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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, 1999 Commission File No. 1-12449
SCPIE HOLDINGS INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
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)
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Registrant's telephone number, including area code: (310) 551-5900
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<S> <C>
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)
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Securities registered pursuant to Section 12(g) of the Act
NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's voting stock held by non-
affiliates of the Registrant at March 13, 2000, was approximately $281,450,490
(based upon the closing sales price of such date, as reported by the Wall Street
Journal).
At March 13, 2000, the Registrant had issued and outstanding an aggregate of
9,901,269 shares of its Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy statement for the Annual Meeting of Stockholders of Registrant to be
held on May 11, 2000 (only portions of which are incorporated by reference).
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PART I
ITEM 1. BUSINESS
SCPIE Holdings Inc. is the parent company of a group of insurance and
insurance-related companies conducting business principally in California. It
began operating as an independent publicly held company on January 29, 1997, as
the result of the merger of Southern California Physicians Insurance Exchange
("SCPIE" or the "Exchange") into SCPIE Indemnity Company, a California domiciled
insurance company and subsidiary of the Company ("SCPIE Indemnity"), and the
issuance of 9,994,652 shares of common stock of the Company to approximately
10,400 members of the Exchange in exchange for their membership interests in
SCPIE and 500,000 shares to SCPIE Indemnity (the "Reorganization"). On January
30, 1997, the Company sold an additional 2,300,000 shares in a public offering
of its common stock (the "Offering"). The common stock is listed on the New York
Stock Exchange ("NYSE") under the trading symbol "SKP."
For purposes of this Form 10-K report, the "Company" refers, at all times
prior to January 29, 1997, the effective date of the Reorganization, to the
Exchange and its subsidiaries, collectively, and at all times on or after such
effective date, to SCPIE Holdings Inc. and its subsidiaries, collectively; the
term "SCPIE Holdings" refers at all times to SCPIE Holdings Inc., excluding its
subsidiaries.
SCPIE Holdings was organized in February 1996, as a Delaware corporation.
The Company principally engages in conducting the business of its predecessor,
the Exchange, through its subsidiaries. The insurance company subsidiaries of
SCPIE Holdings include SCPIE Indemnity, American Healthcare Indemnity Company
("AHI") and American Healthcare Specialty Insurance Company ("AHSIC"). AHI and
AHSIC were inactive insurance companies acquired by the Company in 1996 to
expand the Company's operations outside California. AHI, domiciled in Delaware,
is licensed to transact insurance in 46 states and the District of Columbia, and
AHSIC, domiciled in Arkansas, is eligible to write policies as an excess and
surplus line insurer in 29 states and the District of Columbia. During 1999,
SCPIE Holdings contributed $2.0 million to the capital and surplus of AHSIC.
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 Holdings 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 1999. The Company
currently insures more than 14,500 physicians, other healthcare 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 $191.3 million and $29.9
million, respectively, for the year ended December 31, 1999 and were $210.0
million and $37.0 million, respectively, for the year ended December 31, 1998.
As of December 31, 1999, the Company had $813.2 million of total assets and
$294.7 million of total stockholders' equity.
Medical malpractice insurance, or medical professional liability insurance,
insures the physician, hospital or other healthcare provider against liabilities
arising from the rendering of, or failure to render professional medical
services. Under the typical medical malpractice insurance policy, the insurer
also defends the insured against potentially covered claims. Based on data
compiled by A.M. Best & Co. ("A.M. Best"), in 1998, total medical malpractice
premiums in the United States were approximately $6.0 billion. In California,
the second largest market for medical malpractice insurance based on direct
premiums written, approximately $674.0 million of medical malpractice premiums
were written in 1998. The Company's share of the medical malpractice premiums
written in California in 1998 was approximately 17%. The Company's market share
is substantially higher in Southern California where more than 91% of the
Company's California 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. Six 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 will lead 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 the
current 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 direct insurance operations, the Company has written a
modest portfolio of assumed reinsurance business for a number of years. This
has principally involved small participations in the reinsurance of primary and
excess medical malpractice insurance programs. In the third quarter of 1999,
the Company formed a Ceded and Assumed Reinsurance Division to materially expand
its reinsurance operations. The strategic objective of this division is to
create a well-balanced portfolio of carefully underwritten assumed reinsurance
lines in addition to medical malpractice to add diversity to the direct business
of the Company. The Company expects that a primary source of this business will
be placements from reinsurance brokers and intermediaries. The Company believes
that this line of business will become an increasingly important aspect of its
operations.
Geographic expansion has been accomplished principally through an
arrangement with Brown & Brown, Inc. ("Brown & Brown"), one of the nation's top
independent insurance agency organizations. American Healthcare Indemnity
Company ("AHI"), a subsidiary of SCPIE Holdings, entered into an agreement with
Brown & Brown to market professional liability insurance to physicians and small
medical groups in selected states commencing January 1, 1998. The program now
has been expanded to encompass eight states, the largest in terms of premium
volume being Connecticut, Florida and Georgia. Continued expansion of this
relationship with Brown & Brown is an important element of the Company's
strategy for diversification into states outside California. AHI has also
expanded its operations outside California through sales of professional
liability policies to physicians who do not meet the normal underwriting
criteria of the Company. These policies are sold through various brokers
typically at a higher premium. The broker relationships were developed from the
medical malpractice insurance businesses AHI acquired from Fremont Indemnity
Company (Fremont) and a small midwestern insurance company in 1998 and 1999,
respectively. In 1999, the Company derived approximately 20% of its physician
and medical group premium volume from policies issued outside the state of
California. This expansion is in its initial stages. There is no assurance,
however, that the Company will successfully retain or continue to expand this
business or that it will ultimately be profitable.
Additionally, the Company actively markets its hospital policies under a
program directly and through regional and local brokers, and must compete with a
number of insurance companies in the underwriting of hospital malpractice
policies. At December 31, 1999, the Company insured 57 hospitals, of which 37
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
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and market share when the market "hardens," that is, when demand coincides more
closely with capacity, and premium rates increase 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:
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FOR THE YEAR ENDED DECEMBER 31,
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1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Physician and medical group
liability:
Physician and medical group
standard professional
liability............................. $125,572 $ 108,679 $109,393
Nonstandard physicians................... 5,617 1,299 1,700
Emergency medicine program............... 2,243 2,012 1,589
Urgent care centers...................... 234 325 277
-------- ----------- --------
Subtotal medical liability............ 133,666 112,315 112,959
Excess personal liability................ 694 701 756
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Subtotal physician and
medical group liability............. 134,360 113,016 113,715
Hospital liability......................... 13,448 10,432 8,475
Healthcare provider liability.............. 1,142 761 800
Healthcare facility liability.............. 2,199 -- --
Managed care organization errors
and omissions............................ 750 740 668
Directors and officers'
liability................................ 809 264 252
-------- ----------- --------
Total.................................... $152,708 $125,213 (1) $123,910
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(1) During 1998, the Company reinsured 100% of the risk under certain physician
and medical group liability policies, hospital liability policies, and
healthcare provider and facility liability policies that were issued by
other companies while the Company obtained certain regulatory licenses and
approvals. Most of these policies were written directly by the Company
during 1999. If these policies had been written directly by the Company
during 1998, the total direct written premiums for 1998 would have been
approximately $152.0 million.
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 instituted by state licensing boards and
other governmental entities.
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 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
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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 $10.0 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
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,
1999:
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DIRECT
PREMIUMS PERCENTAGE
GROUP SIZE WRITTEN OF TOTAL
---------- ---------- ------------
(IN THOUSANDS)
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Sole practitioner physicians.......................... $ 83,128 62.2%
Group with less than five physicians.................. 21,063 15.8%
Group with five through eight
physicians............................................ 11,702 8.7%
Group with nine or more physicians.................... 17,773 13.3%
-------- -----
Total............................................. $133,666 100.0%
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The Company has written professional liability insurance for oral surgeons
in California for a number of years. Oral surgeons are frequently licensed
physicians. Beginning in 2000, the Company will expand this program to offer
coverage to oral surgeons nationally. The Company will also begin an expanded
program to underwrite dentists in California and Texas.
Hospital Liability. The Company writes hospital liability insurance on both
a claims made and reported basis and a modified occurrence basis that in effect
includes a combination of occurrence coverage and 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 offers 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 review
and claims and benefit handling in the operation of the managed care
organizations. These policies are generally issued on a claims made
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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,
$264,000 in 1998, and $809,000 in 1999. In 1999, the Company began offering a
new directors and officers' liability policy, and expanded its marketing of this
program. 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.
Billing Errors and Omissions. In late 1999, the Company began offering a
newly designed product that provides physicians and medical groups with
protection for defense expenses and certain liabilities related to governmental
investigations into billing errors and omissions to Medicare and other
governmentally subsidized patients.
Premium volume for all of the foregoing products has been small, but the
Company considers these products important to its expansion plans.
MARKETING AND POLICYHOLDER SERVICES
Historically the Company marketed its physician professional liability
policies directly to physicians and medical groups in California.
Infrequently, larger medical groups were written through insurance brokers.
The Company actively marketed hospital policies through brokers when it
commenced offering this coverage in 1994. Two years ago, brokered business
became the predominant source of new physician and medical group policies as a
result of the Brown & Brown marketing arrangement and a broker network obtained
through the Fremont acquisition.
The Company's marketing organization has approximately 33 employees who
provide marketing support to brokers and service large physician medical groups
and hospital accounts. 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,
educational seminars, advertisements in medical journals plus direct mail
solicitation to licensed physicians and members of physician medical 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 that provide visibility in
the healthcare community.
The Company maintains marketing offices in Addison, Texas, Boca Raton,
Florida and Phoenix, Arizona to support broker's marketing and sales activities
and service direct hospital insureds. The Company has one principal brokerage
relationship in California that accounts for the majority of hospitals insured
in that state.
Six 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, Brown & Brown, formerly 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. The
Company retains the right to market groups above this size threshold through
other brokers. This exclusive marketing arrangement is effective only in
designated states, initially Connecticut, Florida, Georgia and Louisiana. Since
then, Alabama, Kentucky, Oklahoma and Texas have been added to the Brown & Brown
marketing arrangement. Brown & Brown is one of the nation's top independent
insurance agency organizations, with an established physician medical
malpractice program offered to customers through a large select network of local
and regional brokers.
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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 that were formerly insured by the Company through its
relationship with a large insurance broker that encountered financial
difficulties, the Company has generally issued its policies utilizing schedules
of coverage, limits, rating factors and other pertinent information supplied to
the Company by the broker. The Company is now developing its own rating
experience with these insureds and is individually underwriting these policies.
Brown & Brown performs most of the underwriting functions with respect to
policies issued by the Company under its arrangement with Brown & Brown for
physician professional liability and other coverages. Brown & Brown has an
experienced, fully staffed underwriting department that has underwritten the
program for a number of years. The Company has coordinated with Brown & Brown
to provide assurance that the underwriting standards and their application are
consistent.
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 loss adjustment expense (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'
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liability are developed using historical data publicly filed by other insurers,
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 1999, the Company instituted annual overall rate increases
ranging from 3.7% 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 through 1998 and has improved its
underwriting results. In 1999, the Company experienced a small decrease in
earned premium volume as a result of its 3.7% rate increase. The Company has
instituted no rate increase for 2000. It appears that the Company's competitors
are also foregoing rate increases for the current year, and the current
competitive conditions will continue to persist.
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 periodically with the vice president in charge of claims
and other claims managers to consider and evaluate cases that have complex
medical issues and subject the Company to large exposures. At December 31, 1999,
the Company had 3,240 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 generally be settled without the consent of the physician
insured. California law further requires that the insurer report 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.
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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.
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,
----------------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Reserves for losses and LAE at beginning
of year...................................................................... $477,631 $454,971 $459,567
Less reinsurance recoverables................................................ 24,899 21,531 19,266
-------- -------- --------
Reserves for losses and LAE, net of related
reinsurance recoverable, at
beginning of year............................................................ 452,732 433,440 440,301
-------- -------- --------
Reserves from purchase of Fremont
Indemnity Company............................................................ -- 36,972 --
Provision for losses and LAE for claims
occurring in the current year, net of
reinsurance.................................................................. 183,959 197,870 176,586
Decrease in estimated losses and LAE for
claims occurring in prior years, net of
reinsurance.................................................................. (61,179) (65,662) (53,209)
-------- -------- --------
Incurred losses during the year, net of
reinsurance.................................................................. 122,780 132,208 123,377
-------- -------- --------
Deduct losses and LAE payments for
claims, net of reinsurance, occurring
during:
Current year............................................................... 13,742 14,408 11,814
Prior years................................................................ 156,913 135,480 118,424
-------- -------- --------
170,655 149,888 130,238
-------- -------- --------
Reserve for losses and LAE, net of
related reinsurance recoverable, at
end of year.................................................................. 404,857 452,732 433,440
Reinsurance recoverable for losses
and LAE, at end of year...................................................... 45,007 24,899 21,531
-------- -------- --------
Reserves for losses and LAE, gross
of reinsurance recoverable, at end
of year...................................................................... $449,864 $477,631 $454,971
======== ======== ========
</TABLE>
8
<PAGE>
In 1999, the Company experienced a number of large paid losses under its
physician and medical group policies that were in excess of the limits of
insurance retained by the Company. In addition, the Company established
significant reserves for such excess losses for certain claims reported under
its hospital policies. These payments and reserve increases resulted in the
significant increase in reinsurance recoverable at the end of 1999.
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.
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 1999 to be $100,000 was first reserved in 1989
at $150,000, the $50,000 redundancy (original estimate minus actual loss) would
be included in the cumulative redundancy in each of the years 1989 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,
----------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Loss and LAE
reserves............. $412,679 $427,049 $439,908 $465,423 $472,129 $449,566 $446,627 $ 440,301
Liability reestimated
as of:
One year later....... 375,764 401,878 409,966 421,994 411,915 391,733 386,879 387,094
Two years later...... 348,781 368,124 364,105 368,521 363,562 337,441 337,760 301,794
Three years later... 320,319 324,370 316,220 325,073 315,712 304,063 264,813 259,022
Four years later..... 294,992 284,628 282,291 292,801 293,711 254,004 236,609
Five years later..... 266,649 264,582 261,344 274,304 262,879 239,372
Six years later...... 256,900 251,335 252,077 257,864 254,502
Seven years later... 247,678 245,745 243,216 252,353
Eight years later ... 244,863 241,533 240,306
Nine years later..... 242,973 239,883
Ten years later...... 241,836
Cumulative
redundancy........... 170,843 187,166 199,602 213,070 217,627 210,194 210,018 181,280
Cumulative
amount of
liability paid
through:
One year later....... 85,771 103,983 101,001 105,678 121,106 109,481 101,844 118,307
Two years later...... 162,264 171,327 171,429 184,883 192,519 170,603 170,932 181,116
Three years later.... 204,129 206,499 205,829 219,649 217,484 202,660 195,265 207,141
Four years later..... 221,479 221,654 221,884 232,379 231,794 213,431 207,454
Five years later..... 228,922 230,606 227,692 237,879 237,272 221,409
Six years later...... 234,202 232,410 231,277 240,363 241,904
Seven years later.... 235,274 232,912 232,416 242,698
Eight years later.... 235,362 233,263 233,784
Nine years later..... 235,621 243,010
Ten years later...... 236,363
Net reserves--
December 31.......... $472,129 $449,566 $446,627 $ 440,301
Reinsurance
recoverables......... 18,644 19,177 19,560 19,266
-------- ------- -------- ----------
Gross reserves......... $490,773 $468,743 $466,187 $ 459,567
======== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Loss and LAE
reserves............. $433,440 $452,732 $404,857
Liability reestimated
as of:
One year later....... 339,672 391,553
Two years later...... 283,276
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........... 150,165 61,179
Cumulative
amount of
liability paid
through:
One year later....... 107,748 156,912
Two years later...... 179,016
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.......... $433,440 $452,732 $404,857
Reinsurance
recoverables......... 21,531 24,899 45,007
-------- -------- ---------
Gross reserves......... $454,971 $477,631 $449,864
======== ======== =========
</TABLE>
9
<PAGE>
The Company has historically experienced favorable loss and LAE reserve
development. The Company believes that the favorable loss and LAE reserve
development since 1989 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 1.9% 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 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 1999, the
Company ceded $13.9 million of its earned premiums to reinsurers.
The Company's reinsurance arrangements are generally placed through its
exclusive reinsurance broker, Guy Carpenter & Company, Inc. For 1999 and prior
years, the Company retained the first $1.0 million of losses incurred per
incident for its physician and medical group policies and had various
reinsurance treaties covering losses in excess of $1.0 million up to $20.0
million per incident for physician coverage. The reinsurers also were obligated
to bear their proportionate share of allocated loss adjustment expenses (ALAE).
For hospital coverage, the Company reinsured 90% of all losses incurred above a
$1.0 million retention, and the Company retained all LAE. For 2000, the Company
has consolidated these treaties into a program in which the Company retains the
first $2.0 million of losses and ALAE per incident and the reinsurers cover
losses in excess of this amount up to $50.0 million.
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'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 premiums. Through 1999, the Company also reinsured 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 Company has a separate quota share reinsurance treaty with respect to
its managed care organization errors and omissions policies and any directors
and officers' liability policies it may write. Under the most recent treaty, the
reinsurers bear 50% of all losses and ALAE 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, 1999. No other single reinsurer's percentage
participation in 1999 exceeded 5% of total reinsurance premiums.
10
<PAGE>
<TABLE>
<CAPTION>
PREMIUMS CEDED PERCENTAGE OF TOTAL
FOR YEAR ENDED REINSURANCE
DECEMBER 31, 1999 RATING(1) PREMIUMS
----------------- --------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Hannover Ruckversicherungs.............. $3,960 A+ 22%
Lloyd's of London Syndicates............ 6,589 A 36%
American Re............................. 2,073 A 11%
CNA International Reinsurance Co........ 1,101 A 6%
</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 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, and has small participations in other property
and casualty reinsurance syndicates. The Company has engaged in this assumed
reinsurance business for a number of years.
In August 1999, the Company formed a Ceded and Assumed Reinsurance Division
to materially expand its reinsurance operations. The strategic objective of this
division is to create a well-balanced portfolio of carefully underwritten
assumed reinsurance lines of insurance other than medical malpractice to add
diversity to the direct business of the Company. A primary source of business
will be placements from reinsurance brokers and intermediaries. The Company
expects that another source will be generated from strategic investments. In
November 1999, the Company purchased approximately 9.5% of the outstanding
common stock of GoshawK Insurance Holdings plc ("GoshawK"). GoshawK is a
publicly traded underwriter at Lloyd's of London. As part of this transaction,
the Company entered into a quota share reinsurance treaty effective January 1,
2000, under which the Company has assumed 7.5% of GoshawK's annual premium.
The general expansion of the Company into assumed reinsurance is in its
initial state. The Company cannot predict whether it will develop sufficient
opportunities in this line of business or whether this business will be
profitable.
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
for the portfolio of SCPIE Indemnity is Brown Brothers Harriman & Co., and the
investment manager for AHI and AHSIC is Conning & Co.
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.
11
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------- ---------------------------
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............................................ $141,274 $134,090 $237,290 $252,800
State, municipalities and
political subdivisions.............................. 253,741 247,384 348,161 355,402
Mortgage-backed securities,
U.S. Government..................................... 49,800 48,481 68,542 68,938
Corporate............................................ 126,886 118,618 44,881 44,959
Other................................................ 91 91 97 97
-------- -------- -------- --------
Total fixed maturity securities..................... 571,792 549,024 698,971 722,196
Common stocks............................................ 33,428 33,464 31,493 37,015
------- ------- -------- --------
Total..................................................... $605,220 $582,488 $730,464 $759,211
======== ======== ======== ========
</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.
The Company's portfolio of unaffiliated equity securities was $33.5 million at
December 31, 1999.
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, 1999:
<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)..................................................... $275,805 $265,603 48.4%
AA.............................................................. 208,676 199,349 36.3
A............................................................... 70,270 67,925 12.4
BBB............................................................. 9,763 9,020 1.6
Non rated(2).................................................... 7,278 7,127 1.3
-------- -------- -----
$571,792 $549,024 100.0%
======== ======== =====
</TABLE>
____________
(1) The ratings set forth above are based on the ratings, if any, assigned by
Standard & Poor's Corporation ("S&P"). If S&P's ratings were unavailable,
the equivalent ratings supplied by Moody's Investors Services, Inc. were
used.
(2) Includes a credit note received from a catastrophe reinsurance limited
liability company controlled by Hannover Re with an amortized cost and fair
value of $5.0 million. See "--Reinsurance."
12
<PAGE>
The following table sets forth certain information concerning the maturities
of fixed maturity securities in the Company's investment portfolio as of
December 31, 1999:
<TABLE>
<CAPTION>
AMORTIZED FAIR PERCENTAGE OF
COST VALUE FAIR VALUE
--------- -------- -------------
(IN THOUSANDS)
Years to maturity:
<S> <C> <C> <C>
One or less................................................... $ 2,731 $ 2,735 .4%
After one through five........................................ 90,491 89,289 16.3
After five through ten........................................ 192,626 182,712 33.1
After ten..................................................... 236,144 225,447 41.1
Mortgage-backed securities...................................... 49,800 48,841 9.1
-------- -------- -----
Totals................................................ $571,792 $549,024 100.0%
======== ======== =====
</TABLE>
The average weighted maturity of the securities in the Company's fixed
maturity portfolio as of December 31, 1999 was 5.98 years. The average duration
of the Company's fixed maturity portfolio as of December 31, 1999 was 5.1 years.
The Company also maintains cash and highly liquid short-term investments,
which at December 31, 1999 totaled $72.9 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,
----------------------------------------
1999 1998 1997
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
FIXED MATURITY SECURITIES:
Average invested assets (includes short-
term cash investments)(1)......................... $689,036 $739,734 $718,239
Net investment income:
Before income taxes............................... 36,771 39,654 39,926
After income taxes................................ 28,557 30,733 30,731
Average annual return on investments:
Before income taxes............................... 5.34% 5.36% 5.56%
After income taxes................................ 4.14% 4.15% 4.28%
Net realized investment gains (losses) after
income tax........................................ $ (255) $ 5,804 $ 1,909
EQUITY SECURITIES:
Average invested assets(2).......................... $ 35,239 $ 30,269 $ 21,750
Net investment income:
Before income taxes............................... 927 713 840
After income taxes................................ 742 564 777
Average annual return on investments:
Before income taxes............................... 2.63% 2.36% 3.86%
After income taxes................................ 2.11% 1.86% 3.57%
Net realized investment gains after
income tax........................................ $ 63 $ 1,430 $ 2,382
</TABLE>
____________
(1) Fixed maturity securities at cost.
(2) Equities at market.
13
<PAGE>
COMPETITION
The physician professional liability insurance market in California is
highly competitive. The Company competes principally with three physician-owned
mutual or reciprocal insurance companies, Norcal Mutual Insurance Company, The
Doctors' Company and Medical Insurance Exchange of California, with several
commercial insurers, including CNA Insurance Companies, and also with a
physicians' mutual protection trust. The physician-owned insurance companies
were organized at approximately the same time as the Company and all of these
companies have expanded their operations in California. Each of these companies
is actively engaged in soliciting insureds in Southern California, the Company's
primary area of operations, and each has offered assessments or premiums at very
competitive rates during the past few years. The Company believes that the
principal competitive factors, in addition to pricing, include dividend policy,
financial stability, breadth and flexibility of coverage and the quality and
level of services provided. In addition, commercial insurance companies such as
Farmers Group, Inc. and MMI Companies, Inc. (MMI) now actively compete for
larger medical groups in the California market, and companies endorsed by
specialty medical societies are also entering the market. St. Paul Companies,
Inc., the largest national medical professional liability insurance company, has
agreed to acquire MMI and may become a more active competitor in the California
market for physicians and medical groups.
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,
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 Brown &
Brown, and by offering superior policyholder services. The Company also intends
to expand its business through business combinations with medical professional
liability insurers. 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.
14
<PAGE>
Holding Company Regulation. SCPIE Holdings is subject to the California
Insurance Holding Company System Regulatory Act (the "Holding Company Act"). The
Holding Company Act requires the Company periodically to file information with
the California Department and other state regulatory authorities, including
information relating to its capital structure, ownership, financial condition
and general business operations. Certain transactions between an insurance
company and its affiliates of an "extraordinary" type may not be effected if the
California Commissioner disapproves the transaction within 30 days after notice.
Such transactions include, but are not limited to, certain reinsurance
transactions and sales, purchases, exchanges, loans and extensions of credit and
investments, in the net aggregate, involving more than the lesser of 3% of the
insurer's admitted assets or 25% of surplus as to policyholders, as of the
preceding December 31.
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 is also 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.
On August 31, 1999, the California Insurance Commissioner approved a special
dividend of $80.0 million from SCPIE Indemnity Company to SCPIE Holdings, which
was distributed on November 9, 1999. The proceeds from this dividend were used
by the Company to purchase 2,023,973 shares of its common stock at $35 per share
through a procedure referred to as a "Dutch Auction." Including the special
dividend, total dividends of $106.0 million were paid to SCPIE Holdings in
1999. Because of the large amount of these dividends paid to SCPIE Holdings on
November 9, 1999, additional dividends in 2000 in any material amount
effectively may not be paid to SCPIE Holdings, without regulatory approval,
until 12 months after that date. The Company believes that SCPIE Holdings has
sufficient liquid assets and other resources of cash that no dividends will be
required until after November 9, 2000.
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, 1999,
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
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<PAGE>
exceeding regulatory limitations to be treated as nonadmitted assets for
purposes of measuring statutory surplus and, in some instances, would require
divestiture of such non-qualifying investments over specified time periods
unless otherwise permitted by the state insurance authority under certain
conditions.
Prior Approval of Rates and Policies. Pursuant to the California Insurance
Code, the Company must submit rating plans, rates, policies and endorsements to
the Insurance Commissioner for prior approval. The possibility exists that the
Company may be unable to implement desired rates, policies, endorsements, forms
or manuals if the Insurance Commissioner does not approve such items. In the
past, all of the Company's rate applications have been approved in the normal
course of review. AHI is 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. AHSIC is required in many states to
obtain approval to issue policies as a non-admitted excess and surplus lines
insurer, but it is typically not required to obtain rate approvals.
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. Many legislative changes to MICRA have been introduced since
that time, but neither the proponents nor opponents have been able to enact
significant changes. 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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EMPLOYEES
As of December 31, 1999, the Company employed 239 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 13, 2000 are
as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---------------- ------ -----------------------------------------
<S> <C> <C>
Donald J. Zuk 63 President, Chief Executive Officer and
Director
Patrick S. Grant 57 Senior Vice President, Marketing
Joseph P. Henkes 50 Secretary and Senior Vice President,
Operations and Actuarial Services
Patrick T. Lo 47 Senior Vice President and Chief Financial
Officer
Timothy C. Rivers 51 Senior Vice President, Ceded and Assumed
Reinsurance
</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. Mr. Zuk is a director of BCSI Holdings
Inc. and Homeowners Holding Company, both privately held insurance companies.
Patrick S. Grant has been with SCPIE since 1990 serving initially as Vice
President, Marketing. He was named Senior Vice President, Marketing in 1992.
Prior to that time, he spent almost 20 years with the insurance brokerage firm
of Johnson & Higgins. His last position there was Vice President, Professional
Liability. Mr. Grant has worked on the Company operations since 1976.
Joseph P. Henkes has been with the Company since 1990 serving initially as
Vice President, Operations and Actuarial Services. He was named Senior Vice
President, Operations and Actuarial Services in 1992. Prior to that time he
spent almost five years with Johnson & Higgins, where his services were devoted
primarily to the Company. He has been an Associate of the Casualty Actuarial
Society since 1975 and a member of the American Academy of Actuaries since 1980.
Patrick T. Lo has been Senior Vice President since 1999 and Chief Financial
Officer of the Company since 1993. From 1990 to 1993 he served as Vice President
and Controller of the Company. Prior to that time, he spent nine years as
Assistant Controller, Assistant Vice President and Vice President at The
Doctors' Company, a California medical malpractice insurance company.
Timothy C. Rivers has been with SCPIE since August 1999. Prior to that time,
he spent 17 years with Guy Carpenter & Company, a reinsurance brokerage
subsidiary of Marsh McLennan, and a predecessor business, Willcox & Company. Mr.
Rivers has worked on the Company operations since 1985.
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 direct premiums written are generated
from medical malpractice insurance policies issued to physicians and medical
groups and other providers in the healthcare industry. 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.
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Most 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"
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
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 1999, 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 through 1998 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 competitive environment could 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 competes 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
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<PAGE>
emergence of new, larger medical groups that do not have an established claims
history and additional claims resulting from restrictions on treatment by
managed care organizations, may require the Company to adjust its underwriting
and reserving practices. See "-- Changes in Healthcare." While the Company
believes that its reserves for losses and LAE are adequate, there can be no
assurance that the Company's ultimate losses and LAE will not deviate, perhaps
substantially, from the estimates reflected in the Company's financial
statements. If the Company's reserves should prove inadequate, the Company will
be required to increase reserves, which could have a material adverse effect on
the Company's financial condition or results of operations.
The Company believes it has been conservative in establishing loss and LAE
reserves. In recent years, the Company has revised estimates of loss severity
and determined that certain of its reserves were redundant. Redundant reserves,
which have been released in every year since 1985, contributed significantly to
reported earnings in 1999, 1998 and 1997. The Company reduced reserves for prior
years by $61.2 million, $93.8 million and $53.2 million in the years ending
December 31, 1999, 1998 and 1997, 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 Company cannot predict whether similar redundancies will be
experienced in future years. The Company continues to establish its loss and LAE
reserves at what it believes is the upper end of a reasonable range of reserve
estimates, but there is no assurance that such reserves will ultimately prove to
be redundant. If reserves ultimately prove redundant, then the redundant amount
will become income in the period such amount is released from reserves and will
be included in stockholders' equity. During 1999, the Company experienced some
reduction in the amount of the redundancy and believes additional reductions are
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. 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, increased tort liabilities
for managed care organizations 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.
Geographic expansion has been accomplished principally through an
arrangement with Brown & Brown, Inc. ("Brown & Brown"), one of the nation's top
independent insurance agency organizations. American Healthcare Indemnity
Company ("AHI"), a subsidiary of SCPIE Holdings, entered into an agreement with
Brown & Brown to market professional liability insurance to physicians and small
medical groups in selected states commencing January 1, 1998. The program now
has been expanded to encompass eight states, the largest in terms of premium
volume being Connecticut, Florida and Georgia. Continued expansion of this
relationship with Brown &
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<PAGE>
Brown is an important element of the Company's strategy for diversification into
states outside California. AHI has also expanded its operations outside
California through sales of professional liability policies to physicians who do
not meet the normal underwriting criteria of the Company. These policies are
sold through various brokers typically at a higher premium. The broker
relationships were developed from the medical malpractice insurance businesses
AHI acquired from Fremont and a small midwestern insurance company in 1998 and
1999, respectively. In 1999, the Company derived approximately 20% of its
physician and medical group premium volume from policies issued outside the
state of California. This expansion is in its initial stages. There is no
assurance, however, that the Company will successfully retain or continue to
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 relied on its relationship with physicians and medical associations
in marketing its policies in competition with commercial insurance companies and
other physician-owned companies. The Company will endeavor to maintain its
medical association endorsements and to continue its close relationship with
physicians and medical groups through personalized service. There can be no
assurance that the Company will be able to maintain these relationships. In the
last two years, four county medical associations terminated these endorsements.
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 on reasonable terms, there can be no assurance that this
will be the case. In 1999, the Company experienced a number of large paid losses
under its physician and medical group policies that were in excess of the limits
of insurance retained by the Company and thus were borne by the reinsurers. In
addition, the Company established significant reserves for such excess losses on
certain claims reported under its hospital policies in 1999.
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."
The Company for some years has assumed a small amount of reinsurance
covering medical and professional liability risks and other property and
casualty risks. In August 1999, the Company formed a separate division to
materially expand its assumed reinsurance operations. This general expansion of
the Company into assumed reinsurance is in its initial stage. The Company cannot
predict whether it will develop sufficient opportunities in this line of
business or whether this business will be profitable.
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<PAGE>
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), 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
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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).
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 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 Delaware court case, the Board of Directors adopted 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."
ITEM 2. PROPERTIES
The Company is the owner of two office buildings, that were previously
occupied by the Company's headquarters, both located in Beverly Hills,
California. 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.
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
in March 1999. The Company intends to lease its former headquarters entirely to
third parties. The Company expended $5.2 million for leasehold improvements
through 1999.
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 that
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 case was
remanded to the California Superior Court in which the judgment was
23
<PAGE>
originally entered. The Company has filed a motion in the Superior Court for
entry of judgment in its favor, which the bankruptcy estate opposed. The trial
judge ruled in favor of the Company, and judgment for the Company was entered on
September 29, 1999. The bankruptcy estate has filed a notice of appeal of this
ruling with the district court of appeal. 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 1999.
24
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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's Common Stock is publicly traded on the NYSE under the symbol
"SKP." The following table shows the price ranges per share in each quarter
during the last two years:
<TABLE>
<CAPTION>
High Low
1998
----
<S> <C> <C>
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 30.13 25.75
Second quarter 32.63 23.88
Third quarter 32.81 28.69
Fourth quarter 36.06 31.50
2000
----
First quarter (January 1 - March 13) 36.67 27.50
</TABLE>
On March 13, 2000, the closing price of the Company's common stock was $29.94.
STOCKHOLDERS OF RECORD
The approximate number of stockholders of record of the Company's Common Stock
as of March 13, 2000 was 6,368.
DIVIDENDS
The SCPIE Holdings' Board of Directors (the "Board") paid cash dividends on
its common stock of $.24 per share in 1998 and $0.32 per share in 1999. On
February 15, 2000, the Board declared a $0.10 quarterly dividend payable on
March 31, 1999, to stockholders of record on March 15, 2000. 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 2000 up to approximately $30.6 million. See Note 6 of
the Notes to Consolidated Financial Statements and "Business - Regulation --
Regulation of Dividends from Insurance Subsidiaries."
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except per share data)
-------------------------------------
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995
- ---------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1):
Net premiums written $153,896 $156,323 $130,642 $126,318 $114,513
======== ======== ======== ======== ========
Premiums earned $153,192 $157,976 $133,866 $120,484 $116,354
Net investment income 37,697 40,367 42,716 40,769 40,424
Realized investment gains
and other revenue 398 11,618 7,153 12,113 8,231
-------- -------- -------- -------- --------
Total revenues 191,287 209,961 183,735 173,366 165,009
-------- -------- -------- -------- --------
Losses and loss adjustment
expenses 122,780 132,208 123,377 108,797 118,023
Other operating expenses 29,310 28,211 17,987 14,276 12,561
-------- -------- -------- -------- --------
Total expenses 152,090 160,419 141,364 123,073 130,584
-------- -------- -------- -------- --------
Income before policyholder
dividends and
federal income taxes 39,197 49,542 42,371 50,293 34,425
Policyholder dividends(2) -- -- -- 8,436 --
Federal income taxes 9,295 12,566 10,195 11,665 10,056
-------- -------- -------- -------- --------
Net income $ 29,902 $ 36,976 $ 32,176 $ 30,192 $ 24,369
======== ======== ======== ======== ========
BALANCE SHEET DATA(1):
Total investments $655,391 $793,616 $785,664 $717,910 $695,021
Total assets 813,192 921,469 888,449 805,155 781,358
Total liabilities 518,492 534,951 527,334 516,588 507,539
Total stockholders' equity 294,700 386,518 361,115 288,567 273,819
ADDITIONAL DATA(1):
Basic earnings per share of common stock(3) $ 2.63 $ 3.06 $ 2.66 $ 3.02 $ 2.44
Diluted earnings per share of common stock(3) 2.62 3.06 -- -- --
Dividends per share of common stock 0.32 0.24 0.20 -- --
Book value per share 30.98 32.54 29.41 28.86 27.38
GAAP ratios:
Loss ratio 80.2% 83.7% 92.2% 90.3% 101.4%
Expense ratio 19.1% 17.9 13.4 11.8 10.8
Combined ratio 99.3% 101.6 105.6 102.1 112.2
Statutory capital and surplus $265,459 $343,330 $321,289 $251,958 $235,352
</TABLE>
(1) Financial data as of and for the year ended December 31, 1995 are derived
from the combined financial statements of the company's predecessor,
Southern California Physicians Insurance Exchange (the Exchange), and an
affiliated non-profit corporation that was liquidated into the Exchange on
July 12, 1996. Financial data as of and for the year ended December 31, 1996
are derived from the consolidated financial statements of the Exchange and
its subsidiaries. Financial data as of and for the years ended December 31,
1997, 1998 and 1999 are derived from the financial statements of SCPIE
Holdings Inc. (SCPIE Holdings) and its 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, 1999 and 1998 are
computed using the weighted average number of common shares outstanding
during the year of 11,383,592 and 12,074,272, respectively. All other
periods give effect to the merger of the Exchange into a subsidiary of SCPIE
Holdings completed on January 29, 1997, including the allocation of
approximately 10,000,000 shares of common stock to members of the Exchange
in connection therewith. Diluted earnings per share of common stock at
December 31, 1999 and 1998 are computed using the weighted average number
of common shares outstanding during the year of 11,403,081 and 12,089,013,
respectively. For further discussion of basic earnings per share and
diluted earnings per share, see the notes to consolidated financial
statements beginning on page 47.
26
<PAGE>
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 include the accounts and
operations of SCPIE Holdings Inc. (SCPIE Holdings or the Company) and its wholly
owned subsidiaries.
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 periodic filings with the Securities and Exchange Commission.
CYCLICAL NATURE OF MEDICAL MALPRACTICE INSURANCE INDUSTRY
Many factors influence the financial results of the medical malpractice
insurance industry, several of which are beyond the control of the Company.
These factors include, among other things, changes in severity and frequency of
claims; changes in applicable law and regulatory reform; changes in judicial
attitudes toward liability claims; and changes in inflation, interest rates and
general economic conditions.
The availability of medical malpractice insurance, or the industry's
underwriting capacity, is determined principally by the industry's level of
capitalization, historical underwriting results, returns on investment and
perceived premium rate adequacy. Historically, the financial performance of the
medical malpractice industry has tended to fluctuate between a soft insurance
market and a hard insurance market. In a soft insurance market, competitive
conditions could result in premium rates and underwriting terms and conditions
that may be below profitable levels. For a number of years, the medical
malpractice insurance industry in California has faced a soft insurance market.
There can be no assurance as to whether or when industry conditions will improve
or the extent to which any improvement in industry conditions may improve the
Company's financial condition and results of operations.
CHANGING NATURE OF THE BUSINESS
The vast majority of the Company's business is professional liability
insurance for physicians and medical groups in California. In recent years, the
Company has followed a strategy for growth, which includes diversifying
geographically into states other than California and by expanding the insurance
products offered by the Company.
Brown & Brown Relationship. Geographic expansion has been accomplished
--------------------------
principally through an arrangement with Brown & Brown, Inc. ("Brown & Brown"),
one of the nation's top independent insurance agency organizations. American
Healthcare Indemnity Company ("AHI"), a subsidiary of SCPIE Holdings, entered
into an agreement with Brown & Brown to market professional liability insurance
to physicians and small medical groups in selected states commencing January 1,
1998. The program now has been expanded to encompass eight states, the largest
in terms of premium volume being Connecticut, Florida and Georgia. Continued
expansion of this relationship with Brown & Brown is an important element of the
Company's strategy for diversification into states outside California. AHI has
also expanded its operations outside California through sales of professional
liability policies to physicians who do not meet the normal underwriting
criteria of the Company. These policies are sold through various brokers
typically at a higher premium. The broker relationships were developed from the
medical malpractice insurance businesses AHI acquired from Fremont Indemnity
Company (Fremont) and a small midwestern insurance company in 1998 and 1999,
respectively. In 1999, the Company derived approximately 20% of its physician
and medical group premium volume from policies issued outside the state of
California. This expansion is in its initial stages. There is no assurance,
however, that the Company will successfully retain or continue to expand this
business or that it will ultimately be profitable.
Hospital Policies. The Company initially expanded its insurance products in
-----------------
1994 by offering professional liability insurance to hospitals in California.
The Company greatly extended its presence in the hospital market in late 1996
through a marketing agreement with a leading healthcare insurance broker. Under
this arrangement, the broker placed a coverage with the Company for
approximately 75 hospitals, healthcare providers and other organizations in
seven states. The broker encountered financial difficulties, and the Company now
underwrites its business through a regional broker headquartered in California
and through various brokers in other states. The Company has been unable to
expand its hospital business because of the severe competitive conditions in
this market, and
27
<PAGE>
the loss experience is unfavorable. The Company has recently adopted more
stringent underwriting procedures and guidelines for its hospital policies. The
Company expects little or no improvement in this market, as long as the current
conditions exist.
Other Insurance Products. The Company offers a variety of other insurance
------------------------
products to complement its professional liability insurance policies, including
principally directors and officers liability insurance and managed care errors
and omissions policies to medical groups and hospitals. In late 1999, the
Company began offering a newly designed product that provides physicians and
medical groups with protection for defense expenses and certain liabilities
related to governmental investigations into billing errors and omissions to
Medicare (and other governmentally subsidized) patients. Premium volume for all
of these products has been small, but the Company considers these products
important to its expansion plans.
Dentists and Oral Surgeons. The Company has written professional liability
--------------------------
insurance for oral surgeons in California for a number of years. Beginning in
2000, the Company will expand its relationship with Brown & Brown to include
professional liability coverage for dentists in California and Texas and for
oral surgeons nationally. These programs had been underwritten by another
insurance company and marketed by Brown & Brown previously. The Company will
initially reinsure the policies issued and renewed by the other insurance
company, and will issue its own dentist policies as soon as regulatory approvals
are obtained.
Assumed Reinsurance. The Company has written a modest portfolio of assumed
-------------------
reinsurance business for a number of years, which has been profitable. The
Company formed a Ceded and Assumed Reinsurance Division in the third quarter of
1999 to materially expand its reinsurance operations. The strategic objective of
this division is to create a well-balanced portfolio of carefully underwritten
assumed reinsurance lines of insurance other than medical malpractice to add
diversity to the direct business of the company. A primary source of business
will be placements from reinsurance brokers and intermediaries. Another source
will be generated from strategic investments, such as the Company's purchase of
approximately 9.5% of the outstanding common stock of GoshawK Insurance Holdings
plc ("GoshawK") during the fourth quarter of 1999. GoshawK is a publicly held
underwriter at Lloyd's of London. As part of this transaction, the Company
entered into a quota share reinsurance treaty effective January 1, 2000, under
which the Company will assume 7.5% of GoshawK's annual premium. This general
expansion into assumed reinsurance is in its initial stages. There is no
assurance that the Company will be successful in attracting appropriate
reinsurance opportunities or that this business will be profitable.
COMPETITIVE ENVIRONMENT
The California medical malpractice insurance market for medical groups and
physicians, in which the Company principally operates, has been extremely
competitive for a number of 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
significant reduction in premium volume and a deterioration of underwriting
results. Between 1993 and 1999, however, the Company instituted annual overall
rate increases ranging from 3.7% 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 through 1998 and has
improved its underwriting results. In 1999, the Company actually experienced a
small decrease in premium volume as a result of its 3.7% rate increase. The
Company has instituted no rate increase for 2000. It appears that the Company's
competitors are also foregoing rate increases for the current year, and the
current competitive conditions will continue to persist.
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
28
<PAGE>
particularly difficult to make such estimates for medical malpractice claims in
California because of the uncertain benefits of tort reform measures and more
recently a change in the judicial process.
The Company believes that a combination of these and other factors have
contributed to the recent redundancies in reserves established 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 $61.2 million, $93.8 million, and
$53.2 million in the years ended December 31, 1999, 1998 and 1997, respectively.
The 1998 redundancies 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 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 at the upper end of a
reasonable range of reserve estimates, but there is no assurance that such
reserves will ultimately prove to be redundant. During 1999 the Company
experienced some reduction in the amount of the redundancy and believes
additional reductions are 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.
During 1999, the Company experienced a number of paid losses under its
physician and medical group policies that were in excess of the limits of
insurance retained by the Company and thus borne by its reinsurers. In addition,
the Company established significant reserves for such excess losses for certain
claims reported under its hospital policies. The Company has experienced a
similar period in the past in which a number of excess losses were incurred in a
relatively short period of time. However, if such excess losses continue, the
Company may encounter difficulty in obtaining reinsurance on reasonable terms.
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 Brown & 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.
INVESTMENTS
The value of the fixed-maturity portfolio is subject to interest rate risk.
Interest rates have risen substantially since December 31, 1998, resulting in a
decline in the value of five-year treasury bonds and adversely affecting the
carrying value of the Company's fixed maturity portfolio. At December 31, 1998
the Company's fixed maturities were valued at $23.2 million in excess of
amortized cost. At December 31, 1999, the value of the portfolio had declined to
$22.8 million below amortized cost. If these securities were sold at their
current carrying values, the Company would record a realized loss on the sale.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998
PREMIUMS EARNED Premiums earned decreased approximately $4.8 million, or 3.0%,
to $153.2 million in 1999 from $158.0 million in 1998. Medical Malpractice
premiums from physicians and medical groups decreased to approximately $133.0
million in 1999 from $143.2 million in 1998. Of this decrease, approximately
$4.5 million was attributable to additional ceded premiums under the Company's
reinsurance treaties to reflect premium adjustments and additional premiums
resulting from some significant excess losses borne by the reinsurers in 1999.
The decrease in premiums was also attributable to the loss of physician insureds
during the second and third quarters of 1999 in medical specialties that
experienced 1999 rate increases. Hospital medical malpractice premiums were
approximately $9.2 million in 1999 compared to $8.8 million in 1998. Assumed
reinsurance premiums, other than those received in the Fremont and Brown & Brown
arrangements, were approximately $6.8 million in 1999 compared to $5.5 million
in 1998. Other healthcare provider-related liability premiums totaled $4.0
million in 1999 compared to $0.9 million in 1998.
NET INVESTMENT INCOME Net investment income decreased approximately $2.7
million, or 6.7%, to $37.7 million in 1999 from $40.4 million in 1998. Invested
assets decreased $138.2 million to $655.4 million at December 31, 1999, from
$793.6 million at December 31, 1998, due principally to the sale of securities
to fund the Company's repurchase of approximately 2.0 million shares of
29
<PAGE>
its Common Stock from its public stockholders in November 1999. The investment
portfolio also contained a larger percentage of higher-yielding bonds during
1999 than in 1998.
REALIZED INVESTMENT GAINS (LOSSES) Realized investment losses were approximately
$0.3 million in 1999 compared to realized gains of $11.1 million in 1998.
Through the nine months ended September 30, 1999, the Company had net realized
gains of $5.3 million. The Company recorded a realized loss in the 1999 fourth
quarter related to the sale of securities to fund the repurchase of its common
stock and to reposition the Company's investment portfolio.
LOSSES AND LAE Losses and LAE decreased to $122.8 million in 1999 from $132.2
million in 1998. As a percentage of premiums earned, losses and LAE decreased to
80.2% in 1999 from 83.7% for the same period in 1998. For 1999, the Company
reduced loss and LAE reserves incurred in prior policy years approximately $61.2
million as compared to a reserve reduction of $93.8 million for 1998 for claims
incurred in prior policy years.
OTHER OPERATING EXPENSES Other operating expenses increased $1.1 million, or
3.9%, to $29.3 million in 1999 from $28.2 million in 1998. The ratio of other
operating expenses to premiums earned is referred to as the expense ratio, which
increased to 19.1% in 1999 from 17.9% in 1998. This increase reflected a
decrease in premiums earned and higher commission expenses associated with the
greater proportion of broker-produced premiums in 1999 compared to 1998.
FEDERAL INCOME TAXES Federal income taxes decreased $3.3 million, or 26.2%, to
$9.3 million in 1999 from $12.6 million in 1998. The effective tax rate
decreased to 23.7% in 1999 from 25.4% in 1998, due primarily to lower realized
gains in 1999.
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
compared to $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 Brown & Brown,
Inc., 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 interim premiums relating to the Fremont and Brown & 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 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.
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% in 1998 from 13.4% in 1997. This increase is due primarily to
certain one-time charges and the amortization of nonrecurring 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.
30
<PAGE>
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.
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.
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 period to period. During 1999, the Company had negative cash
flow from operations of $9.9 million compared to a positive cash flow of $9.2
million in 1998. The negative cash flow during 1999 was due to unusually high
payments of losses during the second and third quarters of 1999. During that
period, the Company experienced a number of settlements and judgments in
physician medical malpractice insurance claims (and in one hospital malpractice
claim) that were at or near the policy limits involved.
The Company invests its 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 had a fair value of $33.5 million at December 31,
1999. The Company plans to continue this focus on fixed-maturity securities for
the indefinite future.
The Company has made limited investments in real estate, which 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 entirely to third parties. The Company expended
$5.2 million for leasehold improvements through December 31,1999.
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 $72.9
million, or 11.1% of invested assets, at December 31, 1999. The Company believes
that all of its short-term and fixed-maturity securities are readily marketable.
SCPIE Holdings is an insurance holding company whose assets primarily consist
of all of the capital stock of its insurance company subsidiaries. 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 12-month period, 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 2000 without prior regulatory approval is approximately $30.6
million.
On August 31, 1999, the California Insurance Commissioner approved a special
dividend of $80.0 million from SCPIE Indemnity Company to SCPIE Holdings, which
was distributed on November 9, 1999. The proceeds from this dividend were used
by the Company to purchase 2,023,973 shares of its common stock at $35 per share
through a procedure referred to as a "Dutch Auction." Including the special
dividend, total dividends of $106.0 million were paid to SCPIE Holdings in 1999.
Because of the large amount of these dividends paid to SCPIE Holdings on
November 9, 1999, additional dividends in 2000 in any material amount
effectively may not be paid to SCPIE Holdings, without regulatory approval,
until 12 months after that date. The Company believes that SCPIE Holdings has
sufficient liquid assets and other resources of cash that no dividends will be
required until after November 9, 2000.
Common stock dividends paid to stockholders were $0.32 per share in 1999.
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.
31
<PAGE>
On May 25, 1999, the company entered into a credit agreement with the Union
Bank of California, N. A., First Union Bank and Dresdner Bank AG, as lenders.
Under the Credit Agreement, the company may borrow up to $75.0 million from time
to time, subject to certain conditions. The proceeds from the Credit Agreement
may be used by the company for general corporate purposes and certain other
permitted uses. As of December 31, 1999, borrowings under the Credit Agreement
totaled $13.0 million.
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 1999, the Board of Directors authorized the repurchase of up to
1,000,000 shares of its common stock on the open market. This authorization
replaced the company's prior program that expired in May 1999. Since 1997,
900,100 shares were repurchased under these programs.
MARKET RISK DISCLOSURES FOR FINANCIAL INSTRUMENTS
The investment portfolio of 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, 1999, comprised 84% of total investments at market value. U.S.
government and tax-exempt bonds represent 70% 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 11% of the
investment portfolio consists of highly liquid 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.
The first two columns of the following table show the financial statement
carrying values and related estimated fair values of the fixed-maturity
securities and equity investments held by the Company at December 31, 1999 and
1998, respectively. 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 prices (sensitivity analysis). This sensitivity analysis is
required by the Securities and Exchange Commission rules issued in 1997.
<TABLE>
<CAPTION>
Estimated Fair Vale
Estimated Fair Vale At Adjusted
at Current Market Market Rates/Prices
(In Thousands) Carrying Value Rates/Prices as Indicated Below
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1999
- -----------------
Interest rate risk*
Fixed-maturity securities
available for sale $549,024 $549,024 $520,859
Equity price risk**
Common stocks $ 33,464 $ 33,464 $ 30,118
December 31, 1998
- -----------------
</TABLE>
32
<PAGE>
<TABLE>
<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
**Adjusted equity prices assume a 10% decline in market values
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 (e.g.
mortgages underlying mortgage-backed securities).
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.
YEAR 2000
The Year 2000 issue is the result of many computer programs being written
using two digits rather than four digits to define the applicable year. To date,
all of the Company's systems have continued to operate without any disruption
related to the Year 2000. Year 2000 costs incurred were $101,000, $1,018,000 and
$734,000 in 1999, 1998 and 1997, respectively, for a total of $1,853,000. The
Company does not expect to incur any further Year 2000 related costs.
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
rate-making process adequately incorporate the effects of inflation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and related notes, including
supplementary data, are set forth in the "Index" on page 41 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
33
<PAGE>
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 11, 2000 (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."
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."
34
<PAGE>
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 41 of this
Form 10-K report.
(a) (3) Exhibits:
<TABLE>
<CAPTION>
NUMBER DOCUMENT
------ --------
<C> <S>
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. (filed
with the Company's Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
3.1 Amended and Restated Certificate of Incorporation. (filed with the Company's Registration Statement on Form S-1
(No. 33-4450) and incorporated herein by reference).
3.2 Amended and Restated Bylaws. (filed with the Company's Quarterly Report on Form 10-Q on August 16, 1999 and
incorporated herein by reference).
10.1 Amended and Restated Employment Agreement dated January 3, 2000, 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. (filed with the Company's Annual Report on Form 10-K
on March 31, 1998 and incorporated herein by reference).
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. (filed with the Company's Annual Report on Form 10-K
on March 31, 1998 and incorporated herein by reference).
10.6 First Excess of Loss Treaty No. 01-95-0020 with various subscribing reinsurers. (filed with the Company's
Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
10.7 Second Excess of Loss Treaty No. 01-95-0021 with various subscribing reinsurers. (filed with the Company's
Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
10.8 Third Excess of Loss Treaty No. 01-95-0022 with various subscribing reinsurers. (filed with the Company's
Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
10.9 Fourth Excess of Loss Treaty No. 01-95-0599 with various subscribing reinsurers. (filed with the Company's
Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
10.10 Per Policy Excess of Loss Treaty No. 01-94-0365 with various subscribing reinsurers. (filed with the Company's
Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
10.11 Reinstatement/Retroactive/Aggregate Extension Excess of Loss Treaty No. 01-95-0879 with various subscribing
reinsurers. (filed with the Company's Registration Statement on Form S-1 (No. 33-4450) and incorporated herein
by reference).
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. (filed with the Company's Registration Statement on Form S-1 (No. 33-4450) and incorporated
herein by reference).
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. (filed with the
Company's Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
10.14 First Excess of Loss Treaty No. 01-96-0020 with various subscribing reinsurers. (filed with the Company's
Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
10.15 Second Excess of Loss Treaty No. 01-96-0021 with various subscribing reinsurers. (filed with the Company's
Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
</TABLE>
35
<PAGE>
<TABLE>
NUMBER DOCUMENT
------ --------
<C> <S>
10.16 Third Excess of Loss Treaty No. 01-96-0022 with various subscribing reinsurers. (filed with the Company's
Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
10.17 Fourth Excess of Loss Treaty No. 01-96-0599 with various subscribing reinsurers. (filed with the Company's
Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
10.18 Per Policy Excess of Loss Treaty No. 01-96-0365 with various subscribing reinsurers. (filed with the Company's
Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
10.19 Addendum No. 1 to the Reinstatement/Retroactive/Aggregate Extension Excess of Loss Treaty No. 01-96-0879 with
various subscribing reinsurers. (filed with the Company's Registration Statement on Form S-1 (No. 33-4450) and
incorporated herein by reference).
10.20 Quota Share Reinsurance Agreement Treaty No. 01-96-0922. (filed with the Company's Registration Statement on
Form S-1 (No. 33-4450) and incorporated herein by reference).
10.21 First Excess of Loss Treaty No. 01-97-0020 with various subscribing reinsurers. (filed with the Company's
Annual Report on Form 10-K on March 31, 1998 and incorporated herein by reference).
10.22 Second Excess of Loss Treaty No. 01-97-0021 with various subscribing reinsurers. (filed with the Company's
Annual Report on Form 10-K on March 31, 1998 and incorporated herein by reference).
10.23 Third Excess of Loss Treaty No. 01-97-0022 with various subscribing reinsurers. (filed with the Company's
Annual Report on Form 10-K on March 31, 1998 and incorporated herein by reference).
10.24 Fourth Excess of Loss Treaty No. 01-97-0599 with various subscribing reinsurers. (filed with the Company's
Annual Report on Form 10-K on March 31, 1998 and incorporated herein by reference).
10.25 Per Policy Excess of Loss Treaty No. 01-97-0365 with various subscribing reinsurers. (filed with the Company's
Annual Report on Form 10-K on March 31, 1998 and incorporated herein by reference).
10.26 Addendum No. 2 to the Reinstatement/Retroactive/Aggregate Extension Excess of Loss Treaty No. 01-97-0879 with
various subscribing reinsurers. (filed with the Company's Annual Report on Form 10-K on March 31, 1998 and
incorporated herein by reference).
10.27 Quota Share Reinsurance Treaty No. 1-97-0922. (filed with the Company's Annual Report on Form 10-K on March 31,
1998 and incorporated herein by reference).
10.29 First Excess of Loss Reinsurance Treaty No. 01-97-1134 with various subscribing reinsurers. (filed with the
Company's Annual Report on Form 10-K on March 31, 1999 and incorporated herein by reference).
10.30 Second Excess of Loss Reinsurance Treaty No. 01-97-1135 with various subscribing reinsurers. (filed with the
Company's Annual Report on Form 10-K on March 31, 1999 and incorporated herein by reference).
10.31 First Excess of Loss Treaty No. 01-98-0020 with various subscribing reinsurers. (filed with the Company's
Annual Report on Form 10-K on March 31, 1999 and incorporated herein by reference).
10.32 Second Excess of Loss Treaty No. 01-98-0021 with various subscribing reinsurers (filed with the Company's
Annual Report on Form 10-K on March 31, 1999 and incorporated herein by reference).
10.33 Third Excess of Loss Treaty No. 01-98-0022 with various subscribing reinsurers. (filed with the Company's
Annual Report on Form 10-K on March 31, 1999 and incorporated herein by reference).
10.34 Fourth Excess of Loss Treaty No. 01-98-0599 with various subscribing reinsurers. (filed with the Company's
Annual Report on Form 10-K on March 31, 1999 and incorporated herein by reference).
10.35 Quota Share Reinsurance Treaty No. 1-98-0922. (filed with the Company's Annual Report on Form 10-K on March 31,
1999 and incorporated herein by reference).
10.44 SCPIE Management Company Retirement Income Plan, as amended and restated, effective January 1, 1989. (filed
with the Company's Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
10.45 Supplemental Employee Retirement Plan for Selected Employees of SCPIE Management Company dated January 1, 1995.
(filed with the Company's Registration Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
10.47 The SMC Cash Accumulation Plan, dated July 1, 1991, as amended. (filed with the Company's Registration
Statement on Form S-1 (No. 33-4450) and incorporated herein by reference).
</TABLE>
36
<PAGE>
<TABLE>
NUMBER DOCUMENT
------ --------
<C> <S>
10.48 Inter-Company Pooling Agreement effective January 1, 1997. (filed with the Company's Annual Report on Form
10-K on March 31, 1998 and incorporated herein by reference).
10.49 SCPIE Holdings Inc. and Subsidiaries Consolidated Federal Income Tax Liability Allocation Agreement effective
January 1, 1996. (filed with the Company's Annual Report on Form 10-K on March 31, 1998 and incorporated
herein by reference).
10.50 The 1997 Equity Participation Plan of SCPIE Holdings Inc. (filed with the Company's Annual Report on Form 10-K
on March 31, 1998 and incorporated herein by reference).
10.51 Form of Indemnification Agreement. (filed with the Company's Registration Statement on Form S-1 (No. 33-4450)
and incorporated herein by reference).
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. (filed with the Company's Annual Report on Form 10-K on March 31, 1998 and
incorporated herein by reference).
10.53 Quota Share Reinsurance Agreement between Fremont Indemnity Company and SCPIE Indemnity Company, effective
January 1, 1998. (filed with the Company's Annual Report on Form 10-K on March 31, 1998 and incorporated herein
by reference).
10.54 Assumption Reinsurance Agreement between Fremont Indemnity Company and American Healthcare Indemnity Company,
effective January 1, 1998. (filed with the Company's Annual Report on Form 10-K on March 31, 1998 and
incorporated herein by reference).
10.55 First Casualty Excess of Loss Reinsurance Agreement No. S06000-251 99-01-01 SR with various subscribing
reinsurers.
10.56 Second Casualty Excess of Loss Reinsurance Agreement No. S06000-252 99-01-01 SR with various subscribing
reinsurers.
10.57 Casualty Clash Excess of Loss Reinsurance Agreement No. S06000-253 99-01-01 SR with various subscribing
reinsurers.
10.58 Casualty Quota Share Reinsurance Agreement No. SCPIE Cas QS 99-01-01 RE Rel with various subscribing reinsurers.
10.59 First Excess of Loss Reinsurance Treaty No. 8493-00-0007-98-01 with various subscribing reinsurers.
10.60 Second Excess of Loss Reinsurance Treaty No. 8493-00-0007-98-02 with various subscribing reinsurers.
10.61 First Excess of Loss Reinsurance Treaty No. 8493-00-0001-99-01 with various subscribing reinsurers.
10.62 Second Excess of Loss Reinsurance Treaty No. 8493-00-0001-99-02 with various subscribing reinsurers.
10.63 Third Excess of Loss Reinsurance Treaty No. 8493-00-0001-99-03 with various subscribing reinsurers.
10.64 Fourth Excess of Loss Reinsurance Treaty No. 8493-00-0001-99-04 with various subscribing reinsurers.
10.65 Quota Share Reinsurance Treaty No. 8493-00-0005-99-00 with various subscribing reinsurers.
10.66 Cover Note for First Excess of Loss Reinsurance Treaty No. 8493-00-0001-00-01 with various subscribing
reinsurers.
10.67 Cover Note for Second Excess of Loss Reinsurance Treaty No. 8493-00-0001-00-02 with various subscribing
reinsurers.
10.68 Cover Note for Third Excess of Loss Reinsurance Treaty No. 8493-00-0001-00-03 with various subscribing
reinsurers.
10.69 Cover Note for Fourth Excess of Loss Reinsurance Treaty No. 8493-00-0001-00-04 with various subscribing
reinsurers.
10.70 Cover Note for Fifth Excess of Loss Reinsurance Treaty No. 8493-00-0001-00-05 with various subscribing reinsurers.
10.71 Credit Agreement by and among SCPIE Holdings Inc., the Financial Institutions Named Therein, Union Bank of
California, N.A., as Administrative Agent and Arranger, and First Union National Bank, as Documentation Agent,
dated as of May 25, 1999 (filed with the Company's Current Report on Form 8-K on June 22, 1999 and incorporated
by reference).
</TABLE>
37
<PAGE>
<TABLE>
NUMBER DOCUMENT
------ --------
<C> <S>
10.72 First Amendment to Credit Agreement and Waiver Thereunder by and among SCPIE Holdings Inc., the Financial
Institutions Named Therein, Union Bank of California, N.A., as Administrative Agent and Arranger, and First
Union National Bank, as Documentation Agent, dated as of October 1, 1999.
10.73 The SCPIE Holdings Inc. Employee Stock Purchase Plan (filed as an exhibit to the Company's Proxy Statement for
the 2000 Annual Meeting of Stockholders and incorporated herein by reference).
10.74 Program Administrator Agreement by and between the Professional Programs Division of Poe & Brown, Inc. and
American Healthcare Indemnity Company, dated as of January 1, 1998.
10.75 Letter of Credit Agreement dated January 27, 1999 between Union Bank of California, N.A. and SCPIE Indemnity
Company in the amount of $5,730,000.
10.76 Letter of Credit Agreement dated January 27, 1999 between Union Bank of California, N.A. and SCPIE Indemnity
Company in the amount of $4,176,915.
11.1 Statement re: computation of per share earnings (filed with the Company's Registration Statement on Form S-1
(No. 33-4450) and incorporated herein by reference).
21.1 Subsidiaries of the registrant (filed with the Company's Registration Statement on Form S-1 (No. 33-4450) and
incorporated hereby by reference).
23.0 Consent of independent auditors.
27.1 Financial Data Schedule.
</TABLE>
____________
(b) Reports on Form 8-K:
None.
38
<PAGE>
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, 2000
39
<PAGE>
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 dated included.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
/s/ DONALD J. ZUK President Chief Executive Officer and Director March 29, 2000
--------------------------- (Principal Executive Officer)
Donald J. Zuk
/s/ PATRICK T. LO Vice President Chief Financial Officer and March 29, 2000
--------------------------- Chief Accounting Officer
Patrick T. Lo (Principal Financial Officer and
Principal Accounting Officer)
/s/ MITCHELL S. KARLAN, M.D. Chairman of the Board and Director March 29, 2000
---------------------------
Mitchell S. Karlan, M.D.
/s/ JACK E. MCCLEARY, M.D. Director and Treasurer March 29, 2000
---------------------------
Jack E. McCleary, M.D.
/s/ ALLAN K. BRINEY, M.D. Director March 29, 2000
---------------------------
Allan K. Briney, M.D.
/s/ HENRY GLUCK Director March 29, 2000
----------------------------
Henry Gluck
/s/ WILLIS T. KING, JR. Director March 29, 2000
----------------------------
Willis T. King, Jr.
/s/ CHARLES B. MCELWEE, M.D. Director March 29, 2000
----------------------------
Charles B. McElwee, M.D.
/s/ WENDELL L. MOSELY, M.D. Director March 29, 2000
----------------------------
Wendell L. Mosely, M.D.
/s/ DONALD P. NEWELL Director March 29, 2000
----------------------------
Donald P. Newell
/s/ HARRIET M. OPFELL, M.D. Director March 29, 2000
----------------------------
Harriet M. Opfell, M.D.
/s/ WILLIAM A. RENERT, M.D. Director March 29, 2000
----------------------------
William A. Renert, M.D.
/s/ HENRY L. STOUTZ, M.D. Director March 29, 2000
----------------------------
Henry L. Stoutz, M.D.
/s/ REINHOLD A. ULRICH, M.D. Director March 29, 2000
----------------------------
Reinhold A. Ulrich, M.D.
</TABLE>
40
<PAGE>
SCPIE HOLDINGS INC.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
ANNUAL REPORT ON FORM 10-K
_______________
INDEX
<TABLE>
<CAPTION>
PAGES
-------
<S> <C>
Report of Independent Auditors...................................... 42
Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and 1998...... 43
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997................................ 44
Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997................................ 45
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997................................ 46
Notes to Consolidated Financial Statements........................ 47
Schedule II - Condensed Financial Information of Registrant......... 58
</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.
41
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
SCPIE Holdings Inc.
We have audited the accompanying consolidated balance sheets of SCPIE Holdings
Inc. and subsidiaries as of December 31, 1999 and 1998 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, 1999. 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 these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Los Angeles, California
February 21, 2000
42
<PAGE>
SCPIE Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- ------------ -------- --------
<S> <C> <C>
ASSETS
Securities available for sale (Note 2):
Fixed-maturity investments, at fair value
(amortized cost: 1999 - $571,792; 1998 - $698,971) $549,024 $722,196
Equity investments, at fair value
(cost: 1999 - $33,428; 1998 - $31,493) 33,464 37,015
-------- --------
Total securities available-for-sale 582,488 759,211
Short-term investments 72,903 34,405
-------- --------
Total investments 655,391 793,616
Cash 6,858 12,305
Accrued investment income 9,080 11,440
Reinsurance recoverable on unpaid loss and loss adjustment
expense reserves (Note 4) 45,007 24,899
Deferred federal income taxes (Note 5) 25,434 12,163
Costs in excess of net assets acquired 6,983 7,811
Property and equipment, net 3,381 2,925
Real estate 16,485 16,781
Other assets 44,573 39,529
-------- --------
Total assets $813,192 $921,469
======== ========
LIABILITIES
Reserves:
Losses and loss adjustment expenses (Note 3) $449,864 $477,631
Unearned premiums 25,296 24,591
-------- --------
Total reserves 475,160 502,222
Bank loan payable (Note 8) 13,000 --
Other liabilities 30,332 32,729
-------- --------
Total liabilities 518,492 534,951
Commitments and contingencies (Note 9)
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,
1999 - 9,513,189 shares outstanding
1998 - 11,878,791 shares outstanding 1 1
Additional paid-in capital 36,386 36,386
Accumulated other comprehensive income (loss) (14,764) 18,685
Retained earnings 370,923 344,587
-------- --------
392,546 399,659
Treasury stock, at cost
(1999 - 2,778,902 shares and 1998- 413,300 shares) (93,796) (13,141)
Stock subscription notes receivable (4,050) --
-------- --------
Total stockholders' equity 294,700 386,518
-------- --------
Total liabilities and stockholders' equity $813,192 $921,469
======== ========
</TABLE>
See accompanying notes.
43
<PAGE>
SCPIE Holdings Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------- -------- -------- --------
<S> <C> <C> <C>
REVENUES
Premiums earned (Note 4) $153,192 $157,976 $133,866
Net investment income (Note 2) 37,697 40,367 42,716
Realized investment gains (losses) (Note 2) (295) 11,129 6,602
Other revenue 693 489 551
-------- -------- --------
Total revenues 191,287 209,961 183,735
EXPENSES
Losses and loss adjustment expenses (Note 3) 122,780 132,208 123,377
Other operating expenses 29,310 28,211 17,987
-------- -------- --------
Total expenses 152,090 160,419 141,364
-------- -------- --------
Income before federal income taxes 39,197 49,542 42,371
Federal income taxes (Note 5) 9,295 12,566 10,195
-------- -------- --------
Net income $ 29,902 $ 36,976 $ 32,176
======== ======== ========
Basic earnings per share of common stock (Note 11) $ 2.63 $ 3.06 $ 2.66
Diluted earnings per share of common stock (Note 11) $ 2.62 $ 3.06 N/A
</TABLE>
See accompanying notes.
44
<PAGE>
SCPIE Holdings Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
STOCK
ADDITIONAL SUBSCRIPTION ACCUMULATED OTHER TOTAL
COMMON PAID-IN RETAINED TREASURY NOTES COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK RECEIVABLE INCOME EQUITY
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ -- $ -- $280,788 $ -- $ -- $ 7,779 $288,567
Net income -- -- 32,176 -- -- -- 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 1 36,386 -- -- -- -- 36,387
Purchase of treasury stock (416) (416)
Cash dividends -- -- (2,458) -- -- -- (2,458)
---- ------- -------- -------- ------- -------- --------
Balance at December 31, 1997 1 36,386 310,506 (416) -- 14,638 361,115
Net income -- -- 36,976 -- -- -- 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) -- -- -- (2,895)
---- ------- -------- -------- ------- -------- --------
Balance at December 31, 1998 1 36,386 344,587 (13,141) -- 18,685 386,518
Net income -- -- 29,902 -- -- -- 29,902
Comprehensive income for
unrealized gains (losses) on
securities sold, net of
reclassification adjustments of
$1,985 for losses included in
net income -- -- -- -- -- (33,449) (33,449)
--------
Comprehensive loss (3,547)
--------
Purchase of treasury stock -- -- -- (84,705) -- -- (84,705)
Treasury stock re-issued -- -- -- 4,050 (4,050) -- --
Cash dividend -- -- (3,566) -- -- -- (3,566)
---- ------- -------- -------- ------- -------- --------
Balance at December 31, 1999 $ 1 $36,386 $370,923 $(93,796) $(4,050) $(14,764) $294,700
==== ======= ======== ======== ======= ======== ========
</TABLE>
See accompanying notes
45
<PAGE>
SCPIE Holdings Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------- --------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 29,902 $ 36,976 $ 32,176
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provisions for amortization and depreciation 4,562 5,061 4,938
Provision for deferred federal income taxes 4,739 1,815 370
Realized investment (gains) losses 295 (11,129) (6,602)
Changes in operating assets and liabilities:
Accrued investment income 2,360 762 (1,004)
Unearned premiums 705 2,519 (3,225)
Policyholders' dividends payable -- -- (7,723)
Unpaid losses and loss adjustment expenses,
and reinsurance recoverables (47,875) 19,292 (12,950)
Other assets (4,215) (27,232) (755)
--------- --------- ---------
Net cash provided by (used in) operating activities (9,870) 9,159 5,804
INVESTING ACTIVITIES
Purchases - fixed maturities (290,369) (300,916) (410,381)
Sales - fixed maturities 380,415 263,293 335,210
Maturities - fixed maturities 29,967 36,501 38,073
Purchases - equities (26,597) (19,219) (7,692)
Sales - equities 24,776 6,979 10,312
Change in short-term investments, net (38,498) 18,876 4,201
--------- --------- ---------
Net cash provided by (used in) investing activities 79,694 5,514 (30,277)
FINANCING ACTIVITIES
Proceeds from bank loan 13,000 -- --
Issuance of common stock, net of expenses -- -- 36,387
Purchase of treasury stock (84,705) (12,725) (416)
Cash dividends (3,566) (2,895) (2,458)
--------- --------- ---------
Net cash provided by (used in) financing activities (75,271) (15,620) 33,513
--------- --------- ---------
Increase (decrease) in cash (5,447) (947) 9,040
Cash at beginning of year 12,305 13,252 4,212
--------- --------- ---------
Cash at end of year $ 6,858 $ 12,305 $ 13,252
========= ========= =========
</TABLE>
See accompanying notes.
46
<PAGE>
SCPIE Holdings Inc. and subsidiaries
Notes to Consolidated Financial Statements
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying 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. Significant intercompany accounts and
transactions have been eliminated in consolidation.
The Company principally writes professional liability insurance for
physicians, oral and maxillofacial surgeons, hospitals and other healthcare
providers. Most of the Company's coverage is written on a "claims made and
reported" basis. This coverage is provided only for claims that are first
reported to the Company during the insured's coverage period and that 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 that 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. Actual results could differ from
those estimates.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which differ from statutory accounting
practices prescribed or permitted by regulatory authorities. The significant
accounting policies followed by the Company that materially affect financial
reporting are summarized below:
INVESTMENTS
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 se-curities are stated at fair value with the
unrealized gains and losses, net of tax, reported in other comprehensive income.
Realized investment gains and losses and declines in value judged to be other
than temporary 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 and are amortized over the
effective period of the related policies.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998 1997
-------------- ------- ------- --------
<S> <C> <C> <C>
Balance at beginning of year $ 8,051 $ 520 $ 591
Costs deferred 15,237 12,871 2,944
Costs amortized 13,221 5,340 3,015
------- ------- --------
</TABLE>
47
<PAGE>
<TABLE>
<S> <C> <C> <C>
Balance at end of year $10,067 $ 8,051 $ 520
======= ======= ======
</TABLE>
As the Company has expanded its operations in other states during 1998 and
1999 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 basis over the
terms of the respective policies.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses (LAE) represent the estimated
liability for reported claims plus those incurred but not yet reported and the
related estimated adjustment expenses. The reserve for unpaid claims and related
adjustment expenses is determined using case-basis evaluations and statistical
analysis and represents estimates of the ultimate cost of all unpaid losses
incurred through December 31 of each year. Although considerable variability is
inherent in such estimates, management believes that the reserve for unpaid
losses and related LAE is adequate. The estimates are continually reviewed and
adjusted as necessary; such adjustments are included in current operations and
are accounted for as changes in estimates.
REINSURANCE
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.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated principally under
the straight-line method over the useful life of the assets that range from five
to seven years.
REAL ESTATE
Real estate, the Company's former home office headquarters, is recorded at
cost and depreciated principally under the straight-line method over the useful
life of the buildings. Accumulated depreciation at December 31, 1999 and 1998,
was $3.0 million and $2.7 million respectively. 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 March
1999. The Company intends to lease its former headquarters entirely to third
parties.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
Financial Standards Board Statement (FASB) No. 109, Accounting for Income Taxes.
CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of temporary cash investments and fixed
maturities. The Company places its temporary cash investments with high-credit
quality financial institutions and limits the amounts of credit exposure to any
one financial institution. Concentrations of credit risk with respect to fixed
maturities are limited due to the large number of such investments and their
distributions across many different industries and geographics.
48
<PAGE>
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, 1999, approximately 90% of total reinsurance premiums paid were
placed with reinsurance companies with an A.M. Best or Insurance Solvency
International rating of A- or better, including 36% with Lloyd's of London
syndicates, 22% with Hannover Ruickversicherungs, 11% with American Re, and 6%
with CNA. The remaining 25% of reinsurance premiums paid was placed among 18
other reinsurers.
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.
EARNINGS PER SHARE
Basic and diluted earnings per share are calculated in accordance with FASB
Statement No. 128, Earnings Per Share.
SEGMENT INFORMATION
The Company operates principally in the United States of America and in only
one reportable industry segment, which provides professional liability insurance
for physicians, oral and maxillofacial surgeons, hospitals and other healthcare
providers principally in California.
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, 1999
Fixed-maturity securities:
Bonds:
U.S. Government and Agencies $141,274 $ 457 $ 7,641 $134,090
State, municipalities and
political subdivisions 253,741 596 6,953 247,384
Mortgage-backed securities,
U.S. Government 49,800 75 1,034 48,841
Corporate 126,886 2 8,270 118,618
Other 91 -- -- 91
-------- ------- ------- --------
Total fixed-maturity securities 571,792 1,130 23,898 549,024
Common stocks 33,428 43 7 33,464
-------- ------- ------- --------
Total $605,220 $ 1,173 $23,905 $582,488
======== ======= ======= ========
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
======== ======= ======= ========
</TABLE>
49
<PAGE>
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, 1999, are summarized by stated maturities as
follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
(IN THOUSANDS) COST VALUE
-------------- ---------- ----------
<S> <C> <C>
Years to maturity:
One or less $ 2,731 $ 2,735
After one through 90,491 89,289
five
After five through 192,626 182,712
ten
After ten 236,144 225,447
Mortgage-backed 49,800 48,841
securities -------- --------
Totals $571,792 $549,024
======== ========
</TABLE>
The foregoing data is based on the stated maturities of the securities.
Actual maturities will differ for some securities because borrowers may have the
right to call or prepay obligations.
Major categories of the Company's investment income are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Fixed-maturity investments $36,715 $39,670 $39,926
Equity investments 590 812 840
Other 2,758 2,396 4,329
------- ------- -------
Total investment income 40,063 42,878 45,095
Investment expenses 2,366 2,511 2,379
------- ------- -------
Net investment income $37,697 $40,367 $42,716
======= ======= =======
</TABLE>
Realized gains and losses from sales of investments are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR ENDED DECEMBER 31, 1999 1998 1997
- -------------------------------------- ------------- ------------ ------------
<S> <C> <C> <C>
Fixed-maturity investments:
Gross realized gains $6,952 $ 9,060 $4,959
Gross realized losses 7,340 131 2,022
------ ------- ------
Net realized gains (losses) on fixed-maturity investments (388) 8,929 2,937
Equity investments:
Gross realized gains 6,716 2,506 3,854
Gross realized losses 6,623 306 189
------ ------- ------
Net realized gains on equity investments 93 2,200 3,665
------ ------- ------
Total net realized gains (losses) $ (295) $11,129 $6,602
====== ======= ======
</TABLE>
Through the nine months ended September 30, 1999, the Company had net realized
gains of $5.3 million. The Company recorded a realized loss in the 1999 fourth
quarter related to the sale of securities to fund the repurchase of 2,023,973
shares of its own common stock and to reposition the Company's investment
portfolio.
The change in the Company's unrealized appreciation (depreciation) on fixed-
maturity securities was $(46.0 million), $7.2 million and $8.5 million for the
years ended December 31, 1999, 1998 and 1997, respectively; the corresponding
amounts for equity securities were $(5.5 million), $(1.0 million) and $2.0
million.
At December 31, 1999, the Company's investments in fixed-maturity securities
with a fair value of $31.5 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, 1999.
50
<PAGE>
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 1999, 1998 and 1997.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998 1997
- -------------- ----------- ------------ ------------
<S> <C> <C> <C>
Reserve for losses and LAE, net of related
reinsurance recoverable, at beginning of year $452,732 $433,440 $440,301
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 183,959 197,870 176,586
Decrease in estimated losses and LAE for claims
occurring in prior years, net of reinsurance (61,179) (65,662) (53,209)
-------- -------- --------
Incurred losses during the year, net of reinsurance 122,780 132,208 123,377
Deduct losses and LAE payments for claims,
net of reinsurance, occurring during:
Current year 13,742 14,408 11,814
Prior years 156,913 135,480 118,424
-------- -------- --------
170,655 149,888 130,238
Reserve for losses and LAE, net of related
reinsurance recoverable, at end of year 404,857 452,732 433,440
Reinsurance recoverable for losses and LAE,
at end of year 45,007 24,899 21,531
-------- -------- --------
Reserves for losses and LAE, gross of
reinsurance recoverable, at end of year $449,864 $477,631 $454,971
======== ======== ========
</TABLE>
The Company's reserves for unpaid losses and LAE, net of related reinsurance
recoverable, at December 31, 1998, 1997 and 1996, were decreased in the
following year by $61.2 million, $93.8 million, and $53.2 million, respectively,
for claims that had occurred on or prior to those balance sheet dates. Those
redundancies resulted primarily from settlement of claims and reevaluation of
incurred but not reported reserves established in prior years for amounts that
were less than expected. The 1998 redundancies were offset, in part, by a $28.1
million increase in the loss and LAE reserves for the medical malpractice
insurance business acquired from Fremont Indemnity Company (Fremont) in January
1998 (see Note 4 - Reinsurance).
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 that are licensed to assume such business.
51
<PAGE>
The effect of reinsurance on premiums written and earned are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(IN THOUSANDS) --------------------- --------------------- ---------------------
YEAR ENDED DECEMBER 31, WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
- ----------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Direct $152,708 $149,191 $125,213 $124,077 $123,910 $125,289
Assumed 15,564 17,932 39,297 42,080 11,673 13,603
Ceded 14,376 13,931 8,187 8,181 4,941 5,026
-------- -------- -------- -------- -------- --------
Net premiums $153,896 $153,192 $156,323 $157,976 $130,642 $133,866
======== ======== ======== ======== ======== ========
</TABLE>
Reinsurance ceded reduced losses and loss adjustment expenses paid by $12.4
million, $2.6 million and $5.4 million in 1999, 1998 and 1997, respectively.
Reinsurance ceded reduced loss and loss adjustment expenses reserves by $45.0
million, $24.9 million and $21.5 million in 1999, 1998 and 1997, respectively.
For 1999 and prior years, the Company retained the first $1.0 million of
losses incurred per incident and had various reinsurance up to $20.0 million per
incident for physician coverage. The reinsurers also were obligated to bear
their proportionate share of LAE. For hospital coverage, the Company reinsured
90% of all losses incurred above a $1.0 million retention, and the Company
retained all LAE. For 2000, the Company has consolidated these treaties into a
program in which the Company retains the first $2.0 million of losses and LAE
per incident and reinsures the excess losses and LAE per incident up to $50.0
million.
The Company acquired the medical malpractice insurance business of Fremont,
effective January 1, 1998. The Company and Fremont concurrently entered into a
100% quota share prospective fronting arrangement, making the Company the
reinsurer for the Fremont policies issued or renewed until the Company obtained
the necessary regulatory approvals to underwrite the business directly. The
Company entered into a similar arrangement with another insurer when it replaced
the insurer under a multiple state agency program in 1998. Premiums of $6.3
million and $30.9 million are included in assumed premiums written for 1999 and
1998, respectively. The Company now writes these two programs directly. The
Company also assumes reinsurance covering medical professional liability risks,
primarily in the United States, as well as participating in high-layer excess of
loss property catastrophe reinsurance for U.S. and international risks.
In November 1996, the Company entered into a six-year agreement with a third
party whereby the Company provided a $5.5 million letter of credit in exchange
for future gains or losses based on the underwriting index of a reinsurance
portfolio. The portfolio is composed of worldwide geographically dispersed
catastrophe excess of loss treaty reinsurance business. The Company will also
receive semiannual payments based on its notional amount ($5.0 million) at a
rate determined annually. On an annual basis, if the combined ratio of the
portfolio is below a stipulated underwriting index amount, the Company will
recognize a gain; if the combined ratio is between two stipulated underwriting
index amounts, the Company will not recognize a gain or loss; and, if the
combined ratio is greater than a stipulated underwriting index amount, the
Company will recognize a loss limited to its notional value plus any interest
earned during the agreement. At December 31, 1999, the amounts recorded in the
financial statements related to this agreement were 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, 1999 1998 1997
--------------------------------------------------- ------- -------- --------
<S> <C> <C> <C>
Current $4,556 $10,751 $ 9,825
Deferred 4,739 1,815 370
------ ------- -------
Total $9,295 $12,566 $10,195
====== ======= =======
</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, 1999 1998 1997
-------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Federal income tax at 35% $13,719 $17,339 $14,830
Increase (decrease) in taxes resulting from:
Tax-exempt interest (4,657) (4,964) (4,775)
Dividends received deduction (84) (158) (136)
Goodwill 210 210 220
Other 107 139 56
------- ------- -------
Total federal income tax expense $ 9,295 $12,566 $10,195
======= ======= =======
</TABLE>
52
<PAGE>
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> DECEMBER 31,
(IN THOUSANDS) DECEMBER 31, 1999 1998
- --------------------------------------------- ------------ ------------
<S> <C> <C>
Deferred tax assets:
Discounting of loss reserves $20,039 $23,107
Unearned premium 1,771 1,721
Unrealized investment losses 7,948 --
Other 2,484 214
------- -------
Total deferred tax assets 32,242 25,042
Deferred tax liabilities:
Deferred policy acquisition costs 3,523 2,818
Unrealized investment gains -- 10,061
Other 3,285 --
------- -------
Total deferred tax liabilities 6,808 12,879
------- -------
Net deferred tax assets $25,434 $12,163
======= =======
</TABLE>
The Company is required to establish a "valuation allowance" for any portion
of the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will realize
the benefit of the net deferred tax asset and, therefore, no such valuation
allowance has been established.
Federal income taxes paid during 1999, 1998 and 1997 were $8.1 million, $8.7
million and $11.0 million, respectively.
In July 1997, the Internal Revenue Service (IRS) completed its examination of
the Company's 1993 federal income tax return and issued notices of proposed
adjustment that would have increased the Company's 1993 tax liability. In June
1998, the IRS proposed similar adjustments with respect to the Company's 1994
and 1995 federal income tax returns. All three years (1993 - 1995) were the
subject of a settlement accepted by the IRS as of July 16, 1999, that did not
increase the Company's federal income tax liability.
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) effective January 1, 2001. 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 subsidaries 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, California, Delaware and Arkansas 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 anticipated that the states of California, Delaware and Arkansas
will adopt Codification. Management believes that the impact of Codification
will not be material to the Company's statutory-basis financial statements.
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) 1999 1998 1997
- -------------- ------------- ------------- -------------
<S> <C> <C> <C>
Statutory net income for the year $ 34,021 $ 35,936 $ 32,239
Statutory capital and surplus at
year end 265,459 343,330 321,289
</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-
53
<PAGE>
made policy includes a provision for waiving a premium charge in the event of
death, disability or retirement of the insured. Based on the NAIC guidelines,
this reserve should be recorded as an unearned premium reserve. Alternatively,
it can be considered an unpaid loss with the permission of the insurance
entity's state insurance department. In 1999, 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. Due to a special dividend paid during 1999, dividends of $30.6 million
may be distributed from SCPIE Indemnity to SCPIE Holdings after November 9,
2000, 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
up to 6%. The contribution expense for the 401(k) plan was $634,000, $661,000
and $479,000 for the years ended December 31, 1999, 1998 and 1997, 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.
During 1999, the Company implemented the Director and Senior Management Stock
Purchase Plan. The directors and senior managers purchased a total of 145,000
shares of common stock under this plan. The eligible participants executed
promissory notes in the aggregate amount of $4.1 million to fund this purchase.
The Company's Employee Stock Purchase Plan, effective January 1, 2000, offers
eligible employees the opportunity to purchase shares of SCPIE common stock
through payroll deductions.
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, 1999 1998 1997 1999 1998 1997
- ------------------------------------------- ------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 503 $ 344 $ 323 $ 220 $ 184 $ 139
Interest cost 255 195 161 250 212 164
Actual return on plan assets (254) (220) (170) - - -
Amortization of:
Transition obligation (asset) (4) (4) (4) - 7 7
Prior service cost (1) (1) (1) 84 84 84
Actuarial loss - - - 38 26 -
----- ----- ----- ----- ----- -----
Net pension expense $ 499 $ 314 $ 309 $ 592 $ 513 $ 394
===== ===== ===== ===== ===== =====
</TABLE>
54
<PAGE>
The following table sets forth the funding status of the plan:
<TABLE>
<CAPTION>
Qualified Plan Supplemental Plan
-------------------------------------------
(IN THOUSANDS) DECEMBER 31, 1999 1998 1999 1998
- ------------------------------------------------------- -------- -------- --------- ---------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
- ----------------------------
Net benefit obligation at beginning of year $ 3,214 $2,501 $ 3,308 2,724
Service cost 503 344 220 184
Interest cost 255 195 250 212
Actuarial (gain) loss (774) 182 (122) 187
Gross benefits paid (39) (8) - -
------- ------ ------- -------
Net benefit obligation at end of year 3,159 3,214 3,656 3,307
------- ------ ------- -------
Change in Plan Assets
- ---------------------
Fair value of plan assets at beginning of year 3,203 2,758 - -
Actual return on plan assets 455 452 - -
Employer contributions - - - -
Gross benefits paid (39) (8) - -
------- ------ ------- -------
Fair value of plan assets at end of year 3,619 3,202 - -
------- ------ ------- -------
Funded status (underfunded) 461 (12) (3,656) (3,307)
Unrecognized actuarial (gain) loss (1,185) (209) 365 524
Unrecognized prior service cost (10) (11) 856 940
Unrecognized net transition (20) (23) - -
------- ------ ------- -------
Accrued pension expense $ (754) $ (255) $(2,435) $(1,843)
======= ====== ======= =======
Amounts recognized in the statement of
financial position consists of
Accrued benefit liability (754) (255) (2,519) (2,040)
Intangible asset - - 84 197
------- ------ ------- -------
Accrued pension expense $ (754) $ (255) $(2,435) $(1,843)
======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Qualified Plan Supplemental Plan
--------------------------------------------
DECEMBER 31, 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted-average assumptions
Discount rate 7.75% 6.75% 7.00% 7.75% 6.75% 7.00%
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. BANK LOAN PAYABLE
On May 25, 1999, the Company entered into a credit agreement with Union Bank
of California, N. A., First Union Bank and Dresdner Bank AG, as lenders. The
Credit Agreement allows company borrowings up to $75 million from time to time,
subject to certain conditions. The proceeds may be used by the Company for
general corporate purposes and certain other permitted uses. Under the Credit
Agreement, the interest rate (6.785% at December 31, 1999) is based upon
fluctuations in the London InterBank Offered Rate (LIBOR). As of December 31,
1999, $13.0 million of borrowings were outstanding. The entire amount is
payable March 21, 2000, and may be renewed at the option of the Company. No
interest was paid during 1999.
NOTE 9. 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.
55
<PAGE>
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 case was
remanded to the California Superior Court in which the judgment was originally
entered. The Company filed a motion in the Superior Court for entry of judgment
in its favor, which the bankruptcy estate opposed. The trial judge ruled in
favor of the Company, and judgment for the Company was entered on September 29,
1999. The bankruptcy estate filed a notice of appeal of this ruling with the
district court of appeal. The Company believes that the action is entirely
without merit and will continue 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 moved its headquarters and
principal operations to this space. The company expended $5.2 million for
leasehold improvements and equipment through December 31, 1999. Rent expense
for the year ended December 31, 1999 was $2.5 million.
Future minimum payments under noncancelable operating leases with initial
terms of one year or more consist of the following at December 31, 1999 (in
thousands).
<TABLE>
<S> <C>
2000 $ 2,676
2001 2,742
2002 2,723
2003 2,754
2004 2,761
Thereafter 12,071
-------
$25,727
=======
</TABLE>
NOTE 10. 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 10-year
terms and vest over various future periods.
Exercise prices for options outstanding at December 31, 1999, ranged from
$27.73 to $36.50. The weighted average remaining contractual life of those
options is nine years.
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------
Number of Weighted-Average Number of Weighted-Average
Options Exercise Price Options Exercise Price
------------- --------------------- ------------- ---------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 256,790 $30.76 - $ -
Granted during year 216,200 29.02 262,590 30.76
Exercised during year - - - -
Forfeited during year 6,600 29.19 5,800 30.76
------- -------
Options outstanding at end of year 466,390 $29.97 256,790 $30.76
======= =======
</TABLE>
56
<PAGE>
The Company's pro forma information using the Black-Scholes valuation model
follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Estimated weighted average of the fair value of options granted $ 7.40 $ 10.72
Pro forma net income (in 000's) $28,373 $35,869
Pro forma earnings per share - Basic $ 2.50 $ 2.97
- Diluted $ 2.49 $ 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 1.14%; volatility factors of the expected
market price of the Company's common stock ranging from .273 to .358; and a
weighted average expected life of the options ranging from three to five 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 11. 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) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Numerator:
Net income $29,902 $36,976 $32,176
Numerator for:
Basic earnings per share of common stock $29,902 $36,976 $32,176
Diluted earnings per share of common stock $29,902 $36,976 $32,176
Denominator:
Denominator for basic earnings per share of
common stock - weighted-average shares
outstanding 11,384 12,074 12,108
Effect of dilutive securities:
Stock options 19 15 N/A
------- -------
Denominator for diluted earnings per share
of common stock adjusted - weighted-average
shares outstanding 11,403 12,089 N/A
======= =======
Basic earnings per share of common stock $ 2.63 $ 3.06 $ 2.66
======= ======= =======
Diluted earnings per share of common stock $ 2.62 $ 3.06 N/A
======= =======
</TABLE>
NOTE 12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for 1999 and 1998 are summarized
as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------- ----------------------------------------
(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 $41,155 $39,468 $38,992 $34,270 $39,724 $40,026 $38,447 $40,268
Net investment income 9,476 9,961 9,514 8,746 10,503 10,123 9,768 9,973
Realized investment gains (losses) 6,102 506 (1,325) (5,578) 2,320 1,741 3,269 3,799
Net income 11,592 8,006 6,779 3,525 9,024 8,393 9,412 10,147
Basic earnings per share of common stock $ .98 $ .69 $ .59 $ .33 $ 0.74 $ 0.69 $ 0.79 $ 0.85
Diluted earnings per share of common stock $ .98 $ .69 $ .58 $ .33 $ 0.74 $ 0.69 $ 0.78 $ 0.85
</TABLE>
57
<PAGE>
Schedule II - Condensed Financial Information of Registrant
SCPIE Holdings Inc.
Condensed Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
----------------------- ----------------------
<S> <C> <C>
ASSETS
Securities available for sale:
Fixed-maturity investments, at fair value
(amortized cost: 1998 - $43) $ -- $ 43
Equity investments, at fair value 23,401 2,000
Short-term investments 2,724 1,210
Investment in subsidiaries 281,220 383,555
-------- --------
Total investments 307,345 386,808
Cash 282 72
Other 893 652
-------- --------
Total assets $308,520 $387,532
======== ========
LIABILITIES
Due to affiliates $ 640 $ 1,014
Other 180 --
Bank loan payable 13,000 --
-------- --------
Total liabilities 13,820 1,014
Stockholders' equity:
Preferred stock - par value $0.0001,
5,000,000 shares authorized,
no shares issued or outstanding -- --
Common stock - par value $0.0001,
30,000,000 shares authorized, 12,792,091
shares issued,
1999 - 9,513,189 shares outstanding
1998 - 11,878,791 shares outstanding 1 1
Additional paid-in capital 36,386 36,386
Accumulated other comprehensive income (loss) (14,764) 18,685
Retained earnings 370,923 344,587
-------- --------
392,546 399,659
Treasury stock, at cost (1999 - 2,778,902
shares and 1998 - 413,300 shares) (93,796) (13,141)
Stock subscription notes receivable (4,050) --
-------- --------
Total stockholders' equity 294,700 386,518
-------- --------
Total liabilities and stockholders' equity $308,520 $387,532
======== ========
</TABLE>
See accompanying notes.
58
<PAGE>
Schedule II - Condensed Financial Information of Registrant (continued)
SCPIE Holdings Inc.
Condensed Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
FOR THE YEAR ENDED 1999 1998 1997
- ------------------ ------------- ------------- -------------
<S> <C> <C> <C>
Dividend from subsidiary $106,000 $25,000 $20,000
Net investment income 638 142 804
Realized investment gains (losses) (4,278) 2 (10)
Other expenses (2,229) (1,956) (1,287)
-------- ------- -------
Earnings before federal income taxes and
equity in income (loss) of subsidiaries 100,131 23,188 19,507
Federal income taxes (22) (28) (37)
-------- ------- -------
Earnings before equity in income (loss) of
subsidiaries 100,109 23,160 19,470
Equity in income (loss) of subsidiaries (70,207) 13,816 12,706
-------- ------- -------
Net income (loss) $ 29,902 $36,976 $32,176
======== ======= =======
</TABLE>
59
<PAGE>
Condensed Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
FOR THE YEAR ENDED 1999 1998 1997
- ------------------ ------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 29,902 $ 36,976 $ 32,176
Adjustments to reconcile net loss to net cash
provided by operating activities:
Realized investment (gains) losses 4,278 (2) 10
Due to affiliates (374) 1,088 (74)
Provision for amortization 839 601 --
Changes in other assets and liabilities (61) 591 (1,345)
Equity in undistributed (income) loss of subsidiaries 70,207 (13,816) (12,706)
-------- -------- --------
Net cash provided by operating activities 104,791 25,438 18,061
INVESTING ACTIVITIES
Sales - fixed maturities 43 2,965 19,389
Purchase - securities (25,839) (2,000) (22,881)
Change in short-term investments (1,514) (938) (272)
Capital contribution to subsidiaries (2,000) (10,000) (48,000)
-------- -------- --------
Cash used in investing activities (29,310) (9,973) (51,764)
FINANCING ACTIVITIES
Issuance of common stock, net of expenses 36,387
Proceeds from bank loan 13,000 -- --
Purchase of treasury stock (84,705) (12,725) (416)
Cash dividends (3,566) (2,895) (2,458)
-------- -------- --------
Cash provided by (used in) financing activities (75,271) (15,620) 33,513
Increase (decrease) in cash 210 (155) (190)
Cash at beginning of period 72 227 417
-------- -------- --------
Cash at end of period $ 282 $ 72 $ 227
======== ======== ========
</TABLE>
See accompanying notes.
60
<PAGE>
Schedule II - Condensed Financial Information of Registrant (continued)
SCPIE Holdings Inc.
Notes to Condensed Financial Statements
December 31, 1999
1. 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.
2. BANK LOAN PAYABLE
On May 25, 1999, the Company entered into a credit agreement with Union Bank
of California, N. A., First Union Bank and Dresdner Bank AG, as lenders. The
Credit Agreement allows company borrowings up to $75 million from time to time,
subject to certain conditions. The proceeds may be used by the Company for
general corporate purposes and certain other permitted uses. Under the Credit
Agreement, the interest rate (6.785% at December 31, 1999) is based upon
fluctuations in the London InterBank Offered Rate (LIBOR). As of December 31,
1999, $13.0 million of borrowings were outstanding. The entire amount is
payable March 21, 2000, and may be renewed at the option of the Company. No
interest was paid during 1999.
61
<PAGE>
EXHIBIT 10.1
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is hereby made and
entered into this 3rd day of January, 2000, between SCPIE MANAGEMENT COMPANY
(formerly named Physicians Insurance Management, Inc.), a California corporation
("SCPIE Management"), and DONALD J. ZUK ("Executive").
RECITALS
--------
A. Executive is and has been employed for a number of years in a
senior capacity in the administration of casualty insurance, including
particularly medical professional liability insurance. Through such employment
he has acquired outstanding experience and special skills and abilities in the
management and administration of professional liability insurance programs,
including the marketing, underwriting, loss prevention and claims management
aspects of such business.
B. Because of the unique nature of the employment position involved
and the experience, skills, abilities, background and knowledge of Executive,
SCPIE Management desires to continue to retain the services of Executive for the
term of this Agreement on the terms and conditions set forth in this Agreement.
Executive desires to remain in the employ of SCPIE Management and is willing to
accept such employment on the terms and conditions set forth in this Agreement.
C. Executive originally served as the President and Chief Executive
Officer of SCPIE Management pursuant to the terms of an Employment Agreement
dated as of April 28, 1988, which was replaced by a new Employment Agreement
dated as of December 3, 1991 (the "December 1991 Agreement"). The December 1991
Agreement was amended and restated each subsequent year to extend the term and
termination provisions for a period of one additional year, and most recently on
January 4, 1999, SCPIE Management and Executive further amended and restated the
Agreement to
<PAGE>
extend the term and termination provisions for an additional period of one year
(the "1999 Amended and Restated Agreement"). SCPIE Management and Executive
desire to further amend and restate the 1999 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, 2004, 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>
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
$508,014 as of January 1, 1999, and was also increased by the Board of Directors
of SCPIE Management as of January 1, 2000 to $550,000 before inclusion of the
CPI-U adjustment of the 1999 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),
3
<PAGE>
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.
4
<PAGE>
3. Termination of Service.
----------------------
(a) SCPIE Management may terminate this Agreement at any time,
with or without cause, by giving 60 days' written notice to Executive. In the
event of such termination under this paragraph 3(a), SCPIE Management shall be
under no obligation except 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, 2002, 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, 2002, 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>
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, 2004, 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, 2004. Such amount
(if any) payable under paragraph 3(e)(ii) shall be payable between March 1, 2005
and January 10, 2006 in such installments as Executive shall specify by written
6
<PAGE>
notice given to SCPIE Management on or before January 10, 2005; provided,
however, that if Executive does not give such written notice on or before
January 10, 2005, such amount (if any) payable under paragraph 3(e)(ii) shall be
payable in full on March 1, 2005.
(f) In the event that Executive's services hereunder are
terminated under any of the provisions of this Agreement (except by death),
Executive agrees that if at that time he is President of SCPIE Management, he
will, promptly upon the written request of the Board of Directors of SCPIE
Management, deliver his written resignation as such President to the Board of
Directors, such resignation to become effective immediately.
4. Assignment and Binding Effect.
-----------------------------
This Agreement shall not be transferable or assignable by
Executive or SCPIE Management, nor shall Executive's or SCPIE Management's
interest herein be transferred or assigned by operation of law, and any
assignment or attempted assignment, transfer, mortgage, hypothecation, or pledge
of this Agreement or of his interest herein by Executive or SCPIE Management
shall be null and void. This provision, however, shall have no application to
transfers made by reason of the death of the Executive.
5. Arbitration.
-----------
Any controversy or claim arising out of or relating to this
Employment Agreement shall be settled by arbitration in accordance with the
Rules of the American Arbitration Association, and judgment upon the award
rendered by the Arbitrators may be entered in any Court having jurisdiction
thereof. If a controversy or claim results in an award, that award shall also
provide that the prevailing party be reimbursed by the non-prevailing party for
the prevailing party's reasonable attorneys' fees and costs incurred in
connection with the arbitration.
7
<PAGE>
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
1888 Century Park East, Suite 800
Los Angeles, California 90067
Attn: Chairman of the Board
To Executive: Donald J. Zuk
c/o SCPIE Management Company
1888 Century Park East, Suite 800
Los Angeles, California 90067
or to such other address as the respective parties may designate in writing to
the other designate.
7. Unique Nature of Executive's Services.
-------------------------------------
Executive is obligated under this Agreement to render services of
special, unusual, extraordinary and intellectual character, thereby giving his
Agreement peculiar value, so that the loss thereof could not be reasonably or
adequately compensated in damages or an action of law. In addition to other
remedies provided by law, SCPIE Management shall have the right during the term
of this Agreement to compel specific performance hereof by Executive and/or to
obtain injunctive relief against the performance of services elsewhere by
Executive.
8. Withholdings.
------------
All payments made by SCPIE Management under any provision of this
Agreement shall be subject to any deductions and withholdings required by
applicable law.
9. Governing Law.
-------------
This Agreement shall be governed by the laws of the State of
California.
8
<PAGE>
10. Amendment of the December 1991 Agreement.
----------------------------------------
The 1999 Amended and Restated Agreement between Executive and
SCPIE Management is hereby amended and restated in its entirety by this Amended
and Restated Employment Agreement.
IN WITNESS WHEREOF, SCPIE Management has caused this Agreement to be
executed by its officer thereunto duly authorized and Executive has executed
this instrument, all as of the day and year first above written.
SCPIE MANAGEMENT COMPANY
By: /s/ Joseph P. Henkes
-----------------------------------------
Its: Senior Vice President and Secretary
EXECUTIVE:
/s/ Donald J. Zuk
_______________________________
Donald J. Zuk
9
<PAGE>
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 3, 2000, in place of the
Amended and Restated Employment Agreement made and entered into as of January 4,
1999 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 3, 2000.
SCPIE HOLDINGS INC.
By: /s/ Joseph P. Henkes
----------------------------------------
Its: Senior Vice President and Secretary
<PAGE>
EXHIBIT 10.55
SCPIE INDEMNITY COMPANY
AMERICAN HEALTHCARE SPECIALTY INSURANCE COMPANY
AMERICAN HEALTHCARE INDEMNITY COMPANY
FIRST CASUALTY EXCESS OF LOSS
REINSURANCE AGREEMENT
EFFECTIVE: January 1, 1999
ARTICLE SUBJECT PAGE(S)
- ------------- ---------------------------------------------- -----------
Preamble 1
1 Business Reinsured 1
2 Cover 1
3 Term 1
4 Territory 2
5 Exclusions 2
6 Premium and Reports 2
7 Reinstatement 3
8 Profit Commission 3
9 Definitions 4
10 Net Retained Lines 5
11 Currency 5
12 Loss Funding 5
13 Special Funding 6
14 Taxes 7
15 Notice of Loss and Loss Settlements 7
16 Excess of Policy Limits 8
17 Extra Contractual Obligations 8
18 Delay, Omission or Error 9
19 Inspection 9
20 Arbitration 9
21 Service Of Suit 9
22 Insolvency 9
23 Confidentiality 10
24 Commutation 10
25 Intermediary 10
26 Participation 11
<PAGE>
FIRST CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENT
This Agreement is made and entered into by and between SCPIE INDEMNITY COMPANY,
AMERICAN HEALTHCARE SPECIALTY INSURANCE COMPANY, AMERICAN HEALTHCARE INDEMNITY
COMPANY, for themselves and on behalf of each member and affiliated insurance
company of THE SCPIE COMPANIES, Los Angeles, California, that now or in the
future underwrites and/or assumes business covered by this Agreement
(hereinafter together called the "Company") and the Reinsurer specifically
identified on the signature page of this Agreement (hereinafter called the
"Reinsurer").
ARTICLE 1
---------
BUSINESS REINSURED
- ------------------
A. This Agreement is to indemnify the Company in respect of the net excess
liability as a result of any loss or losses as described in paragraph B, of
this article, under any Policies classified by the Company as Physicians
and Surgeons Comprehensive Professional Liability and Personal Umbrella
business in force, written or renewed during the term of this Agreement by
Poe & Brown, Inc., Tampa, Florida, subject to the terms and conditions
herein contained.
B. For purposes of determining the attachment of the Reinsurer's liability
hereunder as respects any one Loss Occurrence, 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
circumstances is notified to the Company during the term of this Agreement
shall be covered hereunder. 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 2
---------
COVER
- -----
The Reinsurer will be liable in respect of each and every Loss Occurrence,
irrespective of the number and kinds of Policies involved, for the Ultimate Net
Loss over and above an initial Ultimate Net Loss of $1,000,000 each and every
Loss Occurrence, subject to a limit of liability to the Reinsurer of $1,000,000
each and every Loss Occurrence.
ARTICLE 3
---------
TERM
- ----
This Agreement shall become effective at 12:01 a.m., Eastern Standard Time,
January 1, 1999, and shall remain in full force and effect for 12 months,
expiring 12:01 a.m., Eastern Standard Time, January 1, 2000.
Upon expiration of this Agreement, at the option of the Company, the Reinsurer
will continue to cover all Policies coming within the scope of this Agreement,
until the natural expiration of such Policies, but in no event longer than 12
months from the date of expiration of this Agreement, subject to an additional
reinsurance premium equal to 50% of the reinsurance premium for the term of this
Agreement.
Page 1
<PAGE>
ARTICLE 4
---------
TERRITORY
- ---------
This Agreement will cover wherever the Company's Policies cover.
ARTICLE 5
---------
EXCLUSIONS
- ----------
This Agreement does not cover:
1. Business excluded by the attached Nuclear Incident Exclusion Clauses:
a. Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A.,
No. 08-31.1.
b. Nuclear Incident Exclusion Clause - Liability - Reinsurance - Canada,
No. 08-32.1.
2. 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 guarantee 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.
3. Pools, associations and syndicates.
ARTICLE 6
---------
PREMIUM AND REPORTS
- -------------------
Within 60 days following the end of each calendar quarter, the Company will
report to the Reinsurer the Gross Net Earned Premium Income hereunder for the
quarter. With such report the Company will remit the reinsurance premium for
this Agreement, calculated at a rate of 7.25% multiplied by the Company's Gross
Net Earned Premium Income. However, the first quarterly payment is due no later
than June 30, 1999.
Within 60 days following expiration of this Agreement, the Company will report
to the Reinsurer any other information which the Reinsurer may require to
prepare its Annual Statement that is reasonably available to the Company.
ARTICLE 7
---------
REINSTATEMENT
- -------------
Loss payments under this Agreement will reduce the limit of coverage afforded by
the amounts paid, but the limit of coverage will be reinstated from the time of
the occurrence of the loss as follows:
Page 2
<PAGE>
A. As respects reinstatement of the first $1,000,000 in limit, the
reinstatement shall be free.
B. As respects reinstatement of the second, third, fourth and fifth $1,000,000
in limit, the Company agrees to pay an additional premium calculated at pro
rata of 25% of the Reinsurer's premium for the term of this Agreement,
being pro rata only as to the fraction of the face value of this Agreement
(i.e., the fraction of $1,000,000) so reinstated.
C. As respects reinstatement of the sixth, seventh, eighth, ninth, tenth,
eleventh and twelfth $1,000,000 in limit, the reinstatement shall be free.
Nevertheless, the Reinsurer's liability hereunder shall never exceed $1,000,000
in respect of any one Loss Occurrence and, subject to the limit in respect of
any one Loss Occurrence, shall be further limited to $13,000,000 during the term
of this Agreement by reason of any and all claims arising hereunder.
ARTICLE 8
---------
PROFIT COMMISSION
- -----------------
A profit commission calculation will be prepared by the Company in accordance
with the following, and a profit commission, if any, paid to the Company by the
Reinsurer.
A. Income
------
The Reinsurer's earned premium for the term of this Agreement.
B. Outgo
-----
1. Losses and loss adjustment expense paid by the Reinsurer on Claims
Made during the term of this Agreement; plus
2. The outstanding reserve of the Reinsurer on Claims Made during the
term of this Agreement; plus
3. The Reinsurer's expense allowance of 25% of premium as in A. above;
plus
4. The Reinsurer's deficit, if any, from the previous profit commission
statement.
The profit commission will be 50.0% of the amount by which Income exceeds Outgo.
Should Outgo exceed Income, the difference will be considered as the Reinsurer's
deficit and carried into ensuing years' calculations.
The first adjustment of Profit Commission shall be as of December 31, 2001 and
adjusted annually thereafter until all losses are adjusted or commuted.
Page 3
<PAGE>
ARTICLE 9
---------
DEFINITIONS
- -----------
A. The term "Ultimate Net Loss" as used in this Agreement shall mean the
actual loss (including 80% of any Extra Contractual Obligation and 100% of
any loss in excess of Policy limits as defined in the EXTRA CONTRACTUAL
OBLIGATIONS ARTICLE and the EXCESS OF POLICY LIMITS ARTICLE herein) paid by
the Company or for which the Company becomes liable to pay (such loss to
include any expenses that are included within the Policy limit and interest
accrued prior to judgment when such interest is made part of the judgment,
but to exclude all other interest and expenses which will be pro rated in
accordance with the NOTICE OF LOSS AND LOSS SETTLEMENTS ARTICLE), but
salvages and all recoveries, including recoveries under all reinsurances
which inure to the benefit of this Agreement (whether recovered or not),
shall be first deducted from such loss to arrive at the amount of liability
attaching hereunder.
All salvages, recoveries or payments recovered or received subsequent to
loss settlement hereunder shall be applied as if recovered or received
prior to the aforesaid settlement, and all necessary adjustments shall be
made by the parties hereto.
For purposes of this definition, the phrase "becomes liable to pay" shall
mean the existence of a judgment which the Company does not intend to
appeal, or a release has been obtained by the Company, or the Company has
accepted a proof of loss.
Nothing in this clause shall be construed to mean that losses are not
recoverable hereunder until the Company's Ultimate Net Loss has been
ascertained.
B. The term "Loss Occurrence" as used in this Agreement shall mean any one
disaster or casualty or accident or loss or series of disasters or
casualties or accidents or losses arising out of or caused by one event.
The parties to this Agreement recognize that a Loss Occurrence, as defined
herein, may involve multiple Policies and that by reason of the manner in
which losses are ascribed, such as losses occurring during, Claims Made,
and Losses Discovered, a portion of the Loss Occurrence may be ascribed to
this Agreement and to other reinsurances covering on substantially the same
basis.
In such event, but only when this Agreement does not specifically prescribe
another method of handling, the Company's retention and the Reinsurer's
limit of liability for the Loss Occurrence shall be proportionate, with the
amount of Ultimate Net Loss to be retained by the Company under this
Agreement being reduced to that percentage which the Company's settled
losses attaching to this Agreement bear to the total of all the Company's
settled losses contributing to the same Loss Occurrence. The Reinsurer's
liability shall be arrived at in the same manner.
C. The term "Gross Net Earned Premium Income" as used in this Agreement shall
mean gross earned premium income on business the subject of this Agreement
less earned premium income paid for reinsurances, recoveries under which
would inure to the benefit of this Agreement.
D. The term "Policy" as used in this Agreement shall mean any binder, policy,
or contract of insurance or reinsurance issued, accepted or held covered
provisionally or otherwise, by or on behalf of the Company.
Page 4
<PAGE>
ARTICLE 10
----------
NET RETAINED LINES
- ------------------
This Agreement applies only to that portion of any insurances or reinsurances
covered by this Agreement which the Company retains net for its own account, and
in calculating the amount of any loss hereunder and also in computing the amount
in excess of which this Agreement attaches, only loss or losses in respect of
that portion of any insurances or reinsurances which the Company retains net for
its own account shall be included, it being understood and agreed that 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 reinsurers, whether specific or general, any amounts which may have
become due from them whether such inability arises from the insolvency of such
other reinsurers or otherwise.
ARTICLE 11
----------
CURRENCY
- --------
The currency to be used for all purposes of this Agreement shall be United
States of America currency.
ARTICLE 12
----------
LOSS FUNDING
- ------------
This clause is only applicable to those Reinsurers who cannot qualify for credit
by the State having jurisdiction over the Company's loss reserves.
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 to set up by law it will forward to the Reinsurer a statement
showing the proportion of such loss reserves which is applicable to them.
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 chosen by the Reinsurer and acceptable to the appropriate insurance
authorities, in an amount equal to the Reinsurer's proportion of the loss
reserves in respect of known outstanding losses that have been reported to the
Reinsurer, allocated loss expenses relating thereto and Incurred But Not
Reported loss and loss expense as shown in the statement prepared by the
Company.
The Letter of Credit shall be "evergreen" and 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
prior to any expiration date, the bank shall notify the Company by certified or
registered mail that it elects not to consider the Letter of Credit extended for
any additional period.
The bank chosen for the issuance of the Letter of Credit 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 5
<PAGE>
At annual intervals, or more frequently as agreed but never more frequently than
semiannually, 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. If the
statement shows that the Reinsurer's share of such losses and allocated loss
expenses, and Incurred But Not Reported loss and loss expense, 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, and Incurred But Not Reported loss and loss expense, relating thereto
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.
With regard to Incurred But Not Reported losses, after consultation with their
outside Actuaries, Tillinghast, Nelson & Warren Inc., the Company intends to use
the following IBNR factors applied to gross reinsurance premiums hereunder for
purposes of this article:
Period IBNR Factor
--------------------------------------------------------
Current Year 97.0%
First Development Year 40.0%
Second Development Year 17.0%
Third Development Year 7.0%
Fourth Development Year & Subsequent Years 2.0%
The Letter of Credit funding requirement for IBNR will be net of any specific
case base loss reserves. Therefore, the factors outlined above represent the
ceiling for the sum of specific case base loss reserves and IBNR. Further, a cap
of five times the gross reinsurance premium will apply as the maximum loss
reserve, being the sum of case reserves plus IBNR, for which the Reinsurer is
required to provide funding pursuant to this article.
ARTICLE 13
----------
SPECIAL FUNDING
- ---------------
(This article is only applicable to those Reinsurers who are not subject to the
LOSS FUNDING ARTICLE).
A. If during the period of this Agreement or thereafter, should the Reinsurer
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 related thereto within 30 days from the date of receipt
by the Reinsurer of written demand by the Company to so fund. Such demand
shall not be made unless balances are 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 LOSS
FUNDING ARTICLE in respect of Letters of Credit shall apply.
C. The phrase "any loss payable" as used in paragraph A., above shall mean any
loss subject to recovery under this Agreement, if the Reinsurer has not
disputed said loss in writing prior to
Page 6
<PAGE>
the due date for payment, i.e., (1) the Reinsurer has not denied the
validity of coverage or (2) the litigation or arbitration between the
Reinsurer and the Company related to the loss has not commenced.
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, then the payment due date as defined in this
Agreement 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 an acceptable manner.
ARTICLE 14
----------
TAXES
- -----
The Company will be liable for taxes (except Federal Excise Tax) on premiums
reported to the Reinsurer hereunder.
Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at
Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are
domiciled outside the United States of America.
The Reinsurer has agreed to allow for the purpose of paying the Federal Excise
Tax 1% of the premium payable hereon to the extent such premium is subject to
Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurer will
deduct 1% from the amount of the return, and the Company or its agent should
take steps to recover the Tax from the U.S. Government.
ARTICLE 15
----------
NOTICE OF LOSS AND LOSS SETTLEMENTS
- -----------------------------------
The Company will advise the Reinsurer promptly of all claims which in the
opinion of the Company may involve the Reinsurer and of all subsequent
developments on these claims which may materially affect the position of the
Reinsurer.
The Reinsurer agrees to abide by the loss settlements of the Company, provided
that retroactive extension of Policy terms or coverages made voluntarily by the
Company and not in response to court decisions (whether such court decision is
against the Company or other companies affording the same or similar coverages)
will not be covered under this Agreement.
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.
The Reinsurer will pay its share of loss settlements immediately upon receipt of
proof of loss from the Company.
Page 7
<PAGE>
Unless otherwise provided for in the definition of Ultimate Net Loss, all
investigation, adjustment, legal expense, (including interest other than
interest accrued prior to judgment which is made part of the judgment), and
claim-specific declaratory judgment expenses, incurred by the Company (except
office expenses and salaries of officials and employees not classified as loss
adjusters) will be divided between the Company and the Reinsurer in proportion
to their respective shares of the Ultimate Net Loss. Such expenses will be in
addition to the limits stated in the COVER ARTICLE. However, if a verdict,
judgment or award is reversed or reduced the Company and the Reinsurer will
share expenses incurred in securing such reversal or reduction in the proportion
that each benefits from the reversal or reduction. Expenses incurred up to the
time of the original verdict, judgment or award will be shared in proportion to
what would have been each party's share.
The phrase "claim-specific declaratory judgment expenses," as used in this
Agreement will mean all expenses incurred by the Company in connection with
declaratory judgment actions brought to determine the Company's defense and/or
indemnification obligations that are allocable to specific Policies and claims
subject to this Agreement. Declaratory judgment expenses will be deemed to have
been incurred by the Company on the date of the original loss (if any) giving
rise to the declaratory judgment action.
ARTICLE 16
----------
EXCESS OF POLICY LIMITS
- -----------------------
In the event the Ultimate Net Loss includes an amount in excess of the Company's
Policy limit, such amount, as provided for in the definition of Ultimate Net
Loss, in excess of the Company's Policy limit shall be added to the amount of
the Company's Policy limit, and the sum thereof shall be covered hereunder,
subject to the Reinsurer's limit of liability appearing in the COVER ARTICLE of
this Agreement.
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.
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 17
----------
EXTRA CONTRACTUAL OBLIGATIONS
- -----------------------------
This Agreement shall protect the Company, subject to the Reinsurer's limit of
liability appearing in the COVER ARTICLE of this Agreement, where the loss
includes any Extra Contractual Obligations as provided for in the definition of
Ultimate Net Loss. "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 in the
preparation or prosecution of an appeal consequent upon such action.
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 loss.
Page 8
<PAGE>
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 18
----------
DELAY, OMISSION OR ERROR
- ------------------------
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, providing such delay, omission or
error is rectified upon discovery.
ARTICLE 19
----------
INSPECTION
- ----------
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
any reinsurance hereunder or claims in connection herewith.
ARTICLE 20
----------
ARBITRATION
- -----------
Any irreconcilable dispute between the parties to this Agreement will be
arbitrated in Los Angeles, California, in accordance with the attached
Arbitration Clause No. 22-01.1.
ARTICLE 21
----------
SERVICE OF SUIT
- ---------------
The attached Service of Suit Clause No. 20-03.6 - California will apply to this
Agreement.
ARTICLE 22
----------
INSOLVENCY
- ----------
In the event of the insolvency of the Company, the attached Insolvency Clause
No. 21-05.2 California 8/93 will apply.
In the event of the insolvency of any company or companies included in the
designation of "Company," this clause will apply only to the insolvent company
or companies.
Page 9
<PAGE>
ARTICLE 23
----------
CONFIDENTIALITY
- ---------------
All claim information communicated between the Company and the Reinsurer is
intended to further the joint interests of the Company and the Reinsurer in the
business covered by and related claims under this Agreement and will be
considered and will be treated by both the Company and the Reinsurer as
privileged and confidential. Claim information will not be disclosed to any
other party other than (i) counsel retained by the Company in the defense of a
claim, (ii) retrocessionaire(s) of the Reinsurer whose interest likewise may be
affected by the claim or claims, (iii) as directed by a lawful court order, (iv)
counsel retained by the Reinsurer, or (v) external accounting or compliance
auditors. The Company and the Reinsurer will take all lawful measures necessary
or required to preserve the confidentiality of claim information received from
the Company.
ARTICLE 24
----------
COMMUTATION
- -----------
The Company or the Reinsurer may, at any time, express their desire to the other
party to commute all losses that are applicable to the term of this Agreement
and that are still unsettled. In such event, the Company and the Reinsurer
shall mutually determine and evaluate such losses, and the payment by the
Reinsurer to the Company of the Reinsurer's proportion of the amount so
ascertained and mutually agreed to be the value of such losses shall relieve the
Reinsurer of all further liability, in respect of the term of this Agreement
both in respect of known and unknown losses.
ARTICLE 25
----------
INTERMEDIARY
- ------------
Sedgwick Re, Inc. is hereby recognized as the Intermediary negotiating this
Agreement for all business hereunder. All communications, including notices,
premiums, return premiums, commissions, taxes, losses, loss adjustment expenses,
salvages and loss settlements relating thereto shall be transmitted to the
Reinsurer or the Company through Sedgwick Re, Inc., 1501 Fourth Avenue, Suite
1400, Seattle, Washington 98101. 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 only to constitute payment to the
Company to the extent that such payments are actually received by the Company.
Page 10
<PAGE>
ARTICLE 26
----------
PARTICIPATION: FIRST CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENT
- -------------
EFFECTIVE: January 1, 1999
This Agreement obligates the Reinsurer for _______% of the interests and
liabilities set forth under this Agreement.
The participation of the Reinsurer in the interests and liabilities of this
Agreement shall be separate and apart from the participations of other
reinsurers and shall not be joint with those of other reinsurers, and the
Reinsurer shall in no event participate in the interests and liabilities of
other reinsurers.
IN WITNESS WHEREOF, the parties hereto, by their authorized representatives,
have executed this Agreement as of the following dates:
PARTICIPATING REINISURERS
J&H Marsh & McLennan (Services) Ltd.
Lloyd's, London
Syndicate No. 1007 RCV 8.7500%
Syndicate No. 1003 SJC 1.9250%
Syndicate No. 2003 SJC 6.8250%
Syndicate No. 0435 DPM 4.9342%
Syndicate No. 0205 HGJ 1.9737%
Syndicate No. 0376 JHV 2.3684%
Syndicate No. 1212 SJB 1.9737%
Syndicate No. 1223 MEL 1.3816%
Syndicate No. 1241 CAR 2.9605%
CNA International Reinsurance Company Limited 0.9868%
Odyssey Re (London) Limited 1.9737%
Unionamerica Insurance Company Ltd. 3.9474%
J&H Marsh & McLennan (Services) Ltd.
GIO Insurance Ltd., Trading as GIO Reinsurance 5.0000%
Hannover Re 16.5000%
Kemper Reinsurance Company 7.0000%
Odyssey Reinsurance Corporation 5.0000%
PMA Reinsurance Corporation 7.0000%
Reliance Reinsurance Corporation
Reliance Insurance Company 7.0000%
Toa-Re Insurance Company of America 5.0000%
Zurich Reinsurance (North America), Inc. 7.5000%
-------
TOTAL: 100.00%
Upon completion of Reinsurers' signing, fully executed signature pages will be
forwarded to you for the completion of your file.
Page 11
<PAGE>
and in Los Angeles, California, this day of , 2000.
SCPIE INDEMNITY COMPANY,
AMERICAN HEALTHCARE SPECIALTY INSURANCE COMPANY,
AMERICAN HEALTHCARE INDEMNITY COMPANY,
for themselves and on behalf of each member
and affiliated insurance company of
THE SCPIE COMPANIES
By_________________________________________
(signature)
___________________________________________
(name)
___________________________________________
(title)
FIRST CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENT
issued to
SCPIE INDEMNITY COMPANY
AMERICAN HEALTHCARE SPECIALTY INSURANCE COMPANY
AMERICAN HEALTHCARE INDEMNITY COMPANY
Page 12
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A.
(Wherever the word "Reassured" appears in this clause, it shall be deemed to
read "Reassured," "Reinsured," "Company," or whatever other word is employed
throughout the text of the reinsurance agreement to which this clause is
attached to designate the company or companies reinsured.)
(1) This reinsurance does not cover any loss or liability accruing to the
Reassured as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
(2) Without in any way restricting the operation of paragraph (1) of this
Clause it is understood and agreed that for all purposes of this reinsurance all
the original policies of the Reassured (new, renewal and replacement) of the
classes specified in Clause II of this paragraph (2) from the time specified in
Clause III in this paragraph (2) shall be deemed to include the following
provision (specified as the Limited Exclusion Provision):
Limited Exclusion Provision.*
I. It is agreed that the policy does not apply under any liability
coverage,
<TABLE>
<S> <C>
injury, sickness, disease, death or destruction
to { with respect to which an insured under the policy is
bodily injury or property damage also an insured under a nuclear
</TABLE>
energy liability policy issued by Nuclear Energy Liability Insurance
Association, Mutual Atomic Energy Liability Underwriters or Nuclear
Insurance Association of Canada, or would be an insured under any such
policy but for its termination upon exhaustion of its limit of
liability.
II. Family Automobile Policies (liability only), Special Automobile Policies
(private passenger automobiles, liability only), Farmers Comprehensive
Personal Liability Policies (liability only), Comprehensive Personal
Liability Policies (liability only) or policies of a similar nature; and
the liability portion of combination forms related to the four classes
of policies stated above, such as the Comprehensive Dwelling Policy and
the applicable types of Homeowners Policies.
III. The inception dates and thereafter of all original policies as described
in II above, whether new, renewal or replacement, being policies which
either
(a) become effective on or after 1st May, 1960, or
(b) become effective before that date and contain the Limited Exclusion
Provision set out above; provided this paragraph (2) shall not be
applicable to Family Automobile Policies, Special Automobile
Policies, or policies or combination policies of a similar nature,
issued by the Reassured on New York risks, until 90 days following
approval of the Limited Exclusion Provision by the Governmental
Authority having jurisdiction thereof.
(3) Except for those classes of policies specified in Clause II of paragraph
(2) and without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that for all purposes of this reinsurance
the original liability policies of the Reassured (new, renewal and replacement)
affording the following coverages:
Owners, Landlords and Tenants Liability, Contractual Liability, Elevator
Liability, Owners or Contractors (including railroad) Protective
Liability, Manufacturers and Contractors Liability, Product Liability,
Professional and Malpractice Liability, Storekeepers Liability, Garage
Liability, Automobile Liability (including Massachusetts Motor Vehicle
or Garage Liability)
shall be deemed to include, with respect to such coverages, from the time
specified in Clause V of this paragraph (3), the following provision (specified
as the Broad Exclusion Provision):
Broad Exclusion Provision.*
It is agreed that the policy does not apply:
<TABLE>
<S> <C>
injury, sickness, disease, death or destruction
I. Under any Liability Coverage, to {
bodily injury or property damage
</TABLE>
(a) with respect to which an insured under the policy is also an insured
under a nuclear energy liability policy issued by Nuclear Energy
Liability Insurance Association, Mutual Atomic Energy Liability
Underwriters or Nuclear Insurance Association of Canada, or would be an
insured under any such policy but for its termination upon exhaustion of
its limit of liability; or
(b) resulting from the hazardous properties of nuclear material and with
respect to which (1) any person or organization is required to maintain
financial protection pursuant to the Atomic Energy Act of 1954, or any
law amendatory thereof, or (2) the insured is, or had this policy not
been issued would be, entitled to indemnity from the United States of
America, or any agency thereof, under any agreement entered into by the
United States of America, or any agency thereof, with any person or
organization.
II. Under any Medical Payments Coverage, or under any Supplementary Payments
Provision relating
<TABLE>
<S> <C>
Immediate medical or surgical relief
to { to expenses incurred with respect
first aid,
</TABLE>
Page 1
<PAGE>
<TABLE>
<S> <C>
bodily injury, sickness, disease or death
to { resulting from the hazardous properties of nuclear material and
bodily injury
</TABLE>
arising out of the operation of a nuclear facility by any person or
organization.
<TABLE>
<S> <C>
injury, sickness, disease, death or destruction
III. Under any Liability Coverage, to {
bodily injury or property damage
</TABLE>
resulting from the hazardous properties of nuclear material, if
(a) the nuclear material (1) is at any nuclear facility owned by, or
operated by or on behalf of, an insured or (2) has been discharged or
dispersed therefrom;
(b) the nuclear material is contained in spent fuel or waste at any time
possessed, handled, used, processed, stored, transported or disposed of
by or on behalf of an insured; or
<TABLE>
<S> <C>
Injury, sickness, disease, death or destruction
(c) the { arises out of the furnishing by an insured of services,
bodily injury or property damage
</TABLE>
materials, parts or equipment in connection with the planning,
construction, maintenance, operation or use of any nuclear facility,
but if such facility is located within the United States of America,
its territories or possessions or Canada, this exclusion (c) applies
only
Injury to or destruction of property at such nuclear facility.
to {
Property damage to such nuclear facility and any property thereat.
IV. As used in this endorsement:
"hazardous properties" include radioactive, toxic or explosive
properties; "nuclear material" means source material, special nuclear
material or byproduct material; "source material," "special nuclear
material," and "byproduct material" have the meanings given them in the
Atomic Energy Act of 1954 or in any law amendatory thereof; "spent fuel"
means any fuel element or fuel component, solid or liquid, which has
been used or exposed to radiation in a nuclear reactor; "waste" means
any waste material (1) containing byproduct material other than tailings
or wastes produced by the extraction or concentration of uranium or
thorium from any ore processed primarily for its source material
content, and (2) resulting from the operation by any person or
organization of any nuclear facility included under the first two
paragraphs of the definition of nuclear facility; "nuclear facility"
means
(a) any nuclear reactor,
(b) any equipment or device designed or used for (1) separating the isotopes
of uranium or plutonium, (2) processing or utilizing spent fuel, or (3)
handling, processing or packaging waste,
(c) any equipment or device used for the processing, fabricating or alloying
of special nuclear material if at any time the total amount of such
material in the custody of the insured at the premises where such
equipment or device is located consists of or contains more than 25
grams of plutonium or uranium 233 or any combination thereof, or more
than 250 grams of uranium 235,
(d) any structure, basin, excavation, premises or place prepared or used for
the storage or disposal of waste,
and includes the site on which any of the foregoing is located, all
operations conducted on such site and all premises used for such operations;
"nuclear reactor" means any apparatus designed or used to sustain nuclear
fission in a self-supporting chain reaction or to contain a critical mass of
fissionable material;
With respect to injury to or destruction of property, the word "injury" or
destruction
"property damage" includes all forms of radioactive contamination of
property.
includes all forms of radioactive contamination of property.
V. The inception dates and thereafter of all original policies affording
coverages specified in this paragraph (3), whether new, renewal or
replacement, being policies which become effective on or after 1st May, 1960,
provided this paragraph (3) shall not be applicable to
(i) Garage and Automobile Policies issued by the Reassured on New York
risks, or
(ii) statutory liability insurance required under Chapter 90, General Laws
of Massachusetts,
until 90 days following approval of the Broad Exclusion Provision by the
Governmental Authority having jurisdiction thereof.
(4) Without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above are not
applicable to original liability policies of the Reassured in Canada and that
with respect to such policies this Clause shall be deemed to include the Nuclear
Energy Liability Exclusion Provisions adopted by the Canadian Underwriters'
Association or the Independent Insurance Conference of Canada.
- --------------------------------------------------------------------------------
* NOTE. The words printed in italics in the Limited Exclusion Provision and in
the Broad Exclusion Provision shall apply only in relation to original liability
policies which include a Limited Exclusion Provision or a Broad Exclusion
Provision containing those words.
- --------------------------------------------------------------------------------
Page 2
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA
1. This Agreement does not cover any loss or liability accruing to the Company
as a member of, or subscriber to, any association of insurers or reinsurers
formed for the purpose of covering nuclear energy risks or as a direct or
indirect reinsurer of any such member, subscriber or association.
2. Without in any way restricting the operation of paragraph 1 of this clause
it is agreed that for all purposes of this Agreement all the original liability
contracts of the Company, whether new, renewal or replacement, of the following
classes, namely,
Personal Liability.
Farmers Liability.
Storekeepers Liability.
which become effective on or after 31st December 1984, shall be deemed to
include, from their inception dates and thereafter, the following provision:-
Limited Exclusion Provision.
This Policy does not apply to bodily injury or property damage with respect
to which the Insured is also insured under a contract of nuclear energy
liability insurance (whether the Insured is unnamed in such contract and
whether or not it is legally enforceable by the Insured) issued by the Nuclear
Insurance Association of Canada or any other group or pool of insurers or
would be an Insured under any such policy but for its termination upon
exhaustion of its limits of liability.
With respect to property, loss of use of such property shall be deemed to
be property damage.
3. Without in any way restricting the operation of paragraph 1 of this clause
it is agreed that for all purposes of this Agreement all the original liability
contracts of the Company, whether new, renewal or replacement, of any class
whatsoever (other than Personal Liability, Farmers Liability, Storekeepers
Liability or Automobile Liability contracts), which become effective on or after
31st December 1984, shall be deemed to include, from their inception dates and
thereafter, the following provision of:-
Broad Exclusion Provision.
It is agreed that this Policy does not apply:
(a) to liability imposed by or arising under the Nuclear Liability Act; nor
(b) to bodily injury or property damage with respect to which an Insured
under this Policy is also insured under a contract of nuclear energy
liability insurance (whether the Insured is unnamed in such contract
and whether or not it is legally enforceable by the Insured) issued by
the Nuclear Insurance Association of Canada or any other insurer or
group or pool of insurers or would be an Insured under any such policy
but for its termination upon exhaustion of its limit of liability; nor
(c) to bodily injury or property damage resulting directly or indirectly
from the nuclear energy hazard arising from:
(i) the ownership, maintenance, operation or use of a nuclear
facility by or on behalf of an Insured;
(ii) the furnishing by an Insured of services, materials, parts or
equipment in connection with the planning, construction,
maintenance, operation or use of any nuclear facility; and
(iii) the possession, consumption, use, handling, disposal or
transportation of fissionable substances, or of other radioactive
material (except radioactive isotopes, away from a nuclear
facility, which have reached the final stage of fabrication so as
to be useable for any scientific, medical, agricultural,
commercial or industrial purpose) used, distributed, handled or
sold by an Insured.
As used in this Policy:
1. The term "nuclear energy hazard" means the radioactive, toxic,
explosive, or other hazardous properties of radioactive material;
2. The term "radioactive material" means uranium, thorium, plutonium,
neptunium, their respective derivatives and compounds, radioactive
isotopes of other elements and any other substances that the Atomic
Energy Control Board may, by regulation, designate as being prescribed
substances capable of releasing atomic energy, or as being requisite for
the production, use or application of atomic energy;
3. The term "nuclear facility" means:
(a) any apparatus designed or used to sustain nuclear fission in a self-
supporting chain reaction or to contain a critical mass of
plutonium, thorium and uranium or any one or more of them;
(b) any equipment or device designed or used for (i) separating the
isotopes of plutonium, thorium and uranium or any one or more of
them, (ii) processing or utilizing spent fuel, or (iii) handling,
processing or packaging waste;
(c) any equipment or device used for the processing, fabricating or
alloying of plutonium, thorium or uranium enriched in the isotope
uranium 233 or in the isotope uranium 235, or any one or more of
them if at any time the total amount of such material in the
custody of the Insured at the premises where such equipment or
device is located consists of or contains more than 25 grams of
plutonium or uranium 233 or any combination thereof, or more than
250 grams of uranium 235;
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste radioactive material;
and includes the site on which any of the foregoing is located, together
with all operations conducted thereon and all premises used for such
operations.
4. The term "fissionable substance" means any prescribed substance that is,
or from which can be obtained, a substance capable of releasing atomic
energy by nuclear fission.
5. With respect to property, loss of use of such property shall be deemed
to be property damage.
<PAGE>
ARBITRATION CLAUSE
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 Lloyds, 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>
SERVICE OF SUIT
This Clause applies only to a reinsurer domiciled outside the United States of
America or should the Company be authorized to do business in the State of New
York, a reinsurer unauthorized in New York as respects suits instituted in New
York.
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 Street, Los Angeles, California 90017
or in the event the suit is instituted in New York State, Messrs. Mendes &
Mount, Three Park Avenue, New York, New York 10016 and that in any suit
instituted against the Reinsurer upon this Agreement, the Reinsurer will abide
by the final decision of such court or of any appellate court in the event of an
appeal.
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.
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 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, 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.
Note:-- Wherever used herein the terms:
"Company" shall be understood to mean "Company," "Reinsured," "Reassured"
or whatever other term is used in the attached reinsurance Agreement to
designate the reinsured company. "Agreement" shall be understood to mean
"Contract," "Agreement," "Policy" or whatever other term is used to
designate the attached reinsurance document.
<PAGE>
INSOLVENCY CLAUSE
In the event of the insolvency and the appointment of a conservator, liquidator
or statutory successor of the Company, reinsurance under this Agreement shall be
payable to such conservator, liquidator or statutory successor immediately upon
demand, with reasonable provision for verification, on the basis of claims
allowed against the insolvent Company by any court of competent jurisdiction or
by any conservator, liquidator or statutory successor of the Company having
authority to allow such claims, without diminution because of such insolvency or
because such conservator, liquidator 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 conservator, liquidator or statutory successor
except as provided by Section 4118(a) of the New York Insurance Law or except
when the Agreement specifically provides another payee of such reinsurance in
the event of the insolvency of the Company and when the Reinsurer with the
consent of the direct insured or insureds has assumed such Policy obligations of
the Company as direct obligations of the Reinsurer to the payees under such
Policies and in substitution for the obligations of the Company to such payees.
It is agreed, however, that the conservator, liquidator or statutory successor
of the insolvent Company shall give written notice to the Reinsurer of the
pendency of a claim against the insolvent Company 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 when
such claim is to be adjudicated, any defense or defenses which it may deem
available to the Company or its conservator or liquidator or statutory
successor. The expense thus incurred by the Reinsurer shall be chargeable,
subject to court approval, against the insolvent Company as part of the expense
of liquidation to the extent of a proportionate share of the benefit which may
accrue to the Company solely as a result of the defense undertaken by the
Reinsurer.
When 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 insolvent Company.
Note:-- Wherever used herein the terms:
"Company" shall be understood to mean "Company," "Reinsured," "Reassured"
or whatever other term is used in the attached reinsurance Agreement to
designate the reinsured Company. "Agreement" shall be understood to mean
"Contract," "Agreement," "Policy" or whatever other term is used to
designate the attached reinsurance document.
<PAGE>
EXHIBIT 10.56
SCPIE INDEMNITY COMPANY
AMERICAN HEALTHCARE SPECIALTY INSURANCE COMPANY
AMERICAN HEALTHCARE INDEMNITY COMPANY
SECOND CASUALTY EXCESS OF LOSS
REINSURANCE AGREEMENT
EFFECTIVE: January 1, 1999
<TABLE>
<CAPTION>
ARTICLE SUBJECT PAGE(S)
- -------------- ---------------------------------------------- -----------
<S> <C> <C>
Preamble 1
1 Business Reinsured 1
2 Cover 1
3 Term 1
4 Territory 2
5 Warranty 2
6 Exclusions 2
7 Premium 3
8 Reinstatement 3
9 Reports 3
10 Definitions 4
11 Net Retained Lines 5
12 Currency 5
13 Loss Funding 5
14 Special Funding 6
15 Taxes 7
16 Notice of Loss and Loss Settlements 7
17 Excess of Policy Limits 8
18 Extra Contractual Obligations 8
19 Delay, Omission or Error 9
20 Inspection 9
21 Arbitration 9
22 Service Of Suit 9
23 Insolvency 9
24 Confidentiality 10
25 Commutation 10
26 Intermediary 10
27 Participation 11
</TABLE>
<PAGE>
SECOND CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENT
This Agreement is made and entered into by and between SCPIE INDEMNITY COMPANY,
AMERICAN HEALTHCARE SPECIALTY INSURANCE COMPANY, AMERICAN HEALTHCARE INDEMNITY
COMPANY, for themselves and on behalf of each member and affiliated insurance
company of THE SCPIE COMPANIES, Los Angeles, California, that now or in the
future underwrites and/or assumes business covered by this Agreement
(hereinafter together called the "Company") and the Reinsurer specifically
identified on the signature page of this Agreement (hereinafter called the
"Reinsurer").
ARTICLE 1
---------
BUSINESS REINSURED
- ------------------
A. This Agreement is to indemnify the Company in respect of the net excess
liability as a result of any loss or losses as described in paragraph B. of
this article, under any Policies classified by the Company as Comprehensive
Physicians and Surgeons Professional Liability and Personal Umbrella
business in force, written or renewed during the term of this Agreement by
Poe & Brown, Inc., Tampa, Florida, subject to the terms and conditions
herein contained.
B. For purposes of determining the attachment of the Reinsurer's liability
hereunder as respects any one Loss Occurrence, 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
circumstances is notified to the Company during the term of this Agreement
shall be covered hereunder. 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 2
---------
COVER
- -----
The Reinsurer will be liable in respect of each and every Loss Occurrence,
irrespective of the number and kinds of Policies involved, for the Ultimate Net
Loss over and above an initial Ultimate Net Loss of $2,000,000 each and every
Loss Occurrence, subject to a limit of liability to the Reinsurer of $8,000,000
each and every Loss Occurrence.
Recoveries from the Company's underlying Casualty Excess of Loss Reinsurance
Agreement(s) will not be deducted when establishing Ultimate Net Loss for
purposes of this Agreement.
ARTICLE 3
---------
TERM
- ----
This Agreement shall become effective at 12:01 a.m., Eastern Standard Time,
January 1, 1999, and shall remain in full force and effect for 12 months,
expiring 12:01 a.m., Eastern Standard Time, January 1, 2000.
Page 1
<PAGE>
Upon expiration of this Agreement, at the option of the Company, the Reinsurer
will continue to cover all Policies coming within the scope of this Agreement,
until the natural expiration of such Policies, but in no event longer than 12
months from the date of expiration of this Agreement, subject to an additional
reinsurance premium equal to 50% of the reinsurance premium for the term of this
Agreement.
ARTICLE 4
---------
TERRITORY
- ---------
This Agreement will cover wherever the Company's Policies cover.
ARTICLE 5
---------
WARRANTY
- --------
The Reinsurer's maximum liability hereunder is $5,000,000 in the aggregate
during the term of this Agreement in respect of the portion of Ultimate Net Loss
excess of $5,000,000 from ground up, each Policy, each Loss Occurrence, but only
in respect of Loss Occurrences involving only one Policy.
ARTICLE 6
---------
EXCLUSIONS
- ----------
This Agreement does not cover:
1. Business excluded by the attached Nuclear Incident Exclusion Clauses:
a. Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A.,
No. 08-31.1.
b. Nuclear Incident Exclusion Clause - Liability - Reinsurance - Canada,
No. 08-32.1.
2. 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 guarantee 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.
3. Pools, associations and syndicates.
Page 2
<PAGE>
ARTICLE 7
---------
PREMIUM
- -------
A. The Company will pay the Reinsurer a premium of $500,000 for the term of
this Agreement, to be paid in the amount of $125,000 on the last day of
each calendar quarter.
B. Within 90 days following the expiration of this Agreement, the Company will
calculate a premium at a rate of 2.20% multiplied by the Company's Gross
Net Earned Premium Income. Should the premium so calculated exceed the
premium paid in accordance with Paragraph A. above, the Company will
immediately pay the Reinsurer the difference. Should the premium so
calculated be less than the deposit premium, the Reinsurer will immediately
pay the Company the difference, subject to a minimum of $475,000.
ARTICLE 8
---------
REINSTATEMENT
- -------------
Loss payments under this Agreement will reduce the limit of coverage afforded by
the amounts paid, but the limit of coverage may be reinstated from the time of
the occurrence of the loss at the Company's option. As respects reinstatement
of the first $8,000,000 in limit, the Company agrees to pay an additional
premium calculated at pro rata of 150% of the Reinsurer's premium for the term
of this Agreement being pro rata only as to the fraction of the face value of
this Agreement (i.e., the fraction of $8,000,000) so reinstated. As respects
reinstatement of the second $8,000,000 in limit, the Company agrees to pay an
additional premium calculated at pro rata of 200% of the Reinsurer's premium for
the term of this Agreement, being pro rata only as to the fraction of the face
value of this Agreement (i.e., the fraction of $8,000,000) so reinstated.
Nevertheless, the Reinsurer's liability hereunder shall never exceed $8,000,000
in respect of any one Loss Occurrence and, subject to the limit in respect of
any one Loss Occurrence, shall be further limited to $24,000,000 during the term
of this Agreement by reason of any and all claims arising hereunder.
The decision of the Company to exercise its reinstatement option must be relayed
to the Reinsurer within three months after payment of the loss on which the
reinstatement is based.
ARTICLE 9
---------
REPORTS
- -------
Within 90 days following the expiration of this Agreement, the Company will
furnish the Reinsurer with:
A. Gross Net Earned Premium Income of the Company for the term of this
Agreement.
B. Any other information which the Reinsurer may require to prepare its Annual
Statement which is reasonably available to the Company.
Page 3
<PAGE>
ARTICLE 10
----------
DEFINITIONS
- -----------
A. The term "Ultimate Net Loss" as used in this Agreement shall mean the
actual loss (including 80% of any Extra Contractual Obligation and 100% of
any loss in excess of Policy limits as defined in the EXTRA CONTRACTUAL
OBLIGATIONS ARTICLE and the EXCESS OF POLICY LIMITS ARTICLE herein) paid by
the Company or for which the Company becomes liable to pay (such loss to
include any expenses that are included within the Policy limit and interest
accrued prior to judgment when such interest is made part of the judgment,
but to exclude all other interest and expenses which will be pro rated in
accordance with the NOTICE OF LOSS AND LOSS SETTLEMENTS ARTICLE), but
salvages and all recoveries, including recoveries under all reinsurances
which inure to the benefit of this Agreement (whether recovered or not),
shall be first deducted from such loss to arrive at the amount of liability
attaching hereunder.
All salvages, recoveries or payments recovered or received subsequent to
loss settlement hereunder shall be applied as if recovered or received
prior to the aforesaid settlement, and all necessary adjustments shall be
made by the parties hereto.
For purposes of this definition, the phrase "becomes liable to pay" shall
mean the existence of a judgment which the Company does not intend to
appeal, or a release has been obtained by the Company, or the Company has
accepted a proof of loss.
Nothing in this clause shall be construed to mean that losses are not
recoverable hereunder until the Company's Ultimate Net Loss has been
ascertained.
B. The term "Loss Occurrence" as used in this Agreement shall mean any one
disaster or casualty or accident or loss or series of disasters or
casualties or accidents or losses arising out of or caused by one event.
The parties to this Agreement recognize that a Loss Occurrence, as defined
herein, may involve multiple Policies and that by reason of the manner in
which losses are ascribed, such as losses occurring during, Claims Made,
and Losses Discovered, a portion of the Loss Occurrence may be ascribed to
this Agreement and to other reinsurances covering on substantially the same
basis.
In such event, but only when this Agreement does not specifically prescribe
another method of handling, the Company's retention and the Reinsurer's
limit of liability for the Loss Occurrence shall be proportionate, with the
amount of Ultimate Net Loss to be retained by the Company under this
Agreement being reduced to that percentage which the Company's settled
losses attaching to this Agreement bear to the total of all the Company's
settled losses contributing to the same Loss Occurrence. The Reinsurer's
liability shall be arrived at in the same manner.
C. The term "Gross Net Earned Premium Income" as used in this Agreement shall
mean gross earned premium income on business the subject of this Agreement
less earned premium income paid for reinsurances, recoveries under which
would inure to the benefit of this Agreement.
D. The term "Policy" as used in this Agreement shall mean any binder, policy,
or contract of insurance or reinsurance issued, accepted or held covered
provisionally or otherwise, by or on behalf of the Company.
Page 4
<PAGE>
ARTICLE 11
----------
NET RETAINED LINES
- ------------------
This Agreement applies only to that portion of any insurances or reinsurances
covered by this Agreement which the Company retains net for its own account, and
in calculating the amount of any loss hereunder and also in computing the amount
in excess of which this Agreement attaches, only loss or losses in respect of
that portion of any insurances or reinsurances which the Company retains net for
its own account shall be included, it being understood and agreed that 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 reinsurers, whether specific or general, any amounts which may have
become due from them whether such inability arises from the insolvency of such
other reinsurers or otherwise.
ARTICLE 12
----------
CURRENCY
- --------
The currency to be used for all purposes of this Agreement shall be United
States of America currency.
ARTICLE 13
----------
LOSS FUNDING
- ------------
This clause is only applicable to those Reinsurers who cannot qualify for credit
by the State having jurisdiction over the Company's loss reserves.
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 to set up by law it will forward to the Reinsurer a statement
showing the proportion of such loss reserves which is applicable to them.
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 chosen by the Reinsurer and acceptable to the appropriate insurance
authorities, in an amount equal to the Reinsurer's proportion of the loss
reserves in respect of known outstanding losses that have been reported to the
Reinsurer, allocated loss expenses relating thereto and Incurred But Not
Reported loss and loss expense as shown in the statement prepared by the
Company.
The Letter of Credit shall be "evergreen" and 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
prior to any expiration date, the bank shall notify the Company by certified or
registered mail that it elects not to consider the Letter of Credit extended for
any additional period.
The bank chosen for the issuance of the Letter of Credit 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 5
<PAGE>
At annual intervals, or more frequently as agreed but never more frequently than
semiannually, 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. If the
statement shows that the Reinsurer's share of such losses and allocated loss
expenses, and Incurred But Not Reported loss and loss expense, 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, and Incurred But Not Reported loss and loss expense, relating thereto
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.
With regard to Incurred But Not Reported losses, after consultation with their
outside Actuaries, Tillinghast, Nelson & Warren Inc., the Company intends to use
the following IBNR factors applied to gross reinsurance premiums hereunder for
purposes of this article:
Period IBNR Factor
-----------------------------------------------------
Current Year 97.0%
First Development Year 40.0%
Second Development Year 17.0%
Third Development Year 7.0%
Fourth Development Year & Subsequent Years 2.0%
The Letter of Credit funding requirement for IBNR will be net of any specific
case base loss reserves. Therefore, the factors outlined above represent the
ceiling for the sum of specific case base loss reserves and IBNR. Further, a
cap of five times the gross reinsurance premium will apply as the maximum loss
reserve, being the sum of case reserves plus IBNR, for which the Reinsurer is
required to provide funding pursuant to this article.
ARTICLE 14
----------
SPECIAL FUNDING
- ---------------
(This article is only applicable to those Reinsurers who are not subject to the
LOSS FUNDING ARTICLE).
A. If during the period of this Agreement or thereafter, should the Reinsurer
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 related thereto within 30 days from the date of receipt
by the Reinsurer of written demand by the Company to so fund. Such demand
shall not be made unless balances are 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 LOSS
FUNDING ARTICLE in respect of Letters of Credit shall apply.
Page 6
<PAGE>
C. The phrase "any loss payable" as used in paragraph A., above shall mean any
loss subject to recovery under this Agreement, if the Reinsurer has not
disputed said loss in writing prior to the due date for payment, i.e., (1)
the Reinsurer has not denied the validity of coverage or (2) the litigation
or arbitration between the Reinsurer and the Company related to the loss
has not commenced.
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, then the payment due date as defined in this
Agreement 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 an acceptable manner.
ARTICLE 15
----------
TAXES
- -----
The Company will be liable for taxes (except Federal Excise Tax) on premiums
reported to the Reinsurer hereunder.
Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at
Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are
domiciled outside the United States of America.
The Reinsurer has agreed to allow for the purpose of paying the Federal Excise
Tax 1% of the premium payable hereon to the extent such premium is subject to
Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurer will
deduct 1% from the amount of the return, and the Company or its agent should
take steps to recover the Tax from the U.S. Government.
ARTICLE 16
----------
NOTICE OF LOSS AND LOSS SETTLEMENTS
- -----------------------------------
The Company will advise the Reinsurer promptly of all claims which in the
opinion of the Company may involve the Reinsurer and of all subsequent
developments on these claims which may materially affect the position of the
Reinsurer.
The Reinsurer agrees to abide by the loss settlements of the Company, provided
that retroactive extension of Policy terms or coverages made voluntarily by the
Company and not in response to court decisions (whether such court decision is
against the Company or other companies affording the same or similar coverages)
will not be covered under this Agreement.
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.
Page 7
<PAGE>
The Reinsurer will pay its share of loss settlements immediately upon receipt of
proof of loss from the Company.
Unless otherwise provided for in the definition of Ultimate Net Loss, all
investigation, adjustment, legal expense, (including interest other than
interest accrued prior to judgment which is made part of the judgment), and
claim-specific declaratory judgment expenses, incurred by the Company (except
office expenses and salaries of officials and employees not classified as loss
adjusters) will be divided between the Company and the Reinsurer in proportion
to their respective shares of the Ultimate Net Loss. Such expenses will be in
addition to the limits stated in the COVER ARTICLE. However, if a verdict,
judgment or award is reversed or reduced the Company and the Reinsurer will
share expenses incurred in securing such reversal or reduction in the proportion
that each benefits from the reversal or reduction. Expenses incurred up to the
time of the original verdict, judgment or award will be shared in proportion to
what would have been each party's share.
The phrase "claim-specific declaratory judgment expenses," as used in this
Agreement will mean all expenses incurred by the Company in connection with
declaratory judgment actions brought to determine the Company's defense and/or
indemnification obligations that are allocable to specific Policies and claims
subject to this Agreement. Declaratory judgment expenses will be deemed to have
been incurred by the Company on the date of the original loss (if any) giving
rise to the declaratory judgment action.
ARTICLE 17
----------
EXCESS OF POLICY LIMITS
- -----------------------
In the event the Ultimate Net Loss includes an amount in excess of the Company's
Policy limit, such amount, as provided for in the definition of Ultimate Net
Loss, in excess of the Company's Policy limit shall be added to the amount of
the Company's Policy limit, and the sum thereof shall be covered hereunder,
subject to the Reinsurer's limit of liability appearing in the COVER ARTICLE of
this Agreement.
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.
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 18
----------
EXTRA CONTRACTUAL OBLIGATIONS
- -----------------------------
This Agreement shall protect the Company, subject to the Reinsurer's limit of
liability appearing in the COVER ARTICLE of this Agreement, where the loss
includes any Extra Contractual Obligations as provided for in the definition of
Ultimate Net Loss. "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 in the
preparation or prosecution of an appeal consequent upon such action.
Page 8
<PAGE>
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 loss.
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 19
----------
DELAY, OMISSION OR ERROR
- ------------------------
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, providing such delay, omission or
error is rectified upon discovery.
ARTICLE 20
----------
INSPECTION
- ----------
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
any reinsurance hereunder or claims in connection herewith.
ARTICLE 21
----------
ARBITRATION
- -----------
Any irreconcilable dispute between the parties to this Agreement will be
arbitrated in Los Angeles, California, in accordance with the attached
Arbitration Clause No. 22-01.1.
ARTICLE 22
----------
SERVICE OF SUIT
- ---------------
The attached Service of Suit Clause No. 20-03.6 - California will apply to this
Agreement.
ARTICLE 23
----------
INSOLVENCY
- ----------
In the event of the insolvency of the Company, the attached Insolvency Clause
No. 21-05.2 California 8/93 will apply.
In the event of the insolvency of any company or companies included in the
designation of "Company," this clause will apply only to the insolvent company
or companies.
Page 9
<PAGE>
ARTICLE 24
----------
CONFIDENTIALITY
- ---------------
All claim information communicated between the Company and the Reinsurer is
intended to further the joint interests of the Company and the Reinsurer in the
business covered by and related claims under this Agreement and will be
considered and will be treated by both the Company and the Reinsurer as
privileged and confidential. Claim information will not be disclosed to any
other party other than (i) counsel retained by the Company in the defense of a
claim, (ii) retrocessionaire(s) of the Reinsurer whose interest likewise may be
affected by the claim or claims, (iii) as directed by a lawful court order, (iv)
counsel retained by the Reinsurer, or (v) external accounting or compliance
auditors. The Company and the Reinsurer will take all lawful measures necessary
or required to preserve the confidentiality of claim information received from
the Company.
ARTICLE 25
----------
COMMUTATION
- -----------
The Company or the Reinsurer may, at any time, express their desire to the other
party to commute all losses that are applicable to the term of this Agreement
and that are still unsettled. In such event, the Company and the Reinsurer
shall mutually determine and evaluate such losses, and the payment by the
Reinsurer to the Company of the Reinsurer's proportion of the amount so
ascertained and mutually agreed to be the value of such losses shall relieve the
Reinsurer of all further liability, in respect of the term of this Agreement
both in respect of known and unknown losses.
ARTICLE 26
----------
INTERMEDIARY
- ------------
Sedgwick Re, Inc. is hereby recognized as the Intermediary negotiating this
Agreement for all business hereunder. All communications, including notices,
premiums, return premiums, commissions, taxes, losses, loss adjustment expenses,
salvages and loss settlements relating thereto shall be transmitted to the
Reinsurer or the Company through Sedgwick Re, Inc., 1501 Fourth Avenue, Suite
1400, Seattle, Washington 98101. 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 only to constitute payment to the
Company to the extent that such payments are actually received by the Company.
Page 10
<PAGE>
ARTICLE 27
----------
PARTICIPATION: SECOND CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENT
- -------------
EFFECTIVE: January 1, 1999
This Agreement obligates the Reinsurer for _______% of the interests and
liabilities set forth under this Agreement.
The participation of the Reinsurer in the interests and liabilities of this
Agreement shall be separate and apart from the participations of other
reinsurers and shall not be joint with those of other reinsurers, and the
Reinsurer shall in no event participate in the interests and liabilities of
other reinsurers.
IN WITNESS WHEREOF, the parties hereto, by their authorized representatives,
have executed this Agreement as of the following dates:
PARTICIPATING REINSURERS
--------------------------------------------------------------------------
J&H Marsh & McLennan (Services) Ltd.
Lloyd's, London
Syndicate No. 1007 RCV 8.7500%
Syndicate No. 1003 SJC 1.9250%
Syndicate No. 2003 SJC 6.8250%
Syndicate No. 0435 DPM 4.3810%
Syndicate No. 0205 HGJ 2.0000%
Syndicate No. 0376 JHV 3.5882%
Syndicate No. 0570 GNR 1.4951%
Syndicate No. 1212 SJB 2.9902%
Syndicate No. 1223 MEL 2.0931%
Syndicate No. 0079 PJG 2.0002%
Syndicate No. 1241/CAR 4.4853%
Syndicate No. 205/HGJ 4.4853%
CNA International Reinsurance Company Limited 2.9902%
Odyssey Re (London) Limited 2.9902%
Unionamerica Insurance Company Ltd. 2.3922%
J&H Marsh & McLennan (Services) Ltd.
GIO Insurance Ltd., Trading as GIO Reinsurance 5.000%
Hannover Re 17.500%
PMA Reinsurance Corporation 7.500%
Odyssey Reinsurance Corporation 7.500%
Toa-Re Insurance Company of America 5.000%
Zurich Reinsurance (North America), Inc. 7.500%
TOTAL 100.00%
Upon completion of Reinsurers' signing, fully executed signature pages will be
forwarded to you for the completion of your file.
Page 11
<PAGE>
and in Los Angeles, California, this day of , 2000.
SCPIE INDEMNITY COMPANY,
AMERICAN HEALTHCARE SPECIALTY INSURANCE COMPANY,
AMERICAN HEALTHCARE INDEMNITY COMPANY,
for themselves and on behalf of each member
and affiliated insurance company of
THE SCPIE COMPANIES
By_________________________________________
(signature)
___________________________________________
(name)
___________________________________________
(title)
SECOND CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENT
issued to
SCPIE INDEMNITY COMPANY
AMERICAN HEALTHCARE SPECIALTY INSURANCE COMPANY
AMERICAN HEALTHCARE INDEMNITY COMPANY
Page 12
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A.
(Wherever the word "Reassured" appears in this clause, it shall be deemed to
read "Reassured," "Reinsured," "Company," or whatever other word is employed
throughout the text of the reinsurance agreement to which this clause is
attached to designate the company or companies reinsured.)
(1) This reinsurance does not cover any loss or liability accruing to the
Reassured as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
(2) Without in any way restricting the operation of paragraph (1) of this
Clause it is understood and agreed that for all purposes of this reinsurance all
the original policies of the Reassured (new, renewal and replacement) of the
classes specified in Clause II of this paragraph (2) from the time specified in
Clause III in this paragraph (2) shall be deemed to include the following
provision (specified as the Limited Exclusion Provision):
Limited Exclusion Provision.*
I. It is agreed that the policy does not apply under any liability
coverage, to bodily injury or property damage injury, sickness, disease,
death or destruction with respect to which an insured under the policy
is also an insured under a nuclear energy liability policy issued by
Nuclear Energy Liability Insurance Association, Mutual Atomic Energy
Liability Underwriters or Nuclear Insurance Association of Canada, or
would be an insured under any such policy but for its termination upon
exhaustion of its limit of liability.
II. Family Automobile Policies (liability only), Special Automobile Policies
(private passenger automobiles, liability only), Farmers Comprehensive
Personal Liability Policies (liability only), Comprehensive Personal
Liability Policies (liability only) or policies of a similar nature; and
the liability portion of combination forms related to the four classes
of policies stated above, such as the Comprehensive Dwelling Policy and
the applicable types of Homeowners Policies.
III. The inception dates and thereafter of all original policies as described
in II above, whether new, renewal or replacement, being policies which
either
(a) become effective on or after 1st May, 1960, or
(b) become effective before that date and contain the Limited Exclusion
Provision set out above; provided this paragraph (2) shall not be
applicable to Family Automobile Policies, Special Automobile
Policies, or policies or combination policies of a similar nature,
issued by the Reassured on New York risks, until 90 days following
approval of the Limited Exclusion Provision by the Governmental
Authority having jurisdiction thereof.
(3) Except for those classes of policies specified in Clause II of paragraph
(2) and without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that for all purposes of this reinsurance
the original liability policies of the Reassured (new, renewal and replacement)
affording the following coverages:
Owners, Landlords and Tenants Liability, Contractual Liability, Elevator
Liability, Owners or Contractors (including railroad) Protective
Liability, Manufacturers and Contractors Liability, Product Liability,
Professional and Malpractice Liability, Storekeepers Liability, Garage
Liability, Automobile Liability (including Massachusetts Motor Vehicle
or Garage Liability)
shall be deemed to include, with respect to such coverages, from the time
specified in Clause V of this paragraph (3), the following provision (specified
as the Broad Exclusion Provision):
Broad Exclusion Provision.*
It is agreed that the policy does not apply:
I. Under any Liability Coverage, to bodily injury or property damage injury,
sickness, disease, death or destruction
(a) with respect to which an insured under the policy is also an insured
under a nuclear energy liability policy issued by Nuclear Energy
Liability Insurance Association, Mutual Atomic Energy Liability
Underwriters or Nuclear Insurance Association of Canada, or would be an
insured under any such policy but for its termination upon exhaustion
of its limit of liability; or
(b) resulting from the hazardous properties of nuclear material and with
respect to which (1) any person or organization is required to maintain
financial protection pursuant to the Atomic Energy Act of 1954, or any
law amendatory thereof, or (2) the insured is, or had this policy not
been issued would be, entitled to indemnity from the United States of
America, or any agency thereof, under any agreement entered into by the
United States of America, or any agency thereof, with any person or
organization.
II. Under any Medical Payments Coverage, or under any Supplementary
Payments Provision relating to first aid, immediate medical or surgical
relief to expenses incurred with respect
to bodily injury bodily injury, sickness, disease or death resulting
from the hazardous properties of nuclear material and
Page 1
<PAGE>
arising out of the operation of a nuclear facility by any person or
organization.
III. Under any Liability Coverage, to bodily injury or property damage injury,
sickness, disease, death or destruction
resulting from the hazardous properties of nuclear material, if
(a) the nuclear material (1) is at any nuclear facility owned by, or
operated by or on behalf of, an insured or (2) has been discharged or
dispersed therefrom;
(b) the nuclear material is contained in spent fuel or waste at any time
possessed, handled, used, processed, stored, transported or disposed of
by or on behalf of an insured; or
(c) the bodily injury or property damage injury, sickness, disease, death
or destruction arises out of the furnishing by an insured of services,
materials, parts or equipment in connection with the planning,
construction, maintenance, operation or use of any nuclear facility,
but if such facility is located within the United States of America,
its territories or possessions or Canada, this exclusion (c) applies
only
to property damage to such nuclear facility and any property thereat.
injury to or destruction of property at such nuclear facility.
IV. As used in this endorsement:
"hazardous properties" include radioactive, toxic or explosive
properties; "nuclear material" means source material, special nuclear
material or byproduct material; "source material," "special nuclear
material," and "byproduct material" have the meanings given them in the
Atomic Energy Act of 1954 or in any law amendatory thereof; "spent
fuel" means any fuel element or fuel component, solid or liquid, which
has been used or exposed to radiation in a nuclear reactor; "waste"
means any waste material (1) containing byproduct material other than
tailings or wastes produced by the extraction or concentration of
uranium or thorium from any ore processed primarily for its source
material content, and (2) resulting from the operation by any person or
organization of any nuclear facility included under the first two
paragraphs of the definition of nuclear facility; "nuclear facility"
means
(a) any nuclear reactor,
(b) any equipment or device designed or used for (1) separating the
isotopes of uranium or plutonium, (2) processing or utilizing
spent fuel, or (3) handling, processing or packaging waste,
(c) any equipment or device used for the processing, fabricating or
alloying of special nuclear material if at any time the total
amount of such material in the custody of the insured at the
premises where such equipment or device is located consists of or
contains more than 25 grams of plutonium or uranium 233 or any
combination thereof, or more than 250 grams of uranium 235,
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste,
and includes the site on which any of the foregoing is located, all
operations conducted on such site and all premises used for such
operations; "nuclear reactor" means any apparatus designed or used to
sustain nuclear fission in a self-supporting chain reaction or to
contain a critical mass of fissionable material;
With respect to injury to or destruction of property, the word "injury"
or destruction "property damage" includes all forms of radioactive
contamination of property. includes all forms of radioactive
contamination of property.
V. The inception dates and thereafter of all original policies affording
coverages specified in this paragraph (3), whether new, renewal or
replacement, being policies which become effective on or after 1st May,
1960, provided this paragraph (3) shall not be applicable to
(i) Garage and Automobile Policies issued by the Reassured on New
York risks, or
(ii) statutory liability insurance required under Chapter 90,
General Laws of Massachusetts,
until 90 days following approval of the Broad Exclusion Provision by
the Governmental Authority having jurisdiction thereof.
(4) Without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above are not
applicable to original liability policies of the Reassured in Canada and that
with respect to such policies this Clause shall be deemed to include the Nuclear
Energy Liability Exclusion Provisions adopted by the Canadian Underwriters'
Association or the Independent Insurance Conference of Canada.
- --------------------------------------------------------------------------------
* NOTE. The words printed in italics in the Limited Exclusion Provision and in
the Broad Exclusion Provision shall apply only in relation to original liability
policies which include a Limited Exclusion Provision or a Broad Exclusion
Provision containing those words.
- --------------------------------------------------------------------------------
Page 2
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA
1. This Agreement does not cover any loss or liability accruing to the Company
as a member of, or subscriber to, any association of insurers or reinsurers
formed for the purpose of covering nuclear energy risks or as a direct or
indirect reinsurer of any such member, subscriber or association.
2. Without in any way restricting the operation of paragraph 1 of this clause
it is agreed that for all purposes of this Agreement all the original liability
contracts of the Company, whether new, renewal or replacement, of the following
classes, namely,
Personal Liability.
Farmers Liability.
Storekeepers Liability.
which become effective on or after 31st December 1984, shall be deemed to
include, from their inception dates and thereafter, the following provision:-
Limited Exclusion Provision.
This Policy does not apply to bodily injury or property damage with respect
to which the Insured is also insured under a contract of nuclear energy
liability insurance (whether the Insured is unnamed in such contract and
whether or not it is legally enforceable by the Insured) issued by the Nuclear
Insurance Association of Canada or any other group or pool of insurers or
would be an Insured under any such policy but for its termination upon
exhaustion of its limits of liability.
With respect to property, loss of use of such property shall be deemed to
be property damage.
3. Without in any way restricting the operation of paragraph 1 of this clause
it is agreed that for all purposes of this Agreement all the original liability
contracts of the Company, whether new, renewal or replacement, of any class
whatsoever (other than Personal Liability, Farmers Liability, Storekeepers
Liability or Automobile Liability contracts), which become effective on or after
31st December 1984, shall be deemed to include, from their inception dates and
thereafter, the following provision of:-
Broad Exclusion Provision.
It is agreed that this Policy does not apply:
(a) to liability imposed by or arising under the Nuclear Liability Act; nor
(b) to bodily injury or property damage with respect to which an Insured
under this Policy is also insured under a contract of nuclear energy
liability insurance (whether the Insured is unnamed in such contract
and whether or not it is legally enforceable by the Insured) issued by
the Nuclear Insurance Association of Canada or any other insurer or
group or pool of insurers or would be an Insured under any such policy
but for its termination upon exhaustion of its limit of liability; nor
(c) to bodily injury or property damage resulting directly or indirectly
from the nuclear energy hazard arising from:
(i) the ownership, maintenance, operation or use of a nuclear facility
by or on behalf of an Insured;
(ii) the furnishing by an Insured of services, materials, parts or
equipment in connection with the planning, construction,
maintenance, operation or use of any nuclear facility; and
(iii) the possession, consumption, use, handling, disposal or
transportation of fissionable substances, or of other radioactive
material (except radioactive isotopes, away from a nuclear
facility, which have reached the final stage of fabrication so as
to be useable for any scientific, medical, agricultural,
commercial or industrial purpose) used, distributed, handled or
sold by an Insured.
As used in this Policy:
1. The term "nuclear energy hazard" means the radioactive, toxic,
explosive, or other hazardous properties of radioactive material;
2. The term "radioactive material" means uranium, thorium, plutonium,
neptunium, their respective derivatives and compounds, radioactive
isotopes of other elements and any other substances that the Atomic
Energy Control Board may, by regulation, designate as being prescribed
substances capable of releasing atomic energy, or as being requisite for
the production, use or application of atomic energy;
3. The term "nuclear facility" means:
(a) any apparatus designed or used to sustain nuclear fission in a self-
supporting chain reaction or to contain a critical mass of
plutonium, thorium and uranium or any one or more of them;
(b) any equipment or device designed or used for (i) separating the
isotopes of plutonium, thorium and uranium or any one or more of
them, (ii) processing or utilizing spent fuel, or (iii) handling,
processing or packaging waste;
(c) any equipment or device used for the processing, fabricating or
alloying of plutonium, thorium or uranium enriched in the isotope
uranium 233 or in the isotope uranium 235, or any one or more of
them if at any time the total amount of such material in the custody
of the Insured at the premises where such equipment or device is
located consists of or contains more than 25 grams of plutonium or
uranium 233 or any combination thereof, or more than 250 grams of
uranium 235;
(d) any structure, basin, excavation, premises or place prepared or used
for the storage or disposal of waste radioactive material;
and includes the site on which any of the foregoing is located, together
with all operations conducted thereon and all premises used for such
operations.
4. The term "fissionable substance" means any prescribed substance that is,
or from which can be obtained, a substance capable of releasing atomic
energy by nuclear fission.
5. With respect to property, loss of use of such property shall be deemed
to be property damage.
<PAGE>
ARBITRATION CLAUSE
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 Lloyds, 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>
SERVICE OF SUIT
This Clause applies only to a reinsurer domiciled outside the United States
of America or should the Company be authorized to do business in the State of
New York, a reinsurer unauthorized in New York as respects suits instituted in
New York.
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 Street, Los Angeles, California 90017
or in the event the suit is instituted in New York State, Messrs. Mendes &
Mount, Three Park Avenue, New York, New York 10016 and that in any suit
instituted against the Reinsurer upon this Agreement, the Reinsurer will abide
by the final decision of such court or of any appellate court in the event of an
appeal.
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.
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 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, 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.
Note:-- Wherever used herein the terms:
"Company" shall be understood to mean "Company," "Reinsured,"
"Reassured" or whatever other term is used in the attached reinsurance
Agreement to designate the reinsured company. "Agreement" shall be
understood to mean "Contract," "Agreement," "Policy" or whatever other
term is used to designate the attached reinsurance document.
<PAGE>
INSOLVENCY CLAUSE
In the event of the insolvency and the appointment of a conservator, liquidator
or statutory successor of the Company, reinsurance under this Agreement shall be
payable to such conservator, liquidator or statutory successor immediately upon
demand, with reasonable provision for verification, on the basis of claims
allowed against the insolvent Company by any court of competent jurisdiction or
by any conservator, liquidator or statutory successor of the Company having
authority to allow such claims, without diminution because of such insolvency or
because such conservator, liquidator 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 conservator, liquidator or statutory successor
except as provided by Section 4118(a) of the New York Insurance Law or except
when the Agreement specifically provides another payee of such reinsurance in
the event of the insolvency of the Company and when the Reinsurer with the
consent of the direct insured or insureds has assumed such Policy obligations of
the Company as direct obligations of the Reinsurer to the payees under such
Policies and in substitution for the obligations of the Company to such payees.
It is agreed, however, that the conservator, liquidator or statutory successor
of the insolvent Company shall give written notice to the Reinsurer of the
pendency of a claim against the insolvent Company 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 when
such claim is to be adjudicated, any defense or defenses which it may deem
available to the Company or its conservator or liquidator or statutory
successor. The expense thus incurred by the Reinsurer shall be chargeable,
subject to court approval, against the insolvent Company as part of the expense
of liquidation to the extent of a proportionate share of the benefit which may
accrue to the Company solely as a result of the defense undertaken by the
Reinsurer.
When 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 insolvent Company.
Note:-- Wherever used herein the terms:
"Company" shall be understood to mean "Company," "Reinsured,"
"Reassured" or whatever other term is used in the attached reinsurance
Agreement to designate the reinsured Company. "Agreement" shall be
understood to mean "Contract," "Agreement," "Policy" or whatever other
term is used to designate the attached reinsurance document.
<PAGE>
EXHIBIT 10.57
SCPIE INDEMNITY COMPANY
AMERICAN HEALTHCARE SPECIALTY INSURANCE COMPANY
AMERICAN HEALTHCARE INDEMNITY COMPANY
CASUALTY CLASH EXCESS OF LOSS
REINSURANCE AGREEMENT
EFFECTIVE: January 1, 1999
<TABLE>
<CAPTION>
ARTICLE SUBJECT PAGE(S)
- ------------------ ---------------------------------------------- -------------------
<S> <C> <C>
Preamble 1
1 Business Reinsured 1
2 Cover 1
3 Term 1
4 Territory 2
5 Exclusions 2
6 Premium 2
7 Reinstatement 3
8 Reports 3
9 Definitions 3
10 Net Retained Lines 4
11 Currency 4
12 Loss Funding 5
13 Special Funding 6
14 Taxes 7
15 Notice of Loss and Loss Settlements 7
16 Excess of Policy Limits 8
17 Extra Contractual Obligations 8
18 Delay, Omission or Error 9
19 Inspection 9
20 Arbitration 9
21 Service Of Suit 9
22 Insolvency 9
23 Confidentiality 9
24 Commutation 10
25 Intermediary 10
26 Participation 11
</TABLE>
<PAGE>
CASUALTY CLASH EXCESS OF LOSS REINSURANCE AGREEMENT
This Agreement is made and entered into by and between SCPIE INDEMNITY COMPANY,
AMERICAN HEALTHCARE SPECIALTY INSURANCE COMPANY, AMERICAN HEALTHCARE INDEMNITY
COMPANY, for themselves and on behalf of each member and affiliated insurance
company of THE SCPIE COMPANIES, Los Angeles, California, that now or in the
future underwrites and/or assumes business covered by this Agreement
(hereinafter together called the "Company") and the Reinsurer specifically
identified on the signature page of this Agreement (hereinafter called the
"Reinsurer").
ARTICLE 1
---------
BUSINESS REINSURED
- ------------------
A. This Agreement is to indemnify the Company in respect of the net excess
liability as a result of any loss or losses as described in paragraph B. of
this article, under any Policies classified by the Company as Comprehensive
Physicians and Surgeons Professional Liability and Personal Umbrella
business in force, written or renewed during the term of this Agreement by
Poe & Brown, Inc., Tampa, Florida, subject to the terms and conditions
herein contained.
B. For purposes of determining the attachment of the Reinsurer's liability
hereunder as respects any one Loss Occurrence, 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
circumstances is notified to the Company during the term of this Agreement
shall be covered hereunder. 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 2
---------
COVER
- -----
The Reinsurer will be liable in respect of each and every Loss Occurrence,
irrespective of the number and kinds of Policies involved, for the Ultimate Net
Loss over and above an initial Ultimate Net Loss of $10,000,000 each and every
Loss Occurrence, subject to a limit of liability to the Reinsurer of $10,000,000
each and every Loss Occurrence.
Recoveries from the Company's underlying Casualty Excess of Loss Reinsurance
Agreement(s) will not be deducted when establishing Ultimate Net Loss for
purposes of this Agreement.
ARTICLE 3
---------
TERM
- ----
This Agreement shall become effective at 12:01 a.m., Eastern Standard Time,
January 1, 1999, and shall remain in full force and effect for 12 months,
expiring 12:01 a.m., Eastern Standard Time, January 1, 2000.
<PAGE>
Upon expiration of this Agreement, at the option of the Company, the Reinsurer
will continue to cover all Policies coming within the scope of this Agreement,
until the natural expiration of such Policies, but in no event longer than 12
months from the date of expiration of this Agreement, subject to an additional
reinsurance premium equal to 50% of the reinsurance premium for the term of this
Agreement.
ARTICLE 4
---------
TERRITORY
- ---------
This Agreement will cover wherever the Company's Policies cover.
ARTICLE 5
---------
EXCLUSIONS
- ----------
This Agreement does not cover:
1. Business excluded by the attached Nuclear Incident Exclusion Clauses:
a. Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A.,
No. 08-31.1.
b. Nuclear Incident Exclusion Clause - Liability - Reinsurance - Canada,
No. 08-32.1.
2. 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 guarantee 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.
3. Pools, associations and syndicates.
ARTICLE 6
---------
PREMIUM
- -------
A. The Company will pay the Reinsurer a minimum and deposit premium of
$285,000 for the term of this Agreement, to be paid in the amount of
$71,250 on the last day of each calendar quarter.
B. Within 90 days following the expiration of this Agreement, the Company will
calculate a premium at a rate of 1.25% multiplied by the Company's Gross
Net Earned Premium Income. Should the premium so calculated exceed the
minimum and deposit premium paid in accordance with Paragraph A. above, the
Company will immediately pay the Reinsurer the difference.
<PAGE>
ARTICLE 7
---------
REINSTATEMENT
- -------------
Loss payments under this Agreement will reduce the limit of coverage afforded by
the amounts paid, but the limit of coverage may be reinstated from the time of
the occurrence of the loss at the Company's option. For each amount so
reinstated, the Company agrees to pay an additional premium calculated at pro
rata of 150% of the Reinsurer's premium for the term of this Agreement, being
pro rata only as to the fraction of the face value of this Agreement (i.e., the
fraction of $10,000,000) so reinstated. Nevertheless, the Reinsurer's liability
hereunder shall never exceed $10,000,000 in respect of any one Loss Occurrence
and, subject to the limit in respect of any one Loss Occurrence, shall be
further limited to $20,000,000 during the term of this Agreement by reason of
any and all claims arising hereunder.
The decision of the Company to exercise its reinstatement option must be relayed
to the Reinsurer within three months after payment of the loss on which the
reinstatement is based.
ARTICLE 8
---------
REPORTS
- -------
Within 90 days following the expiration of this Agreement, the Company will
furnish the Reinsurer with:
A. Gross Net Earned Premium Income of the Company for the term of this
Agreement.
B. Any other information which the Reinsurer may require to prepare its Annual
Statement which is reasonably available to the Company.
ARTICLE 9
---------
DEFINITIONS
- -----------
A. The term "Ultimate Net Loss" as used in this Agreement shall mean the
actual loss (including 80% of any Extra Contractual Obligation and 100% of
any loss in excess of Policy limits as defined in the EXTRA CONTRACTUAL
OBLIGATIONS ARTICLE and the EXCESS OF POLICY LIMITS ARTICLE herein) paid by
the Company or for which the Company becomes liable to pay (such loss to
include any expenses that are included within the Policy limit and interest
accrued prior to judgment when such interest is made part of the judgment,
but to exclude all other interest and expenses which will be pro rated in
accordance with the NOTICE OF LOSS AND LOSS SETTLEMENTS ARTICLE), but
salvages and all recoveries, including recoveries under all reinsurances
which inure to the benefit of this Agreement (whether recovered or not),
shall be first deducted from such loss to arrive at the amount of liability
attaching hereunder.
All salvages, recoveries or payments recovered or received subsequent to
loss settlement hereunder shall be applied as if recovered or received
prior to the aforesaid settlement, and all necessary adjustments shall be
made by the parties hereto.
For purposes of this definition, the phrase "becomes liable to pay" shall
mean the existence of a judgment which the Company does not intend to
appeal, or a release has been obtained by the Company, or the Company has
accepted a proof of loss.
Page 3
<PAGE>
Nothing in this clause shall be construed to mean that losses are not
recoverable hereunder until the Company's Ultimate Net Loss has been
ascertained.
B. The term "Loss Occurrence" as used in this Agreement shall mean any one
disaster or casualty or accident or loss or series of disasters or
casualties or accidents or losses arising out of or caused by one event.
The parties to this Agreement recognize that a Loss Occurrence, as defined
herein, may involve multiple Policies and that by reason of the manner in
which losses are ascribed, such as losses occurring during, Claims Made,
and Losses Discovered, a portion of the Loss Occurrence may be ascribed to
this Agreement and to other reinsurances covering on substantially the same
basis.
In such event, but only when this Agreement does not specifically prescribe
another method of handling, the Company's retention and the Reinsurer's
limit of liability for the Loss Occurrence shall be proportionate, with the
amount of Ultimate Net Loss to be retained by the Company under this
Agreement being reduced to that percentage which the Company's settled
losses attaching to this Agreement bear to the total of all the Company's
settled losses contributing to the same Loss Occurrence. The Reinsurer's
liability shall be arrived at in the same manner.
C. The term "Gross Net Earned Premium Income" as used in this Agreement shall
mean gross earned premium income on business the subject of this Agreement
less earned premium income paid for reinsurances, recoveries under which
would inure to the benefit of this Agreement.
D. The term "Policy" as used in this Agreement shall mean any binder, policy,
or contract of insurance or reinsurance issued, accepted or held covered
provisionally or otherwise, by or on behalf of the Company.
ARTICLE 10
----------
NET RETAINED LINES
- ------------------
This Agreement applies only to that portion of any insurances or reinsurances
covered by this Agreement which the Company retains net for its own account, and
in calculating the amount of any loss hereunder and also in computing the amount
in excess of which this Agreement attaches, only loss or losses in respect of
that portion of any insurances or reinsurances which the Company retains net for
its own account shall be included, it being understood and agreed that 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 reinsurers, whether specific or general, any amounts which may have
become due from them whether such inability arises from the insolvency of such
other reinsurers or otherwise.
ARTICLE 11
----------
CURRENCY
- --------
The currency to be used for all purposes of this Agreement shall be United
States of America currency.
Page 4
<PAGE>
ARTICLE 12
----------
LOSS FUNDING
- ------------
This clause is only applicable to those Reinsurers who cannot qualify for credit
by the State having jurisdiction over the Company's loss reserves.
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 to set up by law it will forward to the Reinsurer a statement
showing the proportion of such loss reserves which is applicable to them.
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 chosen by the Reinsurer and acceptable to the appropriate insurance
authorities, in an amount equal to the Reinsurer's proportion of the loss
reserves in respect of known outstanding losses that have been reported to the
Reinsurer, allocated loss expenses relating thereto and Incurred But Not
Reported loss and loss expense as shown in the statement prepared by the
Company.
The Letter of Credit shall be "evergreen" and 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
prior to any expiration date, the bank shall notify the Company by certified or
registered mail that it elects not to consider the Letter of Credit extended for
any additional period.
The bank chosen for the issuance of the Letter of Credit 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.
At annual intervals, or more frequently as agreed but never more frequently than
semiannually, 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. If the
statement shows that the Reinsurer's share of such losses and allocated loss
expenses, and Incurred But Not Reported loss and loss expense, 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, and
Incurred But Not Reported loss and loss expense, relating thereto 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.
Page 5
<PAGE>
With regard to Incurred But Not Reported losses, after consultation with their
outside Actuaries, Tillinghast, Nelson & Warren Inc., the Company intends to use
the following IBNR factors applied to gross reinsurance premiums hereunder for
purposes of this article:
Period IBNR Factor
------ -----------
Current Year 97.0%
First Development Year 40.0%
Second Development Year 17.0%
Third Development Year 7.0%
Fourth Development Year & Subsequent Years 2.0%
The Letter of Credit funding requirement for IBNR will be net of any specific
case base loss reserves. Therefore, the factors outlined above represent the
ceiling for the sum of specific case base loss reserves and IBNR. Further, a cap
of five times the gross reinsurance premium will apply as the maximum loss
reserve, being the sum of case reserves plus IBNR, for which the Reinsurer is
required to provide funding pursuant to this article.
ARTICLE 13
----------
SPECIAL FUNDING
- ---------------
(This article is only applicable to those Reinsurers who are not subject to the
LOSS FUNDING ARTICLE).
A. If during the period of this Agreement or thereafter, should the Reinsurer
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 related thereto within 30 days from the date of receipt
by the Reinsurer of written demand by the Company to so fund. Such demand
shall not be made unless balances are 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 LOSS
FUNDING ARTICLE in respect of Letters of Credit shall apply.
C. The phrase "any loss payable" as used in paragraph A., above shall mean any
loss subject to recovery under this Agreement, if the Reinsurer has not
disputed said loss in writing prior to the due date for payment, i.e., (1)
the Reinsurer has not denied the validity of coverage or (2) the litigation
or arbitration between the Reinsurer and the Company related to the loss
has not commenced.
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, then the payment due date as defined in this Agreement
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 an acceptable manner.
Page 6
<PAGE>
ARTICLE 14
----------
TAXES
- -----
The Company will be liable for taxes (except Federal Excise Tax) on premiums
reported to the Reinsurer hereunder.
Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at
Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are
domiciled outside the United States of America.
The Reinsurer has agreed to allow for the purpose of paying the Federal Excise
Tax 1% of the premium payable hereon to the extent such premium is subject to
Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurer will
deduct 1% from the amount of the return, and the Company or its agent should
take steps to recover the Tax from the U.S. Government.
ARTICLE 15
----------
NOTICE OF LOSS AND LOSS SETTLEMENTS
- -----------------------------------
The Company will advise the Reinsurer promptly of all claims which in the
opinion of the Company may involve the Reinsurer and of all subsequent
developments on these claims which may materially affect the position of the
Reinsurer.
The Reinsurer agrees to abide by the loss settlements of the Company, provided
that retroactive extension of Policy terms or coverages made voluntarily by the
Company and not in response to court decisions (whether such court decision is
against the Company or other companies affording the same or similar coverages)
will not be covered under this Agreement.
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.
The Reinsurer will pay its share of loss settlements immediately upon receipt of
proof of loss from the Company.
Unless otherwise provided for in the definition of Ultimate Net Loss, all
investigation, adjustment, legal expense, (including interest other than
interest accrued prior to judgment which is made part of the judgment), and
claim-specific declaratory judgment expenses, incurred by the Company (except
office expenses and salaries of officials and employees not classified as loss
adjusters) will be divided between the Company and the Reinsurer in proportion
to their respective shares of the Ultimate Net Loss. Such expenses will be in
addition to the limits stated in the COVER ARTICLE. However, if a verdict,
judgment or award is reversed or reduced the Company and the Reinsurer will
share expenses incurred in securing such reversal or reduction in the proportion
that each benefits from the reversal or reduction. Expenses incurred up to the
time of the original verdict, judgment or award will be shared in proportion to
what would have been each party's share.
Page 7
<PAGE>
The phrase "claim-specific declaratory judgment expenses," as used in this
Agreement will mean all expenses incurred by the Company in connection with
declaratory judgment actions brought to determine the Company's defense and/or
indemnification obligations that are allocable to specific Policies and claims
subject to this Agreement. Declaratory judgment expenses will be deemed to have
been incurred by the Company on the date of the original loss (if any) giving
rise to the declaratory judgment action.
ARTICLE 16
----------
EXCESS OF POLICY LIMITS
- -----------------------
In the event the Ultimate Net Loss includes an amount in excess of the Company's
Policy limit, such amount, as provided for in the definition of Ultimate Net
Loss, in excess of the Company's Policy limit shall be added to the amount of
the Company's Policy limit, and the sum thereof shall be covered hereunder,
subject to the Reinsurer's limit of liability appearing in the COVER ARTICLE of
this Agreement.
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.
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 17
----------
EXTRA CONTRACTUAL OBLIGATIONS
- -----------------------------
This Agreement shall protect the Company, subject to the Reinsurer's limit of
liability appearing in the COVER ARTICLE of this Agreement, where the loss
includes any Extra Contractual Obligations as provided for in the definition of
Ultimate Net Loss. "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 in the
preparation or prosecution of an appeal consequent upon such action.
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 loss.
However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
Page 8
<PAGE>
ARTICLE 18
----------
DELAY, OMISSION OR ERROR
- ------------------------
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, providing such delay, omission or
error is rectified upon discovery.
ARTICLE 19
----------
INSPECTION
- ----------
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
any reinsurance hereunder or claims in connection herewith.
ARTICLE 20
----------
ARBITRATION
- -----------
Any irreconcilable dispute between the parties to this Agreement will be
arbitrated in Los Angeles, California, in accordance with the attached
Arbitration Clause No. 22-01.1.
ARTICLE 21
----------
SERVICE OF SUIT
- ---------------
The attached Service of Suit Clause No. 20-03.6 - California will apply to this
Agreement.
ARTICLE 22
----------
INSOLVENCY
- ----------
In the event of the insolvency of the Company, the attached Insolvency Clause
No. 21-05.2 California 8/93 will apply.
In the event of the insolvency of any company or companies included in the
designation of "Company," this clause will apply only to the insolvent company
or companies.
ARTICLE 23
----------
CONFIDENTIALITY
- ---------------
All claim information communicated between the Company and the Reinsurer is
intended to further the joint interests of the Company and the Reinsurer in the
business covered by and related claims under this Agreement and will be
considered and will be treated by both the Company and the Reinsurer as
privileged and confidential. Claim information will not be disclosed to any
other party other than (i) counsel retained by the Company in the defense of a
claim, (ii) retrocessionaire(s) of the Reinsurer whose interest likewise may be
affected by the claim or claims, (iii) as directed by a
Page 9
<PAGE>
lawful court order, (iv) counsel retained by the Reinsurer, or (v) external
accounting or compliance auditors. The Company and the Reinsurer will take all
lawful measures necessary or required to preserve the confidentiality of claim
information received from the Company.
ARTICLE 24
----------
COMMUTATION
- -----------
The Company or the Reinsurer may, at any time, express their desire to the other
party to commute all losses that are applicable to the term of this Agreement
and that are still unsettled. In such event, the Company and the Reinsurer shall
mutually determine and evaluate such losses, and the payment by the Reinsurer to
the Company of the Reinsurer's proportion of the amount so ascertained and
mutually agreed to be the value of such losses shall relieve the Reinsurer of
all further liability, in respect of the term of this Agreement both in respect
of known and unknown losses.
ARTICLE 25
----------
INTERMEDIARY
- ------------
Sedgwick Re, Inc. is hereby recognized as the Intermediary negotiating this
Agreement for all business hereunder. All communications, including notices,
premiums, return premiums, commissions, taxes, losses, loss adjustment expenses,
salvages and loss settlements relating thereto shall be transmitted to the
Reinsurer or the Company through Sedgwick Re, Inc., 1501 Fourth Avenue, Suite
1400, Seattle, Washington 98101. 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 only to constitute payment to the
Company to the extent that such payments are actually received by the Company.
Page 10
<PAGE>
ARTICLE 26
----------
PARTICIPATION: CASUALTY CLASH EXCESS OF LOSS REINSURANCE AGREEMENT
- ------------- EFFECTIVE: January 1, 1999
This Agreement obligates the Reinsurer for _______% of the interests and
liabilities set forth under this Agreement.
The participation of the Reinsurer in the interests and liabilities of this
Agreement shall be separate and apart from the participations of other
reinsurers and shall not be joint with those of other reinsurers, and the
Reinsurer shall in no event participate in the interests and liabilities of
other reinsurers.
IN WITNESS WHEREOF, the parties hereto, by their authorized representatives,
have executed this Agreement as of the following dates:
PARTICIPATING REINSURERS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
J&H Marsh & McLennan (Services) Ltd.
Lloyd's, London
Syndicate No. 0435 DPM 13.4434%
Syndicate No. 1007 RCV 8.7500%
Syndicate No. 1003 SJC 1.9250%
Syndicate No. 2003 SJC 6.8250%
Syndicate No. 0205 HGJ 8.9623%
Syndicate No. 0376 JHV 5.3740%
Syndicate No. 0570 GNR 4.4811%
Syndicate No. 1212 SJB 4.4811%
Syndicate No. 1223 MEL 3.1368%
Syndicate No. 0079 PJG 4.4811%
Syndicate No. 208 SO 4.4811%
CNA International Reinsurance Company Limited 13.4434%
Unionamerica Insurance Company Ltd. 6.7217%
J&H Marsh & McLennan (Services) Ltd.
GIO Insurance Ltd., Trading as GIO Reinsurance 5.000%
Hannover Re 7.500%
PMA Reinsurance Corporation 7.500%
Zurich Reinsurance (North America), Inc. 7.500%
Odyssey Reinsurance Corporation 7.500%
-------
TOTAL: 100.00%
</TABLE>
Upon completion of Reinsurers' signing, fully executed signature pages will be
forwarded to you for the completion of your file.
Page 11
<PAGE>
and in Los Angeles, California, this day of , 2000.
SCPIE INDEMNITY COMPANY,
AMERICAN HEALTHCARE SPECIALTY
INSURANCE COMPANY, AMERICAN HEALTHCARE
INDEMNITY COMPANY,
for themselves and on behalf of each
member and affiliated insurance company of
THE SCPIE COMPANIES
By_________________________________________
(signature)
___________________________________________
(name)
___________________________________________
(title)
CASUALTY CLASH EXCESS OF LOSS REINSURANCE AGREEMENT
issued to
SCPIE INDEMNITY COMPANY
AMERICAN HEALTHCARE SPECIALTY INSURANCE COMPANY
AMERICAN HEALTHCARE INDEMNITY COMPANY
Page 12
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A.
(Wherever the word "Reassured" appears in this clause, it shall be deemed to
read "Reassured," "Reinsured," "Company," or whatever other word is employed
throughout the text of the reinsurance agreement to which this clause is
attached to designate the company or companies reinsured.)
(1) This reinsurance does not cover any loss or liability accruing to the
Reassured as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
(2) Without in any way restricting the operation of paragraph (1) of this
Clause it is understood and agreed that for all purposes of this reinsurance all
the original policies of the Reassured (new, renewal and replacement) of the
classes specified in Clause II of this paragraph (2) from the time specified in
Clause III in this paragraph (2) shall be deemed to include the following
provision (specified as the Limited Exclusion Provision):
Limited Exclusion Provision.*
I. It is agreed that the policy does not apply under any liability
coverage,
to bodily injury or property damage injury, sickness, disease, death or
destruction with respect to which an insured under the policy is also
an insured under a nuclear
energy liability policy issued by Nuclear Energy Liability Insurance
Association, Mutual Atomic Energy Liability Underwriters or Nuclear
Insurance Association of Canada, or would be an insured under any such
policy but for its termination upon exhaustion of its limit of
liability.
II. Family Automobile Policies (liability only), Special Automobile
Policies (private passenger automobiles, liability only), Farmers
Comprehensive Personal Liability Policies (liability only),
Comprehensive Personal Liability Policies (liability only) or policies
of a similar nature; and the liability portion of combination forms
related to the four classes of policies stated above, such as the
Comprehensive Dwelling Policy and the applicable types of Homeowners
Policies.
III. The inception dates and thereafter of all original policies as
described in II above, whether new, renewal or replacement, being
policies which either
(a) become effective on or after 1st May, 1960, or
(b) become effective before that date and contain the Limited Exclusion
Provision set out above; provided this paragraph (2) shall not be
applicable to Family Automobile Policies, Special Automobile
Policies, or policies or combination policies of a similar nature,
issued by the Reassured on New York risks, until 90 days following
approval of the Limited Exclusion Provision by the Governmental
Authority having jurisdiction thereof.
(3) Except for those classes of policies specified in Clause II of
paragraph (2) and without in any way restricting the operation of
paragraph (1) of this Clause, it is understood and agreed that for all
purposes of this reinsurance the original liability policies of the
Reassured (new, renewal and replacement) affording the following
coverages:
Owners, Landlords and Tenants Liability, Contractual Liability,
Elevator Liability, Owners or Contractors (including railroad)
Protective Liability, Manufacturers and Contractors Liability, Product
Liability, Professional and Malpractice Liability, Storekeepers
Liability, Garage Liability, Automobile Liability (including
Massachusetts Motor Vehicle or Garage Liability)
shall be deemed to include, with respect to such coverages, from the time
specified in Clause V of this paragraph (3), the following provision (specified
as the Broad Exclusion Provision):
Broad Exclusion Provision.*
It is agreed that the policy does not apply:
I. Under any Liability Coverage, to bodily injury or property damage injury,
sickness, disease, death or destruction
(a) with respect to which an insured under the policy is also an insured
under a nuclear energy liability policy issued by Nuclear Energy
Liability Insurance Association, Mutual Atomic Energy Liability
Underwriters or Nuclear Insurance Association of Canada, or would be an
insured under any such policy but for its termination upon exhaustion of
its limit of liability; or
(b) resulting from the hazardous properties of nuclear material and with
respect to which (1) any person or organization is required to maintain
financial protection pursuant to the Atomic Energy Act of 1954, or any
law amendatory thereof, or (2) the insured is, or had this policy not
been issued would be, entitled to indemnity from the United States of
America, or any agency thereof, under any agreement entered into by the
United States of America, or any agency thereof, with any person or
organization.
II. Under any Medical Payments Coverage, or under any Supplementary Payments
Provision relating
to first aid, immediate medical or surgical relief to expenses incurred with
respect
Page 1
<PAGE>
to bodily injury bodily injury, sickness, disease or death resulting from
the hazardous properties of nuclear material and
arising out of the operation of a nuclear facility by any person or
organization.
III. Under any Liability Coverage, to bodily injury or property damage injury,
sickness, disease, death or destruction
resulting from the hazardous properties of nuclear material, if
(a) the nuclear material (1) is at any nuclear facility owned by, or
operated by or on behalf of, an insured or (2) has been discharged or
dispersed therefrom;
(b) the nuclear material is contained in spent fuel or waste at any time
possessed, handled, used, processed, stored, transported or disposed
of by or on behalf of an insured; or
(c) the bodily injury or property damage injury, sickness, disease, death
or destruction arises out of the furnishing by an insured of
services,
materials, parts or equipment in connection with the planning,
construction, maintenance, operation or use of any nuclear facility, but
if such facility is located within the United States of America, its
territories or possessions or Canada, this exclusion (c) applies only
to injury to or destruction of property at such nuclear facility,
property damage to such nuclear facility and any property thereat.
IV. As used in this endorsement:
"hazardous properties" include radioactive, toxic or explosive properties;
"nuclear material" means source material, special nuclear material or
byproduct material; "source material," "special nuclear material," and
"byproduct material" have the meanings given them in the Atomic Energy Act
of 1954 or in any law amendatory thereof; "spent fuel" means any fuel
element or fuel component, solid or liquid, which has been used or exposed
to radiation in a nuclear reactor; "waste" means any waste material (1)
containing byproduct material other than tailings or wastes produced by
the extraction or concentration of uranium or thorium from any ore
processed primarily for its source material content, and (2) resulting
from the operation by any person or organization of any nuclear facility
included under the first two paragraphs of the definition of nuclear
facility; "nuclear facility" means
(a) any nuclear reactor,
(b) any equipment or device designed or used for (1) separating the
isotopes of uranium or plutonium, (2) processing or utilizing spent
fuel, or (3) handling, processing or packaging waste,
(c) any equipment or device used for the processing, fabricating or
alloying of special nuclear material if at any time the total amount
of such material in the custody of the insured at the premises where
such equipment or device is located consists of or contains more than
25 grams of plutonium or uranium 233 or any combination thereof, or
more than 250 grams of uranium 235,
(d) any structure, basin, excavation, premises or place prepared or used
for the storage or disposal of waste,
and includes the site on which any of the foregoing is located, all
operations conducted on such site and all premises used for such
operations; "nuclear reactor" means any apparatus designed or used to
sustain nuclear fission in a self-supporting chain reaction or to contain
a critical mass of fissionable material;
With respect to injury to or destruction of property, the word "injury" or
destruction
"property damage" includes all forms of radioactive contamination of
property.
includes all forms of radioactive contamination of property.
V. The inception dates and thereafter of all original policies affording
coverages specified in this paragraph (3), whether new, renewal or
replacement, being policies which become effective on or after 1st May,
1960, provided this paragraph (3) shall not be applicable to
(i) Garage and Automobile Policies issued by the Reassured on New York
risks, or
(ii) statutory liability insurance required under Chapter 90, General Laws
of Massachusetts,
until 90 days following approval of the Broad Exclusion Provision by the
Governmental Authority having jurisdiction thereof.
(4) Without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above are not
applicable to original liability policies of the Reassured in Canada and that
with respect to such policies this Clause shall be deemed to include the Nuclear
Energy Liability Exclusion Provisions adopted by the Canadian Underwriters'
Association or the Independent Insurance Conference of Canada.
________________________________________________________________________________
* NOTE. The words printed in italics in the Limited Exclusion Provision and in
the Broad Exclusion Provision shall apply only in relation to original liability
policies which include a Limited Exclusion Provision or a Broad Exclusion
Provision containing those words.
- --------------------------------------------------------------------------------
Page 2
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA
1. This Agreement does not cover any loss or liability accruing to the
Company as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
2. Without in any way restricting the operation of paragraph 1 of this
clause it is agreed that for all purposes of this Agreement all the original
liability contracts of the Company, whether new, renewal or replacement, of the
following classes, namely,
Personal Liability.
Farmers Liability.
Storekeepers Liability.
which become effective on or after 31st December 1984, shall be deemed to
include, from their inception dates and thereafter, the following provision:
Limited Exclusion Provision.
This Policy does not apply to bodily injury or property damage with
respect to which the Insured is also insured under a contract of nuclear
energy liability insurance (whether the Insured is unnamed in such contract
and whether or not it is legally enforceable by the Insured) issued by the
Nuclear Insurance Association of Canada or any other group or pool of insurers
or would be an Insured under any such policy but for its termination upon
exhaustion on of its limits of liability.
With respect to property, loss of use of such property shall be deemed
to be property damage.
3. Without in any way restricting the operation of paragraph 1 of this
clause it is agreed that for all purposes of this Agreement all the original
liability contracts of the Company, whether new, renewal or replacement, of any
class whatsoever (other than Personal Liability, Farmers Liability, Storekeepers
Liability or Automobile Liability contracts), which become effective on or after
31st December 1984, shall be deemed to include, from their inception dates and
thereafter, the following provision of:
Broad Exclusion Provision.
It is agreed that this Policy does not apply:
(a) to liability imposed by or arising under the Nuclear Liability
Act; nor
(b) to bodily injury or property damage with respect to which an
Insured under this Policy is also insured under a contract of
nuclear energy liability insurance (whether the Insured is unnamed
in such contract and whether or not it is legally enforceable by
the Insured) issued by the Nuclear Insurance Association of Canada
or any other insurer or group or pool of insurers or would be an
Insured under any such policy but for its termination upon
exhaustion of its limit of liability; nor
(c) to bodily injury or property damage resulting directly or
indirectly from the nuclear energy hazard arising from:
(i) the ownership, maintenance, operation or use of a nuclear
facility by or on behalf of an Insured;
(ii) the furnishing by an Insured of services, materials, parts
or equipment in connection with the planning,
construction, maintenance, operation or use of any nuclear
facility; and
(iii) the possession, consumption, use, handling, disposal or
transportation of fissionable substances, or of other
radioactive material (except radioactive isotopes, away
from a nuclear facility, which have reached the final
stage of fabrication so as to be useable for any
scientific, medical, agricultural, commercial or
industrial purpose) used, distributed, handled or sold by
an Insured.
As used in this Policy:
1. The term "nuclear energy hazard" means the radioactive, toxic,
explosive, or other hazardous properties of radioactive material;
2. The term "radioactive material" means uranium, thorium, plutonium,
neptunium, their respective derivatives and compounds, radioactive
isotopes of other elements and any other substances that the Atomic
Energy Control Board may, by regulation, designate as being prescribed
substances capable of releasing atomic energy, or as being requisite
for the production, use or application of atomic energy;
3. The term "nuclear facility" means:
(a) any apparatus designed or used to sustain nuclear fission in a
self-supporting chain reaction or to contain a critical mass of
plutonium, thorium and uranium or any one or more of them;
(b) any equipment or device designed or used for (i) separating the
isotopes of plutonium, thorium and uranium or any one or more of
them, (ii) processing or utilizing spent fuel, or (iii) handling,
processing or packaging waste;
(c) any equipment or device used for the processing, fabricating or
alloying of plutonium, thorium or uranium enriched in the isotope
uranium 233 or in the isotope uranium 235, or any one or more of
them if at any time the total amount of such material in the
custody of the Insured at the premises where such equipment or
device is located consists of or contains more than 25 grams of
plutonium or uranium 233 or any combination thereof, or more than
250 grams of uranium 235;
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste radioactive material;
and includes the site on which any of the foregoing is located,
together with all operations conducted thereon and all premises used
for such operations.
4. The term "fissionable substance" means any prescribed substance that
is, or from which can be obtained, a substance capable of releasing
atomic energy by nuclear fission.
5. With respect to property, loss of use of such property shall be deemed
to be property damage.
<PAGE>
ARBITRATION CLAUSE
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 Lloyds, 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>
SERVICE OF SUIT
This Clause applies only to a reinsurer domiciled outside the United States of
America or should the Company be authorized to do business in the State of New
York, a reinsurer unauthorized in New York as respects suits instituted in New
York.
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 Street, Los Angeles, California 90017
or in the event the suit is instituted in New York State, Messrs. Mendes &
Mount, Three Park Avenue, New York, New York 10016 and that in any suit
instituted against the Reinsurer upon this Agreement, the Reinsurer will abide
by the final decision of such court or of any appellate court in the event of an
appeal.
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.
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 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, 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.
Note:-- Wherever used herein the terms:
"Company" shall be understood to mean "Company," "Reinsured,"
"Reassured" or whatever other term is used in the attached reinsurance
Agreement to designate the reinsured company. "Agreement" shall be
understood to mean "Contract," "Agreement," "Policy" or whatever other
term is used to designate the attached reinsurance document.
<PAGE>
INSOLVENCY CLAUSE
In the event of the insolvency and the appointment of a conservator, liquidator
or statutory successor of the Company, reinsurance under this Agreement shall be
payable to such conservator, liquidator or statutory successor immediately upon
demand, with reasonable provision for verification, on the basis of claims
allowed against the insolvent Company by any court of competent jurisdiction or
by any conservator, liquidator or statutory successor of the Company having
authority to allow such claims, without diminution because of such insolvency or
because such conservator, liquidator 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 conservator, liquidator or statutory successor
except as provided by Section 4118(a) of the New York Insurance Law or except
when the Agreement specifically provides another payee of such reinsurance in
the event of the insolvency of the Company and when the Reinsurer with the
consent of the direct insured or insureds has assumed such Policy obligations of
the Company as direct obligations of the Reinsurer to the payees under such
Policies and in substitution for the obligations of the Company to such payees.
It is agreed, however, that the conservator, liquidator or statutory successor
of the insolvent Company shall give written notice to the Reinsurer of the
pendency of a claim against the insolvent Company 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 when
such claim is to be adjudicated, any defense or defenses which it may deem
available to the Company or its conservator or liquidator or statutory
successor. The expense thus incurred by the Reinsurer shall be chargeable,
subject to court approval, against the insolvent Company as part of the expense
of liquidation to the extent of a proportionate share of the benefit which may
accrue to the Company solely as a result of the defense undertaken by the
Reinsurer.
When 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 insolvent Company.
Note:-- Wherever used herein the terms:
"Company" shall be understood to mean "Company," "Reinsured,"
"Reassured" or whatever other term is used in the attached reinsurance
Agreement to designate the reinsured Company. "Agreement" shall be
understood to mean "Contract," "Agreement," "Policy" or whatever other
term is used to designate the attached reinsurance document.
<PAGE>
EXHIBIT 10.58
CASUALTY QUOTA SHARE REINSURANCE AGREEMENT
This Agreement is made and entered into by and between SCPIE INDEMNITY COMPANY,
AMERICAN HEALTHCARE SPECIALTY INSURANCE COMPANY, AMERICAN HEALTHCARE INDEMNITY
COMPANY, for themselves and on behalf of each member and affiliated insurance
company of THE SCPIE COMPANIES, Los Angeles, California, that now or in the
future underwrites and/or assumes business covered by this Agreement
(hereinafter together called the "Company") and the Reinsurer specifically
identified on the signature page of this Agreement (hereinafter called the
"Reinsurer").
ARTICLE 1
---------
BUSINESS REINSURED
- ------------------
This Agreement is to share with the Reinsurer the interests and liabilities of
the Company under any Policies classified by the Company as Texas Physicians and
Surgeons Professional Liability, underwritten by Poe & Brown, Inc., Tampa,
Florida, or by the SCPIE Companies, Los Angeles, California, subject to the
terms and conditions herein contained.
ARTICLE 2
---------
COVER
- -----
The Company will cede, and the Reinsurer will accept as reinsurance, an 80%
share of all business reinsured hereunder. Maximum cession to this Agreement
will not exceed $800,000, being 80% of $1,000,000, plus the Reinsurer's pro rata
share of loss expense.
In the event a loss involves more than one of the Company's Policies, this
Agreement shall provide coverage for each and every Policy in such loss.
The Company will retain 20% of all business net and unreinsured.
ARTICLE 3
---------
COMMENCEMENT AND TERMINATION
- ----------------------------
This Agreement shall become effective at 12:01 a.m., Pacific Standard Time,
January 1, 1999, and shall remain in full force through 12:01 a.m., Pacific
Standard Time, January 1, 2002, and continuous thereafter until terminated as
provided in the following paragraph.
Either the Company or the Reinsurer shall have the right to terminate this
Agreement as of 12:01 a.m., Pacific Standard Time, at any January 1, after
January 1, 2002, by giving 90 days' prior notice in writing via either Certified
or Registered Mail, return receipt requested.
Page 1
<PAGE>
For purposes of this Agreement, any extended reporting endorsements or
additional discovery period attaching to a Policy covered hereunder shall be
considered as part of the original Policy period of said Policy; however, in no
event thereunder shall the Reinsurer's liability extend longer than five years
from the final day of the original Policy period of such Policy. Any losses
under the extended reporting period endorsement or the discovery period
provisions of the Company's Policies shall be deemed to have been reported or
discovered on the final day of the original Policy period, to which said
endorsement or coverage was endorsed. The Reinsurer shall receive its share of
any premium applicable to said extended reporting endorsement or discovery
period coverage, which shall be considered fully earned by the Reinsurer on the
last day the original Policy was in force. Further, in conformance with state
regulations, the obligations of the Reinsurer shall extend to the reinstatement
of any aggregate limits as may be afforded by any extended reporting endorsement
or discovery period option.
In the event of termination of this Agreement, the Reinsurer will continue to
cover all Policies coming within the scope of this Agreement, including those
written or renewed during the period of notice, until the natural expiration or
anniversary of such Policies, whichever occurs first, but in no event longer
than 12 months, plus odd time, not to exceed 18 months in all, from the date of
termination.
Upon termination, the Company, at its option, may elect to terminate the
Reinsurer's liability for all losses occurring subsequent to termination. Upon
such termination, the Reinsurer will return to the Company a portfolio
representing the unearned premium reserve under this Agreement.
ARTICLE 4
---------
TERRITORY
- ---------
This Agreement applies to the territory as provided in the Company's Policies
reinsured hereunder.
ARTICLE 5
---------
EXCLUSIONS
- ----------
This Agreement does not cover:
1. Business excluded by the attached Nuclear Incident Exclusion Clauses:
a. Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A.,
No. 08-31.1.
b. Nuclear Incident Exclusion Clause - Liability - Reinsurance - Canada,
No. 08-32.1.
2. 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 guarantee 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.
3. Pools, associations and syndicates.
Page 2
<PAGE>
ARTICLE 6
---------
ACCOUNTS AND REMITTANCES
- ------------------------
A. Within 60 days following the end of each quarter, the Company will render a
net account to the Reinsurer, segregated by Underwriting Year showing:
1. Net written premium accounted for during the quarter as respects
Policy Limits up to $1,000,000; less,
2. The ceding commission as provided for in this Agreement; less,
3. Loss and loss expense paid on losses ascribed to the Underwriting
Year; plus,
Subrogation, salvage, or other recoveries on losses accounted for
during the quarter, ascribed to the Underwriting Year.
Within 90 days following the end of the quarter the debtor party will remit
to the creditor party and balance due.
This account will include a breakdown of business written by class, as well
as a notation advising of the outstanding loss and loss expense reserve and
the unearned premium reserve at the end of the period, segregated by
Underwriting Year, and any special report as provided for in the LOSS AND
LOSS EXPENSE ARTICLE.
B. Within 60 days after the end of each calendar quarter, the Company shall
report to the Reinsurer:
1. A claims bordereau listing the following for all lines of business:
a) Name of Insured
b) Line of Business
c) Date of Occurrence
d) Date Claim Made/Loss Discovered
e) Claimant Name
f) Indemnity: Paid and Reserved
g) Expense: Paid and Reserved
C. Within 30 days following the end of each annual accounting period, the
Company shall furnish to the Reinsurer any other information which the
Reinsurer may require for its Annual Convention Statement which may be
reasonably available to the Company.
ARTICLE 7
---------
CEDING COMMISSION
- -----------------
The Reinsurer will allow the Company a ceding commission of 30% of the written
premiums ceded hereunder. Return commission shall be allowed on return premiums
at the same rate.
Page 3
<PAGE>
ARTICLE 8
---------
DEFINITIONS
- -----------
A. The term "Policy" as used in this Agreement shall mean any binder, policy,
or contract of insurance or reinsurance issued, accepted or held covered
provisionally or otherwise, by or on behalf of the Company.
B. The term "Underwriting Year" as used in this Agreement shall mean those
Policies with an inception, renewal or anniversary date during each 12-
month period commencing with each January 1, and all premium attributable
to, and all loss arising out of such Policies from such inception, renewal
or anniversary date until expiration, cancellation, or next anniversary,
whichever occurs first, will be ascribed to the Underwriting Year.
ARTICLE 9
---------
ORIGINAL CONDITIONS
- -------------------
All insurance's falling under this Agreement shall be subject to the same terms,
rates, conditions and waivers, and to the same modifications, alterations and
cancellations as the respective Policies of the Company (except that in the
event of the insolvency of the Company the provisions of the INSOLVENCY ARTICLE
of this Agreement shall apply) and the Reinsurer shall be credited with its
exact proportion of the original gross premiums received by the Company.
ARTICLE 10
----------
CURRENCY
- --------
The currency to be used for all purposes of this Agreement shall be United
States of America currency.
ARTICLE 11
----------
LOSS AND UNEARNED PREMIUM RESERVE FUNDING
- -----------------------------------------
With respect to loss and unearned premium reserves, funding will be in
accordance with the attached Loss and Unearned Premium Reserve Funding Clause
No. 13-04.
ARTICLE 12
----------
TAXES
- -----
The Company will be liable for taxes (except Federal Excise Tax) on premiums
reported to the Reinsurer hereunder.
Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at
Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are
domiciled outside the United States of America.
Page 4
<PAGE>
The Reinsurer has agreed to allow for the purpose of paying the Federal Excise
Tax 1% of the premium payable hereon to the extent such premium is subject to
Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurer will
deduct 1% from the amount of the return, and the Company or its agent should
take steps to recover the Tax from the U.S. Government.
ARTICLE 13
----------
LOSS AND LOSS EXPENSE
- ---------------------
Any loss settlement made by the Company, whether under strict Policy conditions
or by way of compromise, shall be unconditionally binding upon the Reinsurer in
proportion to its participation, and the Reinsurer shall benefit proportionally
in all salvages and recoveries.
The Reinsurer shall bear its proportionate share of all expenses incurred by the
Company in the investigation, adjustment, appraisal or defense of all claims
under Policies reinsured hereunder (including claim-specific declaratory
judgment expenses but excluding office expenses and salaries of officials of the
Company) and shall receive its proportionate share of any recoveries of such
expenses.
The Reinsurer's share of losses, loss expenses and loss recoveries shall be
carried into the quarterly account for which provision is herein made.
Provided, however, that when, as a result of any one loss the anticipated amount
recoverable under this Agreement exceeds $50,000 the Company will advise the
Reinsurer by separate report, continuing to keep the Reinsurer advised as the
loss progresses. Should the ultimate disposition of the loss involve this
Agreement for an amount in excess of $250,000 the Company shall have the option
of requiring a special payment. The Reinsurer will, upon demand, remit its
proportion forthwith upon receipt of proof of loss. Should a special payment be
demanded, a notation should appear on the next account in accordance with the
ACCOUNTS AND REMITTANCES ARTICLE.
ARTICLE 14
----------
EXCESS OF POLICY LIMITS
- -----------------------
In the event the loss includes an amount in excess of the Company's Policy
limit, 100% of such amount in excess of the Company's Policy limit shall be
added to the amount of the Company's Policy limit, and the sum thereof shall be
covered hereunder, subject to the Reinsurer's limit of liability appearing in
the COVER ARTICLE of this Agreement.
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.
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.
Page 5
<PAGE>
ARTICLE 15
----------
EXTRA CONTRACTUAL OBLIGATIONS
- -----------------------------
This Agreement shall protect the Company, subject to the Reinsurer's limit of
liability appearing in the COVER ARTICLE of this Agreement, where the loss
includes any Extra Contractual Obligations for 100% of such 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 in the preparation
or prosecution of an appeal consequent upon such action.
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 loss.
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 16
----------
DELAY, OMISSION OR ERROR
- ------------------------
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, providing such delay, omission or
error is rectified upon discovery.
ARTICLE 17
----------
INSPECTION
- ----------
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
any reinsurance hereunder or claims in connection herewith.
ARTICLE 18
----------
AMENDMENTS
- ----------
This Agreement may be altered or amended in any of its terms and conditions by
mutual consent of the Company and the Reinsurer by an endorsement hereto. Such
endorsement will then constitute a part of this Agreement.
Page 6
<PAGE>
ARTICLE 19
----------
SPECIAL ACCEPTANCE
- ------------------
The Company may submit to the Reinsurer, for special acceptance hereunder,
business not covered by this Agreement. If said business is accepted by the
Reinsurer, it shall be subject to all terms and conditions of this Agreement,
except as modified by the special acceptance.
ARTICLE 20
----------
ARBITRATION
- -----------
Any irreconcilable dispute between the parties to this Agreement will be
arbitrated in Los Angeles, California, in accordance with the attached
Arbitration Clause No. 22-1.1.
ARTICLE 21
----------
CHOICE OF LAW
- -------------
This Agreement, including all matters relating to formation, validity and
performance thereof, shall be interpreted in accordance with the law of the
State of California.
ARTICLE 22
----------
INTER-COMPANY POOLING
- ---------------------
It is understood and agreed that the Company has entered into The SCPIE
COMPANIES Reinsurance Pooling Agreement whereby it assumes 100% of the liability
of the other participants in The SCPIE COMPANIES Reinsurance Pooling Agreement.
This Agreement protects such assumed liability and attaches prior to
redistribution, if any, within the participating companies. Such redistribution
shall be disregarded for all purposes of this present Agreement. For all
purposes of this present Agreement, other member companies of The SCPIE
COMPANIES Reinsurance Pooling Agreement are: SCPIE INDEMNITY COMPANY, AMERICAN
HEALTHCARE SPECIALTY INSURANCE COMPANY, AMERICAN HEALTHCARE INDEMNITY COMPANY.
It is further agreed that notice will be given to the Reinsurer within 45
(forty-five) days of the acquisition of a company, not previously a participant
in either of the above referenced, having in force business that the Company
wishes to have covered by this Agreement. In the event that either party hereto
maintains that the inclusion hereunder of some portion of the in force business
of any such new acquisition calls for alteration in the existing terms of this
Agreement, and the parties are unable to negotiate terms that are mutually
acceptable, such in force business shall be covered for an additional period of
45 days from the date the dissenting party gives to the other written notice
that said portion of the newly acquired in force business is unacceptable.
ARTICLE 23
----------
SERVICE OF SUIT
- ---------------
The attached Service of Suit Clause No. 20-03.6 - California will apply to this
Agreement.
Page 7
<PAGE>
ARTICLE 24
----------
INSOLVENCY
- ----------
In the event of the insolvency of the Company, the attached Insolvency Clause
No. 21-05.2 - 8/93 will apply.
In the event of the insolvency of any company or companies included in the
designation of "Company," this clause will apply only to the insolvent company
or companies.
ARTICLE 25
----------
INTERMEDIARY
- ------------
Sedgwick Re, Inc. is hereby recognized as the Intermediary negotiating this
Agreement for all business hereunder. All communications, including notices,
premiums, return premiums, commissions, taxes, losses, loss adjustment expenses,
salvages and loss settlements relating thereto shall be transmitted to the
Reinsurer or the Company through Sedgwick Re, Inc., 1501 Fourth Avenue, Suite
1400, Seattle, Washington 98101. 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 only to constitute payment to the
Company to the extent that such payments are actually received by the Company.
Page 8
<PAGE>
ARTICLE 26
----------
PARTICIPATION: CASUALTY QUOTA SHARE REINSURANCE AGREEMENT
- -------------
EFFECTIVE: January 1, 1999
This Agreement obligates the Reinsurer for _______% of the interests and
liabilities set forth under this Agreement.
The participation of the Reinsurer in the interests and liabilities of this
Agreement shall be separate and apart from the participation's of other
reinsurers and shall not be joint with those of other reinsurers, and the
Reinsurer shall in no event participate in the interests and liabilities of
other reinsurers.
IN WITNESS WHEREOF, the parties hereto, by their authorized representatives,
have executed this Agreement as of the following dates:
PARTICIPATING REINSURERS
------------------------------------------------------------------------
Kemper Reinsurance Company 10.00%
PMA Reinsurance Corporation 15.00%
Reliance Reinsurance Corporation
Reliance Insurance Company 50.00%
Toa-Re Insurance Company of America 10.00%
-----
TOTAL: 85.00%
Upon completion of Reinsurers' signing, fully executed signature pages will be
forwarded to you for the completion of your file.
Page 9
<PAGE>
and in Los Angeles, California, this day of , 2000.
SCPIE INDEMNITY COMPANY,
AMERICAN HEALTHCARE SPECIALTY INSURANCE COMPANY,
AMERICAN HEALTHCARE INDEMNITY COMPANY,
for themselves and on behalf of each member
and affiliated insurance company of
THE SCPIE COMPANIES
By_________________________________________
(signature)
___________________________________________
(name)
___________________________________________
(title)
CASUALTY QUOTA SHARE REINSURANCE AGREEMENT
issued to
SCPIE INDEMNITY COMPANY
AMERICAN HEALTHCARE SPECIALTY INSURANCE COMPANY
AMERICAN HEALTHCARE INDEMNITY COMPANY
Page 10
<PAGE>
EXHIBIT 10.59
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>
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, 1998 and shall remain in full force
and effect for twelve (12) consecutive months to expire September 30, 1999,
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.
<PAGE>
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.
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.
<PAGE>
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.
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
<PAGE>
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.
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.
<PAGE>
B. The amount of the Reinsurer's liability hereunder in respect of any loss or
losses shall not be increased by reason of the inability of the Company to
collect from any other reinsurer(s), whether specific or general, any amounts
which may have become due from such reinsurer(s), whether such inability
arises from the insolvency of such other reinsurer(s) or otherwise.
ARTICLE 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.
<PAGE>
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.
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 (BRMA 10A - FLAT COMMISSION) AMENDED TO 15% PLUS ORIGINAL
ACQUISITION COST NOT TO EXCEED 25% IN ALL
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.
<PAGE>
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.
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 (BRMA 36C - OFFSET UNDER THIS AGREEMENT ONLY.)
The Company and the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other under the terms of this Agreement. The
party asserting the right of offset may exercise such right any time whether the
balances due are on account of premiums or losses or otherwise.
<PAGE>
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.
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.
<PAGE>
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.
ARTICLE XXII.
UNAUTHORIZED REINSURANCE (BRMA 55A - COVERS UNEARNED PREMIUM, OUTSTANDING LOSSES
AND IBNR)
(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
<PAGE>
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;
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
<PAGE>
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.
D. All arbitrators shall be disinterested active or former executive officers of
insurance or reinsurance companies or Underwriters at Lloyd's, London.
<PAGE>
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
<PAGE>
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 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
<PAGE>
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).
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., 2 World Trade Center, New York,
New York 10048. 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>
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:
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%
<PAGE>
EXHIBIT 10.60
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>
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, 1998 and shall remain in full force
and effect for twelve (12) consecutive months to expire September 30, 1999,
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.
<PAGE>
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.
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.
<PAGE>
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.
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
<PAGE>
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.
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.
<PAGE>
B. The amount of the Reinsurer's liability hereunder in respect of any loss or
losses shall not be increased by reason of the inability of the Company to
collect from any other reinsurer(s), whether specific or general, any amounts
which may have become due from such reinsurer(s), whether such inability
arises from the insolvency of such other reinsurer(s) or otherwise.
ARTICLE 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.
<PAGE>
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.
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 (BRMA 10A - FLAT COMMISSION) AMENDED TO 15% PLUS ORIGINAL
ACQUISITION COST NOT TO EXCEED 25% IN ALL
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
<PAGE>
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.
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 (BRMA 36C - OFFSET UNDER THIS AGREEMENT ONLY.)
The Company and the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other under the terms of this Agreement. The
party asserting the right of offset may exercise such right any time whether the
balances due are on account of premiums or losses or otherwise.
<PAGE>
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.
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.
<PAGE>
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.
ARTICLE XXII.
UNAUTHORIZED REINSURANCE (BRMA 55A - COVERS UNEARNED PREMIUM, OUTSTANDING LOSSES
AND IBNR)
(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
<PAGE>
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;
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
<PAGE>
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.
D. All arbitrators shall be disinterested active or former executive officers of
insurance or reinsurance companies or Underwriters at Lloyd's, London.
<PAGE>
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
<PAGE>
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 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
<PAGE>
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).
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., 2 World Trade Center, New York,
New York 10048. 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>
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:
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%
<PAGE>
EXHIBIT 10.61
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
and/or FREMONT INDEMNITY COMPANY
(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, Errors and Omissions Liability policies for Managed Care
Organizations and Directors and Officers Liability policies which are in force
or may hereinafter come into force during
<PAGE>
the term of this Agreement, except as excluded under the Exclusions Article
subject to the limitations set forth in the Limits of Cover Article.
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, 1999.
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.
<PAGE>
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.
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
incident, and in which First Notice of Claim or Circumstance is notified to
the Company during the term of this Agreement shall be covered hereunder.
Where First Notice falls in Agreement Years prior to January 1, 1992
paragraph D. (Interlocking Clause) of the Limits of Cover Article below,
shall apply hereon for Physicians and Surgeons Comprehensive Professional
Liability policies only.
B. The date of loss hereunder shall be the earliest date, within the term of
this Agreement, that the Company has received First Notice of Claim or
Circumstance.
ARTICLE V
LIMITS OF COVER
A. 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, Errors and
Omissions Liability policies for Managed Care Organizations and/or
Directors and Officers Liability arising from any one
<PAGE>
incident. It is further understood and agreed that this Section shall
cover $1,800,000 each and every loss in excess of $200,000 each and
every loss as respects Extra Contractual Obligation losses and losses
in Excess of Original Policy Limits only, resulting from the Company's
net retained liability from the Texas Physicians and Surgeons
Professional Liability Program underwritten by Poe & Brown, Inc.,
arising from any one event.
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/or
Directors and Officers Liability and/or Professional and Business
Liability policies for Hospitals arising from any one incident.
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 Directors and Officers Liability 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.
3. The Company shall retain for its own account and pay under one or more
of the Company's policies the first $500,000 ultimate net loss, each
and every loss and the Reinsurer agrees to reimburse the Company for
the amount of ultimate net loss paid in excess of $500,000, each and
every loss, but the Reinsurer's maximum liability shall not exceed
$2,000,000 resulting from each and every loss as respects Directors
and Officers Liability and/or Errors and Omissions Liability policies
for Managed Care Organizations arising from any one incident.
B. 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.
C. The Reinsurer's maximum liability from all losses during the term of this
Agreement shall not exceed $8,500,000 or 182.5% of the Company's
Reinsurance Premiums Earned during the period, whichever is greater. It is
further agreed that the Reinsurer's maximum liability, as respects any
elected run off period, shall be limited to $8,500,000 or 182.5% of the
Company's Reinsurance Premiums Earned, whichever is greater, for said run-
off period.
<PAGE>
D. (This paragraph shall apply only to those claims where first notice of
claim or circumstance falls in Agreement Years prior to January 1, 1992.)
As respects each and every loss where this Agreement responds on a claims
made basis, and more than one insured or policy 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 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.
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 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.
4. It is understood and agreed that the Company shall maintain a 50% Quota
Share Treaty (being 50% of $5,000,000 maximum cession) covering Directors
and Officers Liability and Errors and Omissions Liability Policies for
Managed Care Organizations, recoveries under which shall inure to the
benefit of this Agreement.
5. It is understood and agreed that the Company shall maintain an 85%
placement of an 80% Quota Share Treaty (being a maximum cession of 80% of
$1,000,000/ $3,000,000 limit per physician) covering business classified by
the Company as Texas Physicians and Surgeons Professional Liability
underwritten by Poe & Brown, Inc.
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.
<PAGE>
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.
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
<PAGE>
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, 1999 through December 31, 1999), computed as follows:
INCOME
1. Premiums earned by the Reinsurer during the Agreement period.
OUTGO
<PAGE>
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, 1999, 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, 2003. 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 and Reinsurers hereby agree to pay to the
Company an amount equal to 100% of any outstanding loss and loss adjustment
expense reserves recoverable hereunder at the time of the commutation
calculation.
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.
<PAGE>
C. For the purposes of this Article, the word "loss" shall mean any amounts
for which the Company would have been contractually liable to pay had it
not been for the limit of the original policy.
ARTICLE XII
EXTRA CONTRACTUAL OBLIGATIONS CLAUSE
A. This Agreement shall protect the Company within the limits hereof, where
the ultimate net loss includes Extra Contractual Obligations. "Extra
Contractual Obligations" are defined as those liabilities not covered under
any other provision of this Agreement and which arise from handling of any
claim on business covered hereunder, such liabilities arising because of,
but not limited to the following: failure by the Company to settle within
the policy limit, or by reason of alleged or actual negligence, fraud or
bad faith in rejecting an offer of settlement or in the preparation of the
defense or in the trial of any action against its insured or reinsured or
in the preparation or prosecution of an appeal consequent upon such action.
B. The date on which an Extra Contractual Obligation is incurred by the
Company shall be deemed, in all circumstances, to be the date of the
original accident, casualty, disaster or loss and furthermore, for the
purposes hereof be deemed to follow the claims made provisions of this
Agreement, subject always to the provisions of the Term Article.
C. However, this Article shall not apply where the loss has been incurred due
to the fraud of a member of the Board of Directors or a corporate officer
of the Company acting individually or collectively or in collusion with any
individual or corporation or any other organization or party involved in
the presentation, defense or settlement of any claim covered hereunder.
ARTICLE XIII
CLAIMS
A. In the event of a claim arising hereunder which either results in or
appears to be of serious enough nature as probably to result in a loss
involving this Agreement, the Company shall give notice as soon as
reasonably practicable to Reinsurers and the Company shall keep the
Reinsurer advised of all subsequent developments in connection therewith.
B. The Company shall also promptly notify the Reinsurers of all incidents
involving the following injuries for which the Company has established an
indemnity reserve of $550,000 or greater and with policy limits to affect
Reinsurers:-
1. Death of high wage earner with two or more dependents.
<PAGE>
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. 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 $3,600,000
payable in equal quarterly installments of $900,000 on January 1st, April
1st, July 1st and October 1st, 1999. 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, 2000.
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
<PAGE>
Agreement on all business subject matter of the Agreement, subject to a
minimum premium of $2,800,000. 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.
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
<PAGE>
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.
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.
<PAGE>
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.
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
<PAGE>
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.
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
<PAGE>
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.
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
<PAGE>
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>
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>
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., 2 World Trade Center, New York,
New York 10048. 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>
EXHIBIT 10.62
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
and/or FREMONT INDEMNITY COMPANY
(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, Errors and Omissions Liability policies for Managed Care
Organizations and Directors and
<PAGE>
Officers Liability policies 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, 1993
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.
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, 1999.
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
<PAGE>
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.
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
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
<PAGE>
maximum liability shall not exceed $3,000,000 resulting from each and
every loss as respects Physicians and Surgeons Comprehensive
Professional and Business Liability policies including, Clinics and
Clinical Laboratories, Errors and Omissions Liability policies for
Managed Care Organizations and/or Directors and Officers Liability
and/or Professional and Business Liability policies for hospitals
and/or Extra Contractual Obligation losses and losses in Excess of
Original Policy Limits only, resulting from the Company's net retained
liability from the Texas Physicians and Surgeons Professional
Liability Program underwritten by Poe & Brown, Inc., arising from any
one incident.
2. As respects losses which were first reported to the Company during the
period January 1, 1986 to December 31, 1993 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,
01-92-0021 and 01-93-0021).
It is understood that the Maximum Annual Aggregate Amount recoverable
under A.1. and A.2. 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.
<PAGE>
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 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 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.
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 and Directors and Officers Liability policies, maximum
original policy limit shall not exceed $5,000,000, subject to inuring 50%
Quota Share Recoveries and Excess of Loss Reinsurance of $2,000,000 excess
of $500,000. Policy limits greater than $5,000,000 reinsured elsewhere on
an Excess of Loss basis or so deemed.
6. It is understood and agreed that the Company shall maintain an 85%
placement of an 80% Quota Share Treaty (being a maximum cession of 80% of
$1,000,000/$3,000,000 limit per physician) covering business classified by
the Company as Texas Physicians and Surgeons Professional Liability
underwritten by Poe & Brown, Inc.
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
<PAGE>
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 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.
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, 1993 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>
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.
<PAGE>
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.
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
<PAGE>
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.
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 $1,125,000
payable in equal quarterly installments of $281,250 on January 1st, April
1st, July 1st and October 1st, 1999. 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, 2000.
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
<PAGE>
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 $844,000. 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 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 the Reinsurer for such
reinstatement an additional premium calculated as follows:
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
<PAGE>
Recoverable under Sections A.1. and A.2. 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.
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>
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.
<PAGE>
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.
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
<PAGE>
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.
B. The Reinsurer shall have the sole option of determining the method of
funding referred to above, provided it is acceptable to the insurance
regulatory authorities involved. If the Reinsurer elects to fund the
aforesaid loss by a Letter of Credit, the procedures set forth in the
Funding Article in respect of Letters of Credit shall apply. If the
Reinsurer has already funded obligations hereunder in accordance with the
Funding Article in this Agreement, it agrees that such funds as are
required to pay overdue losses may immediately be drawn down by the
Company.
<PAGE>
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.
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
<PAGE>
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>
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>
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., 2 World Trade Center, New York,
New York 10048. 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>
EXHIBIT 10.63
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
and/or FREMONT INDEMNITY COMPANY
(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, Errors and Omissions Liability policies for Managed Care
Organizations and Directors and
<PAGE>
Officers Liability policies 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, 1993
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.
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, 1999.
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
<PAGE>
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.
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
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
<PAGE>
maximum liability shall not exceed $5,000,000 resulting from each and
every loss as respects Physicians and Surgeons Comprehensive
Professional and Business Liability policies, including Clinics and
Clinical Laboratories, Errors and Omissions Liability policies for
Managed Care Organizations and/or Directors and Officers Liability
and/or Professional and Business Liability policies for hospitals
and/or Extra Contractual Obligation losses and losses in Excess of
Original Policy Limits only, resulting from the Company's net retained
liability from the Texas Physicians and Surgeons Professional
Liability Program underwritten by Poe & Brown, Inc., arising from any
one incident.
2. As respects losses which were first reported to the Company during the
period January 1, 1987 to December 31, 1993 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, 01-92-0022 and
01-93-0022).
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.
B. (This paragraph shall apply only to those claims where first notice of
claim or circumstance falls in Agreement Years prior to January 1, 1992.)
As respects each and every loss where this Agreement responds on a claims
made basis, and more than one insured or policy is covered under this
Agreement period with claims made dates falling in more than one
reinsurance agreement period, the limit and retention as respects claims
covered under this Agreement shall be the percentage of the Limit and
Retention under this Agreement that the amount of covered claim or claims
hereunder bears to the total of all covered claims from the same loss.
<PAGE>
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 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 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.
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 and Directors and Officers Liability policies, the maximum
original policy limit is $5,000,000, subject to inuring 50% Quota Share
Recoveries and Excess of Loss Reinsurance of $2,000,000 excess of $500,000.
Policy limits greater than $5,000,000 reinsured elsewhere on an Excess of
Loss basis or so deemed.
6. It is understood and agreed that the Company shall maintain an 85%
placement of an 80% Quota Share Treaty (being a maximum cession of 80% of
$1,000,000/$3,000,000 limit per physician) covering business classified by
the Company as Texas Physicians and Surgeons Professional Liability
underwritten by Poe & Brown, Inc.
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>
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.
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, 1993 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>
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 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.
<PAGE>
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.
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
<PAGE>
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.
ARTICLE XIV.
PREMIUM
A. The Company shall pay to the Reinsurer a deposit premium of $416,000
payable in equal quarterly installments of $104,000 on January 1st, April
1st, July 1st and October 1st, 1999. 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, 2000.
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
<PAGE>
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 $333,000. 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 Section A.1. of the Limits of Cover Article:
1. In the event of any portion of the coverage under this Agreement being
depleted or exhausted by loss, the amount so depleted or exhausted
may, at the option of the Company, be reinstated from the time claim
is first made and the Company will pay to the Reinsurer for such
reinstatement an additional premium calculated at 100% of the annual
reinsurance premium pro rated as to the amount so reinstated.
2. All calculations of reinstatement premium shall be based on paid
losses only. The decision of the Company to exercise its reinstatement
option must be relayed to Reinsurers within three (3) months from the
time any reserve invades this Agreement.
Plus,
A. 2. As respects Section A.2. of the Limits of Cover Article:
1. In the event of a paid loss arising under this Section, additional to
the reinstatement premium payable above, a further reinstatement
premium shall be payable to the Reinsurer, to be calculated at pro
rata as respects amount reinstated and 100% as respects premium based
on an annual premium of $125,000.
2. It is understood and agreed that the payment of reinstatement premiums
arising from losses recoverable under Section A.2. above shall be
mandatory and not at the option of the Company.
B. Nevertheless, the Reinsurer's liability will never be more than $5,000,000
in respect of any claim made nor more than the Maximum Annual Aggregate
Amount Recoverable under Sections A.1. and A.2. combined of $10,000,000 in
all during the term of the Agreement.
<PAGE>
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>
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.
<PAGE>
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.
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
<PAGE>
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.
B. The Reinsurer shall have the sole option of determining the method of
funding referred to above, provided it is acceptable to the insurance
regulatory authorities involved. If the Reinsurer elects to fund the
aforesaid loss by a Letter of Credit, the procedures set forth in the
Funding Article in respect of Letters of Credit shall apply. If the
Reinsurer has already funded obligations hereunder in accordance with the
Funding Article in this Agreement, it agrees that such funds as are
required to pay overdue losses may immediately be drawn down by the
Company.
<PAGE>
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.
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
<PAGE>
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>
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>
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., 2 World Trade Center, New York,
New York 10048. 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>
EXHIBIT 10.64
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
and/or
FREMONT INDEMNITY COMPANY
(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, Errors
<PAGE>
and Omissions Liability policies for Managed Care Organizations and Directors
and Officers Liability policies 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,
1993 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.
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, 1999.
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
<PAGE>
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.
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
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
<PAGE>
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 as respects Physicians and Surgeons
Comprehensive Professional and Business Liability policies, including
Clinics and Clinical Laboratories, Errors and Omissions Liability
policies for Managed Care Organizations and/or Directors and Officers
Liability and/or Professional and Business Liability policies for
hospitals and/or Extra Contractual Obligation losses and losses in
Excess of Original Policy Limits only, resulting from the Company's
net retained liability from the Texas Physicians and Surgeons
Professional Liability Program underwritten by Poe & Brown, Inc.,
arising from any one incident.
2. As respects losses which were first reported to the Company during the
period January 1, 1992 to December 31, 1993 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 Fourth Excess of Loss Reinsurance Agreement
in force for the same period (see attached Cover Note Number 01-92-
0599 and 01-93-0599).
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.
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
<PAGE>
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 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 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.
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 and Directors and Officers Liability policies, the maximum
original policy limit is $5,000,000, subject to inuring 50% Quota Share
Recoveries and Excess of Loss Reinsurance of $2,000,000 excess of $500,000.
Policy limits greater than $5,000,000 reinsured elsewhere on an Excess of
Loss basis or so deemed.
6. It is understood and agreed that the Company shall maintain an 85%
placement of an 80% Quota Share Treaty (being a maximum cession of 80% of
$1,000,000/$3,000,000 limit per physician) covering business classified by
the Company as Texas Physicians and Surgeons Professional Liability
underwritten by Poe & Brown, Inc.
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
<PAGE>
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.
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, 1993 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 claims upon
other reinsurances and insurances which inure to the benefit of the
<PAGE>
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.
<PAGE>
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 $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.
<PAGE>
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 $556,000
payable in equal quarterly installments of $139,000 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, 2000.
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,
subject to a minimum premium of $417,000. In the event the premium due
hereunder is greater than the deposit premium paid, the difference shall be
paid to the Reinsurer forthwith. If the actual premium is less then the
deposit premium paid, the difference shall be refunded to the Company,
subject to the minimum premium.
<PAGE>
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.
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.
<PAGE>
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.
ARTICLE XIX.
CURRENCY
Premiums shall be payable by the Company and losses shall be paid to the Company
in United States currency.
<PAGE>
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>
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.
<PAGE>
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.
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
<PAGE>
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.
F. The panel shall be relieved of all judicial formality and shall not be
bound by the strict rules of procedure and evidence. Unless the panel
agrees otherwise, arbitration shall take place in Beverly Hills,
California, but the venue may be changed when deemed by the panel to be in
the best interest of the arbitration proceeding. Insofar as the arbitration
panel looks to substantive law, it shall consider the law of the State of
California. The decision of any two arbitrators when rendered in writing
shall be final and binding. The panel is empowered to grant interim relief
as it may deem appropriate.
<PAGE>
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>
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>
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., 2 World Trade Center, New York,
New York 10048. 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>
EXHIBIT 10.65
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 50% 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, 1999, 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. Hospitals.
Page 1 of 12
<PAGE>
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, 1999 through
December 31, 1999, both days inclusive.
B. If any law or regulation of the Federal, State or Local Government or any
jurisdiction in which the Company is doing business shall render illegal the
arrangements made herein, this Agreement can be terminated immediately insofar
as it applies to such jurisdiction by the Company giving notice to the Reinsurer
to such effect.
Page 2 of 12
<PAGE>
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 $2,500,000 per policy in
the aggregate and/or coverage part (i.e., 50% of $5,000,000).
B. With respect to business classified as Errors and Omissions Liability:
The liability of the Reinsurer shall not exceed $2,500,000 per policy in
the aggregate and/or coverage part (i.e., 50% of $5,000,000).
C. This Agreement is extended to protect the Company for 100% of 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 50% of its
net retained insurance liability on each risk reinsured under this Agreement.
ARTICLE VII.
DEFINITIONS:
- ------------
A. The term "net retained insurance liability" as used herein means the
remaining portion of the Company's gross liability on each risk reinsured under
this Agreement after deducting recoveries from all reinsurance, other than the
reinsurance provided.
B. The term "original gross premiums" as used herein means gross premiums and
additional premiums.
Page 3 of 12
<PAGE>
ARTICLE VIII.
ORIGINAL CONDITIONS:
- --------------------
All reinsurance coming within the terms of this Agreement shall be subject
to the same terms, rates, conditions and waivers and to the same modifications
and alterations as the respective policies of the Company, except as modified by
the terms of this Agreement.
ARTICLE IX.
EXCESS OF ORIGINAL POLICY LIMITS:
- ---------------------------------
A. This Agreement shall protect the Company, within the limits hereof, in
connection with loss in excess of the limit of its original policy, such loss in
excess of the limit having been incurred because of failure by it to settle
within the policy limit or by reason of alleged or actual negligence, fraud, or
bad faith in rejecting an offer of settlement or in the preparation of the
defense or in the trial of any action against its insured or reinsured or in the
preparation or prosecution of an appeal consequent upon such action.
B. However, this Article shall not apply where the loss has been incurred due
to fraud by a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
C. For the purpose of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original policy.
ARTICLE X.
EXTRA CONTRACTUAL OBLIGATIONS:
- ------------------------------
A. This Agreement shall protect the Company for any Extra Contractual
Obligations within the limits hereof. The term "Extra Contractual Obligations"
is defined as those liabilities not covered under any other provision of this
Agreement and which arise from the handling of any claim on business covered
hereunder, such liabilities arising because of, but not limited to, the
following: failure by the Company to settle within the policy limit, or by
reason of alleged or actual negligence, fraud, or bad faith in rejecting an
offer of settlement or in the preparation of the defense or in the trial of any
action against its insured or reinsured or in the preparation or prosecution of
an appeal consequent upon such action.
B. The date on which any Extra Contractual Obligation is incurred by the
Company shall be deemed, in all circumstances, to be the date of the original
disaster and/or casualty.
C. However, this Article shall not apply where the loss has been incurred due
to fraud by a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
Page 4 of 12
<PAGE>
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, including declaratory judgement expenses incurred in
connection with coverage questions and actions related to a specific claim
hereunder.
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 50% of the Company's original gross
premiums received by the Company on business covered hereunder.
ARTICLE XIII.
COMMISSION:
- -----------
The Reinsurer shall make a commission allowance equal to the original
acquisition cost plus 15% not to exceed 25% in all to the Company on the
premiums ceded under this Agreement. On all return premiums the Company shall
return to the Reinsurer the commission allowed thereon.
ARTICLE XIV.
REPORTS AND REMITTANCES:
- ------------------------
A. The Company will provide the Reinsurer with all necessary data respecting
premiums and losses, including reserves thereon, as at dates and on forms
mutually acceptable to the Company and the Reinsurer.
B. The Company shall render a quarterly account within forty-five (45) days
after the end of each quarter summarizing the following information relating to
reinsurance covered under this Agreement during the said quarter:
1. Statement of premiums;
2. Statement of losses and loss expenses paid and salvages recovered;
Page 5 of 12
<PAGE>
3. Account Current summarizing premiums, commissions, losses and loss
expenses paid and salvages recovered;
and any balance due the Reinsurer from the Company, as indicated by the
aforesaid Account Current, shall be remitted to the Reinsurer with the quarterly
account. Any balance due the Company from the Reinsurer shall be remitted to the
Company within sixty (60) days after the close of said quarterly account.
ARTICLE XV.
COMMUTATION CLAUSE:
- -------------------
The Company or the Reinsurer may, at any time express their desire to the
other party to commute all losses which are applicable to any Agreement year and
which are still unsettled. In such event the Company and the Reinsurer shall
mutually determine and evaluate such losses and the payment by the Reinsurer of
their proportion of the amount so ascertained and mutually agreed to be the
value of such losses shall relieve them of all further liability, in respect of
that Agreement year both in respect of known or unknown losses.
ARTICLE XVI.
OFFSET:
- -------
The Company and the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other under the terms of this Agreement. The
party asserting the right of offset may exercise such right any time whether the
balances due are on account of premiums or losses or otherwise.
ARTICLE XVII.
CONFIDENTIALITY CLAUSE:
- -----------------------
A. This Agreement and the pre Agreement documentation may contain confidential
or proprietary information of either party to this Agreement. All parties shall
maintain the confidentiality of this information and shall not disclose these to
any third party without both parties approval.
B. Notwithstanding the above, any party may disclose such information without
further approval from the other party in answer to interrogations, subpoenas or
other legal/arbitration process as well as to the Company's reinsurance
intermediary hereon, the Reinsurer's retrocessionaires or in response to
requests by governmental and regulatory agencies. In addition the parties may
disclose such information to their accountants and outside legal counsel as may
be necessary.
Page 6 of 12
<PAGE>
ARTICLE XVIII.
CURRENCY:
- ---------
Premiums shall be payable by the Company and losses shall be paid to the
Company in United States currency.
ARTICLE XIX.
FEDERAL EXCISE TAX:
- -------------------
(Applicable to those Reinsurers, excepting Underwriters at Lloyd's, London and
other Reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow, for the purpose of paying the Federal
Excise Tax, the applicable percentage of the premium payable hereon (as imposed
under Section 4371 of the Internal Revenue Service Code) to the extent such
premium is subject to the Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the Reinsurer
will deduct the aforesaid percentage from the return premium payable hereon and
the Company or its agent should take steps to recover the tax from the United
States government.
ARTICLE XX.
ERRORS AND OMISSIONS:
- ---------------------
Any inadvertent delay, omission or error shall not be held to relieve
either party hereto from any liability which would attach to it hereunder if
such delay, omission or error had not been made, provided such delay, omission
or error is rectified immediately upon discovery; provided, however, this
Article is not to override retroactive dates specified in the Term Article.
ARTICLE XXI.
ACCESS TO RECORDS:
- ------------------
A. The Company shall place at the disposal of the Reinsurer at all reasonable
times, and the Reinsurer shall have the right to inspect, through its authorized
representatives, all books, records and papers of the Company in connection with
this reinsurance hereunder or the subject matter thereof.
B. The Reinsurer shall be afforded the opportunity, at its own expense to
appoint an attorney of its own choice to assess the Company's claims procedures
who shall report to the Reinsurer the results of such.
Page 7 of 12
<PAGE>
ARTICLE XXII.
FUNDING:
- --------
(This clause is only applicable to those Reinsurer(s) who cannot qualify for
credit by the State having jurisdiction over the Company's loss reserves.)
A. As regards policies or bonds issued by the Company coming within the scope
of this Agreement, the Company agrees that, when it shall file with the
Insurance Department or set up on its books reserves for losses covered
hereunder which it shall be required by law to set up, it will forward to the
Reinsurer a statement showing the proportion of such loss reserves which is
applicable to the Reinsurer. The Reinsurer hereby agrees that it will apply for
and secure delivery to the Company of a clean, irrevocable and unconditional
Letter of Credit, issued by a bank which is acceptable to the regulatory
authority(ies) having jurisdiction over the Company's loss reserves in an amount
equal to the Reinsurer's proportion of reserves in respect of known outstanding
losses that have been reported to the Reinsurer and allocated loss expenses
relating thereto, plus reserves for losses incurred but not reported, as shown
in the statement prepared by the Company.
B. The Letter of Credit shall be issued for a period of not less than one (1)
year, and shall be automatically extended for one (1) year from its date of
expiration or any future expiration date unless thirty (30) days prior to any
expiration date the issuing bank shall notify the Company by registered mail
that the bank elects not to consider the Letter of Credit extended for any
additional period. An issuing bank, not a member of the Federal Reserve System
or not chartered in New York State shall provide sixty (60) days notice to the
Company prior to any expiration in the event of non-extension.
C. Notwithstanding any other provision of this Agreement, the Company or its
successors in interest may draw upon such credit at any time without diminution
because of the insolvency of the Company or of the Reinsurer for one or more of
the following purposes only:
1. To pay the Reinsurer's share or to reimburse the Company for the
Reinsurer's share of any loss reinsured by this Agreement, the payment
of which has been agreed by the Reinsurer and which has not been
otherwise paid.
2. To make refund of any sum which is in excess of the actual amount
required to pay the Reinsurer's share of any liability reinsured by
this Agreement.
3. In the event of expiration of the Letter of Credit as provided for
above, to establish deposit of the Reinsurer's share of known and
reported outstanding losses and allocated expenses relating thereto
under this Agreement. Such cash deposit shall be held in an interest
bearing account separate from the Company's other assets, and interest
thereon shall accrue to the benefit of the Reinsurer.
D. The issuing bank shall have no responsibility whatsoever in connection with
the propriety of withdrawals made by the Company or the disposition of funds
withdrawn, except to ensure that withdrawals are made only upon the order of
properly authorized representatives of the Company.
Page 8 of 12
<PAGE>
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>
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>
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>
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., 2 World Trade Center, New York,
New York 10048. 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>
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 01-98-0922 as per the cover note/placement slip:
1. Article I, "Business Covered", has been revised and the Reinsurer's quota
share participation has decreased from 80% to 50%.
2. Article IV, "Term", the dates have been changed, in this and all other
applicable Articles, for the current term.
3. Article V, "Limits of Cover", the Reinsurer's quota share participation
under sections A. and B. has been revised.
4. Article VI, "Company Retention", has increased to 50%.
5. Article XI, "Losses, Loss Adjustment Expenses and Salvages", section A. has
been revised to include declaratory judgement expenses.
6. Article XII, "Reinsurance Premium", has decreased from 80% to 50% of the
Company's original gross premiums received by the Company on the business
covered hereunder.
7. Article XXVII, "Intermediary", the address of the intermediary has been
updated.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
Page 1 of 1
<PAGE>
EXHIBIT 10.66
[LETTERHEAD OF GUY CARPENTER AND COMPANY, INC. APPEARS HERE]
Cover Note
- --------------------------------------------------------------------------------
File #: 8493-01 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
COMPANY:
- --------
SCPIE HOLDINGS, INC.,
AND/OR SCPIE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE SPECIALTY COMPANY,
AND/OR SCPIE INSURANCE SERVICES, INC.,
AND/OR SCPIE MANAGEMENT SERVICES, INC.,
LOS ANGELES, CALIFORNIA
TYPE:
- -----
FIRST EXCESS OF LOSS REINSURANCE
BUSINESS COVERED:
- -----------------
1. Physicians & Surgeons Comprehensive Professional and Business
Liability, including Clinics and Clinical Laboratories.
2. Professional and Business Liability Policies for Hospitals and
Healthcare Facilities, including:
a. Modified Claims Made Coverage Hospitals and Medical Centers (Primary
& Excess);
b. Claims Made Coverage Hospitals and Medical Centers (Primary &
Excess);
c. Excess Automobile Liability and Excess Employers Liability
associated with the policy forms outlined above.
- --------------------------------------------------------------------------------
<PAGE>
Page: 2 of 7
File # 8493-01 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
BUSINESS COVERED (CONTINUED)
- ----------------------------
3. Errors and Omissions Liability Policies for Managed Care Organizations,
and Directors and Officers Liability Policies.
4. Physicians and Surgeons Comprehensive Professional Liability and
Personal Umbrella Business underwritten by Brown & Brown, Inc., Tampa,
Florida.
TERM:
- -----
January 1, 2000 to December 31, 2000 as respects claims made during the
calendar year 2000.
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, or Modified Claims Made
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.
The term "claims made" shall mean claims first reported to the
Reinsured during the period January 1, 1986 to December 31, 1994 and
first reported to Reinsurers 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.
TERRITORY:
- ----------
As per the Company's original policies, contracts, or binders.
EXCLUSIONS:
- -----------
1. Insolvency Funds.
- --------------------------------------------------------------------------------
<PAGE>
Page: 3 of 7
File # 8493-01 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
EXCLUSIONS (CONTINUED)
- ----------------------
2. Nuclear Incident - Liability - Reinsurance.
3. Assumed Reinsurance other than for Licensing, Financial Rating Purposes
or Acquisition Purposes.
LIMIT AND RETENTION:
- --------------------
A.) $3,000,000 each and every loss in excess of $2,000,000 each and every
loss.
B.) $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, 1994 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, 01-93-0021, 01-94-0021).
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 $11,000,000 subject
to inuring protection of $8,000,000 in excess of $2,000,000 with a
maximum aggregate of $8,000,000 during each 12 month period.
2.) In respect of Professional and Business Liability Policies for
Hospitals and Healthcare Facilities, the Maximum Policy Limit is
$50,000,000.
3.) In respect of Errors and Omissions Liability Policies for Managed Care
Organizations and Directors and Officers Liability Policies, the
Maximum Original Policy Limit is $5,000,000.
4.) It is understood and agreed that the Company shall maintain an 80%
Quota Share Treaty (being a maximum cession of 80% of
$1,000,000/$3,000,000 limit per physician) covering business classified
by the Company as Texas Physicians and Surgeons Professional Liability
underwritten by Brown & Brown, Inc.
- --------------------------------------------------------------------------------
<PAGE>
Page: 4 of 7
File # 8493-01 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
PREMIUM:
- --------
3.00% of G.N.E.P.I.
Deposit - $5,100,000, payable $1,275,000 quarterly.
Minimum - $4,080,000
MAXIMUM AGGREGATE:
- ------------------
Reinsurers maximum liability, during the term of this Agreement shall be
$12,000,000.
ATTACHMENT OF LIABILITY:
- ------------------------
(A) For purposes of determining the attachment of the Reinsurers liability
hereunder as respects any one loss, all losses (including Discovery
Period Losses) involving one or more Original Insureds, arising from
the same 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.
(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.
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 included with the Ultimate Net Loss.
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 by Mutual Agreement.
Federal Excise Tax Clause.
Errors and Omissions Clause.
- --------------------------------------------------------------------------------
<PAGE>
Page: 5 of 7
File # 8493-01 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
GENERAL CONDITIONS (CONTINUED)
- ------------------------------
Insolvency Clause.
Service of Suit Clause.
Arbitration Clause.
Access to Records Clause.
Guy Carpenter & Company, Inc. Intermediary Clause.
INFORMATION:
- ------------
With respect to The SCPIE Companies' Reinsurance Program, The SCPIE
Companies does not consider the date change to the year 2000, or any other
date change, including leap year calculations to be an insurable event, or
a covered loss.
However, losses resulting from an otherwise covered incident under this
program, subject to the terms and conditions of the contract, will be
treated in the normal manner.
Reinsurers acknowledge that declaratory judgment expenses are covered under
this proposal in accordance with the Ultimate Net Loss Clause.
Additionally, for purposes of expanded clarification, the Reinsurers
hereunder acknowledge the following:
"Declaratory judgment expense" as used in the Ultimate Net Clause of
this Agreement will mean all expenses incurred by the Company in
connection with declaratory judgment actions brought to determine the
Company's defense and/or indemnification obligations that are allocable
to specific policies and claims subject to this Agreement. Such
declaratory judgment expenses will include those arising out of Year
2000 or date recognition issues. Declaratory judgment expense will be
deemed to have been incurred by the Company on the date of the loss (if
any) giving rise to the declaratory action. In the event there is no
loss other than declaratory judgment expense with respect to any claim
hereunder, such expense will be deemed loss for the purpose of this
Agreement.
REGULATION 98:
- --------------
Premium and loss payments made to Guy Carpenter & Company, Inc. shall be
deposited in a Premium and Loss Account in accordance with Section
32.3(a)(1) of Regulation 98 of the New York Insurance Department. The
parties hereto consent to withdrawals from said account in accordance with
Section 32.3(a)(3) of the Regulation, including interest and Federal Excise
Tax.
- --------------------------------------------------------------------------------
<PAGE>
Page: 6 of 7
File # 8493-01 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
EFFECTED WITH:
- --------------
REINSURERS FEIN # NAIC # %
- ---------- ------ ------ ----
Hannover Ruckversicherungs-Aktiengesellschaft AA-1340125 37.50%
Zurich Reinsurance (North America), Inc. 06-1325038 15.00%
-----
Subtotal 52.50%
=====
Through Guy Carpenter & Company, Ltd.,
- --------------------------------------
London, England
---------------
Underwriters at Lloyd's
- -------------------------
Underwriter Pseudonym Syndicate No. Participation FEIN #
- ----------- --------- ------------- ------------- ------
Spreckley HAW 1007 7.0000% AA-1127007
Mann DPM 435 5.4730% AA-1126435
C4009 10.9460%
Catlin NEW 1900 5.4729%
CG Jago HGJ 0205 1.8244% AA-1126205
CG Jago HGJ 0205 1.0946% AA-1126205
DJ Newman DJN 1218 3.6486% AA-1127218
HAR 2000 0.7297% AA-1128000
Bannister PJG 0079 1.8244% AA-1126079
Pipe PDA 0507 1.8243% AA-1126507
Carrington CAR 1241 3.6486% AA-1127241
U2507 1.4595% AA-1128507
Catlin SJC 1003 0.5619% AA-1127003
Catlin SJC 2003 1.9921% AA-1128003
-------
Subtotal 47.5000%
Total 100.00%
=======
- --------------------------------------------------------------------------------
<PAGE>
Page: 7 of 7
File # 8493-01 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
This Cover Note confirms the terms and conditions of the reinsurance negotiated
with the listed reinsurers on your behalf. In the event that any of these
details do not meet with your approval, or the security of the participating
reinsurers does not meet with your requirements, please notify this office
immediately. If all is in order, please sign and return one copy of this Cover
Note to confirm your approval and complete our files.
- ------------------------------------ ---------------------------------------
Managing Director
Guy Carpenter & Company, Inc. SCPIE Holdings, Inc.
- ------------------------------------ --------------------------------------
Date Date
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 10.67
[LETTERHEAD OF GUY CARPENTER & COMPANY, INC]
Cover Note
- --------------------------------------------------------------------------------
File #: 8493-02 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
COMPANY:
- --------
SCPIE HOLDINGS, INC.,
AND/OR SCPIE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE SPECIALTY COMPANY,
AND/OR SCPIE INSURANCE SERVICES, INC.,
AND/OR SCPIE MANAGEMENT SERVICES, INC.,
LOS ANGELES, CALIFORNIA
TYPE:
- -----
SECOND EXCESS OF LOSS REINSURANCE
BUSINESS COVERED:
- -----------------
1. Physicians & Surgeons Comprehensive Professional and Business
Liability, including Clinics and Clinical Laboratories.
2. Professional and Business Liability Policies for Hospitals and
Healthcare Facilities, including:
a. Modified Claims Made Coverage Hospitals and Medical Centers (Primary
& Excess);
b. Claims Made Coverage Hospitals and Medical Centers (Primary &
Excess);
c. Excess Automobile Liability and Excess Employers Liability
associated with the policy forms outlined above.
- --------------------------------------------------------------------------------
<PAGE>
Page: 2 of 7
File # 8493-02 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
BUSINESS COVERED (CONTINUED)
- ----------------------------
3. Errors and Omissions Liability Policies for Managed Care Organizations,
and Directors and Officers Liability Policies.
4. Physicians and Surgeons Comprehensive Professional Liability and
Personal Umbrella Business underwritten by Brown & Brown, Inc., Tampa,
Florida.
TERM:
- -----
January 1, 2000 to December 31, 2000 as respects claims made during the
calendar year 2000.
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, or Modified Claims Made
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 respect of recoveries made under Limit and Retention, Section B:
The term "claims made" shall mean claims first reported to the
Reinsured during the period January 1, 1987 to December 31, 1994 and
first reported to Reinsurers 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.
TERRITORY:
- ----------
As per the Company's original policies, contracts, or binders.
EXCLUSIONS:
- -----------
1. Insolvency Funds.
- --------------------------------------------------------------------------------
<PAGE>
Page: 3 of 7
File # 8493-02 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
EXCLUSIONS (CONTINUED)
- ----------------------
2. Nuclear Incident - Liability - Reinsurance.
3. Assumed Reinsurance other than for Licensing, Financial Rating Purposes
or Acquisition Purposes.
LIMIT AND RETENTION:
- --------------------
A.) $5,000,000 each and every loss in excess of $5,000,000 each and every
loss.
B.) $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, 1994 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. 01-87-0022, 01-88-0022, 01-89-0022, 01-90-0022, 01-91-0022,
01-92-0022, 01-93-0022, 01-94-0022).
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 $11,000,000 subject
to inuring protection of $8,000,000 in excess of $2,000,000 with a
maximum aggregate of $8,000,000 during each 12 month period.
2.) In respect of Professional and Business Liability Policies for
Hospitals and Healthcare Facilities, the Maximum Policy Limit is
$50,000,000.
3.) In respect of Errors and Omissions Liability Policies for Managed Care
Organizations and Directors and Officers Liability Policies, the
Maximum Original Policy Limit is $5,000,000.
4.) It is understood and agreed that the Company shall maintain an 80%
Quota Share Treaty (being a maximum cession of 80% of
$1,000,000/$3,000,000 limit per physician) covering business classified
by the Company as Texas Physicians and Surgeons Professional Liability
underwritten by Brown & Brown, Inc.
- --------------------------------------------------------------------------------
<PAGE>
Page: 4 of 7
File # 8493-02 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
PREMIUM:
- --------
1.20% of G.N.E.P.I.
Deposit - $2,040,000 payable $510,000 quarterly.
Minimum - $1,630,000
REINSTATEMENTS
- --------------
First - Computed Pro-Rata as to amount, 50% as to Premium.
Second - Computed Pro-Rata as to amount, 100% as to Premium.
ATTACHMENT OF LIABILITY:
- ------------------------
(A) For purposes of determining the attachment of the Reinsurers liability
hereunder as respects any one loss, all losses (including Discovery
Period Losses) involving one or more Original Insureds, arising from
the same 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.
(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.
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 included with the Ultimate Net Loss.
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 by Mutual Agreement.
- --------------------------------------------------------------------------------
<PAGE>
Page: 5 of 7
File # 8493-02 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
GENERAL CONDITIONS (CONTINUED)
- ------------------------------
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.
INFORMATION:
- ------------
With respect to The SCPIE Companies' Reinsurance Program, The SCPIE
Companies does not consider the date change to the year 2000, or any other
date change, including leap year calculations to be an insurable event, or
a covered loss.
However, losses resulting from an otherwise covered incident under this
program, subject to the terms and conditions of the contract, will be
treated in the normal manner.
Reinsurers acknowledge that declaratory judgment expenses are covered under
this proposal in accordance with the Ultimate Net Loss Clause.
Additionally, for purposes of expanded clarification, the Reinsurers
hereunder acknowledge the following:
"Declaratory judgment expense" as used in the Ultimate Net Clause of
this Agreement will mean all expenses incurred by the Company in
connection with declaratory judgment actions brought to determine the
Company's defense and/or indemnification obligations that are allocable
to specific policies and claims subject to this Agreement. Such
declaratory judgment expenses will include those arising out of Year
2000 or date recognition issues. Declaratory judgment expense will be
deemed to have been incurred by the Company on the date of the loss (if
any) giving rise to the declaratory action. In the event there is no
loss other than declaratory judgment expense with respect to any claim
hereunder, such expense will be deemed loss for the purpose of this
Agreement.
REGULATION 98:
- --------------
Premium and loss payments made to Guy Carpenter & Company, Inc. shall be
deposited in a Premium and Loss Account in accordance with Section
32.3(a)(1) of Regulation 98 of the New York Insurance Department. The
parties hereto consent to withdrawals from said account in accordance with
Section 32.3(a)(3) of the Regulation, including interest and Federal Excise
Tax.
- --------------------------------------------------------------------------------
<PAGE>
Page: 6 of 7
File # 8493-02 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
EFFECTED WITH:
- --------------
REINSURERS FEIN # NAIC # %
- ---------- ------ ------ ---
Europa Ruckversicherungs-Aktiengesellschaft AA-1340086 5.00%
Hannover Ruckversicherungs-Aktiengesellschaft AA-1340125 32.50%
Odyssey Reinsurance Corporation 13-2781282 25070 5.00%
PMA Reinsurance Corporation 23-2153760 39675 5.00%
Transatlantic Reinsurance Company 13-5616275 19453 5.00%
-----
Subtotal 52.50%
=====
Through Guy Carpenter & Company, Ltd.,
- --------------------------------------
London, England
---------------
Underwriters at Lloyd's
- -----------------------
Underwriter Pseudonym Syndicate No. Participation FEIN #
- ----------- --------- ------------- ------------- ------
Spreckley HAW 1007 7.0000% AA-1127007
Mann DPM 435 1.9756% AA-1126435
Corfield FRW 190 2.9634% AA-1126190
Harrington HAR 2000 2.9634% AA-1128000
Chaudle BFC 780 1.9756% AA-1126780
Catlin NEW 1900 2.9634% AA-1127900
CG Jago HGJ 0205 0.9878% AA-1126205
CG Jago HGJ 0205 0.5927% AA-1126205
Meacock SAM 727 1.3829% AA-1126727
Montgomerie AGY 376 0.7903% AA-1126376
DJ Newman DJN 1218 1.9756% AA-1127218
Bannister PJG 79 0.9878% AA-1126079
Carrington CAR 1241 1.9756% AA-1127241
U2507 2.9634% AA-1128507
Charman AGM 2488 3.9512% AA-1128488
Tweedie CFP 314 0.7903% AA-1126314
Catlin SJC 1003 0.3042% AA-1127003
Catlin SJC 2003 1.0787% AA-1128003
Helson JAN 1204 5.9268% AA-1127204
C4009 3.9513%
-------
Subtotal 47.5000%
Total 100.00%
=======
- --------------------------------------------------------------------------------
<PAGE>
Page: 7 of 7
File # 8493-02 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
This Cover Note confirms the terms and conditions of the reinsurance negotiated
with the listed reinsurers on your behalf. In the event that any of these
details do not meet with your approval, or the security of the participating
reinsurers does not meet with your requirements, please notify this office
immediately. If all is in order, please sign and return one copy of this Cover
Note to confirm your approval and complete our files.
- ------------------------------------ ---------------------------------------
Managing Director
Guy Carpenter & Company, Inc. SCPIE Holdings, Inc.
- ------------------------------------ ---------------------------------------
Date Date
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 10.68
[LETTERHEAD OF GUY CARPENTER APPEARS HERE]
Cover Note
- --------------------------------------------------------------------------------
File #: 8493-03 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
COMPANY:
- --------
SCPIE HOLDINGS, INC.,
AND/OR SCPIE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE SPECIALTY COMPANY,
AND/OR SCPIE INSURANCE SERVICES, INC.,
AND/OR SCPIE MANAGEMENT SERVICES, INC.,
LOS ANGELES, CALIFORNIA
TYPE:
- -----
THIRD EXCESS OF LOSS REINSURANCE
BUSINESS COVERED:
- -----------------
1. Physicians & Surgeons Comprehensive Professional and Business
Liability, including Clinics and Clinical Laboratories.
2. Professional and Business Liability Policies for Hospitals and
Healthcare Facilities, including:
a. Modified Claims Made Coverage Hospitals and Medical Centers
(Primary & Excess);
b. Claims Made Coverage Hospitals and Medical Centers (Primary &
Excess);
c. Excess Automobile Liability and Excess Employers Liability
associated with the policy forms outlined above.
3. Errors and Omissions Liability Policies for Managed Care Organizations,
and Directors and Officers Liability Policies.
<PAGE>
Page: 2 of 8
File #: 8493-03 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
BUSINESS COVERED (CONTINUED)
- ----------------------------
4. Physicians and Surgeons Comprehensive Professional Liability and
Personal Umbrella Business underwritten by Brown & Brown, Inc., Tampa,
Florida.
TERM:
- -----
January 1, 2000 to December 31, 2000 as respects claims made during the
calendar year 2000.
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, or Modified Claims Made
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 respect of recoveries made under Limit and Retention, Section B:
The term "claims made" shall mean claims first reported to the
Reinsured during the period January 1, 1992 to December 31, 1994 and
first reported to Reinsurers 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.
TERRITORY:
- ----------
As per the Company's original policies, contracts, or binders.
EXCLUSIONS:
- -----------
1. Insolvency Funds.
2. Nuclear Incident - Liability - Reinsurance.
<PAGE>
Page: 3 of 8
File #: 8493-03 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
EXCLUSIONS (CONTINUED)
- ----------------------
3. Assumed Reinsurance other than for Licensing, Financial Rating Purposes
or Acquisition Purposes.
LIMIT AND RETENTION:
- --------------------
A.) $10,000,000 each and every loss in excess of $10,000,000 each and every
loss.
B.) $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, 1994 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. 01-92-0599, 01-93-0599, 01-94-0599).
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 $11,000,000 subject
to inuring protection of $8,000,000 in excess of $2,000,000 with a
maximum aggregate of $8,000,000 during each 12 month period.
2.) In respect of Professional and Business Liability Policies for
Hospitals and Healthcare Facilities, the Maximum Policy Limit is
$50,000,000.
3.) In respect of Errors and Omissions Liability Policies for Managed Care
Organizations and Directors and Officers Liability Policies, the
Maximum Original Policy Limit is $5,000,000.
4.) It is understood and agreed that the Company shall maintain an 80%
Quota Share Treaty (being a maximum cession of 80% of
$1,000,000/$3,000,000 limit per physician) covering business classified
by the Company as Texas Physicians and Surgeons Professional Liability
underwritten by Brown & Brown, Inc.
<PAGE>
Page: 4 of 8
File #: 8493-03 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
PREMIUM:
- --------
.76% of G.N.E.P.I.
Deposit - $1,292,000 payable $323,000 quarterly.
Minimum - $1,034,000
REINSTATEMENTS:
- ---------------
First - Pro-Rata as to amount, 100% as to Premium.
Second - Pro-Rata as to amount, 100% as to Premium
ATTACHMENT OF LIABILITY:
- ------------------------
(A) For purposes of determining the attachment of the Reinsurers liability
hereunder as respects any one loss, all losses (including Discovery
Period Losses) involving one or more Original Insureds, arising from
the same 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.
(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.
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 included with the Ultimate Net Loss.
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 by Mutual Agreement.
Federal Excise Tax Clause.
<PAGE>
Page: 5 of 8
File #: 8493-03 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
GENERAL CONDITIONS (CONTINUED)
- ------------------------------
Errors and Omissions Clause.
Insolvency Clause.
Service of Suit Clause.
Arbitration Clause.
Access to Records Clause.
Guy Carpenter & Company, Inc. Intermediary Clause.
INFORMATION:
- ------------
With respect to The SCPIE Companies' Reinsurance Program, The SCPIE
Companies does not consider the date change to the year 2000, or any other
date change, including leap year calculations to be an insurable event, or
a covered loss.
However, losses resulting from an otherwise covered incident under this
program, subject to the terms and conditions of the contract, will be
treated in the normal manner.
Reinsurers acknowledge that declaratory judgment expenses are covered under
this proposal in accordance with the Ultimate Net Loss Clause.
Additionally, for purposes of expanded clarification, the Reinsurers
hereunder acknowledge the following:
"Declaratory judgment expense" as used in the Ultimate Net Clause of
this Agreement will mean all expenses incurred by the Company in
connection with declaratory judgment actions brought to determine the
Company's defense and/or indemnification obligations that are allocable
to specific policies and claims subject to this Agreement. Such
declaratory judgment expenses will include those arising out of Year
2000 or date recognition issues. Declaratory judgment expense will be
deemed to have been incurred by the Company on the date of the loss (if
any) giving rise to the declaratory action. In the event there is no
loss other than declaratory judgment expense with respect to any claim
hereunder, such expense will be deemed loss for the purpose of this
Agreement.
REGULATION 98:
- --------------
Premium and loss payments made to Guy Carpenter & Company, Inc. shall be
deposited in a Premium and Loss Account in accordance with Section
32.3(a)(1) of Regulation 98 of the New York Insurance Department. The
parties hereto consent to withdrawals from said account in accordance with
Section 32.3(a)(3) of the Regulation, including interest and Federal Excise
Tax.
<PAGE>
Page: 6 of 8
File #: 8493-03 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
EFFECTED WITH:
- --------------
REINSURERS FEIN # NAIC # %
- ---------- ---- ---- ---
Europa Ruckversicherungs Aktiengesellschaft AA-1340086 5.00%
Hannover
Ruckversicherungs-Aktiengesellschaft AA-1340125 15.00%
Odyssey Reinsurance Corporation 13-2781282 25070 10.00%
Transatlantic Reinsurance Company 13-56116275 19453 10.00%
Zurich Reinsurance (North America), Inc. 06-1325038 39136 17.50%
------
Subtotal 57.50%
======
Through Guy Carpenter & Company, Ltd.,
- --------------------------------------
London, England
---------------
Underwriters at Lloyd's
- -----------------------
<TABLE>
<CAPTION>
Underwriter Pseudonym Syndicate No. Participation FEIN #
- ----------- --------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Mann DPM 435 4.5132% AA-1126435
Spreckley HAW 1007 3.0089% AA-1127007
Shipley WEH 362 3.0088% AA-1126362
Harrington HAR 2000 1.5044% AA-1128000
CG Jago HGJ 0205 1.5045% AA-1126205
CG Jago HGJ 0205 0.7522% AA-1126205
Catlin NEW 1900 2.2566% AA-1127900
* WNM 250 0.9027% AA-1126250
Bannister PJG 79 0.7522% AA-1126079
Meacock SAM 727 0.7522% AA-1126727
Pipe PDA 507 1.5044% AA-1126507
Montgomerie AGY 376 0.6018% AA-1126376
Chaudle BFC 780 0.7522% AA-1126780
Goddard MEL 1223 0.9027% AA-1127223
Corfield FRW 190 2.2566% AA-1126190
DJ Newman DJN 1218 1.5044% AA-1127218
Gravett ROS 227 0.3009% AA-1126227
Pexton COX 2027 0.7522% AA-1128027
Carrington CAR 1241 1.5044% AA-1127241
US2507 2.2567% AA-1128507
Charman AGM 2488 3.0088% AA-1128488
Tweedie CFP 314 0.3761% AA-1126314
</TABLE>
<PAGE>
Page: 7 of 8
File #: 8493-03 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
<TABLE>
<S> <C> <C> <C> <C>
C4009 1.5045%
Stuchbery RAS 1096 0.7522% AA-1127096
Catlin SJC 1003 0.2317% AA-1127003
Catlin SJC 2003 0.8214% AA-1128003
Helson JAN 1204 4.5133% AA-1127204
-------
Total 42.500%
Total 100.00%
-------
</TABLE>
<PAGE>
Page: 8 of 8
File #: 8493-03 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
This Cover Note confirms the terms and conditions of the reinsurance negotiated
with the listed reinsurers on your behalf. In the event that any of these
details do not meet with your approval, or the security of the participating
reinsurers does not meet with your requirements, please notify this office
immediately. If all is in order, please sign and return one copy of this Cover
Note to confirm your approval and complete our files.
____________________________________ ____________________________________
Managing Director
Guy Carpenter & Company, Inc. SCPIE Holdings, Inc.
____________________________________ ____________________________________
Date Date
<PAGE>
EXHIBIT 10.69
[LETTERHEAD OF GUY CARPENTER APPEARS HERE]
Cover Note
- --------------------------------------------------------------------------------
File #: 8493-04 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
COMPANY:
- --------
SCPIE HOLDINGS, INC.,
AND/OR SCPIE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE SPECIALTY COMPANY,
AND/OR SCPIE INSURANCE SERVICES, INC.,
AND/OR SCPIE MANAGEMENT SERVICES, INC.,
LOS ANGELES, CALIFORNIA
TYPE:
- -----
FOURTH EXCESS OF LOSS REINSURANCE
BUSINESS COVERED:
- -----------------
1. Physicians & Surgeons Comprehensive Professional and Business
Liability, including Clinics and Clinical Laboratories.
2. Professional and Business Liability Policies for Hospitals and
Healthcare Facilities, including:
a. Modified Claims Made Coverage Hospitals and Medical Centers (Primary
& Excess);
b. Claims Made Coverage Hospitals and Medical Centers (Primary &
Excess);
c. Excess Automobile Liability and Excess Employers Liability
associated with the policy forms outlined above.
3. Errors and Omissions Liability Policies for Managed Care Organizations,
and Directors and Officers Liability Policies.
<PAGE>
Page: 2 of 7
File #: 8493-04 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
BUSINESS COVERED (CONTINUED)
- ----------------------------
4. Physicians and Surgeons Comprehensive Professional Liability and
Personal Umbrella Business underwritten by Brown & Brown, Inc., Tampa,
Florida.
TERM:
- -----
January 1, 2000 to December 31, 2000 as respects claims made during the
calendar year 2000.
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, or Modified Claims Made
Policies, claims or losses first notified to the Company during the term of
this Agreement.
Retroactive date January 1, 1976, except for Extra Contractual Obligations
which is January 1, 1979.
In the event of cancellation, and at the option of the Reinsured,
Reinsurers agree to run-off policies in force until natural expiration not
to exceed 12 months from the expiration date hereon, subject to a Premium
equal to 50% of the Actual Earned Reinsurance Premium.
TERRITORY:
- ----------
As per the Company's original policies, contracts, or binders.
EXCLUSIONS:
- -----------
1. Insolvency Funds.
2. Nuclear Incident - Liability - Reinsurance.
3. Assumed Reinsurance other than for Licensing, Financial Rating Purposes
or Acquisition Purposes.
LIMIT AND RETENTION:
- --------------------
$30,000,000 each and every loss in excess of $20,000,000 each and every
loss.
<PAGE>
Page: 3 of 7
File #: 8493-04 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
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 $11,000,000 subject
to inuring protection of $8,000,000 in excess of $2,000,000 with a
maximum aggregate of $8,000,000 during each 12 month period.
2.) In respect of Professional and Business Liability Policies for
Hospitals and Healthcare Facilities, the Maximum Policy Limit is
$50,000,000.
3.) In respect of Errors and Omissions Liability Policies for Managed Care
Organizations and Directors and Officers Liability Policies, the
Maximum Original Policy Limit is $5,000,000.
4.) It is understood and agreed that the Company shall maintain an 80%
Quota Share Treaty (being a maximum cession of 80% of
$1,000,000/$3,000,000 limit per physician) covering business
classified by the Company as Texas Physicians and Surgeons
Professional Liability underwritten by Brown & Brown, Inc.
PREMIUM:
- --------
.50% of G.N.E.P.I.
Deposit - $850,000 payable $212,500 quarterly.
Minimum - $680,000
REINSTATEMENTS
- --------------
One in all computed Pro Rata as to amount, 100% as to Premium.
ATTACHMENT OF LIABILITY:
- ------------------------
(A) For purposes of determining the attachment of the Reinsurers liability
hereunder as respects any one loss, all losses (including Discovery
Period Losses) involving one or more Original Insureds, arising from
the same 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.
(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.
<PAGE>
Page: 4 of 7
File #: 8493-04 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
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 included with the Ultimate Net Loss.
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 by Mutual Agreement.
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.
INFORMATION:
- ------------
With respect to The SCPIE Companies' Reinsurance Program, The SCPIE
Companies does not consider the date change to the year 2000, or any other
date change, including leap year calculations to be an insurable event, or
a covered loss.
However, losses resulting from an otherwise covered incident under this
program, subject to the terms and conditions of the contract, will be
treated in the normal manner.
Reinsurers acknowledge that declaratory judgment expenses are covered under
this proposal in accordance with the Ultimate Net Loss Clause.
Additionally, for purposes of expanded clarification, the Reinsurers
hereunder acknowledge the following:
<PAGE>
Page: 5 of 7
File #: 8493-04 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
GENERAL CONDITIONS (CONTINUED)
- ------------------------------
"Declaratory judgment expense" as used in the Ultimate Net Clause of
this Agreement will mean all expenses incurred by the Company in
connection with declaratory judgment actions brought to determine the
Company's defense and/or indemnification obligations that are allocable
to specific policies and claims subject to this Agreement. Such
declaratory judgment expenses will include those arising out of Year
2000 or date recognition issues. Declaratory judgment expense will be
deemed to have been incurred by the Company on the date of the loss (if
any) giving rise to the declaratory action. In the event there is no
loss other than declaratory judgment expense with respect to any claim
hereunder, such expense will be deemed loss for the purpose of this
Agreement.
REGULATION 98:
- --------------
Premium and loss payments made to Guy Carpenter & Company, Inc. shall be
deposited in a Premium and Loss Account in accordance with Section
32.3(a)(1) of Regulation 98 of the New York Insurance Department. The
parties hereto consent to withdrawals from said account in accordance with
Section 32.3(a)(3) of the Regulation, including interest and Federal Excise
Tax.
EFFECTED WITH:
- --------------
REINSURERS FEIN # NAIC # %
- ---------- ---- ---- ---
Europa Ruckversicherungs
Aktiengesellschaft AA-1340086 5.00%
Hannover
Ruckversicherungs-Aktiengesellschaft AA-1340125 15.00%
Odyssey Reinsurance Corporation 13-2781282 25070 10.00%
PMA Reinsurance Corporation 23-2153760 39675 2.50%
Transatlantic Reinsurance Company 13-56116275 19453 12.50%
Zurich Reinsurance (North America), Inc. 06-1325038 39136 15.00%
-----
Subtotal 60.00%
=====
<PAGE>
Page: 6 of 7
File #: 8493-04 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
Through Guy Carpenter & Company, Ltd.,
- --------------------------------------
London, England
---------------
Underwriters at Lloyd's
- -------------------------
Underwriter Pseudonym Syndicate No. Participation FEIN #
- ----------- --------- ------------- ------------- ------
Spreckley HAW 1007 7.0000% AA-1127007
Mann DPM 435 5.2659% AA-1126435
CG Jago HGJ 0205 2.8085% AA-1126205
CG Jago HGJ 0205 1.4043% AA-1126205
Stone WNM 250 2.8085% AA-1126250
Bannister PJG 79 1.7553% AA-1126079
Pipe PDA 507 3.5106% AA-1126507
Montgomerie AGY 376 1.4043% AA-1126376
Harrington HAR 2000 1.7553% AA-1128000
DJ Newman DJN 1218 1.0532% AA-1127218
Goddard MEL 1223 1.4043% AA-1127223
Gravett ROS 227 0.7021% AA-1126227
Pexton COX 2027 1.0532% AA-1128027
Helson JAN 1204 4.2127% AA-1127204
Catlin SJC 1003 0.5407% AA-1127003
Catlin SJC 2003 1.9168% AA-1128003
Carrington CAR 1241 1.4043% AA-1127241
-------
Total 40.000%
Total 100.00%
-------
<PAGE>
Page: 7 of 7
File #: 8493-04 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 9, 2000
This Cover Note confirms the terms and conditions of the reinsurance negotiated
with the listed reinsurers on your behalf. In the event that any of these
details do not meet with your approval, or the security of the participating
reinsurers does not meet with your requirements, please notify this office
immediately. If all is in order, please sign and return one copy of this Cover
Note to confirm your approval and complete our files.
____________________________________ _____________________________________
Managing Director
Guy Carpenter & Company, Inc. SCPIE Holdings, Inc.
____________________________________ _____________________________________
Date Date
<PAGE>
EXHIBIT 10.70
[LETTERHEAD OF GUY CARPENTER APPEARS HERE]
Cover Note
- --------------------------------------------------------------------------------
File #: 8493-05 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 20, 2000
COMPANY:
- --------
SCPIE HOLDINGS, INC.,
AND/OR SCPIE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE INDEMNITY COMPANY,
AND/OR AMERICAN HEALTHCARE SPECIALTY COMPANY,
AND/OR SCPIE INSURANCE SERVICES, INC.,
AND/OR SCPIE MANAGEMENT SERVICES, INC.,
LOS ANGELES, CALIFORNIA
TYPE:
- -----
FIFTH EXCESS OF LOSS REINSURANCE
BUSINESS COVERED:
- -----------------
1. Physicians & Surgeons Comprehensive Professional and Business
Liability, including Clinics and Clinical Laboratories.
2. Professional and Business Liability Policies for Hospitals and
Healthcare Facilities, including:
a. Modified Claims Made Coverage Hospitals and Medical Centers (Primary
& Excess);
b. Claims Made Coverage Hospitals and Medical Centers (Primary &
Excess);
c. Excess Automobile Liability and Excess Employers Liability
associated with the policy forms outlined above.
3. Errors and Omissions Liability Policies for Managed Care Organizations,
and Directors and Officers Liability Policies.
<PAGE>
Page: 2 of 6
File #: 8493-05 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 20, 2000
BUSINESS COVERED (CONTINUED)
- ----------------------------
4. Physicians and Surgeons Comprehensive Professional Liability and
Personal Umbrella Business underwritten by Brown & Brown, Inc., Tampa,
Florida.
TERM:
- -----
January 1, 2000 to December 31, 2000 as respects claims made during the
calendar year 2000.
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, or Modified Claims Made
Policies, claims or losses first notified to the Company during the term of
this Agreement.
Retroactive date January 1, 1976, except for Extra Contractual Obligations
which is January 1, 1979.
In the event of cancellation, and at the option of the Reinsured,
Reinsurers agree to run-off policies in force until natural expiration not
to exceed 12 months from the expiration date hereon, subject to a Premium
equal to 50% of the Actual Earned Reinsurance Premium.
TERRITORY:
- ----------
As per the Company's original policies, contracts, or binders.
EXCLUSIONS:
- -----------
1. Insolvency Funds.
2. Nuclear Incident - Liability - Reinsurance.
3. Assumed Reinsurance other than for Licensing, Financial Rating Purposes
or Acquisition Purposes.
LIMIT AND RETENTION:
- --------------------
$20,000,000 each and every loss in excess of $50,000,000 each and every
loss.
<PAGE>
Page: 3 of 6
File #: 8493-05 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 20, 2000
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 $11,000,000 subject
to inuring protection of $8,000,000 in excess of $2,000,000 with a
maximum aggregate of $8,000,000 during each 12 month period.
2.) In respect of Professional and Business Liability Policies for
Hospitals and Healthcare Facilities, the Maximum Policy Limit is
$50,000,000.
3.) In respect of Errors and Omissions Liability Policies for Managed Care
Organizations and Directors and Officers Liability Policies, the
Maximum Original Policy Limit is $5,000,000.
4.) It is understood and agreed that the Company shall maintain an 80%
Quota Share Treaty (being a maximum cession of 80% of
$1,000,000/$3,000,000 limit per physician) covering business
classified by the Company as Texas Physicians and Surgeons
Professional Liability underwritten by Brown & Brown, Inc.
PREMIUM:
- --------
.15% of G.N.E.P.I.
Deposit - $256,000 payable $64,000 quarterly.
Minimum - $204,800
ATTACHMENT OF LIABILITY:
- ------------------------
(A) For purposes of determining the attachment of the Reinsurers liability
hereunder as respects any one loss, all losses (including Discovery
Period Losses) involving one or more Original Insureds, arising from
the same 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.
(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.
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.
<PAGE>
Page: 4 of 6
File #: 8493-05 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 20, 2000
GENERAL CONDITIONS:
- -------------------
Loss Adjustment Expenses to be included with the Ultimate Net Loss.
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 by Mutual Agreement.
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.
INFORMATION:
- ------------
With respect to The SCPIE Companies' Reinsurance Program, The SCPIE
Companies does not consider the date change to the year 2000, or any other
date change, including leap year calculations to be an insurable event, or
a covered loss.
However, losses resulting from an otherwise covered incident under this
program, subject to the terms and conditions of the contract, will be
treated in the normal manner.
Reinsurers acknowledge that declaratory judgement expenses are covered
under this proposal in accordance with the Ultimate Net Loss Clause.
Additionally, for purposes of expanded clarification, the Reinsurers
hereunder acknowledge the following:
"Declaratory judgment expense" as used in the Ultimate Net Clause of
this Agreement will mean all expenses incurred by the Company in
connection with declaratory judgment actions brought to determine the
Company's defense and/or indemnification obligations that are allocable
to specific policies and claims subject to this Agreement. Such
declaratory judgment expenses will include those arising out of Year
2000 or date recognition issues. Declaratory judgment expense will be
deemed to have been incurred by the Company on the date of the loss (if
any) giving rise to the declaratory action. In the event there is
<PAGE>
Page: 5 of 6
File #: 8493-05 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 20, 2000
no loss other than declaratory judgment expense with respect to any
claim hereunder, such expense will be deemed loss for the purpose of
this Agreement.
REGULATION 98:
- --------------
Premium and loss payments made to Guy Carpenter & Company, Inc. shall be
deposited in a Premium and Loss Account in accordance with Section
32.3(a)(1) of Regulation 98 of the New York Insurance Department. The
parties hereto consent to withdrawals from said account in accordance with
Section 32.3(a)(3) of the Regulation, including interest and Federal Excise
Tax.
EFFECTED WITH:
- --------------
<TABLE>
<CAPTION>
REINSURERS FEIN # NAIC # %
- ---------- ------ ------ ---
<S> <C> <C> <C>
Europa Ruckversicherungs AA-1340086 5.00%
Aktiengesellschaft
Odyssey Reinsurance Corporation 13-2781282 25070 10.00%
Zurich Reinsurance (North 06-1325038 39136 10.00%
America), Inc. -----
Subtotal 25.00%
=====
</TABLE>
Through Guy Carpenter & Company, Ltd.,
- --------------------------------------
London, England
---------------
Underwriters at Lloyd's
- -----------------------
<TABLE>
<CAPTION>
Underwriter Pseudonym Syndicate No. Participation FEIN #
- ----------- ---------- ------------- ------------- ------
<S> <C> <C> <C> <C>
Mann DPM 435 10.8211% AA-1126435
Spreckley HAW 1007 7.0000% AA-1127007
Pipe PDA 507 8.6569% AA-1126507
Stone WNM 250 6.9255% AA-1126250
CG Jago HGJ 0205 2.1642% AA-1126205
CG Jago HGJ 0205 1.2985% AA-1126205
Marsh GNR 570 6.4927% AA-1126570
Beazley AFB 623 4.3285% AA-1126623
Montgomerie AGY 376 1.7314% AA-1126376
Meacock SAM 727 0.8657% AA-1126727
Caudle BFC 780 1.0821% AA-1126780
</TABLE>
<PAGE>
Page: 6 of 6
File #: 8493-05 2000 Combined
Effective Date: January 1, 2000
Issue Date: March 20, 2000
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Goddard MEL 1223 1.5582% AA-1127223
Gravett ROS 227 0.8657% AA-1126227
Pexton COX 2027 2.1642% AA-1128027
Stuchbery RAS 1096 1.2985% AA-1127096
Charman AGM 2488 8.6569% AA-1128488
Carrington CAR 1241 1.7314% AA-1127241
Catlin SJC 1003 0.6667% AA-1127003
Catlin SJC 2003 2.3633% AA-1128003
Helson JAN 1204 4.3285% AA-1127204
-------
Subtotal 75.000%
Total 100.000%
=======
</TABLE>
This Cover Note confirms the terms and conditions of the reinsurance negotiated
with the listed reinsurers on your behalf. In the event that any of these
details do not meet with your approval, or the security of the participating
reinsurers does not meet with your requirements, please notify this office
immediately. If all is in order, please sign and return one copy of this Cover
Note to confirm your approval and complete our files.
____________________________________ ___________________________________
Managing
Guy Carpenter & Company, Inc. SCPIE Holdings, Inc.
____________________________________ ___________________________________
Date Date
<PAGE>
EXHIBIT 10.72
FIRST AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
AND
---
WAIVER THEREUNDER
-----------------
This First Amendment to Credit Agreement and Waiver Thereunder ("this
----
Amendment"), dated as of October 1, 1999, is entered into by (1) SCPIE HOLDINGS
- ---------
INC., a Delaware corporation (the "Borrower"), (2) each of UNION BANK OF
--------
CALIFORNIA, N.A., FIRST UNION NATIONAL BANK and DRESDNER BANK AG, New York
Branch and Grand Cayman Branch (the "Lenders"), (3) UNION BANK OF CALIFORNIA,
-------
N.A., as Administrative Agent (in such capacity, the "Agent") and Arranger for
-----
the Lenders, and (4) FIRST UNION NATIONAL BANK, as Documentation Agent for the
Lenders (in such capacity, the Documentation Agent").
-------------------
Recitals
--------
A. The Borrower, the Lenders, the Agent and the Documentation Agent have
entered into a Credit Agreement dated as of May 25, 1999 (the "Credit
------
Agreement"). Terms defined in the Credit Agreement and not otherwise defined
- ---------
herein have the same respective meanings when used herein, and the rules of
interpretation set forth in Sections 1.2 and 1.3 of the Credit Agreement are
incorporated herein by reference.
B. The parties hereto wish to (1) amend the Credit Agreement to, among
other things, permit SCPIE Indemnity Company, a California corporation, to pay
the Borrower one or more dividends in an aggregate amount up to $80,000,000 and
permit the Borrower to repurchase shares of its common stock for an aggregate
purchase price up to $75,000,000 and (2) waive certain of the covenants under
the Credit Agreement in connection with such dividend and such repurchase.
Accordingly, the Borrower, the Lenders, the Agent and the Documentation Agent
hereby agree as set forth below.
Section 1. Amendments to Credit Agreement. Effective as of the date first
---------- ------------------------------
set forth above and subject to satisfaction of the conditions precedent set
forth in Section 3, the Credit Agreement is hereby amended as set forth below.
(a) The definition of "Fixed Charge Coverage Ratio" in Section 1.1 of
the Credit Agreement is amended in full to read as follows:
"'Fixed Charge Coverage Ratio'": as of the last day of any
----------------------------
fiscal quarter of the Borrower, for the period of four consecutive fiscal
quarters then ended
<PAGE>
(the `Measurement Period'), the ratio of (a) the aggregate of (i) the
------------------
Available Dividend Amount of the Insurance Subsidiaries of the Borrower as
of the last day of the Measurement Period (but not including the amount
permitted by the California Department of Insurance to be paid as the 1999
Special Dividend), plus (ii) aggregate EBITDA of the Borrower's
Subsidiaries other than its Insurance Subsidiaries for the Measurement
Period, plus (iii) the Net Tax Payments (whether positive or negative)
during the Measurement Period, minus (iv) the Net Overhead (whether
positive or negative) for the Measurement Period (to the extent not already
included in items (i), (ii) and (iii) above), minus (v) Earnout Payments
paid or accrued (for future payment) by the Borrower or any Subsidiary
during the Measurement Period, to (b) the sum of (i) Debt Service, (ii)
cash dividends paid by the Borrower to any shareholder, common or
preferred, during the Measurement Period and (iii) share repurchases and
redemptions by the Borrower during the Measurement Period, but excluding
the 1999 Share Repurchase and excluding any other share repurchases and
redemptions to the extent (A) such other repurchases and redemptions are
made during the period from and including the date hereof to but excluding
the first anniversary of the date hereof and (B) that the price of the
same, when added to the price of previous share repurchases and redemptions
(not including the 1999 Share Repurchase) by the Borrower on or after the
date of this Agreement, does not exceed $15,000,000."
(b) Section 1.1 of the Credit Agreement is amended by adding the
following new definitions in appropriate alphabetical order:
"`1999 Share Repurchase': the repurchase by the Borrower, before
---------------------
January 1, 2000, of shares of its Common Stock, $0.0001 par value, for an
aggregate purchase price not exceeding $75,000,000, pursuant to an offer by
the Borrower to its shareholders substantially in conformity with the draft
of the Borrower's Offer to Purchase for Cash up to 2,000,000 Shares of its
Common Stock (Including the Associated Preferred Stock Purchase Rights) at
a Purchase Price not in excess of $_____ nor less than $_____ per Share
that was delivered to the Agent under cover of a letter from the Borrower
to the Agent dated September 9, 1999."
"'1999 Special Dividend': one or more dividends paid by SCPIE
---------------------
Indemnity to the Borrower before January 1, 2000 in an aggregate amount not
exceeding $80,000,000, pursuant to the letter of
-2-
<PAGE>
approval dated August 31, 1999 issued by the California Department of
Insurance to SCPIE Indemnity."
"'SCPIE Indemnity': SCPIE Indemnity Company, a California
---------------
corporation that is one of the Borrower's Insurance Subsidiaries."
(c) Section 6.1(c) of the Credit Agreement is amended in full to read
as follows:
"(c) Minimum Tangible Net Worth. Permit the consolidated
--------------------------
Tangible Net Worth of the Borrower and its Subsidiaries as of the end of
any fiscal quarter of the Borrower to be less than the sum of (i) 90% of
the consolidated Tangible Net Worth of the Borrower and its Subsidiaries as
of December 31, 1998 (i.e., $324,020,000), plus (ii) 100% of the aggregate
----
amount of consolidated equity raised by the Borrower and its Subsidiaries
after December 31, 1998, plus (iii) 50% of the aggregate amount of
consolidated profits (without deduction for any losses) earned by the
Borrower and its Subsidiaries after December 31, 1998, minus (iv) the
aggregate price (but not exceeding $75,000,000) paid by the Borrower for
the repurchase of its shares pursuant to the 1999 Share Repurchase, minus
(v) the aggregate price (but not exceeding $15,000,000) paid by the
Borrower for any other repurchase after the date hereof of outstanding
shares of the Borrower."
(d) Section 6.2(b) of the Credit Agreement is amended in full to read
as follows:
"(b) Minimum Policyholder Surplus. Permit the Policyholder
----------------------------
Surplus of any of the Borrower's Insurance Subsidiaries as of the end of
any fiscal quarter of the Borrower to be less than the sum of (i) 90% of
such Insurance Subsidiary's Policyholder Surplus as of December 31, 1998,
plus (ii) 50% of the aggregate amount of additions to such Insurance
Subsidiary's Policyholder Surplus (without deduction for any reductions)
after December 31, 1998, minus (iii) 100% of the aggregate amount of any
dividend paid by such Insurance Subsidiary to the Borrower after December
31, 1998, to the extent that the proceeds of such dividend are invested by
the Borrower in another Insurance Subsidiary of the Borrower, plus (iv)
100% of the aggregate amount of any investment by the Borrower in such
Insurance Subsidiary after December 31, 1998, to the extent that such
investment is funded from a dividend made to the Borrower by another
Insurance Subsidiary of the Borrower, plus (v) 50% of the aggregate amount
of any other equity contributed to such Insurance Subsidiary after December
31, 1998, minus, in
-3-
<PAGE>
the case of SCPIE Indemnity only, (vi) the aggregate amount (but not
exceeding $80,000,000) of dividends paid by SCPIE Indemnity to the Borrower
pursuant to the 1999 Special Dividend."
Section 2. Waiver under Credit Agreement. Effective as of the date first
---------- -----------------------------
set forth above and subject to satisfaction of the conditions precedent set
forth in Section 3, the Lenders hereby waive the requirements of Sections 6.6,
6.7 and 6.9 of the Credit Agreement to the extent required to permit the 1999
Share Repurchase (as defined in Section 1(b)).
Section 3. Conditions to Effectiveness. This Amendment shall become
---------- ---------------------------
effective when and if the Agent has received an amendment fee of $5,000 for the
account of each Lender that approves this Amendment on or before October 4, 1999
(provided that at least two Lenders approve this Amendment on or before October
4, 1999 and that the aggregate of such fees shall not exceed $15,000) and all of
the following documents, each dated the effective date hereof (unless otherwise
specified below), in form and substance satisfactory to the Agent and in the
number of originals requested by the Agent:
(a) this Amendment, duly executed by the Borrower and the Required
Lenders;
(b) such certifications by Governmental Authorities concerning the
Borrower as the Agent may reasonably request, dated a recent date;
(c) copies of (i) the resolutions of the Board of Directors of the
Borrower approving the 1999 Share Repurchase, this Amendment and any documents
delivered by the Borrower pursuant hereto and (ii) the bylaws of the Borrower
(including all amendments thereto), certified by the Secretary or an Assistant
Secretary of the Borrower to be correct and complete and in full force and
effect as of the date of execution, and as of the effective date, of this
Amendment;
(d) a certificate of the Secretary or an Assistant Secretary of the
Borrower as to the incumbency, and setting forth a specimen signature, of each
of the persons who has signed this Amendment or any document delivered by the
Borrower pursuant hereto;
(e) a certificate of the Chief Financial Officer of the Borrower
certifying as to the correctness and completeness and full force and
effectiveness of the copies of (i) the letter of approval referred to in the
definition of "1999 Special Dividend" in Section 1(b) and (ii) the documents
referred to in the definition of "1999 Share Repurchase" in Section 1(b), as
attached to such certificate; and
-4-
<PAGE>
(f) such other approvals, opinions, evidence and documents as the
Agent may reasonably request.
Section 4. Representations and Warranties of Borrower. The Borrower
---------- ------------------------------------------
represents and warrants to the Lenders as set forth below.
(a) The execution, delivery and performance by the Borrower of this
Amendment and the Loan Documents, as amended hereby, are within the Borrower's
corporate powers, have been duly authorized by all necessary corporate action
and do not (i) contravene any Requirement of Law or Contractual Obligation
binding on or affecting the Borrower or (ii) result in or require the creation
or imposition of any Lien upon or with respect to any of the properties now
owned or hereafter acquired by the Borrower.
(b) No authorization, approval or other action by, or notice to or
filing with, any governmental authority or regulatory body is required for the
due execution, delivery or performance by the Borrower of this Amendment or any
of the Loan Documents, as amended hereby.
(c) This Amendment and the Loan Documents, as amended hereby,
constitute legal, valid and binding obligations of the Borrower enforceable
against the Borrower in accordance with their respective terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
(d) There has been no amendment to the charter documents of the
Borrower on or after May 25, 1999. The representations and warranties contained
in the Credit Agreement, each other Loan Document and each certificate or other
writing delivered to the Lenders in connection with the Credit Agreement are
correct on and as of the effective date of this Amendment in all material
respects as though made on and as of such date, except to the extent that such
representations and warranties expressly relate to an earlier date. No Default
has occurred and is continuing or would result from the effectiveness of this
Amendment.
Section 5. Reference to and Effect on Loan Documents.
---------- -----------------------------------------
(a) On and after the effective date of this Amendment, each reference
in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or
any other expression of like import referring to the Credit Agreement, and each
reference in the other Loan Documents to "the Credit Agreement," "thereunder,"
"thereof," "therein" or any other expression of like import
-5-
<PAGE>
referring to the Credit Agreement, shall mean and be a reference to the Credit
Agreement as amended by this Amendment.
(b) Except as specifically amended hereby, the Credit Agreement and
the other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of any Lender or the Agent under any of the Loan Documents or
constitute a waiver of any provision of any of the Loan Documents.
Section 6. Costs, Expenses and Taxes. The Borrower agrees to pay on
---------- -------------------------
demand all reasonable costs and expenses of the Agent in connection with the
preparation, execution and delivery of this Amendment and the other instruments
and documents to be delivered hereunder, including the reasonable fees and out-
of-pocket expenses of counsel for the Agent with respect thereto and with
respect to advising the Agent as to its rights and responsibilities hereunder
and thereunder.
Section 7. Execution in Counterparts. This Amendment may be executed in
---------- -------------------------
any number of counterparts and by the parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute one and the same instrument.
Section 8. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
---------- -------------
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA
APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THE STATE OF CALIFORNIA.
SCPIE HOLDINGS INC.
By: /s/ Patrick T. Lo
----------------------------
Name: Patrick T. Lo
---------------------------
Title: Senior Vice President CFO
--------------------------
UNION BANK OF CALIFORNIA, N.A.,
as Administrative Agent, as
Arranger and as a Lender
By: /s/ Robert C. Nagel
-----------------------------
Robert C. Nagel
Vice President
-6-
<PAGE>
FIRST UNION NATIONAL BANK,
as Documentation Agent and
as a Lender
By: /s/Thomas L. Stitchberry
-----------------------------
Name: Thomas L. Stitchberry
---------------------------
Title: Senior Vice President
--------------------------
DRESDNER BANK AG, New York Branch
and Grand Cayman Branch
By: /s/ George T. Ferguson, IV
-----------------------------
Name: George T. Ferguson, IV
---------------------------
Title: Assistant Vice President
--------------------------
By: /s/ Lloyd C. Stevens
-----------------------------
Name: Lloyd C. Stevens
---------------------------
Title: Vice President
--------------------------
-7-
<PAGE>
EXHIBIT 10.74
PROGRAM ADMINISTRATOR AGREEMENT
-------------------------------
This PROGRAM ADMINISTRATOR AGREEMENT is made and entered into as of
January 1, 1998, by and between the Professional Programs Division of Poe &
Brown, Inc., a Florida corporation ("PA"), and American Healthcare Indemnity
Company, a Delaware corporation ("AHI").
RECITALS
--------
A. PA, headquartered in Tampa, Florida, is an established program
administrator, licensed as an independent insurance agency on behalf of a number
of insurance companies. PA regularly sells and services a broad line of
professional liability-oriented property and casualty insurance.
B. PA is the originator of the Physicians' Protector Plan(R), a
program designed to provide professional liability and related insurance
coverages to physicians and mid-size medical groups (20 or fewer physicians) who
satisfy certain underwriting guidelines (the "Program"). PA has served as the
exclusive administrator of the Program, which is currently underwritten by the
CNA Insurance Companies ("CNA"). CNA has insured physicians and medical groups
under the Program principally in the states of Connecticut, Florida and Georgia,
and to a lesser extent in ten additional states. PA has marketed the Program
through a network of agents and brokers developed by PA in these states.
C. AHI is a property and casualty insurance company committed to
underwrite, market, sell and otherwise transact a broad line of property and
casualty insurance products to customers in the health care industry. AHI,
which is licensed to transact insurance in 45 states, is a subsidiary of SCPIE
Holdings Inc., a publicly held insurance holding company, headquartered in
Beverly Hills, California.
D. PA and CNA have agreed to terminate their relationship with
respect to the Program as of December 31, 1997, except for certain continuing
transitional underwriting services. PA desires AHI to become the underwriter
for the Program in certain states (the "Covered States"), and AHI is willing to
become the underwriter for the Program in the Covered States, all upon the terms
and conditions hereinafter set forth.
E. The parties desire that AHI assume the underwriting functions as
of the Effective Date. In furtherance of this objective, (i) CNA will continue
to underwrite the Program Policies in a particular state until AHI has received
all necessary rate and form approvals in such state to underwrite the Program
Policies, and (ii) AHI has entered into a reinsurance agreement with CNA,
pursuant to which AHI will assume, under a 100% quota share reinsurance
arrangement, the risk for the Program Policies (as defined herein) issued for
inception or renewal on or after the Effective Date (as defined herein).
<PAGE>
AGREEMENT
---------
NOW, THEREFORE, in consideration of the respective covenants and
promises contained herein and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereto agree
as follows:
ARTICLE I
DEFINITIONS
-----------
1.1 Defined Terms. As used herein, the terms below shall have the
-------------
following meanings. Any of such terms, unless the context otherwise requires,
may be used in the singular or plural, depending upon the references.
"Administrative Guidelines" means those procedures set forth on
-------------------------
Addendum "A," which have been agreed upon by AHI and PA for servicing the
insurance business under the Program and as they may be amended or supplemented
from time to time in accordance with the terms of this Agreement
"Affiliate" means, with respect to any party, any individual,
---------
corporation, partnership or other entity that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under common
control with, such party.
"Agreement" refers to this Program Administrator Agreement,
---------
including all Addenda and Schedules hereto, as the same may be amended from time
to time.
"AHI" refers to American Healthcare Indemnity Company, Inc.,
---
having its principal place of business at 9441 W. Olympic Boulevard, Beverly
Hills, California, a Delaware corporation.
"Covered State" means a state or other jurisdiction in which PA
-------------
and AHI agree that the Program will or may be marketed by PA and underwritten by
AHI on terms and conditions set forth in Sections 2.3 and 2.4 of this Agreement.
The initial Covered States are set forth in Part 1 of Schedule I to this
Agreement, as such schedule may be amended or supplemented from time to time in
accordance with the terms of this Agreement.
"Effective Date" means January 1, 1998 at 12:01 a.m.
--------------
"Eligible Insured" means a physician or medical group of 20 or
----------------
fewer physicians engaged in the private practice of medicine in a Covered State
who meets or meet the requirements of the Underwriting Guidelines for inclusion
as an insured in the Program.
-2-
<PAGE>
"Expansion State" means a state or other jurisdiction, if any,
---------------
identified as an Expansion State in Part 2 of Schedule I, as such schedule may
be amended or supplemented from time to time in accordance with the terms of
this Agreement.
"Licensed Producer" means (i) a licensed insurance agent
-----------------
appointed as an "agent" of AHI in a Covered State or an Expansion State to act
as subagent of PA with respect to the Program; or (ii) a licensed broker in a
Covered State or an Expansion State who may legally place Program Policies with
AHI through PA.
"Loss Ratio" means, with respect to any accident year, the
----------
projected indemnity and allocated loss adjustment expense incurred for such
accident year calculated in accordance with the requirements for Schedule P of
the Annual Statement filed with state insurance regulatory authorities.
"Non-Covered State" means any state which is not a Covered State
-----------------
or an Expansion State.
"PA" refers to Poe & Brown, Inc., Professional Programs Division,
--
having its principal place of business at 401 E. Jackson Street, Suite 1700,
Tampa, Florida.
"Policy Forms" means those insurance application forms, insurance
------------
policy forms and endorsements listed on Schedule II, which CNA and AHI have
used and will use for the Program, as such forms may be modified, deleted or
supplemented from time to time by AHI.
"Program" means the Program identified in Recital B, which shall
-------
include the Program Name, the Policy Forms, the Program Materials and the
Program Records.
"Program Claim Records" means those records containing the
---------------------
information set forth on Schedule III with respect to claims or potential claims
against insureds in the Program.
"Program Materials" means those advertising, marketing
-----------------
advertisements, circulars, brochures, pamphlets and other like materials
developed by PA to market the Program. "Program Materials" shall not include
those materials developed by AHI or its Affiliates for the general marketing of
their products which are adapted for use in the Program.
"Program Name" means Physicians' Protector Plan(R).
------------
"Program Policies" means those policies issued under the Program.
----------------
"Program Records" means the Program Underwriting Records and the
---------------
Program Claim Records.
-3-
<PAGE>
"Program Underwriting Records" means those records containing the
----------------------------
names of the insureds under the Program, the policy applications, policy
coverages, endorsements and other information developed for the underwriting and
rating of individual physician insureds and medical groups.
"Underwriting Guidelines" means those rules, standards and
-----------------------
procedures set forth on Addendum "B," including limits of insurance, which have
been established by AHI and are currently utilized for acceptance of risks, the
terms of such acceptance and the issuance of Program Policies in accordance with
such terms.
1.2 Other Defined Terms. The following terms shall have the meanings
-------------------
defined for such terms in the Sections set forth below:
Term Section
---- -------
AAA Section 10.2(a)
Account Current Section 5.1.1
Board Section 10.2
Disputes Section 10.2
Indemnification Claim Section 8.3
Indemnification Claim Notice Section 8.3
ARTICLE II
APPOINTMENT OF PROGRAM ADMINISTRATOR
------------------------------------
2.1. Appointment of Program Administrator. AHI hereby appoints PA as
------------------------------------
administrator of the Program to offer and sell the Program to Eligible Insureds
in the Covered States and to otherwise administer the solicitation,
underwriting, policy issuance, billing, collection and claim notification with
respect to Eligible Insureds, all in accordance with the terms of this
Agreement. PA hereby accepts such appointment and agrees that it will exercise
such authority as is granted in this Agreement and shall abide by all the terms
and conditions of this Agreement and the Administrative Guidelines and the
Underwriting Guidelines.
2.2 Program Transition.
------------------
2.2.1. Rate and Policy Form Approvals. AHI has filed with the
------------------------------
appropriate insurance regulatory authority in each of the Covered States an
application or applications to obtain all required approvals of rates for
Eligible Insureds, Policy Forms, Underwriting Guidelines and other matters to
enable AHI to underwrite and issue Program Policies in such state or states, and
AHI shall take all other actions necessary or appropriate to obtain such
approvals. AHI will promptly file a similar application or applications in any
-4-
<PAGE>
Expansion State for which an initial marketing plan is approved by AHI pursuant
to Section 2.5.1.
2.2.2 Interim Arrangement. AHI shall be the underwriting
-------------------
facility for new and renewing Program Policies in the Covered States on and
after the Effective Date, with the exception of those policies that continue to
be underwritten by CNA, and reinsured by AHI and its Affiliates, in one or more
Covered States, pending AHI obtaining required or appropriate policy form and
rate approvals in such state or states pursuant to Section 2.2.1. For purposes
of this Agreement, policies subject to such reinsurance agreement shall be
considered Program Policies.
2.2.3 Retirement Benefit Credits. Persons insured by CNA
--------------------------
under the Program, who become insured by AHI under the Program with no gap in
coverage, shall be credited by AHI for all consecutive periods insured by CNA
under the Program for purposes of the calculation of their entitlement to
receive extended reporting period coverage, at no charge, in the event of
retirement from the practice of medicine.
2.3 Operating Authority and Restrictions on PA in the Covered
---------------------------------------------------------
States. PA shall have operating authority on behalf of AHI, and shall be
- ------
subject to operating restrictions, as follows in the Covered States.
2.3.1 Authority of Program Administrator. AHI grants to PA
----------------------------------
the following authority exercisable by PA on behalf of AHI. PA shall: (i)
solicit and receive applications for Program Policies directly and from other
Licensed Producers, and bind and issue such policies and endorsements thereto;
(ii) execute and deliver Program Policies and endorsements thereto and
certificates thereof; (iii) bill for, collect and receive premiums on Program
Policies, renewals thereof and endorsements thereto in accordance with the
accounting provisions contained herein; (iv) pay to AHI premiums due on Program
Policies; and (v) receive notices of claims or of incidents or other occurrences
which may give rise to claims under any of the Program Policies. The authority
to execute and deliver certificates of insurance may be delegated by PA to
Licensed Producers at PA's discretion.
2.3.2 Licensed Producers. PA shall (i) recommend for
------------------
appointment by AHI (as appointed "agents") Licensed Producers in Covered States
in accordance with the provisions of the Administrative Guidelines to initiate,
receive and accept Program Policies in accordance with such guidelines, and (ii)
designate those brokers in such Covered State who may act as Licensed Producers
and submit Eligible Insureds for coverage under the Program. PA shall cause each
of the Licensed Producers appointed as an insurance agent to enter into an
agreement with PA on a form which has been approved by AHI. A copy of each
executed agreement will be maintained by PA. All such Licensed Producers shall
act under PA's oversight with respect to the Program, and PA will have sole
responsibility for selecting and terminating Licensed Producers in accordance
with the provisions of the Administrative
-5-
<PAGE>
Guidelines. PA shall be solely responsible for any commissions or other amounts
due to Licensed Producers or insurance brokers with respect to the Program
Policies transacted by them.
2.3.3 Compliance with Guidelines. In its sales, solicitation,
--------------------------
binding, selling and issuance of Program Policies, and in its premium charging
or billing thereof, PA shall act in accordance with the Administrative
Guidelines and the Underwriting Guidelines.
2.3.4 Compliance with Licensing Authority. PA shall act in
-----------------------------------
accordance with all requirements and limitations imposed by PA's license or by
applicable state or federal law in its representation of AHI under this
Agreement and its selling and administrative activities under this Agreement.
2.3.5 Other Insurance Products. PA will solicit and accept
------------------------
only Eligible Insureds in Covered States for inclusion in the Program. PA may,
however, in its capacity as a broker, submit to AHI or its Affiliates other
physicians or medical groups in Covered States, other health care providers and
health care facilities to which AHI or one of its Affiliates offers such
coverage generally in such state or states. AHI will accept such submissions on
a brokerage basis, subject to negotiated terms if accepted for coverage.
2.3.6 Exclusive Program. PA will not offer any other program
-----------------
in competition with the Program in a Covered State, nor will it accept
submissions from Eligible Insureds in a Covered State for any program other than
the Program. Nothing herein, however, shall restrict PA from accepting
submissions for coverages other than those included in the Program Policies.
2.3.7 Marketing Plan. PA shall submit to AHI for AHI's
--------------
approval, as soon as practicable but in no event later than June 30, 1998, a
draft initial three-year marketing plan for each of the Covered States, setting
forth for each Covered State projected premium volume, market share and Loss
Ratio targets for the Program in each state for each of the three years covered
by such plan. AHI will promptly review each such plan and consult with PA
regarding any proposed modifications. The parties agree to use their best
efforts to agree upon a final plan for each of the Covered States as soon as
practicable. The marketing plans for the Covered States shall be updated on a
yearly basis pursuant to Section 3.13 and may contain such additional items as
the parties may agree.
2.3.8 Failure to Meet Targets. In the event that the Program
-----------------------
fails to achieve (x) at least 70% of the stated premium volume target and (y) a
Loss Ratio of less than 110% of the stated Loss Ratio target set forth in the
----
then-existing marketing plan for a Covered State in any of the three years
covered by such plan, then each of AHI and PA shall have the right to terminate
such state's status as a Covered State by giving one year's written notice to
the other party of such intention (such one year period, the "Notice Period").
During the Notice Period, PA shall continue to renew business under the Program
in such Covered State and shall accept applications from Eligible Insureds for
coverage under the Program in such state.
-6-
<PAGE>
Additionally, AHI shall be obligated to continue to write such business in
accordance with the Underwriting Guidelines during the Notice Period.
During the Notice Period, PA will have the right to accelerate the
termination of a state's status as a Covered State upon 90 days' written notice
to AHI, which notice may be given no earlier than the date which is 90 days
after the Notice Period commenced with respect to such state. In no event will
AHI be allowed to terminate a state's status as a Covered State prior to the end
of the Notice Period unless PA chooses to exercise its right to cause an early
termination of the Notice Period as described in the preceding sentence.
During the Notice Period, AHI will have the right to solicit business that
renews or becomes effective after the expiration of the Notice Period (or
earlier termination thereof at the option of PA). Such solicitation shall be
made in accordance with the provisions of Section 9.7.
2.4 Operating Restrictions on AHI in the Covered States. AHI shall be
---------------------------------------------------
subject to the following operating restrictions in the Covered States.
2.4.1 Agent Appointments. Except as otherwise provided in Section
------------------
2.4.3, AHI will not appoint an agent or agents (other than PA or a Licensed
Producer) in a Covered State to solicit or sell professional liability policies
to Eligible Insureds.
2.4.2 Compliance with Guidelines, AHI will not amend or otherwise
--------------------------
modify the Underwriting Guidelines in any material respect without first
consulting with PA, and will make only those modifications that it reasonably
determines are necessary for the effective operation of the Program without the
consent of PA. The Administrative Guidelines shall only be amended or otherwise
modified by the agreement of the parties.
2.4.3 Permissible Underwriting and Marketing. AHI will not offer or
--------------------------------------
sell professional liability insurance to physicians or medical groups in a
Covered State other than through the Program, except that AHI may underwrite,
market and sell directly to insureds or through agents or brokers:
(a) policies to medical groups of more than 20 physicians who
would otherwise be Eligible Insureds;
(b) policies to individual physicians or medical groups of 20
or fewer physicians who do not qualify as Eligible Insureds under the
Underwriting Guidelines;
(c) policies to national accounts, consisting of medical groups
of all sizes that are part of or affiliated with a practice management
entity, an integrated
-7-
<PAGE>
health system or other organization that makes the decision to purchase
professional liability insurance for its owned or affiliated medical
groups;
(d) policies to members of "risk purchasing groups" provided
that (i) the sponsor of the risk purchasing group is not AHI or one of its
Affiliates or is not otherwise affiliated with AHI and (ii) AHI pays to PA
(X) 5% of the premiums paid by Eligible Insureds included in such "risk
purchasing group" in a Covered State where PA provides administrative
services for such group or (Y) 2% of such premiums paid by any such "risk
purchasing group" where PA does not provide administrative services for
such group; or
(e) policies to physicians or medical groups based in or
affiliated with a hospital or other health care facility or system insured
by AHI or one of its Affiliates, when the decision to purchase professional
liability insurance is made by the health care facility or hospital for
such medical group or groups and physicians.
2.4.4 Use Restrictions. Under no circumstances can AHI use the
----------------
Program Name or the Program Materials, except as part of the Program. AHI may
use the Policy Forms or other forms in a Covered State with respect to policies
that may be issued by AHI pursuant to the provisions of Section 2.4.3(a) through
(e).
2.4.5 Improvement in Risk Classification. If an insured to whom AHI
----------------------------------
has issued a policy pursuant to the provisions of Section 2.4.3(b) as a person
who is not an Eligible Insured improves his or her or its risk classification so
that such insured is then qualified to be an Eligible Insured, AHI will use its
best efforts to cause such policy to be renewed as part of the Program.
2.4.6 Purchase of Existing Business. If AHI acquires an insurance
-----------------------------
company that already underwrites physicians' professional liability insurance in
a Covered State, AHI may continue to underwrite those professional liability
insurance policies written by the acquired company on a direct basis, so long as
the premium rates are at least equal to or higher than the rates under the
Program. AHI will only accept such policies written through brokers or agents of
the acquired company for renewal under the Program. Alternatively, if the volume
requirements set forth in Section 9.10 are met, AHI may terminate the Program in
such state as provided in Section 9.10.
2.5 Designation of Expansion States. The following provisions shall apply
-------------------------------
to the expansion of the Program to additional states.
2.5.1 Initial Marketing Plan. In the event that PA shall desire to
----------------------
expand the Program to a state that is not a Covered State, PA shall submit to
AHI for AHI's approval a two-year marketing plan applicable to such state,
setting forth for such state projected premium volume, market share and Loss
Ratio targets for the Program in such state for each of the two
-8-
<PAGE>
years covered by such plan. If the marketing plan submitted by PA to AHI with
respect to a state meets with AHI's approval, and if AHI is otherwise satisfied
that such state should be designated an Expansion State, such state will be
designated an Expansion State for a period of two years from the date that
necessary AHI filings are approved in such state.
2.5.2 Transfer of Policies. In the event that, in any state that is
--------------------
designated an Expansion State, AHI is underwriting policies which would
otherwise be subject to the Program, AHI shall cause such policies to be written
under the Program in such Expansion State as soon as practicable following the
date of such designation.
2.5.3 Accession to Covered State Status. In the event the Program
---------------------------------
meets the stated premium volume and Loss Ratio targets set forth in the initial
marketing plan for an Expansion State for each of the two years covered by such
plan, such state, at the request of PA, will become a Covered State under this
Agreement.
2.5.4 Failure to Meet Targets. In the event the Program fails to
-----------------------
achieve (x) at least 70% of the stated premium volume target and (y) a Loss
Ratio of less than 110% of the stated Loss Ratio targets set forth in the
initial marketing plan for an Expansion State for either of the two years
covered by such plan, AHI has the right to terminate such state's status as an
Expansion State as of such date and such state shall thereafter be treated as a
Non-Covered State under this Agreement. PA shall be entitled to reinitiate the
process set forth in this Section 2.5 with respect to any such state.
2.5.5 Operating Authority of PA and Restrictions on PA and AHI in
-----------------------------------------------------------
Expansion States. The provisions of Sections 2.3.1 through 2.3.6 and 2.4.1
- ----------------
through 2.4.6 shall apply to each Expansion State.
2.6 Activities in Non-Covered States. In any state that is a not a
--------------------------------
Covered State or an Expansion State, (i) AHI will accept brokerage submissions
from PA on the same basis AHI will accept business from other brokers, so long
as AHI has not limited its right to do so contractually, (ii) AHI may underwrite
directly and through agents or brokers or otherwise without restriction
professional liability policies and programs for physicians and medical groups
of all types and sizes, (iii) AHI may appoint other agents, including managing
agents, on an exclusive or non-exclusive basis, to market and sell professional
liability policies and programs for physicians and medical groups of all types
and sizes, and (iv) PA may offer and sell the Program or any other competing
professional liability program utilizing another underwriter or underwriters.
In the event AHI appoints a managing agent in any Non-Covered State on an
exclusive basis, AHI shall use its best efforts to cause PA's business to be
sold under such managing agent arrangement. Neither AHI nor PA will have any
option or right of first refusal from the other party in any such state with
respect to the Program or the offering of other programs of professional
liability insurance. Notwithstanding the foregoing, AHI may not use the Program
Name or Program Materials in any state except as part of the Program. In the
event
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AHI acquires an insurance company that already sells professional liability
insurance in any such state, AHI may operate the acquired company without
restriction.
2.7 Application to Affiliates. The provisions of Sections 2.3 and 2.4
-------------------------
regarding operating authority and restrictions shall apply to Affiliates of PA
under the direct control of PA and to Affiliates of AHI as though specifically
named in such sections.
ARTICLE III
DUTIES AND RESPONSIBILITIES OF PROGRAM ADMINISTRATOR
----------------------------------------------------
Pursuant to this Agreement, PA will perform the following in accordance
with generally accepted good business and insurance practices:
3.1 Solicitation. PA will exert its best efforts to promote the Program
------------
and to solicit and sell Program Policies. PA will solicit risks and classes of
risk that in their pricing and insurability meet or exceed the underwriting and
pricing standards established in the Underwriting Guidelines and that otherwise
qualify as Eligible Insureds. In connection with such solicitation, PA shall
formulate and cause to be prepared programs and Program Materials designed to
acquaint and attract Eligible Insureds. PA shall submit to AHI all advertising
brochures and like materials utilized in connection with the Program for review
and written approval by AHI prior to their dissemination.
3.2 Servicing Business. PA shall act as the primary line of communication
------------------
between AHI, the Licensed Producers and the insureds under the Program. PA
shall provide for all usual and customary services to agents, brokers and
insureds including delivery of Program Policies, return of premiums due insureds
and timely and appropriate responses to inquiries and complaints from agents,
brokers or insureds, and shall comply with the service standards set forth in
the Administrative Guidelines.
3.3 Underwriting and Binding of Risks. PA will act in accordance with the
---------------------------------
Underwriting Guidelines and any other reasonable underwriting and pricing
standards from time to time established by AHI. PA shall bind risks only in
accordance with the Underwriting Guidelines.
3.4 Policy Issuance. PA shall timely and properly issue, deliver and
---------------
execute or countersign Program Policies, endorsements, binders and other
documents in accordance with the Policy Forms approved by AHI. PA will promptly
forward to AHI copies of any declarations, endorsements, other policy form
amendments, certificates or other evidences of insurance that contain any
variation not contemplated by the Underwriting Guidelines for the standard
Policy Forms or that include specific variables for which the approval of AHI is
required under the applicable Underwriting Guidelines. PA will provide AHI with
online access
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to policy information entered into its data processing system. Each party will
bear its own costs for such system access.
3.5 Premium Rates. PA shall quote accurate premiums and rates in
-------------
compliance with the approved and applicable rating manuals or rating plans of
AHI for Program Policies at the approved limits of insurance.
3.6 Claim Notification. PA will promptly notify AHI of any information
------------------
received by PA, whether from an insured or a Licensed Producer, or otherwise,
regarding a claim or potential claim against an Insured under a Program Policy.
3.7 Accounting. PA will account for all Program Policies, endorsements
----------
thereto and renewals thereof in accordance with the method of accounting
designated in Article V of this Agreement.
3.8 Billing, Collection and Deposit of Premiums. PA shall timely bill for
-------------------------------------------
and collect premiums for Program Policies. Upon collection, PA will hold all
such premiums for AHI in a fiduciary account. Such account shall be of a type
and be held at a bank or other institution that is approved in writing by AHI,
which approval shall not be unreasonably withheld. The bank account shall be
established and maintained by PA in such a manner as to clearly establish PA as
holding insurance premiums on behalf of various insurance carriers, including
AHI, with respect to the funds in the account. Interest or other income, if
any, accruing on these premium funds may be retained by PA for its own account.
The net premiums so held will be remitted to (i) AHI in accordance with the
provisions of Section 5.1.2, (ii) PA for commissions in accordance with the
provisions of Section 6.2, and (iii) insureds or their authorized
representatives for return and refund premiums.
On the day that such premiums are required to be paid to AHI by PA in
accordance with Section 5.1.2, PA shall deposit such premiums into a bank
account in the name of AHI under the control of a bank to be designated by PA
and approved by AHI, such approval not to be unreasonably withheld. No other
funds will be deposited by PA into such account and the account shall be
maintained solely for the collection of premiums pursuant to this Agreement.
Interest or other income, if any, accruing on the funds in such account shall
belong to PA and shall be paid to PA by AHI in accordance with the provisions of
Section 6.2. AHI may withdraw premiums from such account on the day that is 75
days after the last day of the month during which the premium was due from the
insured, regardless of the date such premium was actually deposited into the
account. The premiums so held will be disbursed to (i) AHI in accordance with
the provisions of Section 5.1.2, (ii) PA for commissions and interest payable in
accordance with the provisions of Section 6.2, and (iii) insureds or their
authorized representatives for return and refund premiums.
3.9 Administrator Expenses. PA will pay all of its expenses incurred in
----------------------
the performance of this Agreement or otherwise incident to the Program,
including, without
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limitation, commissions to Licensed Producers, travel expense, employee and
clerical salaries, benefits and expense, fees, counter-signature fees and
expense, postage, advertising, marketing, printing and license fees. AHI shall
be responsible only for its own costs and expenses unless otherwise agreed in
writing by AHI.
3.10 Licensed Producers.
------------------
(a) PA will accept applications for Program Policies from Licensed
Producers. PA shall comply with AHI's agent or broker of record procedures as
agreed upon by the parties. PA will pay all counter-signature commissions or
fees required to be paid and be solely responsible to pay all commissions due
and payable to Licensed Producers as negotiated between PA and the Licensed
Producers.
(b) PA will verify that each Licensed Producer is properly licensed
and may legally place Program Policies with AHI through PA.
(c) PA will provide AHI access to copies of the standard contract or
agreement PA maintains with Licensed Producers, as necessary for AHI's audit
purposes.
3.11 Records.
-------
(a) PA will keep and maintain accurate records of all Program
Policies, endorsements and renewals issued by PA on behalf of AHI and all
premiums collected or due and owing thereon. Such records shall be open to
examination by AHI at any time during normal business hours on AHI's request.
(b) PA will establish and maintain reasonably adequate internal
controls and recordkeeping mechanisms for safekeeping and accounting of all
Policy Forms, Program Policies, premium billings, collections and maintenance of
all policyholder records relating to the Program, all as reasonably required for
the fulfillment of its duties as Program Administrator and in addition to any
procedural requirements that may be imposed by AHI.
(c) PA will establish a records retention process under which policy
forms, premium receipt records and records used to determine the status of
insurance in force are maintained for seven years. At the end of such seven-year
period, PA shall request directions from AHI with respect to the disposition of
such records. If PA does not receive any such directions from AHI within 30
days, PA shall ship such records to AHI at AHI's expense. Such records will not
be destroyed without the consent of AHI. PA will provide AHI with access to
these records.
(d) PA will be solely responsible for, and will own, the computer
systems, software and database utilized by PA in connection with the Program.
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<PAGE>
(e) AHI will be solely responsible for, and will own, the computer
systems, software and database utilized by AHI in connection with the Program.
(f) AHI and PA shall each take all actions necessary to cause their
systems to be Year 2000 compliant.
3.12 Accounting. PA will account for all Program Policies, endorsements
----------
thereto and renewals thereof, for all premium billings, collections, cash
receipts and cash disbursements in accordance with the provisions of Article V.
3.13 Annual Marketing Plan. PA shall prepare and submit to AHI annually a
---------------------
written marketing plan for each Covered State covering the next three years,
including, but not limited to, projected premium volume, market share and Loss
Ratio targets for the Program in such Covered State (such targets to be used for
the evaluation of such state's status as a Covered State pursuant to Section
2.3.8). This plan is to be submitted to AHI no later than December 1 of the year
immediately preceding the year the marketing plan is effective.
3.14 Report of Sponsoring Organizations. PA may, with the consent of AHI,
----------------------------------
enter into agreements with local medical societies, medical specialty societies
and other organizations for sponsorship of the Program. PA will attend and
participate on a non-voting basis in all peer review activities by any such
sponsoring organizations, including insurability, loss prevention and claim
review committees.
3.15 Legal Compliance. PA shall use its best efforts to keep fully
----------------
informed of and comply fully with all applicable agency laws and regulations in
the Covered States and the Expansion States. PA will obtain and provide AHI,
upon request, copies of all licenses and permits required by PA for the proper
conduct of its duties under this Agreement.
ARTICLE IV
POWERS AND DUTIES OF AHI
------------------------
Pursuant to this Agreement, AHI will perform the following in accordance
with generally accepted good business and insurance practices:
4.1 Communication. AHI may communicate directly with insureds and with
-------------
sponsoring organizations, if any, in furtherance of the Program, but AHI will
rely principally on communication through PA.
4.2 Commissions. AHI will pay commissions to PA in accordance with this
-----------
Agreement.
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<PAGE>
4.3 Marketing Support. AHI will provide PA with public relations and
-----------------
advertising/sales promotion support with respect to the Program from AHI's
internal design staff, including assistance in the design of descriptive
materials, brochure design, graphics, advice and consultation concerning Program
marketing. AHI shall not be required to provide any additional marketing
support or assistance.
4.4 Approval of Program Materials. AHI will review and approve or modify
-----------------------------
and approve in writing and within a reasonable time Program Materials proposed
by PA for use with the Program.
4.5 Claim Adjustment.
----------------
(a) AHI will have full responsibility for the investigation, defense
and settlement of claims made against insureds under Program Policies, including
the investigation of all claims, establishment of appropriate claim files, the
assembly of all claim forms and data necessary for proper claims administration,
the supervision of all litigation or other proceedings involving any claim, and
the disposition of all claims.
(b) AHI will provide PA with monthly program claim experience
computations for each Covered State as well as individual claim information and
on-line claims access to the AHI claims system deemed necessary for PA to
perform its underwriting obligations under this Agreement, which shall include,
but not be limited to, the information listed in Schedule III. PA will provide
AHI with online access to policy information entered into its data processing
system. Each party will bear its own costs in connection with such system
access.
(c) AHI will establish a retention process under which claim files
will be maintained indefinitely. After a claim is closed, such records may be
maintained on microfiche or in an electronic storage system.
4.6 Policyholder Inquiries or Requests. AHI will refer to PA for handling
----------------------------------
individual policyholder or medical group inquiries and comments concerning the
Program or any Program Policy, and all requests for action by AHI with respect
to Program Policies, except for (i) inquiries, comments or requests for action
with respect to pending claims or medical incidents or other occurrences which
may give rise to claims, or (ii) other matters that AHI determines are legally
necessary to be communicated directly to such insureds.
4.7 Regulatory Filings. AHI will maintain proper filings with Insurance
------------------
Departments in the Covered States.
4.8 Appointment of Licensed Producers. AHI will, upon the reasonable
---------------------------------
request of PA, appoint licensed agents and/or brokers for the Program in the
states in which such agents or brokers will be soliciting Eligible Insureds for
the Program.
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<PAGE>
4.9 Risk Management Services. AHI will maintain and make available its
------------------------
internal risk management staff for services to associations, provider service
organizations, other similar organizations and insureds as agreed upon by PA and
AHI. If a substantial amount of risk management services are required, AHI, in
its discretion, may charge the association or organization for such services, at
its standard rates.
4.10 Cancellation or Non-Renewal of Program Policies. PA shall have the
-----------------------------------------------
right and duty to renew or non-renew a Program Policy and to cancel a Program
Policy for non-payment of premium. AHI shall cooperate with PA with respect to
giving any such non-renewal or cancellation notices required by law to be given
directly by AHI. AHI shall have the right to cancel any Program Policy for any
reason other than non-payment of premium. Nothing contained in this Agreement
shall be deemed to inhibit or interfere with the exercise by AHI of any
obligations it has under applicable law with respect to non-renewal or
cancellation of a Program Policy.
ARTICLE V
ACCOUNTING PROVISIONS
---------------------
5.1 Method of Accounting. All Program business written by PA shall be
--------------------
accounted for on an Account Current basis (as defined below).
5.1.1 Rendering of Account Current. PA shall submit to AHI an
----------------------------
"Account Current" for new Program Policies, renewals and endorsements not later
than the tenth day of the month following the month in which they are effective.
The "Account Current" shall contain the information shown on the attached sample
Account Current (Schedule IV). The weekly data transmission shall contain the
information specified on Schedule V for each such policy. In the event
circumstances outside of PA's control result in the delayed issuance of a
material number of Program renewal policies and thereby result in the inclusion
of such premiums in the Account Current of PA for a month subsequent to the
effective month, PA shall notify AHI of such event and request the consent of
AHI for the payment of such premiums along with the payment of the Account
Current in which such premiums are included. AHI shall not unreasonably withhold
such consent.
5.1.2 Payment of Premium and Compensation. Payment of gross
-----------------------------------
premium (net of all commissions) for all business reported on each month's
Account Current shall be paid to AHI so as to be received by AHI no later than
the 15th day of the second month succeeding (i) with respect to premiums due
upon policy inception or renewal, the month in which the policy inception or
renewal for which payment is being made is effective, or (ii) in the case of
subsequent installments, the month in which the installment is due.
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<PAGE>
5.1.3 Responsibility for Collection of Premiums. PA is fully
-----------------------------------------
responsible for and will pay to AHI all premiums due on Program Policies in the
manner provided in this Article V, whether or not such premiums have been
collected by PA from policyholders.
5.1.4 General Obligations. PA and AHI agree to use their best
-------------------
efforts and to cooperate to cause all premiums under the Program to be paid to
AHI so that any unpaid agents' commissions can be carried by AHI in its
quarterly and annual statements as "admitted assets" under statutory accounting
principles.
ARTICLE VI
PAYMENT OF COMPENSATION TO PROGRAM ADMINISTRATOR
------------------------------------------------
6.1 Transition Payments AHI has paid to PA an amount equal to one percent
-------------------
of total Program "in force" premium as of December 31, 1997, to defray initial
marketing, advertising and related expenses required to effect the transition of
the Program to AHI. AHI will make an additional payment to PA equal to one
percent of the total direct written and assumed premium of the Program for the
1998 calendar year. Such payment shall be made by January 31, 1999.
6.2 Commission Payments. PA shall receive commissions at a rate of 15% on
-------------------
premium collected on Program Policies placed with AHI, or reinsured by AHI
pursuant to agreement with CNA during transition of the Program, as compensation
for the services to be rendered by PA pursuant to this Agreement. Commissions
on premium collected on any other non-Program policies issued by AHI for which
PA acted as broker will be paid at rates agreed upon from time to time by AHI
and PA. The rate of commission specified herein may be changed by AHI upon at
least 365 days' prior written notice.
Whenever premium is returned to any policyholder, PA shall refund
return commission applicable to such policyholder at the same rate at which
commission was originally retained. If AHI has made any such payments on PA's
behalf, PA shall refund such commissions to AHI and expressly authorizes AHI to
deduct such commissions from any commissions due PA.
If PA fails to collect premiums, AHI will have the right to collect
such premiums in any manner AHI deems appropriate.
6.3 Contingent Commission Payments. AHI will pay a contingent
------------------------------
commission of up to one percent of Program premiums earned for each calendar
year beginning with the calendar year ending December 31, 1999. Such payment
will be made on or before April 30 of the following year. The amount of such
commission will be based on loss experience of the Program and pursuant to an
annual profit sharing agreement which shall be in writing and agreed by the
parties no later than August 31, 1998. It is understood that such contingent
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<PAGE>
commission payments shall be offset by an amount equal to 1% of the unearned
premium of the Program as of December 31, 1998.
ARTICLE VII
INSURANCE
---------
7.1 Insurance Maintained by PA. PA will maintain, for as long as this
--------------------------
Agreement remains in force, with insurers and on forms acceptable to AHI: (i) a
professional errors and omissions policy in an amount of $5,000,000 each
occurrence (with a retention of no more than $1,000,000 each occurrence); (ii) a
comprehensive general liability policy in an amount of $5,000,000 each
occurrence; and (iii) a blanket employee dishonesty bond covering all employees
of PA in an amount of $1,000,000 each occurrence. AHI may require certificates
of insurance or other evidence that the insurance required by this Article VII
is and remains in force.
7.2 Insurance Maintained by Licensed Producers. PA will require that its
------------------------------------------
principal Licensed Producers (including each Licensed Producer appointed by AHI
as an "agent") maintain professional errors and omissions insurance in required
amounts of at least $500,000 each occurrence. PA will obtain and submit proof
of such insurance to AHI, upon the request of AHI.
ARTICLE VIII
INDEMNIFICATION AND HOLD HARMLESS
---------------------------------
8.1 By AHI. AHI will indemnify, defend and hold harmless PA against any
------
and all liability, losses, damages, costs or expenses of whatever nature,
including, without limitation, settlement costs and reasonable attorneys' fees,
mediation, arbitration and court costs and other expenses actually incurred by
any such party, whether in investigating, prosecuting or defending any claim or
action, or any threatened claim or action which PA may incur caused by and
arising out of errors, omissions, negligence, dishonesty, fraudulent or criminal
acts or breach of duty or confidentiality of AHI or its employees or anyone
acting on their behalf or under their direct control. The provisions of this
Section 8.1 shall not apply to the extent PA has caused, contributed to, or
compounded any such error, omission or negligence.
8.2 By PA. PA will indemnify, defend and hold harmless AHI against any
------
and all liability, losses, damages, costs or expenses of whatever nature,
including, without limitation, settlement costs and reasonable attorneys' fees,
mediation, arbitration and court costs and other expenses actually incurred by
any such party, whether in investigating, prosecuting or defending any claim or
action, or any threatened claim or action which AHI may incur caused by and
arising out of errors, omissions, negligence, dishonesty, fraudulent or criminal
acts or breach of duty or confidentiality of PA, its employees or anyone acting
on their behalf or under their
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<PAGE>
direct control. The provisions of this Section 8.2 shall not apply to the extent
that AHI has caused, contributed to or compounded any such error, omission or
negligence.
8.3 Claims. If a claim for indemnification (an "Indemnification Claim")
------
is to be made by a party entitled to indemnification hereunder against the
indemnifying party, the party claiming such indemnification shall give written
notice (an "Indemnification Claim Notice") to the indemnifying party as soon as
practicable after the party entitled to indemnification becomes aware of any
fact, condition or event which may give rise to a claim for which
indemnification may be sought under this Section 8.3. If any lawsuit or
enforcement action is filed against any party entitled to the benefit of
indemnity hereunder, written notice thereof shall be given to the indemnifying
party as promptly as practicable (and in any event within 15 calendar days after
the service of the citation or summons). The failure of any indemnified party to
give timely notice hereunder shall not affect rights to indemnification
hereunder, except to the extent that the indemnifying party demonstrates actual
damage caused by such failure. After such Indemnification Claim Notice, if the
indemnifying party shall acknowledge in writing to the indemnified party that
the indemnifying party shall be obligated under the terms of its indemnity
hereunder in connection with such lawsuit or action, then the indemnifying party
shall be entitled, if it so elects at its own cost, risk and expense, (i) to
take control of the defense and investigation of such lawsuit or action, (ii) to
employ and engage attorneys of its own choice to handle and defend the same
unless the named parties to such action or proceeding include both the
indemnifying party and the indemnified party and the indemnified party has been
advised in writing by counsel that there may be one or more legal defenses
available to such indemnified party that are different from or additional to
those available to the indemnifying party, in which event the indemnified party
shall be entitled, at the indemnifying party's cost, risk and expense, to
separate counsel of its own choosing, and (iii) to compromise or settle such
claim, which compromise or settlement shall be made only with the written
consent of the indemnified party, such consent not to be unreasonably withheld.
If the indemnifying party fails to assume the defense of such claim within 15
calendar days after receipt of the Indemnification Claim Notice, the indemnified
party against which such claim has been asserted will (upon delivering notice to
such effect to the indemnifying party) have the right to undertake, at the
indemnifying party's cost and expense, the defense, compromise or settlement of
such claim on behalf of and for the account and risk of the indemnifying party.
In the event the indemnified party assumes the defense of the claim, the
indemnified party will keep the indemnifying party reasonably informed of the
progress of any such defense, compromise or settlement. The indemnifying party
shall be liable for any settlement of any action effected pursuant to and in
accordance with this Section 8.3 and for any final judgment (subject to any
right of appeal), and the indemnifying party agrees to indemnify and hold
harmless an indemnified party from and against any claim by reason of such
settlement or judgment.
8.4 Enforcement. The indemnity provisions set forth in Sections 8.1 and
-----------
8.2 are made for the benefit of the respective parties identified therein,
whether or not a party hereto, and may be specifically enforced by any such
party as if it were a party hereto. These provisions do not pertain only to
third party suits but also include the reasonable attorneys' fees, court costs
-18-
<PAGE>
and other expenses incurred by a party in prosecuting any claim or suit to
enforce any of its rights hereunder.
No party otherwise entitled to be indemnified under this Article VIII
shall be entitled to be indemnified with respect to any payments made in
settlement of a claim made against it unless the party required to give
indemnity hereunder shall first approve in writing the terms of any such
settlement.
8.5 Survival. No termination of this Agreement shall relieve either
--------
party of its obligations of indemnity under this Article VIII.
ARTICLE IX
TERM AND TERMINATION
--------------------
9.1 Term. This Agreement shall become effective on the Effective Date,
----
and shall remain in effect indefinitely until terminated as herein provided.
9.2 Termination. AHI or PA may terminate this Agreement for any reason by
-----------
giving the other party 365 days' prior written notice of such party's intent to
terminate. This Agreement may be mutually terminated at any time.
9.3 Insolvency or Breach. This Agreement may be terminated immediately
---------------------
upon written notice from either AHI or PA to the other in the event of the
other's fraud, insolvency, assignment for the benefit of creditors, willful
misconduct, or breach of this Agreement, or in the event the other shall fail to
pay any sums due under this Agreement within ten days following written notice
of the nonpayment of such funds when due.
Notwithstanding anything in this Section 9.3 to the contrary, with
respect to a breach of any of the terms of this Agreement by either AHI or PA,
the party in breach shall, upon written notice to it, be granted a reasonable
time, not exceeding 30 days, to cure the breach.
9.4 Loss of Authority to Transact Business. This Agreement shall, without
--------------------------------------
regard to the giving of notice, simultaneously and immediately terminate upon:
(i) the loss of PA's authority to do business as an insurance agency in Florida;
or (ii) the loss by AHI of its certificate of authority to transact insurance in
its state of domicile, which is currently Delaware.
9.5 Acquisition or Merger of PA. If PA is acquired by a third party, by
---------------------------
way of sale, merger or otherwise, or if a third party acquires control of a
majority of the outstanding shares of capital stock of PA, AHI shall have the
right, within 90 days after such sale, merger or change of control, to terminate
this Agreement on 30-days' written notice.
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<PAGE>
9.6 Payment of Premiums Upon Termination. In the event of termination of
------------------------------------
this Agreement, any and all premiums due and payable by PA shall be paid to AHI
in accordance with the terms of Section 9.9(c).
9.7 Ownership of Records Upon Termination. In the event of termination of
-------------------------------------
this Agreement, or, with respect to any Covered State or an Expansion State,
such state's status as a Covered State or an Expansion State, and provided that
PA has, in accordance with the terms of this Agreement, accounted for and paid
to AHI all premiums and other monies due and owing to AHI under this Agreement
or with respect to such Covered State or Expansion State, exclusive ownership of
the records, including documents and electronically maintained and transmitted
information, and exclusive ownership of the right to use and control of
expirations of business produced under this Agreement, or with respect to such
Covered State or Expansion State, shall vest in PA. If there has not been such
accounting, payment or return upon written demand, the exclusive ownership of
the records and the exclusive ownership of the right to use and control of such
expirations of business covered or produced under this Agreement, or with
respect to such Covered State or Expansion State, shall vest in AHI. Nothing
contained in this Agreement shall restrict or prevent AHI from continuing to be
an insurance market for physicians' professional liability insurance or from
competing with PA for the insurance of Eligible Insureds insured under the
Program. AHI will not use any proprietary information of PA in soliciting such
prospective insureds in a Covered State or an Expansion State. AHI may (i)
enter into agreements with agents who responded to general mailings based on
publicly available information in the insurance industry or advertisements of
AHI, (ii) solicit and insure physicians or medical groups whose names were
obtained from generally available information in the medical community or
otherwise publicly available, and (iii) accept insurance from any broker who has
submitted a request for quotation or any prospective insured who contacts AHI
without solicitation. Each of AHI and PA agrees that during the term of this
Agreement and for a period of three years after termination of this Agreement,
it will not, directly or indirectly, offer employment to or seek to hire or
offer employment to any individual known by AHI or PA, respectively, to be an
employee of the other, unless AHI or PA first terminates the employment of such
employee.
Notwithstanding the foregoing, or any contrary provision of this
Agreement, if AHI terminates the Agreement pursuant to the provisions of Section
9.2 at any time on or prior to January 1, 2008, then AHI agrees that for a
period of one year after the date of such termination, it will not solicit,
divert, sell or accept any physicians' professional liability or related
business from any insured physician or medical group that was insured under the
Program in the Covered States listed on Schedule I on December 31, 1997, and
continuously insured under the Program thereafter.
9.8 Commissions Upon Termination. Upon termination of this Agreement,
----------------------------
AHI's obligation to pay commissions shall cease as of the date of such
termination, except that PA shall continue to receive any earned but unpaid
commission on Program Policies in force on the date of termination until
termination of the insurance policy or policies.
-20-
<PAGE>
9.9 Additional Procedures and Rights Upon Termination. In addition to the
-------------------------------------------------
provisions of Section 9.6 above, upon termination of this Agreement:
(a) The authority of PA to act on behalf of AHI with respect to the
Program and Program Policies shall cease forthwith;
(b) PA shall promptly return to AHI all policy and endorsement forms
and other materials supplied to it by AHI and then in its possession with
respect to the Program;
(c) The method of accounting for all Account Current Program Policies
will immediately be changed to a basis of AHI billing PA, with future premium
payments becoming due on the 25th day of the month following the month in which
the premium payment is due under the terms of the Program Policy in question.
9.10 Right to Terminate a Covered State. In the event that AHI or an
----------------------------------
Affiliate acquires an insurance company that already underwrites physicians'
professional liability insurance in a Covered State or an Expansion State, and
the acquired company has a larger premium volume than the Program in such state,
AHI may terminate the Program in such state by the payment to PA of (i) the
present fair value of the present Program in such state, plus (ii) an additional
payment equal to ten percent of such present value. Alternatively, the
provisions of Section 2.4.6 shall apply. The "present fair value" shall mean
the price at which the property would change hands between a willing buyer and a
willing seller when the former is not under any compulsion to buy and the latter
is not under any compulsion to sell, both parties having reasonable knowledge of
relevant facts. The present fair value shall be determined by agreement of the
parties or by an appraiser selected by the parties. If PA and AHI cannot agree
on an appraiser to make such determination, then each shall have the right to
appoint its own appraiser, and the two appraisers so appointed shall select a
third appraiser within 30 days after appointment. The three appraisers shall
then determine the present fair value of the Program in such state and the
determination shall be made by majority vote of the appraisers. In making such
determination of the present fair value of the Program in such state, the
appraisers shall (i) take into account all indirect and direct expenses of PA in
that state with respect to the Program so that the "fully burdened"
profitability of the Program in such state is considered, (ii) determine the
present fair value without consideration of any marketability discount or
control premium that may be applicable by reason of the fact that only a
portion, and not the entirety, of PA's business is being sold and (iii) consider
the terms and conditions of the sale that impact value, including the inclusion
or exclusion of covenants not to compete and rights to trading names. AHI shall
pay the price so determined within 30 days after determination. In the event
AHI or an Affiliate acquires an insurance company that is a direct writer of
physicians' professional liability insurance and the provisions of this Section
9.10 would otherwise apply, AHI will offer subproducers on such Program Policies
in such state the option of selling some or all of the Program Accounts in such
state to AHI for the present fair value of the commission
-21-
<PAGE>
revenue received by such subproducers for such accounts, with the present fair
value for such accounts to be determined by AHI.
ARTICLE X
MISCELLANEOUS
-------------
10.1 Independent Contractor. PA is acting under this Agreement as an
----------------------
independent contractor with full power and authority to determine the means,
manner and method of performance of its duties, subject to the Administrative
Guidelines and the Underwriting Guidelines and other limitations and obligations
imposed upon PA by this Agreement, and with full responsibility and liability
for its acts, errors and omissions in its performance of this Agreement. PA
agrees it is not an employee of AHI and is not entitled to any benefits
available to AHI employees.
10.2 Dispute Resolution; Arbitration. Any and all disputes between AHI and
-------------------------------
PA arising out of, relating to, or concerning this Agreement, whether sounding
in contract or tort and whether arising during the term 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 Section 10.2 shall take place in Dallas, Texas.
(a) Mediation. In the event any Dispute is not resolved by an
---------
informal negotiation between the parties within 30 days after either party
receives written notice from the other party that a Dispute exists, the matter
shall be referred to the Dallas, Texas, 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)(ii) 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)
30 days have elapsed since the Dispute was first scheduled for mediation.
(b) Arbitration. 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
-22-
<PAGE>
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:
(i) Submission to Arbitration. Within 30 days of the
-------------------------
termination of mediation proceedings pursuant to this Section 10.2, each party
shall notify the other of the name of its appointed arbitrator. Either party may
appoint the mediator as its appointed arbitrator.
(ii) 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, or active or retired
officers of property-casualty insurance companies or agencies. AHI and PA 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 the 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 30
days after notification of the appointment of the second arbitrator, within ten
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 Section
10.2. 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, and 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.
(iii) 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 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 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 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.
(iv) Arbitration Award. The Board shall take such steps as may
-----------------
be necessary to hold a private hearing within 120 days of the submission of the
Disputes to arbitration and to conclude such hearing within three 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
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
-23-
<PAGE>
the request of the Board, either party may submit a post-hearing brief for
consideration of the Board within 20 days of the close of the hearing. The Board
shall make its decision and award within 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 award interest at a
rate of 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.
(v) 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.
(vi) 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, the
rules of evidence, the rules of privilege and production and the 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.
(vii) 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.
-24-
<PAGE>
(c) Survival. The dispute resolution process set forth in this
--------
Section 10.2 shall survive the termination of this Agreement.
(d) 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 Board. 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.
10.3 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.
10.4 Offset. All amounts due PA or AHI under this Agreement shall be
------
subject to the right of offset.
10.5 Amendment. This Agreement may be amended by the parties only by
---------
written agreement executed by both parties.
10.6 Conflict with Applicable Law. Any portion of this Agreement in
----------------------------
contravention of any applicable statute, insurance department regulation or
directive, or any governmental ruling shall, without further action by the
parties, be modified or deleted to the extent necessary to conform to such
statute, regulation, directive or ruling.
10.7 Notices. All notices from one party to the other shall be in writing,
-------
and except as otherwise expressly herein provided, shall be effective upon
mailing to the other by United States mail, postage pre-paid, certified or
registered mail with return receipt requested, addressed to the other as
follows:
If to PA, addressed to:
President
Professional Programs Division
Poe & Brown, Inc.
401 E. Jackson Street, Suite 1700
Tampa, Florida 33602
-25-
<PAGE>
with a copy to:
General Counsel
Poe & Brown, Inc.
401 E. Jackson Street, Suite 1700
Tampa, Florida 33602
and if to AHI addressed to:
American Healthcare Indemnity Company
9441 W. Olympic Boulevard
Beverly Hills, California 90212-4541
Attention: Donald J. Zuk
President and Chief Executive Officer
By notice given as above provided, either party may change the address or
the addressee to whom any such notice is to be sent.
10.8 Governing Law. This Agreement is to be performed in accordance
-------------
with the laws of the State of Florida. The parties agree that any questions
concerning the interpretation, construction, performance or enforcement of this
Agreement or remedies in the event of its breach are to be governed by the laws
of that State.
10.9 Entire Agreement. This Agreement represents the entire
----------------
agreement between the parties concerning its subject matter. All prior
discussions and agreements between the parties concerning the Program, the
Program Policies, procedures and practices of the parties in the conduct of
their business and anticipated manner of performance of the Agreement and
agreements and understandings between the parties concerning the same are merged
into this Agreement. Neither party is relying on any statements,
representations or warranties from the other party concerning any aspect of
their dealings under this Agreement which are not expressly set forth herein.
10.10 Assignment. Neither this Agreement nor any of the rights or
----------
obligations hereunder may be assigned by any party without the prior written
consent of the other party. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, and no other person shall have any right,
benefit or obligation under this Agreement as a third party beneficiary or
otherwise.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK -
SIGNATURE PAGE FOLLOWS]
-26-
<PAGE>
IN WITNESS WHEREOF, PA and AHI have caused this Agreement to be executed by
their fully authorized respective officers as of this 1st day of January, 1998.
POE & BROWN, INC., PROFESSIONAL
PROGRAMS DIVISION
ATTEST: /s/ Martin W. Brown BY: /s/ Wayne H. Carter, III
-------------------------- -----------------------------------
Wayne H. Carter, III
TITLE: Executive Vice President President
----------------------------
AMERICAN HEALTHCARE INDEMNITY
COMPANY
ATTEST: /s/ Joseph P. Henkes BY: /s/ Donald J. Zuk
-------------------------- ----------------------------------
TITLE: Senior Vice President TITLE: President and Chief Executive
and Secretary Officer
---------------------------- --------------------------------
-27-
<PAGE>
EXHIBIT 10.75
PAGE 1 OF OUR STANDBY L/C NO. 306S231653
TO ADVISING BANK-CITIBANK, N.A.
CITIBANK HOUSE
336 STRAND
LONDON WC2RlHB
UNITED KINGDOM
FROM-UNION BANK OF CALIFORNIA, N.A.
SOUTHERN CALIFORNIA
INTERNATIONAL OPERATIONS CENTER
1980 SATURN STREET, V01-519
MONTEREY PARK, CALIFORNIA 91755-7417, USA
ATTN-STANDBY LETTER OF CREDIT
TELEX NUMBER-188612 (UNIONBKUT)
BANK IDENTIFIER CODE-BOFCUS33SOC
DATE-JANUARY 27, 1999
SUBJECT-ISSUANCE OF OUR IRREVOCABLE STANDBY
LETTER OF CREDIT NO. 306S231653
BENEFICIARY-HANNOVER RUCKVERSICHERUNGS
AKTIENGESELLSCHAFT
KARL-WIECHERT-ALLEE 50
D-30625 HANNOVER, GERMANY
CONTINUED ON PAGE 2
<PAGE>
PAGE 2 OF OUR STANDBY L/C NO. 306S231653
APPLICANT-SCPIE INDEMNITY COMPANY
9441 WEST OLYMPIC BLVD.
BEVERLY HILLS, CALIFORNIA 90213-4015, USA
CURRENCY-USD
AMOUNT-5,450,000.00 (FIVE MILLION FOUR HUNDRED
FIFTY THOUSAND AND N0/100 U.S.DOLLARS)
AVAILABLE BY PAYMENT AT THIS OFFICE IN MONTEREY PARK, CALIFORNIA, USA. FINAL
EXPIRY DATE-NOVEMBER 21, 1999 OR ANY AUTOMATICALLY EXTENDED DATE AS HEREIN SET
FORTH AT THE CLOSE OF BUSINESS OF THIS OFFICE IN MONTEREY PARK, CALIFORNIA, USA.
LADIES/GENTLEMEN-
WE HEREBY ISSUE OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. 30GS231653 (LETTER
OF CREDIT) IN YOUR FAVOR. THIS LETTER OF CREDIT IS AVAILABLE BY SIGHT PAYMENT
WITH OURSELVES ONLY AGAINST PRESENTATION TO THIS OFFICE AT THE ABOVE ADDRESS
THROUGH THE ADVISING BANK OF THE FOLLOWING DOCUMENTATION-
CONTINUED ON PAGE 3
<PAGE>
PAGE 3 OF OUR STANDBY L/C NO. 306S231653
A SIGHT DRAFT DRAWN ON US PURPORTEDLY SIGNED BY AN AUTHORIZED REPRESENTATIVE OR
OFFICER OF THE BENEFICIARY, MARKED-QUOTE-DRAWN UNDER UNION BANK OF CALIFORNIA,
N.A., IRREVOCABLE STANDBY LETTER OF CREDIT NO. 306S231653, DATED JANUARY 27,
1999. UNQUOTE
THE TERM BENEFICIARY INCLUDES ANY SUCCESSOR BY OPERATION OF LAW OF THE NAMED
BENEFICIARY INCLUDING, WITHOUT LIMITATION, ANY LIQUIDATOR, ANY REHABILITATOR,
RECEIVER OR CONSERVATOR.
PARTIAL DRAWINGS ARE PERMITTED.
THIS LETTER OF CREDIT SHALL BE DEEMED AUTOMATICALLY EXTENDED WITHOUT AN
AMENDMENT FOR A ONE YEAR PERIOD BEGINNING ON THE PRESENT EXPIRATION DATE HEREOF
NOVEMBER 21, 1999, AND UPON EACH ANNIVERSARY OF SUCH DATE, UNLESS AT LEAST
NINETY (90) DAYS PRIOR TO ANY SUCH EXPIRATION DATE WE HAVE SENT YOU WRITTEN
NOTICE BY COURIER SERVICE OR OVERNIGHT MAIL (OR BY TELETRANSMISSION THROUGH THE
ADVISING BANK) THAT WE ELECT NOT TO PERMIT THIS LETTER OF CREDIT TO BE SO
EXTENDED BEYOND ITS THEN CURRENT EXPIRATION DATE.
CONTINUED ON PAGE 4
<PAGE>
PAGE 4 OF OUR STANDBY L/C NO. 306S231653
THE DATE THIS LETTER OF CREDIT EXPIRES IN ACCORDANCE WITH THE ABOVE PROVISION IS
THE FINAL EXPIRY DATE. UPON THE OCCURRENCE OF THE FINAL EXPIRY DATE THIS LETTER
OF CREDIT SHALL FULLY AND FINALLY EXPIRE AND NO PRESENTATIONS MADE UNDER THIS
LETTER OF CREDIT AFTER SUCH DATE WILL BE HONORED.
UPON RECEIPT BY YOU OF OUR NOTICE THROUGH THE ADVISING BANK THAT WE ELECT NOT
RENEW YOU MAY DRAW AGAINST PRESENTATION TO OUR OFFICE THROUGH THE ADVISING BANK
AT THE ABOVE ADDRESS OF THE FOLLOWING DOCUMENTATION-
A SIGHT DRAFT DRAWN ON US PURPORTEDLY SIGNED BY AN AUTHORIZED REPRESENTATIVE OR
OFFICER OF THE BENEFICIARY, MARKED-QUOTE-DRAWN UNDER UNION BANK OF CALIFORNIA,
N.A., IRREVOCABLE STANDBY LETTER OF CREDIT NO. 306S231653, DATED JANUARY 27,
1999. UNQUOTE
CONTINUED ON PAGE 5
<PAGE>
PAGE 5 OF OUR STANDBY L/C NO. 306S231653
THIS LETTER OF CREDIT SETS FORTH IN FULL THE TERMS OF OUR UNDERTAKING, AND SUCH
TERMS SHALL NOT BE MODIFIED, AMENDED OR AMPLIFIED BY ANY DOCUMENT, INSTRUMENT OR
AGREEMENT REFERRED TO IN THIS LETTER OF CREDIT, IN WHICH THIS LETTER OF CREDIT
IS REFERRED TO OR TO WHICH THIS LETTER OF CREDIT RELATES.
EXCEPT AS STATED HEREIN, THIS LETTER OF CREDIT IS NOT SUBJECT TO ANY CONDITION
OR QUALIFICATION AND IS OUR INDIVIDUAL OBLIGATION WHICH IS IN NO WAY CONTINGENT
UPON REIMBURSEMENT.
SPECIAL INSTRUCTIONS-RETURN OF ORIGINAL LETTER OF CREDIT-
THE ORIGINAL LETTER OF CREDIT TOGETHER WITH ALL AMENDMENTS MUST BE RETURNED TO
US, WITHOUT NECESSITY OF DEMAND ON OUR PART, CLEARLY SIGNED AND DATED BY YOU AND
MARKED QUOTE CANCELED UNQUOTE WITHIN FIVE (5) BUSINESS DAYS OF THE OCCURRENCE OF
THE EARLIER OF THE FOLLOWING-
CONTINUED ON PAGE 6
<PAGE>
PAGE 6 OF OUR STANDBY L/C NO. 306S231653
1. WHEN THE LETTER OF CREDIT HAS BEEN FULL AND FINALLY DRAWN.
OR
2. UPON THE OCCURRENCE OF THE FINAL EXPIRY DATE OF THIS LETTER OF CREDIT.
ALL BANKING CHARGES UNDER THIS LETTER OF CREDIT INCLUDING THAT OF THE ADVISING
BANK ARE FOR THE ACCOUNT OF THE APPLICANT.
WE UNDERSTAND FROM SCPIE INDEMNITY COMPANY (APPLICANT), THAT THIS LETTER OF
CREDIT IS BEING PROVIDED IN CONNECTION WITH A SWAP AGREEMENT DATED NOVEMBER 21,
1996, BY AND BETWEEN THE APPLICANT AND CITIBANK, N.A.
WE HEREBY AGREE WITH YOU THAT DRAFTS DRAWN UNDER AND IN COMPLIANCE WITH THE
TERMS OF THIS CREDIT WILL BE DULY HONORED UPON PRESENTATION AND DELIVERY TO
UNION BANK OF CALIFORNIA, N.A., AT THE ADDRESS ABOVE. DOCUMENTS ARE TO BE SENT
BY COURIER SERVICE IN ONE LOT THROUGH THE ADVISING BANK TO UNION BANK OF
CALIFORNIA, N.A. AT THE ADDRESS ABOVE TOGETHER WITH REMITTANCE INSTRUCTIONS.
CONTINUED ON PAGE 7
<PAGE>
PAGE 7 OF OUR STANDBY L/C NO. 306S231653
PROCEEDS WILL BE REMITTED IN ACCORDANCE WITH THE INSTRUCTIONS RECEIVED.
AN INTERBANK TRANSFER FEE OF USD30.00 WILL BE DEDUCTED FROM THE PROCEEDS IF
SETTLEMENT IS TO BE REMITTED TO AN ACCOUNT AT ANOTHER BANK.
THE ADVISING BANK IS REQUESTED TO NOTIFY THE BENEFICIARY WITHOUT ITS
CONFIRMATION.
THIS LETTER OF CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR
DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE
PUBLICATION NO.500, EXCEPT THAT IN THE EVENT WE ARE CLOSED ON THE DATE OF
EXPIRATION FOR REASONS SPECIFIED IN ARTICLE 17 THEREOF, WE HEREBY SPECIFICALLY
AGREE THAT DRAFTS DRAWN UNDER AND IN COMPLIANCE WITH THE TERMS OF THIS CREDIT
WILL BE DULY HONORED UPON PRESENTATION AND DELIVERY TO UNION BANK OF CALIFORNIA,
N.A. AT THE ADDRESS ABOVE, IF PRESENTED WITHIN THIRTY (30) DAYS AFTER THE
RESUMPTION OF BUSINESS.
THIS IS THE OPERATIVE INSTRUMENT. NO AIRMAIL CONFIRMATION FOLLOWS.
<PAGE>
*SWIFT MESSAGE CONFIRMATION COPY
MAIL TO:
SCPIE INDEMNITY COMPANY
9441 W. OLYMPIC BLVD
BEVERLY HILLS, CA 90213-4015
WE HAVE ISSUED THE FOLLOWING AMENDMENT IN ACCORDANCE WITH YOUR INSTRUCTIONS:
PAGE 1 OF 2
DATE: 06/17/99
TO ADVISING BANK
CITIBANK N.A.
LONDON MAIN OFFICE
CITIBANK HSE, 336 STRAND, PO BOX 78
LONDON WC2R IHB, UNITED KINGDOM
:20:DOCUMENTARY CREDIT NUMBER
306S231653
:21:RECEIVER'S REFERENCE
5139029002
:31C:DATE OF ISSUE
990127
:DATE OF AMENDMENT
JUNE 17, 1999
:26E:NUMBER OF AMENDMENT
001
:59:BENEFICIARY
HANNOVER RUCKVERSICHERUNGS-
AKTIENGESELLSCHAFT
KARL-WIECHERT-ALLEE 50
D-30625 HANNOVER, GERMANY
:32B:INCREASE OF DOCUMENTARY CREDIT
280,000.00 U.S. DOLLAR
:34B:NEW DOC CREDIT AMT AFTER AMENDMENT
5,730,000.00 U.S. DOLLAR
:79:NARRATIVE
APPLICANT-SCPIE INDEMNITY COMPANY
BENEFICIARY-HANNOVER RUCKVERSICHERUNGS
AKTIENGESELLSCHAFT
WE HAVE AMENDED OUR IRREVOCABLE STANDBY LETTER OF
CREDIT NO. 306S231653 AS FOLLOWS-
INCREASE THIS LETTER OF CREDIT BY THE AMOUNT OF
USD 280,000.00 TO AN AMENDED TOTAL BALANCE OF
USD 5,730,000.00.
:72:SENDER TO RECEIVER INFORMATION
THIS LETTER OF CREDIT IS SUBJECT TO
UCP 1993 ICC PUBLICATION 500.
THIS IS THE OPERATIVE INSTRUMENT.
NO AIRMAIL CONFIRMATION FOLLOWS.
//END OF MESSAGE
<PAGE>
EXHIBIT 10.76
PAGE 1 OF OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. 306S231649.
TO-CITIBANK, N.A.
LONDON WC2RlHB, UNITED KINGDOM
FROM-UNION BANK OF CALIFORNIA, N.A.
SOUTHERN CALIFORNIA
INTERNATIONAL OPERATIONS CENTER
1980 SATURN STREET, MAIL CODE V01-519
MONTEREY PARK, CALIFORNIA 91755-7417, U.S.A.
ATTN-STANDBY LETTER OF CREDIT SECTION
TELEX NUMBER-188612 (ANSWER BACK-UNIONBK UT)
BANK IDENTIFIER CODE-BOFC US 33 SOC
DATE-JANUARY 27, 1999
SUBJECT-ISSUANCE OF OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. 306S231649.
ADVISING BANK-CITIBANK, N.A.
CITIBANK HOUSE,
336 STRAND P.O. BOX 78
LONDON WC2RlHB, UNITED KINGDOM
BENEFICIARY-KOVER, LIMITED
P.O. BOX 309
GEORGETOWN, GRAND CAYMAN
CAYMAN ISLANDS, BRITISH WEST INDIES
APPLICANT-SCPIE INDEMNITY COMPANY
9441 WEST OLYMPIC BLVD.
BEVERLY HILLS, CALIFORNIA, 90213-4015 U.S.A.
CONTINUED ON PAGE 2
<PAGE>
PAGE 2 OF OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. 306S231649.
CURRENCY-USD
AMOUNT-4,176,915.28 (FOUR MILLION ONE HUNDRED SEVENTY SIX THOUSAND NINE HUNDRED
FIFTEEN AND 28/100 U.S. DOLLARS).
AVAILABLE BY PAYMENT- AT THIS OFFICE.
FINAL EXPIRY DATE-JANUARY 31, 2000 OR ANY AUTOMATICALLY EXTENDED DATE AS HEREIN
SET FORTH AT THE CLOSE OF BUSINESS OF THIS OFFICE IN MONTEREY
PARK, CALIFORNIA, U.S.A.
LADIES/GENTLEMEN-
WE HEREBY ISSUE OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. 306S231649 (LETTER
OF CREDIT) IN YOUR FAVOR. THIS LETTER OF CREDIT IS AVAILABLE BY SIGHT PAYMENT
WITH OURSELVES ONLY AGAINST PRESENTATION TO THIS OFFICE AT THE ABOVE ADDRESS
THROUGH THE ADVISING BANK OF THE FOLLOWING DOCUMENTATION-
A SIGHT DRAFT DRAWN ON US PURPORTEDLY SIGNED BY AN AUTHORIZED REPRESENTATIVE OR
OFFICER OF THE BENEFICIARY, MARKED-QUOTE DRAWN UNDER UNION BANK OF CALIFORNIA,
N.A., IRREVOCABLE STANDBY LETTER OF CREDIT NO. 306S231649, DATED JANUARY 27,
1999.UNQUOTE
CONTINUED ON PAGE 3
<PAGE>
PAGE 3 OF OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. 306S231649.
THE TERM BENEFICIARY INCLUDES ANY SUCCESSOR BY OPERATION OF LAW OF THE NAMED
BENEFICIARY INCLUDING, WITHOUT LIMITATION, ANY LIQUIDATOR, ANY REHABILITATOR,
RECEIVER OR CONSERVATOR.
PARTIAL DRAWINGS ARE PERMITTED.
THIS LETTER OF CREDIT SHALL BE DEEMED AUTOMATICALLY EXTENDED WITHOUT AN
AMENDMENT FOR A ONE YEAR PERIOD BEGINNING ON THE PRESENT EXPIRATION DATE HEREOF
JANUARY 31, 2000 AND UPON EACH ANNIVERSARY OF SUCH DATE, UNLESS AT LEAST THIRTY
(30) DAYS PRIOR TO ANY SUCH EXPIRATION DATE WE HAVE SENT YOU WRITTEN NOTICE BY
COURIER SERVICE OR OVERNIGHT MAIL (OR BY TELETRANSMISSION THROUGH THE ADVISING
BANK) THAT WE ELECT NOT TO PERMIT THIS LETTER OF CREDIT TO BE SO EXTENDED BEYOND
ITS THEN CURRENT EXPIRATION DATE.
THE DATE THIS LETTER OF CREDIT EXPIRES IN ACCORDANCE WITH THE ABOVE PROVISION IS
THE FINAL EXPIRY DATE. UPON THE OCCURRENCE OF THE FINAL EXPIRY DATE THIS LETTER
OF CREDIT SHALL FULLY AND FINALLY EXPIRE AND NO PRESENTATIONS MADE UNDER THIS
LETTER OF CREDIT AFTER SUCH DATE WILL BE HONORED.
UPON RECEIPT BY YOU OF OUR NOTICE THROUGH THE ADVISING BANK THAT WE ELECT NOT
RENEW, YOU MAY DRAW AGAINST PRESENTATION TO OUR OFFICE THROUGH THE ADVISING BANK
AT THE ABOVE ADDRESS OF THE FOLLOWING DOCUMENTATION-
CONTINUED ON PAGE 4
<PAGE>
PAGE 4 OF OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. 306S231649.
A SIGHT DRAFT DRAWN ON US PURPORTEDLY SIGNED BY AN AUTHORIZED REPRESENTATIVE
OR OFFICER OF THE BENEFICIARY, MARKED-QUOTE DRAWN UNDER UNION BANK OF
CALIFORNIA, N.A., IRREVOCABLE STANDBY LETTER OF CREDIT NO. 306S231649, DATED
JANUARY 27, 1999. UNQUOTE
THIS LETTER OF CREDIT SETS FORTH IN FULL THE TERMS OF OUR UNDERTAKING, AND SUCH
TERMS SHALL NOT BE MODIFIED, AMENDED OR AMPLIFIED BY ANY DOCUMENT, INSTRUMENT OR
AGREEMENT REFERRED TO IN THIS LETTER OF CREDIT, IN WHICH THIS LETTER OF CREDIT
IS REFERRED TO OR TO WHICH THIS LETTER OF CREDIT RELATES.
EXCEPT AS STATED HEREIN, THIS LETTER OF CREDIT IS NOT SUBJECT TO ANY CONDITION
OR QUALIFICATION AND IS INDIVIDUAL OBLIGATION WHICH IS IN NO WAY CONTINGENT UPON
REIMBURSEMENT.
SPECIAL INSTRUCTIONS-RETURN OF ORIGINAL LETTER OF CREDIT-
THE ORIGINAL LETTER OF CREDIT TOGETHER WITH ALL AMENDMENTS MUST BE RETURNED TO
US, WITHOUT NECESSITY OF DEMAND ON OUR PART, CLEARLY SIGNED AND DATED BY YOU AND
MARKED BY YOU QUOTE CANCELED UNQUOTE, WITHIN FIVE (5) BUSINESS DAYS OF THE
OCCURRENCE OF THE EARLIER OF THE FOLLOWING-
(1) WHEN THE LETTER OF CREDIT HAS BEEN FULL AND FINALLY DRAWN.
CONTINUED ON PAGE 5
<PAGE>
PAGE 5 OF OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. 306S231649.
OR
(2) UPON THE OCCURRENCE OF THE FINAL EXPIRY DATE OF THIS LETTER OF CREDIT.
WE HEREBY AGREE WITH YOU THAT DRAFTS DRAWN UNDER AND IN COMPLIANCE WITH THE
TERMS OF THIS CREDIT WILL BE DULY HONORED UPON PRESENTATION AND DELIVERY TO
UNION BANK OF CALIFORNIA, N.A., AT THE ADDRESS ABOVE. DOCUMENTS ARE TO BE SENT
BY COURIER SERVICE IN ONE LOT THROUGH THE ADVISING BANK TO UNION BANK OF
CALIFORNIA, N.A. AT THE ADDRESS ABOVE TOGETHER WITH REMITTANCE INSTRUCTIONS.
PROCEEDS WILL BE REMITTED IN ACCORDANCE WITH THE INSTRUCTIONS RECEIVED.
AN INTERBANK TRANSFER FEE OF USD30.00 WILL BE DEDUCTED FROM THE PROCEEDS IF
SETTLEMENT IS TO BE REMITTED TO AN ACCOUNT AT ANOTHER BANK.
THE ADVISING BANK IS REQUESTED TO NOTIFY THE BENEFICIARY WITHOUT ITS
CONFIRMATION.
THIS LETTER OF CREDIT IS SUBJECT TO THE 'UNIFORM CUSTOMS AND PRACTICE FOR
DOCUMENTARY CREDITS (1993 REVISION),' INTERNATIONAL CHAMBER OF COMMERCE
PUBLICATION NO. 500, EXCEPT THAT IN THE EVENT WE ARE CLOSED ON THE DATE OF
EXPIRATION FOR REASONS SPECIFIED IN ARTICLE 17 THEREOF, WE HEREBY SPECIFICALLY
AGREE THAT DRAFTS DRAWN UNDER AND IN COMPLIANCE WITH THE TERMS OF THIS CREDIT
CONTINUED ON PAGE 6
<PAGE>
PAGE 6 OF OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. 306S231649.
WILL BE DULY HONORED UPON PRESENTATION AND DELIVERY TO UNION BANK OF CALIFORNIA,
N.A., AT THE ADDRESS ABOVE, IF PRESENTED WITHIN THIRTY (30) DAYS AFTER THE
RESUMPTION OF BUSINESS.
THIS IS THE OPERATIVE INSTRUMENT, NO AIRMAIL CONFIRMATION FOLLOWS.
<PAGE>
EXHIBIT 23.0
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-91525, 333-79965, and 333-00000) pertaining to the SMC Cash
Accumulation Plan, The 1999 Director and Senior Management Stock Purchase Plan
of SCPIE Holdings, Inc., and The SCPIE Holdings Inc. Employees Stock Purchase
Plan, respectively, of our report dated February 21, 2000, with respect to the
consolidated financial statements and schedule included in its Annual Report
(Form 10-K) for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 549,024
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 33,464
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 655,391
<CASH> 6,858
<RECOVER-REINSURE> 45,057
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 813,192
<POLICY-LOSSES> 449,864
<UNEARNED-PREMIUMS> 25,296
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 294,700<F1>
<TOTAL-LIABILITY-AND-EQUITY> 813,192
153,192
<INVESTMENT-INCOME> 37,697
<INVESTMENT-GAINS> (295)
<OTHER-INCOME> 693
<BENEFITS> 122,780
<UNDERWRITING-AMORTIZATION> 29,310
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 39,197
<INCOME-TAX> 9,295
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,902
<EPS-BASIC> 2.63
<EPS-DILUTED> 2.62
<RESERVE-OPEN> 477,631
<PROVISION-CURRENT> 204,067
<PROVISION-PRIOR> (61,179)
<PAYMENTS-CURRENT> 13,742
<PAYMENTS-PRIOR> 156,913
<RESERVE-CLOSE> 449,864
<CUMULATIVE-DEFICIENCY> (61,179)
<FN>
<F1>
Treasury stock of $93,796 is included as a reduction of other stockholders'
equity. Accumulated other comprehensive income of $(14,764) is included as a
component of stockholders' equity.
</FN>
</TABLE>
