall extend to each taxable year in which the Insurance
Company Member 's tax liability (or refund) is determined under
the provisions of this Agreement.
-3-
<PAGE> 4
10. This Agreement shall apply to the taxable years specified in the
preamble of this Agreement, and all subsequent taxable years,
unless the Members agree in writing to terminate the Agreement.
Notwithstanding such termination, this Agreement shall continue
in effect with respect to any payment or refunds due for all
taxable periods prior to termination.
11. This Agreement shall be not assignable by any Member without the
prior written consent of the other Members.
12. All materials including, but not limited to, returns, supporting
schedules, work papers, correspondence, and other documents
relating to the consolidated federal income tax returns filed for
a taxable year during which this Agreement was in effect shall be
made available to any Member to the Agreement during the regular
business hours for a minimum period equal to applicable record
retention requirements of the Internal Revenue Service.
13. The Members shall apply the principles set forth herein to State
and Local tax liabilities to the extent the Members are included
in a consolidated, combined, or unitary state tax filing with any
Member(s).
14. Any dispute or difference between the parties with respect to
the operation or interpretation of this Agreement shall be first
mediated by the Chief Executive Officer of the Parent ("CEO")
and if mediation by the CEO is unsuccessful (or if mediation by
the CEO would represent a conflict of interests), then to
binding arbitration. The arbitrators must all be certified
public accountants ("CPAs") or attorneys. Each Member shall
elect an arbitrator. The losing party will bear all costs of
arbitration including all fees for attorneys and accountants.
15. Any Member corporation which leaves the consolidated group shall
be bound by this Agreement.
16. The Members hereto specifically recognize that from time to time
other companies may become Members of the Affiliated Group and
hereby agree that such new Members may become parties to this
Agreement by executing the master copy of this Agreement which
shall be maintained by the Parent's Corporate Secretary. It will
not be necessary for all the other Members to resign the
Agreement but the new Member may simply sign the existing
Agreement and it will be effective as if the old Members had
resigned.
17. Any alteration, modification, addition, deletion, or other change
in the consolidated income tax return provision of the Code or
the regulations thereunder shall automatically be applicable to
this Agreement.
18. Failure of one or more parties hereto to qualify by meeting the
definition of Member of the "Affiliated Group" shall not operate
to terminate this Agreement
-4-
<PAGE> 5
with respect to the other parties as long as two or more parties
hereto continue to qualify.
19. During any consolidated tax year to which this Agreement, any
Member whose affiliation with the Affiliated Group spans for a
period of less than 12 months ("short-year") shall be bound by
this Agreement at all times in which such Member meets the
definition of Member of the Affiliated Group. Such short-year
Member shall be allocated its share of the consolidated federal
income tax liability in an equitable and consistent manner
pursuant to paragraph 2 based on the Member's contribution to
the consolidated federal income tax liability.
20. This Agreement shall bind and inure to the respective successors
and assigns of the parties hereto; but no assignment shall
relieve any party's obligations hereunder without the written
consent of the other parties.
21. If any provision of this Agreement, as applied to any party
hereto or to any circumstances involving the subject matter
hereof, shall be found by a court of competent jurisdiction to
be void, invalid, or unenforceable, then, notwithstanding such
provision, all other provisions of this Agreement shall remain
in effect and binding on the parties hereto to the fullest
extent permitted by law.
22. This Agreement contains the entire understanding of the parties
hereto relating to the subject matter hereof and supersedes all
prior and collateral agreements, understandings, statements, and
negotiations of the parties. Each party hereto acknowledges that
no representations, inducements, promises, or other agreements,
oral or written, with reference to the subject matter hereof
have been made other than as expressly set forth herein.
IN WITNESS WHEREOF, the parties hereto have caused their names to be
subscribed and executed by their respective authorized officers on the
dates indicated, effective as of the date first written above.
SCPIE Holdings, Inc.
By: /s/ PATRICK T. LO Date 5/9/97
------------------------------------ --------------------------------
Name/Title
Southern California Physicians Insurance Exchange
By: /s/ PATRICK T. LO Date 5/9/97
------------------------------------ --------------------------------
Name/Title
-5-
<PAGE> 6
SCPIE Management Company
By: /s/ PATRICK T. LO Date 5/9/97
------------------------------------ --------------------------------
Name/Title
SCPIE Indemnity Company
By: /s/ PATRICK T. LO Date 5/9/97
------------------------------------ --------------------------------
Name/Title
American Healthcare Indemnity
By: /s/ PATRICK T. LO Date 5/9/97
------------------------------------ --------------------------------
Name/Title
FG Casualty Company
By: /s/ PATRICK T. LO Date 5/9/97
------------------------------------ --------------------------------
Name/Title
SCPIE Insurance Services, Inc.
By: /s/ PATRICK T. LO Date 5/9/97
------------------------------------ --------------------------------
Name/Title
SCPIE Management Services
By: /s/ PATRICK T. LO Date 5/9/97
------------------------------------ --------------------------------
Name/Title
-6-
<PAGE> 1
EXHIBIT 10.42
THE 1997 EQUITY PARTICIPATION PLAN
OF
SCPIE HOLDINGS INC.
SCPIE Holdings Inc., a Delaware corporation, has adopted The
1997 Equity Participation Plan of SCPIE Holdings Inc. (the "Plan"), effective
November 5, 1997, for the benefit of its eligible employees, consultants and
directors. The Plan consists of two plans, one for the benefit of key Employees
(as such term is defined below) and consultants and one for the benefit of
Independent Directors (as such term is defined below).
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, key
Employees and consultants to further the growth, development and financial
success of the Company by personally benefiting through the ownership of Company
stock and/or rights which recognize such growth, development and financial
success.
(2) To enable the Company to obtain and retain the services of
directors, key Employees and consultants considered essential to the long range
success of the Company by offering them an opportunity to own stock in the
Company and/or rights which will reflect the growth, development and financial
success of the Company.
ARTICLE I
DEFINITIONS
1.1 General. Wherever the following terms are used in
this Plan they shall have the meanings specified below, unless the context
clearly indicates otherwise.
1.2 Award Limit. "Award Limit" shall mean 250,000
shares of Common Stock, as adjusted pursuant to Section 10.3.
1.3 Board. "Board" shall mean the Board of Directors
of the Company.
1.4 Change in Control. "Change in Control" shall mean
a change in ownership or control of the Company effected through either of the
following transactions:
(a) any person or related group of persons (other than the
Company or a person that directly or indirectly controls, is controlled
by, or is under common control with, the Company) directly or
indirectly acquires beneficial ownership (within the meaning of Rule
13d-3 under the Exchange Act) of securities possessing more than 20% of
the total combined voting power of the Company's outstanding securities
pursuant to a tender or exchange offer made directly to the Company's
stockholders which the Board does not recommend such stockholders to
accept; or
(b) there is a change in the composition of the Board over a
period of 36 consecutive months (or less) such that a majority of the
Board members (rounded up to the nearest whole number) ceases, by
reason of one or more proxy contests for the election of Board members,
to be comprised of individuals who either (i) have been Board members
continuously
<PAGE> 2
since the beginning of such period or (ii) have been elected or
nominated for election as Board members during such period by at least
a majority of the Board members described in clause (i) who were still
in office at the time such election or nomination was approved by the
Board.
1.5 Code. "Code" shall mean the Internal Revenue Code
of 1986, as amended.
1.6 Committee. "Committee" shall mean the Compensation
Committee of the Board, or another committee or subcommittee of the Board,
appointed as provided in Section 9.1.
1.7 Common Stock. "Common Stock" shall mean the common
stock of the Company, par value $.0001 per share, and any equity security of the
Company issued or authorized to be issued in the future, but excluding any
preferred stock and any warrants, options or other rights to purchase Common
Stock. Debt securities of the Company convertible into Common Stock shall be
deemed equity securities of the Company.
1.8 Company. "Company" shall mean SCPIE Holdings Inc.,
a Delaware corporation.
1.9 Corporate Transaction. "Corporate Transaction"
shall mean any of the following stockholder-approved transactions to which the
Company is a party:
(a) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of
which is to change the State in which the Company is incorporated, form
a holding company or effect a similar reorganization as to form
whereupon this Plan and all Options are assumed by the successor
entity;
(b) the sale, transfer, exchange or other disposition of all
or substantially all of the assets of the Company, in complete
liquidation or dissolution of the Company in a transaction not covered
by the exceptions to clause (a), above; or
(c) any reverse merger in which the Company is the surviving
entity but in which securities possessing more than 50% of the total
combined voting power of the Company's outstanding securities are
transferred or issued to a person or persons different from those who
held such securities immediately prior to such merger.
1.10 Deferred Stock. "Deferred Stock" shall mean Common
Stock awarded under Article VII of this Plan.
1.11 Director. "Director" shall mean a member of (i)
the Board or (ii) the Board of Directors of any corporation which is a
Subsidiary.
1.12 Dividend Equivalent. "Dividend Equivalent" shall
mean a right to receive the equivalent value (in cash or Common Stock) of
dividends paid on Common Stock, awarded under Article VII of this Plan.
1.13 Employee. "Employee" shall mean any officer or other
employee (as defined in accordance with Section 3401(c) of the Code) of the
Company, or of any corporation which is a Subsidiary.
2
<PAGE> 3
1.14 Exchange Act. "Exchange Act" shall mean the
Securities Exchange Act of 1934, as amended.
1.15 Fair Market Value. "Fair Market Value" of a share
of Common Stock as of a given date shall be (i) the closing price of a share of
Common Stock on the principal exchange on which shares of Common Stock are then
trading, if any (or as reported on any composite index which includes such
principal exchange), on the trading day previous to such date, or if shares were
not traded on the trading day previous to such date, then on the next preceding
date on which a trade occurred, or (ii) if Common Stock is not traded on an
exchange but is quoted on Nasdaq or a successor quotation system, the mean
between the closing representative bid and asked prices for the Common Stock on
the trading day previous to such date as reported by Nasdaq or such successor
quotation system; or (iii) if Common Stock is not publicly traded on an exchange
and not quoted on Nasdaq or a successor quotation system, the Fair Market Value
of a share of Common Stock as established by the Committee (or the Board, in the
case of Options granted to Independent Directors) acting in good faith.
1.16 Grantee. "Grantee" shall mean an Employee or
consultant granted a Performance Award, Dividend Equivalent, Stock Payment or
Stock Appreciation Right, or an award of Deferred Stock, under this Plan.
1.17 Incentive Stock Option. "Incentive Stock Option"
shall mean an option which conforms to the applicable provisions of Section 422
of the Code and which is designated as an Incentive Stock Option by the
Committee.
1.18 Independent Director. "Independent Director" shall
mean a Director who is not an Employee of the Company or of any corporation
which is a Subsidiary.
1.19 Non-Qualified Stock Option. "Non-Qualified Stock
Option" shall mean an Option which is not designated as an Incentive Stock
Option by the Committee.
1.20 Option. "Option" shall mean a stock option granted
under Article III of this Plan. An Option granted under this Plan shall, as
determined by the Committee, be either a NonQualified Stock Option or an
Incentive Stock Option; provided, however, that Options granted to Independent
Directors and consultants shall be Non-Qualified Stock Options.
1.21 Optionee. "Optionee" shall mean an Employee,
consultant or Independent Director granted an Option under this Plan.
1.22 Performance Award. "Performance Award" shall mean
a cash bonus, stock bonus or other performance or incentive award that is paid
in cash, Common Stock or a combination of both, awarded under Article VII of
this Plan.
1.23 Plan. "Plan" shall mean The 1997 Equity
Participation Plan of SCPIE Holdings Inc.
1.24 QDRO. "QDRO" shall mean a qualified domestic
relations order as defined by the Code or Title I of the Employee Retirement
Income Security Act of 1974, as amended, or the rules thereunder.
3
<PAGE> 4
1.25 Restricted Stock. "Restricted Stock" shall mean
Common Stock awarded under Article VI of this Plan.
1.26 Restricted Stockholder. "Restricted Stockholder"
shall mean an Employee or consultant granted an award of Restricted Stock under
Article VI of this Plan.
1.27 Rule 16b-3. "Rule 16b-3" shall mean that certain
Rule 16b-3 under the Exchange Act, as such Rule may be amended from time to
time.
1.28 Section 162(m) Participant. "Section 162(m)
Participant" shall mean any key Employee designated by the Committee as a key
Employee whose compensation for the fiscal year in which the key Employee is so
designated or a future fiscal year may be subject to the limit on deductible
compensation imposed by Section 162(m) of the Code.
1.29 Stock Appreciation Right. "Stock Appreciation
Right" shall mean a stock appreciation right granted under Article VIII of this
Plan.
1.30 Stock Payment. "Stock Payment" shall mean a
payment in the form of (i) shares of Common Stock, or (ii) an option or other
right to purchase shares of Common Stock, as part of a deferred compensation
arrangement, made in lieu of all or any portion of the compensation, including
without limitation, salary, bonuses and commissions, that would otherwise become
payable to a key Employee or consultant in cash, awarded under Article VII of
this Plan.
1.31 Subsidiary. "Subsidiary" shall mean any
corporation in an unbroken chain of corporations beginning with the Company if
each of the corporations other than the last corporation in the unbroken chain
then owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
1.32 Termination of Consultancy. "Termination of
Consultancy" shall mean the time when the engagement of an Optionee, Grantee or
Restricted Stockholder as a consultant to the Company or a Subsidiary is
terminated for any reason, with or without cause, including, but not by way of
limitation, by resignation, discharge, death or retirement; but excluding
terminations where there is a simultaneous commencement of employment with the
Company or any Subsidiary. The Committee, in its absolute discretion, shall
determine the effect of all matters and questions relating to Termination of
Consultancy, including, but not by way of limitation, the question of whether a
Termination of Consultancy resulted from a discharge for good cause, and all
questions of whether a particular leave of absence constitutes a Termination of
Consultancy. Notwithstanding any other provision of this Plan, the Company or
any Subsidiary has an absolute and unrestricted right to terminate a
consultant's service at any time for any reason whatsoever, with or without
cause, except to the extent expressly provided otherwise in writing.
1.33 Termination of Directorship. "Termination of
Directorship" shall mean the time when an Optionee who is an Independent
Director ceases to be a Director for any reason, including, but not by way of
limitation, a termination by resignation, failure to be elected, death or
retirement. The Board, in its sole and absolute discretion, shall determine the
effect of all matters and questions relating to Termination of Directorship with
respect to Independent Directors.
1.34 Termination of Employment. "Termination of
Employment" shall mean the time when the employee-employer relationship between
an Optionee, Grantee or Restricted Stockholder
4
<PAGE> 5
and the Company or any Subsidiary is terminated for any reason, with or without
cause, including, but not by way of limitation, a termination by resignation,
discharge, death, disability or retirement; but excluding (i) terminations where
there is a simultaneous reemployment or continuing employment of an Optionee,
Grantee or Restricted Stockholder by the Company or any Subsidiary, (ii) at the
discretion of the Committee, terminations which result in a temporary severance
of the employee-employer relationship, and (iii) at the discretion of the
Committee, terminations which are followed by the simultaneous establishment of
a consulting relationship by the Company or a Subsidiary with the former
employee. The Committee, in its absolute discretion, shall determine the effect
of all matters and questions relating to Termination of Employment, including,
but not by way of limitation, the question of whether a Termination of
Employment resulted from a discharge for good cause, and all questions of
whether a particular leave of absence constitutes a Terminations of Employment;
provided, however, that, with respect to Incentive Stock Options unless
otherwise determined by the Committee in its discretion, a leave of absence,
change in status from an employee to an independent contractor or other change
in the employee-employer relationship shall constitute a Termination of
Employment if, and to the extent that, such leave of absence, change in status
or other change interrupts employment for the purposes of Section 422(a)(2) of
the Code and the then applicable regulations and revenue rulings under said
Section. Notwithstanding any other provision of this Plan, the Company or any
Subsidiary has an absolute and unrestricted right to terminate an Employee's
employment at any time for any reason whatsoever, with or without cause, except
to the extent expressly provided otherwise in writing.
ARTICLE II
SHARES SUBJECT TO PLAN
2.1 Shares Subject to Plan.
(a) The shares of stock subject to Options, awards of
Restricted Stock, Performance Awards, Dividend Equivalents, awards of Deferred
Stock, Stock Payments or Stock Appreciation Rights shall be Common Stock,
initially shares of the Company's Common Stock, par value $.0001 per share. The
aggregate number of such shares which may be issued upon exercise of such
Options or rights or upon any such awards under the Plan shall not exceed
1,250,000. The shares of Common Stock issuable upon exercise of such Options or
rights or upon any such awards may be either previously authorized but unissued
shares or treasury shares.
(b) The maximum number of shares which may be subject to
Options, awards of Restricted Stock, Performance Awards, Dividend Equivalents,
awards of Deferred Stock, Stock Payments or Stock Appreciation Rights granted
under the Plan to any individual in any calendar year shall not exceed the Award
Limit. To the extent required by Section 162(m) of the Code, shares subject to
Options which are canceled continue to be counted against the Award Limit.
2.2 Add-back of Options and Other Rights. If any Option, or
other right to acquire shares of Common Stock under any other award under this
Plan, expires or is canceled without having been fully exercised, or is
exercised in whole or in part for cash as permitted by this Plan, the number of
shares subject to such Option or other right but as to which such Option or
other right was not exercised prior to its expiration, cancellation or exercise
may again be optioned, granted or awarded hereunder, subject to the limitations
of Section 2.1. Furthermore, any shares subject to Options or other awards which
are adjusted pursuant to Section 10.3 and become exercisable with respect to
shares of stock of another corporation shall be considered cancelled and may
again be optioned, granted or awarded hereunder, subject to the limitations of
Section 2.1. Shares of Common Stock which are delivered by
5
<PAGE> 6
the Optionee or Grantee or withheld by the Company upon the exercise of any
Option or other award under this Plan, in payment of the exercise price thereof,
may again be optioned, granted or awarded hereunder, subject to the limitations
of Section 2.1. If any share of Restricted Stock is forfeited by the Grantee or
repurchased by the Company pursuant to Section 6.6 hereof, such share may again
be optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. Notwithstanding the provisions of this Section 2.2, no shares of Common
Stock may again be optioned, granted or awarded if such action would cause an
Incentive Stock Option to fail to qualify as an incentive stock option under
Section 422 of the Code.
ARTICLE III
GRANTING OF OPTIONS
3.1 Eligibility. Any Employee or consultant selected by the
Committee pursuant to Section 3.4(a)(i) shall be eligible to be granted an
Option. Each Independent Director of the Company shall be eligible to be granted
Options at the times and in the manner set forth in Section 3.4(d).
3.2 Disqualification for Stock Ownership. No person may be
granted an Incentive Stock Option under this Plan if such person, at the time
the Incentive Stock Option is granted, owns stock possessing more than ten
percent of the total combined voting power of all classes of stock of the
Company or any then existing Subsidiary or parent corporation (within the
meaning of Section 422 of the Code) unless such Incentive Stock Option conforms
to the applicable provisions of Section 422 of the Code.
3.3 Qualification of Incentive Stock Options. No Incentive
Stock Option shall be granted to any person who is not an Employee.
3.4 Granting of Options
(a) The Committee shall from time to time, in its absolute
discretion, and subject to applicable limitations of this Plan:
(i) Determine which Employees are key Employees
and select from among the key Employees or consultants (including
Employees or consultants who have previously received Options or other
awards under this Plan) such of them as in its opinion should be
granted Options;
(ii) Subject to the Award Limit, determine the
number of shares to be subject to such Options granted to the selected
key Employees or consultants;
6
<PAGE> 7
(iii) Subject to Section 3.3, determine whether
such Options are to be Incentive Stock Options or Non-Qualified Stock
Options and whether such Options are to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such
Options, consistent with this Plan; provided, however, that the terms
and conditions of Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall
include, but not be limited to, such terms and conditions as may be
necessary to meet the applicable provisions of Section 162(m) of the
Code.
(b) Upon the selection of a key Employee or consultant
to be granted an Option, the Committee shall instruct the Secretary of the
Company to issue the Option and may impose such conditions on the grant of the
Option as it deems appropriate.
(c) Any Incentive Stock Option granted under this Plan may
be modified by the Committee to disqualify such Option from treatment as an
"incentive stock option" under Section 422 of the Code.
(d) Each person who is an Independent Director as of the
date the stockholders of the Company approve the Plan as provided in Section
10.4 automatically shall be granted (i) an Option to purchase 5,000 shares of
Common Stock (subject to adjustment as provided in Section 10.3) on the
effective date the Plan and (ii) an Option to purchase 1,000 shares of Common
Stock (subject to adjustment as provided in Section 10.3) on the date of each
subsequent annual meeting of stockholders. During the term of the Plan, a person
who is initially elected a Director after the Plan is approved by the
stockholders and who is an Independent Director at the time of such initial
election automatically shall be granted (i) an Option to purchase 5,000 shares
of Common Stock (subject to adjustment as provided in Section 10.3) on the date
of such initial election and (ii) an Option to purchase 1,000 shares of Common
Stock (subject to adjustment as provided in Section 10.3) on the date of each
annual meeting of stockholders after such initial election. Directors who are
employees of the Company or a Subsidiary who subsequently retire from the
Company or such Subsidiary and remain a Director will not receive an initial
Option grant pursuant to clause (i) of the preceding sentence, but to the extent
that they are otherwise eligible, will receive, after retirement from employment
with the Company or a Subsidiary, Options as described in clause (ii) of the
preceding sentence. All the foregoing Option grants authorized by this Section
3.4(d) are subject to stockholder approval of the Plan.
ARTICLE IV
TERMS OF OPTIONS
4.1 Option Agreement. Each Option shall be evidenced by a
written Stock Option Agreement, which shall be executed by the Optionee and an
authorized officer of the Company and which shall contain such terms and
conditions as the Committee (or the Board, in the case of Options granted to
Independent Directors) shall determine, consistent with this Plan. Stock Option
Agreements evidencing Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
Section 162(m) of the Code. Stock Option Agreements evidencing Incentive Stock
Options shall
7
<PAGE> 8
contain such terms and conditions as may be necessary to meet the applicable
provisions of Section 422 of the Code.
4.2 Option Price. The price per share of the shares subject
to each Option shall be set by the Committee; provided, however, that such price
shall be no less than the par value of a share of Common Stock, unless otherwise
permitted by applicable state law, and (i) in the case of Options intended to
qualify as performance-based compensation as described in Section 162(m)(4)(C)
of the Code, such price shall not be less than 100% of the Fair Market Value of
a share of Common Stock on the date the Option is granted; (ii) in the case of
Incentive Stock Options such price shall not be less than 100% of the Fair
Market Value of a share of Common Stock on the date the Option is granted (or
the date the Option is modified, extended or renewed for purposes of Section
424(h) of the Code); (iii) in the case of Incentive Stock Options granted to an
individual then owning (within the meaning of Section 424(d) of the Code) more
than ten percent of the total combined voting power of all classes of stock of
the Company or any Subsidiary or parent corporation thereof (within the meaning
of Section 422 of the Code), such price shall not be less than 110% of the Fair
Market Value of a share of Common Stock on the date the Option is granted (or
the date the Option is modified, extended or renewed for purposes of Section
424(h) of the Code); and (iv) in the case of Options granted to Independent
Directors, such price shall equal 100% of the Fair Market Value of a share of
Common Stock on the date the Option is granted.
4.3 Option Term. The term of an Option shall be set by the
Committee in its discretion; provided, however, that, (i) in the case of Options
granted to Independent Directors, the term shall be ten years from the date the
Option is granted, without variation or acceleration hereunder, but subject to
Section 5.6, and (ii) in the case of Incentive Stock Options, the term shall not
be more than ten years from the date the Incentive Stock Option is granted, or
five years from such date if the Incentive Stock Option is granted to an
individual then owning (within the meaning of Section 424(d) of the Code) more
than 10% of the total combined voting power of all classes of stock of the
Company or any Subsidiary or parent corporation thereof (within the meaning of
Section 422 of the Code). Except as limited by requirements of Section 422 of
the Code and regulations and rulings thereunder applicable to Incentive Stock
Options, the Committee may extend the term of any outstanding Option in
connection with any Termination of Employment or Termination of Consultancy of
the Optionee, or amend any other term or condition of such Option relating to
such a termination.
4.4 Option Vesting
(a) The period during which the right to exercise an Option
in whole or in part vests in the Optionee shall be set by the Committee and the
Committee may determine that an Option may not be exercised in whole or in part
for a specified period after it is granted; provided, however, that, unless the
Committee otherwise provides in the terms of the Option or otherwise, no Option
shall be exercisable by any Optionee who is then subject to Section 16 of the
Exchange Act within the period ending six months and one day after the date the
Option is granted; and provided, further, that Options granted to Independent
Directors shall become exercisable in cumulative annual installments of 33% on
each of the first, second and third anniversaries of the date of Option grant,
without variation or acceleration hereunder except as provided in Sections
4.4(b) and 10.3. At any time after grant of an Option, the Committee may, in its
sole and absolute discretion and subject to whatever terms and conditions it
selects, accelerate the period during which an Option (except an Option granted
to an Independent Director) vests.
(b) No portion of an Option which is unexercisable at
Termination of Employment, Termination of Directorship or Termination of
Consultancy, as applicable, shall thereafter become
8
<PAGE> 9
exercisable, except (i) as may be otherwise provided by the Committee in the
case of Options granted to Employees or consultants either in the Stock Option
Agreement or by action of the Committee following the grant of the Option, or
(ii) in the case of Termination of Directorship by reason of death, permanent
and total disability (within the meaning of Section 22(e)(3) of the Code) or
retirement required by age limits imposed on directorships, each Option granted
to an Independent Director shall become fully vested and exercisable as to all
shares covered thereby upon such Termination of Directorship.
(c) To the extent that the aggregate Fair Market Value of
stock with respect to which "incentive stock options" (within the meaning of
Section 422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by an Optionee during any calendar year (under
the Plan and all other incentive stock option plans of the Company and any
parent or subsidiary corporation (within the meaning of Section 422 of the Code)
of the Company) exceeds $100,000, such Options shall be treated as Non-Qualified
Options to the extent required by Section 422 of the Code. The rule set forth in
the preceding sentence shall be applied by taking Options into account in the
order in which they were granted. For purposes of this Section 4.4(c), the Fair
Market Value of stock shall be determined as of the time the Option with respect
to such stock is granted.
4.5 Consideration. In consideration of the granting of an
Option, the Optionee shall agree, in the written Stock Option Agreement, to
remain in the employ of (or to consult for or to serve as an Independent
Director of, as applicable) the Company or any Subsidiary for a period of at
least one year (or such shorter period as may be fixed in the Stock Option
Agreement or by action of the Committee, or Board in the case of Independent
Directors, following grant of the Option) after the Option is granted. Nothing
in this Plan or in any Stock Option Agreement hereunder shall confer upon any
Optionee any right to continue in the employ of, or as a consultant for, the
Company or any Subsidiary, or as a director of the Company, or shall interfere
with or restrict in any way the rights of the Company and any Subsidiary, which
are hereby expressly reserved, to discharge any Optionee at any time for any
reason whatsoever, with or without good cause.
ARTICLE V
EXERCISE OF OPTIONS
5.1 Partial Exercise. An exercisable Option may be exercised
in whole or in part. However, an Option shall not be exercisable with respect to
fractional shares and the Committee (or the Board, in the case of Options
granted to Independent Directors) may require that, by the terms of the Option,
a partial exercise be with respect to a minimum number of shares.
5.2 Manner of Exercise. All or a portion of an exercisable
Option shall be deemed exercised upon delivery of all of the following to the
Secretary of the Company or his office:
(a) A written notice complying with the applicable rules
established by the Committee (or the Board, in the case of Options granted to
Independent Directors) stating that the Option, or a portion thereof, is
exercised. The notice shall be signed by the Optionee or other person then
entitled to exercise the Option or such portion of the Option;
(b) Such representations and documents as the Committee (or
the Board, in the case of Options granted to Independent Directors), in its
absolute discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act of 1933, as amended, and any other
federal or state securities laws or regulations. The Committee or Board may, in
its absolute discretion,
9
<PAGE> 10
also take whatever additional actions it deems appropriate to effect such
compliance including, without limitation, placing legends on share certificates
and issuing stop-transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant
to Section 10.1 by any person or persons other than the Optionee, appropriate
proof of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the
shares with respect to which the Option, or portion thereof, is exercised.
However, the Committee (or the Board, in the case of Options granted to
Independent Directors), may in its discretion (i) allow a delay in payment up to
30 days from the date the Option, or portion thereof, is exercised; (ii) allow
payment, in whole or in part, through the delivery of shares of Common Stock
owned by the Optionee, duly endorsed for transfer to the Company with a Fair
Market Value on the date of delivery equal to the aggregate exercise price of
the Option or exercised portion thereof; (iii) allow payment, in whole or in
part, through the surrender of shares of Common Stock then issuable upon
exercise of the Option having a Fair Market Value on the date of Option exercise
equal to the aggregate exercise price of the Option or exercised portion
thereof; (iv) allow payment, in whole or in part, through the delivery of
property of any kind which constitutes good and valuable consideration; (v)
allow payment, in whole or in part, through the delivery of a full recourse
promissory note bearing interest (at no less than such rate as shall then
preclude the imputation of interest under the Code) and payable upon such terms
as may be prescribed by the Committee or the Board; (vi) allow payment, in whole
or in part, through the delivery of a notice that the Optionee has placed a
market sell order with a broker with respect to shares of Common Stock then
issuable upon exercise of the Option, and that the broker has been directed to
pay a sufficient portion of the net proceeds of the sale to the Company in
satisfaction of the Option exercise price; or (vii) allow payment through any
combination of the consideration provided in the foregoing subparagraphs (ii),
(iii), (iv), (v) and (vi). In the case of a promissory note, the Committee (or
the Board, in the case of Options granted to Independent Directors) may also
prescribe the form of such note and the security to be given for such note. The
Option may not be exercised, however, by delivery of a promissory note or by a
loan from the Company when or where such loan or other extension of credit is
prohibited by law.
5.3 Conditions to Issuance of Stock Certificates. The Company
shall not be required to issue or deliver any certificate or certificates for
shares of stock purchased upon the exercise of any Option or portion thereof
prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock
exchanges on which such class of stock is then listed;
(b) The completion of any registration or other qualification
of such shares under any state or federal law, or under the rulings or
regulations of the Securities and Exchange Commission or any other governmental
regulatory body which the Committee or Board shall, in its absolute discretion,
deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee (or Board, in the case
of Options granted to Independent Directors) shall, in its absolute discretion,
determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee (or Board, in the case of Options
granted to Independent Directors) may establish from time to time for reasons of
administrative convenience; and
10
<PAGE> 11
(e) The receipt by the Company of full payment for such
shares, including payment of any applicable withholding tax.
5.4 Rights as Stockholders. The holders of Options shall not
be, nor have any of the rights or privileges of, stockholders of the Company in
respect of any shares purchasable upon the exercise of any part of an Option
unless and until certificates representing such shares have been issued by the
Company to such holders.
5.5 Ownership and Transfer Restrictions. The Committee (or
Board, in the case of Options granted to Independent Directors), in its absolute
discretion, may impose such restrictions on the ownership and transferability of
the shares purchasable upon the exercise of an Option as it deems appropriate.
Any such restriction shall be set forth in the respective Stock Option Agreement
and may be referred to on the certificates evidencing such shares. The Committee
may require the Employee to give the Company prompt notice of any disposition of
shares of Common Stock acquired by exercise of an Incentive Stock Option within
(i) two years from the date of granting (including the date the Option is
modified, extended or renewed for purposes of Section 424(h) of the Code) such
Option to such Employee or (ii) one year after the transfer of such shares to
such Employee. The Committee may direct that the certificates evidencing shares
acquired by exercise of an Option refer to such requirement to give prompt
notice of disposition.
5.6 Limitations on Exercise of Options Granted to Independent
Directors. No Option granted to an Independent Director may be exercised to any
extent by anyone after the first to occur of the following events:
(a) The expiration of 12 months from the date of the
Optionee's death;
(b) The expiration of 12 months from the date of the
Optionee's Termination of Directorship by reason of his permanent and total
disability (within the meaning of Section 22(e)(3) of the Code);
(c) The expiration of 12 months from the date of the
Optionee's retirement;
(d) The expiration of three months from the date of the
Optionee's Termination of Directorship for any reason other than such Optionee's
death, permanent and total disability, or retirement unless the Optionee dies
within said three-month period; or
(e) The expiration of ten years from the date the Option was
granted.
11
<PAGE> 12
ARTICLE VI
AWARD OF RESTRICTED STOCK
6.1 Eligibility. Subject to the Award Limit, Restricted Stock
may be awarded to any Employee who the Committee determines is a key Employee or
any consultant whom the Committee determines should receive such an award.
6.2 Award of Restricted Stock
(a) The Committee may from time to time, in its absolute
discretion:
(i) Determine which Employees are key Employees
and select from among the key Employees or consultants (including
Employees or consultants who have previously received other awards
under this Plan) such of them as in its opinion should be awarded
Restricted Stock; and
(ii) Determine the purchase price, if any, and
other terms and conditions applicable to such Restricted Stock,
consistent with this Plan.
(b) The Committee shall establish the purchase price, if any,
and form of payment for Restricted Stock; provided, however, that such purchase
price shall be no less than the par value of the Common Stock to be purchased,
unless otherwise permitted by applicable state law. In all cases, legal
consideration shall be required for each issuance of Restricted Stock.
(c) Upon the selection of a key Employee or consultant to be
awarded Restricted Stock, the Committee shall instruct the Secretary of the
Company to issue such Restricted Stock and may impose such conditions on the
issuance of such Restricted Stock as it deems appropriate.
6.3 Restricted Stock Agreement. Restricted Stock shall be
issued only pursuant to a written Restricted Stock Agreement, which shall be
executed by the selected key Employee or consultant and an authorized officer of
the Company and which shall contain such terms and conditions as the Committee
shall determine, consistent with this Plan.
6.4 Consideration. As consideration for the issuance of
Restricted Stock, in addition to payment of any purchase price, the Restricted
Stockholder shall agree, in the written Restricted Stock Agreement, to remain in
the employ of, or to consult for, the Company or any Subsidiary for a period of
at least one year after the Restricted Stock is issued (or such shorter period
as may be fixed in the Restricted Stock Agreement or by action of the Committee
following grant of the Restricted Stock). Nothing in this Plan or in any
Restricted Stock Agreement hereunder shall confer on any Restricted Stockholder
any right to continue in the employ of, or as a consultant for, the Company or
any Subsidiary or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Restricted Stockholder at any time for any reason whatsoever, with or
without good cause.
6.5 Rights as Stockholders. Subject to Section 6.6, upon
delivery of the shares of Restricted Stock to the escrow holder pursuant to
Section 6.8, the Restricted Stockholder shall have, unless otherwise provided by
the Committee, all the rights of a stockholder with respect to said shares,
subject to the restrictions in his Restricted Stock Agreement, including the
right to receive all dividends
12
<PAGE> 13
and other distributions paid or made with respect to the shares; provided,
however, that in the discretion of the Committee, any extraordinary
distributions with respect to the Common Stock shall be subject to the
restrictions set forth in Section 6.6.
6.6 Restriction. All shares of Restricted Stock issued under
this Plan (including any shares received by holders thereof with respect to
shares of Restricted Stock as a result of stock dividends, stock splits or any
other form of recapitalization) shall, in the terms of each individual
Restricted Stock Agreement, be subject to such restrictions as the Committee
shall provide, which restrictions may include, without limitation, restrictions
concerning voting rights and transferability and restrictions based on duration
of employment with the Company, Company performance and individual performance;
provided, however, that, unless the Committee otherwise provides in the terms of
the Restricted Stock Agreement or otherwise, no share of Restricted Stock
granted to a person subject to Section 16 of the Exchange Act shall be sold,
assigned or otherwise transferred until at least six months and one day have
elapsed from the date on which the Restricted Stock was issued; provided,
further, that, except with respect to shares of Restricted Stock granted
pursuant to Section 6.10, by action taken after the Restricted Stock is issued,
the Committee may, on such terms and conditions as it may determine to be
appropriate, remove any or all of the restrictions imposed by the terms of the
Restricted Stock Agreement. Restricted Stock may not be sold or encumbered until
all restrictions are terminated or expire. If no consideration was paid by the
Restricted Stockholder upon issuance, a Restricted Stockholder's rights in
unvested Restricted Stock shall lapse upon Termination of Employment or, if
applicable, upon Termination of Consultancy with the Company; provided, however,
that the Committee in its sole and absolute discretion may provide that such
rights shall not lapse in the event of a Termination of Employment following a
"change of ownership control" (within the meaning of Treasury Regulation Section
1.62-27(e)(2)(v) or any successor regulation thereto) of the Company or because
of the Restricted Stockholder's death or disability; provided, further, except
with respect to shares of Restricted Stock granted pursuant to Section 6.10, the
Committee in its sole and absolute discretion may provide that no such right of
repurchase shall exist in the event of a Termination of Employment, or a
Termination of Consultancy, without cause or following any change in control or
ownership of the Company or because of the Restricted Stockholder's retirement,
or otherwise.
6.7 Repurchase of Restricted Stock. The Committee shall
provide in the terms of each individual Restricted Stock Agreement that the
Company shall have the right to repurchase from the Restricted Stockholder the
Restricted Stock then subject to restrictions under the Restricted Stock
Agreement immediately upon a Termination of Employment or, if applicable, upon a
Termination of Consultancy between the Restricted Stockholder and the Company,
at a cash price per share equal to the price paid by the Restricted Stockholder
for such Restricted Stock; provided, however, that the Committee in its sole and
absolute discretion may provide that no such right of repurchase shall exist in
the event of a Termination of Employment following a "change of ownership or
control" (within the meaning of Treasury Regulation Section 1.162-27(e)(2)(v) or
any successor regulation thereto) of the Company or because of the Restricted
Stockholder's death or disability; provided, further, that, except with respect
to shares of Restricted Stock granted pursuant to Section 6.10, the Committee in
its sole and absolute discretion may provide that no such right of repurchase
shall exist in the event of a Termination of Employment or a Termination of
Consultancy without cause or following any change in control or ownership of the
Company or because of the Restricted Stockholder's retirement, or otherwise.
6.8 Escrow. The Secretary of the Company or such other escrow
holder as the Committee may appoint shall retain physical custody of each
certificate representing Restricted Stock until all of the restrictions imposed
under the Restricted Stock Agreement with respect to the shares evidenced by
such certificate expire or shall have been removed.
13
<PAGE> 14
6.9 Legend. In order to enforce the restrictions imposed upon
shares of Restricted Stock hereunder, the Committee shall cause a legend or
legends to be placed on certificates representing all shares of Restricted Stock
that are still subject to restrictions under Restricted Stock Agreements, which
legend or legends shall make appropriate reference to the conditions imposed
thereby.
6.10 Provisions Applicable to Section 162(m) Participants.
(a) Notwithstanding anything in the Plan to the contrary, the
Committee may grant Restricted Stock to a Section 162(m) Participant, the
restrictions with respect to which lapse upon the attainment of performance
goals for the Company which are related to one or more of the following business
criteria: (i) net income either before or after taxes, (ii) market share, (iii)
customer satisfaction, (iv) profits, (v) share price, (vi) earnings per share,
(vii) total stockholder return, (viii) return on assets, (ix) return on equity,
(x) operating income, (xi) return on capital or investments, or (xii) economic
value added (including, but not limited to, any or all of such measures in
comparison to the Company's competitors, the industry, or some other comparator
group).
(b) To the extent necessary to comply with the
performance-based compensation requirements of Section 162(m)(4)(C) of the Code,
with respect to Restricted Stock which may be granted to one or more Section
162(m) Participants, no later than 90 days following the commencement of any
fiscal year in question or any other designated fiscal period or period of
service (or such other time as may be required or permitted by Section 162(m) of
the Code), the Committee shall, in writing, (i) designate one or more Section
162(m) Participants, (ii) select the performance goal or goals applicable to the
fiscal year or other designated fiscal period or period of service, (iii)
establish the various targets and amounts of Restricted Stock which may be
earned for such fiscal year or other designated fiscal period or period of
service and (iv) specify the relationship between performance goals and targets
and the amounts of Restricted Stock to be earned by each Section 162(m)
Participant for such fiscal year or other designated fiscal period or period of
service. Following the completion of each fiscal year or other designated fiscal
period or period of service, the Committee shall certify in writing whether the
applicable performance targets have been achieved for such fiscal year or other
designated fiscal period or period of service. In determining the amount earned
by a Section 162(m) Participant, the Committee shall have the right to reduce
(but not to increase) the amount payable at a given level of performance to take
into account additional factors that the Committee may deem relevant to the
assessment of individual or corporate performance for the fiscal year or other
designated fiscal period or period of service.
ARTICLE VII
PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS,
DEFERRED STOCK, STOCK PAYMENTS
7.1 Eligibility. Subject to the Award Limit, one or more
Performance Awards, Dividend Equivalents, awards of Deferred Stock, and/or Stock
Payments may be granted to any Employee whom the Committee determines is a key
Employee or any consultant whom the Committee determines should receive such an
award.
7.2 Performance Awards. Any key Employee or consultant
selected by the Committee may be granted one or more Performance Awards. The
value of such Performance Awards may be linked to the market value, book value,
net profits or other measure of the value of Common Stock or other specific
performance criteria determined appropriate by the Committee, in each case on a
specified
14
<PAGE> 15
date or dates or over any period or periods determined by the Committee, or may
be based upon the appreciation in the market value, book value, net profits or
other measure of the value of a specified number of shares of Common Stock over
a fixed period or periods determined by the Committee. In making such
determinations, the Committee shall consider (among such other factors as it
deems relevant in light of the specific type of award) the contributions,
responsibilities and other compensation of the particular key Employee or
consultant.
7.3 Dividend Equivalents. Any key Employee or consultant
selected by the Committee may be granted Dividend Equivalents based on the
dividends declared on Common Stock, to be credited as of dividend payment dates,
during the period between the date an Option, Stock Appreciation Right, Deferred
Stock or Performance Award is granted, and the date such Option, Stock
Appreciation Right, Deferred Stock or Performance Award is exercised, vests or
expires, as determined by the Committee. Such Dividend Equivalents shall be
converted to cash or additional shares of Common Stock by such formula and at
such time and subject to such limitations as may be determined by the Committee.
With respect to Dividend Equivalents granted with respect to Options intended to
be qualified performance-based compensation for purposes of Section 162(m) of
the Code, such Dividend Equivalents shall be payable regardless of whether such
Option is exercised.
7.4 Stock Payments. Any key Employee or consultant selected by
the Committee may receive Stock Payments in the manner determined from time to
time by the Committee. The number of shares shall be determined by the Committee
and may be based upon the Fair Market Value, book value, net profits or other
measure of the value of Common Stock or other specific performance criteria
determined appropriate by the Committee, determined on the date such Stock
Payment is made or on any date thereafter.
7.5 Deferred Stock. Any key Employee or consultant selected by
the Committee may be granted an award of Deferred Stock in the manner determined
from time to time by the Committee. The number of shares of Deferred Stock shall
be determined by the Committee and may be linked to the market value, book
value, net profits or other measure of the value of Common Stock or other
specific performance criteria determined to be appropriate by the Committee, in
each case on a specified date or dates or over any period or periods determined
by the Committee. Common Stock underlying a Deferred Stock award will not be
issued until the Deferred Stock award has vested, pursuant to a vesting schedule
or performance criteria set by the Committee. Unless otherwise provided by the
Committee, a Grantee of Deferred Stock shall have no rights as a Company
stockholder with respect to such Deferred Stock until such time as the award has
vested and the Common Stock underlying the award has been issued.
7.6 Performance Award Agreement, Dividend Equivalent
Agreement, Deferred Stock Agreement, Stock Payment Agreement. Each Performance
Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall
be evidenced by a written agreement, which shall be executed by the Grantee and
an authorized officer of the Company and which shall contain such terms and
conditions as the Committee shall determine, consistent with this Plan.
7.7 Term. The term of a Performance Award, Dividend
Equivalent, award of Deferred Stock and/or Stock Payment shall be set by the
Committee in its discretion.
7.8 Exercise or Purchase Price. The Committee may establish
the exercise or purchase price of a Performance Award, shares of Deferred Stock,
or shares received as a Stock
15
<PAGE> 16
Payment; provided, however, that such price shall not be less than the par value
for a share of Common Stock, unless otherwise permitted by applicable state law.
7.9 Exercise Upon Termination of Employment. A Performance
Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment is
exercisable or payable only while the Grantee is an Employee or consultant;
provided, however, that the Committee in its sole and absolute discretion may
provide that the Performance Award, Dividend Equivalent, award of Deferred Stock
and/or Stock Payment may be exercised or paid subsequent to a Termination of
Employment following a "change of control or ownership" (within the meaning of
Section 1.162-27(e)(2)(v) or any successor regulation thereto) of the Company;
provided, further, that except with respect to Performance Awards granted
pursuant to Section 7.12, the Committee in its sole and absolute discretion may
provide that the Performance Awards may be exercised or paid following a
Termination of Employment or a Termination of Consultancy without cause, or
following a change in control of the Company, or because of the Grantee's
retirement, death or disability, or otherwise.
7.10 Payment on Exercise. Payment of the amount determined
under Section 7.2 or 7.3 above shall be in cash, in Common Stock or a
combination of both, as determined by the Committee. To the extent any payment
under this Article VII is effected in Common Stock, it shall be made subject to
satisfaction of all provisions of Section 5.3.
7.11 Consideration. In consideration of the granting of a
Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock
Payment, the Grantee shall agree, in a written agreement, to remain in the
employ of, or to consult for, the Company or any Subsidiary for a period of at
least one year after such Performance Award, Dividend Equivalent, award of
Deferred Stock and/or Stock Payment is granted (or such shorter period as may be
fixed in such agreement or by action of the Committee following such grant).
Nothing in this Plan or in any agreement hereunder shall confer on any Grantee
any right to continue in the employ of, or as a consultant for, the Company or
any Subsidiary or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Grantee at any time for any reason whatsoever, with or without good cause.
7.12 Provisions Applicable to Section 162(m) Participants.
(a) Notwithstanding anything in the Plan to the contrary, the
Committee may grant any performance or incentive awards described in Article VII
to a Section 162(m) Participant that vest or become exercisable or payable upon
the attainment of performance goals for the Company which are related to one or
more of the following business criteria: (i) net income either before or after
taxes, (ii) market share, (iii) customer satisfaction, (iv) profits, (v) share
price, (vi) earnings per share, (vii) total stockholder return, (viii) return on
assets, (ix) return on equity, (x) operating income, (xi) return on capital or
investments, or (xii) economic value added (including, but not limited to, any
or all of such measures in comparison to the Company's competitors, the
industry, or some other comparator group).
(b) To the extent necessary to comply with the
performance-based compensation requirements of Section 162(m)(4)(C) of the Code,
with respect to performance or incentive awards described in Article VII which
may be granted to one or more Section 162(m) Participants, no later than 90 days
following the commencement of any fiscal year in question or any other
designated fiscal period or period of service (or such other time as may be
required or permitted by Section 162(m) of the Code), the Committee shall, in
writing, (i) designate one or more Section 162(m) Participants, (ii) select the
performance goal or goals applicable to the fiscal year or other designated
fiscal period or period of
16
<PAGE> 17
service, (iii) establish the various targets and bonus amounts which may be
earned for such fiscal year or other designated fiscal period or period of
service and (iv) specify the relationship between performance goals and targets
and the amounts to be earned by each Section 162(m) Participant for such fiscal
year or other designated fiscal period or period of service. Following the
completion of each fiscal year or other designated fiscal period or period of
service, the Committee shall certify in writing whether the applicable
performance targets have been achieved for such fiscal year or other designated
fiscal period or period of service. In determining the amount earned by a
Section 162(m) Participant, the Committee shall have the right to reduce (but
not to increase) the amount payable at a given level of performance to take into
account additional factors that the Committee may deem relevant to the
assessment of individual or corporate performance for the fiscal year or other
designated fiscal period or period of service.
ARTICLE VIII
STOCK APPRECIATION RIGHTS
8.1 Grant of Stock Appreciation Rights. A Stock Appreciation
Right may be granted to any key Employee or consultant selected by the
Committee. A Stock Appreciation Right may be granted (i) in connection and
simultaneously with the grant of an Option, (ii) with respect to a previously
granted Option, or (iii) independent of an Option. A Stock Appreciation Right
shall be subject to such terms and conditions not inconsistent with this Plan as
the Committee shall impose and shall be evidenced by a written Stock
Appreciation Right Agreement, which shall be executed by the Grantee and an
authorized officer of the Company. The Committee, in its discretion, may
determine whether a Stock Appreciation Right is to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code and Stock
Appreciation Right Agreements evidencing Stock Appreciation Rights intended to
so qualify shall contain such terms and conditions as may be necessary to meet
the applicable provisions of Section 162(m) of the Code.
8.2 Coupled Stock Appreciation Rights
(a) A Coupled Stock Appreciation Right ("CSAR") shall be
related to a particular Option and shall be exercisable only when and to the
extent the related Option is exercisable.
(b) A CSAR may be granted to the Grantee for no more than the
number of shares subject to the simultaneously or previously granted Option to
which it is coupled.
(c) A CSAR shall entitle the Grantee (or other person entitled
to exercise the Option pursuant to this Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the extent
then exercisable pursuant to its terms) and to receive from the Company in
exchange therefor an amount determined by multiplying the difference obtained by
subtracting the Option exercise price from the Fair Market Value of a share of
Common Stock on the date of exercise of the CSAR by the number of shares of
Common Stock with respect to which the CSAR shall have been exercised, subject
to any limitations the Committee may impose.
8.3 Independent Stock Appreciation Rights
(a) An Independent Stock Appreciation Right ("ISAR") shall be
unrelated to any Option and shall have a term set by the Committee. An ISAR
shall be exercisable in such installments as the Committee may determine. An
ISAR shall cover such number of shares of Common Stock as the
17
<PAGE> 18
Committee may determine; provided, however, that unless the Committee otherwise
provides in the terms of the ISAR or otherwise, no ISAR granted to a person
subject to Section 16 of the Exchange Act shall be exercisable until at least
six months have elapsed from (but excluding) the date on which the Option was
granted. The exercise price per share of Common Stock subject to each ISAR shall
be set by the Committee. An ISAR is exercisable only while the Grantee is an
Employee or consultant; provided that the Committee may determine that the ISAR
may be exercised subsequent to Termination of Employment or Termination of
Consultancy without cause, or following a change in control of the Company, or
because of the Grantee's retirement, death or disability, or otherwise.
(b) An ISAR shall entitle the Grantee (or other person
entitled to exercise the ISAR pursuant to this Plan) to exercise all or a
specified portion of the ISAR (to the extent then exercisable pursuant to its
terms) and to receive from the Company an amount determined by multiplying the
difference obtained by subtracting the exercise price per share of the ISAR from
the Fair Market Value of a share of Common Stock on the date of exercise of the
ISAR by the number of shares of Common Stock with respect to which the ISAR
shall have been exercised, subject to any limitations the Committee may impose.
8.4 Payment and Limitations on Exercise
(a) Payment of the amount determined under Section 8.2(c) and
8.3(b) above shall be in cash, in Common Stock (based on its Fair Market Value
as of the date the Stock Appreciation Right is exercised) or a combination of
both, as determined by the Committee. To the extent such payment is effected in
Common Stock it shall be made subject to satisfaction of all provisions of
Section 5.3 above pertaining to Options.
(b) Grantees of Stock Appreciation Rights may be required to
comply with any timing or other restrictions with respect to the settlement or
exercise of a Stock Appreciation Right, including a window-period limitation, as
may be imposed in the discretion of the Board or Committee.
8.5 Consideration. In consideration of the granting of a Stock
Appreciation Right, the Grantee shall agree, in the written Stock Appreciation
Right Agreement, to remain in the employ of, or to consult for, the Company or
any Subsidiary for a period of at least one year after the Stock Appreciation
Right is granted (or such shorter period as may be fixed in the Stock
Appreciation Right Agreement or by action of the Committee following grant of
the Restricted Stock). Nothing in this Plan or in any Stock Appreciation Right
Agreement hereunder shall confer on any Grantee any right to continue in the
employ of, or as a consultant for, the Company or any Subsidiary or shall
interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any
time for any reason whatsoever, with or without good cause.
18
<PAGE> 19
ARTICLE IX
ADMINISTRATION
9.1 Compensation Committee. The Compensation Committee (or
another committee or a subcommittee of the Board assuming the functions of the
Committee under this Plan) shall consist solely of two or more Independent
Directors of the Company appointed by and holding office at the pleasure of the
Board, each of whom is a "non-employee director" as defined by Rule 16b-3.
Appointment of Committee members shall be effective upon acceptance of
appointment. Committee members may resign at any time by delivering written
notice to the Board. Vacancies in the Committee may be filled by the Board.
9.2 Duties and Powers of Committee. It shall be the duty of
the Committee to conduct the general administration of this Plan in accordance
with its provisions. The Committee shall have the power to interpret this Plan
and the agreements pursuant to which Options, awards of Restricted Stock or
Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments are granted or awarded, and to adopt such rules
for the administration, interpretation, and application of this Plan as are
consistent therewith and to interpret, amend or revoke any such rules.
Notwithstanding the foregoing, the full Board, acting by a majority of its
members in office, shall conduct the general administration of the Plan with
respect to Options granted to Independent Directors. Any such grant or award
under this Plan need not be the same with respect to each Optionee, Grantee or
Restricted Stockholder. Any such interpretations and rules with respect to
Incentive Stock Options shall be consistent with the provisions of Section 422
of the Code. In its absolute discretion, the Board may at any time and from time
to time exercise any and all rights and duties of the Committee under this Plan
except with respect to matters which under Rule 16b-3 or Section 162(m) of the
Code, or any regulations or rules issued thereunder, are required to be
determined in the sole discretion of the Committee.
9.3 Majority Rule; Unanimous Written Consent. The Committee
shall act by a majority of its members in attendance at a meeting at which a
quorum is present or by a memorandum or other written instrument signed by all
members of the Committee.
9.4 Compensation; Professional Assistance; Good Faith Actions.
Members of the Committee shall receive such compensation for their services as
members as may be determined by the Board. All expenses and liabilities which
members of the Committee incur in connection with the administration of this
Plan shall be borne by the Company. The Committee may, with the approval of the
Board, employ attorneys, consultants, accountants, appraisers, brokers, or other
persons. The Committee, the Company and the Company's officers and Directors
shall be entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made by
the Committee or the Board in good faith shall be final and binding upon all
Optionees, Grantees, Restricted Stockholders, the Company and all other
interested persons. No members of the Committee or Board shall be personally
liable for any action, determination or interpretation made in good faith with
respect to this Plan, Options, awards of Restricted Stock or Deferred Stock,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments, and all members of the Committee and the Board shall be fully
protected by the Company in respect of any such action, determination or
interpretation.
19
<PAGE> 20
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Not Transferable. Options, Restricted Stock awards,
Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments under this Plan may not be sold, pledged,
assigned, or transferred in any manner other than by will or the laws of descent
and distribution or pursuant to a QDRO, unless and until such rights or awards
have been exercised, or the shares underlying such rights or awards have been
issued, and all restrictions applicable to such shares have lapsed. No Option,
Restricted Stock award, Deferred Stock award, Performance Award, Stock
Appreciation Right, Dividend Equivalent or Stock Payment or interest or right
therein shall be liable for the debts, contracts or engagements of the Optionee,
Grantee or Restricted Stockholder or his successors in interest or shall be
subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except to
the extent that such disposition is permitted by the preceding sentence.
During the lifetime of the Optionee or Grantee, only he may
exercise an Option or other right or award (or any portion thereof) granted to
him under the Plan, unless it has been disposed of pursuant to a QDRO. After the
death of the Optionee or Grantee, any exercisable portion of an Option or other
right or award may, prior to the time when such portion becomes unexercisable
under the Plan or the applicable Stock Option Agreement or other agreement, be
exercised by his personal representative or by any person empowered to do so
under the deceased Optionee's or Grantee's will or under the then applicable
laws of descent and distribution.
10.2 Amendment, Suspension or Termination of this Plan. Except
as otherwise provided in this Section 10.2, this Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from time
to time by the Board or the Committee. However, without approval of the
Company's stockholders given within 12 months before or after the action by the
Board or the Committee, no action of the Board or the Committee may, except as
provided in Section 10.3, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under this Plan or increase the
Award Limit, and no action of the Board or the Committee may be taken that would
otherwise require stockholder approval as a matter of applicable law, regulation
or rule. No amendment, suspension or termination of this Plan shall, without the
consent of the holder of Options, Restricted Stock awards, Deferred Stock
awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments, alter or impair any rights or obligations under any Options,
Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments theretofore granted
or awarded, unless the award itself otherwise expressly so provides. No Options,
Restricted Stock, Deferred Stock, Performance Awards, Stock Appreciation Rights,
Dividend Equivalents or Stock Payments may be granted or awarded during any
period of suspension or after termination of this Plan, and in no event may any
Incentive Stock Option be granted under this Plan after the first to occur of
the following events:
(a) The expiration of ten years from the date the Plan is
adopted by the Board; or
(b) The expiration of ten years from the date the Plan is
approved by the Company's stockholders under Section 10.4.
20
<PAGE> 21
10.3 Changes in Common Stock or Assets of the Company,
Acquisition or Liquidation of the Company and Other Corporate Events.
(a) Subject to Section 10.3(d), in the event that the
Committee (or the Board, in the case of Options granted to Independent
Directors) determines that any dividend or other distribution (whether in the
form of cash, Common Stock, other securities, or other property),
recapitalization, reclassification, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, liquidation, dissolution, or sale, transfer, exchange or other
disposition of all or substantially all of the assets of the Company (including,
but not limited to, a Corporate Transaction), or exchange of Common Stock or
other securities of the Company, issuance of warrants or other rights to
purchase Common Stock or other securities of the Company, or other similar
corporate transaction or event, in the Committee's sole discretion (or in the
case of Options granted to Independent Directors, the Board's sole discretion),
affects the Common Stock such that an adjustment is determined by the Committee
to be appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to an Option, Restricted Stock award, Performance Award, Stock Appreciation
Right, Dividend Equivalent, Deferred Stock award or Stock Payment, then the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall, in such manner as it may deem equitable, adjust any or all of
(i) the number and kind of shares of Common Stock
(or other securities or property) with respect to which Options,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments may be granted under the Plan, or which may be granted
as Restricted Stock or Deferred Stock (including, but not limited to,
adjustments of the limitations in Section 2.1 on the maximum number and
kind of shares which may be issued and adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock
(or other securities or property) subject to outstanding Options,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents, or
Stock Payments, and in the number and kind of shares of outstanding
Restricted Stock or Deferred Stock, and
(iii) the grant or exercise price with respect to
any Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent or Stock Payment.
(b) Subject to Sections 10.3(b)(vii) and 10.3(d), in the event
of any Corporate Transaction or other transaction or event described in Section
10.3(a) or any unusual or nonrecurring transactions or events affecting the
Company, any affiliate of the Company, or the financial statements of the
Company or any affiliate, or of changes in applicable laws, regulations, or
accounting principles, the Committee (or the Board, in the case of Options
granted to Independent Directors) in its discretion is hereby authorized to take
any one or more of the following actions whenever the Committee (or the Board,
in the case of Options granted to Independent Directors) determines that such
action is appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan or
with respect to any option, right or other award under this Plan, to facilitate
such transactions or events or to give effect to such changes in laws,
regulations or principles:
(i) In its sole and absolute discretion, and on
such terms and conditions as it deems appropriate, the Committee (or
the Board, in the case of Options granted to Independent Directors) may
provide, either by the terms of the agreement or by action taken prior
to the occurrence of such transaction or event and either automatically
or upon the optionee's request,
21
<PAGE> 22
for either the purchase of any such Option, Performance Award, Stock
Appreciation Right, Dividend Equivalent, or Stock Payment, or any
Restricted Stock or Deferred Stock for an amount of cash equal to the
amount that could have been attained upon the exercise of such option,
right or award or realization of the optionee's rights had such option,
right or award been currently exercisable or payable or fully vested or
the replacement of such option, right or award with other rights or
property selected by the Committee (or the Board, in the case of
Options granted to Independent Directors) in its sole discretion;
(ii) In its sole and absolute discretion, the
Committee (or the Board, in the case of Options granted to Independent
Directors) may provide, either by the terms of such Option, Performance
Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment,
or Restricted Stock or Deferred Stock or by action taken prior to the
occurrence of such transaction or event that it cannot vest, be
exercised or become payable after such event;
(iii) In its sole and absolute discretion, and on
such terms and conditions as it deems appropriate, the Committee (or
the Board, in the case of Options granted to Independent Directors) may
provide, either by the terms of such Option, Performance Award, Stock
Appreciation Right, Dividend Equivalent, or Stock Payment, or
Restricted Stock or Deferred Stock or by action taken prior to the
occurrence of such transaction or event, that for a specified period of
time prior to such transaction or event, such option, right or award
shall be exercisable as to all shares covered thereby, notwithstanding
anything to the contrary in (i) Section 4.4 or (ii) the provisions of
such Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock;
(iv) In its sole and absolute discretion, and on
such terms and conditions as it deems appropriate, the Committee (or
the Board, in the case of Options granted to Independent Directors) may
provide, either by the terms of such Option, Performance Award, Stock
Appreciation Right, Dividend Equivalent, or Stock Payment, or
Restricted Stock or Deferred Stock or by action taken prior to the
occurrence of such transaction or event, that upon such event, such
option, right or award be assumed by the successor or survivor
corporation, or a parent or subsidiary thereof, or shall be substituted
for by similar options, rights or awards covering the stock of the
successor or survivor corporation, or a parent or subsidiary thereof,
with appropriate adjustments as to the number and kind of shares and
prices;
(v) In its sole and absolute discretion, and on
such terms and conditions as it deems appropriate, the Committee (or
the Board, in the case of Options granted to Independent Directors) may
make adjustments in the number and type of shares of Common Stock (or
other securities or property) subject to outstanding Options,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents, or
Stock Payments, and in the number and kind of outstanding Restricted
Stock or Deferred Stock and/or in the terms and conditions of
(including the grant or exercise price), and the criteria included in,
outstanding options, rights and awards and options, rights and awards
which may be granted in the future;
(vi) In its sole and absolute discretion, and on
such terms and conditions as it deems appropriate, the Committee may
provide either by the terms of a Restricted Stock award or Deferred
Stock award or by action taken prior to the occurrence of such event
that, for a specified period of time prior to such event, the
restrictions imposed under a Restricted Stock Agreement or a Deferred
Stock Agreement upon some or all shares of Restricted Stock or Deferred
Stock may be terminated, and, in the case of Restricted Stock, some or
all shares of
22
<PAGE> 23
such Restricted Stock may cease to be subject to repurchase under
Section 6.6 or forfeiture under Section 6.5 after such event;
(vii) In the event of a Change in Control, each
Option granted to a key Employee, consultant or Independent Director
shall become fully vested and exercisable as to all shares covered
thereby upon such Change in Control, notwithstanding anything to the
contrary in Section 4.4 or the vesting schedule of such Options; and
(viii) In the event of any Corporate Transaction,
each outstanding Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent, Stock Payment, Restricted Stock, or Deferred Stock
award shall, immediately prior to the effective date of the Corporate
Transaction, automatically become fully exercisable for all of the
shares of Common Stock at the time subject to such rights or fully
vested, as applicable, and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, an outstanding
right shall not so accelerate if and to the extent: (i) such right is,
in connection with the Corporate Transaction, either to be assumed by
the successor or survivor corporation (or parent thereof) or to be
replaced with a comparable right with respect to shares of the capital
stock of the successor or survivor corporation (or parent thereof) or
(ii) the acceleration of exercisability of such right is subject to
other limitations imposed by the Committee (or Board in the case of
Independent Directors) at the time of grant. The determination of
comparability of rights under clause (i) above shall be made by the
Committee (or Board in the case of Independent Directors), and its
determination shall be final, binding and conclusive.
(c) Subject to Section 10.3(d) and 10.8, the Committee (or the
Board, in the case of Options granted to Independent Directors) may, in its
discretion, include such further provisions and limitations in any Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock
Payment, or Restricted Stock or Deferred Stock agreement or certificate, as it
may deem equitable and in the best interests of the Company.
(d) With respect to Options, Stock Appreciation Rights and
performance or incentive awards described in Article VII which are granted to
Section 162(m) Participants and are intended to qualify as performance-based
compensation under Section 162(m)(4)(C), no adjustment or action described in
this Section 10.3 or in any other provision of the Plan shall be authorized to
the extent that such adjustment or action would cause the Plan to violate
Section 422(b)(1) of the Code or would cause such option or stock appreciation
right to fail to so qualify under Section 162(m)(4)(C), as the case may be, or
any successor provisions thereto. Furthermore, no such adjustment or action
shall be authorized to the extent such adjustment or action would result in
short-swing profits liability under Section 16 or violate the exemptive
conditions of Rule 16b-3 unless the Committee (or the Board, in the case of
Options granted to Independent Directors) determines that the option or other
award is not to comply with such exemptive conditions. The number of shares of
Common Stock subject to any option, right or award shall always be rounded to
the next whole number.
10.4 Approval of Plan by Stockholders. This Plan will be
submitted for the approval of the Company's stockholders within 12 months after
the date of the Board's initial adoption of this Plan. Options, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be
granted and Restricted Stock or Deferred Stock may be awarded prior to such
stockholder approval, provided that such Options, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments shall not be
exercisable and such Restricted Stock or Deferred Stock shall not vest prior to
the time when this Plan is approved by the stockholders, and provided further
that if such approval
23
<PAGE> 24
has not been obtained at the end of said 12-month period, all Options,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments previously granted and all Restricted Stock or Deferred Stock
previously awarded under this Plan shall thereupon be canceled and become null
and void.
10.5 Tax Withholding. The Company shall be entitled to require
payment in cash or deduction from other compensation payable to each Optionee,
Grantee or Restricted Stockholder of any sums required by federal, state or
local tax law to be withheld with respect to the issuance, vesting, exercise or
payment of any Option, Restricted Stock, Deferred Stock, Performance Award,
Stock Appreciation Right, Dividend Equivalent or Stock Payment. The Committee
(or the Board, in the case of Options granted to Independent Directors) may in
its discretion and in satisfaction of the foregoing requirement allow such
Optionee, Grantee or Restricted Stockholder to elect to have the Company
withhold shares of Common Stock otherwise issuable under such Option or other
award (or allow the return of shares of Common Stock) having a Fair Market Value
equal to the sums required to be withheld.
10.6 Loans. The Committee may, in its discretion, extend one
or more loans to key Employees in connection with the exercise or receipt of an
Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or
Stock Payment granted under this Plan, or the issuance of Restricted Stock or
Deferred Stock awarded under this Plan. The terms and conditions of any such
loan shall be set by the Committee.
10.7 Forfeiture Provisions. Pursuant to its general authority
to determine the terms and conditions applicable to awards under the Plan, the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall have the right (to the extent consistent with the applicable
exemptive conditions of Rule 16b-3) to provide, in the terms of Options or other
awards made under the Plan, or to require the recipient to agree by separate
written instrument, that (i) any proceeds, gains or other economic benefit
actually or constructively received by the recipient upon any receipt or
exercise of the award, or upon the receipt or resale of any Common Stock
underlying such award, must be paid to the Company, and (ii) the award shall
terminate and any unexercised portion of such award (whether or not vested)
shall be forfeited, if (a) a Termination of Employment, Termination of
Consultancy or Termination of Directorship occurs prior to a specified date, or
within a specified time period following receipt or exercise of the award, or
(b) the recipient at any time, or during a specified time period, engages in any
activity in competition with the Company, or which is inimical, contrary or
harmful to the interests of the Company, as further defined by the Committee (or
the Board, as applicable).
10.8 Limitations Applicable to Section 16 Persons and
Performance-Based Compensation. Notwithstanding any other provision of this
Plan, and any Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent or Stock Payment granted, or Restricted Stock or Deferred Stock
awarded, to any individual who is then subject to Section 16 of the Exchange
Act, shall be subject to any additional limitations set forth in any applicable
exemptive rule under Section 16 of the Exchange Act (including any amendment to
Rule 16b-3 of the Exchange Act) that are requirements for the application of
such exemptive rule. To the extent permitted by applicable law, the Plan,
Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents,
Stock Payments, Restricted Stock and Deferred Stock granted or awarded hereunder
shall be deemed amended to the extent necessary to conform to such applicable
exemptive rule. Furthermore, notwithstanding any other provision of this
24
<PAGE> 25
Plan, any Option, Stock Appreciation Right or performance or incentive award
described in Article VII which is granted to a Section 162(m) Participant and is
intended to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code shall be subject to any additional limitations set
forth in Section 162(m) of the Code (including any amendment to Section 162(m)
of the Code) or any regulations or rulings issued thereunder that are
requirements for qualification as performance-based compensation as described in
Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the
extent necessary to conform to such requirements.
10.9 Effect of Plan Upon Options and Compensation Plans. The
adoption of this Plan shall not affect any other compensation or incentive plans
in effect for the Company or any Subsidiary. Nothing in this Plan shall be
construed to limit the right of the Company (i) to establish any other forms of
incentives or compensation for Employees, Directors or Consultants of the
Company or any Subsidiary or (ii) to grant or assume options or other rights or
awards otherwise than under this Plan in connection with any proper corporate
purpose including but not by way of limitation, the grant or assumption of
options in connection with the acquisition by purchase, lease, merger,
consolidation or otherwise, of the business, stock or assets of any corporation,
partnership, limited liability company, firm or association.
10.10 Compliance with Laws. This Plan, the granting and
vesting of Options, Restricted Stock awards, Deferred Stock awards, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments under
this Plan and the issuance and delivery of shares of Common Stock and the
payment of money under this Plan or under Options, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments granted or
Restricted Stock or Deferred Stock awarded hereunder are subject to compliance
with all applicable federal and state laws, rules and regulations (including but
not limited to state and federal securities law and federal margin requirements)
and to such approvals by any listing, regulatory or governmental authority as
may, in the opinion of counsel for the Company, be necessary or advisable in
connection therewith. Any securities delivered under this Plan shall be subject
to such restrictions, and the person acquiring such securities shall, if
requested by the Company, provide such assurances and representations to the
Company as the Company may deem necessary or desirable to assure compliance with
all applicable legal requirements. To the extent permitted by applicable law,
the Plan, Options, Restricted Stock awards, Deferred Stock awards, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments
granted or awarded hereunder shall be deemed amended to the extent necessary to
conform to such laws, rules and regulations.
10.11 Titles. Titles are provided herein for convenience only
and are not to serve as a basis for interpretation or construction of this Plan.
25
<PAGE> 26
10.12 Governing Law. This Plan and any agreements hereunder
shall be administered, interpreted and enforced under the internal laws of the
State of Delaware without regard to conflicts of laws thereof.
26
<PAGE> 1
Exhibit 11 Statement re Computation of per share earnings
SCPIE Holdings, Inc. and Subsidiaries
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996(1) 1995(1)
---- ------ ------
<S> <C> <C> <C>
Net Income $ 32,176 $ 30,192 $ 24,369
Weighted average number of
common stock outstanding 12,108 10,000 10,000
Basic Earnings Per Share $ 2.66 $ 3.02 $ 2.44
======== ======== =========
Diluted Earnings Per Share (2) $ - $ - $ -
======== ======== =========
</TABLE>
(1) The weighted average number of common stock oustanding gives effect to the
Company's reorganization including the allocation of approximately 10,000,000
shares of common stock to members of Southern California Physicians Insurance
Exchange.
(2) The Company does not have diluted earnings per share as it has only common
stock outstanding.
<PAGE> 1
EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Company Domicile
- ------- --------
<S> <C>
SCPIE Holdings Inc. Delaware
SCPIE Indemnity Company California
American Healthcare Indemnity Company Delaware
American Healthcare Specialty Insurance Company Arkansas
SCPIE Management Company California
SCPIE Insurance Services Inc. California
SCPIE Management Services Inc. California
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 708,860
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 23,523
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 732,383
<CASH> 13,252
<RECOVER-REINSURE> 21,531
<DEFERRED-ACQUISITION> 520
<TOTAL-ASSETS> 888,449
<POLICY-LOSSES> 454,971
<UNEARNED-PREMIUMS> 22,072
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 1
<OTHER-SE> 346,476<F1>
<TOTAL-LIABILITY-AND-EQUITY> 888,449
133,866
<INVESTMENT-INCOME> 42,716
<INVESTMENT-GAINS> 6602
<OTHER-INCOME> 551
<BENEFITS> 123,377
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 17,987
<INCOME-PRETAX> 42,371
<INCOME-TAX> 10,195
<INCOME-CONTINUING> 32,176
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,176
<EPS-PRIMARY> 2.66<F2>
<EPS-DILUTED> 0
<RESERVE-OPEN> 440,301
<PROVISION-CURRENT> (53,209)
<PROVISION-PRIOR> 176,586
<PAYMENTS-CURRENT> 11,814
<PAYMENTS-PRIOR> 118,424
<RESERVE-CLOSE> 433,440
<CUMULATIVE-DEFICIENCY> (53,209)
<FN>
<F1>TREASURY STOCK OF $416 IS INCLUDED AS A REDUCTION OF OTHER STOCKHOLDERS'
EQUITY. NET UNREALIZED APPRECIATION OF $14,638 IS INCLUDED IN OTHER STOCKHOLDER
EQUITY.
<F2>THE ADOPTION OF FASB 128 DID NOT HAVE AN IMPACT ON ANY OF THE COMPANY'S
EARNINGS PER SHARE CALCULATIONS AS IT ONLY HAS COMMON STOCK OUTSTANDING.
</FN>
</TABLE>
