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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, 1998 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.)
1888 Century Park East, Los Angeles, California 90067
(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
Preferred Stock, par value $1.00 per share New York Stock Exchange
Common Stock, par value $0.0001 per share New York Stock Exchange
(Title of Class)
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. [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant at March 15, 1999, was approximately
$348,863,840 (based upon the closing sales price of such date, as reported by
the Wall Street Journal).
At March 15, 1999, the Registrant had issued and outstanding an aggregate of
12,300,891 shares of its Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part II incorporates certain information by reference from the Registrant's
definitive proxy statement for the Annual Meeting of Stockholders of Registrant
to be held on May 13, 1999 (only portions of which are incorporated by
reference).
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PART I
ITEM 1. BUSINESS
SCPIE Holdings Inc. (the "Company") 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 eligible to write policies as an excess and surplus
lines insurer in 24 states and the District of Columbia. 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
SCPIE Holdings is one of the nation's leading providers of medical
malpractice insurance based on direct premiums written in 1998. The Company
currently insures more than 12,500 physicians, other providers and oral and
maxillofacial surgeons practicing alone or in medical groups, clinics or other
healthcare organizations. The Company also insures a variety of healthcare
facilities, including hospitals, emergency departments, outpatient surgery and
hemodialysis centers, and clinical and pathology laboratories.
The Company's total revenues and net income were $210.0 million and $37.0
million, respectively, for the year ended December 31, 1998 and were $183.7
million and $32.2 million, respectively, for the year ended December 31, 1997.
As of December 31, 1998, the Company had total assets of $921.5 million and
total stockholders' equity of $386.5 million.
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 1997, total medical malpractice
premiums in the United States were approximately $5.9 billion. In California,
the second largest market for medical malpractice insurance based on direct
premiums written, approximately $632.3 million of medical malpractice premiums
were written in 1997. The Company's share of the medical malpractice premiums
written in California in 1997 was approximately 19%. 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. Eight county medical associations and several specialty
societies in California have endorsed the medical malpractice insurance offered
by the Company.
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The Company believes that the growth in managed healthcare and the emergence
of multi-state integrated healthcare providers and delivery systems has led to
major changes in the medical malpractice insurance industry. Practice management
organizations, 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.
Furthermore, the Company has begun to expand its operations beyond
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 currently offered to solo physicians and medical groups
in five states, the largest such states being Connecticut, Florida, Georgia and
Louisiana. In 1999, the Company expects to offer this coverage in three
additional states. 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 acquired the medical malpractice insurance business of
Fremont Indemnity Company ("Fremont") effective January 1, 1998 through a 100%
quota-share retroactive reinsurance agreement. Simultaneously, a 100%
quota-share prospective fronting agreement went into effect, making SCPIE
Indemnity the reinsurer for the Fremont policies until AHI obtains the proper
approvals to write this business directly. The Fremont policies are written
through brokers in 10 states, with the vast majority in California and Arizona.
During the fourth quarter of 1998, AHI received regulatory approval to write
this business directly. Upon the policy's renewal date, each policy will be
transferred from a Fremont policy to an AHI policy. There is no assurance,
however, that the Company will successfully retain or expand this business or
that it will ultimately be profitable.
Additionally, the Company 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, 1998, the Company insured 33 hospitals, of
which 18 were located in California.
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 and other states has faced a soft insurance market. 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
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to more appropriate levels. However, 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.
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,
----------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Physician and medical group
liability:
Physician and medical group
standard professional
liability ..................... $108,679 $109,393 $117,679
Special risk physicians .......... 1,299 1,700 1,398
Emergency medicine program ....... 2,012 1,589 628
Urgent care centers .............. 325 277 262
-------- -------- --------
Subtotal medical liability .... 112,315 112,959 119,967
Excess personal liability ........ 701 756 829
-------- -------- --------
Subtotal physician and
medical group liability ..... 113,016 113,715 120,796
Hospital liability ................. 10,432 8,475 3,487
Healthcare provider liability ...... 761 800 792
Managed care organization
errors and omissions ............... 740 668 347
Directors and officers'
liability ........................ 264 252 213
-------- -------- --------
Total ............................ $125,213 $123,910 $125,635
======== ======== ========
</TABLE>
The Company also wrote physician premium on a fronted basis in connection
with the Poe & Brown and Fremont arrangements. The Company assumed premium from
CNA Insurance Company in connection with the Poe & Brown arrangement and from
Fremont in connection with the Fremont arrangement as an interim measure until
such time as the Company obtained proper approvals to write the business
directly. In 1998 these assumed premiums were $6.0 million and $24.9 million for
the Poe & Brown and Fremont arrangements, respectively.
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 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 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 state licensing boards.
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 business liability coverage included in the
medical group policy includes 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
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physician for personal liabilities in excess of amounts covered under the
physician's homeowners and automobile policies. The Company has developed
nonstandard programs which may exclude business liability coverages for certain
physicians.
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 with the Company and
who are also at least 65 years old.
Business 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,
1998:
<TABLE>
<CAPTION>
DIRECT
PREMIUMS PERCENTAGE
GROUP SIZE WRITTEN OF TOTAL
---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C>
Sole practitioner physicians ................ $ 74,129 65.6%
Group with less than five physicians ........ 16,126 14.3
Group with five through eight physicians .... 8,561 7.6
Group with nine or more physicians .......... 14,260 12.5
-------- -------
Total ........................... $113,076 100.0%
======== =======
</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 business 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/Healthcare Facilities 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. The Company also offers its professional liability coverage to
healthcare providers such as chiropractors, podiatrists and nurse practitioners.
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.
Managed Care Organization Errors and Omissions. The Company has introduced a
policy for managed care organizations. The policy provides coverage for
liability arising from covered managed care incidents or vicarious liability for
medical services rendered by non-employed physicians. Covered services include
peer review, healthcare expense review, utilization management, utilization
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review and claims and benefit handling in the operation of the managed care
organizations. 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. In 1996, the Company began to directly
write renewals of these policies previously underwritten by other companies,
accounting for approximately $252,000 in direct premiums written in 1997 and
$264,000 in 1998. In August 1998, the California Department of Insurance
approved a new directors and officers' liability policy form that expands the
scope of coverage. 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 marketing organization has approximately 38 employees providing
sales solicitation and communications services. In support of its broker
network, 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 Addison, Texas, Boca Raton,
Florida and Phoenix, Arizona principally to solicit hospital and physician
accounts both directly and through brokers, and has one principal brokerage
relationship in California that accounts for 12 of the 18 hospitals insured by
the Company in that state.
Eight county medical associations and several specialty societies have
endorsed 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.
Effective January 1, 1998, Poe & Brown began marketing 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 one of the nation's top
independent insurance agency organizations, with an established physicians
medical malpractice program in these states offered to customers through a large
network of local and regional brokers.
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 provides a variety of printed materials and newsletters
relating to Risk Management topics. The Company maintains a 24-hour hotline to
provide immediate access to its risk management personnel. The Company conducts
surveys for hospitals and large medical groups both to review their practice
procedures generally and to focus
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on specific areas in which there may be some concern. 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
large and mid-size 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. The company's website also allows insureds to
access various risk management information materials and sources. 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, 15 underwriters and 17
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 may conduct 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
claims and risk management reports or correspondence.
The underwriting department submits recommendations for premium surcharges or
non-renewal of physicians 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 the Company has primarily issued its policies utilizing
schedules of coverage, limits, rating factors and other pertinent information
supplied to the Company by independent brokers. 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.
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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 nonstandard programs 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. 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. The Company ceased
paying such premium credit dividends to its policyholders in 1998. The Company
instituted no rate increases for 1998, which may have offset the elimination of
dividends to policyholders and somewhat improved its competitive position.
During 1999, the Company will institute an average rate increase of 3.7% for
California physician insureds. Therefore, the Company may find it more difficult
to compete with other insurance companies offering such dividends.
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 60 employees, including 16
clerical personnel. The Company has 5 unit managers and 4 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 reserves and
settlement of claims. The Company has a claims committee comprised solely of
physicians which meets bi-monthly with the vice
8
<PAGE> 9
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, 1998, the Company had 3,488 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.
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,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Reserves for losses and LAE at beginning of year .............. $454,971 $ 459,567 $ 466,187
Less reinsurance recoverables ................................. 21,531 19,266 19,560
--------- --------- ---------
Reserves for losses and LAE, net of related
reinsurance recoverable, at beginning of year ................. 433,440 440,301 446,627
--------- --------- ---------
Reserves from purchase of Fremont Indemnity Company ........... 36,972 -- --
Provision for losses and LAE for claims occurring in the
current year, net of reinsurance .............................. 197,870 176,586 168,545
Decrease in estimated losses and LAE for claims occurring in
prior years, net of reinsurance ............................... (65,662) (53,209) (59,748)
--------- --------- ---------
Incurred losses during the year, net of reinsurance ........... 132,208 123,377 108,797
--------- --------- ---------
Deduct losses and LAE payments for claims, net of reinsurance,
occurring during:
Current year ................................................ 14,408 11,814 13,274
Prior years ................................................. 135,480 118,424 101,849
--------- --------- ---------
149,888 130,238 115,123
--------- --------- ---------
Reserves for losses and LAE, net of related reinsurance
recoverable, at end of year ................................... 452,732 433,440 440,301
Reinsurance recoverable for losses and LAE, at end of year .... 24,899 21,531 19,266
--------- --------- ---------
Reserves for losses and LAE, gross of reinsurance recoverable,
at end of year ................................................ $ 477,631 $ 454,971 $ 459,567
========= ========= =========
</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 1988
at $150,000, the $50,000 redundancy (original estimate minus actual loss) would
be included in the cumulative redundancy in each of the years 1988 through 1998
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,
---------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995
------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loss and LAE
reserves............... 389,404 $412,679 $427,049 $439,908 $465,423 $472,129 $449,566 $446,627
Liability reestimated as of:
One year later......... 362,058 375,764 401,878 409,966 421,994 411,915 391,733 386,879
Two years later........ 337,901 348,781 368,124 364,105 368,521 363,562 337,441 337,760
Three years later ..... 315,718 320,319 324,370 316,220 325,073 315,712 304,063 264,813
Four years later....... 299,308 294,992 284,628 282,291 292,801 293,711 254,004
Five years later....... 284,972 266,649 264,582 261,344 274,304 262,879
Six years later........ 266,423 256,900 251,335 252,077 257,864
Seven years later ..... 262,642 247,678 245,745 243,216
Eight years later ..... 257,731 244,863 241,533
Nine years later....... 256,354 242,973
Ten years later........ 255,709
Cumulative
redundancy............. 133,695 169,706 185,516 196,692 207,559 209,250 195,562 181,814
Cumulative amount of
liability paid through:
One year later......... 93,607 85,771 103,983 101,001 105,678 121,106 109,481 101,844
Two years later........ 155,505 162,264 171,327 171,429 184,883 192,519 170,603 170,932
Three years later ..... 206,413 204,129 206,499 205,829 219,649 217,484 202,660 195,265
Four years later....... 232,777 221,479 221,654 221,884 232,379 231,794 213,431
Five years later....... 242,140 228,922 230,606 227,692 237,879 237,272
Six years later........ 244,587 234,202 232,410 231,277 240,363
Seven years later ..... 248,319 235,274 232,912 232,416
Eight years later ..... 248,993 235,362 233,263
Nine years later....... 249,122 235,621
Ten years later........ 249,213
Net reserves--
December 31............ $472,129 $449,566 $446,627
Reinsurance
recoverables........... 18,644 19,177 19,560
-------- -------- --------
Gross reserves........... $490,773 $468,743 $466,187
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Loss and LAE
reserves............... $440,301 $433,440 $452,732
Liability reestimated as of:
One year later......... 387,094 339,672
Two years later........ 301,794
Three years later .....
Four years later.......
Five years later.......
Six years later........
Seven years later .....
Eight years later .....
Nine years later.......
Ten years later........
Cumulative
redundancy............. 138,507 93,768
Cumulative amount of
liability paid through:
One year later......... 118,307 107,748
Two years later........ 181,116
Three years later .....
Four years later.......
Five years later.......
Six years later........
Seven years later .....
Eight years later .....
Nine years later.......
Ten years later........
Net reserves--
December 31............ $440,301 $433,440 $452,732
Reinsurance
recoverables........... 19,266 21,531 24,899
-------- -------- --------
Gross reserves........... $459,567 $454,971 $477,631
======== ======== ========
</TABLE>
The Company has historically experienced favorable loss and LAE reserve
development. The Company believes that the favorable loss and LAE reserve
development since 1988 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 1.5% 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.
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
11
<PAGE> 12
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 1998, the
Company ceded $8.2 million of its earned premiums to reinsurers.
The Company's reinsurance arrangements are generally placed through its
exclusive reinsurance broker, Guy Carpenter & Company, Inc. 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 1998 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, 1998. No other single reinsurer's percentage
participation in 1998 exceeded 3.1% of total reinsurance premiums.
<TABLE>
<CAPTION>
PREMIUMS CEDED PERCENTAGE OF TOTAL
FOR YEAR ENDED REINSURANCE
DECEMBER 31, 1998 RATING(1) PREMIUMS CEDED
----------------- --------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Lloyd's of London NR Syndicates . $5,165 NR 31.3
Hannover Ruckversicherungs ...... 4,535 A+ 27.5
American Re ..................... 2,836 A 17.2
GIO, Ltd. ....................... 625 A 5.3
CNA International Reinsurance Co. 611 A 5.1
</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.
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
12
<PAGE> 13
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 $100,000 in 1998. In 1998, 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 $57,000 for 1998.
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.
Effective October 1, 1997, the Company assumed 50% of a 50% quota share of
Odyssey Reinsurance Corporation's Regional Companies Program. Maximum 100%
limits vary from $500,000 on proportional programs up to $5,000,000 on any one
non-proportional program. Participation in this Treaty allows access to a wide
geographic distribution of small to medium sized companies writing personal and
commercial property and casualty business. This facility targets Mutual and
Stock Insurance Companies with a subject premium base of less than $100,000,000,
operating in no more than ten states. Premiums earned for 1998 were $742,952.
The Company has a small participation of the Catastrophe First Aggregate
Excess Reinsurance Contract for the California Earthquake Authority (CEA)
through a fronting relationship with X.L. Global Reinsurance Company. This
program is in excess of an aggregate incurred loss equal to CEA's claims-paying
capacity less a minimum capital requirement of $350,000,000. Premiums earned for
1998 were $512,007.
The Company participates as a co-reinsurer with Zurich Insurance Company,
Zurich, Switzerland on an adverse loss development contract protecting a
specific portfolio of non-U.S. medical malpractice business. Premiums earned for
1998 were $1,660,000.
The Company also wrote physician premium on a fronted basis in connection
with the Poe & Brown and Fremont arrangements. The Company also assumed premium
from CNA Insurance Company in connection with the Poe & Brown arrangement and
from Fremont in connection with the Fremont arrangement through 100% quota share
reinsurance agreements as an interim measure until
13
<PAGE> 14
such time as the Company obtained proper approvals to write the business
directly. In 1998 these assumed premiums were $6.0 million and $24.9 million for
the Poe & Brown and Fremont arrangements, respectively.
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.
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, 1998 DECEMBER 31, 1997
---------------------- -----------------------
COST OR COST OR
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturity securities:
U.S. Government and
Agencies ................................. $237,290 $252,800 $290,028 $298,073
State, municipalities and
political subdivisions ................... 348,161 355,402 327,273 335,156
Mortgage-backed securities,
U.S. Government . ........................ 68,542 68,938 68,161 68,290
Corporate ................................ 44,881 44,959 7,256 7,248
Other .................................... 97 97 93 93
-------- -------- -------- --------
Total fixed maturity securities ............ 698,971 722,196 692,811 708,860
Common stocks .................................. 31,493 37,015 17,052 23,523
-------- -------- -------- --------
Total .......................................... $730,464 $759,211 $709,863 $732,383
======== ======== ======== ========
</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 $37.0
million at December 31, 1998.
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, 1998:
<TABLE>
<CAPTION>
AMORTIZED FAIR PERCENTAGE OF
TYPE/RATING OF INVESTMENT(1) COST VALUE FAIR VALUE
- ---------------------------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
AAA (including U.S.
Government and Agencies) ... $442,461 $457,315 63.3%
AA ........................... 186,494 192,591 26.7
A ............................ 62,329 64,511 8.9
BBB .......................... 2,591 2,682 0.4
Non rated (2) ................ 5,097 5,097 0.7
-------- -------- -------
$698,972 $722,196 100.0%
======== ======== =======
</TABLE>
- ------------
14
<PAGE> 15
(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."
15
<PAGE> 16
The following table sets forth certain information concerning the maturities
of fixed maturity securities in the Company's investment portfolio as of
December 31, 1998:
<TABLE>
<CAPTION>
AMORTIZED FAIR PERCENTAGE OF
COST VALUE FAIR VALUE
--------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Years to maturity:
One or less ...................... $ 3,205 $ 3,216 0.5%
After one through five ........... 88,083 90,539 12.5
After five through ten ........... 226,817 240,097 33.3
After ten ........................ 312,324 319,406 44.2
Mortgage-backed securities ......... 68,542 68,938 9.5
-------- -------- -----
Totals ................... $698,971 $722,196 100.0%
======== ======== =====
</TABLE>
The average weighted maturity of the securities in the Company's fixed
maturity portfolio as of December 31, 1998 was 6.63 years. The average duration
of the Company's fixed maturity portfolio as of December 31, 1998 was 5.71
years.
The Company also maintains cash and highly liquid short-term investments,
which at December 31, 1998 totaled $46.7 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,
-------------------------------------------------------
1998 1997 1996
--------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
FIXED MATURITY SECURITIES:
Average invested assets
(includes short-term cash investments)(1) .... $739,734 $718,239 $650,090
Net investment income:
Before income taxes ........................... 39,654 39,926 40,594
After income taxes ............................ 30,733 30,731 29,706
Average annual return on investments:
Before income taxes ........................... 5.36% 5.56% 6.24%
After income taxes ............................ 4.15% 4.28% 4.57%
Net realized investment gains after
income tax .................................... $ 5,804 $ 1,909 $ 351
Net increase (decrease) in
unrealized gains on all fixed maturity
investments after income taxes . .............. 4,664 5,526 (10,720)
EQUITY SECURITIES:
Average invested assets(2) ...................... $ 30,269 $ 21,750 $ 37,695
Net investment income:
Before income taxes ........................... 713 840 994
After income taxes ........................... 564 777 854
Average annual return on investments:
Before income taxes ........................... 2.36% 3.86% 2.64%
After income taxes ............................ 1.86% 3.57% 2.27%
Net realized investment gains after
income tax .................................... $ 1,430 $ 2,382 $ 7,279
Net increase (decrease) in
unrealized gains on all equity
investments after income taxes .................. (617) 1,333 (4,742)
</TABLE>
- ------------
(1) Fixed maturity securities at cost.
(2) Equities at market.
16
<PAGE> 17
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 policyholder
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").
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Pursuant to the Holding Company Act, the California Department of Insurance
may examine the affairs of each company at any time. The Holding Company Act
requires disclosure of any material transactions by or among an insurance
company and its affiliates. Certain transactions and dividends defined to be of
an "extraordinary" type may not be effected if the California Department of
Insurance disapproves the transaction within 30 days after notice. Such
transactions include, but are not limited to, sales, purchases, exchanges, loans
and extensions of credit, and investments, in the net aggregate, involving more
than the lesser of 3% of the Company's admitted assets or 25% of surplus as to
policyholders, as of the preceding December 31. An extraordinary dividend is a
dividend which, together with other dividends or distributions made within the
preceding 12 months, exceeds the greater of 10% of the insurance company's
policyholders' surplus as of the preceding December 31 or the insurance
company's net income for the preceding calendar year. An insurance company is
also required to notify the California Department of Insurance of any dividend
after declaration, but prior to payment.
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 12
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 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, 1998,
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,
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<PAGE> 19
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 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 expects that concentrated
efforts will be undertaken by opponents of MICRA in 1999 to weaken its
provisions. 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.
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<PAGE> 20
EMPLOYEES
As of December 31, 1998, the Company employed 233 persons. None of the
employees is covered by a collective bargaining agreement. The Company believes
that its employee relations are good.
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EXECUTIVE OFFICERS
The Executive Officers of the Company and their ages as of March 17, 1999 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Donald J. Zuk 62 President, Chief Executive Officer
and Director
Patrick S. Grant 56 Senior Vice President, Marketing
Joseph P. Henkes 49 Secretary and Senior Vice President,
Operations and Actuarial Services
Patrick T. Lo 46 Senior 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 was named Senior Vice President in 1999 and has been 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".
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<PAGE> 22
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 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 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 financial condition and 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 instituted overall rate increases 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 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 partially offset the effect of its 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. The
Company ceased paying such premium credit dividends to its policyholders in
1998. The Company instituted no rate increases for 1998, which may have offset
the elimination of dividends to policyholders and somewhat improved its
competitive position. During 1999, the Company will institute an average rate
increase of 3.7% for California physician insureds. Therefore, the Company may
find it more difficult to compete with other insurance companies offering such
dividends.
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 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.
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<PAGE> 23
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 1998, 1997 and 1996. The Company reduced reserves for prior
years by $ 93.8 million, $53.2 million and $59.7 million in the years ending
December 31, 1998, 1997 and 1996, respectively. The redundancies recognized in
1998 were offset, in part, by a $28.1 million increase in the loss and LAE
reserves for the medical malpractice insurance business assumed from Fremont in
January 1998. The strengthening of the Fremont reserves was made in order to
bring those reserves in line with the Company's more conservative reserving
policy. 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. The Company
believes that some reduction in the amount of redundancies recently experienced
is reasonably likely. 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 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.
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<PAGE> 24
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 coverage will be
offered to solo physicians and medical groups in eight states, the largest being
Connecticut, Florida, Georgia and Louisiana. 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 acquired the medical malpractice insurance business of
Fremont effective January 1, 1998 through a 100% quota-share retroactive
reinsurance agreement. Simultaneously, a 100% quota-share prospective fronting
reinsurance agreement went into effect, making SCPIE Indemnity the reinsurer for
the Fremont policies until AHI obtains the proper approvals to write this
business directly. The Fremont policies are written through brokers in 10
states, with the vast majority in California and Arizona. During the fourth
quarter of 1998, AHI received regulatory approval to write this business
directly. Upon the policy's renewal date, each policy will be transferred from a
Fremont policy to an AHI policy. There is no assurance, however, that the
Company will successfully retain or expand this business or that it will
ultimately 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 in part on its relationship with eight county physician
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. Two other county associations recently switched their endorsements
to another insurance company. There can be no assurance that the Company will be
able to maintain its remaining 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."
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<PAGE> 25
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. 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."
In May 1997, the Board of Directors of the Company adopted a stockholder
rights plan (the "Rights Plan") to deter any attempted takeover of the Company
on terms not approved by the Board of Directors. Pursuant to the Rights
Agreement, dated May 13, 1997, with ChaseMellon Shareholder Services, LLC (the
"Rights Agreement"), the Company declared a dividend of one preferred share
purchase right (a "Right") for each share of Company common stock, $.0001 par
value (the "Common Shares"), of the Company outstanding at the close of business
on June 3, 1997 (the "Record Date"). One Right attaches to each share of common
stock, and, when exercisable, each Right will entitle the registered holder to
purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, $1.00 par value per share (the "Preferred
Shares"), at a price of $80.00 per one one-hundredth of a Preferred Share,
subject to adjustment (the "Purchase Price"). Because of the nature of the
Preferred Share's dividend, liquidation and voting rights, the value of one
one-hundredth of a Preferred Share purchasable upon exercise of each Right
should approximate the value of one Common Share.
The Rights Plan operates by diluting the ownership of any person who
acquires a number of Common Shares above the 20% threshold defined in the Rights
Agreement (an "Acquiring Person") or any person or group who commences or
announces an intention to commence a tender or exchange offer that would result
in beneficial ownership of 20% or more of the Common Shares. In the event that a
person becomes an Acquiring Person or if the Company were the surviving
corporation in a merger with an Acquiring Person or any affiliate or associate
of an Acquiring Person and the Common Shares were not changed or exchanged, each
holder of a Right, other than Rights that are or were acquired or beneficially
owned by the 20% stockholder (which Rights will thereafter be void), will
thereafter have the right to receive upon exercise that number of Common Shares
having a market value of two times the then current Purchase Price of the Right.
In the event that, after a person has become an Acquiring Person, the Company
were acquired in a merger or other business combination transaction or more than
50% of its assets or earning power were sold, proper provision shall be made so
that each holder of a Right shall thereafter have the right to receive, upon the
exercise thereof at the then current Purchase Price of the Right, that number of
shares of common stock of the acquiring company which at the time of such
transaction would have a market value of two times the then current Purchase
Price of the Right.
The Rights will expire on May 12, 2007, subject to the Company's right
to extend such date, unless earlier redeemed or exchanged by the Company or
terminated. The Rights may be redeemed in whole, but not in part, at a price of
$.01 per Right by the Board of Directors at any time prior to the time a person
becomes an Acquiring Person. The Rights may also be exchanged at any time after
a person becomes an Acquiring Person and prior to the acquisition of 50% or more
of the then-outstanding Common Shares (except for the Rights of the Acquiring
Person) for that number of Common Shares having an aggregate value equal to the
Spread (the excess of the value of the Common Shares issuable upon exercise of a
Right after a Person becomes an Acquiring Person over the Purchase Price) per
Right (subject to adjustment).
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<PAGE> 26
Any of the provisions of the Rights Agreement may be amended by the Board of
Directors of the Company prior to the Distribution Date as defined in the Rights
Agreement. After the Distribution Date, the Company and the Rights Agent may
amend or supplement the Rights Agreement without the approval of any holders of
Right Certificates under certain circumstances provided that the interests of
the holders of Right Certificates (other than an Acquiring Person or an
affiliate or associate of an Acquiring Person) are not adversely affected
thereby.
As the result of a recent Delaware court case, the Board of Directors
recently approved an amendment to the Rights Agreement which eliminated certain
"Continuing Director" provisions from the Rights Agreement to bring the Rights
Agreement squarely within the type of plan previously held to be valid by the
Delaware Supreme Court. The Company does not believe this amendment dilutes the
effectiveness of the Company's Rights Plan or reduces the ability of the
Company's directors, in response to any likely set of circumstances, to redeem
the Rights if required to properly exercise their fiduciary duties.
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."
YEAR 2000
The Company relies heavily on information technology ("IT") systems and
other systems and facilities such as telephones, building access control systems
and heating and ventilation equipment ("embedded systems") to conduct its
business. The Company also has business relationships with health care
providers, financial institutions, financial intermediaries, public utilities
and other critical vendors as well as regulators and customers who are
themselves reliant on IT and embedded systems to conduct their businesses.
Worldwide concerns have arisen over the ability of IT and embedded systems to
function properly on and after January 1, 2000 ("Year 2000") generally because
many computer programs are written using two digits rather than four digits to
define the applicable year, and thus may not properly recognize "00" as the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
operations. As set forth below in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000," the Company believes
it has taken adequate steps to prepare its IT, embedded systems, and external
relationships for the Year 2000. There can be no assurance, however, that the
Company or its external relationships have adequately prepared their computer
systems for the Year 2000.
ITEM 2. PROPERTIES
The Company is the owner of two office buildings, both located in Beverly
Hills, California, which were occupied by the Company's headquarters until March
1999. One building contains approximately 25,000 square feet of office space and
the other office building contains approximately 24,000 square feet. Both office
buildings are currently unencumbered. The Company intends to lease all of the
space in both buildings to third parties.
In July 1998, the Company entered into a lease covering approximately 95,000
square feet of office space for new Company headquarters. The lease is for a
term of 10 years and the Company moved its headquarters and principal operations
to this space in early March 1999. The Company
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expended $4.7 million for leasehold improvements and equipment in the fourth
quarter of 1998, and estimates that a total of $6.9 million will be incurred.
The Company also leases office space for claims offices in San Diego,
California; Fresno, California and Tampa, Florida, a sales office in Sacramento,
California and Phoenix, Arizona and marketing offices in Addison, Texas and Boca
Raton, Florida.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a California 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. In 1995, a jury made a damage award against
the Company of $4.2 million in compensatory damages, and punitive damages which
were reduced to $14.0 million by the trial judge. The Company appealed these
awards to the California district court of appeal. On May 8, 1998, the appellate
court reversed the judgment against the Company in its entirety. The bankruptcy
estate may attempt to obtain a new trial in the California Superior Court in
which the judgment was originally entered. The Company believes that the
bankruptcy estate is not entitled to any additional trial under applicable
California appellate court decisions and will aggressively oppose any such
attempt. The Company believes that the action is entirely without merit and will
continue to aggressively pursue its rights.
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 1998.
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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 31.63 27.31
Second quarter 38.38 30.25
Third quarter 35.38 28.50
Fourth quarter 32.25 27.94
1999
First quarter (January 1 - March 15) 30.13 28.13
----- -----
</TABLE>
On March 15, 1999, the closing price of the Company's common stock was
$29.56.
STOCKHOLDERS OF RECORD
The approximate number of stockholders of record of the Company's Common
Stock as of March 15, 1999 was 7,326.
DIVIDENDS
The SCPIE Holdings' Board of Directors (the "Board") declared cash dividends
per share on its common stock of $0.20 per share in 1997 and $0.24 per share in
1998. On February 24, 1999, the Board declared an $0.08 quarterly dividend
payable on March 31, 1999, to stockholders of record on March 15, 1999. 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 1999 up to approximately $41.1 million. See Note 6 of
the Notes to Consolidated Financial Statements and "Business - Regulation --
Regulation of Dividends from Insurance Subsidiaries."
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<PAGE> 29
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated 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, 1998 1997 1996 1995 1994
- ------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1):
Direct premiums written $125,213 $123,910 $125,635 $122,277 $120,024
======== ======== ======== ======== ========
Premiums earned $157,976 $133,866 $120,484 $116,354 $111,659
Net investment income 40,367 42,716 40,769 40,424 39,663
Realized investment gains
and other revenue 11,618 7,153 12,113 8,231 755
-------- -------- -------- -------- --------
Total revenues 209,961 183,735 173,366 165,009 152,077
-------- -------- -------- -------- --------
Losses and loss adjustment
expenses 132,208 123,377 108,797 118,023 108,720
Other operating expenses 28,211 17,987 14,276 12,561 11,844
-------- -------- -------- -------- --------
Total expenses 160,419 141,364 123,073 130,584 120,564
-------- -------- -------- -------- --------
Income before policyholder
dividends and
federal income taxes 49,542 42,371 50,293 34,425 31,513
Policyholder dividends (2) -- -- 8,436 -- --
Federal income taxes 12,566 10,195 11,665 10,056 9,212
-------- -------- -------- -------- --------
Net income $ 36,976 $ 32,176 $ 30,192 $ 24,369 $ 22,301
======== ======== ======== ======== ========
BALANCE SHEET DATA(1):
Total investments $793,616 $785,664 $717,910 $695,021 $636,909
Total assets 921,469 888,449 805,155 781,358 751,605
Total liabilities 534,951 527,334 516,588 507,539 542,069
Total stockholders' equity 386,518 361,115 288,567 273,819 209,536
ADDITIONAL DATA(1):
Basic earnings per share of common stock(3) $ 3.06 $ 2.66 $ 3.02 $ 2.44 $ 2.23
Diluted earnings per share of common
stock(3) 3.06 -- -- -- --
Dividends per share of common stock
0.24 0.20 -- -- --
Book value per share(3) 32.54 29.41 28.86 27.38 20.95
GAAP ratios:
Loss ratio 83.7% 92.2% 90.3% 101.4% 97.4%
Expense ratio 17.9 13.4 11.8 10.8 10.6
Combined ratio 101.6 105.6 102.1 112.2 108.0
Statutory capital and surplus $343,330 $321,289 $251,958 $235,352 $187,299
</TABLE>
(1) Financial data as of and for the years ended December 31, 1995 and 1994 are
derived from the combined financial statements of 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 years ended
December 31, 1998 and 1997 are derived from the consolidated 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, 1998 and 1997 is
computed using the weighted average number of common shares outstanding
during the year of 12,074,272 and 12,108,330, respectively. All other
periods give effect to the Reorganization completed on January 29, 1997,
including the allocation of 9,994,652 shares of common stock to members of
the Exchange in connection therewith. Diluted earnings per share of common
stock at December 31, 1998 is computed using the weighted average number of
common shares outstanding during the year of 12,089,013. The adoption of
Statement of Financial Accounting Standards No. 128 (Statement 128),
"Earnings per Share" had no impact on the calculation of earnings per share
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<PAGE> 30
amounts. For further discussion of earnings per share and Statement 128 see
the notes to consolidated financial statements beginning on page 54.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and the related notes thereto appearing elsewhere in this
Form 10-K. The consolidated financial statements for 1998 and 1997 include the
accounts and operations of SCPIE Holdings Inc. and its wholly-owned
subsidiaries. The financial statements for 1996 include the 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 Company ("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 in "Year 2000" disclosure, and in periodic filings with the
Securities and Exchange Commission ("SEC").
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 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 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
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<PAGE> 31
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.
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 currently offered to solo physicians and medical groups in five
states, the largest such states being Connecticut, Florida, Georgia and
Louisiana. In 1999, the Company expects to offer this coverage in three
additional states. 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 acquired the medical malpractice insurance business of
Fremont Indemnity Company ("Fremont") effective January 1, 1998 through a 100%
quota-share retroactive reinsurance agreement. Simultaneously, a 100%
quota-share prospective fronting reinsurance agreement went into effect, making
SCPIE Indemnity the reinsurer for the Fremont policies until AHI obtains the
proper approvals to write this business directly. The Fremont policies are
written through brokers in 10 states, with the vast majority in California and
Arizona. During the fourth quarter of 1998, AHI received regulatory approval to
write this business directly. Upon the policy's renewal date, each policy will
be transferred from a Fremont policy to an AHI policy. There is no assurance,
however, that the Company will successfully retain or expand this business or
that it will ultimately be profitable.
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 1998, however, 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. 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. The Company ceased
paying such premium credit dividends to its policyholders in 1998. The Company
instituted no rate increases for 1998, which may have offset the elimination of
dividends to policyholders and somewhat improved its competitive position.
During 1999, the Company will institute an average rate increase of 3.7% for
California physician insureds. Therefore, the Company may find it more difficult
to compete with other insurance companies offering such dividends.
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 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 changes
in the judicial process.
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<PAGE> 32
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 $93.8 million,
$53.2 million, and $59.7 million in the years ended December 31, 1998, 1997 and
1996, respectively. The redundancies recognized in 1998 were offset, in part, by
a $28.1 million increase in the loss and LAE reserves for the medical
malpractice insurance business assumed from Fremont in January 1998. The
strengthening of the Fremont reserves was made in order to bring those reserves
in line with the Company's more conservative reserving policy. 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 7.0% 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 physician 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, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997
PREMIUMS EARNED Premiums earned increased approximately $24.1 million, or 18%,
to $158.0 million in 1998 from $133.9 million in 1997. The increase was
principally due to a $30.0 million increase in physician and medical group
medical malpractice insurance premiums to approximately $143.2 million in 1998
from $113.2 million in 1997. This increase was a result of the Company's
acquisition of the medical malpractice book of business of Fremont on January 1,
1998 and premiums attributable to an agency relationship with Poe & Brown which
commenced on January 1, 1998. Hospital medical malpractice premiums were
approximately $8.8 million in 1998 compared to $14.6 million in 1997. This
decrease in 1998 hospital premiums is due principally to the loss of one large
integrated hospital account in Florida in late 1997. Assumed reinsurance
premiums, other than those received in the Fremont and Poe and Brown
arrangements, increased slightly in 1998.
NET INVESTMENT INCOME Net investment income decreased approximately $2.3
million, or 5.5%, to $40.4 million in 1998 from $42.7 million in 1997. Invested
assets increased $7.9 million to $793.6 million in 1998 from $785.7 million at
December 31, 1997. The average pretax yield on the investment portfolio
decreased to 5.2% in 1998 compared to 5.6% in 1997 due to a general decline in
interest rates and a greater proportion of lower-yielding, tax-exempt securities
in the portfolio.
REALIZED INVESTMENT GAINS AND OTHER REVENUE Realized investment gains were
approximately $11.1 million in 1998 compared to $6.6 million in 1997. In
December 1998 sales were made in the fixed-maturity portion of the investment
portfolio to reposition the portfolio by increasing the percentage of corporate
securities.
LOSSES AND LAE Losses and LAE increased $8.8 million, or 7.2%, to $132.2 million
in 1998 from $123.4 million in 1997. As a percentage of premiums earned, losses
and LAE decreased to 83.7% in 1998 from 92.2% for the same period in 1997. For
1998, the Company reduced loss and LAE reserves incurred in prior policy years
approximately $93.8 million as compared to a reserve reduction of $53.2 million
for 1997 for claims incurred in prior policy years. The redundancies recognized
in 1998 were offset, in part, by a $28.1 million increase in the loss and LAE
reserves for the medical malpractice insurance business assumed from Fremont in
January 1998. The strengthening of those reserves was made in order to bring
those reserves in line with the Company's more conservative reserving policy.
OTHER OPERATING EXPENSES Other operating expenses increased $10.2 million, or
56.8%, to $28.2 million in 1998 from $18.0 million in 1997. The ratio of other
operating expenses to premiums earned is referred to as the expense ratio, which
increased to 17.9%
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<PAGE> 33
in 1998 from 13.4% in 1997. This increase is due primarily to certain one-time
charges and the amortization of non-recurring costs related to the acquisition
of the Fremont business. Additionally, other operating expenses include higher
commission expenses associated with the greater percentage of business written
through brokers in 1998 and general personnel increases necessary to produce and
service the higher 1998 premium volume.
FEDERAL INCOME TAXES Federal income taxes increased $2.4 million, or 23.3%, to
$12.6 million in 1998 from $10.2 million in 1997. The effective tax rate
increased to 25.4% in 1998 from 24.1% in 1997, due primarily to higher realized
gains in 1998.
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
principally due to a $5.7 million increase in hospital medical malpractice
premiums and an increase of $9.1 million increase in assumed reinsurance
premiums. 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 in 1997, which includes $6.5 million of assumed
hospital premiums compared to $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 expense ratio was 13.4% in 1997 and
11.8% in 1996.
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.
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 the years 1980 through
33
<PAGE> 34
1997. 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 paid no
policyholder dividends in 1998, and has ceased paying such dividends to its
policyholders.
The Company 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 the Company was
$9.2 million in 1998 compared to $13.5 million in 1997. The cash provided by
operating activities in 1997 was before the payment of policyholder dividends.
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 $37.0 million at December 31,
1998. The Company plans to continue this focus on fixed-maturity securities for
the indefinite future.
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 $34.4
million, or 4.3% of invested assets, at December 31, 1998. The Company believes
that all of its short-term and fixed-maturity securities are readily marketable.
The Company has made limited investments in real estate, which have been used
almost entirely in the Company's operating activities, with the remainder leased
to third parties. In July 1998, the Company entered into a lease covering
approximately 95,000 square feet of office space for new Company headquarters.
The lease is for a term of 10 years and the Company moved its headquarters and
principal operations to this space in early March 1999. The Company intends to
lease its former headquarters to third parties. The Company expended $4.7
million for leasehold improvements and equipment in the fourth quarter of 1998,
and estimates a total of $6.9 million will be incurred.
SCPIE Holdings is an insurance holding company whose assets primarily consist
of all of the capital stock of its insurance company subsidiaries. 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 1999
without prior regulatory approval is approximately $41.1 million. Dividends of
$25 million were paid to SCPIE Holdings during 1998.
Common stock dividends paid to stockholders were $0.24 per share in 1998.
These dividends were 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 $75.0 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.
During May 1997, the Board of Directors authorized the repurchase of up to
1,000,000 shares of the Company's common stock in the open market. The
repurchases may be made from time to time and continue until May 1999. Since
1997, 413,300 shares were repurchased. Subsequent to December 31, 1998, an
additional 77,900 shares were repurchased. The Board of Directors may further
extend the program's expiration date.
34
<PAGE> 35
YEAR 2000
The Company relies heavily on information technology ("IT") systems and other
systems and facilities such as telephones, building access control systems and
heating and ventilation equipment ("embedded systems") to conduct its business.
The Company also has business relationships with health care providers,
financial institutions, financial intermediaries, public utilities and other
critical vendors as well as regulators and customers who are themselves reliant
on IT and embedded systems to conduct their businesses.
Worldwide concerns have arisen over the ability of IT and embedded systems
to function properly on and after January 1, 2000 ("Year 2000"). The Year 2000
concern is the result of many computer programs being written using two digits
rather than four digits to define the applicable year. Systems that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000, or as no date. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business operations.
State of Readiness
In 1995, the Company organized a multi-disciplinary Year 2000 Project Team.
The Year 2000 Project Team has developed and is currently executing a
comprehensive plan designed to make the Company's mission critical IT systems
and embedded systems Year 2000 ready. Outside consultants have reviewed the
Company's overall process, plan and progress to date. The Company's plan for IT
systems consists of four phases: (1) inventory - identifying all IT systems and
risk rating each according to its potential business impact; (2) assessment
identifying IT systems that use date functions and assessing them for Year 2000
functionality; (3) remediation - reprogramming, or replacing where necessary,
inventoried items to ensure they are Year 2000 ready; and (4) testing and
certification - testing the code modifications and new inventory with other
associated systems, including extensive date testing and performing quality
assurance testing to ensure successful operation in the post-1999 environment.
The Company completed the remediation of substantially all of its mission
critical IT systems by year-end 1998.
The Company believes that its Year 2000 project is on schedule.
External Relationships
The Company also faces the risk that one or more of its critical suppliers or
customers ("external relationships") will not be able to interact with the
Company due to the third party's inability to resolve its own Year 2000 issues,
including those associated with its own external relationships. The Company has
completed its inventory of external relationships and risk rated each external
relationship based upon the potential business impact, available alternatives
and cost of substitution. The Company is attempting to determine the overall
Year 2000 readiness of its external relationships. In the case of mission
critical suppliers such as banks, financial intermediaries (such as stock
exchanges), telecommunications providers and other utilities, IT vendors,
financial market data providers, major physician groups and major hospitals, the
Company is engaged in discussions with the third parties and is attempting to
obtain detailed information as to those parties' Year 2000 plans and state of
readiness. The Company, however, does not have sufficient information at the
current time to predict whether its external relationships will be Year 2000
ready.
Year 2000 Costs
Year 2000 costs incurred were $1,018,000 and $734,000 in 1998 and 1997,
respectively and are currently estimated to be $101,000 in 1999 for a total of
$1,853,000. A large majority of these costs are expected to be incremental
expenses that will not recur in the Year 2000 or thereafter. The Company
expenses these costs as incurred and funds these costs through operating cash
flows.
Risks and Contingency/Recovery Planning
If the Company's Year 2000 issues were unresolved, potential consequences
would include, among other possibilities, the inability to accurately and timely
process claims, update policyholders' accounts, process financial transactions,
bill policyholders, assess exposure to risks, determine liquidity requirements
or report accurate data to management, stockholders, policyholders, regulators
and others as well as business interruptions or shutdowns, financial losses,
reputational harm, increased scrutiny by regulators and litigation related to
Year 2000 issues. The Company is attempting to limit the potential impact of the
Year 2000 by monitoring the progress of its
35
<PAGE> 36
own Year 2000 project and those of its critical external relationships and by
developing contingency/recovery plans. The Company cannot guarantee that it will
be able to resolve all of its Year 2000 issues. Any critical unresolved Year
2000 issues at the Company or with its external relationships, however, could
have a material adverse effect on the Company's results of operations, liquidity
or financial condition.
The Company has begun to develop contingency/recovery plans aimed at ensuring
the continuity of critical business functions before and after December 31,
1999. As part of that process, the Company has begun to develop reasonably
likely failure scenarios for its critical IT systems and external relationships
and the embedded systems in its critical facilities. Once these scenarios are
identified, the Company will develop plans that are designed to reduce the
impact on the Company, and provide methods of returning to normal operations, if
one or more of those scenarios occur. The Company expects contingency/recovery
planning to be substantially complete by March 31, 1999.
Other Factors Affecting the Company's Businesses
Any critical unresolved Year 2000 issues at the Company or with its external
relationships could have a material adverse effect on the Company's results of
operations, liquidity or financial condition. In addition, the Company's
expectations about the future costs and timely and successful completion of its
Year 2000 program are subject to uncertainties that could cause actual results
to differ materially from what has been discussed above under "Year 2000."
Factors that could influence the amount of future costs and the completion dates
and effectiveness of remediation, testing and certification and contingency
planning efforts include the Company's success in identifying IT systems and
embedded systems that contain two-digit year codes, the nature and amount of
required reprogramming, testing and certification, the rate and magnitude of
related labor and consulting costs, the availability of qualified personnel and
the success of the Company's external relationships in addressing their own Year
2000 issues.
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 7a: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to various market risk exposures, including
interest rate risk and equity price risk.
The Company invests its assets primarily in fixed-maturity securities,
which at December 31, 1998 comprised 91% of total investments at market value.
U.S. government and tax-exempt bonds represent 84% of the fixed-maturity
investments, with the remainder consisting almost entirely of mortgage-backed
securities and corporate bonds. Equity securities, consisting primarily of
common stocks, account for 5% of total investment at market value. The remaining
4% of the investment portfolio consists of highly liquid short-term investments,
which are primarily overnight bank repurchase agreements and short-term money
market funds.
The value of the fixed-maturity portfolio is subject to interest rate
risk. As market interest rates decrease, the value of the portfolio goes up with
the opposite holding true in rising interest rate environments. A common measure
of the interest sensitivity of fixed-maturity assets is modified duration, a
calculation that takes maturity, coupon rate, yield and call terms to calculate
an average age of the expected cash flows. The longer the duration, the more
sensitive the asset is to market interest rate fluctuations.
The value of the common stock equity investments is dependent upon
general conditions in the securities markets and the business and financial
performance of the individual companies in the portfolio. Values are typically
based on future economic prospects as perceived by investors in the equity
markets.
36
<PAGE> 37
The first two columns of the following table show the financial
statement carrying values and related estimated fair values of certain of the
Company's financial instruments as of December 31, 1998. The third column shows
the effect on current estimated fair values assuming a 100-- basis point
increase in market interest rates and a 10% decline in equity price (sensitivity
analysis).
<TABLE>
<CAPTION>
Estimated Fair Vale
Estimated Fair Vale At Adjusted
(In thousands) at Current Market Market Rates/Prices
Carrying Value Rates/Prices as Indicated Below
-------------------------- ----------------- --------------- -----------------
<S> <C> <C> <C>
Interest rate risk*
Fixed-maturity securities
available-for-sale $ 722,196 $ 722,196 $ 662,312
Equity price risk**
Common stocks $ 37,015 $ 37,015 $ 33,314
</TABLE>
* Adjusted interest rates assume a 100-basis point increase in
market rates at December 31, 1998
** Adjusted equity prices assume a 10 percent decline in values at
December 31, 1998
For all its financial assets and liabilities, the Company seeks to maintain
reasonable average durations, consistent with the maximization of income without
sacrificing investment quality and providing for liquidity and diversification.
The estimated fair values at current market rates for financial instruments
subject to interest rate risk in the table above are the same as those disclosed
in Note 2 (Investments) to the consolidated financial statements. The estimated
fair values at the adjusted market rates (assuming a 100-basis point increase
in market interest rates) are calculated using discounted cash flow analysis and
duration modeling where appropriate. The estimated values do not consider the
effect that changing interest rates could have on prepayment activity.
This sensitivity analysis provides only a limited, point-in-time view of the
market risk sensitivity of certain of the Company's financial instruments. The
actual impact of market interest rate and price changes on the financial
instruments may differ significantly from those shown in the sensitivity
analysis. The sensitivity analysis is further limited as it does not consider
any actions the Company could take in response to actual and/or anticipated
changes in interest rates and equity prices.
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 48 hereof.
37
<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
38
<PAGE> 39
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 13, 1999 (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."
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 and Certain Beneficial Owners."
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."
39
<PAGE> 40
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 48
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.**
3.3 First Amendment to the Bylaws
10.1 Amended and Restated Employment Agreement dated
January 4, 1999, 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.**
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.**
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
NUMBER DOCUMENT
------ --------
<S> <C>
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.**
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
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
NUMBER DOCUMENT
------ --------
<S> <C>
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 First Excess of Loss Reinsurance Treaty No.
01-97-1134 with various subscribing
reinsurers.
10.30 Second Excess of Loss Reinsurance Treaty No.
01-97-1135 with various subscribing
reinsurers.
10.31 First Excess of Loss Treaty No. 01-98-0020 with
various subscribing reinsurers.
10.32 Second Excess of Loss Treaty No. 01-98-0021 with
various subscribing reinsurers
10.33 Third Excess of Loss Treaty No. 01-98-0022 with
various subscribing reinsurers.
10.34 Fourth Excess of Loss Treaty No. 01-98-0599 with
various subscribing reinsurers.
10.35 Quota Share Reinsurance Treaty No. 1-98-0922.
10.36 Cover Note for Allocated Loss Adjustment Expense
Excess of Loss Treaty No. 01-99-1154 with
various subscribing reinsurers.
10.37 Cover Note for First Excess of Loss Reinsurance
Treaty No. 01-98-1134 with various subscribing
reinsurers.
10.38 Cover Note for Second Excess of Loss Reinsurance
Treaty No. 01-98-1135 with various subscribing
reinsurers.
10.39 Cover Note for First Excess of Loss Reinsurance
Treaty No. 01-99-0020 with various subscribing
reinsurers.
10.40 Cover Note for Second Excess of Loss Reinsurance
Treaty No. 01-99-0021 with various subscribing
10.44 reinsurers.
10.41 Cover Note for Third Excess of Loss Reinsurance
Treaty No. 01-99-0022 with various subscribing
reinsurers.
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
NUMBER DOCUMENT
------ --------
<S> <C>
10.42 Cover Note for Fourth Excess of Loss Reinsurance
Treaty No. 01-99-0599 with various subscribing
reinsurers
10.43 Cover Note for Quota Share Reinsurance Treaty
No. 1-99-0922.
10.44 SCPIE Management Company Retirement Income Plan,
as amended and restated, effective January 1,
1989.**
10.45 Supplemental Employee Retirement Plan for
Selected Employees of SCPIE Management Company
dated January 1, 1995.**
10.46 Retirement Plan for Outside Governors and
Affiliated Directors, effective January 1, 1994
as amended.**
10.47 The SMC Cash Accumulation Plan, dated July 1,
1991, as amended.**
10.48 Inter-Company Pooling Agreement effective
January 1, 1997.**
10.49 SCPIE Holdings Inc. and Subsidiaries
Consolidated Federal Income Tax Liability
Allocation Agreement effective January 1, 1996.
**
10.50 The 1997 Equity Participation Plan of SCPIE
Holdings Inc.**
10.51 Form of Indemnification Agreement.**
10.52 Lease between Wh/WSA Realty, L.L.C., a Delaware
limited liability company and SCPIE Holdings
Inc., a Delaware corporation dated July 31, 1998.
10.53 Quota Share Reinsurance Agreement between
Fremont Indemnity Company and SCPIE Indemnity
Company, effective January 1, 1998.
10.54 Assumption Reinsurance Agreement between Fremont
Indemnity Company and American Healthcare Indemnity
Company, effective January 1, 1998.
11.1 Statement re: computation of per share earnings.**
21.1 Subsidiaries of the registrant.**
27.1 Financial Data Schedule.
</TABLE>
- ------------
43
<PAGE> 44
(**) 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 or as Exhibits to the Company's Annual Report on Form 10-K, dated
March 31, 1998, and incorporated herein by this reference.
(b) Reports on Form 8-K:
None.
44
<PAGE> 45
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 29, 1999
45
<PAGE> 46
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on 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
Donald J. Zuk and Director
(Principal Executive
Officer) March 29, 1999
/s/ PATRICK T. LO Vice President
- ---------------------------- Chief Financial Officer
Patrick T. Lo and Chief Accounting
Officer
(Principal Financial
Officer and
Principal Accounting
Officer) March 29, 1999
/s/ MITCHELL S. KARLAN, M.D.
- ---------------------------- Chairman of the Board
Mitchell S. Karlan, M.D. and Director March 29, 1999
/s/ JACK E. MCCLEARY, M.D.
- ---------------------------- Director and Treasurer March 29, 1999
Jack E. McCleary, M.D.
</TABLE>
46
<PAGE> 47
<TABLE>
<S> <C> <C>
/s/ ALLAN K. BRINEY, M.D. Director March 29, 1999
- ----------------------------
Allan K. Briney, M.D.
/s/ WILLIS T. KING, JR. Director March 29, 1999
- ----------------------------
Willis T. King, Jr.
/s/ CHARLES B. MCELWEE, M.D. Director March 29, 1999
- ----------------------------
Charles B. McElwee, M.D.
/s/ WENDELL L. MOSELEY, M.D. Director March 29, 1999
- ----------------------------
Wendell L. Moseley, M.D.
/s/ DONALD P. NEWELL Director March 29, 1999
- ----------------------------
Donald P. Newell
/s/ HARRIET M. OPFELL, M.D. Director March 29, 1999
- ----------------------------
Harriet M. Opfell, M.D.
/s/ WILLIAM A. RENERT, M.D. Director March 29, 1999
- ----------------------------
William A. Renert, M.D.
/s/ HENRY L. STOUTZ, M.D. Director March 29, 1999
- ----------------------------
Henry L. Stoutz, M.D.
/s/ REINHOLD A. ULRICH, M.D. Director March 29, 1999
- ----------------------------
Reinhold A. Ulrich, M.D.
</TABLE>
47
<PAGE> 48
SCPIE HOLDINGS INC.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
ANNUAL REPORT ON FORM 10-K
---------------
<TABLE>
<CAPTION>
INDEX
PAGES
-----
<S> <C>
Report of Independent Auditors .......................................... 49
Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997 ........... 50
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 ..................................... 51
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996.......................... 52
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996...................................... 53
Notes to Consolidated Financial Statements.............................. 54
Schedule II - Condensed Financial Information of Registrant .............. 70
</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.
48
<PAGE> 49
Report of Independent Auditors
Board of Directors and Shareholders
SCPIE Holdings Inc.
We have audited the accompanying consolidated balance sheets of SCPIE Holdings
Inc. and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, 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.
/s/ Ernst & Young LLP
Los Angeles, California
February 22, 1999
49
<PAGE> 50
SCPIE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ------------ -------- ------
<S> <C> <C>
ASSETS
Securities available for sale (Note 2):
Fixed-maturity investments, at fair value
(amortized cost: 1998 - $698,971; 1997 -
$ 692,811) $ 722,196 $ 708,860
Equity investments, at fair value
(cost: 1998 - $31,493; 1997 - $17,052) 37,015 23,523
--------- ---------
Total securities available for sale 759,211 732,383
Short-term investments 34,405 53,281
--------- ---------
Total investments 793,616 785,664
Cash 12,305 13,252
Accrued investment income 11,440 12,202
Reinsurance recoverable (Note 4) 24,899 21,531
Deferred federal income taxes (Note 5) 12,163 16,158
Costs in excess of net assets acquired 7,811 4,641
Property and equipment, net 19,706 19,534
Other assets 39,529 15,467
--------- ---------
Total assets $ 921,469 $ 888,449
========= =========
LIABILITIES
Reserves:
Losses and loss adjustment expenses (Note 3) $477,631 $ 454,971
Unearned premiums 24,591 22,072
--------- ---------
Total reserves 502,222 477,043
Other liabilities 32,729 50,291
--------- ---------
Total liabilities 534,951 527,334
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY
Preferred stock - par value $1.00; 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,
1998 - 11,878,791 shares outstanding
1997 - 12,276,691 shares outstanding 1 1
Additional paid-in capital 36,386 36,386
Retained earnings 344,587 310,506
Treasury stock, at cost
(1998 - 413,300 shares; 1997 - 15,400 shares) (13,141) (416)
Accumulated other comprehensive income 18,685 14,638
--------- ---------
Total stockholders' equity 386,518 361,115
--------- ---------
Total liabilities and stockholders' equity $ 921,469 $ 888,449
========= =========
</TABLE>
See accompanying notes.
50
<PAGE> 51
SCPIE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------- -------- -------- ------
REVENUES
<S> <C> <C> <C>
Premiums earned (Note 4) $157,976 $133,866 $120,484
Net investment income (Note 2) 40,367 42,716 40,769
Realized investment gains (Note 2) 11,129 6,602 11,738
Other revenue 489 551 375
-------- -------- --------
Total revenues 209,961 183,735 173,366
EXPENSES
Losses and loss adjustment expenses (Note 3) 132,208 123,377 108,797
Other operating expenses 28,211 17,987 14,276
-------- -------- --------
Total expenses 160,419 141,364 123,073
-------- -------- --------
Income before policyholder dividends
and federal income taxes 49,542 42,371 50,293
Policyholder dividends -- -- 8,436
Federal income taxes (Note 5) 12,566 10,195 11,665
-------- -------- --------
Net income $ 36,976 $ 32,176 $ 30,192
======== ======== ========
Basic earnings per share of common stock (Note 10) $ 3.06 $ 2.66 $ 3.02
Diluted earnings per share of common stock (Note 10) $ 3.06 N/A N/A
</TABLE>
See accompanying notes.
51
<PAGE> 52
SCPIE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ -- $ -- $ -- $ 250,596
Net income -- -- -- 30,192
Comprehensive income for
unrealized losses on securities
sold, net of reclassification
adjustments of $13,743 for
gains included in net income -- -- -- --
Comprehensive Income
--------- --------- --------- ---------
Balance at December 31, 1996 -- -- -- 280,788
Net income -- -- -- 32,176
Comprehensive income for
unrealized gains on securities
sold, net of reclassification
adjustments of $4,534 for
gains included in net income -- -- -- --
--------- --------- --------- ---------
Comprehensive Income
Issuance of common stock -- 1 36,386 --
Purchase of treasury stock -- -- -- --
Cash dividends -- -- -- (2,458)
--------- --------- --------- ---------
Balance at December 31, 1997 -- 1 36,386 310,506
Net income -- -- -- 36,976
Comprehensive income for
unrealized gains on securities
sold, net of reclassification
adjustments of $1,863 for
gains included in net income -- -- -- --
--------- --------- --------- ---------
Comprehensive Income
Purchase of treasury stock -- -- -- --
Cash dividends -- -- -- (2,895)
--------- --------- --------- ---------
Balance at December 31, 1998 $ $ 1 $ 36,386 $ 344,587
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED OTHER TOTAL
TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK INCOME EQUITY
--------- --------- ---------
<S> < <C> <C> <C>
Balance at January 1, 1996 $ -- $ 23,223 $ 273,819
Net income -- -- 30,192
Comprehensive income for
unrealized losses on securities
sold, net of reclassification
adjustments of $13,743 for
gains included in net income -- (15,444) (15,444)
---------
Comprehensive Income 14,748
--------- --------- ---------
Balance at December 31, 1996 -- 7,779 288,567
Net income -- -- 32,176
Comprehensive income for
unrealized gains on securities
sold, net of reclassification
adjustments of $4,534 for
gains included in net income -- 6,859 6,859
--------- --------- ---------
Comprehensive Income 39,035
---------
Issuance of common stock -- -- 36,387
Purchase of treasury stock (416) -- (416)
Cash dividends -- -- (2,458)
--------- --------- ---------
Balance at December 31, 1997 (416) 14,638 361,115
Net income -- -- 36,976
Comprehensive income for
unrealized gains on securities
sold, net of reclassification
adjustments of $1,863 for
gains included in net income -- 4,047 4,047
--------- --------- ---------
Comprehensive Income 41,023
---------
Purchase of treasury stock (12,725) -- (12,725)
Cash dividends -- -- (2,895)
--------- --------- ---------
Balance at December 31, 1998 $ (13,141) $ 18,685 $ 386,518
========= ========= =========
</TABLE>
See accompanying notes.
52
<PAGE> 53
SCPIE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 36,976 $ 32,176 $ 30,192
Adjustments to reconcile net income to net cash provided by operating
activities:
Unpaid losses and loss adjustment expenses,
and reinsurance recoverables 19,292 (12,950) (6,301)
Accrued investment income 762 (1,004) (1,363)
Provision for deferred federal income taxes 1,815 370 80
Unearned premiums 2,519 (3,225) 5,381
Policyholders' dividends payable -- (7,723) (923)
Realized investment gains (11,129) (6,602) (11,738)
Provisions for amortization and depreciation 5,061 4,938 2,837
Changes in other liabilities (18,905) 579 11,212
Changes in other assets (27,232) (755) 9,468
--------- --------- ---------
Net cash provided by operating activities 9,159 5,804 38,845
INVESTING ACTIVITIES
Purchases - fixed maturities (300,916) (410,381) (480,401)
Sales - fixed maturities 263,293 335,210 375,877
Maturities - fixed maturities 36,501 38,073 23,571
Purchases - equities (19,219) (7,692) (5,445)
Sales - equities 6,979 10,312 50,495
Change in short-term investments, net 18,876 4,201 (1,783)
--------- --------- ---------
Net cash provided by (used in) investing activities 5,514 (30,277) (37,686)
FINANCING ACTIVITIES
Issuance of common stock, net of expenses -- 36,387 --
Purchase of treasury stock (12,725) (416) --
Cash dividends (2,895) (2,458) --
--------- --------- ---------
Net cash provided by (used in) financing activities (15,620) 33,513 --
--------- --------- ---------
Increase (decrease) in cash (947) 9,040 1,159
Cash at beginning of year 13,252 4,212 3,053
--------- --------- ---------
Cash at end of year $ 12,305 $ 13,252 $ 4,212
========= ========= =========
</TABLE>
See accompanying notes.
53
<PAGE> 54
SCPIE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying 1998 and 1997 consolidated 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 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 the Company'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 exchange for their membership interests
in the Exchange.
Concurrent with the Reorganization, SCPIE Holdings completed an initial
public offering, which generated net proceeds to SCPIE Holdings of approximately
$36.4 million.
In March 1996, SCPIE Holdings acquired the outstanding stock of AHI and
AHSIC, both inactive property/casualty insurance companies for $12.5 million.
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 is
being 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 operations, after
intercompany eliminations, of the Exchange and its wholly-owned subsidiaries,
principally SCPIE Holdings, SCPIE Indemnity, AHI, AHSIC, and SMC.
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.
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:
54
<PAGE> 55
INVESTMENTS
The Company has designated its entire investment portfolio as
available-for-sale. The Company has no securities classified as "trading" or
"held-to-maturity." Available-for-sale securities are stated at fair value with
the unrealized gains and losses, net of tax, reported in other comprehensive
income. Realized investment gains and losses are included as a component of
revenues based on specific identification of the investment sold. Interest and
dividends on securities classified as available-for-sale are included in
investment 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.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs are capitalized and amortized as premiums are
earned over the terms of the related policies.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -------------- -------- ------- --------
<S> <C> <C> <C>
Balance at beginning of year $ 520 $ 591 $ 468
Costs deferred 12,871 2,944 2,920
Costs amortized 5,340 3,015 2,797
-------- ------- --------
Balance at end of year $ 8,051 $ 520 $ 591
======== ======= ========
</TABLE>
As the Company has expanded its operations in other states during 1998
through brokerage relationships, the corresponding commissions and fronting fee
arrangements have resulted in an overall increase in acquisition costs.
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 method 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
Prospective 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.
55
<PAGE> 56
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 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 buildings, are
recorded at cost and depreciated principally under the straight-line method over
the useful life of the assets.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
Financial Accounting Standards Board (FASB) Statement No. 109, Accounting for
Income Taxes.
CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments,
fixed maturities and reinsurance recoverables. 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
geographic areas.
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, 1998, approximately 64% 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 28% with Hannover
Ruickversicherungs, 17% with American Re and between 2% to 5% primarily among
five other reinsurers. Of the remaining reinsurance companies, Lloyd's of London
syndicates' participation is 31%.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
and non-employee directors with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) and related Interpretations because the Company
believes the alternative fair value accounting provided for under FASB Statement
No. 123, Accounting for Stock-Based Compensation, requires the use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the dates of
grant, no compensation expense is recognized.
EARNING PER SHARE
Basic and diluted earnings per share are calculated in accordance with FASB
Statement No. 128, Earnings Per Share. All earnings per-share amounts for all
periods have been presented and where appropriate restated to conform to the
requirements of FASB Statement No. 128.
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.
56
<PAGE> 57
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
As of January 1, 1998, the Company adopted FASB No. 130, Reporting
Comprehensive Income (FASB 130). FASB 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption had 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 prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income.
RECLASSIFICATIONS
The accompanying 1997 and 1996 financial statements have been reclassified to
conform with the 1998 presentation.
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, 1998
Fixed-maturity securities:
Bonds:
U.S. Government and Agencies $ 237,290 $ 15,874 $ 364 $ 252,800
State, municipalities and
political subdivisions 348,161 8,080 839 355,402
Mortgage-backed securities,
U.S. Government 68,542 602 206 68,938
Corporate 44,881 254 176 44,959
Other 97 -- -- 97
------------ ----------- --------- -----------
Total fixed-maturity securities 698,971 24,810 1,585 722,196
Common stocks 31,493 6,930 1,408 37,015
------------ ----------- --------- -----------
Total $ 730,464 $ 31,740 $ 2,993 $ 759,211
============ =========== ========= ===========
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
============ =========== ========= ===========
</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, 1998, are summarized by stated
maturities as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
(IN THOUSANDS) COST VALUE
- ------------- -------- --------
<S> <C> <C>
Years to maturity:
One or less $ 3,205 $ 3,216
After one through five 88,083 90,539
After five through ten 226,817 240,097
After ten 312,324 319,406
Mortgage-backed securities 68,542 68,938
-------- --------
Totals $698,971 $722,196
======== ========
</TABLE>
57
<PAGE> 58
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.
58
<PAGE> 59
Major categories of the Company's investment income are summarized as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------- ------- ------- ------
<S> <C> <C> <C>
Fixed-maturity investments $39,670 $39,926 $40,594
Equity investments 812 840 994
Other 2,396 4,329 1,213
------- ------- -------
Total investment income 42,878 45,095 42,801
Investment expenses 2,511 2,379 2,032
------- ------- -------
Net investment income $40,367 $42,716 $40,769
======= ======= =======
</TABLE>
Realized gains and losses from sales of investments are summarized as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------ ------- ------- -----
<S> <C> <C> <C>
Fixed-maturity investments:
Gross realized gains $ 9,060 $ 4,959 $6,419
Gross realized losses 131 2,022 5,880
------- ------- ------
Net realized gains on fixed-maturity
investments 8,929 2,937 539
Equity investments:
Gross realized gains 2,506 3,854 13,028
Gross realized losses 306 189 1,829
------- ------- ------
Net realized gains on equity investments 2,200 3,665 11,199
------- ------- ------
Total net realized gains $11,129 $ 6,602 $11,738
======= ======= =======
</TABLE>
The change in the Company's unrealized appreciation (depreciation) on
fixed-maturity securities was $7.2 million, $8.5 million and ($16.5 million) for
the years ended December 31, 1998, 1997 and 1996, respectively; the
corresponding amounts for equity securities were ($1.0 million), $2.0 million
and ($7.3 million).
At December 31, 1998, the Company's investments in fixed-maturity securities
with a carrying amount of $50.5 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, 1998.
59
<PAGE> 60
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 1998, 1997 and 1996.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -------------- --------- --------- ---------
<S> <C> <C> <C>
Reserves for losses and LAE, net of related
reinsurance recoverable, at beginning of year $ 433,440 $ 440,301 $ 446,627
Reserves assumed under the retroactive reinsurance agreement
(Note 4) 36,972 -- --
Provision for losses and LAE for claims occurring
in the current year, net of reinsurance 197,870 176,586 168,545
Decrease in estimated losses and LAE for claims
occurring in prior years, net of reinsurance (65,662) (53,209) (59,748)
--------- --------- ---------
Incurred losses during the year, net of reinsurance 132,208 123,377 108,797
Deduct losses and LAE payments for claims,
net of reinsurance, occurring during:
Current year 14,408 11,814 13,274
Prior years 135,480 118,424 101,849
--------- --------- ---------
149,888 130,238 115,123
Reserves for losses and LAE, net of related
reinsurance recoverable, at end of year 452,732 433,440 440,301
Reinsurance recoverable for losses and LAE,
at end of year 24,899 21,531 19,266
--------- --------- ---------
Reserves for losses and LAE, gross of
reinsurance recoverable, at end of year $ 477,631 $ 454,971 $ 459,567
========= ========= =========
</TABLE>
The Company's reserves for unpaid losses and LAE, net of related reinsurance
recoverable, at December 31, 1997, 1996 and 1995, were decreased in the
following year by $93.8 million, $53.2 million, and $59.7 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 redundancies
recognized in 1998 were offset, in part, by a $28.1 million increase in the loss
and LAE reserves for the medical malpractice insurance business assumed from
Fremont in January 1998. The strengthening of the Fremont book of business was
made in order to bring those reserves in line with the Company's more
conservative reserving policy.
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.
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 Company generally does not require collateral
from its reinsurers.
The effect of reinsurance on premiums written and earned are as follows:
60
<PAGE> 61
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
--------------------- ---------------------- --------------------
YEAR ENDED DECEMBER 31, WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
----------------------- ------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Direct $125,213 $124,077 $123,910 $125,289 $125,635 $124,281
Assumed 39,297 42,080 11,673 13,603 8,922 4,497
Ceded 8,187 8,181 4,941 5,026 8,239 8,294
-------- -------- -------- ------- -------- --------
Net premiums $156,323 $157,976 $130,642 $133,866 $126,318 $120,484
======== ======== ======== ======= ======== ========
</TABLE>
Reinsurance ceded reduced losses and loss adjustment expenses incurred by
$2.6 million, $5.4 million and $0.9 million in 1998, 1997 and 1996,
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 90% of all losses up to $50.0 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.
The Company acquired the medical malpractice insurance business of Fremont
effective January 1, 1998 for $14.0 million. As part of this transaction, the
Company assumed $42.0 million in loss and LAE reserves outstanding, and other
net liabilities through a 100% quota-share retroactive reinsurance agreement and
received $28.0 million in investments, which has been reflected in short-term
investments and other liabilities, respectively, at December 31, 1997. The
difference between the loss and LAE reserves assumed and their estimated
discounted basis ($10.0 million) was charged to operations in 1998 and the
balance of the purchase price is reflected as goodwill in the accompanying
consolidated balance sheet and is being amortized over a period of 10 years. The
Company concurrently entered into a 100% quota-share prospective fronting
agreement, making SCPIE Indemnity the reinsurer for the Fremont policies until
AHI obtains the necessary licenses to write them directly. The Fremont policies
are written in 10 states, with the vast majority in California and Arizona.
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, 1998, the amounts recorded in the
financial statements related to this agreement are not material.
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, 1998 1997 1996
- ----------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Current $10,751 $ 9,825 $11,585
Deferred 1,815 370 80
------- ------- -------
Total $12,566 $10,195 $11,665
======= ======= =======
</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, 1998 1997 1996
- ------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Federal income tax at 35% $ 17,339 $ 14,830 $ 14,650
Increase (decrease) in taxes resulting from:
Tax-exempt interest (4,964) (4,775) (3,124)
Dividends received deduction (158) (136) (139)
Goodwill 210 220 148
Other 139 56 130
-------- -------- --------
Total federal income tax expense $ 12,566 $ 10,195 $ 11,665
======== ======== ========
</TABLE>
61
<PAGE> 62
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) DECEMBER 31, 1998 1997
- ----------------------------------- ------- ------
<S> <C> <C>
Deferred tax assets:
Discounting of loss reserves $23,107 $22,122
Unearned premium 1,721 1,545
Other 214 557
------- -------
Total deferred tax assets 25,042 24,224
Deferred tax liabilities:
Deferred policy acquisition costs 2,818 182
Unrealized investment gains 10,061 7,882
Other -- 2
------- -------
Total deferred tax liabilities 12,879 8,066
Net deferred tax assets $12,163 $16,158
======= =======
</TABLE>
Federal income taxes paid during 1998, 1997 and 1996 were $8.7 million, $11.0
million and $14.8 million, respectively.
The Internal Revenue Service (IRS) has proposed adjustments to increase
the Company's tax liability for 1993 through 1995 as a result of its
examinations. The Company's management disagrees with the adjustments proposed
by the IRS and has decided to contest the deficiencies proposed by the IRS for
these years. The 1993 through 1995 taxable years have been assigned to the IRS
Appeals Office.
The Company's management will take all necessary steps to contest the
IRS' position. The Company's management believes that resolution of this matter
will not have a material adverse effect on the Company's financial position or
results of operations. However, the ultimate outcome cannot be predicted at this
time.
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 are interspersed throughout the state insurance law and regulations,
the National Association of Insurance Commissioner's (NAIC) Accounting Practices
and Procedures Manual and a variety of other NAIC publications. "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.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that the Company's insurance subsidiaries use to prepare their
statutory-basis financial statements. Codification will require adoption by the
various states before it becomes the prescribed statutory basis of accounting
for insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for each of the Company's insurance subsidiaries,
the respective state of domicile must adopt Codification as the prescribed basis
of accounting on which domestic insurers must report their statutory-basis
results to the Insurance Departments. 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) 1998 1997 1996
- -------------- ---- ---- ----
<S> <C> <C> <C>
Statutory net income for the year $ 35,936 $ 32,239 $ 32,703
Statutory capital and surplus at year end $343,330 $321,289 $254,679
</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
62
<PAGE> 63
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 1998, 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 1999, dividends of $41.1 million may be distributed from SCPIE
Indemnity to SCPIE Holdings without prior approval of the California Insurance
Commissioner.
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 $661,000,
$479,000 and $418,000 for the years ended December 31, 1998, 1997 and 1996,
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 and a non-qualified
supplemental plan of which the net pension expense consists of the following
components:
<TABLE>
<CAPTION>
QUALIFIED PLAN SUPPLEMENTAL PLAN
--------------------------- ----------------------------
(IN THOUSANDS) YEAR ENDED DECEMBER 31, 1998 1997 1996 1998 1997 1996
-------------------------------------- -------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 344 $ 323 $ 291 $ 184 $ 139 $ 115
Interest cost 195 161 123 212 164 143
Actual return on plan assets (220) (170) (120) -- -- --
Amortization of:
Transition obligation (asset) (4) (4) (4) 7 7 7
Prior service cost (1) (1) (1) 84 84 84
Actuarial loss -- -- -- 26 -- --
----- ----- ----- ----- ----- -----
Net pension expense $ 314 $ 309 $ 289 $ 513 $ 394 $ 349
===== ===== ===== ===== ===== =====
</TABLE>
The following table sets forth the funding status of the plan:
<TABLE>
<CAPTION>
QUALIFIED PLAN SUPPLEMENTAL PLAN
--------------------- --------------------
(IN THOUSANDS) DECEMBER 31, 1998 1997 1998 1997
- ----------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Net benefit obligation at beginning of year 2,501 1,764 2,724 2,079
Service cost 344 323 184 139
Interest cost 195 161 212 164
Actuarial loss 182 275 187 342
Gross benefits paid (8) (22) -- --
------- ------- ------- -------
Net benefit obligation at end of year 3,214 2,501 3,307 2,724
------- ------- ------- -------
Change in Plan Assets
Fair value of plan assets at beginning of year 2,758 1,966 -- --
Actual return on plan assets 452 527 -- --
Employer contributions -- 287 -- --
Gross benefits paid (8) (22) -- --
------- ------- ------- -------
Fair value of plan assets at end of year 3,202 2,758 -- --
------- ------- ------- -------
Funded status (underfunded) (12) 257 (3,307) (2,724)
Unrecognized actuarial (gain) loss (209) (159) 524 364
Unrecognized prior service cost (11) (12) 940 1,024
Unrecognized net transition obligation (asset) (23) (27) -- 7
------- ------- ------- -------
Prepaid (accrued) pension expense $ (255) $ 59 $(1,843) $(1,329)
======= ======= ======= =======
Amounts recognized in the statement of
financial position consists of
Prepaid benefit cost $ -- $ 59 $ -- $ --
Accrued benefit liability (255) -- (2,040) (1,816)
Intangible asset -- -- 197 487
------- ------- ------- -------
Prepaid (accrued) pension expense $ (255) $ 59 $(1,843) $(1,329)
======= ======= ======= =======
</TABLE>
63
<PAGE> 64
<TABLE>
<CAPTION>
QUALIFIED PLAN SUPPLEMENTAL PLAN
--------------------------- -------------------------
DECEMBER 31, 1998 1997 1996 1998 1997 1996
----------------------- -------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average assumptions
Discount rate 6.75% 7.00% 7.25% 6.75% 7.00% 7.25%
Expected return on plan assets 8.00% 8.00% 8.00% -- -- --
Rate of compensation increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
</TABLE>
NOTE 8. COMMITMENTS AND CONTINGENCIES
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.
The Company is a defendant in a California 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. In 1995, a jury made a damage award against
the Company of $4.2 million in compensatory damages, and punitive damages which
were reduced to $14.0 million by the trial judge. The Company appealed these
awards to the California district court of appeal. On May 8, 1998, the appellate
court reversed the judgment against the Company in its entirety. The bankruptcy
estate may attempt to obtain a new trial in the California Superior Court in
which the judgment was originally entered. The Company believes that the
bankruptcy estate is not entitled to any additional trial under applicable
California appellate court decisions and will aggressively oppose any such
attempt. The Company believes that the action is entirely without merit and
plans to aggressively pursue its rights.
In July 1998, the Company entered a lease covering approximately 95,000
square feet of office space for new Company headquarters. The lease has
escalating payments over a term of 10 years and the Company expects to occupy
this space in early March 1999. The Company estimates that expenditures of
approximately $6.9 million in capital improvements, equipment and relocation
costs will be incurred in connection with this relocation.
Future minimum payments under noncancelable operating leases with initial
terms of one year or more consist of the following at December 31, 1998 (in
thousands).
<TABLE>
<S> <C>
1999 $ 2,407
2000 2,637
2001 2,732
2002 2,718
2003 2,754
Thereafter 14,833
----------
$28,081
</TABLE>
NOTE 9. STOCK BASED COMPENSATION
The Company has a stock compensation plan, the 1997 Equity Participation
Plan of SCPIE Holdings Inc. (the Plan), which provides for grants of stock
options to key employees and non-employee directors of the Company.
The company has elected to follow APB No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related Interpretations in accounting for its
stock-based compensation. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized. FASB No. 123
requires disclosure of the pro forma net income and earnings per share as if the
Company had accounted for its employee stock compensation under the fair value
method of that Statement.
The aggregate number of options for common shares issued and issuable
under the Plan currently is limited to 1,250,000. All options granted have ten
year terms and vest over various future periods.
64
<PAGE> 65
Exercise prices for options outstanding at December 31, 1998 ranged from
$29.19 to $36.50. The weighted average remaining contractual life of those
options is 9 years.
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Options Exercise Price
--------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1997 -- $ --
Granted in 1998 262,590 30.76
Exercised in 1998 -- --
Forfeited in 1998 5,800 30.76
--------
Options outstanding at December 31, 1998 256,790 30.76
========
</TABLE>
The Company's pro forma information using the Black-Scholes valuation
model follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Estimated weighted average of the fair value of options granted $ 10.72
Pro forma net income (in thousands) $ 35,869
Pro forma earnings per share - Basic $ 2.97
- Diluted $ 2.97
</TABLE>
For pro forma disclosure purposes, the fair value of stock options was
estimated at each date of grant using a Black-Scholes option pricing model using
the following assumptions: Risk-free interest rates ranging from 5.5% to 5.6%;
dividend yields ranging from 0.66% to 0.75%; volatility factors of the expected
market price of the Company's common stock ranging from .283 to .358; and a
weighted average expected life of the options ranging from 3 to 5 years.
In management's opinion, existing stock option valuation models do not
provide an entirely reliable measure of the fair value of non-transferable
employee stock options with vesting restrictions.
NOTE 10. EARNINGS PER SHARE OF COMMON STOCK
The following table sets forth the computation of basic and diluted earnings
per share as of and for the year ended:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
------------ ----------- --------
<S> <C> <C> <C>
Numerator:
Net income $36,976 $32,176 $30,192
Numerator for:
Basic earnings per share of common stock $36,976 $32,176 $30,192
Diluted earnings per share of common stock $36,976 $32,176 $30,192
Denominator:
Denominator for basic earnings per share of common
stock - weighted-average shares outstanding 12,074 12,108 9,995
Effect of dilutive securities:
Stock options 15 -- --
-------
Denominator for diluted earnings per share of common
stock adjusted - weighted-average shares outstanding 12,089 -- --
=======
Basic earnings per share of common stock $ 3.06 $ 2.66 $ 3.02
======= ======= =======
Diluted earnings per share of common stock $ 3.06 -- --
=======
</TABLE>
65
<PAGE> 66
Basic earnings per share of common stock for the year ended December 31, 1996
gives effect to the Reorganization and the allocation of 9,994,652 shares of
common stock to eligible members of the Exchange.
NOTE 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- ----------------------------------------
(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 $39,724 $40,026 $38,447 $40,268 $36,563 $32,837 $33,126 $31,891
Net investment income 10,503 10,123 9,768 9,973 10,572 10,637 10,798 10,709
Realized investment gains 2,320 1,741 3,269 3,799 1,212 1,975 989 2,426
Net income 9,024 8,393 9,412 10,147 8,121 8,004 7,320 8,731
Basic earnings per share of common stock $ 0.74 $ 0.69 $ 0.79 $ 0.85 $ 0.70 $ 0.65 $0.60 $ 0.71
Diluted earnings per share of common stock $ 0.74 $ 0.69 $ 0.78 $ 0.85 -- -- -- --
</TABLE>
66
<PAGE> 67
Schedule II - Condensed Financial Information of Registrant
SCPIE Holdings Inc.
Condensed Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Investments
Available for sale fixed maturity investments,
at fair value (amortized cost: 1998 - $43, $ 43 $ 2,994
1997 - 3,004)
Investments - Equity 2,000 --
Short-term investments 1,210 272
Investment in subsidiaries 383,555 356,179
--------- ---------
Total investments 386,808 359,445
Cash 72 227
Due from subsidiaries -- 74
Other 652 1,369
--------- ---------
Total assets $ 387,532 $ 361,115
========= =========
LIABILITIES
Due to affiliates $ 1,014 $ --
Other --
--------- ---------
Total liabilities 1,014
Stockholders' equity:
Preferred stock - $1 par value;
5,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock - $0.0001 par value;
30,000,000 shares authorized; 1 1
1998 - 11,878,791 shares outstanding; 1997 -
12,276,691 shares outstanding
Additional paid-in capital 36,386 36,386
Retained earnings 344,587 310,506
Treasury stock, at cost 1998 - (13,141) (416)
413,300 shares; 1997 - 15,400 shares 18,685 14,638
--------- ---------
Accumulated other comprehensive income
Total stockholders' equity 386,518 361,115
--------- ---------
Total liabilities and stockholders' equity $ 387,532 $ 360,987
========= =========
</TABLE>
See accompanying notes.
67
<PAGE> 68
Schedule II - Condensed Financial Information of Registrant (continued)
SCPIE Holdings Inc.
Condensed Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
Dividend from subsidiary $ 25,000 $ 20,000
Net investment income 142 804
Realized investment gains (losses) 2 (10)
Other expenses (1,956) (1,287)
-------- --------
Earnings before federal income taxes and
equity in income of subsidiaries 23,188 19,507
Federal income taxes (28) (37)
-------- --------
Earnings before equity in income of
subsidiaries 23,160 19,470
Equity in income of subsidiaries 13,816 12,706
-------- --------
Net income $ 36,976 $ 32,176
======== ========
</TABLE>
See accompanying notes.
68
<PAGE> 69
Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 36,976 $ 32,176
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for amortization 601 --
Realized investment gains (losses) (2) 10
Change in due from subsidiaries 1,088 (74)
Changes in other assets and liabilities 591 (1,345)
Equity in undistributed income of subsidiaries (13,816) (12,706)
-------- --------
Net cash provided by operating activities 25,438 18,061
INVESTING ACTIVITIES
Purchases - fixed maturities -- (22,881)
Sales - fixed maturities 2,965 19,389
Purchase-securities (2,000) --
Change in short-term investments (938) (272)
Capital contribution to subsidiaries (10,000) (48,000)
-------- --------
Cash used in investing activities (9,973) (51,764)
FINANCING ACTIVITIES
Issuance of common stock, net of expenses -- 36,387
Purchase of treasury stock (12,725) (416)
Cash dividends (2,895) (2,458)
-------- --------
Cash provided by financing activities (15,620) 33,513
Decrease in cash (155) (190)
Cash at beginning of period 227 417
-------- --------
Cash at end of period $ 72 $ 227
======== ========
</TABLE>
See accompanying notes.
69
<PAGE> 70
Schedule II - Condensed Financial Information of Registrant (continued)
SCPIE Holdings, Inc.
Notes to Condensed Financial Statements
December 31, 1998
I. REORGANIZATION
On January 29, 1997, the Southern California Physicians Insurance Exchange (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,
Inc. (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 Company, a California stock insurance company and a wholly owned
subsidiary of SCPIE Holdings, the surviving corporation of the Reorganization.
II. 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.
III. RECLASSIFICATIONS
The accompanying 1997 financial statements have been reclassified to conform
with the 1998 presentation.
70
<PAGE> 1
EXHIBIT 3.3
FIRST AMENDMENT
TO
BYLAWS
OF
SCPIE HOLDINGS INC.
FIRST AMENDMENT, dated as of February 24, 1999 ("First
Amendment"), to the Amended and Restated Bylaws ("By-Laws") of SCPIE Holdings
Inc., a Delaware corporation (the "Company"). Capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to them in the
By-Laws.
RECITALS
WHEREAS, pursuant to Article IX, Section 1 of the By-Laws, the
Board of Directors may alter, amend, repeal or adopt new By-Laws at any regular
meeting of the Board of Directors or at any special meeting of the Board of
Directors if notice of such alteration, amendment, repeal or adoption of new
By-Laws is contained in the notice of such special meeting;
WHEREAS, the purpose of this First Amendment is to permit
voting by electronic means, including telephone and internet voting, by
stockholders at any future meeting of the Company's stockholders;
WHEREAS, Delaware General Corporation Law Section 211(e)
provides that the election of directors must be by written ballot unless the
certificate of incorporation provides otherwise, Article Sixth, Section 2 of the
Company's Certificate of Incorporation provides that the election of directors
need not be by written ballot unless the By-Laws of the Company so provide, and
the Company's By-Laws currently provide that proxies must be "appointed by an
instrument in writing subscribed by such stockholder;"
WHEREAS, ChaseMellon Shareholder Services, the Company's
Transfer Agent, has advised the Company that the electronic transmission voting
system used by ChaseMellon Shareholder Services, which assigns control numbers
to each stockholder, sets forth or submits information from which it can be
determined that the electronic transmission was authorized by the stockholder,
in accordance with Delaware law; and
WHEREAS, in accordance with the purpose of this First
Amendment, the Board of Directors has deemed it in the best interests of the
Company to amend the By-Laws as set forth herein.
NOW, THEREFORE, the By-Laws are hereby amended as follows:
1. Amendment
<PAGE> 2
The first sentence of Article II, Section 5 of the
Company's By-Laws is deleted in its entirety and replaced with the following:
At each meeting of the stockholders, each stockholder having
the right to vote may vote in person or may authorize another
person or persons to act for him by proxy (i) appointed by an
instrument in writing subscribed by such stockholder and
bearing a date not more than one year prior to said meeting,
unless such proxy provides for a longer period, or (ii)
transmitted electronically (including by use of telephone
keypad or by the internet), provided that such transmission is
suitably authenticated by a unique password or other similar
means and is recorded electronically or mechanically.
2. Continuation
Except as specifically amended by this First
Amendment, the By-Laws shall continue in full force and effect in accordance
with their terms as in effect existing on the date of this First Amendment.
3. References
After the date of this First Amendment, any
references to the By-Laws shall mean the By-Laws as amended by this First
Amendment.
2
<PAGE> 1
EXHIBIT 10.1
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is hereby made
and entered into this 4th day of January, 1999, 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
<PAGE> 2
subsequent year to extend the term and termination provisions for a period of
one additional year, and most recently on January 2, 1998, 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 "1998 Amended
and Restated Agreement"). SCPIE Management and Executive desire to further amend
and restate the 1998 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.
(a) 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, 2003, unless
earlier terminated pursuant to paragraph 3 hereof. Executive agrees to serve as
President and Chief Executive Officer of SCPIE Management and its parent
corporation, SCPIE Holdings Inc. ("SCPIE Holdings"), 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 $482,834.00 as of January 1, 1998, and was also increased by
the Board of Directors of SCPIE Management as of January 1, 1999 to $501,000.00
before inclusion of the CPI-U adjustment of the 1998 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, 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, for the purposes of paragraphs 3(a)(i) or (ii),
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<PAGE> 4
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. Effective January 1,
1999, SCPIE Management Company shall pay for the cost of a golf membership at
the Riviera Country Club, Los Angeles, California, which shall be in the name of
and become the property of Executive. Executive shall be responsible for the
dues and fees with respect to such membership. 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.
4
<PAGE> 5
(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 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, 2001, 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, 2001,
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
5
<PAGE> 6
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 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, 2003, 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, 2003.
Such amount (if any) payable under paragraph
6
<PAGE> 7
3(e)(ii) shall be payable between March 1, 2004 and January 10, 2005 in such
installments as Executive shall specify by written notice given to SCPIE
Management on or before January 10, 2004; provided, however, that if Executive
does not give such written notice on or before January 10, 2004, such amount (if
any) payable under paragraph 3(e)(ii) shall be payable in full on March 1, 2004.
(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
7
<PAGE> 8
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.
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 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
<PAGE> 9
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.
10. Amendment of the December 1991 Agreement.
The 1998 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: __________________________
Its: _____________________
EXECUTIVE:
-------------------------------
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 4, 1999, in place
of the Amended and Restated Employment Agreement, made and entered into as of
January 2, 1998 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 4, 1999.
SCPIE HOLDINGS INC.
By: ______________________________
Its: ______________________
<PAGE> 1
EXHIBIT 10.29
01-97-1134
FIRST EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
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
(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 on the terms
and conditions and subject to the exceptions, exclusions and limitations
hereinafter set forth. 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, except as provided for in
the Insolvency Article of 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 which the Company may pay as a result of
claims made during the term of this Agreement under binders, policies and
contracts of insurance (hereinafter called "policies"), hereafter issued or
entered into by or on behalf of the Company, covering the types of policy forms
set forth below as written by the Company, except as excluded under the
Exclusions Article of this Agreement, subject to the limitations set forth in
the Limit and Retention Article:
<PAGE> 2
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.
ARTICLE II.
TERM:
A. This Agreement shall commence October 1, 1997 and shall remain in full force
and effect for twelve (12) consecutive months to expire September 30, 1998, both
days inclusive, as respects all risks attaching during said twelve (12) months
period.
B. It is agreed that Modified Claims Made Policies include an Automatic Pre-Paid
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, the Reinsurers hereon will be relieved of all
liability for any claims not made in the First Annual Reporting Period of each
policy. In consideration the 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.
C. In the event of non-renewal, and at the option of the Company, the 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.
D. In the event that an Original Insured's policy is canceled or non-renewed, a
further Extended Reporting Period Endorsement for an unlimited period my 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 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 and 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.
E. Further, at the option of the Company, non renewal may be effected on a cut
off basis as of the expiration date hereon and the Reinsurers shall return to
the Company their respective share of the unearned premium reserve at that time.
<PAGE> 3
F. 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 expiration shall be fully performed and discharged.
ARTICLE III.
EXCLUSIONS:
This Agreement does not cover and specifically excludes the following:
1. Insolvency Funds, per the attached "Insolvency Fund Exclusion
Clause".
2. Nuclear Incidents, per the attached "Nuclear Incident Exclusion
Clause - 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.
ARTICLE IV.
TERRITORY:
This Agreement will apply as per the Company's Original Policies.
ARTICLE V.
LIMIT AND RETENTION:
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 claim
made for indemnity only during the term of this Agreement 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 claim made for indemnity only during the
term of this Agreement, but the Reinsurer's maximum liability shall not exceed
100% of $9,000,000 resulting from each and every claim made for indemnity only
during the term of this Agreement.
B. The term "claim made" shall be as defined in the Company's Original Policies.
C. The Company's retention shall be the difference between $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 $500,000
each and every claim made for indemnity only.
<PAGE> 4
D. As respects Medical Staff Members, including any other Associated Individuals
or Entities, added by Endorsement to the policies subject to this Agreement
under a Unification Plan, the following shall apply:
1. 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. 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 $5,000,0000 each and
every loss.
E. 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.
F. 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.
G. The maximum amount of losses recoverable hereunder during the term of this
Agreement, including but not limited to indemnity, loss in Excess of Original
Policy Limits (XPL), and Extra Contractual Obligations (ECO) shall not exceed
$50,000,000 or 400% of Gross Premium Ceded hereunder, whichever is the greater.
H. The Company shall co-participate for 10% of the ultimate net loss hereunder,
net and unreinsured.
ARTICLE VI.
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. 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 $500,000 or greater and with policy limits to affect
Reinsurers:
1. Death.
<PAGE> 5
2. Brain Injury.
3. Nerve Injury.
4. Paralysis - cord injury.
5. Amputations.
6. Internal injuries which require continuous treatment (e.g. Dialysis,
Hyperalimentation, failure to diagnose).
7. Loss of Sight of one or both eyes.
C. The Company has the obligation to investigate and, to the extent that may be
required by the policies reinsured, defend any claim affecting this reinsurance
and to pursue such claim to final determination.
D. All loss settlements made by the Company, provided they are within the terms
and conditions of the original policies (or as provided for in Excess of
Original Policy Limits or Extra Contractual Obligations Articles contained in
this Agreement) and within the terms of this Agreement shall be unconditionally
binding upon the Reinsurer, and amounts falling due to the share of the
Reinsurer shall be payable by the Reinsurer immediately in accordance with the
provisions set forth in paragraph D. of the Reports and Remittances Article.
E. It is understood that when so requested the Company will afford the Reinsurer
an opportunity to be associated with the Company, at the expense of the
Reinsurer, in the defense of any claim or suit or proceeding involving this
reinsurance; and the Company will cooperate in every respect in the defense of
such claim, suit or proceeding.
ARTICLE VII.
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.
<PAGE> 6
ARTICLE VIII.
ULTIMATE NET LOSS:
The term "ultimate net loss" means the actual loss, including 90% of loss
in Excess of Original Policy Limits and 90% of Extra Contractual Obligations in
accordance with the provisions of the respectively titled Articles herein, but
excluding loss adjustment expense, paid or to be paid by the Company on its net
retained lines 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 IX.
EXCESS OF ORIGINAL POLICY LIMITS:
A. This Agreement shall protect the Company, within the limits hereof, in
respect of policies ceded to this Agreement in connection with ultimate net 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 within the limits hereof, in respect
of policies ceded to this Agreement where the ultimate net loss includes any
Extra Contractual Obligations. 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.
<PAGE> 7
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.
ARTICLE XI.
CEDING COMMISSION:
A. The Reinsurer shall allow the Company a 15% commission plus original
acquisition cost not to exceed 25% in all on all premiums ceded to the Reinsurer
hereunder. The Company shall allow the Reinsurer return commission on return
premiums at the same rate.
B. It is expressly agreed that the ceding commission allowed the Company
includes provision for all dividends, commissions, taxes, assessments, and all
other expenses of whatever nature, except loss adjustment expense.
ARTICLE XII.
REINSURANCE PREMIUM:
A. As premium for the reinsurance provided hereunder, the Company shall pay the
Reinsurer 100% of its Original Gross Excess Limit Premium and Extended Reporting
Period Endorsement Premium calculated by the Company.
B. The term "Original Gross Excess Limit Premium" as used herein 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.
ARTICLE XIII.
REPORTS AND REMITTANCES:
A. The Company will provide the Reinsurer with all necessary data respecting
premiums, losses and recoveries on forms mutually acceptable to the Company and
the Reinsurer.
B. Within forty-five (45) days after the close of each fiscal month the Company
shall pay to the Reinsurer an amount equal to the Ceded Excess Limit Premium
less Ceding Commission.
C. The Company shall provide to the Reinsurer, as promptly as possible after the
close of each year the information necessary for Annual Statement purposes.
D. 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 immediately upon receipt of
satisfactory proof of loss being given to it by the Company.
<PAGE> 8
ARTICLE XIV.
FOLLOW THE FORTUNES:
The Reinsurer shall follow the fortunes of the Company in respect of all
business hereunder. All loss and expense payments or settlements made by the
Company are unconditionally binding upon the Reinsurer if such payments or
settlements were made within the terms and conditions of the Company's policies
and within the terms and conditions of this Agreement.
ARTICLE XV.
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 XVI.
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 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 such
information 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> 9
ARTICLE XVIII.
ACCESS TO RECORDS:
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 designated
representatives, during the term of this Agreement and thereafter, all books,
records and papers of the Company in connection with any reinsurance hereunder,
or the subject matter hereof.
ARTICLE XIX.
ERRORS AND OMISSIONS:
Errors and omissions on the part of the Company shall not invalidate the
reinsurance under this Agreement, provided such errors and omissions are
corrected promptly after discovery thereof, but the liability of the Reinsurer
under this Agreement shall in no event exceed the limits specified herein.
ARTICLE XX.
TAXES:
In consideration of the terms under which this Agreement is issued, the
Company will not claim a deduction in respect of the premium hereon when making
tax returns, other than income or profits tax returns, to any state or territory
of the United States of America or the District of Columbia.
ARTICLE XXI.
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 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 applicable 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.
<PAGE> 10
ARTICLE XXII.
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 unearned premium and
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 unearned premium, 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 year, and shall be
automatically extended for one 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> 11
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 XXIII.
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.
<PAGE> 12
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.
I. If more than one reinsurer is involved in arbitration where there are common
questions of law or fact and a possibility of conflicting awards or inconsistent
results, all such reinsurers may constitute and act as one party for purposes of
this Article and communications shall be made by the Company to each of the
reinsurers constituting the one party; provided, however, that nothing therein
shall impair the rights of such reinsurers to assert several, rather than joint
defenses or claims, nor be construed as changing the liability of the reinsurers
under the terms of this Agreement from several to joint.
ARTICLE XXIV.
SERVICE OF SUIT:
(This Article only applies to Reinsurers domiciled outside of the United States
and/or unauthorized in any state, territory or district of the United States
having jurisdiction over the Company.)
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 Article 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
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 a 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 therefore, 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 its true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on behalf
of the Company or any beneficiary hereunder arising out of this Agreement of
reinsurance, and hereby designates the above-named as the person to whom the
said officer is authorized to mail such process or a true copy thereof.
ARTICLE XXV.
INSOLVENCY:
A. In the event of the insolvency of one or more than one of the Companies
reinsured hereunder, this reinsurance shall be payable directly to the
Company(ies) or to its liquidator, receiver, conservator or statutory successor
immediately upon demand, with reasonable provision for verification, on the
basis of the liability of the Company(ies) without diminution because of the
insolvency of one or more than one of the Companies or because the liquidator,
receiver, conservator or statutory successor of the Company(ies) has failed to
pay all or a portion of any claim. It is agreed, however, that the liquidator,
receiver, conservator or statutory successor of the Company(ies) shall give
written notice to the Reinsurer of the pendency of a claim against the
Company(ies) indicating the policy or bond reinsured which claim would involve a
possible liability on the part of the Reinsurer within a reasonable time after
such claim is filed in the conservation or liquidation proceeding or in the
receivership, 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 that it may deem
available to the Company(ies) or its liquidator, receiver, conservator or
statutory successor. The expense thus incurred by the Reinsurer shall be
chargeable, subject to the approval of the Court, against the Company(ies) as
part of the expense of conservation or liquidation to the extent of a pro rata
share of the benefit which may accrue to the Company(ies) solely as a result of
the defense undertaken by the Reinsurer.
B. 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 shall be
apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the Company(ies).
<PAGE> 14
C. It is further understood and agreed that, in the event of the insolvency of
one or more than one of the Companies, the reinsurance under this Agreement
shall be payable directly by the Reinsurer to the Company(ies) or to its
liquidator, receiver or statutory successor, except where this Agreement
specifically provides another payee of such reinsurance in the event of the
insolvency of the Company(ies).
ARTICLE XXVI.
INTERMEDIARY:
Guy Carpenter & Company, Inc. 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 Guy Carpenter & Company, Inc., 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.
ARTICLE XXVIII.
SEVERAL LIABILITY NOTICE (LSW 1001 REINSURANCE):
The subscribing reinsurer's 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
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
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
(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 under no circumstances shall the
Subscribing Reinsurer participate in the Interests and Liabilities, if any, of
the other subscribing reinsurers in said Agreement.
The Company shall pay ___% 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 October 1, 1997 and is subject to the
provisions contained in the Term Article of the attached Agreement, which
provisions are hereby incorporated by reference into this Contract and which
shall apply as though they had been specifically provided for herein.
<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 and
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 ________, 199
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.
By:
--------------------------------------------
Signed in Los Angeles, California
this __________ day of ________, 199
<PAGE> 17
INFORMATION
The factors to be used in calculating the Earned Premium as respects
Modified Claims Made risks attaching during the term of this Agreement and
subsequent agreements shall be as follows:
<TABLE>
<CAPTION>
Reporting Period Earned Premium Factors
---------------- ----------------------
<S> <C>
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%
</TABLE>
<PAGE> 18
INSOLVENCY FUND EXCLUSION
It is agreed that this Agreement excludes all liability of the Company
arising by agreement, operation of law, or otherwise, from its participation or
membership, whether voluntary or involuntary, in any insolvency fund.
"Insolvency Fund" includes any guaranty fund, insolvency 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.
<PAGE> 1
EXHIBIT 10.30
01-97-1135
SECOND EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
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
(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 on the terms
and conditions and subject to the exceptions, exclusions and limitations
hereinafter set forth. 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, except as provided for in
the Insolvency Article of 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 which the Company may pay as a result of
claims made during the term of this Agreement under binders, policies and
contracts of insurance (hereinafter called "policies"), hereafter issued or
entered into by or on behalf of the Company, covering the types of policy forms
set forth below as written by the Company, except as excluded under the
Exclusions Article of this Agreement, subject to the limitations set forth in
the Limit and Retention Article:
<PAGE> 2
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.
ARTICLE II.
TERM:
A. This Agreement shall commence October 1, 1997 and shall remain in full force
and effect for twelve (12) consecutive months to expire September 30, 1998, both
days inclusive, as respects all risks attaching during said twelve (12) months
period.
B. It is agreed that Modified Claims Made Policies include an Automatic Pre-Paid
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, the Reinsurers hereon will be relieved of all
liability for any claims not made in the First Annual Reporting Period of each
policy. In consideration the 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.
C. In the event of non-renewal, and at the option of the Company, the 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.
D. In the event that an Original Insured's policy is canceled or non-renewed, a
further Extended Reporting Period Endorsement for an unlimited period my 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 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 and 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.
E. Further, at the option of the Company, non renewal may be effected on a cut
off basis as of the expiration date hereon and the Reinsurers shall return to
the Company their respective share of the unearned premium reserve at that time.
<PAGE> 3
F. 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 expiration shall be fully performed and discharged.
ARTICLE III.
EXCLUSIONS:
This Agreement does not cover and specifically excludes the following:
1. Insolvency Funds, per the attached "Insolvency Fund Exclusion
Clause".
2. Nuclear Incidents, per the attached "Nuclear Incident Exclusion
Clause - 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.
ARTICLE IV.
TERRITORY:
This Agreement will apply as per the Company's Original Policies.
ARTICLE V.
LIMIT AND RETENTION:
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 claim
made for indemnity only during the term of this Agreement 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 claim made for indemnity only during the
term of this Agreement, but the Reinsurer's maximum liability shall not exceed
100% of $40,000,000 resulting from each and every claim made for indemnity only
during the term of this Agreement.
B. The term "claim made" shall be as defined in the Company's Original Policies.
C. The Company's retention shall be the difference between $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 $500,000
each and every claim made for indemnity only.
<PAGE> 4
D. As respects Medical Staff Members, including any other Associated Individuals
or Entities, added by Endorsement to the policies subject to this Agreement
under a Unification Plan, the following shall apply:
1. 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. 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 $5,000,0000 each and
every loss.
E. 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.
F. 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.
G. The maximum amount of losses recoverable hereunder during the term of this
Agreement, including but not limited to indemnity, loss in Excess of Original
Policy Limits (XPL), and Extra Contractual Obligations (ECO) shall not exceed
$100,000,000.
H. The Company shall co-participate for 10% of the ultimate net loss hereunder,
net and unreinsured.
ARTICLE VI.
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. 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 $5,000,000 or greater and with policy limits to affect
Reinsurers:
1. Death.
<PAGE> 5
2. Brain Injury.
3. Nerve Injury.
4. Paralysis - cord injury.
5. Amputations.
6. Internal injuries which require continuous treatment (e.g. Dialysis,
Hyperalimentation, failure to diagnose).
7. Loss of Sight of one or both eyes.
C. The Company has the obligation to investigate and, to the extent that may be
required by the policies reinsured, defend any claim affecting this reinsurance
and to pursue such claim to final determination.
D. All loss settlements made by the Company, provided they are within the terms
and conditions of the original policies (or as provided for in Excess of
Original Policy Limits or Extra Contractual Obligations Articles contained in
this Agreement) and within the terms of this Agreement shall be unconditionally
binding upon the Reinsurer, and amounts falling due to the share of the
Reinsurer shall be payable by the Reinsurer immediately in accordance with the
provisions set forth in paragraph D. of the Reports and Remittances Article.
E. It is understood that when so requested the Company will afford the Reinsurer
an opportunity to be associated with the Company, at the expense of the
Reinsurer, in the defense of any claim or suit or proceeding involving this
reinsurance; and the Company will cooperate in every respect in the defense of
such claim, suit or proceeding.
ARTICLE VII.
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.
<PAGE> 6
ARTICLE VIII.
ULTIMATE NET LOSS:
A. The term "ultimate net loss" means the actual loss, including 90% of loss in
Excess of Original Policy Limits and 90% of Extra Contractual Obligations in
accordance with the provisions of the respectively titled Articles herein, but
excluding loss adjustment expense, paid or to be paid by the Company on its net
retained lines 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.
B. 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
this Agreement and will be deducted 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
respect of policies ceded to this Agreement in connection with ultimate net 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, within the limits hereof, in
respect of policies ceded to this Agreement where the ultimate net loss includes
any Extra Contractual Obligations. 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.
<PAGE> 7
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.
ARTICLE XI.
CEDING COMMISSION:
A. The Reinsurer shall allow the Company a 15% commission plus original
acquisition cost not to exceed 25% in all on all premiums ceded to the Reinsurer
hereunder. The Company shall allow the Reinsurer return commission on return
premiums at the same rate.
B. It is expressly agreed that the ceding commission allowed the Company
includes provision for all dividends, commissions, taxes, assessments, and all
other expenses of whatever nature, except loss adjustment expense.
ARTICLE XII.
REINSURANCE PREMIUM:
A. As premium for the reinsurance provided hereunder, the Company shall pay the
Reinsurer 100% of its 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.
B. The term "Original Gross Excess Limit Premium" as used herein 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 and experience
credits only.
ARTICLE XIII.
REPORTS AND REMITTANCES:
A. The Company will provide the Reinsurer with all necessary data respecting
premiums, losses and recoveries on forms mutually acceptable to the Company and
the Reinsurer.
B. Within forty-five (45) days after the close of each fiscal month the Company
shall pay to the Reinsurer an amount equal to the Ceded Excess Limit Premium
less Ceding Commission.
C. The Company shall provide to the Reinsurer, as promptly as possible after the
close of each year the information necessary for Annual Statement purposes.
D. 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 immediately upon receipt of
satisfactory proof of loss being given to it by the Company.
<PAGE> 8
ARTICLE XIV.
FOLLOW THE FORTUNES:
The Reinsurer shall follow the fortunes of the Company in respect of all
business hereunder. All loss and expense payments or settlements made by the
Company are unconditionally binding upon the Reinsurer if such payments or
settlements were made within the terms and conditions of the Company's policies
and within the terms and conditions of this Agreement.
ARTICLE XV.
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 XVI.
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 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 such
information 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> 9
ARTICLE XVIII.
ACCESS TO RECORDS:
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 designated
representatives, during the term of this Agreement and thereafter, all books,
records and papers of the Company in connection with any reinsurance hereunder,
or the subject matter hereof.
ARTICLE XIX.
ERRORS AND OMISSIONS:
Errors and omissions on the part of the Company shall not invalidate the
reinsurance under this Agreement, provided such errors and omissions are
corrected promptly after discovery thereof, but the liability of the Reinsurer
under this Agreement shall in no event exceed the limits specified herein.
ARTICLE XX.
TAXES:
In consideration of the terms under which this Agreement is issued, the
Company will not claim a deduction in respect of the premium hereon when making
tax returns, other than income or profits tax returns, to any state or territory
of the United States of America or the District of Columbia.
ARTICLE XXI.
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 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 applicable 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.
<PAGE> 10
ARTICLE XXII.
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 unearned premium and
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 unearned premium, 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 year, and shall be
automatically extended for one 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> 11
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 XXIII.
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.
<PAGE> 12
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.
I. If more than one reinsurer is involved in arbitration where there are common
questions of law or fact and a possibility of conflicting awards or inconsistent
results, all such reinsurers may constitute and act as one party for purposes of
this Article and communications shall be made by the Company to each of the
reinsurers constituting the one party; provided, however, that nothing therein
shall impair the rights of such reinsurers to assert several, rather than joint
defenses or claims, nor be construed as changing the liability of the reinsurers
under the terms of this Agreement from several to joint.
ARTICLE XXIV.
SERVICE OF SUIT:
(This Article only applies to Reinsurers domiciled outside of the United States
and/or unauthorized in any state, territory or district of the United States
having jurisdiction over the Company.)
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 Article 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
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 a 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 therefore, 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 its true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on behalf
of the Company or any beneficiary hereunder arising out of this Agreement of
reinsurance, and hereby designates the above-named as the person to whom the
said officer is authorized to mail such process or a true copy thereof.
ARTICLE XXV.
INSOLVENCY:
A. In the event of the insolvency of one or more than one of the Companies
reinsured hereunder, this reinsurance shall be payable directly to the
Company(ies) or to its liquidator, receiver, conservator or statutory successor
immediately upon demand, with reasonable provision for verification, on the
basis of the liability of the Company(ies) without diminution because of the
insolvency of one or more than one of the Companies or because the liquidator,
receiver, conservator or statutory successor of the Company(ies) has failed to
pay all or a portion of any claim. It is agreed, however, that the liquidator,
receiver, conservator or statutory successor of the Company(ies) shall give
written notice to the Reinsurer of the pendency of a claim against the
Company(ies) indicating the policy or bond reinsured which claim would involve a
possible liability on the part of the Reinsurer within a reasonable time after
such claim is filed in the conservation or liquidation proceeding or in the
receivership, 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 that it may deem
available to the Company(ies) or its liquidator, receiver, conservator or
statutory successor. The expense thus incurred by the Reinsurer shall be
chargeable, subject to the approval of the Court, against the Company(ies) as
part of the expense of conservation or liquidation to the extent of a pro rata
share of the benefit which may accrue to the Company(ies) solely as a result of
the defense undertaken by the Reinsurer.
B. 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 shall be
apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the Company(ies).
<PAGE> 14
C. It is further understood and agreed that, in the event of the insolvency of
one or more than one of the Companies, the reinsurance under this Agreement
shall be payable directly by the Reinsurer to the Company(ies) or to its
liquidator, receiver or statutory successor, except where this Agreement
specifically provides another payee of such reinsurance in the event of the
insolvency of the Company(ies).
ARTICLE XXVI.
INTERMEDIARY:
Guy Carpenter & Company, Inc. 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 Guy Carpenter & Company, Inc., 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.
ARTICLE XXVIII.
SEVERAL LIABILITY NOTICE (LSW 1001 REINSURANCE):
The subscribing reinsurer's 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
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
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
(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 under no circumstances shall the
Subscribing Reinsurer participate in the Interests and Liabilities, if any, of
the other subscribing reinsurers in said Agreement.
The Company shall pay % 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 October 1, 1997 and is subject to the
provisions contained in the Term Article of the attached Agreement, which
provisions are hereby incorporated by reference into this Contract and which
shall apply as though they had been specifically provided for herein.
<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 and
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 __________, 199
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.
By:
------------------------------------------
Signed in Los Angeles, California
this _________ day of __________, 199
<PAGE> 17
INFORMATION
The factors to be used in calculating the Earned Premium as respects
Modified Claims Made risks attaching during the term of this Agreement and
subsequent agreements shall be as follows:
<TABLE>
<CAPTION>
Reporting Period Earned Premium Factors
---------------- ----------------------
<S> <C>
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%
</TABLE>
<PAGE> 18
INSOLVENCY FUND EXCLUSION
It is agreed that this Agreement excludes all liability of the Company
arising by agreement, operation of law, or otherwise, from its participation or
membership, whether voluntary or involuntary, in any insolvency fund.
"Insolvency Fund" includes any guaranty fund, insolvency 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.
<PAGE> 1
EXHIBIT 10.31
01-98-0020
FIRST EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
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
(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> 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, 1998. 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> 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 E.
(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.1. 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 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.
A.2. The Company shall retain for its own account and pay under one or more of
the Company's policies the first $1,500,000 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 $1,500,000, each and every loss, but the
Reinsurer's maximum liability shall not exceed $500,000 resulting from 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.
<PAGE> 4
B. It is understood and agreed that Section A.1. 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
A.2. would respond in the same fashion as Section A.1. when any one incident
includes any losses under Professional and Business Liability policies for
Hospitals.
C. Notwithstanding the foregoing, it is a condition hereto that an Annual
Aggregate Deductible of losses otherwise recoverable hereunder equal to .80% of
GNEPI shall first be deducted before any liability attaches to the Reinsurer
hereon.
D. 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.
E. (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.
ARTICLE VI.
WARRANTIES:
The Company warrants the following in respect of the business covered
hereunder:
1. In respect of 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 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 Professional and Business Liability policies for
Hospitals written on or after October 1, 1997, policy limits greater
than $1,000,000 shall be reinsured elsewhere on an Excess of Loss
basis or so deemed.
<PAGE> 5
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.
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.
<PAGE> 6
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 declaratory judgement expenses incurred in connection with
coverage questions and legal actions related to a specific claim, 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.
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, 1998 through December 31, 1998), computed as follows.
INCOME
1. Premiums earned by the Reinsurer during the Agreement period.
<PAGE> 7
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, 1998, 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,
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.
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.
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> 8
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.
3. Nerve Injury.
4. Paralysis - cord injury.
5. Amputations.
6. Internal injuries which require continuous treatment (e.g. Dialysis,
Hyperalimentation, failure to diagnose).
<PAGE> 9
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 $3,100,000
payable in equal quarterly installments of $775,000 on January 1st, April 1st,
July 1st and October 1st, 1998. 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, 1999.
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 $2,465,000. 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 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.
<PAGE> 10
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.
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.
<PAGE> 11
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 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
<PAGE> 12
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 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
<PAGE> 13
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.
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.
<PAGE> 14
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 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,
Page 14 of 16
<PAGE> 15
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).
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).
Page 15 of 16
<PAGE> 16
ARTICLE XXVIII.
INTERMEDIARY:
Guy Carpenter & Company, Inc. 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 Guy Carpenter & Company, Inc., 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> 17
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
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
(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, 1998 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> 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 _________, 199
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.
By:
-----------------------------------------
Signed in
this _____ day of _________, 199
<PAGE> 19
MEMORANDUM OF CHANGES
to the
SCPIE HOLDINGS, INC., et al
FIRST EXCESS OF LOSS REINSURANCE AGREEMENT
The following changes have been effected from the expiring First Excess of
Loss Reinsurance Agreement Number 01-97-0020 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 V, "Limits of Cover",
- section A. has been revised and is now in two parts, sections A.1.
and A.2.
- section B. has been added and all subsequent sections have been
relettered accordingly.
- section C. has been revised in that the annual aggregate deductible
has been decreased from 1% of the GNEPI to .80% of the GNEPI.
4. Article VI, "Warranties", item 1. has been revised and item 3. has been
added.
5. Article IX, "Ultimate Net Loss", paragraph A. has been revised to include
declaratory judgement expenses.
6. Article XV, "Premium",
- the deposit premium decreased from $3,450,000 to $3,100,000.
- the minimum premium decreased from $2,760,000 to $2,465,000.
7. Article XXVIII, "Intermediary", reference to Willcox Incorporated
Reinsurance Intermediaries has been replaced with Guy Carpenter & Company,
Inc.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
<PAGE> 1
EXHIBIT 10.32
01-98-0021
SECOND EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
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
(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, 1992 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> 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, 1998. 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> 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, 1992 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, 01-91-0021 and 01-92-0021).
<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.
ARTICLE VI.
WARRANTIES:
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 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. In respect of 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 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 Professional and Business Liability policies for
Hospitals written on or after October 1, 1997, policy limits greater than
$1,000,000 shall be 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 shall not exceed $5,000,000.
<PAGE> 5
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.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, 1992 and first
reported to the Reinsurer during the term of this Agreement.
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.
<PAGE> 6
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 declaratory judgement expenses incurred in connection with
coverage questions and legal actions related to a specific claim, 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 X.
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
<PAGE> 7
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 XI.
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 XII.
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.
<PAGE> 8
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 XIII.
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 XIV.
PREMIUM:
A. The Company shall pay to the Reinsurer a deposit premium of $960,000 payable
in equal quarterly installments of $240,000 on January 1st, April 1st, July 1st
and October 1st, 1998. 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, 1999.
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 $768,000. 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 XV.
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:
<PAGE> 9
a. For the first reinstatement, 125% of the annual reinsurance
premium pro rated as to the amount so reinstated;
b. For the second reinstatement, 175% of the annual reinsurance
premium pro rated as to the amount so reinstated.
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 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 $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 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 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.
<PAGE> 10
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:
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.
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.
<PAGE> 11
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 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.
<PAGE> 12
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 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.
<PAGE> 13
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.
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.
<PAGE> 14
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 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> 15
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).
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:
Guy Carpenter & Company, Inc. 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 Guy Carpenter & Company, Inc., 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> 16
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> 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
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
(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, 1998 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> 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 __________, 199_
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.
By:
-----------------------------------------
Signed in
this _______ day of __________, 199_
<PAGE> 19
MEMORANDUM OF CHANGES
to the
SCPIE HOLDINGS, INC., et al
SECOND EXCESS OF LOSS REINSURANCE AGREEMENT
The following changes have been effected from the expiring Second Excess
of Loss Reinsurance Agreement Number 01-97-0021 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 1992 underwriting year, in this and 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 VI, "Warranties", (previously addressed under C. and D. of the
Limits of Cover Article) has been revised and all subsequent Articles have
been renumbered accordingly.
5. Article IX, "Ultimate Net Loss", paragraph A. has been revised to include
declaratory judgement expenses.
6. Article XIV, "Premium",
- the deposit premium decreased from $1,080,000 to $960,000.
- the minimum premium decreased from $864,000 to $768,000.
7. 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 decreased from 150% to
125% of the annual reinsurance premium.
- the specified amount of additional premium the Company will pay the
Reinsurer for the second reinstatement as respects Sections A.1. and
A.3. of the Limits of Cover Article has been decreased from 200% to
175% of the annual reinsurance premium.
8. Article XXVIII, "Intermediary", reference to Willcox Incorporated
Reinsurance Intermediaries has been replaced with Guy Carpenter & Company,
Inc.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
<PAGE> 1
EXHIBIT 10.33
01-98-0022
THIRD EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
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
(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, 1992 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> 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, 1998. 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> 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, 1992 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, 01-91-0022 and 01-92-0022).
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.
<PAGE> 4
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.
ARTICLE VI.
WARRANTIES:
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 and prior to October
1, 1997, 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 Professional and Business Liability policies for
Hospitals written on or after October 1, 1997, policy limits greater
than $1,000,000 shall be reinsured elsewhere on an excess of loss
basis or so deemed.
5. In respect of Errors and Omissions Liability policies for Managed
Care Organizations, the maximum original policy limit is $5,000,000.
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:
<PAGE> 5
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 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, 1992 and first
reported to the Reinsurer during the term of this Agreement.
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 declaratory judgement expenses incurred in connection with
coverage questions and legal actions related to a specific claim, 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
<PAGE> 6
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 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 X.
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> 7
ARTICLE XI.
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 XII.
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 XIII.
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> 8
ARTICLE XIV.
PREMIUM:
A. The Company shall pay to the Reinsurer a minimum and deposit premium of
$355,000 payable in equal quarterly installments of $88,750 on January 1st,
April 1st, July 1st and October 1st, 1998. 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,
1999.
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 XV.
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.
<PAGE> 9
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.
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 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 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:
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> 10
ARTICLE XIX.
CURRENCY:
Premiums shall be payable by the Company and losses shall be paid to the
Company in United States currency.
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.
<PAGE> 11
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 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> 12
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 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.
Page 12 of 15
<PAGE> 13
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 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 13 of 15
<PAGE> 14
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 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.
Page 14 of 15
<PAGE> 15
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 XXVIII.
INTERMEDIARY:
Guy Carpenter & Company, Inc. 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 Guy Carpenter & Company, Inc., 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
THIRD EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
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
(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, 1998, 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 __________, 199__
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.
By:
-----------------------------------------
Signed in
this ______ day of __________, 199__
<PAGE> 18
MEMORANDUM OF CHANGES
to the
SCPIE HOLDINGS, INC., et al
THIRD EXCESS OF LOSS REINSURANCE AGREEMENT
The following changes have been effected from the expiring Third Excess of
Loss Reinsurance Agreement Number 01-97-0022 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 extended to
include the 1992 underwriting year, in this and 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 VI, "Warranties", (previously addressed under C. of the Limits of
Cover Article) has been revised and all subsequent Articles have been
renumbered accordingly.
5. Article IX, "Ultimate Net Loss", paragraph A. has been revised to include
declaratory judgement expenses.
6. Article XIV, "Premium", the minimum and deposit premium decreased from
$400,000 to $355,000.
7. Article XXVIII, "Intermediary", reference to Willcox Incorporated
Reinsurance Intermediaries has been replaced with Guy Carpenter & Company,
Inc.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
<PAGE> 1
EXHIBIT 10.34
01-98-0599
FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
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
(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, 1992 to December 31, 1992 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> 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, 1998. 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> 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 $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.
A.2. As respects losses which were first reported to the Company during the
period January 1, 1992 to December 31, 1992 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
$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. 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 Number 01-92-0599).
It is understood that the Maximum Annual Aggregate Amount recoverable
under A.1. and A.2. combined is $20,000,000 in all during the period of this
Agreement.
<PAGE> 4
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.
ARTICLE VI.
WARRANTIES:
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 and prior to October
1, 1997, 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 Professional and Business Liability policies for
Hospitals written on or after October 1, 1997, policy limits greater
than $1,000,000 shall be reinsured elsewhere on an excess of loss
basis or so deemed.
5. In respect of Errors and Omissions Liability policies for Managed
Care Organizations, the maximum original policy limit is $5,000,000.
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:
<PAGE> 5
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 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, 1992 to December 31, 1992 and first
reported to the Reinsurer during the term of this Agreement.
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 declaratory judgement expenses incurred in connection with
coverage questions and legal actions related to a specific claim, 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
<PAGE> 6
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 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 X.
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> 7
ARTICLE XI.
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 XII.
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 XIII.
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> 8
ARTICLE XIV.
PREMIUM:
A. The Company shall pay to the Reinsurer a minimum and deposit premium of
$475,000 payable in equal quarterly installments of $118,750 on January 1st,
April 1st, July 1st and October 1st, 1998. 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,
1999.
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.
ARTICLE XV.
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 $120,000.
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.
<PAGE> 9
B. Nevertheless, the Reinsurer's liability will never be more than $10,000,000
in respect of any claim made nor more than the Maximum Annual Aggregate Amount
Recoverable under Sections A.1. and A.2. combined of $20,000,000 in all during
the term of the Agreement.
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 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 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:
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> 10
ARTICLE XIX.
CURRENCY:
Premiums shall be payable by the Company and losses shall be paid to the
Company in United States currency.
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.
<PAGE> 11
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 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> 12
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 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.
Page 12 of 15
<PAGE> 13
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 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 13 of 15
<PAGE> 14
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 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.
Page 14 of 15
<PAGE> 15
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 XXVIII.
INTERMEDIARY:
Guy Carpenter & Company, Inc. 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 Guy Carpenter & Company, Inc., 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
FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
It is hereby mutually agreed by
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
(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, 1998, 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> 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 , 199
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.
By:_________________________________
Signed in
this day of , 199
<PAGE> 18
MEMORANDUM OF CHANGES
to the
SCPIE HOLDINGS, INC., et al
FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT
The following changes have been effected from the expiring Fourth Excess
of Loss Reinsurance Agreement Number 01-97-0599 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", a sunrise provision for the 1992
underwriting year has been added to this and 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 VI, "Warranties", (previously addressed under C. of the Limits of
Cover Article) has been revised and all subsequent Articles have been
renumbered accordingly.
5. Article IX, "Ultimate Net Loss", paragraph A. has been revised to include
declaratory judgement expenses.
6. Article XIV, "Premium", the minimum and deposit premium decreased from
$500,000 to $475,000.
7. Article XXVIII, "Intermediary", reference to Willcox Incorporated
Reinsurance Intermediaries has been replaced with Guy Carpenter & Company,
Inc.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
<PAGE> 1
EXHIBIT 10.35
01-98-0922
QUOTA SHARE REINSURANCE AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
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
(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, 1998, 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> 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, 1998 through
December 31, 1998, 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> 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> 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> 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> 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> 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> 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> 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:
Guy Carpenter & Company, Inc. 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 Guy Carpenter & Company, Inc., 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
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
(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, 1998 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> 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 , 199
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.
By:_________________________________
Signed in
this day of , 199
<PAGE> 15
MEMORANDUM OF CHANGES
to the
SCPIE HOLDINGS, INC., et al
QUOTA SHARE REINSURANCE AGREEMENT
The following changes have been effected from the expiring Quota Share
Reinsurance Agreement Number 01-97-0922:
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.
3. Article XXVII, "Intermediary", reference to Willcox Incorporated
Reinsurance Intermediaries has been replaced with Guy Carpenter & Company,
Inc.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
<PAGE> 1
EXHIBIT 10.36
<TABLE>
<S> <C>
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: Allocated Loss Adjustment Expense Excess of Loss Reinsurance.
BUSINESS
COVERED: Allocated Loss Adjustment Expenses arising from Physicians and Surgeons
Comprehensive Professional and Business Liability Policies, including
Clinics and Clinical Laboratories.
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, 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.
</TABLE>
Page 1 of 4
<PAGE> 2
<TABLE>
<S> <C>
EXCLUSIONS: 1. Insolvency Funds.
2. Nuclear Incident - Liability - Reinsurance.
LIMIT AND
RETENTION: 100% of $2,500,000 of allocated loss adjustment expenses
per medical incident in excess of $500,000 of allocated
loss adjustment expenses per medical incident. 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.
The term "Medical Incident" 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.
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.
MAXIMUM
AGGREGATE
LIMIT: Reinsurers maximum liability during the term of this Contract shall be
$5,000,000.
PREMIUM: $1,000,000 payable $250,000 quarterly.
</TABLE>
Page 2 of 4
<PAGE> 3
GENERAL
CONDITIONS: Ultimate Net Loss Clause.
Net Retained Lines Clause.
Notice of Loss Clause.
Loss Funding Clause Including IBNR.
Special Funding Clause.
Commutation Clause - Mutual Agreement only.
Offset Clause.
Errors and Omissions Clause.
Insolvency Clause.
Service of Suit Clause.
Arbitration Clause.
Access to Records Clause.
Guy Carpenter & Company, Inc. Intermediary Clause.
Page 3 of 4
<PAGE> 4
REINSURERS
HEREON: Hannover Ruckversicherungs AG 100%
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.
- ---------------------------
Signature
- ---------------------------
Date
Guy Carpenter & Company, Inc.
By
----------------------------
Executive Vice President
Page 4 of 4
<PAGE> 1
EXHIBIT 10.37
<TABLE>
<S> <C>
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
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, 1998 to September 30, 1999, 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 Pre-Paid 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.
</TABLE>
Page 1 of 6
<PAGE> 2
TERM:
(Cont'd.)
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 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 and
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:
<TABLE>
<CAPTION>
Reporting Period Earned Premium Factors
----------------- -----------------------
<S> <C>
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%
</TABLE>
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.
Page 2 of 6
<PAGE> 3
LIMIT AND
RETENTION: 100% of $9,000,000 each and every Claim Made 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:
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.
Page 3 of 6
<PAGE> 4
MAXIMUM
AGGREGATE LIMIT: The maximum amount of losses recoverable
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.
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, Inc. Intermediary Clause.
Page 4 of 6
<PAGE> 5
REINSURERS
HEREON: Domestic:
Odyssey Reinsurance Co. 3.000%
Gulf Insurance Company 3.000%
Zurich Reinsurance Company 10.000%
-------
Domestic Total 16.000%
Australia:
Through Guy Carpenter & Company, Pty. Ltd.
GIO Reinsurance Co. 7.500%
-------
Australia Total 7.500%
Germany:
Hannover Ruckversicherungs AG 10.000%
-------
Germany Total 10.000%
United Kingdom:
Through Guy Carpenter & Company, Ltd. (UK)
London, England
Underwriters at Lloyd's
SJB 1212 4.0043%
RCV 1007 4.0000%
1007 4.0000%
SJC 1003 2.2400%
2003 5.7600%
BFC 780 0.7701%
MFN 1027 0.2861%
2027 0.6380%
MHE 529 1.2321%
RAE 219 2.4642%
MEL 1223 2.7722%
ROS 227 0.4497%
CMP 2227 0.1663%
RJH 122 1.3861%
BAR 990 0.9241%
HGJ 205 3.6963%
DPM 435 5.6250%
SAM 727 0.3850%
JHV 376 1.4107%
2376 1.6695%
PJG 79 1.5401%
CNA International Reinsurance Co., Ltd. 8.0000%
Odyssey Reinsurance Ltd. 3.0802%
-------
United Kingdom Total 56.5000%
=======
Domestic Total 16.000%
Foreign Total 74.000%
-------
Grand Total 90.000%
=======
Page 5 of 6
<PAGE> 6
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.
- ------------------------------
Signature
- ------------------------------
Date
Guy Carpenter & Company, Inc.
By
----------------------------
Managing Director
Page 6 of 6
<PAGE> 1
EXHIBIT 10.38
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, 1998 to September 30, 1999, 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 Pre-Paid 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.
Page 1 of 6
<PAGE> 2
TERM:
(Cont'd.) 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 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 and 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.
Page 2 of 6
<PAGE> 3
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.
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.
Page 3 of 6
<PAGE> 4
MAXIMUM
AGGREGATE LIMIT: The maximum amount of losses recoverable hereunder
during the term of this agreement shall not exceed
$100,000,000.
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 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.
Errors and Omissions Clause.
Insolvency Clause.
Service of Suit Clause.
Arbitration Clause.
Offset Clause - this Agreement only.
Access to Records Clause.
Guy Carpenter & Company, Inc. Intermediary Clause.
Page 4 of 6
<PAGE> 5
REINSURERS
HEREON: Domestic:
Odyssey Reinsurance Co. 3.000%
Gulf Insurance Company 3.000%
Zurich Reinsurance Company 10.000%
------
Domestic Total 16.000%
Australia:
Through Guy Carpenter & Company, Pty. Ltd.
GIO Reinsurance Co. 7.500%
------
Australia Total 7.500%
Germany:
Hannover Ruckversicherungs AG 8.000%
------
Germany Total 8.000%
United Kingdom:
Through Guy Carpenter & Company, Ltd. (UK)
London, England
Underwriters at Lloyd's
SJB 1212 2.2380%
1213 1.8311%
RCV 1007 4.0000%
1007 4.0000%
SJC 1003 2.2400%
2003 5.7600%
BFC 780 0.7825%
MFN 1027 0.2907%
2027 0.6483%
MHE 529 1.2520%
RAE 219 2.5041%
MEL 1223 2.8171%
ROS 227 0.4570%
CMP 2227 0.1690%
RJH 122 1.4085%
BAR 990 0.9390%
HGJ 205 2.5041%
205 1.2520%
DPM 435 5.6250%
SAM 727 0.3913%
JHV 376 1.4336%
2376 1.6965%
FRW 190 1.5650%
PJG 79 1.5650%
CNA International Reinsurance Co., Ltd. 8.0000%
Odyssey Reinsurance Ltd. 3.1302%
------
United Kingdom Total 58.5000%
Domestic Total 16.000%
Foreign Total 74.000%
------
Grand Total 90.000%
======
Page 5 of 6
<PAGE> 6
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.
- -------------------------------
Signature
- -------------------------------
Date
Guy Carpenter & Company, Inc.
By
-------------------------------
Managing Director
Page 6 of 6
<PAGE> 1
EXHIBIT 10.39
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
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.
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.
Page 1 of 5
<PAGE> 2
EXCLUSIONS: 1. Insolvency Funds.
2. Nuclear Incident - Liability - Reinsurance.
LIMIT AND
RETENTION:
A.) $1,000,000 each and every loss in excess of
$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 or after
October 1, 1997, Policy Limits greater than
$1,000,000 reinsured elsewhere on an Excess of
Loss basis or so deemed.
Page 2 of 5
<PAGE> 3
MAXIMUM
AGGREGATE: Reinsurers maximum liability during the term of this
Contract shall be $8,500,000 or 182.5% of Reinsurance
Premiums Earned during the Contract term, whichever is
the greater.
PREMIUM: 2.88% of G.N.E.P.I.
Deposit - $3,100,000, payable $775,000 quarterly.
Minimum - $2,465,000
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 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
COMMISSION: The Company shall receive a Profit Commission
equal to 90% of 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.
Page 3 of 5
<PAGE> 4
<TABLE>
<S> <C>
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.
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 Declatory 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.
Service of Suit Clause.
Arbitration Clause.
Access to Records Clause.
Guy Carpenter & Company, Inc. Intermediary Clause.
REINSURERS
HEREON: Domestic:
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>
Page 4 of 5
<PAGE> 5
<TABLE>
<S> <C> <C>
REINSURERS
HEREON: United Kingdom:
(Cont'd) Through Guy Carpenter & Company, Ltd. (UK)
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.
- -------------------------------------
Signature
- -------------------------------------
Date
Guy Carpenter & Company, Inc.
By
----------------------------
Managing Director
Page 5 of 5
<PAGE> 1
EXHIBIT 10.40
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.
Page 1 of 5
<PAGE> 2
<TABLE>
<S> <C>
TERM: In respect of recoveries made under Section A.2:
(Cont'd)
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 term of this
Agreement.
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. $3,000,000 each and every loss in excess
of $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 Company during
the period January 1, 1986 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 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 each policy
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.
</TABLE>
Page 2 of 5
<PAGE> 3
PREMIUM: .900% of G.N.E.P.I.
Deposit Premium: $960,000, payable $240,000
quarterly.
Minimum - $768,000.
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
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.
Page 3 of 5
<PAGE> 4
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 Declatory
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.
Service of Suit Clause.
Arbitration Clause.
Access to Records Clause.
Guy Carpenter & Company, Inc. Intermediary Clause.
REINSURERS
HEREON: Domestic:
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%
Page 4 of 5
<PAGE> 5
<TABLE>
<S> <C> <C>
REINSURERS
HEREON:
(Continued) United Kingdom:
Through Guy Carpenter & Company, Ltd. (UK)
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 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.
- -----------------------------
Signature
- -----------------------------
Date
Guy Carpenter & Company, Inc.
By
--------------------------------
Managing Director
Page 5 of 5
<PAGE> 1
EXHIBIT 10.41
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
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:
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.
Page 1 of 5
<PAGE> 2
TERM: In respect of recoveries made under Section A.2:
(Cont'd)
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.
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 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: .333% of G.N.E.P.I.
Deposit Premium: $355,000, payable $88,750 quarterly.
Minimum - $355,000.
Page 2 of 5
<PAGE> 3
REINSTATEMENT(S): 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 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 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 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.
Page 3 of 5
<PAGE> 4
GENERAL
CONDITIONS:
(Cont'd) 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:
Gulf Insurance Company 5.00%
Odyssey 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%
PJG 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%
Page 4 of 5
<PAGE> 5
<TABLE>
<S> <C> <C>
REINSURERS
HEREON: GSC 958 0.791%
(Cont'd) 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%
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 duplicate copy of this Cover Note for completion of
our files.
- ----------------------------------
Signature
- ----------------------------------
Date
Guy Carpenter & Company, Inc.
By
-----------------------------
Managing Director
Page 5 of 5
<PAGE> 1
EXHIBIT 10.42
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 50% of the Actual
Earned Reinsurance Premium.
Page 1 of 6
<PAGE> 2
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, 1992 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.
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 and 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 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: .445% of G.N.E.P.I.
Deposit Premium: $475,000, payable $118,750
quarterly.
Minimum - $475,000.
Page 2 of 6
<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 Declatory
Judgement Expenses incurred in connection with
coverage questions and legal actions related to a
specific claim. Net Retained Lines Clause.
Page 3 of 6
<PAGE> 4
<TABLE>
<S> <C> <C>
GENERAL
CONDITIONS: Notice of Loss Clause.
(Cont'd) 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:
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%
</TABLE>
Page 4 of 6
<PAGE> 5
<TABLE>
<S> <C> <C>
REINSURER
HEREON: United Kingdom:
(Cont'd) Through Guy Carpenter & Company, Ltd., (UK)
London, England
Underwriters at Lloyd's
SVH 1007 6.568%
DFM 435 10.946%
SJC 1003 28.00%
2003 72.00% 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%
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 5.000%
Foreign Total 95.000%
------
Grand Total 100.000%
=======
</TABLE>
Page 5 of 6
<PAGE> 6
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.
- ----------------------------------
Signature
- ----------------------------------
Date
Guy Carpenter & Company, Inc.
By
----------------------------------
Managing Director
Page 6 of 6
<PAGE> 1
EXHIBIT 10.43
<TABLE>
<S> <C>
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
COVERED: (A) Directors and Officers Liability for the 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.
</TABLE>
Page 1 of 3
<PAGE> 2
<TABLE>
<S> <C>
PREMIUM: Original Gross Premiums received by the Reinsured on business
covered hereunder less Ceding Commission.
CEDING
COMMISSION: Original Acquisition Cost plus 15% not to exceed 25% in all.
ACCOUNTS: Reports within forty five (45) days and settlements within
sixty (60) days of the end of each calendar quarter.
GENERAL
CONDITIONS: Loss Adjustment Expenses are within the limit of the 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.
</TABLE>
<TABLE>
REINSURERS
HEREON: Hannover Ruckversicherungs AG 50.00%
Through Guy Carpenter & Co., Ltd.
London, England
Underwriters at Lloyd's
<S> <C> <C> <C>
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%
=======
</TABLE>
Page 2 of 3
<PAGE> 3
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 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.
- -------------------------------------
Signature
- -------------------------------------
Date
Guy Carpenter & Company, Inc.
By
-----------------------------
Managing Director
Page 3 of 3
<PAGE> 1
EXHIBIT 10.52
OFFICE LEASE
THIS LEASE made as of the ______ day of July, 1998, between WH/WSA REALTY,
L.L.C., a Delaware limited liability company ("Landlord") and SCPIE HOLDINGS
INC., a Delaware corporation ("Tenant").
WITNESSETH:
ARTICLE 1
PREMISES, TERM, OPTION TERMS AND RIGHT OF FIRST OPPORTUNITY
(A) PREMISES AND TERM.
(i) Premises and Expected Delivery Dates. Landlord hereby leases to
Tenant and Tenant hereby leases from Landlord that certain space ("Premises")
comprised of: (i) the 4th Floor (consisting of approximately 23,675 square
feet), (ii) the 6th Floor (consisting of approximately 23,675 square feet),
(iii) the 7th Floor (consisting of approximately 23,675 square feet), and (iv)
the 8th Floor (consisting of approximately 23,675 square feet), all of the
foregoing individually and collectively designated on Exhibit "A-1" attached
hereto and made a part hereof and being located in that certain building known
as The Eighteen Eighty Eight Building ("Building") located at 1888 Century Park
East, Los Angeles, California 90067 ("Property", as further described in Article
25), subject to the provisions herein contained. Subject to (ii) below, the term
("Term") of this Lease shall commence ("Commencement Date") on the one hundred
tenth (110th) day following delivery by Landlord of the Premises to Tenant or
its representative for construction (the "110 Day Period"), with Landlord having
completed its asbestos abatement program and associated demolition for the
Premises in accordance with Section 13 of the Work Agreement (as hereinafter
defined). The delivery of the Premises for construction shall occur promptly
after the execution and delivery of this Lease (as to the 6th and 7th floors)
and as soon as practicable, and (subject to (ii) below) in any event by November
1, 1998 (as to the 4th and 8th floors or any portion thereof), provided that
Landlord's failure to deliver the Premises by such date will not subject
Landlord to any liability. The Term shall end on the day ("Expiration Date")
that is ten (10) years following the Commencement Date (unless the Commencement
Date does not occur on the first day of a calendar month, in which event the
Term shall end on the day which is ten (10) years following the first day of the
calendar month immediately after the calendar month in which the Commencement
Date occurs) unless sooner terminated as provided herein. Landlord and Tenant
agree that for purposes of this Lease the rentable area of the Premises is
94,700 square feet and the rentable area of the Property is 472,948 square feet.
(ii) Alternative Delivery Possibilities. If Landlord delivers all of
the Premises, except for a portion thereof currently occupied by a tenant or
tenants of the Building, not to exceed 4,000 square feet (the "Excluded
Portion"), and if the Excluded Portion is delivered on or before thirty (30)
days after delivery of the remainder of the Premises (the "Substantial
Portion"), the 110 Day Period will commence upon delivery of the
Page 1
1888 Century Park East
[SCPIE Holdings Lease]
<PAGE> 2
Substantial Portion. If the Excluded Portion is delivered later than thirty (30)
days after delivery of the Substantial Portion, the 110 Day Period will commence
upon delivery of the Entire Premises; provided, however, that (a) Landlord and
Tenant will consult diligently and in good faith in an effort to agree upon a
construction process that will minimize the delay to the completion of its
improvements which is attributable to the late delivery of the Excluded Portion,
but neither Landlord nor Tenant shall be obligated to expend sums, in addition
to those otherwise required to be expended hereunder, to minimize such delay,
and (b) the Commencement Date will occur on the earlier to occur of (I) the
later to occur of February 20, 1999 and 110 days after delivery of the entire
Premises, or (II) the later to occur of 110 days after delivery of the
Substantial Portion or commencement of operations by Tenant in the Premises.
Landlord will use commercially reasonable efforts to deliver the entire Premises
to Tenant on or before November 1, 1998; provided, however, that Tenant
acknowledges that such delivery may be beyond Landlord's reasonable control
because a number of tenants currently occupying portions of the Premises must be
relocated or must otherwise vacate the Premises (and Landlord must perform the
abatement and associated demolition work required by this Lease) prior to such
delivery. Landlord does not have actual knowledge of any material problems in
connection with such relocation and vacation, and represents to Tenant that it
believes it will be able to so deliver the entirety of the Premises to Tenant by
November 1, 1998, but such relocation and vacation is subject to certain
approvals by or agreements with the existing tenants which have not been
obtained. If the Excluded Portion is delivered after the Substantial Portion but
the 110 Day Period nevertheless commences as provided above, Tenant will be
entitled to an abatement of Basic Rent calculated by multiplying the number of
days of such delay by two (2), multiplying the product by the number of square
feet of the Excluded Portion and multiplying the product by the Basic Rent per
square foot payable under this Lease as of the Commencement Date (one-half of
such abated Basic Rent being taken into account by Tenant's not be obligated to
pay rent as to the Excluded Portion during the period of such delay and the
remaining one-half of such abated Basic Rent being taken into account by
crediting such amount against the Basic Rent first payable under this Lease.
(B) OPTION TERMS.
(i) Option Right. Landlord hereby grants Tenant two (2) options to
extend the Lease Term for a period of five (5) years each (individually and
collectively, the "Option Term"), which options shall be exercisable only by
written notice delivered by Tenant to Landlord as provided below, provided that,
as of the date of delivery of such notice, Tenant is not in Default under this
Lease. Upon Tenant's exercise of each such option to extend strictly in
accordance with the provisions hereof, the Lease Term (as extended if the first
option has already been exercised), shall be extended for a period of five
years. The rights contained in this Article 1(B) may only be exercised by Tenant
or an assignee of Tenant's entire interest under this Lease; provided, however,
that (a) such assignment is otherwise permitted under this Lease, and (b) the
notice to Landlord set forth in clause (iii) below exercising the option
contained in this Article 1(B) shall, if this Lease shall have been assigned,
include an agreement of the assignor to the effect that the assignor shall
remain liable under this Lease during each Option Term.
Page 2
1888 Century Park East
[SCPIE Holdings Lease]
<PAGE> 3
(ii) Option Rent. The Rent payable by Tenant during the Option Term
(the "Option Rent") shall be equal to 95% of the then "Prevailing Fair Market
Rental Rate" for the first five year Option Term, and shall be equal to 100% of
the then "Prevailing Fair Market Rental Rate" for the second five year Option
Term. The "Prevailing Fair Market Rental Rate" shall be the rate at which
tenants, as of the commencement of the applicable Option Term, are leasing
non-sublease, non-encumbered, non-equity space comparable in size, location and
quality to the Premises, which comparable space is located in the Building or
Comparable Buildings, taking into consideration (a) rental abatement
concessions, if any, and (b) tenant improvements or allowances provided or to be
provided for such comparable space, taking into account, and deducting the value
of, the existing improvements in the Premises, such value to be based upon the
age, quality and layout of the improvements and the extent to which the same can
be utilized by Tenant based upon the fact that the precise tenant improvements
existing in the Premises are specifically suitable to Tenant; provided that, in
calculating the Option Rent, no consideration shall be given to any period of
rent abatement in connection with construction of improvements in such
comparable space. The Base Tax Year (as hereinafter defined) and the Base
Expenditure Year (as hereinafter defined) for the first Option Term shall be
2009 and the Base Tax Year and the Base Expenditure Year for the second Option
Term shall be 2014, and the Option Rent shall be adjusted, if necessary, to
reflect any difference between such base year and the base years or expense
stops utilized for the comparable space(s) being considered to determine the
Option Rent.
(iii) Exercise of Options. The options contained in this Article
1(B) shall be exercised by Tenant, if at all, only in the following manner: (i)
Tenant shall deliver written notice to Landlord not less than 14 months prior to
the expiration of the initial Lease Term or the expiration of the Lease Term as
extended by the first option (whichever is applicable), stating that Tenant is
interested in exercising its option; (ii) Landlord, after receipt of Tenant's
notice, shall deliver notice (the "Option Rent Notice") to Tenant not less than
13 months prior to the expiration of the initial Lease Term, setting forth the
Option Rent; and (iii) if Tenant wishes to exercise such option, then Tenant
shall, on or before the earlier of (A) the date occurring 12 months prior to:
(1) the expiration of the initial Lease Term, or (2) the expiration of the Lease
Term as extended by exercise of the first option (whichever is applicable), and
(B) the date occurring 30 days after Tenant's receipt of the Option Rent Notice,
exercise the option by delivering written notice thereof to Landlord, and upon,
and concurrent with, such exercise, Tenant may, at its option, object to the
Option Rent, in which case the parties shall follow the procedure, and the
Option Rent shall be determined, as set forth below.
(a) Determination of Option Rent. In the event Tenant timely
and appropriately objects to the Option Rent, Landlord and Tenant shall attempt
to agree upon the Option Rent using their best good faith efforts. If Landlord
and Tenant fail to reach agreement within thirty (30) days following Tenant's
objection to the Option Rent (the "Outside Agreement Date"), then each party
shall make a separate determination of the Option Rent within an additional
thirty (30) days, and such determinations
Page 3
1888 Century Park East
[SCPIE Holdings Lease]
<PAGE> 4
shall be submitted to arbitration as set forth below. Failure of Landlord or
Tenant to make a determination of the Option Rent within the second thirty-day
period shall conclusively be deemed its approval of the Option Rent determined
by the other.
(1) Landlord and Tenant shall each appoint one
arbitrator who shall by profession be a real estate appraiser who shall have
been active over the five (5) year period ending on the date of such appointment
in the appraisal of commercial high-rise properties in Century City, California.
The determination of the arbitrators shall be limited solely to the issue of
whether Landlord's or Tenant's actual Option Rent for the Premises is the
closest to the actual Option Rent for the Premises as determined by the
arbitrators, taking into account the requirements of this Article 1(B) in
determining the Option Rent. Each such arbitrator shall be appointed within
fifteen (15) days after the applicable Outside Agreement Date.
(2) The two arbitrators so appointed shall within ten
(10) days of the date of the appointment of the last appointed arbitrator agree
upon and appoint a third arbitrator who shall be qualified under the same
criteria set forth hereinabove for qualification of the initial two arbitrators.
(3) The three arbitrators shall within thirty (30) days
of the appointment of the third arbitrator reach a decision as to whether the
parties shall use Landlord's or Tenant's submitted Option Rent and shall notify
Landlord and Tenant thereof.
(4) The decision of the majority of the three
arbitrators shall be binding upon Landlord and Tenant.
(5) If either Landlord or Tenant fails to appoint an
arbitrator within fifteen (15) days after the Outside Agreement Date, the
arbitrator appointed by one of them shall reach a decision, notify Landlord and
Tenant thereof, and such arbitrator's decision shall be binding upon Landlord
and Tenant.
(6) If the two arbitrators fail to agree upon and
appoint a third arbitrator, or both parties fail to appoint an arbitrator, then
the appointment of the third arbitrator or any arbitrator shall be dismissed and
the matter to be decided shall be forthwith submitted to arbitration under the
provisions of the American Arbitration Association, but subject to the
instruction set forth in this Article 1(B).
(7) The cost of arbitration shall be paid by Landlord
and Tenant equally.
(C) RIGHT OF FIRST OPPORTUNITY.
(i) Grant of Right. Subject to the provisions of this Article 1(C),
Tenant shall have the right of first opportunity (the "Right of First
Opportunity") with respect to any space not then leased pursuant to leases in
effect as of May 29, 1998 or pursuant to extensions of the terms of such leases
(whether pursuant to extension options set forth in such leases or pursuant to
other agreements with such tenants in lieu of or in addition to the exercise by
such tenants of such extension options): (a) on the second (2nd) and third (3rd)
floor of the Building, so long as a minimum of 10,000 rentable square feet of
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such space is then available, and (b) either (i) the entire fifth (5th) floor of
the Building or (ii) that certain space on the fifth (5th) floor of the Building
consisting of approximately 15,000 rentable square feet and more specifically
set forth on Exhibit "A-2" attached hereto (collectively, the "First Opportunity
Spaces").
(ii) Procedure for Taking Opportunity. Tenant, at Tenant's option,
shall upon its need for additional space deliver to Landlord written notice (the
"Interest Notice") of its interest in leasing any portion or all of the First
Opportunity Spaces. For a period of twelve (12) months following Landlord's
receipt of the Interest Notice (the "Required Landlord Notice Delivery Period"),
Landlord shall deliver Tenant written notice (the "First Opportunity Notice")
from time to time when any of the First Opportunity Spaces become available for
lease to third parties. Following the expiration of each Required Landlord
Notice Delivery Period, Landlord shall have no obligation to deliver to Tenant a
First Opportunity Notice until and unless Tenant shall have delivered to
Landlord a new Interest Notice (a "New Interest Notice") in accordance with the
provisions hereof (and until Landlord shall receive a New Interest Notice,
Landlord shall be free to lease the First Opportunity Space to anyone to whom
Landlord desires on any terms which Landlord desires [and Landlord shall be free
to not lease the First Opportunity Spaces to anyone at all]).
(iii) Procedure for Acceptance. If Tenant wishes to exercise its
Right of First Opportunity as to the then available portion of the First
Opportunity Spaces, then within three (3) business days of Landlord's delivery
of the First Opportunity Notice to Tenant, Tenant shall deliver written notice
(the "Space Exercise Notice") to Landlord of Tenant's intention to exercise its
Right of First Opportunity. If Tenant timely exercises its Right of First
Opportunity as set forth herein, then Landlord and Tenant shall, within five (5)
business days after Landlord's receipt of the Space Exercise Notice, meet and
discuss during one (1) or more meetings, as is then appropriate under the
circumstances, Tenant's prospective lease from Landlord of the then available
portion of the First Opportunity Spaces (collectively, the "Opportunity
Meetings"). If Tenant shall have failed to deliver a Space Exercise Notice to
Landlord within the aforesaid three (3) day period, or if Tenant does deliver a
Space Exercise Notice within such period but Landlord and Tenant do not reach
agreement as to the material economic terms of the prospective lease of the then
available portion of the First Opportunity Spaces within ten (10) business days
of the first Opportunity Meeting (a "Negotiation Impasse"), then Landlord shall
be free to lease the then available portion of the First Opportunity Space to
anyone to whom Landlord desires on any terms which Landlord desires (and
Landlord shall be free to not lease the then available portion of the First
Opportunity Space to anyone at all), and Tenant shall have no further rights
under this Article 1(C) as to the floor of the Building to which the First
Opportunity Notice relates.
(iv) Effect of Opportunity Meetings. Landlord and Tenant acknowledge
and agree that they shall negotiate in good faith with one another during the
Opportunity Meetings; provided, however, that notwithstanding anything to the
contrary contained in this Lease, (a) the negotiations for Rent payable by
Tenant for the Available Space shall be based upon the same economic and
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other standards set forth in Article 1(B) of this Lease for calculations of
Option Rent and (b) in the event of a Negotiation Impasse, this Lease shall not
be void or voidable by either party, and this Lease shall remain in full force
and effect, without any right of offset or abatement or termination.
(v) Limitations on Right of First Opportunity. Tenant shall not have
the right to exercise its Right of First Opportunity if Tenant, as of either the
date of Tenant's attempted exercise of the Right of First Opportunity or the
scheduled commencement date of the term of the portion of the First Opportunity
Spaces prospectively leased by Tenant pursuant to this Article 1(C), is in
Default under this Lease. Tenant's Right of First Opportunity is personal to
Tenant, may not be transferred to a Transferee (except to an Affiliate of
Tenant, as defined in Article 21 of this Lease), and may only be exercised by
Tenant if Tenant (as distinguished from any subtenants or other occupants), at
the time of Tenant's delivery of the Space Exercise Notice to Landlord with
respect to the portion of the First Opportunity Spaces prospectively leased by
Tenant pursuant to this Article 1(C), occupies at least two (2) floors of the
Premises.
ARTICLE 2
BASE RENT
Tenant shall pay Landlord monthly Base Rent in advance on or before the
first day of each calendar month during the Term, except that the Base Rent for
the first full calendar month for which Base Rent shall be due shall be paid
when Tenant executes this Lease. If the Term commences on a day other than the
first day of a calendar month, or ends on a day other than the last day of a
calendar month, then the Base Rent for such month shall be prorated on the basis
of the actual number of days in such month. During the term, Base Rent shall be
as follows:
<TABLE>
<CAPTION>
Monthly
Rate Per
Rentable Monthly Annual
Square Foot Installment Base
Period of Lease Term ("RSF") of Base Rent Rent
- -------------------- ----------- ------------ ----------
<S> <C> <C> <C>
Lease Commencement Date
through 24th Full Calendar Month $2.13 $201,711 $2,420,532
Calendar Months 25 through 48 $2.28 $215,916 $2,590,992
Calendar Months 49 through 72 $2.43 $230,121 $2,761,452
Calendar Months 73 through 96 $2.53 $239,591 $2,875,092
Calendar Months 97 through 120 $2.68 $253,796 $3,045,552
</TABLE>
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ARTICLE 3
ADDITIONAL RENT
(A) TAXES. Tenant shall pay Landlord an amount equal to Tenant's Prorata
Share of Taxes in excess of the amount of Taxes paid by Landlord during the
calendar year 1999 ("Base Tax Year"); provided, however, that if the
Commencement Date has not occurred on or before 110 days after January 1, 1999,
Tenant shall not be required to pay any increases in Taxes for the first 12
months of the Lease Term. The terms "Taxes" and "Tenant's Prorata Share" shall
have the meanings specified therefor in Article 25.
(B) OPERATING EXPENSES. Tenant shall pay Landlord an amount equal to
Tenant's Prorata Share of Operating Expenses in excess of the amount of
Operating Expenses paid by Landlord during the calendar year 1999 ("Base Expense
Year"); provided, however, that if the Commencement Date has not occurred on or
before 110 days after January 1, 1999, Tenant shall not be required to pay any
increases in Operating Expenses for the first 12 months of the Lease Term. The
terms "Operating Expenses" and "Tenant's Prorata Share" shall have the meanings
specified therefor in Article 25. Landlord agrees that Tenant's Prorata Share of
the Operating Expenses, excluding therefrom any expenses affected by insurance
and unionized labor, shall be capped at, and shall not increase by more than, a
non-cumulative seven percent (7%) per annum as compared to such Expenses for the
prior calendar year. Tenant shall pay (without the benefit of such cap) for all
After-Hours HVAC (as hereinafter defined) and other excess usage of utility
services applicable to Tenant, in accordance with the terms and conditions of
Article 7.
(C) MANNER OF PAYMENT. Taxes and Operating Expenses shall be paid in the
following manner:
(i) Landlord may reasonably estimate in advance the amounts Tenant
shall owe for Taxes and Operating Expenses for any full or partial calendar year
of the Term. In such event, Tenant shall pay such estimated amounts, on a
monthly basis, on or before the first day of each calendar month, together with
Tenant's payment of Base Rent. Such estimate may be reasonably adjusted from
time to time by Landlord.
(ii) Within 120 days after the end of each calendar year, or as soon
thereafter as practicable, Landlord shall provide a statement (the "Statement")
to Tenant showing: (a) the amount of actual Taxes and Operating Expenses for
such calendar year, with a listing of amounts for major categories of Operating
Expenses, and such amounts for the Base Years, (b) any amount paid by Tenant
towards Taxes and Operating Expenses during such calendar year on an estimated
basis, and (c) any revised estimate of Tenant's obligations for Taxes and
Operating Expenses for the current calendar year.
(iii) If the Statement shows that Tenant's estimated payments were
less than Tenant's actual obligations for Taxes and Operating Expenses for such
year, Tenant shall pay the difference. If the Statement shows an increase in
Tenant's estimated payments for the current calendar year, Tenant shall pay the
difference between the new and former estimates, for the period from January 1
of the current calendar year through the month in which the
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Statement is sent. Tenant shall make such payments within thirty (30) days after
Landlord sends the Statement.
(iv) If the Statement shows that Tenant's estimated payments
exceeded Tenant's actual obligations for Taxes and Operating Expenses, Tenant
shall receive a credit for the difference against payments of Rent next due. If
the Term shall have expired and no further Rent shall be due, Tenant shall
receive a refund of such difference, within thirty (30) days after Landlord
sends the Statement.
(v) So long as Tenant's obligations hereunder are not materially
adversely affected thereby, Landlord reserves the right to reasonably change,
from time to time, the manner or timing of the foregoing payments. In lieu of
providing one Statement covering Taxes and Operating Expenses, Landlord may
provide separate statements, at the same or different times. No delay by
Landlord in providing the Statement (or separate statements) shall be deemed a
default by Landlord or a waiver of Landlord's right to require payment of
Tenant's obligations for actual or estimated Taxes or Operating Expenses. In no
event shall a decrease in Taxes or Operating Expenses below the Base Year
amounts, ever decrease the monthly Base Rent, or give rise to a credit in favor
of Tenant.
(D) PRORATION. If the Term commences other than on January 1, or ends
other than on December 31, Tenant's obligations to pay estimated and actual
amounts towards Taxes and Operating Expenses for such first or final calendar
years shall be prorated to reflect the portion of such years included in the
Term. Such proration shall be made by multiplying the total estimated or actual
(as the case may be) Taxes and Operating Expenses, for such calendar years, as
well as the Base Year amounts, by a fraction, the numerator of which shall be
the number of days of the Term during such calendar year, and the denominator of
which shall be 365.
(E) LANDLORD'S RECORDS. Landlord shall maintain records respecting Taxes
and Operating Expenses and determine the same in accordance with sound
accounting and management practices, consistently applied. Although this Lease
contemplates the computation of Taxes and Operating Expenses on a cash basis,
Landlord shall make reasonable and appropriate accrual adjustments to ensure
that each calendar year, including the Base Years, includes substantially the
same recurring items. Landlord reserves the right to change to a full accrual
system of accounting so long as the same is consistently applied and Tenant's
obligations are not materially adversely affected. Tenant or its representative
shall have the right to examine such records upon reasonable prior notice
specifying such records Tenant desires to examine, during normal business hours
at the place or places where such records are normally kept by sending such
notice no later than forty-five (45) days following the furnishing of the
Statement. Tenant may take exception to matters included in Taxes or Operating
Expenses, or Landlord's computation of Tenant's Prorata Share of either, by
sending notice specifying such exception and the reasons therefor to Landlord no
later than thirty (30) days after Landlord makes such records available for
examination. Such Statement shall be considered final, except as to matters to
which exception is taken after examination of Landlord's records in the
foregoing manner and within the foregoing times. Tenant acknowledges that
Landlord's ability to budget and incur expenses depends on the
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finality of such Statement, and accordingly agrees that time is of the essence
of this Paragraph. If Tenant takes exception to any matter contained in the
Statement as provided herein, Landlord shall refer the matter to a nationally
recognized independent certified public accountant with substantial experience
in reviewing operating expenses for office buildings in Southern California,
whose certification as to the proper amount shall be final and conclusive as
between Landlord and Tenant. Tenant shall promptly pay the cost of such
certification unless such certification determines that Tenant was over billed
by more than 5%. If Tenant was over billed by more than 5%, Landlord shall pay
the cost of such certification, and Landlord shall reimburse Tenant for the
reasonable expenses (exclusive of fees calculated on a contingency basis)
actually paid by Tenant to third parties in connection with their examination of
Landlord's records; provided, however, that the amount of the over billing shall
be taken into account by Landlord in determining the reasonability of such
expenses. Pending resolution of any such exceptions in the foregoing manner,
Tenant shall continue paying Tenant's Prorata Share of Taxes and Operating
Expenses in the amounts determined by Landlord, subject to adjustment after any
such exceptions are so resolved.
(F) RENT AND OTHER CHARGES. Base Rent, Taxes, Operating Expenses, and any
other amounts which Tenant is or becomes obligated to pay Landlord under this
Lease or other agreement entered in connection herewith, are sometimes herein
referred to collectively as "Rent," and all remedies applicable to the
non-payment of Rent shall be applicable thereto. Rent shall be paid at any
office maintained by Landlord or its agent at the Property, or at such other
place as Landlord may designate.
ARTICLE 4
DELIVERY OF PREMISES
Tenant shall construct all improvements to the Premises in accordance with
that certain Work Letter Agreement ("Work Agreement") bearing even date herewith
between Landlord and Tenant. All of the terms and conditions of this Lease shall
be applicable to the period between the date hereof and the Commencement Date
except that Tenant shall not be obligated to pay Base Rent or Tenant's Prorata
Share of Taxes or Operating Expenses during such period.
ARTICLE 5
CONDITION OF PREMISES
Tenant has inspected the Premises, Property, Systems and Equipment (as
defined in Article 25), or has had an opportunity to do so, and agrees to accept
the same "as is", in its current state, without any agreements, representations,
understandings or obligations on the part of Landlord to perform any
alterations, repairs or improvements, except as expressly set forth in the Work
Agreement.
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ARTICLE 6
USE AND RULES
Tenant shall use the Premises for general, non-medical offices and no
other purpose whatsoever, in compliance with all applicable Laws. Tenant shall
not use the Premises in any manner so as to cause a cancellation of Landlord's
insurance policies, or an increase in the premiums thereunder. Tenant shall have
access to the Building and the Building's parking garage ("Parking Garage")
seven (7) days per week, twenty-four (24) hours per day subject to such
reasonable security procedures Landlord may from time to time impose, fire or
other casualty, strikes, lockouts or other labor troubles, shortages of
equipment or materials, governmental requirements, power shortages or outages,
or other causes beyond Landlord's reasonable control. Tenant shall comply with
all rules set forth in Rider One attached hereto (the "Rules"). Landlord shall
have the right to reasonably amend such Rules and supplement the same with other
reasonable Rules (not expressly inconsistent with this Lease and provided that
the same do not have a material adverse effect on Tenant's use of the Premises
otherwise expressly permitted hereunder) relating to the Property, or the
promotion of safety, care, cleanliness or good order therein, and all such
amendments or new Rules shall be binding upon Tenant after five (5) days' notice
thereof to Tenant. All Rules shall be applied on a non-discriminatory basis, but
unless Landlord fails to use good faith efforts to resolve any violation of
Rules which materially and adversely affects Tenant's use of the Premises,
nothing herein shall be construed to give Tenant or any other Person (as defined
in Article 25) any claim, demand or cause of action against Landlord arising out
of the violation of such Rules by any other tenant, occupant, or visitor of the
Property, or out of the enforcement or waiver of the Rules by Landlord in any
particular instance.
ARTICLE 7
SERVICES AND UTILITIES
Landlord shall provide the following services and utilities (the cost of
which shall be included in Operating Expenses unless otherwise stated herein or
in any separate rider hereto):
(A) Electricity for standard office lighting fixtures, and equipment and
accessories customary for offices (up to 280 hours per month) where: (1) the
connected electrical load of all of the same does not exceed 4 watts per
rentable square foot of the Premises (which shall be calculated by reference to
the average connected electrical load for the entire Premises and which may
increase if and to the extent the standard for the Building increases beyond 4
watts), and (2) the electricity will be at nominal 120 volts, single phase (or
110 volts, depending on available service in the Building), and 277 volts, three
phase. Tenant shall install, at its cost and expense, meters to measure its
electrical usage.
(B) Heat and air-conditioning to provide a temperature consistent with
temperature ranges provided for other tenants in the Building, and in accordance
with applicable Law, for occupancy
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of the Premises under normal business operations, from 8:00 a.m. until 6:00 p.m.
Monday through Friday, and from 9:00 a.m. until 1:00 p.m. on Saturday, except on
Holidays (as defined in Article 25). If Tenant desires to use heat and
air-conditioning during the hours other than during normal business operations
as stated herein ("After-Hours HVAC"), Tenant shall have access on a floor by
floor basis (with no start-up charge) to such After-Hours HVAC to the extent
permitted under applicable laws and regulations at the prevailing hourly rate
per hour in the Building at the time of such request, which rate shall be
designed to cover the out-of-pocket expenses, and a reasonable allocation of
overhead, of Landlord in supplying the After-Hours HVAC. As of the date of this
Lease, the hourly rate for After-Hours HVAC in the Building is Thirty-Five
Dollars ($35.00) per hour per floor, with a one (1) hour minimum order; Tenant
acknowledges and agrees that such rate satisfies the "reasonable allocation of
overhead" standard set forth in the immediately preceding sentence.
(C) Water for drinking, lavatory and toilet purposes at those points of
supply provided for nonexclusive general use of other tenants at the Property.
(D) Customary office cleaning and trash removal service Monday through
Friday or Sunday through Thursday in and about the Premises.
(E) Operatorless passenger elevator service and freight elevator service
(subject to reasonable scheduling by Landlord) in common with Landlord and other
tenants and their contractors, agents and visitors.
(F) Landlord shall provide such extra utilities or services as Tenant may
from time to time request, if the same are reasonable and feasible for Landlord
to provide and do not involve modifications or additions to the Property or
existing Systems and Equipment (as defined in Article 25), and if Landlord shall
receive Tenant's request within a reasonable period prior to the time such extra
utilities or services are required. Landlord may comply with written or oral
requests by any officer or employee of Tenant, unless Tenant shall notify
Landlord of, or Landlord shall request, the names of authorized individuals (up
to 3 for each floor on which the Premises are located) and procedures for
written requests. Tenant shall, for such extra utilities or services, pay such
charges as Landlord shall from time to time reasonably establish. Such charges
shall not be in excess of charges generally by landlords of Comparable Buildings
for comparable utilities and services. All charges for such extra utilities or
services shall be due at the same time as the installment of Base Rent with
which the same are billed, or if billed separately, shall be due within thirty
(30) days after such billing.
(G) Landlord shall provide such services to the Building that are
consistent with the services provided by Comparable Buildings (consistent with
the age of the Building and so long as such requirement can be met with the
existing physical plant), the cost of which shall (except as otherwise
specifically set forth in this Lease) be included in Operating Expenses.
Landlord may install and operate meters or any other reasonable system for
monitoring or estimating any services or utilities used by Tenant in excess of
those required to be provided by Landlord under this Lease (including a system
for Landlord's
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engineer to reasonably estimate any such excess usage). If such system indicates
such excess services or utilities, Tenant shall pay Landlord's reasonable
charges for installing and operating such system and any supplementary
air-conditioning, ventilation, heat, electrical or other systems or equipment
(or adjustments or modifications to the existing Systems and Equipment), and
Landlord's reasonable charges for such amount of excess services or utilities
used by Tenant, subject to the above provisions for such charges.
Landlord does not warrant that any services or utilities will be free from
shortages, failures, variations, or interruptions caused by repairs,
maintenance, replacements, improvements, alterations, changes of service,
strikes, lockouts, labor controversies, accidents, inability to obtain services,
fuel, steam, water or supplies, governmental requirements or requests, or other
causes beyond Landlord's reasonable control. None of the same shall be deemed an
eviction or disturbance of Tenant's use and possession of the Premises or any
part thereof, or render Landlord liable to Tenant for abatement of Rent, or
relieve Tenant from performance of Tenant's obligations under this Lease;
Landlord in no event shall be liable for damages by reason of loss of profits,
business interruption or other consequential damages.
If (a) heat, air-conditioning or any other utility is interrupted or
discontinued, and Tenant is unable to reasonably use the Premises or at least
one (1) floor thereof as a result of such interruption or discontinuance, and
(b) Tenant shall have given written notice respecting such interruption or
discontinuance to Landlord, and Landlord shall have failed to cure such
interruption or discontinuance within five (5) business days after receiving
such notice, or an aggregate of thirty (30) business days in any calendar year
after receiving one (1) or more such notices, Base Rent hereunder shall
thereafter (but not retroactively) be proportionately abated with respect to the
portion or portions of the Premises affected thereby for the periods so
affected, until such time as such heat or air-conditioning or other utility is
restored. Such abatement of Base Rent shall be Tenant's sole recourse in the
event of a discontinuance or interruption of heat or air-conditioning or any
other utility. Notwithstanding the foregoing: (a) if any discontinuance or
interruption of heat or air-conditioning or any other utility occurs (or
continues) for reasons beyond Landlord's reasonable control or other than by
reason of Landlord's failure to make repairs which Landlord is required to
perform, such abatement of Base Rent shall be available only if and to the
extent Landlord receives proceeds of rental interruption insurance with respect
to the Base Rent payable by Tenant, and (b) abatement of Taxes and Operating
Expenses shall be available only if and to the extent Landlord receives proceeds
of rental interruption insurance with respect to such Taxes and Operating
Expenses payable by Tenant.
ARTICLE 8
ALTERATIONS AND LIENS
Tenant shall make no additions, changes, alterations or improvements (the
"Work") to the Premises or the Systems and Equipment (as defined in Article 25)
pertaining to the Premises without the prior written consent of Landlord;
provided, however, Tenant shall be permitted to perform non-structural Work that
is only cosmetic in nature (consisting of painting, carpeting, wall
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covering and floor covering) not exceeding an aggregate cost of $75,000
("Cosmetic Work") on any one floor of the Premises, without Landlord's consent,
so long as Tenant pays for the entire cost of such Work and delivers written
notice to Landlord of the proposed Work, together with any plans and
specifications, if any, not less than ten (10) business days prior to the
anticipated commencement of any such Work. Landlord may impose reasonable
requirements as a condition of such consent including without limitation the
submission of plans and specifications for Landlord's prior written approval,
obtaining necessary permits, obtaining insurance, reasonable prior approval of
contractors, subcontractors and suppliers, prior receipt of copies of all
contracts and subcontracts, contractor and subcontractor lien waivers,
affidavits listing all contractors, subcontractors and suppliers, use of union
labor (if Landlord uses union labor), affidavits from engineers reasonably
acceptable to Landlord stating that the Work will not adversely affect the
Systems and Equipment or the structure of the Property, and reasonable
requirements as to the manner and times in which such Work shall be done. All
Work shall be performed in a good and workmanlike manner and all materials used
shall be of a quality comparable to or better than those in the Premises or
Property and shall, to the extent applicable, be in accordance with plans and
specifications approved by Landlord, and Landlord may require that all such Work
(other than Cosmetic Work) be performed under Landlord's supervision. In all
cases in which Landlord's consent is required, Tenant shall pay Landlord a
reasonable fee to cover Landlord's overhead in reviewing Tenant's plans and
specifications, except that Landlord shall not charge Tenant any supervision
fee. If Landlord consents or supervises any work, the same shall not be deemed a
warranty as to the adequacy of the design, workmanship or quality of materials,
and Landlord hereby expressly disclaims any responsibility or liability for the
same. Landlord shall under no circumstances have any obligation to repair,
maintain or replace any portion of the Work. The Work Agreement shall apply with
respect to Tenant's initial improvement Work.
Tenant shall keep the Property and Premises free from any mechanic's,
materialman's or similar liens or other such encumbrances in connection with any
Work on or respecting the Premises performed by or at the request of Tenant and
shall indemnify and hold Landlord harmless from and against any claims,
liabilities, judgments, or costs (including reasonable attorneys' fees) arising
out of the same or in connection therewith. Tenant shall give Landlord notice at
least twenty (20) days prior to the commencement of any Work (or such additional
time as may be necessary under applicable Laws), to afford Landlord the
opportunity of posting and recording appropriate notices of non-responsibility.
Tenant shall remove any such lien or encumbrance by bond or otherwise within
thirty (30) days after written notice by Landlord, and if Tenant shall fail to
do so, Landlord may pay the amount necessary to remove such lien or encumbrance,
without being responsible for investigating the validity thereof. The amount so
paid shall be deemed additional Rent under this Lease payable within thirty (30)
days after demand, without limitation as to other remedies available to Landlord
under this Lease. Nothing contained in this Lease shall authorize Tenant to do
any act which shall subject Landlord's title to the Property or Premises to any
liens or encumbrances whether claimed by operation of law or express or implied
contract. Any claim to a lien or encumbrance upon the Property or Premises
arising in connection with any Work on or respecting the Premises performed by
or at the request of
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Tenant shall be null and void, or at Landlord's option shall attach only against
Tenant's interest in the Premises and shall in all respects be subordinate to
Landlord's title to the Property and Premises.
ARTICLE 9
REPAIRS
Except for customary cleaning and trash removal provided by Landlord under
Article 7, ordinary wear and tear and damage covered under Article 10, and the
structural and building system elements which constitute a part of the Building,
Tenant shall keep the Premises in good and sanitary condition, working order and
repair (including without limitation, carpet, wall-covering, doors, plumbing and
other fixtures, equipment, alterations and improvements whether installed by
Landlord or Tenant). In the event that any repairs, maintenance or replacements
are required, Tenant shall promptly arrange for the same, except in an emergency
where Landlord has no on-site personnel that may respond to the situation,
either through Landlord for such reasonable charges as Landlord may from time to
time establish, or such contractors as Landlord generally uses at the Property
or such other contractors as Landlord shall first approve in writing, and in a
first class, workmanlike manner approved by Landlord in advance in writing. If
Tenant does not promptly make such arrangements for thirty (30) days after
notice from Landlord to Tenant, except in any emergency, Landlord may, but need
not, make such repairs, maintenance and replacements, and the reasonable costs
paid or incurred by Landlord therefor shall be reimbursed by Tenant promptly
after request by Landlord. Tenant shall indemnify Landlord and pay for any
repairs, maintenance and replacements to areas of the Property outside the
Premises, caused, in whole or in part, as a result of moving any furniture,
fixtures, or other property to or from the Premises, or by Tenant or its
employees or agents (notwithstanding anything to the contrary contained in this
Lease). Except as provided in the preceding sentence, or for damage covered
under Article 10, Landlord shall keep the structural and building system
elements which constitute a part of the Building and the common areas of the
Property in good and sanitary condition, working order and repair (the cost of
which shall be included in Operating Expenses, as described in Article 25,
except as limited therein).
ARTICLE 10
CASUALTY DAMAGE
If the Premises or any common areas of the Property providing access
thereto shall be damaged by fire or other casualty, Landlord shall use available
insurance proceeds to restore the same. Such restoration shall be to
substantially the condition prior to the casualty, except for modifications
required by zoning and building codes and other Laws or by any Holder (as
defined in Article 25), any other modifications to the common areas reasonably
determined to be made by Landlord (provided access to the Premises or the
parking facility servicing the Building is not materially impaired without
providing reasonably comparable substitute facilities taking into account the
change in location), and except that Landlord shall not be required to repair or
replace any of Tenant's furniture, furnishings, fixtures or equipment, or any
alterations
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or improvements in excess of any work performed or paid for by Landlord under
this Lease or any separate agreement signed by the parties in connection
herewith. Landlord shall not be liable for any inconvenience or annoyance to
Tenant or its visitors, or injury to Tenant's business resulting in any way from
such damage or the repair thereof. However, Landlord shall allow Tenant a
proportionate abatement of Rent during the time and to the extent the Premises
are unfit for occupancy for the purposes permitted under this Lease and not
occupied by Tenant as a result thereof (but abatement shall be limited to
Landlord's rent loss insurance proceeds if Tenant or its employees or agents
caused the damage). Notwithstanding the foregoing to the contrary, Landlord may
elect to terminate this Lease by notifying Tenant in writing of such termination
within ninety (90) days after the date of damage (such termination notice to
include a termination date providing at least ninety (90) days for Tenant to
vacate the Premises), if the Property shall be damaged by fire or other casualty
or cause such that: (a) repairs to the Premises and access thereto cannot
reasonably be completed within one hundred fifty (150) days after the casualty
without the payment of overtime or other premiums, (b) more than 25% of the
Premises is affected by the damage, and fewer than 24 months remain in the Term,
or any material damage occurs to the Premises during the last 12 months of the
Term, (c) any Holder (as defined in Article 25) shall require that the insurance
proceeds or any substantial portion thereof be used to retire the Mortgage debt
(or shall terminate the ground lease, as the case may be), or the damage is not
fully covered by Landlord's insurance policies (provided Landlord has maintained
the insurance required under this Lease), or (d) the cost of the repairs,
alterations, restoration or improvement work would exceed 25% of the replacement
value of the Building, or the nature of such work would make termination of this
Lease necessary. Tenant agrees that Landlord's obligation to restore, and the
abatement of Rent provided herein, shall be Tenant's sole recourse in the event
of such damage, and waives any other rights Tenant may have under any applicable
Law to terminate the Lease by reason of damage to the Premises or Property,
including all rights under California Civil Code, Sections 1932(2), 1933(4), and
1942, as the same may be modified or replaced hereafter.
Notwithstanding anything contained in this Lease to the contrary, Tenant
may terminate this Lease if Tenant is unable to use all or a substantial portion
of the Premises as a result of fire or other casualty, and: (a) Landlord fails
to commit to complete restoration work to the Premises and access thereto within
ninety (90) days after the damage occurs, or (b) Landlord fails to substantially
complete such work within two hundred ten (210) days after the damage occurs, or
such additional time as may be necessary due to Force Majeure, or (c) such work
is reasonably estimated (which estimate Landlord shall provide within ninety
(90) days following the casualty if Tenant so requests within sixty (60) days
following the casualty), to take more than two hundred ten (210) days to
substantially complete after the damage occurs, or (d) any material damage
occurs to the Premises and fewer than twelve (12) months remain in the Term. In
order to exercise any of the foregoing termination rights, Tenant must send
Landlord at least thirty (30) days (but not more than 120 days) advance written
notice specifying the basis for termination, and such notice must be given no
later than thirty (30) days following the occurrence of the condition serving as
the basis for the termination right invoked by Tenant. If Tenant exercises its
termination right on the basis of the provisions set forth in clause (a) or (b)
above,
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and Landlord commences or substantially completes, as the case may be, the
restoration work to the Premises within thirty (30) days after receipt of such
notice from Tenant, such notice shall be of no force or effect. Notwithstanding
anything to the contrary contained herein, if Tenant, or its officers,
employees, contractors or agents delay Landlord in performing the repairs,
Landlord shall have additional time to complete the work equal to such delay and
Tenant shall pay Landlord all Rent for the period of such delay.
The word "Term" as used in this Article 10, or as used in any Rider or
other provision of this Lease respecting termination of this Lease in the event
of casualty or other damage, shall include any extension or renewal period which
shall have been duly exercised by Tenant prior to the casualty pursuant to any
express option granted to Tenant under or in connection with this Lease.
Tenant acknowledges that this Article represents the entire agreement between
the parties respecting damage to the Premises or Property.
ARTICLE 11
INSURANCE, SUBROGATION, AND WAIVER OF CLAIMS
Tenant shall maintain during the Term comprehensive (or commercial)
general liability insurance, with limits of not less than $2,000,000 combined
single limit for personal injury, bodily injury or death, or property damage or
destruction (including loss of use thereof) for any one occurrence. Tenant shall
also maintain during the Term worker compensation insurance as required by
statute, and primary, noncontributory, "all-risk" property damage insurance
covering Tenant's personal property, business records, fixtures and equipment,
for damage or other loss caused by fire or other casualty or cause including,
but not limited to, vandalism and malicious mischief, theft, water damage of any
type, including sprinkler leakage, bursting or stoppage of pipes, explosion,
business interruption, and other insurable risks in amounts not less than the
full insurable replacement value of such property and full insurable value of
such other interests of Tenant (subject to deductible amounts appropriate for a
company of Tenant's size and financial standing). Landlord shall, as part of
Operating Expenses, maintain during the Term comprehensive (or commercial)
general liability insurance with respect to the Property, with limits of not
less than $2,000,000 combined single limit for personal injury, bodily injury or
death, or property damage or destruction (including loss of use thereof) for any
one occurrence. Landlord shall also, as part of Operating Expenses, maintain
during the Term worker compensation insurance as required by statute, and
primary, non-contributory, extended coverage or "all-risk" property damage
insurance, in an amount equal to at least ninety percent (90%)(except with
respect to earthquake coverage) of the full insurable replacement value of the
Property (exclusive of the costs of excavation, foundations and footings, and
such risks required to be covered by Tenant's insurance, and subject to
reasonable deductible amounts), or such other amount necessary to prevent
Landlord from being a co-insured, and such other coverage as Landlord may
reasonably elect to carry or that may be required by any Holder (as defined in
Article 25).
Each Party shall provide the other with certificates evidencing such
coverage (and, with respect to liability coverage,
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showing the other and in the case of Landlord, Landlord's property manager, as
additional insureds) prior to Tenant's performance of any work at the Premises,
and Tenant's certificate shall state that such insurance coverage may not be
reduced or cancelled without at least thirty (30) days' prior written notice to
Landlord, and each party shall provide renewal certificates to the other at
least twenty (20) days prior to expiration of such policies. Landlord may
periodically, but not more often than every five years, require that Tenant
reasonably increase the aforementioned coverage to that coverage then provided
by other similarly situated tenants in the Building. Except as provided to the
contrary herein, any insurance carried by Landlord or Tenant shall be for the
sole benefit of the party carrying such insurance. Any insurance policies
hereunder may be "blanket policies." All insurance required hereunder shall be
provided by responsible insurers and Tenant's insurer shall be reasonably
acceptable to Landlord. By this Article, Landlord and Tenant intend that their
respective property loss risks shall be borne by responsible insurance carriers
to the extent above provided, and Landlord and Tenant hereby agree to look
solely to, and seek recovery only from, their respective insurance carriers in
the event of a property loss to the extent that such coverage is agreed to be
provided hereunder. The parties each hereby waive all rights and claims against
each other for such losses, and waive all rights of subrogation of their
respective insurers, provided such waiver of subrogation shall not affect the
right of the insured to recover thereunder. The parties agree that their
respective insurance policies are now, or shall be, endorsed such that said
waiver of subrogation shall not affect the right of the insured to recover
thereunder, so long as no material additional premium is charged therefor.
ARTICLE 12
CONDEMNATION
If the whole or any material part of the Premises or Property shall be
taken by power of eminent domain or condemned by any competent authority for any
public or quasi-public use or purpose, or if Landlord shall grant a deed or
other instrument in lieu of such taking by eminent domain or condemnation,
Landlord shall have the option to terminate this Lease upon ninety (90) days'
notice, provided such notice is given no later than 120 days after the date of
such taking, deed or other instrument. Tenant shall have reciprocal termination
rights if the whole or any material part of the Premises or its parking
facilities (unless reasonably comparable substitute parking facilities are
provided) is permanently taken. Such termination rights of Tenant shall be in
lieu of any other rights Tenant may have under Law, and all such rights are
hereby waived. Landlord shall be entitled to receive the entire award or payment
in connection therewith, except that Tenant shall have the right to file any
separate claim available to Tenant for any taking of Tenant's personal property
and fixtures belonging to Tenant and removable by Tenant upon expiration of the
Term, and for relocation expenses (so long as such claim does not diminish the
award available to Landlord or any Holder, and such claim is payable separately
to Tenant). All Rent and Tenant's Prorata Share shall be apportioned as of the
date of such termination, or the date of such taking, whichever shall first
occur. If any part of the Premises shall be taken, and this Lease shall not be
so terminated, the Rent and Tenant's Prorata Share shall be proportionately
abated.
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ARTICLE 13
RETURN OF POSSESSION
At the expiration or earlier termination of this Lease or Tenant's right
of possession, Tenant shall surrender possession of the Premises in the
condition required under Article 9, ordinary wear and tear and damage by
casualty or condemnation excepted, and shall surrender all keys, any key cards,
and any parking stickers or cards, to Landlord, and advise Landlord as to the
combination of any locks or vaults then remaining in the Premises, and shall
remove all trade fixtures and personal property. All improvements, fixtures and
other items in or upon the Premises (except trade fixtures and personal property
belonging to Tenant), whether installed by Tenant or Landlord, shall be
Landlord's property and shall remain upon the Premises, all without
compensation, allowance or credit to Tenant. However, if prior to such
termination or within ten (10) days thereafter Landlord so directs by notice,
Tenant shall promptly remove such of the foregoing items that are extraordinary
improvements (e.g., staircase) as are designated in such notice and restore the
Premises to the condition prior to the installation of such items; provided,
Landlord shall not require removal of customary office improvements installed
pursuant to any separate agreement signed by both parties in connection with
entering this Lease (except as expressly provided to the contrary therein), or
installed by Tenant with Landlord's written approval (except as expressly
required by Landlord in connection with granting such approval) and provided
further, that Tenant shall not be obligated to repair, replace or restore wall
coverings or floor coverings in the Premises. If Tenant shall fail to perform
any repairs or restoration, or fail to remove any items from the Premises
required hereunder, Landlord may do so, and Tenant shall pay Landlord the cost
thereof upon demand. All property removed from the Premises by Landlord pursuant
to any provisions of this Lease or any Law may be handled or stored by Landlord
at Tenant's expense, and Landlord shall in no event be responsible for the
value, preservation or safekeeping thereof. All property not removed from the
Premises or retaken from storage by Tenant within thirty (30) days after
expiration or earlier termination of this Lease or Tenant's right to possession,
shall at Landlord's option be conclusively deemed to have been conveyed by
Tenant to Landlord as if by bill of sale without payment by Landlord. Unless
prohibited by applicable Law, Landlord shall have a lien against such property
for the costs incurred in removing and storing the same.
ARTICLE 14
HOLDING OVER
Unless Landlord expressly agrees otherwise in writing, Tenant shall pay
Landlord 150% of the amount of Rent then applicable prorated on per diem basis
for each day Tenant shall retain possession of the Premises or any part thereof
after expiration or earlier termination of this Lease, together with all damages
sustained by Landlord on account thereof. The foregoing provisions shall not
serve as permission for Tenant to hold-over, nor serve to extend the Term
(although Tenant shall remain bound to comply with
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all provisions of this Lease until Tenant vacates the Premises, and shall be
subject to the provisions of Article 13).
ARTICLE 15
NO WAIVER
No provision of this Lease will be deemed waived by either party unless
expressly waived in writing signed by the waiving party. No waiver shall be
implied by delay or any other act or omission of either party. No waiver by
either party of any provision of this Lease shall be deemed a waiver of such
provision with respect to any subsequent matter relating to such provision, and
Landlord's consent or approval respecting any action by Tenant shall not
constitute a waiver of the requirement for obtaining Landlord's consent or
approval respecting any subsequent action. Acceptance of Rent by Landlord shall
not constitute a waiver of any breach by Tenant of any term or provision of this
Lease. No acceptance of a lesser amount than the Rent herein stipulated shall be
deemed a waiver of Landlord's right to receive the full amount due, nor shall
any endorsement or statement on any check or payment or any letter accompanying
such check or payment be deemed an accord and satisfaction, and Landlord may
accept such check or payment without prejudice to Landlord's right to recover
the full amount due. The acceptance of Rent or of the performance of any other
term or provision from any Person other than Tenant, including any Transferee,
shall not constitute a waiver of Landlord's right to approve any Transfer.
ARTICLE 16
ATTORNEYS' FEES AND JURY TRIAL
In the event of any litigation between the parties regarding this Lease,
the prevailing party shall be entitled to obtain, as part of the judgment, all
reasonable attorneys' fees, costs and expenses incurred in connection with such
litigation, except as may be limited by applicable Law. In the interest of
obtaining a speedier and less costly hearing of any dispute, the parties hereby
each irrevocably waive the right to trial by jury.
ARTICLE 17
PERSONAL PROPERTY TAXES, RENT TAXES AND OTHER TAXES
Tenant shall pay prior to delinquency all taxes, charges or other
governmental impositions assessed against or levied upon Tenant's fixtures,
furnishings, equipment and personal property located in the Premises, and any
Work to the Premises under Article 8 (to the extent that such Work is not
considered part of the real property taxes to be paid by Tenant hereunder) and
Landlord can demonstrate through the Assessor's work papers or otherwise that
such Work has caused the Building to be assessed at a higher value than the
Building would have been assessed if the Premises had merely been improved to
building standard tenant improvements. Whenever possible, Tenant shall cause all
such items to be assessed and billed separately from the property of Landlord.
In the event any such items shall be assessed and billed with the property of
Landlord, Tenant shall pay Landlord its share of such taxes,
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charges or other governmental impositions within thirty (30) days after Landlord
delivers a statement and a copy of the assessment or other documentation showing
the amount of such impositions applicable to Tenant's property. Tenant shall pay
any rent tax or sales tax, service tax, transfer tax or value added tax, or any
other applicable tax on the Rent or services herein or otherwise respecting this
Lease. Tenant shall not be responsible for the payment of any of Landlord's
federal, state or local income, franchise, inheritance or estate taxes.
ARTICLE 18
REASONABLE APPROVALS
Whenever Landlord's approval or consent (or words or phrases of similar
import) is expressly required under this Lease (including, but not limited to,
Article 21 and the Riders hereto) or any other agreement between the parties,
Landlord shall not unreasonably withhold or delay such approval or consent
(reasonableness shall be a condition to Landlord's enforcement of such consent
or approval requirement, and not a covenant), except for matters affecting the
structure, safety or security of the Property, or unless specifically provided
to the contrary elsewhere herein, the appearance of the Property from any common
or public areas.
ARTICLE 19
SUBORDINATION, ATTORNMENT AND MORTGAGEE PROTECTION
This Lease is subject and subordinate to all Mortgages (as defined in
Article 25) now or hereafter placed upon the Property, and all other
encumbrances and matters of public record applicable to the Property, provided,
this Lease shall be subordinate to Mortgages entered after the date of this
Lease, only if the Holders thereof agree to recognize this Lease, and not
disturb Tenant's occupancy hereunder (so long as Tenant does not commit an
uncured Default hereunder), pursuant to each such Holder's standard
nondisturbance agreement, which Tenant hereby agrees to execute. Such
nondisturbance agreement shall provide that if any foreclosure proceedings are
initiated by any Holder or a deed in lieu is granted (or if any ground lease is
terminated), Tenant agrees to attorn and pay Rent to such party provided such
Holder or purchaser at a foreclosure sale shall agree to accept this Lease and
not disturb Tenant's occupancy, so long as Tenant does not default and fail to
cure within the time permitted hereunder. However, in the event of attornment,
no Holder shall be: (i) liable for any act or omission of Landlord, or subject
to any offsets or defenses which Tenant might have against Landlord (prior to
such Holder becoming Landlord under such attornment), (ii) liable for any
security deposit or bound by any prepaid Rent not actually received by such
Holder, or (iii) if required pursuant to the nondisturbance agreement, bound by
any future modification of this Lease not consented to by such Holder. Any
Holder (as defined in Article 25) may elect to make this Lease prior to the lien
of its Mortgage, by written notice to Tenant, and if the Holder of any prior
Mortgage shall require, this Lease shall be prior to any subordinate Mortgage.
Tenant agrees to give by certified mail, return receipt requested, a copy of any
notice of default served by Tenant upon Landlord, to any Holder designated by
Landlord from time to time by
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notice to Tenant (by way of service on Tenant of a copy of an assignment of
leases, or otherwise) of the address of such Holder. Tenant further agrees that
if Landlord shall have failed to cure such default within the times permitted
Landlord for cure under this Lease, such Holder shall have an additional period
of thirty (30) days in which to cure (or such additional time as may be required
due to causes beyond such Holder's control, including time to obtain possession
of the Property by power of sale or judicial action). Tenant shall execute such
documentation as Landlord may reasonably request from time to time, in order to
confirm the matters set forth in this Article in recordable form. Concurrently
with the execution and delivery of this Lease by Landlord, Landlord shall
provide Tenant, at Landlord's sole cost and expense, a Subordination,
Non-Disturbance and Attornment Agreement (the "Non-Disturbance Agreement")
substantially in the form of Exhibit "B" attached hereto in favor of Tenant and
duly executed by the lender identified therein, which Non-Disturbance Agreement
shall control in the event of any conflict with the terms and conditions of this
Lease. Tenant shall execute such form of Non-Disturbance Agreement when it
executes this Lease and submits it to Landlord for execution.
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ARTICLE 20
ESTOPPEL CERTIFICATE
Tenant and Landlord shall from time to time, within twenty (20) days after
written request from the other, execute, acknowledge and deliver a statement (i)
certifying that this Lease is unmodified and in full force and effect or, if
modified, stating the nature of such modification and certifying that this Lease
as so modified, is in full force and effect (or if this Lease is claimed not to
be in force and effect, specifying the ground therefor) and any dates to which
the Rent has been paid in advance, and the amount of any security deposit, (ii)
acknowledging that there are not, to the knowledge of the party delivering the
certificate, any uncured defaults on the part of the other hereunder, or
specifying such defaults if any are claimed, and (iii) certifying such other
matters as the other may reasonably request, or as may be reasonably requested
by current or prospective Holders, insurance carriers, auditors, and prospective
purchasers. Any such statement may be relied upon by any such parties. If Tenant
or Landlord shall fail to execute and return such statement within the time
required herein, the other shall be deemed to have agreed with the matters set
forth therein.
ARTICLE 21
ASSIGNMENT AND SUBLETTING
(A) TRANSFERS. Tenant shall not, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld or delayed, as
further described below: (i) assign, mortgage, pledge, hypothecate, encumber, or
permit any lien to attach to, or otherwise transfer, this Lease or any interest
hereunder, by operation of law or otherwise (provided that a blanket mortgage
encumbering all or substantially all of Tenant's assets shall not be construed
to violate this provision if such mortgage expressly provides that it is subject
and subordinate to this Lease and Landlord's assignment of leases and rents to
its lender and all of their terms and conditions, including but not limited to
Landlord's rights under this Article 21, which rights shall be applicable in the
event of any foreclosure of such mortgage or deed in lieu thereof), (ii) sublet
the Premises or any part thereof, or (iii) permit the use of the Premises by any
Persons (as defined in Article 25) other than Tenant and its employees (all of
the foregoing are hereinafter sometimes referred to collectively as "Transfers"
and any Person to whom any Transfer is made or sought to be made is hereinafter
sometimes referred to as a "Transferee"). If Tenant shall desire Landlord's
consent to any Transfer, Tenant shall notify Landlord in writing (the "Transfer
Notice"), which notice shall include: (a) the proposed effective date (which
shall not be less than 30 nor more than 180 days after Tenant's notice), (b) the
portion of the Premises to be Transferred (herein called the "Subject Space"),
(c) the terms of the proposed Transfer and the consideration therefor and the
name and address of the proposed Transferee, and a copy of all assignment or
subleasing documents and all other documents pertaining to the proposed Transfer
reasonably requested by Landlord (provided that such documents may be delivered
to Landlord for its review at any time up to but not later than ten (10) days
prior to the effective date of the Transfer), and (d) current
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financial statements of the proposed Transferee certified by an officer, partner
or owner thereof, and any other information reasonably required to enable
Landlord to determine the financial responsibility, character, and reputation of
the proposed Transferee, nature of such Transferee's business and proposed use
of the Subject Space, and such other information as Landlord may reasonably
require. Any Transfer made without complying with this Article shall, at
Landlord's option, be null, void and of no effect, or shall constitute a Default
under this Lease. Whether or not Landlord shall grant consent, Tenant shall pay
$300.00 towards Landlord's review and processing expense, as well as any
reasonable legal fees incurred by Landlord, within thirty (30) days after
written request by Landlord.
(B) APPROVAL. Landlord will not unreasonably withhold or delay its consent
(as provided in Article 18) to any proposed Transfer of the Subject Space to the
Transferee on the terms specified in Tenant's notice. The parties hereby agree
that it shall be reasonable under this Lease and under any applicable Law for
Landlord to withhold consent to any proposed Transfer where one or more of the
following applies (without limitation as to other reasonable grounds for
withholding consent): (i) the Transferee is of a character or reputation or
engaged in a business which is not consistent with the quality of the Property,
(ii) the Transferee intends to use the Subject Space for purposes which are not
permitted under this Lease, (iii) the Subject Space is not regular in shape with
appropriate means of ingress and egress suitable for normal renting purposes,
(iv) the Transferee is either a government (or agency or instrumentality
thereof) or an occupant of the Property (if Landlord has space available to meet
such occupant's needs), (v) the proposed Transferee does not have a reasonable
financial condition in relation to the obligations to be assumed in connection
with the Transfer, or (vi) Tenant has committed and failed to cure a Default
within the time period therefor provided in Article 23 at the time Tenant
requests consent to the proposed Transfer. Notwithstanding anything to the
contrary herein, if Landlord does not reject such Transferee (or request
additional information) within twenty (20) business days of Landlord's receipt
of the Transfer Notice, the Transfer shall be deemed approved.
(C) TRANSFER PREMIUM. If Landlord consents to a Transfer, and as a
condition thereto which the parties hereby agree is reasonable, Tenant shall pay
Landlord fifty percent (50%) of any Transfer Premium derived by and received by
Tenant from such Transfer. "Transfer Premium" shall mean all rent, additional
rent or other consideration paid by such Transferee in excess of the Rent
payable by Tenant under this Lease (on a monthly basis during the Term, and on a
per rentable square foot basis, if less than all of the Premises is
transferred), after deducting the reasonable expenses incurred by Tenant for any
changes, alterations and improvements to the Premises, any other economic
concessions or services provided to the Transferee, fees for use of Tenant's
fixtures or equipment (in no event more than their depreciated value) and any
customary brokerage commissions paid in connection with the Transfer. If part of
the consideration for such Transfer shall be payable other than in cash,
Landlord's share of such non-cash consideration shall be in such form as is
reasonably satisfactory to Landlord. The percentage of the Transfer Premium due
Landlord hereunder shall be paid within thirty (30) days after Tenant receives
any Transfer Premium from the Transferee.
(D) Intentionally deleted.
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(E) TERMS OF CONSENT. If Landlord consents to a Transfer: (a) the terms
and conditions of this Lease, including among other things, Tenant's liability
for the Subject Space, shall in no way be deemed to have been waived or modified
(and, as a condition to the effectiveness of any assignment of this Lease, the
assignor shall, if Landlord or any Holder so requests, deliver to Landlord a
guaranty evidencing such continuing liability), (b) such consent shall not be
deemed consent to any further Transfer by either Tenant or a Transferee, (c)
Tenant shall deliver to Landlord promptly after execution, an original executed
copy of all documentation pertaining to the Transfer in form reasonably
acceptable to Landlord, and (d) Tenant shall furnish upon Landlord's request a
complete statement, certified by an independent certified public accountant, or
Tenant's chief financial officer, setting forth in detail the computation of any
Transfer Premium Tenant has derived and shall derive from such Transfer.
Landlord or its authorized representatives shall have the right at all
reasonable times to audit the books, records and papers of Tenant relating to
any Transfer, and shall have the right to make copies thereof. If the Transfer
Premium respecting any Transfer shall be found understated, Tenant shall within
thirty (30) days after demand pay the deficiency, and if understated by more
than 2%, Tenant shall pay Landlord's costs of such audit. Otherwise, Landlord
shall pay for such audit. Any sublease hereunder shall be subordinate and
subject to the provisions of this Lease, and if this Lease shall be terminated
during the term of any sublease, Landlord shall have the right to: (i) treat
such sublease as cancelled and repossess the Subject Space by any lawful means,
or (ii) require that such subtenant attorn to and recognize Landlord as its
landlord under any such sublease. If Tenant shall Default and fail to cure
within the time permitted for cure under Article 23(A), Landlord is hereby
irrevocably authorized, as Tenant's agent and attorney-in-fact, to direct any
Transferee to make all payments under or in connection with the Transfer
directly to Landlord (which Landlord shall apply towards Tenant's obligations
under this Lease) until such Default is cured.
(F) CERTAIN TRANSFERS. For purposes of this Lease, the term "Transfer"
shall also include (a) if Tenant is a partnership or a limited liability
company, the withdrawal or change, voluntary, involuntary or by operation of
law, of a majority of the partners or members, or a transfer of a majority of
partnership or membership interests, within a twelve month period, or the
dissolution of the partnership or limited liability company, and (b) if Tenant
is a closely held corporation (i.e., whose stock is not publicly held and not
traded through an exchange or over the counter), the dissolution, merger,
consolidation or other reorganization of Tenant, or within a twelve month
period: (i) the sale or other transfer of more than an aggregate of 50% of the
voting shares of Tenant (other than to immediate family members by reason of
gift or death) or (ii) the sale of more than an aggregate of 50% of Tenant's net
assets.
(G) PERMITTED TRANSFERS. Notwithstanding anything to the contrary in
Article 21, neither the Landlord consent provisions of Articles 21(A), (B) and
(E) nor the Transfer Premium provisions of Article 21(C) shall apply to the use
or sublease of all or any portion of the Premises, or to the assignment of this
Lease, by or to a "person" (each an "Affiliate") who (i) "controls" Tenant, (ii)
is "controlled by" Tenant, (iii) is "under common control" with Tenant, or (iv)
into or with which Tenant or any of the
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foregoing parties is merged, consolidated or reorganized, or to which all or
substantially all of Tenant's assets or any such other party's assets are sold;
provided that Tenant (a) supplies Landlord with a copy of the executed transfer
documents promptly after execution, (b) Tenant shall remain liable under this
Lease and (c) in the case of an assignment, the Transferee shall expressly
assume Tenant's after accruing obligations under this Lease. For the purposes of
this Article 21, "controls" (including the correlative meanings of "controlled
by and under common control with") shall mean the ownership directly or
indirectly of at least 51% of the voting or equity interest in a person or
entity and "person" shall include an individual, entity, corporation,
partnership, limited liability company or trust. In addition thereto, upon
giving prior written notice to Landlord, neither the Landlord consent provisions
of Articles 21(A), (B) and (E) nor the Transfer Premium Provisions of Article
21(C) shall apply to any sublease or subleases of individual office space which
consists of, or consists of in the aggregate with individual office space
previously sublet, twenty-five percent (25%) or less of the rentable square feet
of the Premises, on and subject to the condition that the subtenant agrees that
its sublease is subordinate to this Lease and that it is bound by all of the
terms, covenants and conditions of this Lease applicable to the sublet space. No
such sublease shall relieve Tenant from any liability under this Lease. Any such
subtenant's occupancy of the Premises shall otherwise be subject to, and in
accordance with, all provisions of this Lease, including, without limitation,
the provisions of Article 6 hereof.
ARTICLE 22
RIGHTS RESERVED BY LANDLORD
Except to the extent expressly limited herein or in the Parking Agreement
of even date herewith, Landlord reserves full rights to control the Property
(which rights may be exercised without subjecting Landlord to claims for
constructive eviction, abatement of Rent, damages or other claims of any kind,
including more particularly, but without limitation, the following rights:
(A) To change the name or street address of the Property; install and
maintain signs on the exterior and interior of the Property (subject to Article
36); retain at all times, and use in appropriate instances, keys to all doors
within and into the Premises; grant to any Person the right to conduct any
business or render any service at the Property, whether or not it is the same or
similar to the use permitted Tenant by this Lease; and have access for Landlord
to any mail chutes located on the Premises according to the rules of the United
States Postal Service.
(B) To enter the Premises at reasonable hours for reasonable purposes,
including inspection and supplying cleaning service or other services to be
provided Tenant hereunder, to show the Premises to current and prospective
mortgage lenders, ground lessors, insurers, and prospective purchasers, and,
during the last year of the Term, to tenants and brokers, at reasonable hours,
and if Tenant shall abandon the Premises at any time, or shall vacate the same
during the last three (3) months of the Term, to decorate, remodel, repair, or
alter the Premises.
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(C) To limit or prevent access to the Property, shut down elevator
service, activate elevator emergency controls, or otherwise take such action or
preventative measures reasonably deemed necessary by Landlord for the safety of
tenants or other occupants of the Property or the protection of the Property and
other property located thereon or therein, in case of fire, invasion,
insurrection, riot, civil disorder, public excitement or other dangerous
condition, or threat thereof.
(D) To decorate and to make or permit alterations, additions and
improvements, structural or otherwise, in or to the Property or any part
thereof, exclusive of the Premises, and any adjacent building, structure,
parking facility, land, street or alley (including without limitation changes
and reductions in corridors, lobbies, parking facilities and other public areas
and the installation of kiosks, planters, sculptures, displays, escalators,
mezzanines, and other structures, facilities, amenities and features therein,
and changes for the purpose of connection with or entrance into or use of the
Property in conjunction with any adjoining or adjacent building or buildings,
now existing or hereafter constructed). In connection with such matters, or with
any other repairs, maintenance, improvements or alterations, in or about the
Property, Landlord may erect scaffolding and other structures reasonably
required, and during such operations may enter upon the Premises and take into
and upon or through the Premises, all materials required to make such repairs,
maintenance, alterations or improvements, and may close public entry ways, other
public areas, restrooms, stairways or corridors.
In connection with entering the Premises to exercise any of the foregoing
rights, Landlord shall: (a) provide reasonable advance written or oral notice
thereof to Tenant's on-site manager or other appropriate person (except in
emergencies, or for routine cleaning or other routine matters), and (b) take
reasonable steps to minimize any interference with Tenant's business, and if
Tenant's use of the executive or boardroom portions of the eighth floor, or its
MIS operations on the fourth floor, are likely to be affected, Landlord shall
consult with Tenant and provide to Tenant, as Tenant shall reasonably request,
plans and specifications for the alterations, additions and improvements or
other items to the extent that they affect such portion of the Premises.
Landlord shall not, subject to Force Majeure, perform any alterations or other
activities pursuant to (d) above that cause material adverse impact to Tenant's
use of the Premises.
ARTICLE 23
LANDLORD'S REMEDIES
(A) DEFAULT. The occurrence of any one or more of the following events
shall constitute a "Default" by Tenant which if not cured within any applicable
time permitted for cure below, shall give rise to Landlord's remedies set forth
in Paragraph (B) below and Tenant shall not be deemed to be in Default for any
purpose whatsoever under this Lease (including, but not limited to any Rider
annexed hereto) unless and until the applicable notice to Tenant, if any, has
been given and the event specified in such notice has not been cured within the
applicable cure period, if any: (i) failure by Tenant to make when due any
payment of Rent, unless such failure is cured within ten (10) days after notice;
(ii) failure by Tenant to observe or perform any of the terms or
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conditions of this Lease to be observed or performed by Tenant other than the
payment of Rent, or as provided below, unless such failure is cured within
thirty (30) days after notice, (provided, if the nature of Tenant's failure is
such that more time is reasonably required in order to cure, Tenant shall not be
in Default if Tenant commences to cure within such period and thereafter
reasonably seeks to cure such failure to completion); (iii) failure by Tenant to
comply with the Rules, unless such failure is cured within thirty(30) days after
notice (provided, if the nature of Tenant's failure is such that more than
thirty (30) days are reasonably required in order to cure, Tenant shall not be
in Default if Tenant commences to cure within such period and thereafter
reasonably seeks to cure such failure to completion); (iv) abandonment of the
Premises which shall be deemed to have occurred if Tenant, while in Default
hereunder, has vacated the Premises for more than three (3) months, or the
failure to take possession of the Premises within sixty (60) days after the
Commencement Date (provided that Landlord shall have the right to terminate this
Lease upon thirty (30) days' notice to Tenant if Tenant, even if not in Default
hereunder, has vacated all or a substantial portion of the Premises for more
than two (2) months at any time during the last fourteen (14) months of the
Lease Term but such termination shall not entitle Landlord to exercise Default
remedies if Tenant is not in Default); (v) (a) making by Tenant of any general
assignment for the benefit of creditors, (b) filing by or against Tenant of a
petition to have Tenant adjudged a bankrupt or a petition for reorganization or
arrangement under any Law relating to bankruptcy (unless, in the case of a
petition filed against Tenant the same is dismissed within ninety (90) days),
(c) appointment of a trustee or receiver to take possession of substantially all
of Tenant's assets located on the Premises or of Tenant's interest in this
Lease, where possession is not restored to Tenant within sixty (60) days, (d)
attachment, execution or other judicial seizure of substantially all of Tenant's
assets located on the Premises or of Tenant's interest in this Lease, (e)
Tenant's convening of a meeting of its creditors or any class thereof for the
purpose of effecting a moratorium upon or composition of its debts, or (f)
Tenant's insolvency or admission of an inability to pay its debts as they
mature; (vi) any material misrepresentation herein, or material
misrepresentation or omission in any financial statements or other materials
provided by Tenant in connection with negotiating or entering this Lease or in
connection with any Transfer under Article 21; or (vii) failure of Tenant to
provide the Security Deposit (as hereinafter defined) on or before the date
required by Article 35 of the Lease. Failure by Tenant to comply with the same
term or condition of this Lease on three occasions during any twelve month
period shall cause any failure to comply with such term or condition during the
succeeding twelve month period, at Landlord's option, to constitute a Default,
if Landlord has given Tenant notice of each such failure within ten (10) days
after each such failure occurs. The notice and cure periods provided herein are
in lieu of, and not in addition to, any notice and cure periods provided by Law.
(B) REMEDIES. If Tenant commits a Default and fails to cure within the
time permitted for cure under Article 23(A), in addition to any other right or
remedy allowed under any Law or other provision of this Lease (all of which
remedies shall be distinct, separate and cumulative), Landlord may terminate
this Lease, repossess the Premises by detainer suit, summary proceedings, or
other lawful means, and recover as damages a sum of money equal to: (a) the
worth at the time of award of the unpaid Rent which had
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been earned at the time of termination; (b) the worth at the time of award of
the amount by which the unpaid Rent which would have been earned after
termination until the time of the award exceeds the amount of such Rent loss
that Tenant proves could have been reasonably avoided; (c) the worth at the time
of award of the amount by which the unpaid Rent for the balance of the Term
after the time of award exceeds the amount of such Rent loss that Tenant proves
can reasonably be avoided; and (d) any other amounts necessary to compensate
Landlord for all detriment or damages proximately caused by Tenant's failure to
perform its obligations under this Lease or that in the ordinary course would be
likely to result therefrom, including without limitation all Costs of Reletting
(as defined in Paragraph F). For purposes of computing the amount of Rent herein
that would have accrued after the time of award, Tenant's Prorata Share of Taxes
and Operating Expenses, shall be projected, based upon the average rate of
increase, if any, in such items from the Commencement Date through the time of
award. The "worth at the time of award" of the amounts referred to in clauses
(a) and (b) shall be computed by allowing interest at the Default Rate (as
defined in Article 25). The "worth at the time of award" of the amount referred
to in clause (c) shall be computed by discounting such amount at the discount
rate of the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%).
(C) MITIGATION OF DAMAGES. If Landlord terminates this Lease or Tenant's
right to possession, Landlord shall use reasonable efforts to mitigate
Landlord's damages, and Tenant shall be entitled to submit proof of such failure
to mitigate as a defense to Landlord's claims hereunder, if mitigation of
damages by Landlord is required by applicable Law. If Landlord has not
terminated this Lease or Tenant's right to possession, Landlord shall have no
obligation to mitigate, may permit the Premises to remain vacant or abandoned,
and shall have the remedies under California Civil Code, Section 1951.4, as the
same may be modified or replaced hereafter; in such case, Tenant may seek to
mitigate damages by attempting to sublease the Premises or assign this Lease
(subject to Article 21).
(D) SPECIFIC PERFORMANCE AND COLLECTION OF RENT. Landlord shall at all
times have the rights and remedies (which shall be cumulative with each other
and cumulative and in addition to those rights and remedies available under
Paragraph (B), above or any Law or other provision of this Lease), without prior
demand or notice except as required by this Lease or applicable Law: (i) to seek
any declaratory, injunctive or other equitable relief, and specifically enforce
this Lease, or restrain or enjoin a violation or breach of any provision hereof,
and (ii) to sue for and collect any unpaid Rent which has accrued.
(E) LATE CHARGES AND INTEREST. Tenant shall pay, as additional Rent, a
service charge of One Thousand Dollars ($1,000.00) for bookkeeping and
administrative expenses, if Rent is not received within five (5) days after its
due date. In addition, any Rent paid more than five (5) days after due shall
accrue interest from the due date at the Default Rate (as defined in Article
25), until payment is received by Landlord. Such service charge and interest
payments shall not be deemed consent by Landlord to late payments, nor a waiver
of Landlord's right to insist upon timely payments at any time, nor a waiver of
any remedies to which Landlord is entitled as a result of the late payment of
Rent.
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(F) CERTAIN DEFINITIONS. "Net Re-Letting Proceeds" shall mean the total
amount of rent and other consideration paid by any Replacement Tenants, less all
Costs of Re-Letting, during a given period of time. "Costs of Re-Letting" shall
include without limitation, all reasonable costs and expenses incurred by
Landlord for any repairs, maintenance, changes, alterations and improvements to
the Premises, brokerage commissions, advertising costs, attorneys' fees, any
customary free rent periods or credits, tenant improvement allowances,
reasonable take-over lease obligations and other customary, necessary or
appropriate economic incentives required to enter leases with Replacement
Tenants, and costs of collecting rent from Replacement Tenants. "Replacement
Tenants" shall mean any Persons (as defined in Article 25) to whom Landlord
relets the Premises or any portion thereof pursuant to this Article.
(G) OTHER MATTERS. No re-entry or repossession, repairs, changes,
alterations and additions, reletting, acceptance of keys from Tenant, or any
other action or omission by Landlord shall be construed as an election by
Landlord to terminate this Lease or Tenant's right to possession, or accept a
surrender of the Premises, nor shall the same operate to release the Tenant in
whole or in part from any of Tenant's obligations hereunder, unless express
written notice of such intention is sent by Landlord or its agent to Tenant. To
the fullest extent permitted by Law, all rent and other consideration paid by
any Replacement Tenants shall be applied: first, to the Costs of Re-Letting,
second, to the payment of any Rent theretofore accrued, and the residue, if any,
shall be held by Landlord and applied to the payment of other obligations of
Tenant to Landlord as the same become due (with any remaining residue to be
retained by Landlord). Rent shall be paid without any prior demand or notice
therefor (except as expressly provided herein) and without any deduction,
set-off or counterclaim (except as expressly provided herein), or relief from
any valuation or appraisement laws. Landlord may apply payments received from
Tenant to any obligations of Tenant then accrued, without regard to such
obligations as may be designated by Tenant. Except for services and utilities
which are standard for the Building (as opposed to any special services related
to Tenant's use of the Premises), Landlord shall be under no obligation to
observe or perform any provision of this Lease on its part to be observed or
performed which accrues after the date of any Default by Tenant hereunder not
cured within the times permitted hereunder. The times set forth herein for the
curing of Defaults by Tenant, and for the performance by Landlord of its
obligations hereunder, are of the essence of this Lease. Tenant hereby
irrevocably waives any right otherwise available under any Law to redeem or
reinstate this Lease.
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ARTICLE 24
LANDLORD'S RIGHT TO CURE
If Landlord shall fail to perform any term or provision under this Lease
required to be performed by Landlord, Landlord shall not be deemed to be in
default hereunder nor subject to any claims for damages of any kind, unless such
failure shall have continued for a period of thirty (30) days after written
notice thereof by Tenant; provided, if the nature of Landlord's failure is such
that more than thirty (30) days are reasonably required in order to cure,
Landlord shall not be in default if Landlord commences to cure such failure
within such thirty (30) day period, and thereafter reasonably seeks to cure such
failure to completion. The aforementioned periods of time permitted for Landlord
to cure shall be extended for any period of time during which Landlord is
delayed in, or prevented from, curing due to fire or other casualty, strikes,
lock-outs or other labor troubles, shortages of equipment or materials,
governmental requirements, power shortages or outages, acts or omissions by
Tenant or other Persons, and other causes beyond Landlord's reasonable control.
If Landlord shall fail to cure within the times permitted for cure herein,
Landlord shall be subject to such remedies as may be available to Tenant
(subject to the other provisions of this Lease); provided, in recognition that
Landlord must receive timely payments of Rent and operate the Property, Tenant
shall have no right of self-help to perform repairs or any other obligation of
Landlord, and shall only have the right to withhold, set-off, or abate Rent as
set forth in this Lease.
ARTICLE 25
CAPTIONS, DEFINITIONS AND SEVERABILITY
The captions of the Articles and Paragraphs of this Lease are for
convenience of reference only and shall not be considered or referred to in
resolving questions of interpretation. If any term or provision of this Lease
shall be found invalid, void, illegal, or unenforceable with respect to any
particular Person by a court of competent jurisdiction, it shall not affect,
impair or invalidate any other terms or provisions hereof, or its enforceability
with respect to any other Person, the parties hereto agreeing that they would
have entered into the remaining portion of this Lease notwithstanding the
omission of the portion or portions adjudged invalid, void, illegal, or
unenforceable with respect to such Person.
(A) "Building" shall mean the structure identified in Article I of this
Lease.
(B) "Comparable Buildings" shall mean high rise office buildings of an age
and size and, with comparable physical plants and amenities to that of the
Building, and located in Century City, California. For the purposes of this
Lease, "Century City, California" shall be defined as that area of Los Angeles,
California which has as its Northern boundary, the Northernmost boundary of
Santa Monica Boulevard, as its Southern boundary, the Southernmost boundary of
Pico Boulevard, as its Western boundary, the Westernmost boundary of Century
Park West (as though such street was extended to intersect Pico Boulevard), and
as its
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Eastern boundary, the Easternmost boundary of the legal lots upon which all of
the buildings and improvements which front onto the Eastern boundary of Century
Park East are located.
(C) "Default Rate" shall mean three percent (3%) per annum over the prime
lending rate published in the "Wall Street Journal", or the highest rate
permitted by applicable Law, whichever shall be less.
(D) "Holder" shall mean the holder of any Mortgage at the time in
question, and where such Mortgage is a ground lease, such term shall refer to
the ground lessor.
(E) "Holidays" shall mean all federally observed holidays, including New
Year's Day, President's Day, Memorial Day, Independence Day, Labor Day,
Veterans' Day, Thanksgiving Day, Christmas Day.
(F) "Landlord" and "Tenant" shall be applicable to one or more Persons as
the case may be, and the singular shall include the plural, and the neuter shall
include the masculine and feminine; and if there be more than one, the
obligations thereof shall be joint and several. For purposes of any provisions
indemnifying or limiting the liability of Landlord, the term "Landlord" shall
include Landlord's present and future partners, members, beneficiaries,
trustees, officers, directors, employees, shareholders, principals, agents,
affiliates, successors and assigns.
(G) "Law" shall mean all federal, state, county and local governmental and
municipal laws, statutes, ordinances, rules, regulations, codes, decrees, orders
and other such requirements, applicable equitable remedies and decisions by
courts in cases where such decisions are considered binding precedents in the
state in which the Property is located, and decisions of federal courts applying
the Laws of such State.
(H) "Mortgage" shall mean all mortgages, deeds of trust, ground leases and
other such encumbrances now or hereafter placed upon the Property or Building,
or any part thereof, and all renewals, modifications, consolidations,
replacements or extensions thereof, and all indebtedness now or hereafter
secured thereby and all interest thereon.
(I) "Operating Expenses" shall mean all expenses, costs and amounts (other
than Taxes) of every kind and nature which Landlord shall pay during any
calendar year any portion of which occurs during the Term, because of or in
connection with the ownership, management, repair, maintenance, restoration and
operation of the Property, including without limitation, any amounts paid for:
(a) utilities for the Property, including but not limited to electricity, power,
gas, steam, oil or other fuel, water, sewer, lighting, heating, air conditioning
and ventilating, (b) permits, licenses and certificates necessary to operate,
manage and lease the Property, (c) insurance applicable to the Property
reasonably obtained by Landlord, not limited to the amount of coverage Landlord
is required to provide under this Lease, (d) supplies, tools, equipment and
materials used in the operation, repair and maintenance of the Property, (e)
accounting, legal, inspection, consulting, concierge and other services, (f) any
equipment rental (or installment equipment purchase or equipment financing
agreements), or management agreements (including the cost of any
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management fee actually paid thereunder and the fair rental value of any office
space provided thereunder, up to customary and reasonable amounts), (g) wages,
salaries and other compensation and benefits (including the fair value of any
parking privileges provided) for all persons engaged in the operation,
maintenance or security of the Property (excluding parking personnel), and
employer's Social Security taxes, unemployment taxes or insurance, and any other
taxes which may be levied on such wages, salaries, compensation and benefits,
(h) payments under any easement, operating agreement, declaration, restrictive
covenant, or instrument pertaining to the sharing of costs in any planned
development, and (i) operation, repair, and maintenance of all Systems and
Equipment and components thereof (including replacement of components),
janitorial service, alarm and security service, window cleaning, trash removal,
elevator maintenance, cleaning of walks, parking facilities and building walls,
removal of ice and snow, replacement of wall and floor coverings, ceiling tiles
and fixtures in lobbies, corridors, restrooms and other common or public areas
or facilities, maintenance and replacement of shrubs, tree, grass, sod and other
landscaped items, irrigation systems, drainage facilities, fences, curbs, and
walkways, re-paving and re-striping parking facilities, and roof repairs. If the
Property is not fully occupied during all or a portion of any calendar year,
Landlord shall, in accordance with sound accounting and management practices,
determine the amount of variable Operating Expenses (i.e. those items which vary
according to occupancy levels) that would have been paid had the Property
achieved a 100% occupancy level, and the amount so determined shall be deemed to
have been the amount of variable Operating Expenses for such year. Landlord
shall also make such an adjustment for the Base Expense Year. Notwithstanding
the foregoing, Operating Expenses shall not, however, include:
(i) depreciation, interest and amortization on Mortgages, and other debt
costs or ground lease payments, if any; legal fees in connection with
leasing, tenant disputes or enforcement of leases; real estate brokers'
leasing commissions; improvements or alterations to tenant spaces; the
cost of providing any service directly to and paid directly by, any
tenant; any costs expressly excluded from Operating Expenses elsewhere in
this Lease; costs of any items to the extent Landlord receives
reimbursement from insurance proceeds or from a third party (such proceeds
to be deducted from Operating Expenses in the year in which received);
(ii) capital expenditures, except those: (a) made primarily to
reduce Operating Expenses, or to comply with any future Laws (other than
those made to correct violations existing as of the date of this Lease
under laws in existence as of the date of this Lease), or other
governmental requirements, or (b) for replacements (as opposed to
additions or new improvements) of nonstructural items located in the
common areas of the Property required to keep such areas in good
condition; provided, all such permitted capital expenditures (together
with reasonable financing charges) shall be amortized for purposes of this
Lease (i) in the case of any capital expenditures costing in excess of
$250,000, over their useful lives, and (ii) in the case of any other
capital expenditures, over the shorter of: (1) their useful lives, or (2)
four (4) years;
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(iii) utilities which are separately metered and paid for by tenants
in the Building or the Property (including Tenant) and any other benefit
or services separately paid for by such tenants;
(iv) welfare, retirement, vacation, holiday and other paid absences,
fringe benefits and salaries of executives or employees above the level of
building manager and fees, wages, salaries and other compensation to the
extent allocable to services not rendered in connection with the operation
or maintenance of the Building;
(v) the cost of contract services provided by Landlord or its
subsidiaries or affiliates and overhead and profit increments paid to
subsidiaries or affiliates of Landlord for services to the extent that the
costs of such services exceed competitive costs for such services rendered
by independent third parties of similar skill, competence and experience;
(vi) depreciation of the Building or the Property or of any
component thereof or of any equipment or tools used in connection with the
operation or maintenance thereof;
(vii) fines, penalties or penalty interest due to violations by
Landlord of any governmental rule or authority;
(viii) any bad debts loss, rent loss, or reserves for bad debts or
rent loss;
(ix) costs associated with the operation of the business of the
person or entity which constitutes Landlord (as the same are distinguished
from the costs of operation of the Building, the Property or the common
areas), including costs of Landlord's general corporate overhead and
general administrative expenses;
(x) costs (including without limitation permit, license, and
inspection costs) incurred in connection with tenant improvement work
performed by Landlord for specific tenants (or in vacant rentable space)
in the Building or the Property (including Tenant);
(xi) repairs or replacements covered by warranties or guaranties or
for which Tenant or other tenants of the Building or Property are
obligated to pay to the extent of the funds actually recovered in
connection therewith;
(xii) salaries of service personnel (including the building manager)
to the extent that such service personnel perform services other than in
connection with the management, operation, repair or maintenance of the
Building or common areas;
(xiii) costs to repair or rebuild the Building after casualty loss
except to the extent of the deductible under Landlord's insurance policy;
(xiv) damage and repairs attributable to condemnation;
(xv) any sale, syndication, financing or refinancing costs and
expenses, including, but not limited to, interest or
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amortization on debt and rent under any ground or underlying lease;
(xvi) tax penalties incurred as a result of Landlord's negligence or
its inability or unwillingness to make payments when due;
(xvii) any compensation paid to clerks, attendants or other persons
in commercial concessions operated by Landlord or its affiliates;
(xviii) costs incurred by Landlord due to the violation by Landlord
or any other tenant of the terms and conditions of any lease of space in
the Building or the Property;
(xix) marketing costs incurred in connection with the initial
development, initial leasing and any future leasing of the Building,
including, but not limited to, leasing commissions, attorneys' fees, space
planning costs, and other costs and expenses in connection with
negotiation and preparation of proposal letters, deal memos, letters of
intent, leases, subleases and/or assignments incurred in connection with
lease, sublease and/or assignment negotiations and transactions with
present or prospective tenants or other occupants of the Building or the
Property;
(xx) costs arising from Landlord's charitable or political
contributions;
(xxi) costs arising from or as a result of major latent or patent
defects (as distinguished from normal, ordinary and customary repairs or
materials) in or significant design error relating to the initial design
or construction of the Building;
(xxii) costs incurred in connection with the original construction
of the Building or any portion of the Property or in connection with any
major changes in the Building, such as adding or deleting floors;
(xxiii) costs of alterations or improvements to the Premises or the
premises of other tenants;
(xxiv) damage and repairs necessitated by the negligence or willful
misconduct of Landlord or Landlord's employees, contractors or agents;
(xxv) interest, penalties or other costs arising out of Landlord's
failure to make timely payment of its obligations; and
(xxvi) categories of expenses with respect to the Parking Garage if
such categories of expenses are not included in the Base Year.
(J) "Person" shall mean an individual, trust, partnership, joint venture,
association, corporation, and any other entity.
(K) "Property" shall mean the Building, and any common or public areas or
facilities, easements, corridors, lobbies, sidewalks, loading areas, driveways,
landscaped areas, skywalks,
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parking garages and lots, and any and all other structures or facilities located
on the Property operated or maintained in connection with or for the benefit of
the Building, and all parcels or tracts of land on which all or any portion of
the Building or any of the other foregoing items are located, and any fixtures,
machinery, equipment, apparatus, Systems and Equipment, furniture and other
personal property located thereon or therein and used in connection therewith,
whether title is held by Landlord or its affiliates. Possession of areas
necessary for utilities, services, safety and operation of the Property,
including the Systems and Equipment (as defined in Article 25), fire stairways,
perimeter walls, space between the finished ceiling of the Premises and the slab
of the floor or roof of the Property thereabove, and the use thereof together
with the right to install, maintain, operate, repair and replace the Systems and
Equipment, including any of the same in, through, under or above the Premises in
locations that will not materially interfere with Tenant's use of the Premises,
are hereby excepted and reserved by Landlord, and not demised to Tenant.
(L) "Rent" shall have the meaning specified therefor in Article 3(G).
(M) "Systems and Equipment" shall mean any plant, machinery, transformers,
duct work, cable, wires, and other equipment, facilities, and systems designed
to supply heat, ventilation, air conditioning and humidity or any other services
or utilities, or comprising or serving as any component or portion of the
electrical, gas, steam, plumbing, sprinkler, communications, alarm, security, or
fire/life/safety systems or equipment, or any other mechanical, electrical,
electronic, computer or other systems or equipment for the Property.
(N) "Taxes" shall mean all federal, state, county, or local governmental
or municipal taxes, fees, charges or other impositions of every kind and nature,
whether general, special, ordinary or extraordinary (including without
limitation, real estate taxes, general and special assessments, transit taxes,
water and sewer rents, taxes based upon the receipt of rent including gross
receipts or sales taxes applicable to the receipt of rent or service or value
added taxes (unless required to be paid by Tenant under Article 17), personal
property taxes imposed upon the fixtures, machinery, equipment, apparatus,
Systems and Equipment, appurtenances, furniture and other personal property used
in connection with the Property which Landlord shall pay during any calendar
year, any portion of which occurs during the Term (without regard to any
different fiscal year used by such government or municipal authority) because of
or in connection with the ownership, leasing and operation of the Property.
Notwithstanding the foregoing, there shall be excluded from Taxes all excess
profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and
succession taxes, estate taxes, federal and state income taxes, and other taxes
to the extent applicable to Landlord's general or net income (as opposed to
rents, receipts or income attributable to operations at the Property). If the
method of taxation of real estate prevailing at the time of execution hereof
shall be, or has been altered, so as to cause the whole or any part of the taxes
now, hereafter or heretofore levied, assessed or imposed on real estate to be
levied, assessed or imposed on Landlord, wholly or partially, as a capital levy
or otherwise, or on or measured by the rents received therefrom, then such new
or altered taxes attributable to the Property shall be included within
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the term "Taxes," except that the same shall not include any enhancement of said
tax attributable to other income of Landlord. Any expenses incurred by Landlord
in attempting to protest, reduce or minimize Taxes shall be included in Taxes in
the calendar year such expenses are paid. Tax refunds shall be deducted from
Taxes in the year they are received by Landlord, but if such refund shall relate
to taxes paid in a prior year of the Term, and the Lease shall have expired,
Landlord shall mail Tenant's Prorata Share of such net refund (after deducting
any unreimbursed expenses and attorneys' fees), up to the amount Tenant paid
towards Taxes during such year, to Tenant's last known address. If Taxes for the
Base Tax Year are reduced as the result of protest, or by means of agreement, or
as the result of legal proceedings or otherwise, Landlord may adjust Tenant's
obligations for Taxes in all years following the Tax Base Year, and Tenant shall
pay Landlord within 30 days after notice any additional amount required by such
adjustment for any such years or portions thereof that have theretofore
occurred. If Taxes for any period during the Term or any extension thereof,
shall be increased after payment thereof by Landlord, for any reason including
without limitation error or reassessment by applicable governmental or municipal
authorities, Tenant shall pay Landlord within thirty (30) days after demand
Tenant's Prorata Share of such increased Taxes. Except as provided in subsection
(i) below, Tenant shall pay increased Taxes whether Taxes are increased as a
result of increases in the assessment or valuation of the Property (whether
based on a sale, change in ownership or refinancing of the Property or
otherwise), increases in the tax rates, reduction or elimination of any
rollbacks or other deductions available under current law, scheduled reductions
of any tax abatement, as a result of the elimination, invalidity or withdrawal
of any tax abatement, or for any other cause whatsoever. Notwithstanding the
foregoing, if any Taxes shall be paid based on assessments or bills by a
governmental or municipal authority using a fiscal year other than a calendar
year, Landlord may elect to average the assessments or bills for the subject
calendar year, based on the number of months of such calendar year included in
each such assessment or bill.
(i) Notwithstanding anything to the contrary contained in this
Lease, in the event that after the date of this Lease, and prior to the
expiration of the initial Term of this Lease, any sale, refinancing, long
term ground lease, reorganization of Landlord or change in ownership of
the Real Property is consummated, and as a result thereof, and to the
extent that in connection therewith, or for any other reason, the Real
Property is reassessed (the "Reassessment") for real estate tax purposes
by the appropriate governmental authority pursuant to the terms of
Proposition 13 (as adopted by the voters of the State of California in the
June, 1978 election), then the terms of this Section 25(N)(i) shall apply.
(a) For purposes of this Section, the term "Tax
Increase" shall mean that portion of the Taxes, as calculated
immediately following the Reassessment, which is attributable solely
to the Reassessment. Accordingly, the term Tax Increase shall not
include any portion of the Taxes, as calculated immediately
following the Reassessment, which (i) is attributable to assessments
pending immediately prior to the Reassessment, which assessments
were conducted during, and included in, such Reassessment, or which
assessments were otherwise rendered unnecessary following the
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Reassessment, or (ii) is attributable to the annual inflationary
increase to real estate taxes.
(b) During the entire initial Term of this Lease, Tenant
shall not be obligated to pay any portion of the Tax Increase
relating to the first Reassessment occurring after the date of this
Lease.
(c) With respect to any Reassessment occurring within
three (3) years of the first Reassessment (but prior to the
expiration of the initial Term), Tenant shall be responsible for and
shall pay fifty percent (50%) of Tenant's Prorata Share of the Tax
Increase during the remainder of the initial Term.
(d) With respect to any Reassessment occurring after
three (3) years from the date of the first Reassessment, Tenant
shall be responsible for and shall pay one hundred percent (100%) of
Tenant's Prorata Share of the Tax Increase.
(e) This Section 25(N)(i) shall not be applicable during
any option term.
(O) "Tenant's Prorata Share" of Taxes and Operating Expenses shall be the
rentable area of the Premises divided by the rentable area of the Property on
the last day of the calendar year for which Taxes or Operating Expenses are
being determined, excluding any parking facilities. Tenant acknowledges that the
"rentable area of the Premises" under this Lease includes the usable area per
BOMA standards, without deduction for columns or projections, multiplied by a
load or conversion factor, to reflect a share of certain areas, which may
include lobbies, corridors, mechanical, utility, janitorial, boiler and service
rooms and closets, restrooms, and other public, common and service areas. Except
as provided expressly to the contrary herein, the "rentable area of the
Property" shall include all rentable area of all space leased or available for
lease at the Property, which Landlord may reasonably re-determine from time to
time, to reflect re-configurations, additions or modifications to the Property.
If the Property or any development of which it is a part, shall contain
non-office uses, Landlord shall have the right to determine in accordance with
sound accounting and management principles, Tenant's Prorata Share of Taxes and
Operating Expenses for only the office portion of the Property or of such
development, in which event, Tenant's Prorata Share shall be based on the ratio
of the rentable area of the Premises to the rentable area of such office
portion. Similarly, if the Property shall contain tenants who do not participate
in all or certain categories of Taxes or Operating Expenses on a pro rata basis,
Landlord shall exclude the amount of Taxes or Operating Expenses, or such
categories of the same, as the case may be, attributable to such tenants, and
exclude the rentable area of their premises, in computing Tenant's Prorata
Share, but Landlord shall not be required to make any such exclusion except to
the extent that failure to do so would result in Landlord's being entitled to
collect more than 100% of its costs as to such categories of Taxes or Operating
Expenses, taking into account the gross up provisions of Section 25 I of this
Lease.
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ARTICLE 26
CONVEYANCE BY LANDLORD AND LIABILITY
In case Landlord or any successor owner of the Property or the Building
shall convey or otherwise dispose of any portion thereof in which the Premises
are located, to another Person (and nothing herein shall be construed to
restrict or prevent such conveyance or disposition), such other Person shall
thereupon be and become landlord hereunder and shall be deemed to have fully
assumed and be liable for all obligations of this Lease to be performed by
Landlord which first arise after the date of conveyance, including the return of
any Security Deposit, and Tenant shall attorn to such other Person, and Landlord
or such successor owner shall, from and after the date of conveyance, be free of
all liabilities and obligations hereunder not then incurred. The liability of
Landlord to Tenant for any default by Landlord under this Lease or arising in
connection herewith or with Landlord's operation, management, leasing, repair,
renovation, alteration, or any other matter relating to the Property or the
Premises, shall be limited to the interest of Landlord in the Property (and the
rental proceeds thereof). Tenant agrees to look solely to Landlord's interest in
the Property (and the rental proceeds thereof) for the recovery of any judgment
against Landlord, and Landlord shall not be personally liable for any such
judgment or deficiency after execution thereon. The limitations of liability
contained in this Article shall apply equally and inure to the benefit of
Landlord's present and future partners, members, beneficiaries, officers,
directors, trustees, shareholders, agents and employees, and their respective
partners, heirs, successors and assigns. Under no circumstances shall any
present or future general or limited partner of Landlord (if Landlord is a
partnership), or any present or future member (if Landlord is a limited
liability company), or trustee or beneficiary (if Landlord or any partner of
Landlord is a trust) have any liability for the performance of Landlord's
obligations under this Lease. Notwithstanding the foregoing to the contrary,
Landlord shall have personal liability for insured claims, beyond Landlord's
interest in the Property (and rental proceeds thereof), to the extent of
Landlord's liability insurance coverage available for such claims.
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ARTICLE 27
INDEMNIFICATION
Except to the extent arising from the intentional misconduct or negligent
acts of Landlord or Landlord's agents or employees, or contractors, Tenant shall
defend, indemnify and hold harmless Landlord from and against any and all
claims, demands, liabilities, damages, judgments, orders, decrees, actions,
proceedings, fines, penalties, costs and expenses, including without limitation,
court costs and reasonable attorneys' fees arising from or relating to any loss
of life, damage or injury to person, property or business occurring in or from
the Premises, or caused by or in connection with any violation of this Lease or
use of the Premises or Property by Tenant, any other occupant of the Premises,
or any of their respective agents, employees or contractors. Without limiting
the generality of the foregoing, Tenant specifically acknowledges that the
indemnity undertaking herein shall apply to claims in connection with or arising
out of any "Work" as described in Article 8, the installation, maintenance, use
or removal of any "Lines" located in or serving the Premises as described in
Article 29, and the transportation, use, storage, maintenance, generation,
manufacturing, handling, disposal, release or discharge of any "Hazardous
Material" as described in Article 30 (whether or not any of such matters shall
have been theretofore approved by Landlord), except to the extent that any of
the same arises from the intentional misconduct or negligent acts of Landlord or
Landlord's agents or employees or contractors.
ARTICLE 28
SAFETY AND SECURITY DEVICES, SERVICES AND PROGRAMS
The parties acknowledge that safety and security devices, services and
programs provided by Landlord, if any, while intended to deter crime and ensure
safety, may not in given instances prevent theft or other criminal acts, or
ensure safety of persons or property. The risk that any safety or security
device, service or program may not be effective, or may malfunction, or be
circumvented by a criminal, is assumed by Tenant with respect to Tenant's
property and interests, and Tenant shall obtain insurance coverage to the extent
Tenant desires protection against such criminal acts and other losses, as
further described in Article 11. Tenant agrees to cooperate, at no cost to
Tenant, in any reasonable safety or security program developed by Landlord or
required by Law.
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ARTICLE 29
COMMUNICATIONS AND COMPUTER LINES
Tenant may install, maintain, replace, remove or use any communications or
computer wires, cables and related devices (collectively the "Lines") at the
Property in or serving the Premises, provided: (a) Tenant shall obtain
Landlord's prior written consent, use an experienced and qualified contractor
approved in writing by Landlord, and comply with all of the other provisions of
Article 8, (b) any such installation, maintenance, replacement, removal or use
shall comply with all laws applicable thereto and good work practices, and shall
not interfere with the use of any then existing Lines at the Property, (c) an
acceptable number of spare Lines and space for additional Lines shall be
maintained for existing and future occupants of the Property, as determined in
Landlord's reasonable opinion, (d) if Tenant at any time uses any equipment that
may create an electromagnetic field exceeding the normal insulation ratings of
ordinary twisted pair riser cable or cause a radiation higher than normal
background radiation, the Lines therefor (including riser cables) shall be
appropriately insulated to prevent such excessive electromagnetic fields or
radiation, (e) as a condition to permitting the installation of new Lines,
Landlord may require that Tenant remove existing Lines of prior tenants located
in or serving the Premises, (f) Tenant's rights shall be subject to the rights
of any regulated telephone company, and (g) Tenant shall pay all costs in
connection therewith. Landlord reserves the right to require that Tenant remove
any Lines located in or serving the Premises which are installed in violation of
these provisions, or which are at any time in violation of any Laws or represent
a dangerous or potentially dangerous condition (whether such Lines were
installed by Tenant or any other party), within three (3) days after written
notice. Landlord hereby consents to the installation by Tenant, at Tenant's sole
cost and expense, in accordance with the foregoing provisions and in accordance
with the terms and conditions relating to the work performed by Tenant pursuant
to the Work Agreement, within six (6) months after the Commencement Date, a four
inch conduit for its Lines in the existing telephone closet riser or otherwise
in the Building core (the precise location to be as specified by Landlord).
Tenant's work in connection with its installation of such conduit shall include
compliance with any and all applicable laws and governmental requirements
relating to asbestos in a manner that will be subject to Landlord's prior
written approval.
Landlord may (but shall not have the obligation to): (i) install new Lines
at the Property (ii) create additional space for Lines at the Property, and
(iii) reasonably direct, monitor and/or supervise the installation, maintenance,
replacement and removal of, the allocation and periodic re-allocation of
available space (if any) for, and the allocation of excess capacity (if any) on,
any Lines now or hereafter installed at the Property by Landlord, Tenant or any
other party (but Landlord shall have no right to monitor or control the
information transmitted through such Lines). Such rights shall not be in
limitation of other rights that may the available to Landlord by Law or
otherwise. If Landlord exercises any such rights, Landlord may charge Tenant for
the costs attributable to Tenant, or may include those costs and all other costs
in Operating Expenses under Article 25 (including without limitation, costs for
acquiring and installing Lines and risers to accommodate new Lines and spare
Lines, any associated computerized
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system and software for maintaining records of Line connections, and the fees of
any consulting engineers and other experts); provided, any capital expenditures
included in Operating Expenses hereunder shall be amortized (together with
reasonable finance charges) over the period of time prescribed by Article 25.
If Tenant violates any other provision of this Article, Landlord may,
after twenty (20) days' written notice to Tenant, remedy such other violation,
at Tenant's expense (without limiting Landlord's other remedies available under
this Lease or applicable Law). Tenant shall not, without the prior written
consent of Landlord in each instance, grant to any third party a security
interest or lien in or on the Lines, and any such security interest or lien
granted without Landlord's written consent shall be null and void. Except to the
extent arising from the intentional or negligent acts of Landlord or Landlord's
agents, employees, or contractors, Landlord shall have no liability for damages
arising from, and Landlord does not warrant that the Tenant's use of any Lines
will be free from the following (collectively called "Line Problems"): (x) any
eavesdropping or wire-tapping by unauthorized parties, (y) any failure of any
Lines to satisfy Tenant's requirements, or (z) any shortages, failures,
variations, interruptions, disconnections, loss or damage caused by the
installation, maintenance, replacement, use or removal of Lines by or for other
tenants or occupants at the Property, by any failure of the environmental
conditions or the power supply for the Property to conform to any requirements
for the Lines or any associated equipment, or any other problems associated with
any Lines by any other cause. Under no circumstances shall any Line Problems be
deemed an actual or constructive eviction of Tenant, or relieve Tenant from
performance of Tenant's obligations under this Lease, and Tenant shall only be
entitled to abatement of Rent to the extent Landlord receives insurance proceeds
in connection with Tenant's Line Problems under Landlord's rent interruption
insurance. Landlord in no event shall be liable for damages by reason of loss of
profits, business interruption or other consequential damage arising from any
Line Problems.
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ARTICLE 30
HAZARDOUS MATERIALS
Tenant shall not transport, use, store, maintain, generate, manufacture,
handle, dispose, release or discharge any "Hazardous Material" (as defined
below) upon or about the Property, nor permit Tenant's employees, agents,
contractors, and other occupants of the Premises to engage in such activities
upon or about the Property. However, the foregoing provisions shall not prohibit
the transportation to and from, and use, storage, maintenance and handling
within, the Premises of substances customarily used in offices (or such other
business or activity expressly permitted to be undertaken in the Premises under
Article 6), provided: (a) such substances shall be used and maintained only in
such quantities as are reasonably necessary for such permitted use of the
Premises, strictly in accordance with applicable Law and the manufacturers'
instructions therefor, (b) such substances shall not be disposed of, released or
discharged on the Property, and shall be transported to and from the Premises in
compliance with all applicable Laws, and as Landlord shall reasonably require,
(c) if any applicable Law or Landlord's trash removal contractor requires that
any such substances be disposed of separately from ordinary trash, Tenant shall
make arrangements at Tenant's expense for such disposal directly with a
qualified and licensed disposal company at a lawful disposal site (subject to
scheduling and approval by Landlord), and shall ensure that disposal occurs
frequently enough to prevent unnecessary storage of such substances in the
Premises, and (d) any remaining such substances shall be completely, properly
and lawfully removed from the Property upon expiration or earlier termination of
this Lease.
Tenant shall promptly notify Landlord of: (i) any enforcement, cleanup or
other regulatory action taken or threatened by any governmental or regulatory
authority with respect to the presence of any Hazardous Material on the Premises
or the migration thereof from or to other property, (ii) any demands or claims
made or threatened by any party against Tenant or the Premises relating to any
loss or injury resulting from any Hazardous Material, (iii) any release,
discharge or non-routine, improper or unlawful disposal or transportation of any
Hazardous Material on or from the Premises, and (iv) any matters where Tenant is
required by Law to give a notice to any governmental or regulatory authority
respecting any Hazardous Material on the Premises. Landlord shall have the right
(but not the obligation) to join and participate, as a party, in any legal
proceedings or actions affecting the Premises initiated in connection with any
environmental, health or safety Law. At such times as Landlord may reasonably
request, Tenant shall provide Landlord with a written list identifying any
Hazardous Material then used, stored, or maintained upon the Premises, the use
and approximate quantity of each such material, a copy of any material safety
data sheet ("MSDS") issued by the manufacturer thereof, written information
concerning the removal, transportation and disposal of the same, and such other
information as Landlord may reasonably require or as may be required by Law;
provided, however, that except to the extent required by law, provided that
Tenant complies with (a) through (d) of the immediately preceding paragraph,
Tenant need not identify Hazardous Material customarily used in offices and held
in quantities customarily held in offices. The term "Hazardous Material" for
purposes hereof shall mean any chemical, substance, material or waste or
component thereof which is now or hereafter listed, defined or regulated as a
hazardous or
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toxic chemical, substance, material or waste or component thereof by any
federal, state or local governing or regulatory body having jurisdiction, or
which would trigger any employee or community "right-to-know" requirements
adopted by any such body, or for which any such body has adopted any
requirements for the preparation or distribution of an MSDS.
If any Hazardous Material is released, discharged or disposed of by Tenant
or any other occupant of the Premises, or their employees, agents or
contractors, on or about the Property in violation of the foregoing provisions,
Tenant shall immediately, properly and in compliance with applicable Laws clean
up and remove the Hazardous Material from the Property and any other affected
property and clean or replace any affected personal property (whether or not
owned by Landlord), at Tenant's expense. Such clean up and removal work shall be
subject to Landlord's prior written approval (except in emergencies), and shall
include, without limitation, any testing, investigation, and the preparation and
implementation of any remedial action plan required by any governmental body
having jurisdiction or reasonably required by Landlord. If Tenant shall fail to
comply with the provisions of this Article within five (5) days after written
notice by Landlord, or such shorter time as may be required by Law or in order
to minimize any hazard to Persons or property, Landlord may (but shall not be
obligated to) arrange for such compliance directly or as Tenant's agent through
contractors or other parties selected by Landlord, at Tenant's expense (without
limiting Landlord's other remedies under this Lease or applicable Law). If any
Hazardous Material is released, discharged or disposed of on or about the
Property and such release, discharge or disposal is not caused by Tenant or
other occupants of the Premises, or their employees, agents or contractors, such
release, discharge or disposal shall be deemed casualty damage under Article 10
to the extent that the Premises or common areas serving the Premises are
affected thereby; in such case, Landlord and Tenant shall have the obligations
and rights respecting such casualty damage provided under Article 10.
Landlord shall promptly notify Tenant after Landlord has received notice
of: (1) any enforcement, cleanup or other regulatory action taken or threatened
by any governmental or regulatory authority with respect to the presence of any
Hazardous Material on or affecting the Premises or the Property involving a
material health risk for occupants of the Premises, (ii) any discharge or
nonroutine, improper or unlawful disposal or transportation of any Hazardous
Material affecting the Premises or the Property involving a material health risk
for occupants of the Premises, and (iii) any matters where Landlord is required
by Law or by a governmental or regulatory agency to give a notice to Tenant
respecting Hazardous Materials at the Property or which involve a material
health risk for occupants of the Premises.
ARTICLE 31
MISCELLANEOUS
(A) Each of the terms and provisions of this Lease shall be binding upon
and inure to the benefit of the parties hereto, their respective heirs,
executors, administrators, guardians, custodians, successors and assigns,
subject to the provisions of Article 21 respecting Transfers.
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(B) Neither this Lease nor any memorandum of lease or short form lease
shall be recorded by Tenant.
(C) This Lease shall be construed in accordance with the Laws of the state
in which the Property is located.
(D) All obligations or rights of either party arising during or
attributable to the period ending upon expiration or earlier termination of this
Lease shall survive such expiration or earlier termination.
(E) Landlord agrees that, if Tenant timely pays the Rent and performs the
terms and provisions hereunder, and subject to all other terms and provisions of
this Lease, Tenant shall hold and enjoy the Premises during the Term, free of
lawful claims by any Person acting by or through Landlord.
(F) This Lease does not grant any legal rights to "light and air" outside
the Premises nor any particular view or cityscape visible from the Premises nor
any right to be free of inconvenience attributable to street or sidewalk
improvement or repair.
(G) Tenant shall have the right to place the firm's name, the name of each
of Tenant's professionals and any other employees, and the name(s) of any
subtenants and their professionals and employees, on the Building directory
board in the lobby of the Building and any other directory which may be a part
of the complex, not to exceed 1.5 names per 1,000 rentable square feet of space
leased. Tenant shall have the right to install at Tenant's expense, subject to
the Rules attached hereto as Rider One, signage in the elevator lobby area of
the Premises identifying Tenant's firm name.
ARTICLE 32
STORAGE SPACE
Landlord hereby grants to Tenant a license to use that certain storage
space in the basement of the Building more precisely shown on Exhibit A-3
attached hereto and made a part hereof ("Storage Space") consisting of
approximately 3,050 rentable square feet. The term of such license shall
commence on the Commencement Date or any earlier date specified in a notice from
Tenant to Landlord and shall continue for ten (10) years after the Commencement
Date or until such earlier time as this Lease shall terminate or Tenant shall
vacate the Premises or the Storage Space. During the term of this license,
Tenant shall pay Landlord a monthly fee of $1.25 per rentable square foot
($3,812.50 per month), on or before the first day of each calendar month during
such term. Any initial or final partial month shall be prorated. Tenant may
reduce the amount of the Storage Space by at least 30 days prior written notice
to Landlord, which reduction shall be effective as of the last day of a calendar
month, as designated in the notice. Any additional storage space which Tenant
desires to occupy (including but not limited to storage space originally subject
to the license but then eliminated therefrom pursuant to a reduction notice, as
set forth in the immediately preceding sentence), shall be subject to
availability, as reasonably determined by Landlord, and if the space requested
by Tenant is not configured as required by Tenant, Tenant shall pay all
reasonable costs of reconfiguring
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such space.
Tenant shall use the Storage Space for purposes of storing equipment,
inventory or other items normally used in Tenant's business. All items stored in
the Storage Space shall be elevated at least six inches (6") above the floor on
wooden pallets, and shall be at least eighteen inches (18") below the bottom of
all sprinklers located in the ceiling of the Storage Space, if any. Any boxes
shall not be stacked more than 7 feet high. Tenant shall not store anything in
the Storage Space which is unsafe or which otherwise may create a hazardous
condition, or which may increase Landlord's insurance rates, or cause a
cancellation or modification of Landlord's insurance coverage. Without
limitation, Tenant shall not store any flammable, combustible or explosive
fluid, chemical or substance nor any perishable food or beverage products,
except with Landlord's prior written approval. Landlord reserves the right to
adopt and enforce reasonable rules and regulations governing the use of the
Storage Space from time to time. Tenant shall properly and at all times comply
with all applicable ordinances, rules, regulations, codes, laws, statutes and
requirements of all federal, state, county and municipal governmental bodies or
their subdivisions respecting the use of the Storage Space.
Tenant shall not, without the prior written consent of Landlord, assign,
mortgage, pledge, hypothecate, encumber or permit any liens to attach to, or
otherwise transfer, the Storage Space or any interest therein, by operation of
law or otherwise, nor sublet the Storage Space, nor permit the use thereof by
any parties other than Tenant and its employees. Any such transfer without
Landlord's prior written consent shall, at Landlord's option, be null, void and
of no effect. Landlord agrees not to unreasonably withhold consent to any such
transfer if it is made in connection with a Transfer pursuant to Article 21 of
this Lease, and the Storage Space shall be deemed assigned to any assignee of
Tenant's entire interest in this Lease pursuant to such Article 21, and such
assignee shall be deemed to have assumed all obligations with respect thereto,
but Tenant shall not be released from any such obligations.
Landlord may, at its option, upon at least 30 days' advance written notice
to Tenant, change the Storage Space hereunder to other storage space at the
Property comparable to the Storage Space herein. Tenant agrees to accept the
Storage Space "as is", and Landlord shall have no obligation to maintain or
repair the same. Tenant shall extend all of its insurance policies required
under this Lease to include the Storage Space, and the property to be located
therein. Upon request, Tenant shall provide Landlord with certificates or other
satisfactory evidence of such insurance. Landlord shall have no liability
whatsoever for any damage to property or any other items located in the Storage
Space, nor for any personal injuries or death arising out of any matter relating
to the Storage Space, and in all events, Tenant agrees to look first to its
insurance carrier for payment of any losses sustained in connection with
Tenant's use of the Storage Space. More particularly, but without limitation,
Landlord shall have no liability for loss of or damage to any property by theft,
vandalism, fire, explosion, falling plaster, steam, gas, electricity, water,
rain, bursting of pipes, seepage, dampness, or any other cause. Tenant hereby
waives on behalf of its insurance carriers all rights of subrogation against
Landlord and its agents. If Tenant shall default under this Article 32,
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Landlord shall have the right to cancel this Storage Space license on ten (10)
days' written notice, unless within such ten (10) day period, Tenant cures such
default. Such cancellation right shall be cumulative and in addition to any
other rights or remedies available to Landlord at law or equity, or provided
under this Lease.
ARTICLE 33
NOTICES
Except as expressly provided to the contrary in this Lease, every notice
or other communication to be given by either party to the other with respect
hereto or to the Premises or Property, shall be in writing and shall not be
effective for any purpose unless the same shall be served personally or by
national air courier service, or United States certified mail, return receipt
requested, postage prepaid, addressed, if to Tenant, prior to Commencement Date,
9441 W. Olympic Blvd. Beverly Hills, CA 90212-4541, Attn: Carol Crovisier and
after the Commencement Date, 1888 Century Park East, 8th floor, Los Angeles, CA
90067, Attn: Carol Crovisier and if to Landlord, at the address at which the
last payment of Rent was required to be made and to 900 North Michigan Avenue,
Chicago, Illinois 60611, Attn; Douglas Welker, or such other address or
addresses as Tenant or Landlord may from time to time designate by notice given
as above provided. Every notice or other communication hereunder shall be deemed
to have been given as of the third business day following the date of such
mailing (or as of any earlier date evidenced by a receipt from such national air
courier service or United States Postal Service) or immediately if personally
delivered. Notices not sent in accordance with the foregoing shall be of no
force or effect until received by the foregoing parties at such addresses
required herein.
ARTICLE 34
REAL ESTATE BROKERS
Landlord and Tenant each represents to the other that other than
Industrial Commercial Properties (whose commission shall be paid by Landlord
pursuant to a separate agreement) no broker, agent or finder negotiated or was
instrumental in negotiating or consummating this Lease and each party agrees to
indemnify and hold the other harmless from all damages, judgments, liabilities
and expenses (including reasonable attorneys' fees) arising from any claims or
demands of any other broker, agent or finder with whom such party has dealt for
any commission or fee alleged to be due in connection with its participation in
the procurement of Tenant or the negotiation with Tenant of this Lease.
ARTICLE 35
SECURITY DEPOSIT
Tenant shall provide or cause to be provided to Landlord with either (i)
an unconditional, clean, irrevocable letter of credit from Union Bank of
California, or an equivalent bank (the "L-C"), or (ii) a third party custody
account (the "Account") (provided that Landlord's ability to draw against the
Account is unilateral
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and functions in the in the same manner as a letter of credit), in the amount of
$1,250,000 (in total, the "Security Deposit"), on or before Landlord's delivery
of the Premises to Tenant for Tenant's construction. At Landlord's option, the
provision to Landlord of such Security Deposit shall be condition precedent to
Landlord's obligation to deliver the Premises (in addition to and not in lieu of
Landlord's other rights and remedies in the event of Tenant's failure to provide
the Security Deposit at such time). The L-C shall be issued by a money center
bank reasonably acceptable to Landlord that accepts deposits, maintains
accounts, has a local Los Angeles office that will negotiate a letter of credit
and whose qualifying deposits are insured by the FDIC. The L-C shall be
reasonably acceptable to Landlord and shall be in a form and content as set
forth in Exhibit "C", attached hereto. The Account shall be set up in a money
center bank approved by Landlord that accepts deposits, maintains accounts, and
has a local Los Angeles office whose qualifying deposits are insured by the FDIC
(such institution shall hereinafter be referred to as the "Holder"). The Account
shall be registered solely in the name of Landlord and any interest thereon
actually received by Landlord from Holder over and above the amount then
required for the Security Deposit under this Lease shall be paid by Landlord to
Tenant. Tenant shall pay all points and/or fees incurred by Tenant in obtaining
the L-C or setting up and maintaining the Account. The Security Deposit shall
serve as security for the prompt, full and faithful performance by Tenant of the
terms and provisions of this Lease. The Security Deposit shall not be mortgaged,
assigned or encumbered in any manner whatsoever by Tenant without the prior
written consent of Landlord. In the event that Tenant is in Default hereunder,
or in the event that Tenant owes any amounts to Landlord upon the expiration of
this Lease, or if Tenant fails to renew the L-C at least thirty (30) days before
its expiration, Landlord may draw upon all or any portion of the L-C or the
Account for the payment of Tenant's obligations hereunder. Any amount of the L-C
or the Account which is drawn upon by Landlord, but is not used or applied by
Landlord, shall be held by Landlord and deemed a security deposit. The use or
application of the Security Deposit or any portion thereof shall not prevent
Landlord from exercising any other right or remedy provided hereunder or under
any Law and shall not be construed as liquidated damages. In the event the
Security Deposit is reduced by such use or application, Tenant shall, within ten
(10) days after written notice, either (i) deposit cash with Landlord in an
amount sufficient to restore the amount of the Security Deposit then required
under the lease or (ii) reinstate the L-C or the Account to the amount of the
Security Deposit then required under the lease. If Tenant is not then in Default
under this Lease, the sum of the L-C or the Account, and thereby the Security
Deposit, shall be reduced by $333,333.00 on the first, second and third
anniversary of the Commencement Date. The balance of the L-C or the Account
remaining after the end of the third (3rd) year of the Lease Term shall be
$250,000.00, and shall remain active and in effect until the expiration of the
Lease Term, as such Term may be extended. Any remaining portion of the Security
Deposit shall be returned to Tenant within sixty (60) days after the Tenant has
vacated the Premises in accordance with Article 13. If the Premises shall be
expanded at any time, or if the Term shall be extended at an increased rate of
Rent, the L-C or the Account and the Security Deposit shall thereupon be
proportionally increased.
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ARTICLE 36
SIGNS
Tenant shall have the right to construct and install, subject to all
applicable governmental approvals, an exclusive monument sign structure (the
"Monument") at 1888 Century Park East on either the south side or the north side
of the entrance to 1888 Century Park East (to be decided on or before July 1,
1999 by notice to Landlord). The size, style and type of the monument and
signage lettering shall be similar to that shown on the plan delivered to
Landlord by letter dated July 14, 1998. The final plans for the Monument and
signage lettering shall be reviewed and approved by Landlord and Landlord's sign
designer, Paul Hirschfield prior to installation, and in any event shall be
consistent with Landlord's existing monument signs in terms of material, design
style and overall quality, and shall comply with all applicable laws,
regulations, ordinances and governmental requirements.
The Monument shall be the sole responsibility of Tenant and Tenant shall
bear all costs associated with the Monument, including, without limitation: (i)
the cost of reconstructing the existing sign to the left side of the entrance in
a manner satisfactory to Landlord, should Tenant elect to place its sign on the
right side, (ii) the cost to install the Monument, (iii) the cost to construct,
design and finish the Monument, and (iv) the cost to maintain the Monument in a
first class fashion. However, Landlord shall be responsible for all costs
associated with bringing electrical power to the Monument's planter and shall,
prior to or promptly after installation of the sign, remove landscaping which
unreasonably obstructs visibility of the Monument's signage.
Landlord shall not permit the addition of any other monument sign but
nothing contained herein shall give Tenant the right of approval over signage on
the existing monument sign (whether or not the same is relocated), and Landlord
may leave in existence the existing monument sign. No tenant of the Building
will have the right to building identity signage, whether at the top or eyebrow
level or otherwise (exclusive of retail signage substantially consistent with
Landlord's current retail signage program or reasonable variations thereof),
unless such tenant then leases and occupies one hundred thirty-five percent
(135%) or more of the rentable square feet then leased and occupied by Tenant.
Any current or future owner of the Building or any partner or member of the
entity owning the Building or any of their respective affiliates (the "Owner"),
whether or not the Owner is also a tenant of the Building and regardless of the
area the Owner occupies, may, without Tenant's consent, place its name in one
(1) or more locations on the Building. However, (i) no tenant of the Building,
and no subsequent Owner of the Building, whether or not such Owner is also a
tenant of the Building, may erect any such signage if the same would (x)
identify Norcal Mutual Insurance Company, The Doctors' Company, Medical
Insurance Exchange of California, CNA Insurance Companies, Freemont Indemnity
Company, Cooperative of American Physicians/Mutual Protection Trust, Farmers
Group, Inc. or MMI Companies, Inc., or any other entity (including a division of
the aforesaid entities) which offers, as a material portion of its business
relative to the size of the business of Tenant, professional liability insurance
to healthcare professionals or providers; (y) identify CIGNA, WellPoint Health
Network Inc.,
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[SCPIE Holdings Lease]
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Pacific Care Health Systems or any other entity (including a division of the
aforesaid entities) primarily engaged in the business of providing healthcare
services which in the normal course of its business, contests claims against
insureds of Tenant; or (z) would otherwise be clearly inappropriate or
materially and adversely affect the reputation of the Building; and (ii) no
tenant of the Building, other than a subsequent Owner of the Building who is
also a tenant of the Building, may erect any such signage if the same would
identify any other company engaged in the insurance business to a substantial
degree relative to the size of the business of Tenant.
The above referenced signage rights are personal to Tenant; provided,
however, that (i) if Tenant assigns its entire interest in and to the Lease for
the remainder of the Term or transfers its corporate ownership to another entity
pursuant to Article 21 of this Lease, such entity shall enjoy Tenant's rights,
subject to Landlord's reasonable approval (it being understood and agreed that
Landlord shall have the right, acting reasonably, to approve an assignee but
disapprove transfer of Tenant's signage rights) and any approval rights held by
Sullivan & Cromwell, its successors and assigns as a tenant in the Building;
(ii) Tenant shall be entitled to monument signage only as long as it continues
to lease the entire Premises and occupies one full floor or more; and (iii)
Tenant shall have the rights set forth above to restrict building identity
signage only as long as it continues to lease the entire Premises and occupies
two full floors or more. Further, subject to the limitations set forth in the
immediately preceding sentence, and subject to Landlord's reasonable approval
and any approval rights held by Sullivan & Cromwell, its successors and assigns
as a tenant in the Building, Tenant shall have the right to place one
subtenant's name on the Monument, if such subtenant occupies at least two
floors.
Tenant's remedy in the event of a default by Landlord under this Article
shall be limited to specific performance.
ARTICLE 37
ENTIRE AGREEMENT
This Lease, together with Rider One (Rules), the Asbestos Lease Rider,
Exhibits A-1 (Floor Plans of Premises), A-2 (Floor Plan of 5th Floor First
Opportunity Space), A-3 (Storage Space), B (Agreement of Subordination,
Non-Disturbance and Attornment) and C (Form of Letter of Credit), and the
documents captioned "Work Letter Agreement" and "Parking Agreement" (WHICH
COLLECTIVELY ARE HEREBY INCORPORATED WHERE REFERRED TO HEREIN AND MADE A PART
HEREOF AS THOUGH FULLY SET FORTH), contains all the terms and provisions between
Landlord and Tenant relating to the matters set forth herein and no prior or
contemporaneous agreement or understanding pertaining to the same shall be of
any force or effect, except any such contemporaneous agreement specifically
referring to and modifying this Lease, signed by both parties. Without
limitation as to the generality of the foregoing, Tenant hereby acknowledges and
agrees that Landlord's leasing agents and field personnel are only authorized to
show the Premises and negotiate terms and conditions for leases subject to
Landlord's final approval, and are not authorized to make any agreements,
representations, understandings or obligations, binding upon Landlord,
respecting the condition of the Premises or Property, suitability of the same
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for Tenant's business, or any other matter, and no such agreements,
representations, understandings or obligations not expressly contained herein or
in such contemporaneous agreement shall be of any force or effect. Neither this
Lease, nor any Riders or Exhibits referred to above may be modified, except in
writing signed by both parties.
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WITNESSES; ATTESTATION
(TWO FOR EACH SIGNATORY
REQUIRED):
LANDLORD:
WH/WSA REALTY, L.L.C.,
a Delaware limited liability company
By: Walton Street-1888 L.L.C.,
a Delaware limited liability company
By: 1888 Investors, L.L.C.,
a Delaware limited liability company,
Manager and Member
By:
------------------------------------
Its: Authorized Representative
By:
------------------------------------
Its: Authorized Representative
TENANT:
SCPIE HOLDINGS INC.,
a Delaware corporation
By:
----------------------------------------
Name:
Its:
By:
----------------------------------------
Name:
Its:
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CERTIFICATE OF TENANT
(IF TENANT IS A CORPORATION)
I, _________________________, Secretary of ____________________________,
Tenant, hereby certify that the officer(s) executing the foregoing Lease on
behalf of Tenant was/were duly authorized to act in his/their capacities as
________________________ and _________________________, and his/their action(s)
are the action of Tenant.
(Corporate Seal)
----------------------------------------
Secretary
Certificate of Tenant
1888 Century Park East
[SCPIE Holdings Lease]
<PAGE> 53
RIDER ONE
RULES
(1) On Saturdays, Sundays and Holidays, and on other days between the
hours of 6:00 P.M and 8:00 A.M. the following day, or such other hours as
Landlord shall reasonably determine from time to time, access to the Property
and/or to the passageways, entrances, exits, shipping areas, halls, corridors,
elevators or stairways and other areas in the Property may be restricted and
access gained by use of a key to the outside doors of the Property, or pursuant
to such security procedures Landlord may from time to time reasonably impose.
All such areas, and all roofs, are not for use of the general public and
Landlord shall in all cases retain the right to reasonably control and prevent
access thereto by all persons whose presence in the reasonable judgment of
Landlord shall be prejudicial to the safety, character, reputation and interests
of the Property and its tenants provided, however, that nothing herein contained
shall be construed to prevent such access to persons with whom Tenant deals in
the normal course of Tenant's business unless such persons are engaged in
activities which are illegal or violate these Rules. No Tenant and no employee
or invitee of Tenant shall enter into areas reserved for the exclusive use of
Landlord, its employees or invitees.
(2) Tenant shall not paint, display, inscribe, maintain or affix any sign,
placard, picture, advertisement, name, notice, lettering or direction on any
part of the outside or inside of the Property, or on any part of the inside of
the Premises which can be seen from the outside of the Premises, without the
prior consent of Landlord, and then only such name or names or matter and in
such color, size, style, character and material as may be first approved by
Landlord in writing.
(3) Tenant shall not in any manner use the name of the Property for any
purpose other than that of the business address of the Tenant, or use any
picture or likeness of the Property, in any letterheads, envelopes, circulars,
notices, advertisements, containers or wrapping material without Landlord's
express consent in writing.
(4) Tenant shall not place anything or allow anything to be placed in the
Premises near the glass of any door, partition, wall or window which may be
unsightly from outside the Premises, and Tenant shall not place or permit to be
placed any article of any kind on any window ledge or on the exterior walls.
Blinds, shades, awnings or other forms of inside or outside window ventilators
or similar devices, shall not be placed in or about the outside windows in the
Premises except to the extent, if any, that the character, shape, color,
material and make thereof is first approved by the Landlord.
(5) Furniture, freight and other large or heavy articles, and all other
deliveries may be brought into the Property only at times and in the manner
reasonably designated by Landlord, and always at the Tenant's sole
responsibility and risk. Landlord may impose no reasonable charges for use of
freight elevators after or before normal business hours. All damage done to the
Property by moving or maintaining such furniture, freight or articles shall be
repaired by Landlord at Tenant's expense. Landlord may inspect items brought
into the Property or Premises with respect to weight or dangerous nature.
Landlord may require that all furniture,
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[SCPIE Holdings Lease]
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equipment, cartons and similar articles removed from the Premises or the
Property be listed and a removal permit therefor first be obtained from
Landlord. Tenant shall not take or permit to be taken in or out of other
entrances or elevators of the Property, any item normally taken, or which
Landlord otherwise reasonably requires to be taken, in or out through service
doors or on freight elevators. Tenant shall not allow anything owned or
controlled by Tenant to remain in or obstruct in any way, any lobby, corridor,
sidewalk, passageway, entrance, exit, hall, stairway, shipping area, or other
such area. Tenant shall move all supplies, furniture and equipment as soon as
received directly to the Premises, and shall move all such items and waste
(other than waste customarily removed by Property employees) that are at any
time being taken from the Premises directly to the areas designated for
disposal. Any hand-carts used at the Property shall have rubber wheels.
(6) Tenant shall not overload any floor or part thereof in the Premises,
or Property, including any public corridors or elevators therein bringing in or
removing any large or heavy articles, and Landlord may reasonably direct and
control the location of safes and all other heavy articles and require
supplementary supports at Tenant's expense of such material and dimensions as
Landlord may reasonably deem necessary to properly distribute the weight.
(7) Tenant shall furnish to Landlord at all times keys and access cards
and codes to all locked areas other than rooms containing confidential
information, and upon termination of its tenancy, shall deliver to the Landlord
all keys and access cards and codes which have been furnished Tenant or which
the Tenant shall have had made.
(8) If Tenant desires signal, communication, alarm or other utility or
similar service connections installed or changed, Tenant shall not install or
change the same without the prior approval of Landlord, and then only under
Landlord's direction at Tenant's expense. Tenant shall not install in the
Premises any equipment which requires more electric current than Landlord is
required to provide under this Lease, without Landlord's prior approval, and
Tenant shall ascertain from Landlord the maximum amount of load or demand for or
use of electrical current which can safely be permitted in the Premises, taking
into account the capacity of electric wiring in the Property and the Premises
and the needs of tenants of the Property, and shall not in any event connect a
greater load than such safe capacity.
(9) Tenant shall not obtain for use upon the Premises janitor and other
similar services, except from Persons approved by the Landlord. Any Person
engaged by Tenant to provide janitor or other services shall be subject to
direction by the manager or security personnel of the Property.
(10) The toilet rooms, urinals, wash bowls and other such apparatus shall
not be used for any purpose other than that for which they were constructed and
no foreign substance of any kind whatsoever shall be thrown therein and the
expense of any breakage, stoppage or damage resulting from the violation of this
Rule shall be borne by the tenant who, or whose employees or invitees shall have
caused it.
(11) The Building's core janitorial closets, utility closets, telephone
closets, electrical closets and other such closets, rooms
Rider One - Page 2
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[SCPIE Holdings Lease]
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and areas shall be used only for the purposes for which they were designed and
in the manner designated by Landlord, and may not be used by tenants, or their
contractors, agents, employees, or other parties without Landlord's prior
written consent.
(12) Landlord reserves the right to exclude or expel from the Property any
person who, in the reasonable judgment of Landlord, is intoxicated or under the
influence of liquor or drugs, or who shall in any manner do any act in violation
of any of these Rules. Tenant shall not at any time manufacture, sell, use or
give away, any spirituous, fermented, intoxicating or alcoholic liquors on the
Premises, nor permit any of the same to occur (except in connection with
occasional social or business events conducted in the Premises which do not
violate any laws nor bother or annoy any other tenants). Tenant shall not at any
time sell, purchase or give away, food in any form by or to any of Tenant's
agents or employees or any other parties on the Premises nor permit any of the
same to occur (other than in lunch rooms or kitchens for employees as may be
permitted or installed by Landlord, which does not, violate any Laws or
unreasonably bother or annoy any other tenant)
(13) Tenant shall not make any room-to-room canvass to solicit business or
information or to distribute any article or material to or from other tenants or
occupants of the Property and shall not exhibit, sell or offer to sell, use,
rent or exchange any products or services in or from the Premises unless
ordinarily embraced within the Tenant's use of the Premises specified in the
Lease.
(14) Tenant shall not waste electricity, water, heat or air conditioning
or other utilities or services, and agrees to cooperate fully with Landlord (at
no out-of-pocket cost to Tenant) to assure the most effective and energy
efficient operation of the Property and shall not allow the adjustment (except
by Landlord's authorized Property personnel) of any controls. Tenant shall not
open any windows, except that if the air circulation shall not be in operation,
windows which are openable may be opened with Landlord's consent.
(15) Tenant shall conduct no auction, fire or "going out of business sale"
or bankruptcy sale in or from the Premises, and such prohibition shall apply to
Tenant's creditors.
(16) Tenant shall cooperate and comply with any reasonable safety or
security programs, including fire drills and air raid drills, and the
appointment of "fire wardens" developed by Landlord for the Property, or
required by Law.
(17) Tenant will comply with all municipal, county, state, federal or
other governmental laws, statutes, codes, regulations and other requirements,
including without limitation, environmental health, safety and police
requirements and regulations respecting the Premises, now or hereinafter in
force, at its sole cost, and will not use the Premises for any immoral purposes;
provided, however, if such compliance requires physical alterations to
substantially all of the rentable space in the Building, Landlord and not
Tenant, shall be required to perform such alterations and the costs thereof may
be included in Operating Expenses to the extent they conform to the definition
of "Operating Expenses" under Section 25(I) of the Lease.
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(18) Tenant shall not (i) carry on any business, activity or service
except those ordinarily embraced within the permitted use of the Premises
specified in the Lease and more particularly, but without limiting the
generality of the foregoing, shall not (ii) install or operate any internal
combustion engine, boiler, machinery, refrigerating, heating (except
refrigerators or microwaves for kitchen use to the extent consistent with
practices in the Building) or air conditioning equipment in or about the
Premises, except as provided in the Work Letter or pursuant to Article 8, (iii)
use the Premises for housing, lodging or sleeping purposes or for the washing of
clothes, (iv) place any radio or television antennae other than inside of the
Premises, (v) operate or permit to be operated any musical or sound producing
instrument or device which may be heard outside the Premises, (vi) use any
source of power other than electricity, (vii) operate any electrical or other
device from which may emanate electrical or other waves which may interfere with
or impair radio, television, microwave, or other broadcasting or reception from
or in the Property or elsewhere, (viii) bring or permit any bicycle or other
vehicle, or dog (except in the company of a blind person or except where
specifically permitted) or other animal or bird in the Property, (ix) make or
permit reasonably objectionable noise or odor to emanate from the Premises, (x)
do anything in or about the Premises tending to create or maintain a nuisance or
do any act tending to injure the reputation of the Property, (xi) throw or
permit to be thrown or dropped any article from any window or other opening in
the Property, (xii) use or permit upon the Premises anything that will
invalidate or increase the rate of insurance on any policies of insurance now or
hereafter carried on the Property or violate the certificates of occupancy
issued for the Premises or the Property, (xiii) except as permitted pursuant to
Article 30 of the Lease, use the Premises for any purpose, or permit upon the
Premises anything, that may be dangerous to persons or property (including but
not limited to flammable oils, fluids, paints, chemicals, firearms or any
explosive articles or materials) nor (xiv) do or permit anything to be done upon
the Premises in any way tending to disturb any other tenant at the Property or
the occupants of neighboring property.
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1888 Century Park East
[SCPIE Holdings Lease]
<PAGE> 57
EXHIBIT "A-1"
1888 Century Park East
Outline of Floor Plans of Premises
[Attached]
NOTE: The Premises does not include the Building's core janitorial closet, and
the Building's core fan, electrical and telephone rooms on the floor or
floors containing the Premises, and does not include any ceilings and
space above the same on the floor or floors containing the Premises, nor
does the Premises include any floors or walls on the floor or floors
containing the Premises (with the exception of the inner surfaces thereof
and with the further exception of any walls which are constructed solely
to partition space within the Premises). Furthermore, Tenant shall not
have any right of access to the foregoing areas which are excluded from
the Premises.
Floors 4,6,7 and 8
Exhibit A-1
Exhibit "A-1"
1888 Century Park East
[SCPIE Holdings Lease]
<PAGE> 58
EXHIBIT "A-2"
1888 Century Park East
Outline of Floor Plan of 5th Floor First Opportunity Space
[Attached]
NOTE: This First Opportunity Space does not include the Building's core
janitorial closet, and the Building's core fan, electrical and telephone
rooms on the floor or floors containing the Premises, and does not include
any ceilings and space above the same on the floor or floors containing
the Premises, nor does the Premises include any floors or walls on the
floor or floors containing the Premises (with the exception of the inner
surfaces thereof and with the further exception of any walls which are
constructed solely to partition space within the Premises). Furthermore,
Tenant shall not have any right of access to the foregoing areas which are
excluded from the Premises.
Floor 5
Exhibit A-2
Exhibit "A-2"
1888 Century Park East
[SCPIE Holdings Lease]
<PAGE> 59
EXHIBIT "A-3"
1888 Century Park East
Storage Space plan
[Attached]
Storage Space plan
Exhibit A-3
Exhibit "A-3"
1888 Century Park East
[SCPIE Holdings Lease]
<PAGE> 60
EXHIBIT "B"
Form of SNDA
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:
MAYER, BROWN & PLATT
1675 Broadway
New York, New York 10019
Attention: Ellyn J. Steuer, Esq.
________________________________________________________________________________
(space above reserved for record's use)
AGREEMENT OF SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT
Dated: As of ______________________, 1998
BY AND AMONG
[NAME OF BORROWER],
a [TYPE OF ENTITY], having its principal place of business at
[____________________
____________________]
[NAME OF LESSEE],
a [TYPE OF ENTITY], having its principal place of business at
[____________________
____________________]
AND
BAYERISCHE HYPOTHEKEN-UND WECHSEL-BANK
AKTIENGESELLSCHAFT, ACTING BY AND THROUGH ITS
NEW YORK BRANCH,
a German chartered bank,
32 Old Slip
Financial Square
32nd Floor
New York, New York 10005
LOCATION OF PROPERTY
Street Address:
--------------------------------------------
California
County: [ ]
---------------------
State: California
<PAGE> 61
AGREEMENT OF SUBORDINATION,
NON-DISTURBANCE AND ATTORNMENT
NOTICE: THIS AGREEMENT OF SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT RESULTS
IN THE LEASEHOLD ESTATE IN THE PROPERTY BECOMING SUBJECT TO AND OF LOWER
PRIORITY THAN THE LIEN OF SOME OTHER OR LATER SECURITY INSTRUMENT.
THIS AGREEMENT is made this __ day of ___________, 1998, by and among
[BORROWER], a [TYPE OF ENTITY], having offices at [_________________]
("Lessor"), and _______________________, a ___________________, having offices
at ______________ ("Lessee"), and BAYERISCHE HYPOTHEKEN-UND WECHSEL-BANK
AKTIENGESELLSCHAFT, ACTING BY AND THROUGH ITS NEW YORK BRANCH, a German
chartered bank, having offices at 32 Old Slip, Financial Square, 32nd Floor, New
York, New York 10005, its successors and assigns or an affiliate ("Lender").
W I T N E S S E T H:
WHEREAS, Lender is providing financing for the land and building located
at 1888 Century Park East, Los Angeles, California (as the same is more fully
described on Exhibit A attached hereto and made a part hereof, the ("Property");
WHEREAS, under a certain lease (the "Lease") Lessor did lease, let, and
demise a portion of the Property (such portion of the Property is hereinafter
called the "Premises") to Lessee;
WHEREAS, said Lease has not been further amended, supplemented or
modified; and
WHEREAS, Lender has or will become the owner of an indebtedness secured
by, among other things, a deed of trust, made by Lessor, as trustor, for the
benefit of Lender, as beneficiary (the "Deed of Trust"), and an assignment of
Lessor's interest in the Lease for the benefit of Lender ("Assignment of
Leases");
NOW, THEREFORE, in consideration of the covenants, terms, conditions and
agreements herein contained, and in consideration of other good and valuable
consideration, the sufficiency and receipt of which are hereby acknowledged, the
parties hereto agree as follows:
1. The Lease and all rights and liens created thereby shall be subject and
subordinate in all respects to the Deed of Trust and the lien created thereby,
to any advancements made thereunder, and to all renewals, modifications,
supplements, amendments, consolidations, replacements, substitutions, additions
and extensions of the Deed of Trust.
2. So long as (i) Lessee is not in default under the Lease beyond any
applicable grace or cure period, (ii) the Lease shall have been executed by
Lessor and Lessee, (iii) Lessee or anyone claiming through or under Lease shall
be in possession of a substantial portion of the Premises, and (iv) the Lease
shall be in full force and effect, Lender hereby covenants to Lessee that if it
or any party claiming through or under it, including any purchaser at a
foreclosure sale (to the extent such third party
1
<PAGE> 62
is bound by this Agreement), obtains title to the Property, either by
foreclosure or by deed in lieu of foreclosure, and thereafter obtains the right
of possession of the Premises, that the Lease will continue in full force and
effect, and Lender shall recognize the Lease and Lessee's rights thereunder;
provided, however, that Lender shall not be subject to liability if such third
party fails to comply with the terms and conditions of this agreement.
3. Lessee agrees that from and after the date hereof in the event of any
act or omission by Lessor under the Lease which would give Lessee the right,
either immediately or after the lapse of a period of time, to terminate the
Lease, or to claim a partial or total eviction, or which would entitle Lessee to
abate any of the rent, additional rent or other sums payable under the Lease,
Lessee will not exercise any such right (a) until it has given written notice of
such act or omission to Lender by certified mail, return receipt requested, and
(b) until and unless Lender fails to remedy such act or omission within sixty
(60) days for any act or omission which can be cured by the payment of money, or
in the case of any other act or omission, as long as reasonably necessary to
remedy such act or omission, provided (i) Lender commences such remedy within
sixty (60) days, (ii) Lender pursues completion of such remedy with due
diligence following such giving of notice and completes such remedy within a
reasonable period of time, which shall include, if necessary, the time
reasonably required by Lender to enforce its rights and remedies under the Deed
of Trust or the Assignment of Leases, and (iii) Lessee's abatement rights shall
be limited to those expressly set forth in the Lease, but Lessee shall be
entitled to such abatement rights if Lender fails to remedy the act or omission
entitling Lessee to such abatement rights within the time period during which
Lessor is entitled to remedy such act or omission pursuant to the Lease (and the
cure period set forth in (i) and (ii) above shall not be applicable to such
abatement rights). It is specifically agreed that (1) notwithstanding any terms
of this Agreement to the contrary, in no event shall Lender's cure rights under
this paragraph be for a period of time less than the Lessor's cure period (if
any) under the Lease, (2) Lessee shall not, as to Lender, be entitled to require
cure of any such default which is personal to Lessor, and therefore not
susceptible of cure by Lender, and (3) no such uncured default shall entitle
Lessee to exercise any rights under the Lease with respect to Lender.
4. That if the interests of Lessor under the Lease shall be transferred to
Lender or any nominee, designee, assignee of Lender or any purchaser at
foreclosure sale (Lender or such other party is herein referred to as "Successor
Landlord") by reason of foreclosure, deed in lieu of foreclosure, or similar
transaction, Lessee hereby covenants and agrees to make, for the benefit and
reliance of Lender, full and complete attornment to Successor Landlord as
substitute lessor and shall recognize Successor Landlord as its landlord under
the Lease upon the same terms, covenants and conditions as provided in the
Lease, except for provisions which are personal to Lessor and to the extent
otherwise set forth herein. Lessee hereby waives all joinder and/or service of
any and all foreclosure actions by Lender under the Note and Deed of Trust upon
the Property, and of any actions at law by Lender to gain possession of the
Property or any portion thereof (including, without limitation, the Premises).
It shall not he necessary, except as required by law, for Lender
2
<PAGE> 63
to name Lessee as a party to enforce its rights under the Note or the Deed of
Trust, or any other instrument collateralizing the loan made by Lender to
Lessor, or to prosecute any action at law to gain possession of the Property or
any portion thereof (including, without limitation, the Premises) and, unless
required by law, Lender agrees not to name Lessee in any such proceeding. Lessee
shall promptly execute and deliver any instrument that Successor Landlord may
request in writing to evidence further said attornment, provided such Successor
Landlord recognizes the rights of Lessee under the Lease.
5. The provisions of this Agreement shall be real covenants running with
the Property, and shall be binding upon and inure to the benefit of the
respective parties hereto and their respective heirs, executors, administrators,
beneficiaries, successors and assigns, including without limitation any
Successor Landlord.
6. Upon any foreclosure of the Deed of Trust or other acquisition of the
Property, the Lease shall continue as a direct lease between Successor Landlord
and Lessee upon all terms, covenants and conditions thereof as are then
applicable, except that Successor Landlord shall not be:
(a) Liable for any previous act or omission of any prior landlord
(including Lessor);
(b) Subject to any offsets, claims, counterclaims or defenses which Lessee
might have against any landlord (including Lessor) under the Lease, except to
the extent such offset, claim or defense is attributable to a default of the
"landlord" under the Lease which occurs or is continuing after Lender or
Successor Landlord, as the case may be, obtains title to the Property, but then
only to the extent of such offset, claim or defense accruing after such title to
the Property is obtained;
(c) Bound by any prepayment of more than one (1) month's rent or other
charges under the Lease, unless such prepayment shall have been expressly
approved in writing by Lender;
(d) Bound by any amendment, modification, extension, expansion,
termination, cancellation or surrender of the Lease unless the same shall have
been expressly approved in writing by Lender;
(e) Intentionally deleted;
(f) In the event of damage to the Premises by fire or other casualty,
obligated to repair the Premises or the property or any part thereof beyond such
repair as may reasonably be accomplished from the net proceeds of insurance
actually made available to Successor Landlord, and only to the extent Lessor
would have been so obligated under the terms of the Lease;
(g) In the event of partial condemnation, obligated to repair the Premises
or the Property or any part thereof beyond such repair as may reasonably be
accomplished from the net proceeds of any award actually made available to
Successor Landlord allocable to the part of the Premises or the Property not
taken, and only to the extent Lessor would have been so obligated under the
terms of the Lease;
3
<PAGE> 64
(h) Required to make any capital improvements to the Property or the
Premises which Lessor may have agreed to make, but had not completed, or to
perform or provide any services not related to possession or quiet enjoyment of
the Premises, except as otherwise expressly provided herein; or
(i) Bound to refund, or liable for the refund of, all or any part of any
security deposit by Lessee with Lessor for any purpose, unless and until all
such security deposit shall have been delivered by Lessor to and actually
received by Successor Landlord. In the event of receipt of any such security
deposit, the obligations of Successor Landlord with respect thereto shall be
limited to the amount of such security deposit actually received by Successor
Landlord, and Successor Landlord shall be entitled to all rights, privileges and
benefits of Lessor set forth in the Lease with respect thereto.
7. Lessee covenants and agrees to make rental payments according to the
terms of such Assignment of Leases upon written demand by Lender in the event of
any default (as described therein). Lessor consents to payments being so made.
8. The attornment provided for in Paragraph 4 of this Agreement shall
inure to the benefit of any Successor Landlord (including, without limitation,
Lender), shall be self- operative, and no further instrument shall be required
to give effect to such attornment. Lessee, however, upon demand of any Successor
Landlord (including, without limitation, Lender), agrees to execute, from time
to time, instruments in confirmation of such attornment, reasonably satisfactory
to such Successor Landlord, acknowledging such attornment and setting forth the
terms and conditions of its tenancy. Nothing contained in this Paragraph 8 shall
be construed to impair any right otherwise exercisable by such Successor
Landlord.
9. Lessor and Lessee hereby jointly and severally agree for the benefit
and reliance of Lender, as follows:
(a) That neither this Agreement, the Assignment of Leases, nor
anything to the contrary in the Lease, prior to Lender's acquisition of
Lessor's interest in and possession of the Property, operate to give rise
to or create any responsibility or liability for the control, care,
management or repair of the Property or the Premises upon Lender, or
impose responsibility for the carrying out by Lender of any of the
covenants, terms and conditions of the Lease, nor shall said instruments
operate to make Lender responsible or liable for any waste committed on
the Property or the Premises by any party whatsoever, or for dangerous or
defective condition of the Property or the Premises, or for any negligence
in the management, upkeep, repair or control of the Property or the
Premises resulting in loss, injury or death to any lessee, licensee,
invitee, guest, employee, agent or stranger. Notwithstanding anything to
the contrary in the Lease, Lender, its successors and assigns or a
purchaser under the terms of the Deed of Trust, shall, subject to the
terms of this Agreement, be responsible for performance of only those
covenants and obligations of the Lease accruing after Lender's acquisition
of Lessor's interest in and possession of the Property.
4
<PAGE> 65
(b) That in the event Lender obtains title to the Property and
becomes Successor Landlord, it is agreed that Lender may assign its
interest as Successor Landlord without notice to or the consent of any
other party to this Agreement; provided, however, that Lender's successor
shall assume the Successor Landlord's obligations under the Lease to the
extent provided by the terms of this Agreement.
10. Lessee acknowledges that it has notice that Lessor's interest under
the Lease and the rent and all other sums due thereunder have been assigned to
Lender pursuant to an Assignment of Rents and Leases ("Assignment") as part of
the security for the obligations secured by the Deed of Trust and the
Assignment. Notice from Lender to Lessee directing payment of rent and all other
sums due under the Lease shall have the same effect under the Lease as notice to
Lessee from Lessor thereunder, and Lessee agrees to be bound by such notice from
Lender notwithstanding the existence or non-existence of a default under the
Deed of Trust or the Assignment or any dispute with respect thereto between
Lessor and Lender. In the event of any inconsistency between a notice from
Lessor and a notice from Lender directing payment of rent and other sums due
under the Lease, the notice from Lender shall govern; provided, however, that
nothing contained herein shall restrict any rights of Lessor under the documents
evidencing and securing the obligations secured by the Deed of Trust and the
Assignment. Lessee shall not be in default under the Lease if Lessee delivers
payments of rent and other sums due under the Lease to Lender, notwithstanding
any dispute between Landlord and Lender which may arise as to the existence or
non-existence of a default under the Deed of Trust or the Assignment or as to
Lender's authority to notify Lessee to direct payments to Lenders.
11. Lessee covenants and acknowledges that it has no right or option of
any nature whatsoever, whether pursuant to the Lease or otherwise, to purchase
the Property or any portion thereof or any interest therein and to the extent
that Lessee has or hereafter acquires any such right or option, the same is
hereby acknowledged to be subject to and subordinate to the Deed of Trust and
such right to option is waived and released as against Lender in the event of
default under the Deed of Trust.
12. Notwithstanding anything to the contrary in this Agreement or in the
Lease, in the event that Lender shall obtain title to the Property, Lender shall
have no obligation, nor incur any liability, beyond Lender's then interest, if
any, in the Property and Lessee shall look exclusively to such interest of
Lender, if any, in the Property for the payment and discharge of any obligations
imposed upon Lender under this Agreement or under the Lease. Lessee agrees that
with respect to any money judgment which may be obtained or secured by Lessee
against Lender, Lessee shall look solely to the estate or interest owned by
Lender in the Property or any portion of the Property or interest in the
Property and Lessee will not collect or attempt to collect any such judgment out
of any other assets of Lender.
13. Any notices hereunder shall be effective upon mailing by certified
mail, return receipt requested, or delivery by Federal Express addressed to the
recipient at its address set forth in the preambles hereof or as to each party,
to such other address as the party may designate by a notice given in accordance
with the requirements contained herein and if to
5
<PAGE> 66
Lender, Attention: ______________, with a copy to: Mayer, Brown & Platt, 1675
Broadway, New York, New York 10019, Attention: Ellyn J. Steuer, Esq.
14. This instrument may be executed in multiple counterparts, all of which
shall be deemed originals and with the same effect as if all parties hereto had
signed the same document. Signature and acknowledgment pages may be detached
from the counterparts and attached to a single copy of this document to
physically form one document.
15. This Agreement may not be modified, amended or terminated except by a
writing duly executed by the party against whom the same is sought to be
asserted. This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof.
16. This Agreement shall bind and inure to the benefit of me parties
hereto and their respective successors and assigns. The provisions of this
Agreement shall be binding upon any guarantor of Tenant's obligations under the
Lease.
17. This Agreement shall be construed, interpreted and governed by the
laws of the State of New York without regard to principles of conflicts of law.
18. NOTICE: THIS AGREEMENT CONTAINS A PROVISION WHICH ALLOWS THE PERSON
OBLIGATED ON YOUR LEASE TO OBTAIN A LOAN, A PORTION OF WHICH MAY BE EXPENDED FOR
PURPOSES OTHER THAN IMPROVEMENT OF THE PROPERTY.
6
<PAGE> 67
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
LESSOR:
[ ]
------------------------------------
By:
----------------------------------
Its:
-----------------------------
LESSEE:
By:
----------------------------------
Its:
-----------------------------
By:
----------------------------------
Its:
-----------------------------
LENDER:
BAYERISCHE HYPOTHEKEN-UND WECHSEL-BANK
AKTIENGESELLSCHAFT, acting by and
through its NEW YORK BRANCH, a German
chartered bank
By:
----------------------------------
Authorized Signatory
By:
----------------------------------
Authorized Signatory
7
<PAGE> 68
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On this ___ day of __________, 1998, before me personally came
_______________, to me known, who, being by me duly sworn, did depose and say
that he/she resides at ______________________; that he/she is a/the
________________ of BAYERISCHE HYPOTHEKEN-UND WECHSEL-BANK AKTIENGESELLSCHAFT,
acting by and through its NEW YORK BRANCH, the banking corporation described in
and which executed the foregoing instrument; that he/she signed his/her name
thereto by authority of the board of directors of said banking corporation.
----------------------------------------
Notary Public
On this ___ day of __________, 1998, before me personally came
_______________, to me known, who, being by me duly sworn, did depose and say
that he/she resides at ______________________; that he/she is a/the
________________ of BAYERISCHE HYPOTHEKEN-UND WECHSEL-BANK AKTIENGESELLSCHAFT,
acting by and through its NEW YORK BRANCH, the banking corporation described in
and which executed the foregoing instrument; that he/she signed his/her name
thereto by authority of the board of directors of said banking corporation.
----------------------------------------
Notary Public
On this ___ day of ____________, 1998, before me personally came
________________, to me known, who, being by me duly sworn, did depose and say
that he/she resides at ___________________________________________; that he/she
is a/the ______________ of ____________________________, the corporation
described in and which executed the foregoing instrument; that he/she signed
his/her name thereto by authority of the board of directors of said corporation.
----------------------------------------
Notary Public
On this ___ day of ____________, 1998, before me personally came
________________, to me known, who, being by me duly sworn, did depose and say
that he/she resides at ___________________________________________; that he/she
is a/the ______________ of ____________________________, the corporation
described in and which executed the foregoing instrument; that he/she signed
his/her name thereto by authority of the board of directors of said corporation.
----------------------------------------
Notary Public
8
<PAGE> 69
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On this ___ day of __________, 1998, before me personally came
_______________, to me known, who, being by me duly sworn, did depose and say
that he/she resides at ______________________; that he/she is a/the
____________________ of _____________________________, the corporation described
in and which executed the foregoing instrument; that he/she signed his/her name
thereto by authority of the board of directors of said corporation.
----------------------------------------
Notary Public
9
<PAGE> 70
[TO BE USED FOR A PARTNERSHIP ENTITY]
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On this ___ day of __________, 1998, before me personally came
_______________, to me known, who, being by me duly sworn, did depose and say
that he/she resides at ______________________; that he/she is a/the
_________________ of _______________________________, the corporation described
in and which executed the foregoing instrument; which corporation is the general
partner of ______________, the partnership which executed the foregoing
instrument; that the execution of instruction by said corporation was duly
authorized according to Articles of Partnership; that said corporation executed
the instrument on behalf of said partnership pursuant to said authorization; and
that he/she signed his/her name thereto by authority of the board of directors
of said corporation.
----------------------------------------
Notary Public
10
<PAGE> 71
SCHEDULE A to
Subordination Agreement
LEGAL DESCRIPTION OF THE LAND
THAT PORTION OF LOT 4 OF TRACT NO. 26196, IN THE CITY OF LOS ANGELES, COUNTY OF
LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 684 PAGE 86 OF MAP
RECORDS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, MORE PARTICULARLY
DESCRIBED AS FOLLOWS:
PARCEL "B", AS SHOWN IN PARCEL MAP L.A. NO. 1200, FILED MAY 6, 1968 IN BOOK 12
PAGE 25 OF PARCEL MAPS, RECORDS OF LOS ANGELES COUNTY, CALIFORNIA, AND
PARCELS 2 AND 3, IN THE CITY OF LOS ANGELES, COUNTY OF LOS ANGELES, STATE OF
CALIFORNIA, AS SHOWN UPON A RECORD OF SURVEY FILED IN BOOK 81 PAGE 26 OF RECORD
OF SURVEYS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
EXCEPT FROM ALL OF THE ABOVE DESCRIBED LAND, ALL MINERALS, OIL, GAS AND
HYDROCARBONS AND THE RIGHT TO EXPLORE FOR, DEVELOP, PRODUCE AND EXTRACT THE
SAME, TOGETHER WITH ALL SUBSURFACE EASEMENTS AND SUBSURFACE RIGHTS OF WAY
NECESSARY FOR DIRECTIONALLY DRILLING ON WELLS, THE SURFACE LOCATIONS OF WHICH
SHALL BE ON OTHER LANDS BUT WITHOUT RIGHT OF ENTRY UPON THE SURFACE OR UPPER 500
FEET (MEASURED FROM THE SURFACE) OF SAID LAND, AS RESERVED BY FOX REALTY
CORPORATION OF CALIFORNIA, A CORPORATION, IN DEED RECORDED APRIL 17, 1961 IN
BOOK D-1190 PAGE 104, OFFICIAL RECORDS.
Schedule A to Subordination Agreement
<PAGE> 72
EXHIBIT "C"
Form of Letter of Credit
[TO BE RECOPIED ON BANK LETTER OF CREDIT LETTERHEAD]
[DATE]
WH/WSA REALTY, L.L.C.
900 North Michigan Avenue
Chicago, Illinois 60611
RE: IRREVOCABLE LETTER OF CREDIT NO. __________
AMOUNT OF LETTER OF CREDIT: $___________
EXPIRATION DATE: _____________
Gentlemen:
We hereby issue this Irrevocable Letter of Credit in favor of WH/WSA
REALTY, L.L.C. ("OWNER"). This letter of Credit is available against Owner's
drafts presented at sight drawn on this Bank bearing the clause:
"Drawn under the ________________ Bank Letter of Credit Number ________"
and accompanied by the following document:
A written instrument (the "STATEMENT"), signed by a representative of
Owner, certifying that the signatory is an authorized representative of
Owner and that either one of the following two(2) events has occurred:
(1) SCPIE Holdings Inc. ("TENANT"), is in breach or default under a
Lease (the "LEASE") dated as of ______ , 1998 between Owner and
Tenant for space at 1888 Century Park East, Los Angeles, CA 90067
(the "Property"), and Owner is entitled to draw the sum demanded in
the accompanying sight draft; or
(2) This Letter of Credit is scheduled to expire in less than thirty
(30) days from the date of this Statement and Owner has not received
from Tenant a substitute letter of credit or an extension of this
Letter of Credit acceptable in all respects to Owner.
This Letter of Credit is transferable to any successor or assign of Owner
and to any person or entity holding a security interest in the Property. We
shall be entitled to rely on a certificate to such effect.
We hereby agree with the drawers, endorsers and bona fide holders of all
sight drafts drawn in compliance with the terms and conditions of this Letter of
Credit that such sight drafts
1
Exhibit "C"
<PAGE> 73
will be duly honored upon presentation and delivery of the sight draft
together with the Statement specified above and this letter of Credit, if
presented as aforesaid. Drafts and Statements will be honored provided that the
terms and conditions of this Letter of Credit are complied with.
We hereby agree that partial drawings are permitted under this Letter of
Credit.
We hereby agree that this Letter of Credit shall be effective as of the
date hereof and shall continue in effect until the close of business on its
expiration date.
We agree that sight drafts drawn in compliance with the terms and
conditions of this Letter of Credit may be negotiated at any time while this
Letter of Credit remains in effect.
The credit is subject to the Uniform Customs and Practice for Documentary
Credits (1983 revision), International Chamber of Commerce-Publication 400.
Very truly yours,
(Name of Bank)
By:
---------------------------------
Title:
---------------------------------
2
Exhibit "C"
<PAGE> 74
OFFICE LEASE
By and Between
WH/WSA REALTY, L.L.C.,
a Delaware limited liability company
and
SCPIE HOLDINGS INC.,
a Delaware corporation
<PAGE> 75
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1 - PREMISES, TERM, OPTION, TERMS AND RIGHT OF FIRST
OPPORTUNITY.................................................. 1
ARTICLE 2 - BASE RENT.................................................... 7
ARTICLE 3 - ADDITIONAL RENT.............................................. 7
ARTICLE 4 - DELIVERY OF PREMISES......................................... 10
ARTICLE 5 - CONDITION OF PREMISES........................................ 10
ARTICLE 6 - USE AND RULES................................................ 11
ARTICLE 7 - SERVICES AND UTILITIES....................................... 11
ARTICLE 8 - ALTERATIONS AND LIENS........................................ 14
ARTICLE 9 - REPAIRS...................................................... 16
ARTICLE 10 - CASUALTY DAMAGE............................................. 16
ARTICLE 11 - INSURANCE, SUBROGATION, AND WAIVER OF CLAIMS................ 18
ARTICLE 12 - CONDEMNATION................................................ 19
ARTICLE 13 - RETURN OF POSSESSION........................................ 20
ARTICLE 14 - HOLDING OVER................................................ 21
ARTICLE 15 - NO WAIVER................................................... 21
ARTICLE 16 - ATTORNEYS' FEES AND JURY TRIAL.............................. 21
ARTICLE 17 - PERSONAL PROPERTY TAXES, RENT TAXES AND OTHER TAXES......... 22
ARTICLE 18 - REASONABLE APPROVALS........................................ 22
ARTICLE 19 - SUBORDINATION, ATTORNMENT AND MORTGAGEE PROTECTION.......... 22
</TABLE>
i
<PAGE> 76
<TABLE>
<S> <C>
ARTICLE 20 - ESTOPPEL CERTIFICATE........................................ 24
ARTICLE 21 - ASSIGNMENT AND SUBLETTING................................... 24
ARTICLE 22 - RIGHTS RESERVED BY LANDLORD................................. 27
ARTICLE 23 - LANDLORD'S REMEDIES......................................... 29
ARTICLE 24 - LANDLORD'S RIGHT TO CURE.................................... 32
ARTICLE 25 - CAPTIONS, DEFINITIONS AND SEVERABILITY...................... 33
ARTICLE 26 - CONVEYANCE BY LANDLORD AND LIABILITY........................ 41
ARTICLE 27 - INDEMNIFICATION............................................. 42
ARTICLE 28 - SAFETY AND SECURITY DEVICES, SERVICES AND PROGRAMS.......... 42
ARTICLE 29 - COMMUNICATIONS AND COMPUTER LINES........................... 43
ARTICLE 30 - HAZARDOUS MATERIALS......................................... 45
ARTICLE 31 - MISCELLANEOUS............................................... 47
ARTICLE 32 - STORAGE SPACE............................................... 47
ARTICLE 33 - NOTICES..................................................... 49
ARTICLE 34 - REAL ESTATE BROKERS......................................... 50
ARTICLE 35 - SECURITY DEPOSIT............................................ 50
ARTICLE 36 - SIGNS....................................................... 51
ARTICLE 37 - ENTIRE AGREEMENT............................................ 53
</TABLE>
ii
<PAGE> 1
EXHIBIT 10.53
FREMONT INDEMNITY COMPANY
QUOTA SHARE
REINSURANCE AGREEMENT
between
FREMONT INDEMNITY COMPANY
("Company")
and
SCPIE INDEMNITY COMPANY
("Reinsurer")
Effective: January 1, 1998
<PAGE> 2
QUOTA SHARE REINSURANCE AGREEMENT
THIS QUOTA SHARE REINSURANCE AGREEMENT (this "Agreement") is
made and entered into as of this 1st day of January, 1998 (the "Closing Date"),
by and between FREMONT INDEMNITY COMPANY, a California domiciled insurance
company ("Company"), and SCPIE Indemnity Company, a California domiciled
insurance company ("Reinsurer").
AGREEMENT
ARTICLE 1. DEFINITIONS
A. "Allocated Loss Expense" means all expenses (except for salaries,
benefits and traveling expenses of Company's directors, officers, or employees
office expenses, overhead or other fixed expenses of Company) relating to the
adjustment of claims on business covered including appellate expenses,
monitoring expenses, and expenses and fees associated with policy coverage and
declaratory judgment actions, prejudgment and postjudgment interest, and legal
expenses and costs associated with extra-contractual obligations and Loss in
Excess of Limits.
B. "Business Covered" means all liability insurance policies (including
all binders contracts, endorsements, supplements, riders and ancillary
agreements thereto) which (i) were issued by Company for medical malpractice,
healthcare provider and healthcare facility liability insurance policies (the
"Coverages") for inception or renewal in the jurisdictions listed on Schedule 1
attached hereto (the "Covered States") prior to 12:01 a.m. on the Closing Date
and (ii) are issued by Company for the Coverages through SCPIE Management
Company and SCPIE Insurance Services, Inc. (collectively, the "Manager"),
pursuant to that certain Program Manager Agreement between SCPIE Management
Company, SCPIE Insurance Services, Inc. and Company of even date herewith (the
"Program Manager Agreement") for inception or renewal in the Covered States on
or after 12:01 a.m. on the Closing Date. The Subject Policies (as hereinafter
defined) reinsured hereunder shall, upon satisfaction of all applicable legal
and regulatory requirements, be assumed by Reinsurer pursuant to the terms of
that certain Assumption Reinsurance Agreement of even date herewith between
Company and American Healthcare Indemnity Company ("AHIC," and such agreement,
the "Assumption Reinsurance Agreement").
C. "Extra contractual obligations" means any punitive, exemplary,
compensatory or consequential damages, other than Loss in Excess of Limits,
together with any legal costs and expenses incurred in connection therewith,
paid or payable by the Company as a result of an action against it by its
insured, its insured's assignee, or a third party claimant, which action alleges
negligence or bad faith on the part of the Company in handling a claim under the
policy insured. an Extra-Contractual obligation shall be deemed to have occurred
on the same date as the loss covered or alleged to be covered under the policy
that gives rise to the Extra-Contractual obligation.
D. "Gross Net Written Premium" means gross written premiums received by
Company on Subject Policies, less returns and refunds thereon, less premiums
paid on Reinsurance Agreements (as defined in Article VII).
2
<PAGE> 3
E. "Loss in Excess of Limits" means any amount of loss, together with
any legal costs and expenses incurred in connection therewith, paid or payable
by the company in excess of its policy limits, but otherwise within the coverage
terms of the policy, as a result of an action against it by its insured or its
insured's assignee to recover damages the insured is legally obligated to pay to
a third party claimant because of the Company's alleged or actual negligence or
bad faith in rejecting a settlement within the policy limits, or in discharging
its duty to defend or prepare the defense in the trial of an action against its
insured, or in discharging its duty to prepare and prosecute an appeal
consequent upon such an action.
F. "SAP" means Statutory Accounting Principles permitted or prescribed
by the California Department of Insurance.
G. "Subject Policy" or "Subject Policies" means any policy that is
Business Covered.
H. "Ultimate Net Loss" means 100% of the amounts paid or payable in
defense and/or settlement of loss or liability under the Subject Policies,
including all Allocated Loss Adjustment Expense, Unallocated Loss Adjustment
Expense, Loss in Excess of Limits and Extra-Contractual Obligations.
I. "Unallocated Loss Adjustment Expense" means the unallocated loss
adjustment expenses as calculated for purposes of SAP and in accordance with
Schedule 2, if applicable.
ARTICLE II. REINSURANCE COVERAGE
With respect to Business Covered, Company shall cede and Reinsurer
shall accept 100% of Company's Ultimate Net Loss each and every loss on each and
every Subject Policy.
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Except as expressly provided otherwise in this Agreement, the
reinsurance coverage of this Agreement shall be subject to the same terms,
limits, conditions, and endorsements of the Subject Policies and to all
interpretations, modifications, waivers, and alterations thereto.
ARTICLE III. EXCLUSIONS
This Agreement does not apply to (i) any workers' compensation or other
insurance issued by Company to any account other than the Business Covered, or
(ii) any liability of Company for Loss in Excess of Limits, Extra-Contractual
Obligations and associated Allocated Loss Adjustment Expense arising out of or
related to acts, omissions or occurrences prior to the Closing, with respect to
medical malpractice and related liability policies, contracts and binders of
insurance included in the Business Covered.
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ARTICLE IV. TERM AND TERMINATION
This Agreement shall commence at 12.01 a.m. Pacific Standard Time on the
Closing Date at the location of the risk and shall continue until THE EARLIER TO
OCCUR OF (i) with respect to a jurisdiction, the date all "Required Approvals"
and "Required Licenses" (as such terms are defined in Section 1.2 of the
Assumption Reinsurance Agreement) have been obtained by AHIC, or (ii)
December 31, 1998.
In the event of termination, reinsurance coverage shall remain in force
and Reinsurer shall remain liable to Company for all losses, including losses
with a date of loss after the date of termination of this Agreement, on all
Subject Policies in force at the date of termination until their natural
expiration plus odd time and/or any run-off provision or any extended reporting
period option or any discovery period contained in the subject original
policies.
However, should any of the Subject Policies to which this Agreement
applies be extended, continued or renewed due to regulatory, or other legal
restrictions, this Agreement shall automatically continue to provide reinsurance
coverage until that Business Covered is actually terminated by Company.
Alternatively, if mutually agreed between Company and Reinsurer,
coverage under this Agreement may be terminated by "cut-off" as respects
Business Covered in force as of the date of termination and in that event
Reinsurer shall not be responsible to Company for losses or any portion thereof
with a date of loss on or after the termination date and Reinsurer will return,
within thirty (30) days of Company's notice, the unearned reinsurance premium
reserve in respect of the Business Covered in U. S. currency in that amount net
of any applicable ceding commission thereon. In the event this clause is
applicable and a loss covered under this Agreement has commenced, the entire
loss covered under the policy to which this Agreement originally attached shall
be covered under this Agreement regardless of the number of dates of loss that
may be involved with that occurrence/accident resulting in said loss; provided
however, that notwithstanding the foregoing provisions of this Article IV, as
to any policy assumed by AHIC pursuant to the Assumption Reinsurance Agreement,
this reinsurance shall automatically terminate on a cut-off basis and all SAP
reserves with respect to such policy (the "Assumed Policy SPA Reserve") shall
be paid to Company by Reinsurer.
ARTICLE V. REINSURANCE PREMIUM
As reinsurance premium, Company shall pay Reinsurer 100% of Company's
Gross Net Written Premium actually received by Company on Business Covered on
premiums written on or after the closing date (the "Reinsurance Premium").
ARTICLE VI. LOSS PORTFOLIO TRANSFER
Company shall transfer to Reinsurer on the business day before the
Closing Date cash and/or U.S. Treasuries with a fair market value equal to the
reserves for the losses, Allocated Loss Adjustment Expenses, Unallocated Loss
Adjustment Expenses, unearned premium, contingent commissions, contingent
reinsurance premiums and retrospective premiums and any other reserves for
liabilities under the Subject Policies issued prior to 12:01 a.m. Pacific
Standard Time on the Closing Date (the "Reserves"), all as identified in
Schedule 2 and determined in accordance with the actuarial methods and
directions set forth in such schedule (the "Transfer Amount").
Prior to January 1, 1998, Company shall prepare an estimate of the
Transfer Amount based on reserve summaries and policy information expected as of
the Closing Date (the "Estimated Transfer Amount"). Company shall then remit to
Reinsurer, on the business day preceding the Closing Date, cash or U.S.
Treasuries in an amount equal to the Estimated Transfer Amount, together with a
schedule of the Subject Policies (Schedule 3). In consideration of the
transactions under the Agreement, Reinsurer shall concurrently pay to Company
on the business day preceding the Closing Date a cash commission in accordance
with Section 2.5 of that certain Asset Purchase Agreement dated as of December
18, 1997, between Company and American Healthcare Indemnity Company (the
"Asset Purchase Agreement").
On or about January 31, 1998, or as soon thereafter as practicable,
Company shall prepare a final schedule of Subject Policies (Schedule 3) and a
final schedule of reserves and related liabilities, along with a final
determination of the Transfer Amount, all calculated as of the Closing Date (the
"Final Transfer Amount"). If the Final Transfer Amount is greater than the
Estimated Transfer Amount, Company shall then remit to Reinsurer cash equal to
the difference between the Final Transfer Amount and the Estimated Transfer
Amount. If the Final Transfer Amount is less than the Estimated Transfer Amount,
Reinsurer shall then remit to Company cash equal to the difference between the
Estimated Transfer Amount and the Final Transfer Amount. Any dispute which may
arise between Company and Reinsurer as to the Final Transfer Amount calculation
shall be resolved in the following manner:
(a) Reinsurer, if it disputes the Final Transfer Amount
calculation, shall notify Company shall notify Company in writing within
fifteen days (15) days after its receipt thereof that Reinsurer disputes such
calculation; such notice shall specify in reasonable detail the nature of
the dispute;
(b) during the fifteen (15) day period following the date of such
notice, Company and Reinsurer shall attempt to resolve such dispute and to
determine the appropriateness of the Final Transfer Amount calculation; and
(c) if at the end of the fifteen (15) day period specified in
subsection (b) above, Company and Reinsurer shall have failed to reach a written
agreement with respect to such dispute, the matter shall be referred to an
independent certified public accountant (the "Arbitrator") to be mutually agreed
upon by Company and Reinsurer, who shall act as an arbitrator and shall issue
its report as to the Final Transfer Amount calculation within sixty (60) days
after such dispute is referred to the Arbitrator. The Arbitrator shall be
permitted access to all books and records necessary to resolve any such
dispute. Each of the parties hereto shall bear all costs and expenses incurred
by it in connection with such arbitration, except that the fees and expenses of
the Arbitrator hereunder shall be borne equally by Company and Reinsurer. This
provision for arbitration shall be specifically enforceable by the parties and
the decision of the Arbitrator in accordance with the provisions hereof shall
be final and binding and there shall be no right of appeal therefrom.
ARTICLE VII. ASSIGNMENT OF CEDED REINSURANCE AGREEMENTS
As of the Closing Date, Company hereby transfers, sets over, assigns and
conveys all of its right and obligations of any nature whatsoever under any
reinsurance cover note, binder, slip, contract, agreement, treaty or
certificate, retrocession agreement, stop loss agreement or other instrument of
reinsurance ceded by Company in respect of any of the Subject Policies,
including without limitation, the reinsurance arrangements set forth on
Schedule 4 hereof (such reinsurance agreements being hereinafter collectively
referred to as the "Reinsurance Agreements"). Reinsurer hereby accepts such
conveyance, transfer and assignment of Company's rights under the Reinsurance
Agreements and assumes all of Company's obligations under the Reinsurance
Agreements arising after the date hereof. As soon as practicable after the
Closing Date, Company shall use commercially reasonable efforts to cause all of
the Reinsurance Agreements to be endorsed to substitute Reinsurer for Company
as the cedent, effective as of the Closing Date.
The assignment and assumption of the Reinsurance Agreements effected by
this Article VII shall be effective only if and to the extent that such
assignment and assumption shall preserve fully the obligations of the
reinsurers thereunder in respect of the Subject Policies. To the extent that
less than all of Company's rights and obligations under the Reinsurance
Agreements are so assigned to and assumed by Reinsurer pursuant to the
foregoing sentence, (i) after the Closing Date Reinsurer shall be responsible
for the payment of all premiums and other considerations required to be paid by
Company in respect of any of the Reinsurance Agreements, whether or not fully
assigned and assumed pursuant to the terms of this Article VII; (ii) all
reinsurance recoveries attributable to any of the Subject Policies with the
exception of reinsurance recoveries attributable to that claim described in
Schedule 5 attached hereto (the "Gillespie Claim") ceded hereunder are assigned
and shall accrue to the benefit of Reinsurer hereunder by operation of this
Article VII and shall, upon receipt thereof by Company, be paid promptly
thereby to Reinsurer upon and in accordance with its direction; and (iii) such
assignment and assumption shall be effective at such times as the assignment
and assumption may be effected while preserving fully the obligations of the
reinsurer under the respective Reinsurance Agreement.
Company shall forward to Reinsurer any funds collected from reinsurers
with respect to any Reinsurance Agreements except for any such amounts
pertaining to the Gillespie Claim; provided however, that Reinsurer assumes all
risk of non-payment of such amounts.
To the extent necessary to effect transfer of any Reinsurance Agreement,
Company hereby appoints Reinsurer as attorney-in-fact for Company to act for
and on behalf of Company with respect to letters of credit, trust funds and
other security mechanisms outstanding for the benefit of Company under the
Reinsurance Agreements. Each of Company and Reinsurer shall use commercially
reasonable efforts, to the extent deemed reasonably necessary by Reinsurer, to
cause the reinsurers under the Reinsurance Agreements to provide replacement
letters of credit, trust funds or other security mechanisms, as applicable,
naming Reinsurer as the beneficiary thereof in amounts and with terms
substantially similar to those currently provided by such reinsurers for the
benefit of the Company.
ARTICLE VIII. CEDING COMMISSION
Reinsurer shall allow Company a ceding commission on gross premiums
written on the Business Covered on or after 12:01 a.m. Pacific Standard Time on
the Closing Date equal to premium taxes plus (i) 100% of assessments from
guarantee funds, insolvency funds and any other type of assessment imposed on
Company associated with such premiums and (ii) broker commissions and all other
expenses due Manager on Company business under Article VII of the Program
Manager Agreement.
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ARTICLE IX. REPORTS AND REMITTANCES
Company shall furnish a quarterly bordereau to Reinsurer within
fifteen (15) days after the end of each quarter on formats mutually acceptable
to Company and Reinsurer indicating as respects each subject policy:
a) Insured's name;
b) Policy number;
c) Effective date and term;
d) Limit of liability;
e) Policy premium;
f) Premium applicable to this reinsurance including additional
and return or refund premiums; and
an account summarizing Reinsurance Premium ceded under this Agreement, return
and refund premium, ceding commission allowed pursuant to Article VIII hereof,
paid Ultimate Net Loss, and the net balance. The parties hereto agree and
acknowledge that the responsibility for preparation of the bordereau is with
Manager pursuant to the Program Manager Agreement. Company shall make a
good-faith effort to furnish the quarterly bordereau to Reinsurer upon receipt.
The balance due either party as indicated by the aforesaid net balance, shall
be remitted to the other party within fifteen (15) days following Reinsurer's
receipt of the quarterly bordereau.
ARTICLE X. OFFSET
All amounts due either Company or Reinsurer, whether by reason of
premium, commission, loss or Ultimate Net Loss or Allocated Loss Adjustment
Expense, or otherwise, under this Agreement or any other Agreement previously,
now or later in force between Reinsurer and Company, whether as ceding company,
reinsurer or otherwise, shall be subject to the right of recoupment and offset
and upon the exercise of the same, only the net balance shall be due. All claims
for amounts of premium, commission, loss or Ultimate Net Loss, whether or not
fixed in amount at the time of the insolvency of any party to this Agreement,
arising from coverage placed in effect under this Agreement prior to the
insolvency of any party to this Agreement shall be deemed pre-liquidation debts
and subject to this Article. In the event of insolvency of Company, offset shall
be in accord with applicable law.
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ARTICLE XI. NOTICE OF LOSS
Company shall furnish a quarterly loss bordereau to reinsurer within
fifteen (15) days after the end of each quarter on formats mutually acceptable
to Company and Reinsurer indicating as respects each loss:
a) Insured's name;
b) Policy number;
c) Claimant's name;
d) Loss Report Date;
e) Outstanding Loss, Allocated Loss Adjustment Expense and
Unallocated Loss Adjustment Expense reserve;
f) Paid Loss, Allocated Loss Adjustment Expense and Unallocated
Loss Adjustment Expense;
g) Total Incurred Loss, Allocated Loss Adjustment Expense and
Unallocated Loss Adjustment Expense;
The parties hereto agree and acknowledge that the responsibility for
preparation of loss bordereau is with Manager pursuant to the Program Manager
Agreement. Upon receipt of said loss bordereau, Company shall endeavor to
furnish Reinsurer with a copy as soon as possible. When requested, Company will
afford Reinsurer the opportunity to be associated with Company at the sole
expense of Reinsurer in the defense of any claim or suit or proceeding and
Company and Reinsurer shall cooperate in every respect in the defense of such
claim, suit, or proceeding.
ARTICLE XII. LOSS SETTLEMENTS
All loss settlements made by Company or Manager, on its behalf, whether
under the policy terms and conditions or by way of compromise shall be
unconditionally binding upon Reinsurer. Loss settlements shall be payable in
accordance with Article IX.
ARTICLE XIII. TAXES
Company shall not claim any deduction of the Reinsurance Premium under
this Agreement when making tax returns, other than income or profits tax returns
to any state, territory, or possession of the United States or the District of
Columbia.
ARTICLE XIV. CURRENCY
All settlements of account between Company and Reinsurer shall be made
in cash or its equivalent. Wherever the word "Dollars" and the sign "$" shall
appear in or in connection with this Agreement, they shall be construed to mean
United States Dollars unless clearly indicated to the contrary.
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ARTICLE XV. THIRD PARTY BENEFICIARY
Except as expressly provided for in Article XVI hereof, the provisions
of this Agreement are intended solely for the benefit of Company and Reinsurer.
Nothing in this Agreement shall in any manner create or be construed to create
any obligations to or establish any rights against any party to this Agreement
in favor of any other persons not party to this Agreement.
ARTICLE XVI. ERRORS AND OMISSIONS
Any inadvertent act, neglect, delay, omission, or error by either party
to this Agreement, or by its representatives shall not be held to relieve either
party to this Agreement from any liability that would attach to it under this
Agreement if that act, neglect, delay, omission, or error had not been made,
providing that act, neglect, delay, omission, or error is sought to be rectified
after discovery.
ARTICLE XVII. ACCESS TO RECORDS
Reinsurer shall have the right at any reasonable time upon five (5)
working days prior notice during or at any time after the expiration of this
Agreement, and as frequently as deemed reasonably necessary by Reinsurer, to
visit the offices of Company to inspect, examine, audit, and verify any of the
policy or claim files ("records") relating to the business reinsured under this
Agreement. Reinsurer shall have the right to make copies, at its own expense, or
extracts of any records. Notwithstanding the above, Reinsurer shall not have any
right of access to the records of Company if it is not current in all payments
due to Company and Company shall have no right to reimbursement under this
Agreement if it fails or refuses to provide the access required by this section
other than by reason of Reinsurer's failure to pay. Reinsurer shall keep
confidential all information and reports derived from the records of Company to
which it has received access and shall not publish or communicate that
information or report(s) to any other person or reinsurer without Company's
express prior written consent. Reinsurer shall promptly upon Company's request
deliver a complete copy of any report(s) concerning the records and information
to which it has received access.
ARTICLE XVIII. INSOLVENCY
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In the event of the insolvency of Company, any sums due from
Reinsurer hereunder shall be payable immediately upon demand directly to the
insolvent Company, or to its liquidator, receiver, conservator or statutory
successor without diminution because of the insolvency of Company or because the
liquidator, receiver, conservator or statutory successor of that Company has
failed to pay all or a portion of any claim.
The liquidator, receiver, conservator or statutory successor of Company
shall give written notice to the Reinsurer of the pendency of a claim against
Company indicating the policy or bond reinsured which claim would involve a
possible liability on the part of Reinsurer within a reasonable time after such
claim is filed in the conservation or liquidation proceeding or in the
receivership, and that during the pendency of such claim, 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 that it may deem
to be available to Company or its liquidator, receiver, conservator or statutory
successor. The expense thus incurred by Reinsurer shall be chargeable, subject
to the approval of the court, against Company as part of the expense of
conservation or liquidation to the extent of the benefit which may accrue to
Company solely as a result of the defense undertaken by Reinsurer.
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 shall
be apportioned in accordance with the terms of the reinsurance agreements as
though such expense had been incurred by the Company.
The reinsurance shall be payable by Reinsurer to Company or to its
liquidator, receiver, conservator or statutory successor, except as provided by
applicable Insurance Law, or except where Reinsurer with the consent of the
direct insured or insureds have assumed such policy obligations of Company as
direct obligations of Reinsurer to the payees under such policies and in
substitution for the obligations of Company to such payees.
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ARTICLE XVII. SECURITY AND UNAUTHORIZED REINSURANCE
A. If Reinsurer is unauthorized or otherwise unqualified in any state
or other United States jurisdiction, and if, without such security, a financial
penalty to Company would result on any statement or report it is required to
make or file with regulatory authorities, for reasons of Company's financial
security and condition, Reinsurer will secure, at the inception hereof and
within thirty (30) days after the end of each calendar quarter (but no later
than December 31 of each year as respects the fourth quarter), its share of
"obligations" under this Agreement in a manner, form and amount acceptable to
Company and to all applicable regulatory authorities by either:
1. In accordance with applicable law, including but not limited
to, California Insurance Code Section 922.5(b) and California
Insurance Bulletin 97-5 (the "Bulletin"), clean, irrevocable,
and unconditional evergreen letter(s) of credit issued and
confirmed, if confirmation is required by the applicable
insurance regulatory authorities, by a bank or banks meeting
the NAIC Securities Valuation Office credit standards for
issuers of letters of credit and acceptable to Company and
those insurance regulatory authorities; or
2. In accordance with applicable law, including but not limited
to, California Insurance Code Section 922.5(a) and the
Bulletin, cash advances or funds withheld or a combination of
both ("deposit of funds").
The initial amount of this security shall be delivered to Company no
later than the closing date of this Agreement. If Reinsurer fails to provide
the security as required by this paragraph by the first December 15 following
the closing date of this Agreement, or any anniversary thereof, Reinsurer will
secure its obligations under this Agreement at a time, in a manner and form from
among the above three options, and in an amount, all as designated by and
acceptable to Company in its sole discretion and to insurance regulatory
authorities.
B. The "obligations" referred to herein shall mean the then current (as
of the end of each calendar quarter) sum of:
1. The amount of ceded unearned premium for which Reinsurer is
responsible;
2. The amount of paid losses and allocated loss adjustment
expenses paid by Company for which Reinsurer is responsible
but not yet recovered from the Reinsurer;
3 The amount of ceded reserves for losses reported and
outstanding, as well as for reserves for allocated loss
adjustment expenses, for which Reinsurer is responsible;
4. The amount of ceded reserves for the development of losses
reported and outstanding, as well as for the development of
allocated loss adjustment expense for which Reinsurer is
responsible;
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5. The amount of ceded reserves for incurred but not reported
losses for which Reinsurer is responsible; and
6. The amount of return and refund premiums for which Reinsurer
is responsible but not yet recovered from Reinsurer.
C. Company, or its successors in interest may draw, at any time and
from time to time upon the:
1. established letter of credit (or subsequent cash deposit);
2. established trust fund (or subsequent cash deposit); or
3. deposit of funds;
without diminution or restriction because of the insolvency of either Company or
Reinsurer for one or more of the following purposes:
a. To make payment to and reimburse Company for Reinsurer's share
of paid loss and allocated loss adjustment expense paid by
Company under its "subject policies" and for which Reinsurer
is responsible under this Agreement that is due to Company but
unpaid by Reinsurer;
b. To make payments to Reinsurer of any amounts held thereby that
exceed the amount required to fund Reinsurer's "obligations"
under this Agreement provided that if a trust fund is
applicable, only the excess of one hundred two (102%) percent
of the amount required to fund Reinsurer's "obligations" may
be released;
c. To make payment to and reimburse Company for other amounts due
Company under this Agreement from Reinsurer, including but not
limited to, Reinsurer's share of premium refunds and returns;
d. To obtain a cash deposit of the entire amount of the remaining
balance under the established letter of credit or established
trust fund ("cash deposit") in the event that Company:
(i) has received notice of non-renewal or expiration of the
letter of credit or trust fund;
(ii) has not received assurances satisfactory to Company of
any required increase in the amount of the trust fund or
letter of credit, or its replacement or other continuation
of the letter of credit at least thirty (30) days before its
stated expiration date;
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(iii) has been made aware that others may attempt to attach
or otherwise place in jeopardy the security represented by
the letter of credit or trust fund; or
(iv) has concluded that the trustee or issuing (or
confirming) bank's financial condition is such that the
security represented by the trust fund or letter of credit
may be in jeopardy; and
e. any other amounts necessary to secure the credit or
reduction from liability for reinsurance taken by company.
and under any of those circumstances where Reinsurer's entire "obligations" or
part thereof, under this Agreement remain unliquidated and undischarged at least
thirty (30) days prior to the stated expiration date or at the time Company
learns of the possible jeopardy to the security represented by the letter of
credit or trust fund.
D. If Company draws on the letter of credit or trust fund to obtain a
cash deposit, Company shall hold the amount of the cash deposit so obtained in
the name of Company in any solvent United States Bank or Trust Company that is a
member of the Federal Reserve System and insured by the Federal Deposit
Insurance Corporation in trust solely to secure the "obligations" referred to
above and for the use and purposes enumerated above and to return any balance
thereof to Reinsurer:
(1) upon the complete and final liquidation and discharge of all
of Reinsurer's obligations to Company under this Agreement; or
(2) in the event Reinsurer subsequently provides alternate or
replacement security consistent with the terms hereof and
acceptable to Company.
E. Company will prepare and forward at least quarterly to Reinsurer a
statement for the purposes of this Article, showing Reinsurer's share of
"obligations" as set forth above. If Reinsurer's share thereof exceeds the then
existing balance of the security provided, Reinsurer shall, within fifteen (15)
days of receipt of Company's statement, but never later than December 31 of any
year, increase the amount of the deposit of funds, the trust fund, the letter of
credit, or the cash deposit to the required amount of Reinsurer's share of
"obligations" set forth in Company's statement.
Subject to the one hundred two percent (102%) restraints with respect to
trust funds, if Reinsurer's share thereof is less than the then existing balance
of the deposit of funds, trust account, letter of credit, or cash deposit as
provided for above, Company will release the excess thereof to Reinsurer upon
Reinsurer's written request.
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F. Reinsurer shall not attempt to prevent Company from holding the
deposit of funds, drawing on the letter of credit or trust fund or holding the
cash deposit so long as Company is acting in accordance with this Article.
G. The assets deposited in the trust fund shall be valued according to
their current fair market value and shall consist only of cash (U.S. legal
tender), certificates of deposit issued by a United States Bank and payable in
cash, and investments of the types permissible for such deposits under the
California Insurance Law. Investments issued by the parent, subsidiary, or
affiliate of either Company or Reinsurer shall not be eligible investments. All
assets so deposited shall be accompanied by all necessary assignments,
endorsements in blank, or transfer of legal title to the trustee in order that
Company may negotiate any such assets without the requirement of consent or
signature from Reinsurer or any other entity.
H. All settlements of account between Company and Reinsurer shall be
made in cash or its equivalent.
I. Company's "successors in interest" shall include those by operation
of law, including without limitation, any liquidator, rehabilitator, receiver,
or conservator.
J. Any income earned and received by the amount held in a trust fund
shall be added to the principal thereof.
K. Reinsurer will take any other reasonable steps that may be required
for Company to take full credit on its statutory financial statements for the
reinsurance provided by this Agreement.
L. To the extent that any provisions of this Article XVIII conflict
with the requirements of California law, including the Bulletin, such
conflicting provisions or the appropriate portions thereof shall be superseded
and replaced by such law or the Bulletin, as the case may be, and shall be
incorporated herein by this reference.
ARTICLE XX. ARBITRATION.
With the exception of any dispute subject to resolution pursuant to
Article VI, any and all disputes between Company and Reinsurer arising out of,
relating to, or concerning this Agreement, whether sounding in contract or tort
and whether arising during or after termination of this Agreement (hereinafter
"Disputes"), shall be resolved in accordance with a two-step dispute resolution
process involving, first, mediation before a mediator mutually acceptable to
the parties, followed, if necessary, by final and binding arbitration before a
board of arbitration composed of two arbitrators and an umpire ("Board"), which
may or may not include the mediator, or if requested by either party, another
Board. The parties confirm that by agreeing to this dispute resolution process,
they intend to and do waive their right to have any dispute decided in court by
a judge or jury. All proceedings pursuant to this Article XX shall take place in
Los Angeles, California.
In the event any Dispute is not resolved by an informal negotiation
between the parties within thirty (30) days after either party receives written
notice from the other party that a Dispute exists, the matter shall be referred
to the Los Angeles, California offices of the American Arbitration Association
("AAA") for an informal, non-binding mediation consisting of one or more
conferences between the parties in which a mediator will seek to guide the
parties to a resolution of the Disputes. The parties shall select a mutually
acceptable neutral mediator meeting the qualifications set forth in clause (B)
below. In the event the parties cannot agree on a mediator, the Administrator
of AAA will appoint a mediator meeting such qualifications. The mediation
process shall begin on a date mutually agreed upon by the parties and mediator
or, in the event the parties cannot agree on a date, the mediator shall select
a date. The mediation process shall continue until the earliest to occur of the
following: (i) the Disputes are resolved, (ii) the mediator makes a finding
that there is no possibility of resolution through mediation, or (iii) thirty
(30) days have elapsed since the Dispute was first scheduled for mediation.
Should any disputes remain after the completion of the mediation
process described above, the parties agree to submit all remaining Disputes to
final and binding arbitration administered by AAA in accordance with the
then-existing AAA Commercial Arbitration Rules. Neither party nor the Board
shall disclose the existence, content or results of any arbitration hereunder
without the prior written consent of all parties. The arbitration shall be
conducted under the Federal Arbitration Act and shall proceed as follows:
(A) Submission to Arbitration. Within thirty (30) days of the
termination of mediation proceedings pursuant to this Article XX, each party
shall notify the other of the name of its appointed arbitrator. Either party
may appoint the mediator as its appointed arbitrator.
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(B) Arbitration Board Membership. Unless otherwise mutually agreed, the
members of the Board shall be impartial and disinterested and shall be active or
retired lawyers, familiar with insurance and reinsurance, or active or retired
officers of property-casualty insurance companies, reinsurance companies, or
Lloyds Underwriters. Company and Reinsurer as aforesaid shall each appoint an
arbitrator and the two (2) arbitrators shall choose an umpire before instituting
the hearing. As time is of the essence, if either party fails to appoint its
arbitrator within thirty (30) day period described above, the other party is
authorized to and shall appoint the second arbitrator. If the two arbitrators
fail to agree upon the appointment of an umpire within thirty (30) days after
notification of the appointment of the second arbitrator, within ten (10) days
thereof, the two (2) arbitrators shall request the AAA to appoint an umpire for
the arbitration with the qualifications set forth above in this Article. If the
AAA fails to name an umpire, either party may apply to the court named below to
appoint an umpire with the above required qualifications, the umpire shall
promptly notify in writing all parties to the arbitration of his selection and
of the scheduled date for the hearing. Upon resignation or death of any member
of the Board, a replacement shall be appointed in the same fashion as the
resigning or deceased member was appointed.
(C) Submission of Briefs. The claimant and respondent shall each submit
initial briefs to the Board outlining the issues in dispute and the basis,
authority, and reasons for their respective positions within thirty (30) days of
the date of notice of appointment of the umpire. The claimant and the respondent
may submit reply briefs to the Board within ten (10) days after filing of the
initial brief(s). Initial and reply briefs may be amended by the submitting
party at any time, but not later than ten (10) days prior to the date of
commencement of the arbitration hearing. Reasonable responses shall be allowed
at the arbitration hearing to new material contained in any amendments filed to
the briefs but not previously responded to.
(D) Arbitration Award. The Board shall take such steps as may be
necessary to hold a private hearing within one hundred twenty (120) days of the
submission of the Disputes to arbitration and to conclude such hearing within
three (3) days. The Board shall make a decision and award with regard to the
terms of this Agreement, the original intentions of the parties to the extent
reasonably ascertainable, and the custom and usage of the property and casualty
insurance and reinsurance business which decision and award shall be in writing
and shall state the factual and legal basis for the decision and award. The
decision and award shall be based upon a hearing in which evidence shall be
allowed and in which the formal rules of evidence shall not strictly apply but
in which cross examination and rebuttal shall be allowed. At its own election or
at the request of the Board, either party may submit a post-hearing brief for
consideration of the Board within twenty (20) days of the close of the hearing.
The Board shall make its decision and award within thirty (30) days following
the close of the hearing or the submission of post-hearing briefs, whichever is
later, unless the parties consent to an extension. Every decision by the Board
shall be by a majority of the members of the Board and each decision and award
by the majority of the members of the Board shall be final and binding upon all
parties to the proceeding. Either party may apply to a court of competent
jurisdiction for an order confirming any decision and the award; a judgment of
that court shall thereupon be entered on an decision or award. If such an order
is issued, the attorneys' fees of the party so applying and court costs will be
paid by the party against whom confirmation is sought. The Board may award
interest at a rate of one hundred (100) basis points above the prime rate as
published in the Wall Street Journal on the date of the award of the Board
calculated from the date the Board determines that any amounts due the
prevailing party should have been paid to the prevailing party but may not award
punitive, exemplary, or treble damages.
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<PAGE> 15
(E) Arbitration Expense. Each party shall bear the expense of the one
arbitrator appointed by it and shall jointly and equally bear with the other
party the expense of any stenographer requested, and of the umpire. The
remaining costs of the arbitration proceedings shall be finally allocated by the
Board.
(F) Evidence. Subject to customary and recognized legal rules of
privilege, each party participating in the arbitration shall have the obligation
to produce those documents, and as witnesses to the arbitration those of its
employees, those of its affiliates, and those of any intermediary or
underwriting manager as any other participating party reasonably requests,
providing always that the same witnesses and documents be obtainable and
relevant to the issues before the arbitration and not be unduly burdensome or
excessive. The parties may mutually agree as to pre-hearing discovery prior to
the arbitration hearing and in the absence of agreement, upon the request of any
party, prehearing discovery may be conducted as the umpire shall determine in
his/her sole discretion to be in the interest of fairness, full disclosure, and
a prompt hearing, decision and award by the Board. The umpire shall be the final
judge of the procedures of the Board, the conduct of the arbitration, of the
rules of evidence, the rules of privilege and production and of excessiveness
and relevancy of any witnesses and documents upon the petition of any
participating party. To the extent permitted by law, the Board and the umpire
shall have the authority to issue subpoenas and other orders to enforce their
decisions.
(G) Equitable Relief. Nothing herein shall be construed to prevent any
participating party from applying to a federal district court of competent
jurisdiction to issue a restraining order or other equitable relief to maintain
the "status quo" of the parties participating in the arbitration pending the
decision and award by the Board or to prevent any party from incurring
irreparable harm or damage at any time prior to the decision and award of the
Board. The Board shall also have the authority to issue interim decisions or
awards in the interest of fairness, full disclosure, and a prompt and orderly
hearing and decision and award by the Board.
Each of the parties hereto expressly and unequivocally agrees to waive
it right to recover punitive or exemplary damages in connection with any claim
arising out of, in connection with, or in relation to this Agreement.
The dispute resolution process set forth in this Article XX shall
survive the termination of this Agreement.
Any and all matters related to the arbitration, including all discovery
and all evidence presented at the arbitration hearing, shall be treated as
strictly confidential by the parties and arbitrator. The award or decision of
the Board shall not be disclosed to any other party, except as may be required
by law or as may be needed to confirm or enforce this award, or upon the written
consent of all parties.
ARTICLE XXI. SALVAGE AND SUBROGATION
Reinsurer shall be credited with its proportional share of subrogation
and salvage (i.e., reimbursement obtained or recoveries made by Company, less
the actual cost, excluding salaries of officers and employees of Company and
sums paid to attorneys as retainer, of obtaining such reimbursement or making
such recoveries) on any claims or settlements involving this reinsurance.
Subrogation and salvage shall always be used to reimburse the excess reinsurers
in the reverse
15
<PAGE> 16
order of their priority according to their participation in the loss before
being used in any way to reimburse Company for its portion of the loss under its
retention.
Company shall reasonably enforce its rights to salvage or subrogation
relating to any loss, a part of which loss was sustained by Reinsurer, and to
reasonably prosecute all claims arising out of those rights. In the event
Company shall unreasonably refuse or neglect to enforce its rights to salvage or
subrogation, Reinsurer is authorized and empowered to bring any appropriate
action in the name of Company or its policyholder or otherwise to enforce those
rights and Company shall cooperate fully with Reinsurer in enforcing those
rights. Company and Reinsurer shall share in the cost and expense of any
unsuccessful salvage or subrogation efforts in the same proportion that Company
and Reinsurer shared the loss giving rise to those salvage or subrogation
efforts.
ARTICLE XXII. OTHER TERMS AND CONDITIONS
A. Waiver. The failure of Company or Reinsurer to insist on strict
compliance with this Agreement, or to exercise any right or remedy hereunder,
shall not constitute a waiver of any rights contained herein nor stop the
parties from thereafter demanding full and complete compliance nor prevent the
parties from exercising such a remedy in the future.
B. Conflict with Law and Severability . If any provisions of this
Agreement should be invalid under applicable laws, the latter shall control but
only to the extent of the conflict without affecting the remaining provisions of
this Agreement.
C. Headings. The headings preceding the text of the Articles and
paragraphs of this Agreement are intended and inserted solely for the
convenience of references and shall not affect the meaning, interpretation,
construction or effect of this Agreement.
D. Assignment. This Agreement shall be binding upon, and inure to the
benefit of, Company and Reinsurer and their respective successors and assigns;
provided, however, that this Agreement may not be assigned by either Company or
Reinsurer without the prior written consent the other.
E. Governing Law. This Agreement shall be governed as to performance,
administration, and interpretation by the laws of the State of California,
exclusive of its rules with respect to conflicts of law, except as to rules with
respect to credit for reinsurance in which case the rules of all applicable
states shall apply.
F. Negotiated Agreement. This Agreement has been negotiated by the
parties and the fact that the initial and final draft shall have been prepared
by Reinsurer shall not give rise to any presumption for or against any party to
this Agreement or be used in any form in the construction or interpretation of
this Agreement or any of its provisions.
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<PAGE> 17
G. Notices. Wherever written notice is required under this Agreement,
it shall be in writing and either delivered personally or sent by certified
mail, return receipt requested, to the addresses indicated below.
To Company:
Fremont Indemnity Company
c/o Fremont General Corporation
2020 Santa Monica Boulevard
Santa Monica, California 90404
Attention: Alan W. Faigin, Esq.
Secretary and General Counsel
FAX: (310) 315-5593
To Reinsurer:
SCPIE Indemnity Company
9441 West Olympic Boulevard
Beverly Hills, California 90212
Attention: Donald J. Zuk
President and Chief Executive Officer
FAX: (310) 551-5924
All notices and other communications required or permitted under this
Agreement that are addressed as provided in this paragraph will, whether sent by
mail, facsimile, or courier, be deemed given upon the first business day after
actual delivery to the party to whom such notice or other communication is sent
(as evidenced by the return receipt or shipping invoice signed by a
representative of such party or by the facsimile confirmation). Any party from
time to time may change its address for the purpose of notices to that party by
giving a similar notice specifying a new address, but no such notice will be
deemed to have been given until it is actually received by the party sought to
be charged with the contents thereof.
H. Entire Agreement. Except for that certain Assumption Reinsurance
Agreement and the Claims Service Agreement of even date herewith between Company
and SCPIE Management Services, Inc., this Agreement supersedes and merges with
any and all previous agreements, whether written or oral, between Company and
Reinsurer, or their predecessors with respect to this reinsurance of the Company
by Reinsurer commencing January 1, 1998 and constitutes the full and complete
Agreement between the parties with respect to that reinsurance. No amendment to
this Agreement shall be valid unless in writing and signed by both parties.
I. Run-off. Notwithstanding anything in this Agreement to the Contrary,
Company retains liability as specified in Section 9.4 of the Asset Purchase
Agreement.
ARTICLE XXI. INTERMEDIARY CLAUSE
There is no Intermediary for this Agreement.
IN WITNESS WHEREOF, Company and Reinsurer intending to be
bound have caused this Agreement to be executed by their duly authorized
representatives on the dates set forth next to their names below.
COMPANY:
Fremont Indemnity Company
By: /s/
------------------------------------
Title: V.P. and Asst. Sec.
---------------------------------
Date: 12-30-97
----------------------------------
REINSURER.
American Healthcare Indemnity Company
By: /s/
------------------------------------
Title: President & CEO
---------------------------------
Date: 12-30-97
----------------------------------
17
<PAGE> 1
EXHIBIT 10.54
FREMONT INDEMNITY COMPANY
ASSUMPTION REINSURANCE AGREEMENT
between
FREMONT INDEMNITY COMPANY
("Fremont")
and
AMERICAN HEALTHCARE INDEMNITY COMPANY
("AHIC")
Effective: January 1, 1998
<PAGE> 2
ASSUMPTION REINSURANCE AGREEMENT
THIS ASSUMPTION REINSURANCE AGREEMENT (this "Agreement") is
made and entered into as of this 1st day of January, 1998 (the "Closing Date"),
by and between FREMONT INDEMNITY COMPANY, a California domiciled insurance
company ("Fremont"), and American Healthcare Indemnity Company, a Delaware
domiciled insurance company ("AHIC").
RECITALS
A. Fremont underwrites medical malpractice, healthcare provider and
healthcare facility liability insurance policies (collectively, the "Coverages")
in the jurisdictions listed on Exhibit A hereto (the "Covered States").
B. AHIC underwrites medical malpractice, healthcare provider and
healthcare facility liability insurance policies and is licensed to transact
insurance in those Covered States listed on Exhibit B hereto.
C. AHIC is in the process of obtaining licenses to transact insurance
and issue insurance policies for the Coverages in each of the Covered States
listed on Exhibit C hereto in which it is currently not licensed to transact
insurance (the "Nonadmitted States") and in which Insurance Policies (as
hereinafter defined) are or will be in force, as the case may be.
D. In accordance with the terms and conditions of this Agreement,
Fremont and AHIC desire to implement the assumption by AHIC of all liability
insurance policies (including all binders contracts, endorsements, supplements,
riders and ancillary agreements thereto) which are issued by Fremont for the
Coverages through SCPIE Management Company and SCPIE Insurance Services, Inc.
(collectively, the "Manager"), pursuant to that certain Program Manager
Agreement between SCPIE Management Company, SCPIE Insurance Services, Inc. and
Fremont of even date herewith for inception or renewal in the Covered States on
or after 12:01 a.m. Pacific Standard Time on the Closing Date. Each such policy
is hereinafter referred to as an "Insurance Policy" and, collectively, as the
"Insurance Policies").
E. AHIC and Fremont desire to effect, to the fullest extent permissible
under applicable law, the assignment and transfer to AHIC of all of the economic
risks, benefits, liabilities and obligations of Fremont with respect to the
Insurance Policies for a full, complete and unqualified assumption of such
Insurance Policies by AHIC.
F. Upon the "Assumption Dates" as defined in Section 1.2 hereof, such
Insurance policies shall be assumed from time to time by AHIC in accordance with
Section 1.1 hereof and the other applicable provisions of this Agreement.
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<PAGE> 3
AGREEMENT
NOW, THEREFORE, in consideration of the covenants and promises
set forth herein and the premises, and upon the terms and conditions set forth
in this Agreement, the parties hereto agree as follows:
ARTICLE I - BUSINESS REINSURED
Section 1.1. Assignment of the Insurance Policies and
Assumptive Reinsurance. Effective as of the Assumption Date (as defined below),
Fremont hereby transfers, assigns, conveys and cedes to AHIC, and AHIC hereby
accepts and assumes as direct obligations thereof, the Insurance Policies and
100% of the Policy Liabilities (as defined in Article IV below) with respect to
the Insurance Policies whether absolute, accrued, contingent or outstanding as
if AHIC were the original issuer of each of the Insurance Policies. Insurance
Policies reinsured by AHIC on an assumption basis pursuant to the terms of this
Agreement are sometimes hereinafter referred to as the "Assumed Insurance
Policies."
Section 1.2. The Assumption Date. The "Assumption Date" with
respect to an Insurance Policy shall be later of (i) the Closing Date or (ii)
if, and to the extent that, the assumption reinsurance contemplated by Section
1.1 hereof shall require the approval or consent of any regulatory authority in
a Covered State (a "Required Approval"), or any insurance licensing in a
Nonadmitted State on the part of AHIC (a "Required License") which Required
Approval or Required License shall not have been obtained and be in effect as of
the Closing Date, then the date such Required Licenses and Required Approvals
have been obtained.
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<PAGE> 4
Section 1.3. Preservation of Defenses. All Policy Liabilities
for which AHIC is liable under this Agreement are subject in all respects to the
same terms, conditions, interpretations, waivers, modifications, alterations and
cancellations as the Insurance Policies. AHIC accepts and assumes the Policy
Liabilities subject to all defenses, setoffs and counterclaims to which Fremont
would be entitled with respect to the Insurance Policies. It is expressly
understood and agreed by the parties that no such defenses, setoffs or
counterclaims are waived by the execution of this Agreement or the consummation
of the transactions contemplated by this Agreement and that, as of the
Assumption Date, AHIC shall be fully subrogated to all such defenses, setoffs
and counterclaims and entitled to the benefits thereof as if it were Fremont.
Section 1.4. AHIC as Successor. AHIC is hereby appointed and
constituted the successor to Fremont under the Assumed Insurance Policies and,
except as otherwise provided for herein, will from and after the date hereof
perform all of Fremont's obligations under the Assumed Insurance Policies as if
it had been the original issuer thereof. The Assumed Insurance Policies shall be
direct obligations of AHIC. The insureds under the Assumed Insurance Policies
shall thereafter be entitled to disregard Fremont as party to the Assumed
Insurance Policies and treat AHIC as if it had been originally obligated under
the Assumed Insurance Policies. From the date hereof, the insureds shall have
the right to file claims arising under the Assumed Insurance Policies directly
with AHIC and shall have a direct right of action against AHIC, and AHIC hereby
consents to being subject to direct action taken by any insured. The rights of
any insured under an Assumed Insurance Policy shall be limited to and consist of
those rights expressly set forth in the Assumed Insurance Policy (including any
written rider or endorsement to the Assumed Insurance Policy and the applicable
policy application) and applicable law, and no effect shall be given to the
bankruptcy, liquidation, receivership, insolvency, reorganization or moratorium
of Fremont. No insured shall have the right to receive a greater amount under
the Assumed Insurance Policy than such insured would have had in the absence of
this Agreement.
Section 1.5. Certificates of Assumption. As soon as
practicable after the Assumption Date, AHIC shall issue to each policyholder
insured under an Assumed Insurance Policy, a certificate of assumption
substantially in the form attached hereto as Exhibit D or such other form
required by any regulatory authority.
Section 1.6. Offer of Insurance for the Assumed Insurance
Policies. In accordance with applicable law with respect to all Assumed
Insurance Policies. AHIC shall issue notices of nonrenewal on behalf of Fremont
and Fremont hereby appoints AHIC as its attorney-in-fact to issue such notices
of non-renewal and AHIC may, on its own behalf, offer to renew or issue
Coverage.
ARTICLE II - ASSIGNMENT OF CEDED REINSURANCE AGREEMENTS
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<PAGE> 5
Section 2.1. Assignment and Assumption. (a) As of the
Assumption Date, Fremont hereby transfers, sets over, assigns and conveys all of
its right and obligations of any nature whatsoever under any reinsurance cover
note, binder, slip, contract, agreement, treaty or certificate, retrocession
agreement, stop loss agreement or other instrument of reinsurance ceded by
Fremont in respect of any of the Insurance Policies, including, without
limitation, the reinsurance arrangements set forth on Exhibit E hereof (such
reinsurance agreements being hereinafter collectively referred to as the
"Reinsurance Agreements"), excluding amounts which may become due from
reinsurers with respect to paid losses under the Insurance Policies as of the
Assumption Date. AHIC hereby accepts such conveyance, transfer and assignment of
Fremont's rights under the Reinsurance Agreements and assumes all of Fremont's
obligations under the Reinsurance Agreements arising after the date hereof. As
soon as practicable after the Effective Date, Fremont shall use commercially
reasonable efforts to cause all of the Reinsurance Agreements to be endorsed to
substitute AHIC for Fremont as the cedent, effective as of the Effective Date.
(b) The assignment and assumption of the Reinsurance
Agreements effected by this Section 2.1 shall be effective only if and to the
extent that such assignment and assumption shall preserve fully the obligations
of the reinsurers thereunder in respect of the Insurance Policies. To the extent
that less than all of Fremont's rights and obligations under the Reinsurance
Agreements are so assigned to and assumed by AHIC pursuant to the foregoing
sentence, (i) after the Assumption Date AHIC shall be responsible for the
payment of all premiums and other considerations required to be paid by Fremont
in respect of any of the Reinsurance Agreements, whether or not fully assigned
and assumed pursuant to the terms of Article II hereof; (ii) all reinsurance
recoveries attributable to any of the Insurance Policies with the exception of
reinsurance recoveries attributable to the claim described on Exhibit F attached
hereto (the "Gillespie Claim") ceded hereunder are INSURANCE and shall accrue to
the benefit of AHIC hereunder by operation of this Section 2.1 and shall, upon
receipt thereof by Fremont, be paid promptly thereby to AHIC upon and in
accordance with its direction; and (iii) such assignment and assumption shall be
effective at such times as the assignment and assumption may be effected while
preserving fully the obligations of the reinsurer under the respective
Reinsurance Agreement.
Section 2.2. Reinsurance Collections. Fremont shall forward to
AHIC any funds collected from reinsurers with respect to any Reinsurance
Agreements except for any such amounts pertaining to the gillespie claim;
provided, however, that AHIC assumes all risk of non-payment of such amounts.
Section 2.3. Ceded Reinsurance Collateral. To the extent
necessary to effect transfer of any Reinsurance Agreement, Fremont hereby
appoints AHIC as attorney-in-fact for Fremont pursuant to Article V hereof to
act for and on behalf of Fremont with respect to letters of credit, trust funds
and other security mechanisms outstanding for the benefit of Fremont under the
Reinsurance Agreements. Each of Fremont and AHIC shall use commercially
reasonable efforts, to the extent deemed reasonably necessary by AHIC, to cause
the reinsurers under the Reinsurance Agreements to provide replacement letters
of credit, trust funds or other security
5
<PAGE> 6
mechanisms, as applicable, naming AHIC as the beneficiary thereof in amounts and
with terms substantially similar to those currently provided by such reinsurers
for the benefit of Fremont.
ARTICLE III - TERRITORY
Section 3.1. Territory. This Agreement shall apply to the
Insurance Policies covering risks wherever resident or situated.
ARTICLE IV - LIABILITY
Section 4.1. Policy Liabilities. For the purposes of this
Agreement, the term "Policy Liabilities" means all amounts or benefits payable
under the terms and conditions of, or with respect to, the Insurance Policies,
including without limitation: (a) all losses and loss adjustment expenses; (b)
all liability for premium taxes and commissions payable with respect to the
Insurance Policies based on insurance premiums paid on or after the Closing
Date; (c) all liability in connection with the participation by Fremont or AHIC,
whether involuntary or voluntary, in any guaranty fund, insolvency fund, plan,
pool, association or other similar fund or association, established or governed
by state, federal or foreign law or any other jurisdiction, which participation
is based on insurance premiums paid after the Closing Date; and (d) all
liability for returns or refunds of insurance premiums with respect to the
Insurance Policies; and (c) all loss in excess of limits, extra-contractual
obligations and associated allocated loss adjustment expense (all as defined in
the Quota Share Reinsurance Agreement of even date herewith between Fremont and
SCPIE Indemnity Company (the "Quota Share Reinsurance Agreement")) arising out
of or related to acts, omissions or occurrences on or after 12:01 a.m. Pacific
Standard Time on the Closing Date.
ARTICLE V - ADMINISTRATION
Section 5.1. Administration and Adjustment. Fremont will
adjust, administer and service, at the cost and expense of AHIC, all of the
Insurance Policies and Policy Liabilities prior to a completed assumption under
this Agreement. Pursuant to the terms of the Program Manager Agreement and that
certain Claims Service Agreement (the "Claims Service Agreement") between
Fremont and SCPIE Management Services, Inc. ("SMS") of even date herewith,
Fremont will grant to SCPIE Management Company, SCPIE Insurance Services, Inc.
and SMS, as appropriate, authority in all matters relating to the administration
of the Insurance Policies in accordance with such agreements, to the extent such
authority may be granted under applicable law. This power and authority
includes, without limitation, the power to service all the Insurance Policies,
to defend, settle and pay all claims and to take such other actions as may be
necessary or desirable to effect the transactions contemplated by this
Agreement. Notwithstanding the foregoing, the parties agree that Fremont shall
have final authority with respect to the administration of the Insurance
Policies prior to such policies becoming Assumed Insurance policies.
6
<PAGE> 7
ARTICLE VI - PREMIUMS, CONSIDERATION
Section 6.1. Assumption Premium. With respect to each Assumed
Insurance Policy, Fremont shall pay to AHIC the Assumed Policy SAP Reserve (as
defined in the Quota Share Reinsurance Agreement). Such premium shall be
remitted by Fremont to AHIC with respect to all policies assumed during a
calendar month within fifteen (15) days after the end of such month.
ARTICLE VII - RECORDS AND ACCOUNTING
Section 7.1. Records Transfer. (a) On a monthly basis
following the Assumption Date with respect to a policy, or as soon thereafter as
practicable, Fremont shall forward to AHIC, the original or copies of all
reports, records,
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<PAGE> 8
underwriting files, claim files and other information reasonably requested by
AHIC and in its possession which relate to the Assumed Insurance Policies
("Records") and shall cooperate with AHIC in the transfer of the administration
of the Assumed Insurance Policies to AHIC; provided, however, that Fremont shall
at all times retain copies of the Records that relate to the Reinsured Insurance
Policies. Subject thereto, Fremont hereby transfers, conveys and assigns all
right, title and interest in the Insurance Policies and the Records to AHIC.
AHIC shall permit Fremont access to and the right to copy, during AHIC's normal
business hours, all Records pertaining to the Assumed Insurance Policies
necessary to permit Fremont to respond to or comply with requests for
information by governmental or judicial authorities, insurance regulatory
bodies, financial auditors or tax auditors or to defend lawsuits.
(b) From and after the Assumption Date, Fremont shall refer to
AHIC or an affiliate of AHIC, as designated by AHIC, all inquiries involving
claims payment or policy provisions, limitations or exclusions. Claims under the
Assumed Insurance Policies submitted to Fremont will be forwarded to AHIC as
promptly as practicable. From and after the date hereof, Fremont will use
commercially reasonable efforts to notify AHIC upon receipt of any material
written or oral complaint to or from any official of a state insurance
department, any federal or state regulatory authority or other person and any
material complaint threatening litigation in connection with any of the Assumed
Insurance Policies.
Section 7.2. Accounting and Records. All premiums earned and
all claims incurred after the Assumption Date with respect to the Assumed
Insurance Policies will be accounted for as direct business of AHIC, and Fremont
will have no further obligations under this Agreement for accounting for any
Assumed Insurance Policies after the Assumption Date.
ARTICLE VIII - ARBITRATION
Section 8.1. Arbitration of Disputes. Any and all disputes
between Fremont and AHIC arising out of, relating to, or concerning this
Agreement, whether sounding in contract or tort and whether arising during or
after termination of this Agreement (hereinafter "Disputes"), shall be resolved
in accordance with a two-step dispute resolution process involving, first,
mediation before a mediator mutually acceptable to the parties, followed, if
necessary, by final and binding arbitration before a board of arbitration
composed of two arbitrators and an umpire ("Board"), which may or may not
include the mediator, or if requested by either party, another Board. The
parties confirm that by agreeing to this dispute resolution process, they
intend to and do waive their right to have any dispute decided in court by a
judge or jury. All proceedings pursuant to this Article VIII shall take place
in Los Angeles, California.
Section 8.2. Mediation. In the event any Dispute is not
resolved by an informal negotiation between the parties within thirty (30) days
after either party receives written notice from the other party that a Dispute
exists, the matter shall be referred to the Los Angeles, California offices of
the American Arbitration Association ("AAA") for an informal, non-binding
mediation consisting of one or more conferences between the parties in which a
mediator will seek to guide the parties to a resolution of the Disputes. The
parties shall select a mutually acceptable neutral mediator meeting the
qualifications set forth in clause (B) below. In the event the parties cannot
agree on a mediator, the Administrator of AAA will appoint a mediator meeting
such qualifications. The mediation process shall begin on a date mutually
agreed upon by the parties and mediator or, in the event the parties cannot
agree on a date, the mediator shall select a date. The mediation process shall
continue until the earliest to occur of the following: (i) the Disputes are
resolved, (ii) the mediator makes a finding that there is no possibility of
resolution through mediation, or (iii) thirty (30) days have elapsed since the
Dispute was first scheduled for mediation.
Section 8.3. Arbitration. Should any Disputes remain after
completion of the mediation process described above, the parties agree to
submit all remaining Disputes to final and binding arbitration administered by
AAA in accordance with the then-existing AAA Commercial Arbitration Rules.
Neither party nor the Board shall disclose the existence, content or results of
any arbitration hereunder without the prior written consent of all parties. The
arbitration shall be conducted under the Federal Arbitration Act and shall
proceed as follows:
(a) Submission to Arbitration. Within thirty (30) days of
the termination of mediation proceedings pursuant to this Article VIII, each
party shall notify the other of the name of the appointed arbitrator. Either
party may appoint the mediator as its appointed arbitrator.
(b) Arbitration Board Membership. Unless otherwise
mutually agreed, the members of the Board shall be impartial and disinterested
and shall be active or retired lawyers, familiar with insurance and
reinsurance, or active or retired officers of property-casualty insurance
companies, reinsurance companies, or Lloyds Underwriters. Fremont and AHIC as
aforesaid shall each appoint an arbitrator and the two (2) arbitrators shall
choose an umpire before instituting the hearing. As time is of the essence, if
either party fails to appoint its arbitrator within thirty (30) day period
described above, the other party is authorized to and shall appoint the second
arbitrator. If the two arbitrators fail to agree upon the appointment of an
umpire within thirty (30) days after notification of the appointment of the
second arbitrator, within ten (10) days thereof, the two (2) arbitrators shall
request the AAA to appoint an umpire for the arbitration with the
qualifications set forth above in this Article. If the AAA fails to name an
umpire, either party may apply to the court named below to appoint an umpire
with the above required qualifications, the umpire shall promptly notify in
writing all parties to the arbitration of his selection and of the scheduled
date for the hearing. upon resignation or death of any member of the Board, a
replacement shall be appointed in the same fashion as the resigning or deceased
member was appointed.
(c) Submission of Briefs. The claimant and respondent
shall each submit initial briefs to the Board outlining the issues in dispute
and the basis, authority, and reasons for their respective positions within
thirty 930) days of the date of notice of appointment of the umpire. The
claimant and the respondent may submit reply briefs to the Board within ten
910) days after filing of the initial brief(s). initial and reply briefs may be
amended by the submitting party at any time, but not later than ten 910) days
prior to the date of commencement of the arbitration hearing. Reasonable
responses shall be allowed at the arbitration hearing to new material contained
in any amendments filed to the briefs but not previously responded to.
(d) Arbitration Award. The Board shall take such steps as
may be necessary to hold a private hearing within one hundred twenty (120) days
of the submission of the Disputes to arbitration and to conclude such hearing
within three (3) days. The Board shall make a decision and award with regard to
the terms of this Agreement, the original intentions of the parties to the
extent reasonably ascertainable, and the custom and usage of the property and
casualty insurance and reinsurance business which decision and ward shall be in
writing and shall state the factual and legal basis for the decision and award.
The decision and award shall be based upon a hearing in which evidence shall be
allowed and in which the formal rules of evidence shall not strictly apply but
in which cross examination and rebuttal shall be allowed. At its own election
or at the request of the Board, either party may submit a post-hearing brief
for consideration of the Board within twenty (20) days of the close of the
hearing. The Board shall make its decision and award within thirty (30) days
following the close of the hearing or the submission of post-hearing briefs,
whichever is later, unless the parties consent to an extension. Every decision
by the Board shall be by a majority of the members of the Board and each
decision and award by the majority of the members of the Board shall be final
and binding upon all parties to the proceeding. Either party may apply to a
court of competent jurisdiction for an order confirming any decision and the
award; a judgment of that court shall thereupon be entered on any decision or
award. if such an order is issued, the attorneys' fees of the party so applying
and court costs will be paid by the party against whom confirmation is sought.
The Board may ward interest at a rate of one hundred (100) basis points above
the prime rate as published in the Wall Street Journal on the date of the award
of the Board calculated from the date the Board determines that any amounts due
the prevailing party should have been paid to the prevailing party but may not
award punitive, exemplary, or treble damages.
(e) Arbitration Expense. Each party shall bear the expense
of the one arbitrator appointed by it and shall jointly and equally bear with
the other party the expense of any stenographer requested, of the mediator and
of the umpire. The remaining costs of the arbitration proceedings shall be
finally allocated by the Board.
(f) Evidence. Subject to customary and recognized legal
rules of privilege, each party participating in the arbitration shall have the
obligation to produce those documents, and as witnesses to the arbitration those
of its employees, those of its affiliates, and those of any intermediary or
underwriting manager as any other participating party reasonably requests,
providing always that the same witnesses and documents be obtaining and relevant
to the issues before the arbitration and not be unduly burdensome or excessive.
The parties may mutually agree as to pre-hearing discovery prior to the
arbitration hearing and in the absence of agreement, upon the request of any
party, prehearing discovery may be conducted as the umpire shall determine in
his/her sole discretion to be in the interest of fairness, full disclosure, and
a prompt hearing, decision and award by the Board. The umpire shall be the final
judge of the procedures of the Board, the conduct of the arbitration, of the
rules of evidence, the rules of privilege and production and of excessiveness
and relevancy of any witnesses and documents upon the petition of any
participating party. To the extent permitted by law, the Board and the umpire
shall have the authority to issue subpoenas and other orders to enforce their
decisions.
(g) Equitable Relief. Nothing herein shall be construed to
prevent any participating party from applying to a federal district court of
competent jurisdiction to issue a restraining order or other equitable relief
to maintain the "status quo" of the parties participating in the arbitration
pending the decision and award by the Board or to prevent any party from
incurring irreparable harm or damage at any time prior to the decision and
award of the Board. The Board shall also have the authority to issue interim
decisions or awards in the interest of fairness, full disclosure, and a prompt
and orderly hearing and decision and award by the Board.
Section 8.4. Waiver of Punitive Damages. Each of the parties
hereto expressly and unequivocally agrees to waive its right to recover punitive
or exemplary damages in connection with any claim arising out of, in connection
with, or in relation to this Agreement.
Section 8.5. Survival. The dispute resolution process set
forth in this Article VIII shall survive the termination of this Agreement.
Section 8.6. Confidentiality. Any and all matters related to
the arbitration, including all discovery and all evidence presented at the
arbitration hearing, shall be treated as strictly confidential by the parties
and the arbitrator. The award or decision of the Board shall not be disclosed
to any other party, except as may be required by law or as may be needed to
confirm or enforce this award, or upon the written consent of all parties.
8
<PAGE> 9
ARTICLE IX - MISCELLANEOUS PROVISIONS
Section 9.1. Offsets. All amounts due either Fremont or AHIC,
whether by reason of premium, commission, loss or Ultimate Net Loss or
Allocated Loss Adjustment Expense (as defined in the Quota Share Reinsurance
Agreement, or otherwise, under this Agreement or any other Agreement
previously, now or later in force between Fremont and AHIC, whether as ceding
company, reinsurer or otherwise, shall be subject to the right of recoupment
and offset and upon the exercise of the same, only the net balance shall be
due. All claims for amounts of premium, commission, loss or Ultimate Net Loss
(as defined in the Quota Share Reinsurance Agreement), whether or not fixed in
amount at the time of the insolvency of any party to this Agreement, arising
from coverage placed in effect under this Agreement prior to the insolvency of
any party to this Agreement shall be deemed pre-liquidation debts and subject
to this Article. In the event of insolvency of Fremont, offset shall be in
accord with applicable law.
Section 9.2. Errors or Omissions. Inadvertent delays, errors
or omissions made in connection with this Agreement or any transaction hereunder
will not relieve either party from any liability that would otherwise have
attached had such delay, error or omission not occurred. Regardless, the
responsible party will rectify each such delay, error or omission as promptly as
practicable after discovery.
Section 9.3. Honorable Undertaking. This Agreement shall be
construed as an honorable undertaking between the parties hereto not to be
defeated by technical legal constructions.
Section 9.4. Insolvency. In the event of the insolvency of
Fremont, any amounts due under the Insurance Policies shall be payable by AHIC,
without diminution on account of such insolvency, directly to the insureds or
third party claimants as may be required under the Insurance Policies.
9
<PAGE> 10
Section 9.5. Amendments. This Agreement may only be amended by
mutual consent of the parties expressed in a written addendum; and such
addendum, when executed by both parties, shall be deemed to be an integral part
of this Agreement and binding on the parties hereto. Any change or modification
to this Agreement shall be null and void unless made by amendment to the
Agreement and signed by the parties.
Section 9.6. Successors and Assigns. This Agreement shall
inure to the benefit of and bind Fremont and its successors and assigns and AHIC
and its successors and assigns. Neither this Agreement nor any right or
obligation hereunder nor any part hereof may be assigned by any party hereto
without the prior written consent of the other party hereto. Prior to any such
assignment, the consent of all necessary regulatory authorities must be
obtained.
Section 9.7. Governing Law. This Agreement will be governed by
and construed in accordance with the laws of the State of California (without
giving effect to principles of conflicts of laws) applicable to a contract
executed and to be performed in such state.
Section 9.8. Entire Agreement. This Agreement supersedes all
prior discussions and agreements between and contains the sole and entire
agreement between Fremont and AHIC with respect to the business being reinsured
hereunder and there are no understandings between the parties other than as
expressed herein.
Section 9.9. Headings, etc. The Headings used in this
Agreement have been inserted for convenience and do not constitute matter to be
construed or interpreted in connection with this Agreement. Unless the context
of this Agreement otherwise requires, (1) words of any gender will be deemed to
include each other gender, (2) words using the singular or plural number will
also include the plural or singular number, respectively, (3) the terms hereof,
herein, hereby, and derivative or similar words will refer to this entire
Agreement, and (4) the conjunction "or" will denote any one or more, or any
combination or all, of the specified items or matters involved in the respective
list.
Section 9.10. Non-Waiver. The failure of either party hereto
at any time to enforce any provision of this Agreement shall not be construed as
a waiver of that provision and shall not effect the right of either party
thereafter to enforce each and every provision of this Agreement in accordance
with its terms.
Section 9.11. Severability. If any provision of this Agreement
is held to be illegal, invalid, or unenforceable under any present or future
law, and if the rights or obligations of any party under this Agreement will not
be materially and adversely affected thereby, (1) such provision will be fully
severable, (2) this Agreement will be construed and enforced as if such illegal,
invalid, or unenforceable provision had never comprised a part hereof, (3) the
remaining provisions of this Agreement will remain in full force and effect and
will not be affected by the illegal, invalid, or unenforceable provision or by
its severance herefrom, and (4) in lieu of such illegal, invalid, or
unenforceable provision, there will be added automatically as a part of this
10
<PAGE> 11
Agreement, a legal, valid, and enforceable provision as similar in terms to such
illegal, invalid, or unenforceable provision as may be possible.
Section 9.12. Further Assurances. Fremont hereby agrees to
execute, acknowledge and deliver, and will cause its affiliates to so execute,
acknowledge and deliver to AHIC any further documents and instruments reasonably
requested by AHIC as necessary or appropriate to implement further the terms of
this Agreement.
Section 9.13. Notices. Any notice or communication given
pursuant to this Agreement must be in writing and will be deemed to have been
duly given if mailed (by registered or certified mail, postage prepaid, return
receipt requested), or if transmitted by facsimile, or if delivered by courier,
as follows:
To Fremont:
Fremont Indemnity Company
c/o Fremont General Corporation
2020 Santa Monica Boulevard
Santa Monica, California 90404
Attn: Alan Faigin
Secretary and General Counsel
FAX: (310) 315-5593
To AHIC:
American Healthcare Indemnity Company
9441 West Olympic Boulevard
Beverly Hills, California 90212
Attention: Donald J. Zuk
President and Chief Executive Officer
FAX No.: (310) 551-5924
All notices and other communications required or permitted under this Agreement
that are addressed as provided in this paragraph will, whether sent by mail,
facsimile, or courier, be deemed given upon the first business day after actual
delivery to the party to whom such notice or other communication is sent (as
evidenced by the return receipt or shipping invoice signed by a representative
of such party or by the facsimile confirmation). Any party from time to time may
change its address for The purpose of notices to that party by giving a similar
notice specifying a new address, but no such notice will be deemed to have been
given until it is actually received by the party sought to be charged with the
contents thereof.
Section 9.14. Counterparts. This Agreement may be executed
simultaneously in any number of counterparts, each of which will be deemed an
original, but all of which will constitute one and the same instrument.
11
<PAGE> 12
Section 9.15. Exhibits. The Exhibits attached to this
Agreement are a part of this Agreement as if fully set forth herein.
Section 9.16. Run-off. AHIC will cede to Fremont, on an
indemnity basis, liability to Fremont as contemplated under Section 9.4 of the
Asset Purchase Agreement dated as of December 18, 1997 between Fremont and AHIC.
IN WITNESS WHEREOF, Fremont and AHIC have caused this
Assumption Reinsurance and Indemnity Agreement to be executed as of the day and
year first above written.
FREMONT INDEMNITY COMPANY
By: /s/
---------------------------------
Title: VP and Asst. Sec.
------------------------------
AMERICAN HEALTHCARE INDEMNITY COMPANY
By: /s/
---------------------------------
Title: President & CEO
------------------------------
12
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 722,196
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 37,015
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 793,616
<CASH> 12,305
<RECOVER-REINSURE> 24,899
<DEFERRED-ACQUISITION> 8,051
<TOTAL-ASSETS> 921,469
<POLICY-LOSSES> 477,631
<UNEARNED-PREMIUMS> 24,591
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 1
<OTHER-SE> 386,517<F1>
<TOTAL-LIABILITY-AND-EQUITY> 921,469
157,976
<INVESTMENT-INCOME> 40,367
<INVESTMENT-GAINS> 11,129
<OTHER-INCOME> 489
<BENEFITS> 132,208
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 28,211
<INCOME-PRETAX> 49,542
<INCOME-TAX> 12,566
<INCOME-CONTINUING> 36,976
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,976
<EPS-PRIMARY> 3.06<F2>
<EPS-DILUTED> 3.06
<RESERVE-OPEN> 470,412<F3>
<PROVISION-CURRENT> 197,870
<PROVISION-PRIOR> (65,662)
<PAYMENTS-CURRENT> 14,408
<PAYMENTS-PRIOR> 135,,480
<RESERVE-CLOSE> 452,732
<CUMULATIVE-DEFICIENCY> (65,662)
<FN>
<F1>Treasury stock of $13,141 is included as a reduction of other stockholders'
equity. Accumulated other comprehensive income of $18,685 is included as a
component of stockholders' equity.
<F2>The adoption of FASB 128 did not have an impact on the prior period per share
calculations as the Company had only common stock outstanding.
<F3>Includes loss and loss adjustment expense reserves of $36,972 the Company
assumed under a reinsurance agreement from Fremont Indemnity Company as of
January 1, 1998.
</FN>
</TABLE>
