-ii-
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, 1996
Gryphon Holdings Inc.
30 Wall Street
New York, New York 10005-2201
(212) 825-1200
Commission file number 0-5537
State of Incorporation: Delaware
I.R.S. Employer Identification No. 13-3287060
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock NASDAQ National Market
(par value $.01 per share)
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 than 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 (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. [ ]
As of March 13, 1997, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was $94,731,229.
As of March 13, 1997, the number of shares outstanding of the
Registrant's Common Stock, par value $.01 per share, was
6,668,340.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy statement for the Annual Meeting of Shareholders to be
held on May 8, 1997, which is incorporated into Part III of this
Form 10-K.
FORM 10-K
TABLE OF CONTENTS
Page
Part I
Item 1. Business 1
Item 2. Properties 21
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security
Holders 21
Part II
Item 5. Market for Company's Common Equity and
Related Stockholder Matters 22
Item 6. Selected Consolidated Financial Data 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 25
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 30
Part III 30
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 30
PART I
ITEM 1. BUSINESS.
(a) General Development of Business.
Gryphon Holdings Inc. (the "Company") was incorporated
under the laws of the State of Delaware in 1983. The Company is
a holding company that, through its subsidiaries, underwrites
specialized commercial property and casualty insurance coverages
in selected niche markets. The Company has developed expertise
in lines of insurance typically not emphasized by standard lines
insurers, including architects' and engineers' professional
liability ("A&E"), difference in conditions ("DIC") (primarily
earthquake coverage), and various other specialty coverages. The
Company focuses on providing coverage for small to medium-sized
insureds.
The Company employs a disciplined approach to underwriting
to achieve an overall underwriting profit, even if it is
necessary to limit premium growth at times. The Company
emphasizes quality service in all areas of its operations and
believes that this approach has enabled the Company to maintain
strong relationships with its insurance producers, which are
primarily excess and surplus lines brokers and general agents.
On December 28, 1993 and January 6, 1994, Willis Corroon
Group plc, a public company organized under the laws of England
and Wales ("Willis Corroon"), through a wholly owned subsidiary
sold 4,500,000 shares and 632,100 shares, respectively, of the
outstanding common stock (the "Common Stock"), par value $.01 per
share, of the Company to the public pursuant to the initial
public offering (the "Offering") of the Company. The Company did
not receive any proceeds from the Offering. As a result of the
Offering, Willis Corroon's ownership was reduced from 100% to
36.1%. In September 1995, the Company purchased 1.5 million
shares of its Common Stock from Willis Corroon for a purchase
price of $25.5 million, including related expenses, in a private
transaction. This transaction reduced Willis Corroon's ownership
in the Company to 21.6%. In November 1995, Willis Corroon sold
its remaining ownership interest in the Company in transactions
that were effected on the NASDAQ stock exchange. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Liquidity and Capital Resources."
Historically, the Company's insurance subsidiaries,
Associated International Insurance Company, a California-
domiciled insurance corporation ("Associated"), and Calvert
Insurance Company, a Pennsylvania-domiciled insurance corporation
("Calvert"), operated primarily as independent, indirect
subsidiaries of Willis Corroon, each having its own underwriting,
marketing, claims processing and administrative staff.
Associated is an admitted carrier in California and an approved
excess and surplus lines insurer in 48 other states. Calvert is
a specialty property and casualty carrier that is admitted in all
states, the District of Columbia and Canada and all of its
provinces.
Business Plan
Since the Offering, the Company has pursued a business
plan that has emphasized a more coordinated and integrated
approach to the businesses of its two major underwriting
subsidiaries. Through this strategy, the Company has endeavored
to better utilize the complementary state licensing of the
subsidiaries by making available to all underwriting personnel of
the Company the policy issuance capability of either its admitted
insurance company subsidiary, Calvert, or its non-admitted
subsidiary, Associated. In addition, the Company has attempted
to enhance profitability by increasing the net per-risk
retentions of its smaller subsidiary, Calvert, by making
available to it the financial resources of the Company's larger
subsidiary, Associated.
In pursuit of these objectives, the Company has
implemented two significant changes, effective January 1, 1996.
On that date, all of the operating-level personnel previously
employed by Associated and Calvert, became employees of a new
management and service subsidiary, Gryphon Insurance Group Inc.
("GIG"). The consolidation into a single company has created a
more efficient organization, has facilitated a more uniform
approach to underwriting and related operations, with freer
access to either issuing company, and has encouraged a single-
company culture. Secondly, the Company has put into place a
pooling arrangement between Associated and Calvert through which
the financial resources of the two subsidiaries are, in effect,
combined into one larger and stronger entity. This arrangement
has enhanced various operating ratios and facilitated the use of
higher net retentions in selected lines of business.
Underwriting Strategy
The Company seeks to optimize underwriting profitability
regardless of market conditions by providing specialty insurance
products to small and medium-sized commercial insureds. Using
its expertise in specialized lines of insurance, the Company
endeavors to maintain adequate pricing by exercising underwriting
discipline, particularly during times of excess underwriting
capacity and greater competition among insurers. The principal
elements of this strategy are set forth below.
Focus on Specialized Lines. The Company focuses on
specialized lines of insurance where the Company expects
that its particular expertise in evaluating and pricing
risks will give it a competitive advantage. By underwriting
a variety of specialty insurance programs, the Company
diversifies its risk among lines of insurance.
Underwriting Discipline. The Company seeks to write
insurance at prices and terms that it believes will generate
overall underwriting profits. In underwriting, the Company
typically reviews the type of risk, the attractiveness of
the pricing and terms relative to the risk and the Company's
aggregate exposure to similar risks.
Opportunistic Approach. The Company changes its mix
of business as market conditions change and opportunities
arise. The Company generally emphasizes insurance products
which have greater potential for underwriting profitability.
The Company avoids underwriting a line of business if the
line cannot be priced profitably. The Company does not
emphasize market share.
Commitment to Service. The Company focuses on
providing consistent, high quality service to its insurance
producers and insureds in both underwriting and claims
handling. The Company believes its producers and insureds
benefit from the extensive experience of its underwriting
and claims personnel.
Use of Sophisticated Computer Modeling Techniques.
In addition to employing standard insurance underwriting
techniques, the Company's underwriters utilize the
Insurance/Investment Risk Assessment System ("IRAS"), a
sophisticated computer model which estimates the probable
maximum loss ("PML") from earthquakes of varying frequency
and severity, to quantify the risk of and assist in
determining the price and terms of DIC coverage. The
Company also uses IRAS on an ongoing basis to monitor
aggregate earthquake exposure.
Emphasis on Relationships with Producers. The
Company utilizes select excess and surplus lines producers,
including general agents and wholesale brokers, to
distribute its insurance products, expand market reach and
provide specialized knowledge of particular coverages,
markets and customers. The Company generally seeks to be a
substantial underwriter for its producers, in order to
enhance the likelihood of receiving the most desirable
underwriting opportunities.
(b) Financial Information about Industry Segments.
The Company operates in only one industry segment, the
property and casualty insurance industry.
(c) Narrative Description of Business.
Principal Business Lines and Products
The following tables set forth the gross and net premiums
written by principal lines of business of the Company for the
periods indicated:
<TABLE>
Gross Premiums Written by Principal Lines of Business
(Dollars in thousands)
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
Premiums Percent Premiums Percent Premiums Percent Premiums Percent Premiums Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lines of Business
Architects'& Engineers'
Liability $17,843 11.4% $14,452 9.2% $15,910 11.4% $16,677 14.9% $18,539 20.0%
Casualty 29,234 18.6 26,902 17.2 21,284 15.3 19,680 17.6 18,381 19.9
Commercial
Automobile 18,337 11.7 18,580 11.8 14,258 10.3 3,201 2.9
Difference in
Conditions 38,500 24.5 45,213 28.8 43,259 31.1 34,035 30.5 26,914 29.1
Other
Property 24,192 15.4 27,601 17.6 18,424 13.2 13,159 11.8 9,792 10.6
Specialty
Lines 28,831 18.4 24,232 15.4 26,014 18.7 24,588 22.0 17,507 18.9
Run-Off Business 2 323 .3 1,424 1.5
_______ _____ _______ _____ _______ _____ _______ _____ _______ _____
TOTAL $156,937 100.0% $156,980 100.0% $139,151 100.0% $111,663 100.0% $92,557 100.0
</TABLE>
<TABLE>
Net Premiums Written by Principal Lines of Business
(Dollars in thousands)
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
Premiums Percent Premiums Percent Premiums Percent Premiums Percent Premiums Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lines of Business
Architects' & Engineers'
Liability $12,884 13.6% $10,576 11.7% $11,381 16.5% $12,302 19.8% $14,971 28.3%
Casualty 20,775 22.0 17,266 19.2 14,611 21.1 12,538 20.2 13,080 24.8
Commercial
Automobile 13,947 14.7 13,111 14.5 6,022 8.7 2,341 3.7
Difference in
Conditions 20,238 21.4 22,497 25.0 17,247 24.9 18,008 29.0 11,372 21.5
Other
Property 9,843 10.4 10,454 11.6 4,916 7.1 3,724 6.0 4,541 8.6
Specialty
Lines 16,920 17.9 16,271 18.0 15,008 21.7 12,931 20.8 7,558 14.3
Run-Off Business 2 323 .5 1,324 2.5
_______ _____ _______ _____ _______ _____ _______ _____ _______ _____
TOTAL $94,607 100.0% $90,175 100.0% $69,187 100.0% $62,167 100.0% $52,846 100.0%
</TABLE>
Architects' and Engineers' Liability. A&E insurance
protects architects, engineers and other design professionals
against liability to third parties due to the insured's
negligence. A&E policies are written by the Company exclusively
as claims-made coverage. A&E policies written by the Company
protect insureds for up to $5 million.
The Company generally concentrates on smaller
architectural and engineering firms (i.e., those with $10 million
or less in annual billings) where the principals actively
participate in the operations of the business. Based upon gross
premiums written, approximately 49.0% and 54.1% of the A&E
insurance was written for firms located in California for the
years ended December 31, 1996 and 1995, respectively.
The Company has generated its A&E business exclusively
through Risk Administration & Management Company ("RAMCO") for
over 9 years. RAMCO has been granted binding authority, subject
to A&E underwriting guidelines specified by the Company. The
Company may cancel any policy, subject to applicable insurance
regulations, if it is inconsistent with such guidelines. All A&E
claims are handled by RAMCO with oversight by the Company. The
Company conducts semi-annual audits of RAMCO's underwriting files
and reviews claims with RAMCO on a quarterly basis.
As compensation for A&E insurance produced by RAMCO, the
Company pays RAMCO commissions based upon a percentage of gross
A&E premiums written. RAMCO also receives a contingent
commission based upon the profitability of A&E insurance policies
it produces.
Casualty. The Company specializes in casualty policies
which provide coverage above an insured's self-insured retention
("SIR policies"), umbrella and buffer or excess layer casualty
coverage, including general liability and products liability
coverage. SIR policies have minimum attachment points of
$100,000 on automobile liability and $50,000 on general
liability. The Company's commercial umbrella coverage is
generally written in excess of primary liability insurance
coverage provided by other insurance carriers. The Company also
writes primary general liability and commercial multi-peril
package policies.
Commercial Automobile. The Company underwrites commercial
automobile policies for owner-operators and small commercial
fleets for local, intermediate and long-haul trucking risks
produced through selected general agents. The policies provide
liability, physical damage and cargo insurance with liability
protection up to $1 million.
Difference in Conditions. Substantially all of the DIC
policies written by the Company are for California earthquake
coverage. The Company uses IRAS, a computer modeling program, in
connection with underwriting DIC coverage to estimate PML from
earthquakes of varying severity. IRAS evaluates seismic hazard
by matching structural information provided by the Company
regarding a particular building, group of exposures or portfolio
with the IRAS database, which includes information concerning
earthquake severity and frequency, soil composition, and
proximity to known faults. Although IRAS is available to other
property and casualty insurers, the Company believes that the
amount and quality of information input into IRAS by the Company
results in more effective utilization of IRAS' capabilities. The
Company further believes that its use of IRAS prior to actual
risk selection enables the Company to differentiate its pricing
and terms with respect to particular risks on DIC coverage.
Other Property. The Company's other property coverage
consists primarily of fire insurance, inland marine and plate
glass insurance written on either a primary or an excess and
surplus basis. The Company also writes course-of-construction
coverage on engineering projects, national accounts, railroad and
utilities coverage on an excess-of-loss basis.
Specialty Lines. Other specialty insurance products
provided by the Company include liquor liability insurance,
special events insurance (for events such as concerts and
contests), directors' and officers' liability insurance for
"not-for-profit" organizations, fiduciary liability insurance for
pension fund trustees, public officials liability and
miscellaneous errors and omissions. The Company has expanded its
specialty lines business to diversify its risk exposure.
Marketing
The Company writes business through wholesale excess and
surplus lines brokers and general agents. The Company believes
that close working relationships with these insurance producers
are essential to its success. These producers provide
specialized knowledge of particular products, markets and
customers, and enable the Company to capitalize on underwriting
opportunities. The Company seeks to be a substantial underwriter
for its producers in order to enhance the likelihood of receiving
the most desirable underwriting opportunities.
The Company pays brokers and agents commissions based on
the amount of premiums and types of business underwritten. These
payments constitute part of the Company's acquisition costs and
are included in its underwriting expenses. The Company also pays
RAMCO and other general agents contingent commissions based upon
the profitability of the policies they produce for the Company.
See "Principal Business Lines and Products--Architects' and
Engineers' Liability."
Gross premiums written in the State of California amounted
to approximately 43.7% and 48.7% of the aggregate gross premiums
written by the Company for the years ended December 31, 1996 and
1995, respectively. In the State of New York, the Company's
gross premiums written were 7.6% and 12.8% of total premiums for
the years ended December 31, 1996 and 1995, respectively. Gross
premiums written in any other state did not exceed 10% of gross
premiums written during 1996 or 1995.
Management emphasizes quality service in all phases of its
operations and believes that this approach has enabled the
Company to maintain strong relationships with its producers. To
deliver prompt service while ensuring consistent disciplined
underwriting, the Company has granted selected general agents the
authority to sell and bind insurance coverages in accordance with
detailed procedures and limitations established by the Company.
The Company promptly reviews coverages bound by these agents,
decides whether the insurance is written in accordance with such
procedures and limitations and may cancel policies that are not
in compliance with such procedures and limitations.
Approximately 35.6% and 25.4% of the Company's gross premiums for
the years ended December 31, 1996 and 1995, respectively, were
written by general agents with binding authority.
Underwriting
The Company employs a disciplined approach to underwriting
to achieve an overall underwriting profit, even if it is
necessary to limit premium growth at times.
At December 31, 1996, the Company's thirty-three
underwriters had an average of 19 years of underwriting
experience. By focusing on specialized classes of insurance, the
Company is able to take advantage of its underwriters' experience
to underwrite complicated insurance risks on a case-by-case
basis. In accepting risks, each underwriter is required to
comply with risk parameters, retention limits and rates
prescribed by the Company. Compensation of senior underwriters
depends in part on the profitability of the lines of business for
which they are responsible.
The Company's computer systems are capable of generating
specific risk reports, which include a variety of historical data
regarding individual risks underwritten by the Company. These
reports inform the underwriters of the historical annual premium
quoted with respect to the risk, the reported losses and loss
adjustment expenses ("LAE") relating to the risk, cumulative
underwriting profitability and other relevant information.
The Company's underwriters generally perform a complete
underwriting evaluation of applicants and determine premiums and
coverage provisions before an insurance quotation is issued.
While the Company's business is primarily underwritten in-house
(except for A&E coverage, which is underwritten exclusively by
RAMCO), the Company has granted selected agents binding authority
to underwrite programs for the Company, subject to specific
guidelines that have been established by the Company. See
"Marketing."
Claims Management and Administration
In accordance with its emphasis on underwriting
profitability, the Company has an active approach to claims
management that is designed to investigate claims as soon as
practicable, manage and anticipate developments and service
producing brokers and insureds throughout the process. The
Company maintains an experienced claims management staff at each
of its major offices, with eight claims examiners in Woodland
Hills, California and five claims examiners in Hoboken, New
Jersey.
Claims in respect of A&E insurance written by the Company
are administered by RAMCO under the Company's supervision. Each
of the A&E policies written by the Company is on a claims-made
basis and includes defense costs within the policy limit. Due to
the nature of this line of professional liability coverage, the
Company generally has needed to retain counsel for a majority of
its A&E claims. When the estimated value of a claim exceeds the
Company's attachment level on a particular policy, RAMCO provides
the Company with documentation and a caption report, recommends
appropriate reserve levels and sends requests for claims payments
directly to the Company for processing. The Company reviews each
claim that is submitted and makes the payment it believes is
appropriate.
Reserves
The Company's loss reserves are estimates of amounts that
may be needed in the future to pay losses as well as expenses
related to the final adjustment of those losses. Reserves for
losses and LAE have been estimated by the Company utilizing its
own historical experience as well as that of the industry. These
estimates include two components: case reserves and non-case
reserves. Case reserves are estimates of losses and LAE for
reported claims and are established by the Company's claims
departments. Non-case reserves, which include a provision for
losses that have occurred but have not been reported to the
Company as well as development on reported claims, are the
difference between (i) the sum of case reserves and paid losses
and (ii) estimated ultimate incurred losses. Ultimate incurred
losses are an estimate of total losses and LAE necessary for the
ultimate settlement of all reported claims, including amounts
already paid and incurred but not reported claims. The Company
engages independent actuarial consultants to perform periodic
loss and LAE reserve analyses.
The Company's management believes its loss and LAE
reserves are adequate for the ultimate net cost of all losses
incurred by the Company. The Company does not discount its
reserves. The Company will continue to make additional
adjustments to loss and LAE reserve calculations based on
additional analyses and information as available.
Notwithstanding the foregoing, the Company can give no assurances
as to the ultimate accuracy of current reserves for losses or
LAE, or that additional development will not occur in the future
since the process of establishing and estimating loss and LAE
reserves is, by its nature, imprecise.
The following loss and LAE development table illustrates
the change over time of reserves established for
property-liability losses and LAE at the end of various calendar
years. The amounts shown for each year on the top line of the
table represent the Company's estimate of its gross liability for
future payments of losses and LAE as of the balance sheet date as
originally reported. The next line represents the amount of
ceded reserves recoverable from reinsurers for losses and LAE for
the same period, followed by the net losses and LAE unpaid on the
Company's business. The upper half of the table includes re-
estimates of the original balance sheet net liability for unpaid
losses and LAE at the end of each period following the original
report date. The estimates change as more information is known
about the frequency and severity patterns of claims for each
year. A redundancy (deficiency) exists when the reserve as
originally reported is greater (less) than the amount
re-estimated at each December 31. The cumulative redundancy
(deficiency) depicted in the table for a particular calendar year
shows the aggregate change in estimates over the period of years
subsequent to the original calendar year. As of December 31,
1996, the cumulative deficiency of $4,298,000 resulted
principally from additional loss and LAE development from a truck
leasing program and a used car dealers program, each in run-off,
which during 1996 produced $5.3 million and $2.2 million of
losses, respectively, in excess of existing reserves; and an
increase of $2.2 million in reserves for environmental and
asbestos-related exposures on business written prior to 1985.
Such increases were partially offset by favorable development of
A&E reserves and a re-estimation of IBNR reserves pertaining to
other property business. The lower portion of the table shows
the cumulative amount of the original net liability that has been
paid in each succeeding year.
In evaluating the information in the table, it should be
noted that each column includes the effects of all changes in
amounts for prior periods. The table does not present accident
year or policy year development data. Conditions and trends that
have affected the development of liabilities in the past may not
necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies
based on this table.
<TABLE>
Analysis of Loss and Loss Adjustment Expense Development
(Dollars in thousands)
<CAPTION>
December 31,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross liability for
unpaid losses
and LAE $93,492 $109,557 $115,796 $151,952 $163,818 $201,057 $231,415 $275,660 $315,691 $308,886 $309,259
Deduct: reinsurance
recoverable on unpaid
losses and LAE 53,077 58,396 57,097 83,574 77,334 87,927 104,352 133,783 169,889 152,975 137,952
_______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______
Net liability for unpaid
losses and LAE $40,415 $51,161 $58,699 $68,378 $86,484 $113,130 $127,063 $141,877 $145,802 $155,911 $171,307
Liability re-estimated
as of:
One year later 40,627 49,839 61,040 67,584 83,630 111,197 125,372 133,367 146,194 160,209
Two years late 41,233 52,808 58,037 66,774 82,672 110,056 118,354 128,675 143,131
Three years later 44,159 51,360 57,297 66,244 82,271 102,436 114,577 123,942
Four years later 44,876 51,188 56,583 65,745 76,339 98,812 110,989
Five years later 45,712 52,219 55,042 61,067 72,766 96,907
Six years later 45,845 50,122 51,921 58,220 71,686
Seven years later 44,728 48,719 48,290 58,509
Eight years later 43,354 45,261 50,370
Nine years later 39,938 48,154
Ten years later 42,619
_______ _______ _______ _______ _______ _______ _______ _______ _______ _______ ________
Cumulative redundancy
(deficiency) $(2,204) $3,007 $8,329 $9,869 $14,798 $16,223 $16,074 $17,935 $2,671 $(4,298) $0
Cumulative liability
paid as of:
One year later $6,186 $9,321 $8,854 $8,253 $2,692 $16,014 $16,692 $24,152 $28,911 $30,784
Two years later 12,541 16,078 13,539 11,135 12,648 27,223 34,302 42,402 47,380
Three years later 17,772 20,020 15,143 17,906 20,788 39,657 45,587 53,752
Four years later 21,114 20,936 18,221 21,485 28,381 46,314 52,959
Five years later 21,939 23,453 19,748 26,127 33,633 51,038
Six years later 22,775 23,847 22,641 29,941 36,714
Seven years later 22,939 25,571 25,814 32,322
Eight years later 23,470 28,348 27,552
Nine years later 25,986 29,682
Ten years later 27,321
</TABLE>
Prior to June 30, 1985, the Company wrote casualty
insurance coverage at high attachment levels on an excess-of-loss
basis. The Company's net retention was generally $50,000 per
risk on such coverage. As was customary for the insurance
industry at that time, such policies sometimes included coverage
for sudden and accidental, as well as cumulative, environmental
impairment and asbestos-related risks that involve significant
unresolved issues regarding liability, policy coverage and other
matters. Given the nature of this business, the pre-1985
casualty book of business has an extremely long tail, creating
uncertainty in the estimation of ultimate losses to be paid. The
Company generally establishes reserves for such claims if it
believes that the attachment level of such policies is likely to
be reached.
The Company's reserves also reflect certain facultative
and treaty casualty and professional liability reinsurance
assumed (written) prior to 1985. The inherent uncertainties in
estimating reserves are greater for reinsurance than for primary
insurance due to the diversity of the development patterns among
different types of reinsurance contracts, the longer period
between the occurrence of a claim and the reporting of such claim
to the reinsurer, the necessary reliance on ceding companies or
reinsurance intermediaries for information regarding reported
claims and different reserving practices among ceding companies.
A reinsurer's internal data is often supplemented with industry
data to provide the basis for reserve analysis. Thus,
management's judgments about the applicability of industry data
to the Company's reinsurance assumed business adds an additional
element of uncertainty to the reserving process. The Company no
longer writes this business.
The insurance industry experienced a number of reinsurance
company failures in the 1980's and certain of the Company's
treaty reinsurers relating to the pre-1985 book of casualty
business have become insolvent or are financially impaired. The
Company has written off all debts due from insolvent companies
and all receivables for paid losses and LAE and reserves ceded to
companies it believes to be financially impaired.
Since 1985, the Company has changed the type of casualty
insurance it writes and the risks it covers and has amended the
policy forms it uses to expressly exclude from the coverage any
risks directly associated with pollution and asbestos.
Associated revised its casualty coverage to meet the
severity of loss requirements of sophisticated commercial
insureds by providing coverage over an SIR together with first
layer umbrella and buffer/excess layer policies. The policies
generally have minimum SIR's of $50,000 for general liability and
$100,000 for commercial automobile. As a result, coverage now
attaches at much lower levels and the reporting tail for claims
is much shorter than for the pre-1986 book of business. The
Company has also developed specialty programs which focus on
lower-severity business and, in addition, writes A&E coverage
only on a claims-made basis and includes defense costs within A&E
policy limits.
The following table provides a reconciliation of beginning
and ending loss and LAE reserve balances of the Company for each
of the years in the three-year period ended December 31, 1996, as
computed in accordance with GAAP.
<TABLE>
Reconciliation of Liability for Loss and Loss Adjustment Expenses
(Dollars in thousands)
<CAPTION>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Gross reserves for losses and LAE at the beginning of the year $308,886 $315,691 $275,660
Ceded reserves for losses and LAE at the beginning of the year 152,975 169,889 133,783
________ ________ ________
Net reserves for losses and LAE at the beginning of the year 155,911 145,802 141,877
-------- -------- --------
Add:Provision for losses and LAE for claims occurring in:
The current year 53,402 50,424 49,047
Prior years 4,298 392 (8,510)
-------- -------- --------
Total net incurred losses and LAE 57,700 50,816 40,537
-------- -------- --------
Less:Losses and LAE payments for claims occurring in:
The current year 11,520 11,796 12,460
Prior years 30,784 28,911 24,152
-------- -------- --------
Total net paid losses and LAE 42,304 40,707 36,612
-------- -------- --------
Reserves for net losses and LAE at end of year 171,307 155,911 145,802
Reinsurance recoverable on unpaid losses 137,952 152,975 169,889
-------- -------- --------
Reserves for gross losses and LAE at end of year $309,259 $308,886 $315,691
</TABLE>
The following table provides a reconciliation of beginning
and ending loss and LAE reserve balances of the Company for each
of the years in the three-year period ended December 31, 1996 for
environmental impairment and asbestos-related liabilities.
<TABLE>
Reconciliation of Environmental Impairment and Asbestos-related
Liability for Loss and Loss Adjustment Expenses
(Dollars in thousands)
<CAPTION>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Environmental Impairment Liability
Gross reserves for losses and LAE at the beginning of the year $11,938 $14,200 $15,000
Ceded reserves for losses and LAE at the beginning of the year 3,958 5,100 5,000
------- ------- -------
Net reserves for losses and LAE at the beginning of the year 7,980 9,100 10,000
Add: Provision for losses and LAE
for claims occurring in prior years 1,598 3 (58)
Less: Losses and LAE payments for claims occurring in prior years 774 1,123 842
------- ------- -------
Reserves for net losses and LAE at end of year 8,804 7,980 9,100
Reinsurance recoverable on unpaid losses 4,177 3,958 5,100
------- ------- -------
Reserves for gross losses and LAE at end of year $12,981 $11,938 $14,200
<CAPTION>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Asbestos-related Liability
Gross reserves for losses and LAE at the beginning of the year $1,700 $4,050 $5,000
Ceded reserves for losses and LAE at the beginning of the year 1,060 3,350 4,250
Net reserves for losses and LAE at the beginning of the year 640 700 750
Add: Provision for losses and LAE for claims occurring in the
prior years 583 612 (158)
Less: Losses and LAE payments for claims occurring in the prior
years 212 672 (108)
Reserves for net losses and LAE at end of year 1,011 640 700
Reinsurance recoverable on unpaid losses 3,110 1,060 3,350
Reserves for gross losses and LAE at end of year $4,121 $1,700 $4,050
</TABLE>
At December 31, 1996, the reserve for unpaid environmental
impairment losses and related loss adjustment expenses was
approximately $8.8 million, net of reinsurance recoverables
deemed probable of collection by the Company of approximately
$4.2 million. The range of gross reserves for unpaid
environmental impairment losses and loss adjustment expenses is
estimated to be $13.0 million to $22.0 million and the range of
reserves, net of reinsurance recoverable, for unpaid
environmental impairment losses and loss adjustment expenses is
estimated to be approximately $8.8 million to $13.3 million.
At December 31, 1996, the reserve for unpaid asbestos-
related losses and related loss adjustment expenses was $1.0
million, net of reinsurance recoverables deemed probable of
collection by the Company of approximately $3.1 million. The
range of gross reserves for unpaid asbestos-related losses and
loss adjustment expenses is estimated to be $4.1 million to $8.3
million and the range of reserves, net of reinsurance
recoverable, for unpaid asbestos-related losses and loss
adjustment expenses is estimated to be approximately $1.0 million
to $2.0 million.
At December 31, 1996, reserves for incurred but not
reported losses and LAE for environmental impairment and asbestos-
related claims were $5.3 million and $0.8 million, respectively.
The range of reserves, net of reinsurance recoverable, for
unpaid environmental impairment and asbestos-related losses and
loss adjustment expenses is estimated to be approximately
$9.8 million to $15.3 million.
At December 31, 1996 and 1995, the Company had 232 and 229
environmental impairment liability claims, respectively, covering
154 and 103 policyholders, respectively. At December 31, 1996
and 1995, the Company had 66 and 61 asbestos claims,
respectively, covering 53 and 39 policyholders, respectively.
The Company disputes coverage on substantially all of its
environmental impairment and asbestos-related claims since such
underlying policies were generally written with certain coverage
exclusions. In a majority of cases, coverage is being determined
through judicial interpretation, which can vary from jurisdiction
to jurisdiction.
There are significant uncertainties in estimating the
amount of the Company's environmental impairment and asbestos-
related liabilities resulting from a lack of historical data,
long reporting delays, uncertainty as to the number and identity
of insureds with potential exposure, and complex, unresolved
legal issues regarding policy coverage and the extent and timing
of any such contractual liability. Courts have reached different
and sometimes inconsistent conclusions as to when a loss occurred
and what policies provide coverage, what claims are covered,
whether there is an insured obligation to defend, how policy
limits are determined, how policy exclusions are applied and
interpreted, and whether cleanup costs are includible as insured
property damage. These issues are not likely to be resolved in
the near future. As a result of these issues, the ultimate
number and cost of these claims may generate losses that vary
materially from the amounts currently recorded and could have a
material adverse effect on the Company's results of operations
and financial condition. While management believes the Company's
reserves for these coverages are appropriately established,
because of the uncertainty of circumstances surrounding many
critical factors that affect environmental impairment and
asbestos-related liabilities, there can be no assurance that the
Company's reserves for and losses from these claims will not
increase in the future.
Investments
The Company's investment policy has an overall objective
of enhancing after-tax return, through allocations among a range
of investment-grade securities having varying tax
characteristics, maturities and ratings. The precise allocation
varies depending upon investment opportunities, economic
conditions and tax considerations. The Company's investment
portfolio continues to be professionally managed with emphasis on
municipal bonds, U.S. Treasury securities and corporate bonds.
As of December 31, 1996, the portfolio had an estimated effective
modified duration of approximately 5 years.
The Company utilizes outside professional investment
managers who currently invest substantially all of the Company's
invested assets. The outside investment managers consult
frequently with management regarding the Company's tax position
and aggregate portfolio characteristics. The Investment
Committee of the Company's Board of Directors meets quarterly
with management to review and amend investment policy and monitor
the performance of the Company's investment managers.
The Company's investment portfolio is subject to several
risks, including interest rate and reinvestment risk. Fixed
maturity security values generally fluctuate inversely with
movements in interest rates. The Company's corporate and
municipal bond investments may contain call and sinking fund
features which may result in early redemptions and the Company's
mortgage-backed securities are subject to prepayment risk.
Declines in interest rates could cause early redemptions or
prepayments, which would require the Company to reinvest at lower
rates.
Effective January 1, 1994, the Company changed its method
of accounting for investments, in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under the
accounting pronouncement, the Company's securities are classified
as available for sale and reported at fair value, with unrealized
gains and losses, net of deferred income taxes, included in
stockholders' equity.
<TABLE>
The following table summarizes the investment results of
the Company for the periods indicated.
Investment Results
(Dollars in thousands)
<CAPTION>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Average invested assets $287,210 $263,674 $244,296
Net investment income 16,453 15,839 13,099
Realized gains (losses) on investments 1,203 3,647 (2,046)
Pre-tax yield on average assets (excluding
realized gains on investments) 5.7% 6.0% 5.4%
</TABLE>
<TABLE>
The following table summarizes the Company's fixed
maturity portfolio, excluding short-term investments, by sector
as of December 31, 1996.
Fixed Maturity Portfolio by Sector
(Dollars in thousands)
<CAPTION>
December 31, 1996
Amortized Percent of Fair
Cost Total Value
<S> <C> <C> <C>
U.S. Government and government agencies $55,845 20.3% $56,584
Debt securities issued by foreign governments 5,747 2.1 5,923
States and political subdivisions 141,686 51.6 146,335
Corporate securities 27,856 10.2 27,861
Mortgage-backed securities 43,381 15.8 43,461
Total $274,515 100.0% $280,164
</TABLE>
<TABLE>
The following table summarizes the Company's fixed
maturity portfolio by rating as of December 31, 1996.
Fixed Maturity Portfolio by Rating (1)
(Dollars in thousands)
<CAPTION>
December 31, 1996
Fair Percent of
Value Total
<S> <C> <C>
U.S. Government and government agencies $84,910 30.3%
Aaa 107,743 38.5
Aa 49,030 17.5
A 30,059 10.7
Baa 8,422 3.0
Total $280,164 100.0%
(1) Ratings as assigned by Moody's. Such ratings are generally
assigned upon the issuance of the securities, subject to
revision on the basis of ongoing evaluations. Bonds rated
Aaa by Moody's are judged to be of the best quality and are
considered to carry the smallest degree of investment risk.
</TABLE>
<TABLE>
The following table summarizes the Company's fixed
maturity portfolio by years to stated maturity as of December 31,
1996.
Fixed Maturity Portfolio by Stated Maturity
(Dollars in thousands)
<CAPTION>
December 31, 1996
Fair Percent of
Value Total
<S> <C> <C>
1 year or less $5,148 1.8%
Over 1 year through 5 47,012 16.8
Over 5 years through 10 years 78,610 28.1
Over 10 years through 20 years 97,808 34.9
Over 20 years 8,125 2.9
Mortgage-backed securities 43,461 15.5
Total $280,164 100.0%
</TABLE>
At December 31, 1996, investments in Federal National
Mortgage Association securities aggregating approximately $24.7
million represented the only investments in any entity in excess
of 10% of stockholders' equity other than those investments
issued or guaranteed by the U.S. Government.
The Company is subject to state laws and regulations that
require diversification of its investment portfolio and limit the
amount of investments in certain investment categories. As of
December 31, 1996, the Company's investments complied with all
such laws and regulations.
Reinsurance
Insurance companies purchase reinsurance to spread risk on
individual exposures, protect against catastrophic losses and
increase their capacity to write insurance. Reinsurance involves
an insurance company transferring, or ceding, all or a portion of
its exposure on insurance to a reinsurer. The reinsurer assumes
the exposure in return for a portion of the premium received by
the insurance company. Reinsurance does not discharge the
insurer from its obligations to its insureds. If the reinsurer
fails to meet its obligations, the ceding insurer remains liable
to pay the insured.
The Company cedes a material amount of its business to
reinsurers to spread risk and limit loss per exposure. During
1996, 1995 and 1994, the Company ceded premiums of $62.3
million, $66.8 million and $70.0 million, respectively, which
constituted 39.7%, 42.6%, and 50.3% respectively, of gross
premiums written in each year. Management seeks to mitigate
exposure to adverse reinsurance pricing conditions and its credit
risk by maintaining a diversity of reinsurers.
Catastrophe reinsurance protects an insurer from
significant aggregate loss exposure arising from a single event
such as an earthquake, hurricane, riot, tornado or other
extraordinary event. The Company uses IRAS to evaluate its
earthquake exposure in connection with purchasing catastrophe
reinsurance coverage.
Effective January 1, 1997, The Company maintains a six-
layer catastrophe reinsurance program covering its DIC writings.
The catastrophe reinsurance program covers 95% of the annual
aggregate amount of property claims up to $138 million per
occurrence, subject to a retention of $2.5 million per
occurrence. The Company limits its net retention to $100,000 per
risk for DIC.
Most other exposures, including Casualty, A&E, Specialty
Lines, Commercial Auto and certain Other Property risks have been
consolidated in a new three-layer reinsurance program arranged in
late 1996. The new program provides for indemnity of $24.5
million in excess of an increased net retention of $500,000 per
risk. In addition to per-risk coverage, the new program provides
casualty clash & contingency and certain non-DIC property
catastrophe protection on an occurrence basis, subject to the
same net retention. The new program was effective as of October
1, 1996 but will not incorporate some of the lines of business
until the expiration of previously existing reinsurance contracts
in the first half of 1997.
Effective January 1, 1997, the Company entered into an
aggregate stop loss reinsurance agreement with Scandinavian
Reinsurance Company, Ltd. This agreement is for a three-year
term and automatically renews annually unless canceled by either
party at the end of any fiscal year. Under the terms of the
agreement, the reinsurer provides indemnity if accident-year loss
and LAE ratios exceed 55%, subject to an aggregate limit of
approximately $45,000,000 over the three-year term. Certain
terms apply which may increase the loss and LAE threshold to 60%
of the Company's net earned premiums for the 1999 accident year.
The Company continually evaluates the credit risk related
to its reinsurers and has established a minimum A.M. Best rating
of "A-" for its domestic and Bermuda-based reinsurers and also
requires at least $50 million of policyholder surplus for all
domestic and foreign reinsurers. The Company works with
intermediaries to continually monitor the financial condition of
its reinsurers, as appropriate. If a reinsurer of the Company
were to become insolvent or unable to make payments under the
terms of a reinsurance agreement, it could have a material
adverse effect on the Company.
Competition
The property and casualty insurance industry is highly
competitive. The Company competes with national and smaller
regional insurers in each state in which it operates, as well as
with monoline specialty insurers. Certain of these competitors
are larger and have greater financial resources than the Company.
Among other things, competition may take the form of lower
prices, broader coverage, greater product flexibility, higher
quality services or an insurer's rating by independent rating
agencies. The Company competes with admitted insurers, surplus
line insurers, new forms of insurance organizations such as risk
retention groups, and alternative self-insurance mechanisms.
Increased public and regulatory concerns regarding the
financial stability of participants in the insurance industry
have resulted in greater emphasis being placed by policyholders
upon insurance company ratings and have created some measure of
competitive advantage for insurance carriers with higher ratings.
Associated's and Calvert's financial strength and claims-paying
ability are currently rated "A p (Excellent)" by A.M. Best.
Also, A.M. Best has assigned the financial size category of Class
VII to both companies under its pooling arrangement. In
evaluating a company's financial and operating performance,
A.M. Best reviews the company's profitability, leverage and
liquidity as well as the company's 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 and
the experience and competence of the management. The ratings
assigned by A.M. Best are based upon factors of concern to
policyholders, agents and intermediaries and are not directed
toward the protection of investors.
Cyclicality
Historically, the overall financial performance of the
property and casualty industry has tended to fluctuate in
cyclical market patterns. These cycles can be more pronounced for
insurance companies, such as the Company, that underwrite
business on a surplus lines basis. During a soft market,
heightened competition for premiums not only increases
competition among surplus lines insurers, but also causes
admitted insurers to offer coverages for risks generally
underwritten by the surplus lines insurers. During a hard market,
the constriction of available capital among admitted carriers,
combined with the opportunity for increased underwriting profit
in their more traditional lines of business, tends to cause
admitted carriers to reduce their underwriting of surplus lines
coverages. This may increase the overall number of risks
submitted to the surplus lines insurers and consequently may
enhance the opportunity of surplus lines companies to increase
premium volume and improve pricing.
Surplus lines insurance is generally placed by wholesale
brokers and general agents who specialize in particular lines of
coverage or classes of insureds. These insureds tend to be
sophisticated and price-conscious insurance purchasers. As a
result, surplus lines insurers may experience increased premium
rate competition and volume competition in soft markets.
At present, the property and casualty insurance industry
is experiencing a prolonged soft market.
Employees
As of December 31, 1996, the Company employed
approximately 130 persons, all in the United States. None of its
employees is represented by a labor union, and the Company
believes that its employee relations are excellent.
Regulation and Other Matters
As a general rule, an insurance company must be licensed
to transact insurance business in each jurisdiction in which it
operates, and almost all significant operations of a licensed
insurer are subject to regulatory scrutiny. Licensed insurance
companies are generally known as "admitted" insurers. Most
states provide a limited exemption from licensing for insurers
issuing insurance coverages that generally are not available from
admitted insurers. These coverages are referred to as "surplus
lines" insurance and these insurers are referred to as surplus
lines or "non-admitted" companies.
The Company's admitted insurance businesses are subject to
comprehensive, detailed regulation throughout the United States
and Canada. Various jurisdictions have established supervisory
agencies with broad authority to regulate, among other things,
licenses to transact business, premium rates for certain
coverages, trade practices, agent licensing, policy forms,
cancellation and renewal practices, underwriting and claims
practices, reserve adequacy and insurer solvency. Many
jurisdictions also regulate investment activities on the basis of
quality, distribution and other quantitative criteria. Further,
most jurisdictions in the United States require admitted
insurance companies to participate in their respective guaranty
funds. Insurers admitted to transact business in such
jurisdictions are required to cover losses of insolvent insurers
and are generally subject to annual assessments of 1% to 2% of
direct premiums written in that jurisdiction to pay claims of
insolvent insurers. In addition, most jurisdictions compel
participation in, and regulate the composition of, various shared
and residual market mechanisms under which insurers are induced
to provide certain coverages.
Generally, non-admitted insurers are subject to less
regulatory scrutiny than admitted companies. The eligibility of
the Company to write insurance on a surplus lines basis in most
jurisdictions is dependent on its compliance with certain
financial standards, including the maintenance of a requisite
level of capital and surplus and the establishment of certain
statutory deposits. State surplus lines laws typically:
(i) require the insurance producer placing the business to show
that he or she was unable to place the coverage with admitted
insurers; (ii) establish minimum financial requirements for
surplus lines insurers operating in the state; and (iii) require
the insurance producer to obtain a special surplus lines license.
In recent years, many jurisdictions have increased the minimum
financial standards applicable to surplus lines eligibility.
State insurance regulators have the discretionary
authority, in connection with the licensing of an insurance
company, to limit or prohibit writing new business within their
jurisdiction when, in the state's judgment, the insurance company
is not maintaining adequate statutory surplus or capital. The
Company does not currently anticipate that any regulator would
limit the amount of new business that Associated or Calvert may
write, given their respective current levels of statutory
surplus.
Most states have enacted legislation that regulates
insurance holding company systems, including acquisitions,
dividends, the terms of surplus notes, the terms of affiliate
transactions and other related matters. Typically, such statutes
require the Company to periodically file information with the
state insurance commissioner, including information concerning
its capital structure, ownership, financial condition and general
business operations. Under the terms of applicable state
statutes, any person or entity desiring to purchase a specified
percentage (commonly 10% or more) of the Company's outstanding
voting securities would be required to obtain prior regulatory
approval of the purchase. Further, state insurance statutes
typically place limitations on the amount of dividends or other
distributions payable by insurance companies, in order to protect
their solvency. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The insurance industry has been subject to increased
scrutiny. A number of state legislatures have considered or
enacted legislative proposals that alter and, in many cases,
increase the authority of state agencies to regulate insurance
companies and holding company systems. In addition, legislation
has been introduced in several of the past sessions of Congress
which, if enacted, could result in the federal government
assuming some role in the regulation of the insurance industry.
Several committees of Congress have made inquiries and conducted
hearings as part of a broad study of the regulation of United
States insurance companies.
The National Association of Insurance Commissioners (the
"NAIC") and insurance regulators continue to re-examine existing
laws and regulations and their application to insurance
companies. In particular, this re-examination has focused on
insurance company investment and solvency issues and, in some
instances, has resulted in new interpretations of existing law,
the development of new laws and the implementation of
non-statutory guidelines. The NAIC has formed groups to study and
formulate regulatory proposals on such diverse issues as the use
of surplus debentures, accounting for reinsurance transactions,
and the adoption of risk-based capital rules. In connection with
its accreditation of states and as part of its program to monitor
the solvency of insurance companies, the NAIC requires states to
adopt model NAIC laws and regulations on specific topics, such as
holding company regulations and the definition of extraordinary
dividends. The NAIC adopted a new system for assessing the
adequacy of statutory capital and surplus for all property and
casualty insurers. Based on the NAIC guidelines and computations
made by the Company in conformity with such risk-based capital
guidelines, Associated and Calvert satisfy the required levels of
capital. There can be no assurance, however, that capital
requirements applicable to the Company's businesses will not
increase in the future.
The NAIC has developed through the years a set of
financial relationships or "tests" called the Insurance
Regulatory Information System ("IRIS") that are designed for
early identification of companies which may require special
attention by insurance regulatory authorities. Insurance
companies submit data on an annual basis to the NAIC, which in
turn analyzes the data. Generally, an insurance company will
become subject to regulatory scrutiny if it fails to satisfy NAIC
standards for such factors as leverage, profitability, liquidity
and loss reserve development. Failure to satisfy these standards
may result in action by regulatory authorities to constrain a
company's underwriting capacity. No such action has been taken
with respect to the Company.
It is not possible to predict the future impact of
changing state and federal regulations on the Company's
operations.
ITEM 2. PROPERTIES.
The Company leases approximately 49,500 square feet of
office space, including its corporate headquarters located in New
York, New York and underwriting offices located in Woodland
Hills, California and Hoboken, New Jersey, respectively. The
headquarters in New York, which consists of 3,900 square feet, is
leased for a term ending in the year 1999. The Woodland Hills
office space consists of 30,275 square feet and is leased for a
term ending in the year 2008. The Hoboken office space consists
of 13,525 square feet and is leased for a term ending in the year
2000. The Company also leases small regional offices in Grand
Rapids, Michigan and Denver, Colorado.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to litigation and arbitration in
the normal course of its business. The Company does not believe
that any pending litigation or arbitration to which it is a
party, or of which any of its property is the subject, is likely
to have a material adverse effect on its consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ
National Market under the symbol "GRYP". The following table
reflects the high and low prices for the quarterly periods during
the years ended December 31,1996 and 1995, as furnished by the
NASDAQ National Market:
1996 1995
High Low High Low
First Quarter $20 1/4 $16 7/8 $14 1/4 $12 5/8
Second Quarter 19 1/2 14 5/8 16 5/8 13 1/2
Third Quarter 15 1/4 12 17 14 3/8
Fourth Quarter 16 12 1/2 19 3/8 15
As of February 10, 1997, there were approximately 45
record holders of the Common Stock, which does not include
beneficial owners of shares registered in nominee or street name.
Since the Offering, the Company has not paid any cash dividends
on its Common Stock and does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company's
term-loan agreement contains a covenant restricting its ability
to declare or pay any cash dividends to its shareholders.
Because the Company is a holding company and operates through its
subsidiaries, its cash flow and consequent ability to pay
dividends are dependent upon the earnings of its subsidiaries and
the distribution of those earnings to the Company. Also, the
ability of the Company's subsidiaries to pay dividends to the
Company is subject to certain regulatory restrictions. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and Note
9 of Notes to Consolidated Financial Statements.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table sets forth selected consolidated
financial data of the Company for the periods indicated. The
selected consolidated financial data for the five years ended
December 31, 1996 set forth below are derived from the audited
consolidated financial statements of the Company. The selected
statutory data have been derived from the financial statements of
Associated and Calvert prepared in accordance with statutory
accounting practices ("SAP") and filed with insurance regulatory
authorities. The following information should be read in
conjunction with the Consolidated Financial Statements and the
notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations", included
elsewhere herein.
<TABLE>
Gryphon Holdings Inc.
Selected Consolidated Financial Data
<CAPTION>
Year ended December 31,
1996 1995 1994 1993 1992
(Dollars and shares in thousands, except per-share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Gross premiums written $156,937 $156,980 $139,151 $111,663 $92,557
Net premiums written $94,607 $90,175 $69,187 $62,167 $52,846
Net premiums earned $87,929 $83,399 $61,605 $57,933 $53,511
Net investment income 16,453 15,839 13,099 12,216 12,367
Realized gains (losses) on investments 1,203 3,647 (2,046) 5,163 2,377
Other income 1,059
Total revenues 106,644 102,885 72,658 75,312 68,255
Losses and loss adjustment expenses 57,700 50,816 40,537 37,065 32,535
Underwriting, acquisition, and insurance expenses 40,967 34,590 25,721 18,481 17,771
Proposition 103 settlement expense 2,000(1)
Bonuses paid by Willis Corroon 2,670(2)
Interest expenses 1,761 595 172 437
Total expenses 100,428 86,001 66,258 60,388 50,743
Income before income taxes 6,216 16,884 6,400 14,924 17,512
Provision for income taxes 53 3,959 169 2,772(3) 5,014
Net income $6,163 $12,925 $6,231 $12,152 $12,498
Net income per share $.93 $1.69 $.77 $1.62 $1.67
Weighted average shares outstanding 6,656 7,648 8,132 7,485 7,478
Pro forma net income per share(4) $1.51 $1.57
GAAP Ratios:
Loss and loss adjustment expense ratio 65.6% 60.9% 65.8% 64.0% 60.8%
Underwriting expense ratio,
excluding Proposition 103 settlement 46.6 41.5 41.8 31.9 33.2
Combined ratio, excluding
Proposition 103 settlement 112.2 102.4 107.6 95.9 94.0
Proposition 103 settlement 3.5(1)
Combined ratio 112.2% 102.4% 107.6% 99.4% 94.0%
Selected Statutory Data:
Statutory net income $7,298 $13,876 $5,296 $7,459(1)(5)$11,091
Statutory surplus (at end of period) 82,566 83,433 72,220 69,161 59,123
Ratio of net premiums
written to surplus 1.1:1 1.1:1 1.0:1 0.9:1 0.9:1
Balance Sheet Data (at end of period):
Investments, including cash and cash equivalents $303,869 $288,602 $245,242 $237,442 $204,094
Total assets 526,984 530,989 492,717 432,080 362,201
Loss and loss adjustment expense reserves 309,259 308,886 315,691 275,660 231,415
Long-term debt 24,625 25,500 6,690
Stockholders' equity 95,136 93,222 93,773 91,489 68,254
Book value per share 14.28 14.02 11.51 11.25 9.13
____________________
(1) As part of a stipulation and consent order with the
California Department of Insurance to settle outstanding
obligations under Proposition 103, the Company refunded to
policyholders $2.0 million, including interest. This
amount has been reflected as a charge to net income for
the year ended December 31, 1993.
(2) In connection with the Offering, Willis Corroon paid
bonuses to certain executives. The bonuses, consisting of
cash and common stock and aggregating approximately
$2,670,000, are shown as an expense and were offset by a
capital contribution equal to the after-tax cost of such
bonuses.
(3) Includes the effect of the Company's adoption of SFAS No.
109, which resulted in a one-time cumulative tax benefit
of $0.7 million ($.09 per share) for the year ended
December 31, 1993.
(4) After giving pro forma effect to the cancellation of an
intercompany loan in the amount of $7.9 million and the
issuance of 651,833 shares of Common Stock in connection
with the Offering.
(5) Includes the effect of $5.0 million of additional
environmental impairment and asbestos-related reserves
recorded in GAAP financial statements in prior periods.
The effect of such addition was to increase the 1993
statutory combined ratio from 97.7% to 106.3%.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General
The Company is a holding company that, through its
subsidiaries, underwrites specialty property and casualty
insurance in sectors of the insurance industry that are generally
considered difficult to insure. Many of the coverages written by
the Company can be categorized as excess and surplus lines, which
generally means that the risks are nonstandard, or that the
policies in respect of the risks are written with unusual limits
or at deviated rates. The property and casualty insurance
industry is highly cyclical. The excess and surplus lines
sectors of the property and casualty insurance industry are often
subject to greater cyclicality and volatility than the industry
in general. During soft markets, large standard lines insurers
often utilize excess capacity to assume risks in excess and
surplus and specialty lines. During hard markets, such insurers
tend to abandon the excess and surplus and specialty lines to the
carriers that concentrate in these sectors. Thus, capacity in
these lines will fluctuate substantially, often with fluctuations
in revenues or profits, or both.
Results of Operations
Year Ended December 31, 1996 Compared with Year Ended December
31, 1995
Gross Premiums Written. Gross premiums written were
$156.9 million for the year ended December 31, 1996 compared to
$157.0 million for the year ended December 31, 1995. In 1996, the
Company's gross premiums written experienced increases in the
following lines of business: a $4.6 million increase in premiums
from specialty lines, primarily due to a new animal mortality
program; a $3.4 million increase in A&E liability due to expanded
marketing and enhanced coverages offered; and a $2.3 million
increase in casualty premiums, primarily due to new programs, but
offset in part by business lost because of competitive market
conditions in other casualty business written. Such increases
were offset by a $6.7 million decrease in DIC premiums, resulting
from the sharing of premiums with a companion carrier and, to a
lesser extent, from an increase in competition with respect to
certain types of DIC risks; a $3.4 million decrease in premiums
from other property, due to increased competition, mitigated in
part by new business from plate glass and fire policies; and a
$0.2 million decrease in commercial automobile, where the non-
renewal of a truck leasing program offset growth resulting from
new business written.
Net Premiums. Net premiums written increased 4.9% to
$94.6 million for the year ended December 31, 1996 from $90.2
million for the year ended December 31, 1995. This resulted
primarily from a shift in the mix of business toward lines with
higher net retention levels. Also, the Company paid $2.2 million
of catastrophe reinsurance reinstatement premiums in 1995, which
had the effect of increasing ceded premiums and reducing net
premiums written.
Net premiums earned increased by 5.4% to $87.9 million in
the year ended December 31, 1996 from $83.4 million in the year
ended December 31, 1995.
Net Investment Income. Net investment income increased
3.9% to $16.5 million for the year ended December 31, 1996 from
$15.8 million for the year ended December 31, 1995. The increase
is primarily due to additional funds available for investment in
1996 and was partially mitigated by lower average pre-tax
interest rates in 1996 than in 1995, resulting from a greater
component of tax-exempt securities in 1996.
Net Realized Gains on Investments. For the year ended
December 31, 1996, the Company realized a net gain of $1.2
million, compared with a net gain of $3.6 million for the year
ended December 31, 1995. Portfolio sales were effected in each
year to optimize the mix of taxable and tax-exempt securities.
Other Income. For the year ended December 31, 1996, the
Company recorded $1.1 million of underwriting management fees for
DIC business underwritten on behalf of a companion carrier.
Losses and Loss Adjustment Expenses. Losses and LAE
increased by 13.5% to $57.7 million for the year ended
December 31, 1996 from $50.8 million for the year ended
December 31, 1995, due to additional losses and reserve
strengthening for a truck leasing program ($5.3 million) and used-
car dealers program ($2.2 million), each discontinued during
1995; an increase of $2.2 million in reserves for environmental
impairment and asbestos-related exposures on business written
prior to 1985; other reserve increases pertaining to previous
accident years; and, more generally, increases in earned premium
exposures. Such increases were partially offset by reserve
redundancies resulting from favorable development of A&E case
reserves and a re-estimate of other property liabilities. In
1995, the Company recorded catastrophe losses of $1.9 million
related to hailstorms and the Northridge earthquake of 1994.
Underwriting, Acquisition, and Insurance Expenses.
Underwriting, acquisition, and insurance expenses increased by
18.4% to $41.0 million for the year ended December 31, 1996 from
$34.6 million for the year ended December 31, 1995. The expense
growth was primarily attributable to increased acquisition costs,
resulting from a change in the mix of business written; additions
to staff, related to new business; and new facilities for the
operating companies. Also, in 1996, the Company expensed an
additional $1.4 million of deferred acquisition costs.
Interest Expense. Interest expense was $1.8 million for
the year ended December 31, 1996, compared with $0.6 million for
the year ended December 31, 1995. Interest expense resulted from
a term loan of $25.5 million borrowed in 1995 to finance the
purchase of 1.5 million shares of the Company's common stock.
Interest expense was lower in 1995 because it accrued only from
the date of the take-down, in September.
Income Taxes. Income taxes were $53,000 for the year
ended December 31, 1996, compared with $4.0 million for 1995. In
1996, income taxes were reduced by the tax benefit from
additional reserve strengthening on discontinued lines of
business, increased underwriting expenses and tax-exempt
investment income. In 1995, the income tax expense was reduced
by the tax benefit from net claims costs and reinstatement
premiums relating to the Northridge earthquake and tax-exempt
investment income.
Net Income. Net income was $6.2 million for the year
ended December 31, 1996, compared with $12.9 million for the year
ended December 31, 1995.
Weighted Average Shares Outstanding. Average shares
outstanding were 6.7 million in 1996, compared with 7.6 million
in 1995, reflecting the effect of the purchase by the Company of
1.5 million shares of the Company's Common Stock in September of
1995.
Year Ended December 31, 1995 Compared with Year Ended December
31, 1994
Material Event. The Company writes a substantial amount
of DIC coverage in California, including the San Fernando Valley
area, which was struck by a major earthquake on January 17, 1994.
As a result of losses sustained in that event, the Company
recorded net pre-tax costs of $8.2 million for the year ended
December 31, 1994. The costs consisted of $4.3 million of claims
expense and $3.9 million of reinsurance reinstatement premiums.
In 1995, the Company recorded additional net pre-tax charges of
$3.0 million for expected additional loss development. These
charges consisted of $0.8 million of claims costs and $2.2
million of reinsurance reinstatement premiums.
Gross Premiums Written. Gross premiums written increased
12.8% to $157.0 million for the year ended December 31, 1995 from
$139.2 million for the year ended December 31, 1994. The
increase in gross premiums written was attributable to a $9.2
million increase in premiums from other property, due to new
business and a hardening of property markets; a $5.6 million
increase in casualty premiums, resulting from additional general
liability policies written; a $4.3 million increase in commercial
automobile premiums, resulting from new policies written; and a
$2.0 million increase in DIC premiums, resulting from changes in
market conditions for earthquake coverages. Such increases were
partially offset by a $1.8 million decrease in premiums from
specialty lines, due to the discontinuance of a used car dealers
program, and a $1.5 million decrease in premiums caused by
competitive market conditions in the A&E business.
Net Premiums. Net premiums written increased 30.3% to
$90.2 million for the year ended December 31, 1995 from $69.2
million for the year ended December 31, 1994 as a result of most
of the factors described above, which were enhanced by increased
retention levels in commercial automobile policies and plate
glass policies. Also, catastrophe reinsurance reinstatement
premiums ceded with respect to DIC policies decreased by $1.7
million in 1995.
Net premiums earned increased by 35.4% to $83.4 million in
the year ended December 31, 1995 from $61.6 million in the year
ended December 31, 1994.
Net Investment Income. Net investment income increased
20.9% to $15.8 million for the year ended December 31, 1995 from
$13.1 million for the year ended December 31, 1994. The increase
is primarily due to additional funds available for investment in
1995. To a lesser extent, net investment income, which is
reported before taxes, increased as a result of a greater
component of taxable securities in 1995 than in 1994.
Net Realized Gains (Losses) on Investments. For the year
ended December 31, 1995, the Company realized a net gain of $3.6
million compared to a net loss of $2.0 million for the year ended
December 31, 1994. Portfolio sales were effected in each year
to optimize the mix of taxable and tax-exempt securities.
Losses and Loss Adjustment Expenses. Losses and LAE
increased by 25.4% to $50.8 million for the year ended
December 31, 1995 from $40.5 million for the year ended
December 31, 1994, primarily due to increases in earned premium
exposures and catastrophe losses of $1.9 million, from Texas
hailstorms and additional reserves for the Northridge earthquake.
In 1994, the Company recorded net claims costs of $4.3 million
from the Northridge earthquake and additional reserves for
specialty lines, partially offset by favorable development in
other property reserves, as well as A&E coverages.
Underwriting, Acquisition, and Insurance Expenses.
Underwriting, acquisition, and insurance expenses increased by
34.5% to $34.6 million for the year ended December 31, 1995 from
$25.7 million for the year ended December 31, 1994, primarily due
to increased acquisition costs and additions to staff related to
new business.
Interest Expense. For the year ended December 31, 1995,
the Company recorded $0.6 million for interest expense associated
with a term loan of $25.5 million in connection with the purchase
of 1.5 million shares of its common stock in September of 1995.
Income Taxes. Income taxes were $4.0 million for the year
ended December 31, 1995, compared with $0.2 million for 1994. In
1994, the income tax expense was impacted by net claims costs and
reinstatement premiums relating to the Northridge earthquake, net
realized losses on investments, and a shift from taxable to tax-
exempt investments.
Net Income. Net income was $12.9 million for the year
ended December 31, 1995, compared with $6.2 million for the year
ended December 31, 1994.
Weighted Average Shares Outstanding. Average shares
outstanding were 7.6 million in 1995, compared with 8.1 million
in 1994, reflecting the effect of the purchase by the Company of
1.5 million shares of the Company's Common Stock in September of
1995.
Liquidity and Capital Resources
The Company receives cash from premiums and, to a lesser
extent, investment income. The principal cash outflows are for
the payment of claims, reinsurance premiums, policy acquisition
costs and general and administrative expenses. Net cash provided
by operations was $24.7 million in 1996, $22.0 million in 1995,
and $17.8 million in 1994.
At December 31, 1996, the Company maintained cash and cash
equivalents of $23.4 million to meet payment obligations. In
addition, the Company's investment portfolio could be
substantially liquidated without any material financial impact.
Substantially all of the cash and investments of the Company at
December 31, 1996 were held by its subsidiaries.
Reinsurance recoverables on unpaid losses were $138.0
million at December 31, 1996 and $153.0 million at December 31,
1995. Because of the high limits on many policies relative to
the Company's net retentions, reinsurance recoverable on unpaid
losses can fluctuate significantly depending upon the emergence
and severity of reported and unreported losses.
In September 1995, the Company purchased 1.5 million
shares of its Common Stock from Willis Corroon for a total
purchase price of $25.5 million, including related expenses. The
Company financed its purchase of such shares through the proceeds
of borrowing from commercial lending institutions. As a result
of the interest on this indebtedness, the Company's corporate
overhead expenses increased by approximately $1.8 million.
As a holding company, the Company depends principally on
dividends from its insurance company subsidiaries to pay
corporate overhead expenses, including principal and interest on
its borrowings. The Company's subsidiaries are subject to state
insurance laws that restrict their ability to collectively pay
dividends. See "Regulation and Other Matters." Under the
insurance code of Pennsylvania, dividends from Calvert are
limited to the greater of 10% of surplus as regards policyholders
as of the preceding year end or the net income for the previous
year, without prior approval from the Pennsylvania Department of
Insurance. Under the insurance code of California, dividends
from Associated are limited to the greater of 10% of
policyholders' statutory surplus as of the preceding year end or
the company's statutory net income for the previous year, without
prior approval from the California Department of Insurance. In
1996, 1995 and 1994, the aggregate dividends paid by the two
subsidiaries were $4.7 million, $2.0 million and $1.3 million,
respectively.
The NAIC has adopted a risk-based capital system for
assessing the adequacy of statutory capital and surplus for all
property and casualty insurers. Based on the guidelines and
computations made by the Company in conformity with such
guidelines, Associated and Calvert have exceeded the required
levels of capital. There can be no assurance that capital
requirements applicable to the Company's business will not
increase in the future.
The Company has no present plans to make any significant
capital expenditures in the foreseeable future.
The Company has no off-balance-sheet obligations that are
not disclosed in its financial statements. The Company believes
that retained earnings will be sufficient to satisfy its long-
term capital requirements to fund growth.
Effects of Inflation
There was no significant impact on the Company's
operations as a result of inflation during 1996, 1995 and 1994.
However, there can be no assurance that inflation will not have a
material impact on the Company's operations in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
An index to financial statements and required financial
statement schedules is set forth at Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
The information required in Part III (Items 10, 11, 12 and
13) is hereby incorporated by reference from the Company's
definitive Proxy Statement, which is expected to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934
not later than 120 days after the end of the fiscal year covered
by this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
(a) Financial Statements. See the index
immediately following the signature pages.
(b) Reports on Form 8-K. The Company did not file any
reports on Form 8-K during the last quarter of the
year ended December 31, 1996.
(c) Exhibits.
All exhibits listed below are filed with this Annual
Report on Form 10-K unless specifically stated to be incorporated
by reference to other documents previously filed with the
Securities and Exchange Commission.
Exhibit No.
3.1 Amended and Restated Certificate of Incorporation
incorporated herein by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 (the "Registration
Statement") filed with the Securities and Exchange
Commission (the "SEC") on September 23, 1993.
3.2 Amended and Restated By-Laws incorporated herein
by reference to Exhibit 3.2 of the 1995 Form 10-K.
4.1 Specimen Common Stock certificate incorporated
herein by reference to Exhibit 4.1 to Amendment No. 3 to
the Registration Statement filed with the SEC on December
14, 1993.
10.1 Loan Agreement, dated September 8, 1995, in the
principal amount of $25,500,000 by and among Gryphon
Holdings Inc., CIBC Inc. and Canadian Imperial Bank of
Commerce incorporated herein by reference to Exhibit 10.1
of the 1995 Form
10-K.
10.2 Tax Sharing Agreement among Willis Corroon Group
plc, the Company and certain other parties thereto
incorporated herein by reference to Exhibit 10.2 to
Amendment No. 1 to the Registration Statement.
10.3 General Indemnity Agreement between Willis Corroon
Group plc and the Company incorporated herein by
reference to Exhibit 10.3 to Amendment No. 1 to the
Registration Statement.
10.4 Form of Indemnification Agreement between the
Company and each of its directors and executive officers
incorporated herein by reference to Exhibit 10.4 to the
Registration Statement.
10.5 1993 Stock Option Plan of the Company incorporated
herein by reference to Exhibit 10.5 to Amendment No. 1 to
the Registration Statement.
10.6 Contractual Management Subsidiary Agreement, dated
July 1, 1987, between Associated and RAMCO incorporated
herein by reference to Exhibit 10.6 to the Registration
Statement.
10.7 Non-Competition and Confidentiality Agreement,
dated January 15, 1993, among Willis Corroon Group plc
and Stewart Smith (Canada) Limited, in favor of
Wellington Insurance Company incorporated herein by
reference to Exhibit 10.7 to the Registration Statement.
10.8 Severance and Confidentiality Agreement among the
Company, Willis Corroon Group plc and John F. Iannucci
incorporated herein by reference to Exhibit 10.30 of
Amendment No. 1 to the Registration Statement.
10.9 Severance and Confidentiality Agreement among the
Company, Willis Corroon Group plc and John H. Walton
incorporated herein by reference to Exhibit 10.31 of
Amendment No. 1 to the Registration Statement.
10.10 Severance and Confidentiality Agreement between the
Company and Stephen A. Crane incorporated herein by
reference to Exhibit 10.32 of Amendment No. 1 to the
Registration Statement.
10.11 Loan Cancellation Agreement between Willis Corroon Group
plc and the Company incorporated herein by reference to
Exhibit 10.33 of Amendment No. 1 to the Registration
Statement.
10.12 Restricted Stock Plan of the Company incorporated herein
by reference to Exhibit 10.34 of Amendment No. 1 to the
Registration Statement.
10.13 Severance and Confidentiality Agreement dated as of March
21, 1994 between the Company and Robert P. Cuthbert
incorporated herein by reference to Exhibit 10.35 of the
Company's Annual Report on Form 10-K for 1994 (the "1994
Form 10-K").
10.14 Severance and Confidentiality Agreement dated as of
November 11, 1994 between the Company and Robert M.
Coffee incorporated herein by reference to Exhibit 10.36
of the 1994 Form 10-K.
10.15 Amendment to Severance and Confidentiality Agreement
dated as of November 11, 1994 between the Company and
Stephen A. Crane incorporated herein by reference to
Exhibit 10.37 of the 1994 Form 10-K.
10.16 Amendment to Severance and Confidentiality Agreement
dated as of November 11, 1994 between the Company and
Robert P. Cuthbert incorporated herein by reference to
Exhibit 10.38 of the 1994 Form 10-K.
10.17 Amendment to Severance and Confidentiality Agreement
dated as of November 11, 1994 by and among Willis Corroon
Group plc, the Company and John F. Iannucci incorporated
herein by reference to Exhibit 10.39 of the 1994 Form 10-
K.
10.18 Amendment to Severance and Confidentiality Agreement
dated as of November 11, 1994 by and among Willis Corroon
Group plc, the Company and John H. Walton incorporated
herein by reference to Exhibit 10.40 of the 1994 Form 10-
K.
10.19 Casualty First Excess of Loss Reinsurance Agreement,
effective July 1, 1994, among Calvert and various
reinsurers incorporated herein by reference to Exhibit
10.41 of the 1994 Form 10-K.
10.20 Casualty Second Excess of Loss Reinsurance Agreement,
effective July 1, 1994, among Calvert and various
reinsurers incorporated herein by reference to Exhibit
10.42 of the 1994 Form 10-K.
10.21 Casualty Clash and Contingency, First Excess of Loss
Reinsurance Agreement, effective July 1, 1993, as
amended, among Calvert and various reinsurers
incorporated herein by reference to Exhibit 10.43 of the
1994 Form 10-K.
10.22 Casualty Clash and Contingency, Second Excess of Loss
Reinsurance Agreement, effective July 1, 1993, as
amended, among Calvert and various reinsurers
incorporated herein by reference to Exhibit 10.44 of the
1994 Form 10-K.
10.23 Casualty Quota Share Treaty, effective December 1, 1994,
among Calvert and various reinsurers incorporated herein
by reference to Exhibit 10.45 of the 1994 Form 10-K.
10.24 Property Quota Share Reinsurance Contract, effective July
1, 1994, among Calvert and various reinsurers
incorporated herein by reference to Exhibit 10.46 of the
1994 Form 10-K.
10.25 Property Quota Share Reinsurance Contract, effective July
1, 1993, as amended, among Calvert and various reinsurers
incorporated herein by reference to Exhibit 10.47 of the
1994 Form 10-K.
10.26 New York Trucking Quota Share Treaty, effective December
31, 1993, among Calvert and various reinsurers
incorporated herein by reference to Exhibit 10.48 of the
1994 Form 10-K.
10.27 Property Excess Per Risk Reinsurance Contract, effective
January 1, 1995, among Associated, Calvert and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.49 of the 1994 Form 10-K.
10.28 Preliminary Property Excess Per Risk Reinsurance
Contract, effective January 1, 1996, among Associated,
Calvert and various reinsurers stated therein
incorporated herein by reference to Exhibit 10.44 of the
1995 Form 10-K.
10.29 Combined Coded Inside Excess Per Risk and Quota Share
Reinsurance Contract, effective October 1, 1992 through
June 30, 1994, among Associated and various reinsurers
stated therein incorporated herein by reference to
Exhibit 10.50 of the 1994 Form 10-K.
10.30 Property Excess & Surplus Lines Excess Per Risk
Reinsurance Contract, effective July 1, 1994, among
Associated, Calvert and various reinsurers stated therein
incorporated herein by reference to Exhibit 10.51 of the
1994 Form 10-K.
10.31 Excess Catastrophe Reinsurance Contract, effective
January 1, 1994, among Associated, Calvert and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.52 of the 1994 Form 10-K.
10.32 External Third through Sixth Excess Catastrophe
Reinsurance Contract, effective January 1, 1996, among
Associated, Calvert and various reinsurers stated therein
incorporated herein by reference to Exhibit 10.53 of the
1994 Form 10-K.
10.32 External Third through Sixth Excess Catastrophe
Reinsurance Contract, effective January 1, 1995, among
Associated, Calvert and various reinsurers stated therein
incorporated herein by reference to Exhibit 10.49 of the
1995 Form 10-K.
10.34 Casualty Excess of Loss Reinsurance Contract, effective
July 1, 1994, among Associated, Calvert and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.54 of the 1994 Form 10-K.
10.35 Casualty Excess of Loss Reinsurance Contract, effective
July 1, 1995, among Associated, Calvert, Timberline
Insurance Company and various reinsurers stated therein
incorporated herein by reference to Exhibit 10.51 of the
1995 Form 10-K.
10.36 First Excess Multiple Line Reinsurance Contract,
effective July 1, 1994, among Associated, Calvert and
various reinsurers stated therein incorporated herein by
reference to Exhibit 10.55 of the 1994 Form 10-K.
10.37 Second Excess Multiple Line Reinsurance Contract,
effective July 1, 1994, among Associated, Calvert and
various reinsurers stated therein incorporated herein by
reference to Exhibit 10.56 of the 1994 Form 10-K.
10.38 Form of Stock Option Agreement under the 1995 Non-
Employee Directors Stock Option Plan incorporated herein
by reference to Exhibit 10.54 of the 1995 Form 10-K.
10.39 Combined Casualty 1st Excess of Loss and Quota Share
Reinsurance Contract, effective July 1, 1995, among
Associated, Calvert, Timberline Insurance Company and
various reinsurers stated therein incorporated herein by
reference to Exhibit 10.55 of the 1995 Form 10-K.
10.40 Casualty Second Excess of Loss Reinsurance Agreement,
effective July 1, 1995, among Associated, Calvert,
Timberline Insurance Company and various reinsurers
stated therein incorporated herein by reference to
Exhibit 10.56 of the 1995 Form 10-K.
10.41 Multi-Line Excess of Loss Reinsurance Contract, effective
July 1, 1995, among Associated, Calvert, Timberline
Insurance Company and various reinsurers stated therein
incorporated herein by reference to Exhibit 10.57 of the
1995 Form 10-K.
10.42 First Contingency Excess of Loss Reinsurance Contract,
effective July 1, 1995, among Associated, Calvert,
Timberline Insurance Company and various reinsurers
stated therein incorporated herein by reference to
Exhibit 10.58 of the 1995 Form 10-K.
10.43 Second Contingency Excess of Loss Reinsurance
Contract, effective July 1, 1995, among Associated,
Calvert, Timberline Insurance Company and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.59 of the 1995 Form 10-K.
10.44 First Excess Casualty Contingency Reinsurance Contract,
effective July 1, 1994, among Associated, Calvert and
various reinsurers stated therein incorporated herein by
reference to Exhibit 10.60 of the 1995 Form 10-K.
10.45 Second Excess Casualty Contingency Reinsurance Contract,
effective July 1, 1994, among Associated, Calvert and
various reinsurers stated therein incorporated herein by
reference to Exhibit 10.61 of the 1995 Form 10-K.
10.46 Casualty Excess of Loss Reinsurance Contract, effective
July 1, 1993, among Associated, Calvert and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.62 of the 1995 Form 10-K.
10.47 First Excess Casualty Contingency Reinsurance Contract,
effective October 1, 1992, among Associated and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.63 of the 1995 Form 10-K.
10.48 Second Excess Casualty Contingency Reinsurance Contract,
effective October 1, 1992, among Associated and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.64 of the 1995 Form 10-K.
10.49 First Excess Casualty Contingency Reinsurance Contract,
effective July 1, 1993, among Associated and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.65 of the 1995 Form 10-K.
10.50 Second Excess Casualty Contingency Reinsurance Contract,
effective July 1, 1993, among Associated and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.66 of the 1995 Form 10-K.
10.51 External Third through Fifth Excess Catastrophe
Reinsurance Contract, effective January 1, 1994, among
Associated, Calvert and various reinsurers stated therein
incorporated herein by reference to Exhibit 10.67 of the
1995 Form 10-K.
10.52 Preliminary Property Excess and Surplus Lines Excess Per
Risk Reinsurance Contract, effective January 1, 1996,
among Associated, Calvert, all other subsidiaries of the
Company (the "Subsidiaries") and various reinsurers
stated therein incorporated herein by reference to
Exhibit 10.68 of the 1995 Form 10-K.
10.53 Preliminary Property Excess and Surplus Lines Excess
Carve Out Reinsurance Contract, effective January 1,
1996, among Associated, Calvert, the Subsidiaries and
various reinsurers stated therein incorporated herein by
reference to Exhibit 10.69 of the 1995 Form 10-K.
10.54 Preliminary Franchise Excess of Loss Reinsurance
Contract, effective January 1, 1996, among Associated,
Calvert, the Subsidiaries and various reinsurers stated
therein incorporated herein by reference to Exhibit 10.70
of the 1995 Form 10-K.
10.55 Property Quota Share Reinsurance Agreement, dated July 1,
1995, among Calvert and various reinsurers stated therein
incorporated herein by reference to Exhibit 10.71 of the
1995 Form 10-K.
10.56 Property First Per Risk Excess Reinsurance Agreement,
dated July 1, 1995, among Calvert and various reinsurers
stated therein incorporated herein by reference to
Exhibit 10.72 of the 1995 Form 10-K.
10.57 First Catastrophe Excess Reinsurance Agreement, dated
July 1, 1995, among Calvert and various reinsurers stated
therein incorporated herein by reference to Exhibit 10.73
of the 1995 Form 10-K.
10.58 Second Catastrophe Excess Reinsurance Agreement, dated
July 1, 1995, among Calvert and various reinsurers stated
therein incorporated herein by reference to Exhibit 10.74
of the 1995 Form 10-K.
10.59 Third Catastrophe Excess Reinsurance Agreement, dated
July 1, 1995, among Calvert and various reinsurers stated
therein incorporated herein by reference to Exhibit 10.75
of the 1995 Form 10-K.
10.60 Fourth Catastrophe Excess Reinsurance Agreement, dated
July 1, 1995, among Calvert and various reinsurers stated
therein incorporated herein by reference to Exhibit 10.76
of the 1995 Form 10-K.
10.61 Casualty First Excess of Loss Reinsurance Contract, dated
July 1, 1995, among Calvert, the Company and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.77 of the 1995 Form 10-K.
10.62 Casualty Second Excess of Loss Reinsurance Contract,
dated July 1, 1995, among Calvert, the Company and
various reinsurers stated therein incorporated herein by
reference to Exhibit 10.78 of the 1995 Form 10-K.
10.63 Casualty Third Excess of Loss Reinsurance Contract, dated
July 1, 1995, among Calvert, the Company and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.79 of the 1995 Form 10-K.
10.64 Casualty Fourth Excess of Loss Reinsurance Contract,
dated July 1, 1995, among Calvert, the Company and
various reinsurers stated therein incorporated herein by
reference to Exhibit 10.80 of the 1995 Form 10-K.
10.65 Property Excess Per Risk Reinsurance Contract, dated
January 1, 1997 between the subsidiaries of the Company
and various reinsurers stated therein.
10.66 Property Excess and Surplus Lines Excess Per Risk
Reinsurance Contract, dated January 1, 1997 between the
subsidiaries of the Company and various reinsurers stated
therein.
10.67 Franchise Excess Loss Reinsurance Contract, dated January
1, 1997 between the subsidiaries of the Company and
various reinsurers stated therein.
10.68 External Third Through Seventh Catastrophe Excess
Reinsurance Contract, dated January 1, 1997 between the
subsidiaries of the Company and various reinsurers stated
therein.
10.69 Aggregate Excess of Loss Reinsurance Contract, dated
January 1, 1997 between the subsidiaries of the Company
and various reinsurers stated therein.
10.70 Per Event Reinsurance Contract, dated October 1, 1996
between the subsidiaries of the Company and various
reinsurers stated therein.
10.71 "Working" Per Event Reinsurance Contract, dated October
1, 1996 between the subsidiaries of the Company and
various reinsurers stated therein.
10.72 Excess Per Event Reinsurance Contract, dated October 1,
1996 between the subsidiaries of the Company and various
reinsurers stated therein.
21.1 Subsidiaries of the Company (included in Notes to the
Consolidated Financial Statements).
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule
(d) Financial Statement Schedules
The financial statement schedules required by
Regulation S-K are incorporated by reference to Item 14(a).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Gryphon Holdings Inc. has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
GRYPHON HOLDINGS INC.
Dated: March 25, 1997
By: Stephen A. Crane
Stephen A. Crane
President
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated:
Signature Title Date
Stephen A. Crane Director and President March 25, 1997
Stephen A. Crane (Chief Executive Officer)
Robert P. Cuthbert Chief Financial Officer March 25, 1997
Robert P. Cuthbert and Chief Accounting Officer
John F. Iannucci Executive Vice President March 25, 1997
John F. Iannucci and Director
Robert M. Baylis Director March 25, 1997
Robert M. Baylis
Franklin L. Damon Director March 25, 1997
Franklin L. Damon
Robert R. Douglass Director March 25, 1997
Robert R. Douglass
David H. Elliott Director March 25, 1997
David H. Elliott
Hadley C. Ford Director March 25, 1997
Hadley C. Ford
Richard W. Hanselman Director March 25, 1997
Richard W. Hanselman
Joe M. Rodgers Director March 25, 1997
Joe M. Rodgers
George L. Yeager Director March 25, 1997
George L. Yeager
Form 10-K--Item 14(a)(1) and (2)
Gryphon Holdings Inc. and Subsidiaries
Index of Financial Statements and Financial Statement Schedules
Page
Reports of Independent Auditors:
KPMG Peat Marwick LLP F-2
Ernst & Young LLP F-3
The following audited consolidated financial statements of
Gryphon Holdings Inc. and subsidiaries are included in Item 8:
Consolidated Balance Sheets at December 31, 1996 and 1995 F-4
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements F-8
The following consolidated financial statement schedules of
Gryphon Holdings Inc. and subsidiaries are included in Item
14(d):
Schedules
I Summary of Investments -- Other Than Investments in Related
Parties S-1
II Condensed Financial Information of Registrant S-2
III Supplemental Insurance Information S-4
IV Reinsurance S-5
VI Supplemental Information Concerning Property/Casualty
Insurance Operations S-6
All other schedules to the consolidated financial statements required
by Article 7 of Regulation S-X are not required under the related
instructions or are not applicable and, therefore, have been omitted.
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Gryphon Holdings Inc.
We have audited the accompanying consolidated balance sheets of
Gryphon Holdings Inc. and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the
two-year period then ended. In connection with our audits of the
consolidated financial statements, we have also audited the
financial statement schedules, as of and for the years ended
December 31, 1996 and 1995, as listed in the accompanying index.
These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Gryphon Holdings Inc. and subsidiaries as of December
31, 1996 and 1995, and the results of their operations and their
cash flows for each of the years in the two-year period then
ended, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedules as of and for the year ended December 31,
1996 and 1995, when considered in relation to the basic
consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
New York, New York
February 14, 1997
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Gryphon Holdings Inc.
We have audited the accompanying consolidated statements of
income, stockholders' equity, and cash flows of Gryphon Holdings
Inc. and subsidiaries (the "Company") for the year ended
December 31, 1994. Our audit also included the financial
statement schedules for the year ended December 31, 1994 listed
in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements and schedules based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements of Gryphon
Holdings Inc. and subsidiaries referred to above present fairly,
in all material respects, the consolidated results of their
operations and their cash flows for the year ended December 31,
1994, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements,
the Company made an accounting change in 1994.
Ernst & Young LLP
New York, New York
February 21, 1995
<TABLE>
Gryphon Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
December 31,
1996 1995
(Dollars in thousands)
<S> <C> <C>
Assets
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost: 1996 - $274,515; 1995 - $248,324) $280,164 $260,728
Short-term investments, at cost, which approximates market 307 537
Total investments 280,471 261,265
Cash and cash equivalents 23,398 27,337
Accrued investment income 3,919 4,080
Premiums receivable 18,509 17,475
Reinsurance recoverable on paid losses 14,326 24,489
Reinsurance recoverable on unpaid losses 137,952 152,975
Prepaid reinsurance premiums 18,965 20,434
Deferred policy acquisition costs 12,415 12,182
Deferred income taxes 10,282 6,582
Other assets 6,747 4,170
Total assets $526,984 $530,989
Liabilities and Stockholders' Equity
Policy liabilities:
Unpaid losses and loss adjustment expenses $309,259 $308,886
Unearned premiums 68,683 63,472
Total policy liabilities 377,942 372,358
Reinsurance balances payable 16,207 29,373
Income taxes payable 55 387
Long-term debt 24,625 25,500
Other liabilities 13,019 10,149
Total liabilities 431,848 437,767
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued or outstanding
Common stock, $.01 par value; 15,000,000 shares
authorized; 8,148,050 shares issued 81 81
Additional paid-in capital 30,847 30,850
Foreign currency translation adjustment, net of tax (219) (209)
Net unrealized investment gains, net of tax 3,672 8,063
Deferred compensation (257) (193)
Retained earnings 86,271 80,108
Treasury stock, at cost; shares 1996: 1,487,075:
1995: 1,500,000 (25,259) (25,478)
Total stockholders' equity 95,136 93,222
Total liabilities and stockholders' equity $526,984 $530,989
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
Gryphon Holdings Inc. and Subsidiaries
Consolidated Statements of Income
<CAPTION>
Year ended December 31,
1996 1995 1994
(Dollars and shares in thousands,
except per-share data)
<S> <C> <C> <C>
Revenues
Net premiums earned $87,929 $83,399 $61,605
Net investment income 16,453 15,839 13,099
Realized gains (losses) on investments 1,203 3,647 (2,046)
Other income 1,059
Total revenues 106,644 102,885 72,658
Expenses
Losses and loss adjustment expenses 57,700 50,816 40,537
Underwriting, acquisition, and insurance expenses 40,967 34,590 25,721
Interest expense 1,761 595
Total expenses 100,428 86,001 66,258
Income before income taxes 6,216 16,884 6,400
Provision for income taxes (benefit):
Current 1,389 2,969 507
Deferred (1,336) 990 (338)
Total income taxes 53 3,959 169
Net income $6,163 $12,925 $6,231
Net income per-share $.93 $1.69 $.77
Weighted average shares outstanding 6,656 7,648 8,132
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
Gryphon Holdings Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<CAPTION>
Foreign
Additional Currency Unrealized
Common Paid-in Translation Investment Deferred Retained Treasury
Stock Capital Adjustment Gains (Losses) Compensation Earnings Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994 $81 $30,602 $(146) $60,952 $91,489
Add (deduct):
Net income 6,231 6,231
Translation adjustment (113) (113)
Cumulative effect of a change
in accounting principle $6,143 6,143
Net unrealized investment
losses, net of tax (9,983) (9,983)
Stock award plans 248 $(242) 6
Balances at December 31, 1994 81 30,850 (259) (3,840) (242) 67,183 93,773
Add (deduct):
Net income 12,925 12,925
Translation adjustment 50 50
Stock award plans 49 49
Net unrealized investment
gains, net of tax 11,903 11,903
Purchase of common stock
for treasury $(25,478) (25,478)
Balances at December 31, 1995 81 30,850 (209) 8,063 (193) 80,108 (25,478) 93,222
Add (deduct):
Net income 6,163 6,163
Translation adjustment (10) (10)
Stock award plans (3) (64) 219 152
Net unrealized investment
losses, net of tax (4,391) (4,391)
Balances at December 31, 1996 $81 $30,847 $(219) $3,672 $(257) $86,271 $(25,259) $95,136
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
Gryphon Holdings Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Year ended December 31,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Operating activities
Net income $6,163 $12,925 $6,231
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in net policy liabilities 32,239 4,958 2,854
Increase in premiums receivable (1,034) (3,196) (3,073)
Increase in deferred policy acquisition costs (233) (2,388) (2,853)
Deferred income tax provision (1,336) 990 (338)
Decrease (increase) in other assets and liabilities 1,543 (539) 5,169
Amortization and depreciation 595 402 389
Amortization of bond discount, net 944 370 1,332
Realized (gains) losses on investments (1,203) (3,647) 2,046
Increase (decrease) in reinsurance balances payable (13,166) 12,341 5,874
Decrease (increase) in accrued investment income 161 (175) 169
Net cash provided by operating activities 24,673 22,041 17,800
Investing activities
Sales of fixed maturities 281,728 221,026 159,484
Purchases of fixed maturities (310,660) (249,119) (185,184)
Maturities or calls of fixed maturities 3,000 4,775 3,010
Net sales of Short-term investments 230
Capital expenditures (2,111) (366) (540)
Net cash used by investing activities (27,813) (23,684) (23,230)
Financing activities
Proceeds from long-term debt 25,500
Common stock acquired for treasury (25,478)
Principal payment on long-term debt (875)
Issuance of common stock 217
Deferred compensation (131)
Net cash provided by financing activities (789) 22
Effect of exchange rate changes on cash (10) 50 (113)
Decrease in cash and cash equivalents (3,939) (1,571) (5,543)
Cash and cash equivalents at beginning of year 27,337 28,908 34,451
Cash and cash equivalents at end of year $23,398 $27,337 $28,908
Supplemental disclosure of cash flow information
Income taxes paid $1,701 $2,783 $245
Interest paid 1,761 586
See accompanying notes to consolidated financial statements.
</TABLE>
1. Summary of Significant Accounting Policies
The significant accounting policies followed by Gryphon
Holdings Inc. (the "Company") are summarized below.
Basis of Presentation and Principles of Consolidation
Gryphon Holdings Inc.'s wholly owned insurance company
subsidiaries are Associated International Insurance Company
("Associated") and Calvert Insurance Company ("Calvert"), which
operate in the property and casualty insurance industry.
Associated writes the majority of its property and casualty
insurance policies in the State of California. Calvert writes
property and casualty insurance policies throughout the United
States and Canada.
The accompanying consolidated financial statements have
been prepared on the basis of generally accepted accounting
principles ("GAAP"), which as to the two insurance subsidiaries
differ from the statutory accounting practices ("SAP") prescribed
or permitted by regulatory authorities, and include the accounts
of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The preparation of the financial statements in conformity
with GAAP requires the use of estimates and assumptions that
affect amounts reported in the financial statements and the
accompanying notes. Actual results could differ from such
estimates.
Premium Revenues
Direct, assumed and ceded property and liability insurance
premiums written are recognized as earned on a pro rata basis
over the terms of the policies. Unearned premiums are calculated
principally by the application of pro rata fractions and
represent the portion of premiums written that is applicable to
unexpired terms of policies in force.
Recoverable policy acquisition costs that vary with and
are directly related to the production of business, consisting of
commissions, premium taxes and other underwriting expenses
incurred, net of ceding allowances, are deferred and amortized to
income as the related premiums are earned. The Company does not
consider anticipated investment income when determining the
recoverability of amounts deferred. Amortization of policy
acquisition costs amounted to $30.1 million, $26.7 million, and
$18.1 million for the years ended December 31, 1996, 1995 and
1994, respectively.
Reinsurance
Assumed reinsurance premiums written, commissions and
unpaid losses and loss adjustment expenses are accounted for
based principally on the reports received from the ceding
insurance companies and in a manner consistent with the terms of
the related reinsurance agreements.
To limit its risks, the Company acquires reinsurance
coverage with retentions and limits that management believes are
appropriate for the circumstances. Reinsurance arrangements
effected under quota-share reinsurance contracts and excess-of-
loss reinsurance contracts provide for greater diversification of
business, allow management to control exposure to potential
losses arising from large risks, and provide additional capacity
for growth. The accompanying consolidated financial statements
reflect premiums earned, losses and loss adjustment expenses
(LAE) and underwriting, acquisition and insurance expenses, net
of reinsurance ceded. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability
associated with the reinsured policies.
Contingent commissions and retrospectively-rated premiums
are accounted for on an earned basis and are accrued, in
accordance with the terms of the applicable reinsurance
agreement, based on the estimated ultimate level of profitability
relating to such reinsured business. Accordingly, the
profitability of the reinsured business is continually reviewed
and as adjustments become necessary, such adjustments are
reflected in current operations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Investments
Effective January 1, 1994, the Company changed its method
of accounting for investments, in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under the
accounting pronouncement, the Company's debt and equity
securities are classified as available for sale and reported at
fair value, with unrealized gains and losses, net of deferred
income taxes, included in stockholders' equity.
Fair values are based on quoted market prices, when
available, or estimates based on market prices for similar
securities, when quotes are not available. Short-term
investments are carried at cost, which approximates their fair
value. Realized gains and losses from sales or liquidations of
investments are determined on the basis of the specific
identification method and are included in net income. Investment
income is recognized when earned. The amortization of premium
and accretion of discount for fixed maturity securities are
computed utilizing the interest method.
Losses and Loss Adjustment Expenses
The liabilities for unpaid losses and loss adjustment
expenses are based on the Company's estimates of the ultimate
cost of unpaid losses reported prior to the close of the
accounting period, incurred but not reported losses, and the
related loss adjustment expenses. These liabilities are
estimated by management utilizing methods and procedures which it
believes are reasonable and necessarily are subject to the impact
of future changes in claim severity and frequency, as well as
numerous other factors. Although management believes that the
estimated liabilities for losses and loss adjustment expenses are
reasonable, because of the extended period of time over which
such losses are reported and settled, the subsequent development
of these liabilities may not conform to the assumptions inherent
in their determination and, accordingly, may vary from the
estimated amounts included in the accompanying consolidated
financial statements. To the extent that the actual emerging
loss experience varies from the assumptions used in the
determination of these liabilities, they are adjusted to reflect
actual experience. Such adjustments, to the extent they occur,
are reported in the period recognized.
The Company's liabilities for unpaid losses and loss
adjustment expenses include estimates for certain types of latent
exposures, such as environmental impairment and asbestos-related
claims, relating to business written prior to 1985 and which are
generally difficult to establish with traditional reserving
techniques.
The Company wrote environmental impairment and
asbestos-related coverages at high attachment levels and obtained
reinsurance coverage reducing its net retention to $50,000 per
occurrence. Among the complications of reserving for this type
of business are a lack of sufficient historical data, long
reporting delays, uncertainty as to the number and identity of
insureds with potential exposure, and complex, unresolved legal
issues regarding policy coverage and the extent and timing of any
such contractual liability. Courts have reached different and
sometimes inconsistent conclusions as to when a loss occurred and
which policies provide coverage, which claims are covered,
whether there is an insured obligation to defend, how policy
limits are determined, how policy exclusions are applied and
interpreted, and whether clean-up costs are includible as insured
property damage. These legal issues are not likely to be
resolved in the near future.
The establishment of appropriate reserves is an inherently
uncertain process, and there can be no assurance that the
ultimate liability, particularly with respect to latent exposures
such as environmental impairment and asbestos, will not
materially exceed the Company's current liability for unpaid loss
and loss adjustment expense reserve estimates and have a material
adverse effect on its future results of operations and financial
condition. Furthermore, due to the inherent uncertainty of
estimating such liabilities, particularly with respect to such
latent exposures, it has been, and may over time continue to be,
necessary to revise such estimated liabilities. However, on the
basis of the Company's internal procedures, which analyze, among
other things, its experience with similar cases and historical
trends such as reserving patterns, loss payments, pending levels
of unpaid claims, and product mix, as well as court decisions,
economic conditions and public attitudes, management believes
that adequate provision has been made for the Company's
liabilities for unpaid losses and loss adjustment expenses.
Foreign Currency
Transactions denominated in foreign currencies are
translated at the rate of exchange at the transaction date.
Revenues and expenses are translated at average exchange rates.
Assets and liabilities are translated at the exchange rates in
effect at the balance sheet date.
Earnings per Share
Earnings per common share are based on the average number
of shares outstanding during each year; the exercise of
outstanding stock options would have no significant dilutive
effect on earnings per share.
2. Investments
<TABLE>
The major categories of net investment income are
summarized as follows:
<CAPTION>
Year ended December 31
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Fixed maturities $16,256 $15,245 $12,471
Cash, cash equivalents and
short-term investments 1,117 1,610 1,455
Total investment income 17,373 16,855 13,926
Less related expenses (920) (1,016) (827)
Net investment income $16,453 $15,839 $13,099
</TABLE>
<TABLE>
The gross realized gains and losses from sales of fixed
maturity securities are as follows:
<CAPTION>
Year ended December 31
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Gross realized gains $3,074 $4,306 $1,666
Gross realized losses (1,871) (659) (3,712)
Net realized gains (losses) on sales $1,203 $3,647 $(2,046)
</TABLE>
<TABLE>
At December 31, 1996 and 1995, the amortized cost and
estimated fair values of investments in fixed maturities, by
categories of securities, and short-term investments were as
follows:
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
<S> <C> <C> <C> <C>
December 31, 1996
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $55,845 $826 $(87) $56,584
Debt securities issued by foreign governments 5,747 186 (10) 5,923
Tax-exempt obligations of states and political subdivisions 141,686 4,718 (69) 146,335
Mortgage-backed securities 43,381 294 (214) 43,461
Corporate securities 27,856 345 (340) 27,861
274,515 6,369 (720) 280,164
Short-term investments 307 307
$274,822 $6,369 $(720) $280,471
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
<S> <C> <C> <C> <C>
December 31, 1995
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $48,292 $3,101 $(8) $51,385
Debt securities issued by foreign
governments 4,078 158 4,236
Tax-exempt obligations of states and
political subdivisions 124,073 6,702 (40) 130,735
Mortgage-backed securities 36,616 976 37,592
Corporate securities 35,265 1,571 (56) 36,780
248,324 12,508 (104) 260,728
Short-term investments 537 537
$248,861 $12,508 $(104) $261,265
</TABLE>
At December 31, 1996, the amortized cost and estimated
fair value of fixed maturities, by contractual maturity, are
shown below. Expected maturities, which are best estimates, will
differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without prepayment
penalties.
December 31, 1996
Amortized Fair
Cost Value
(Dollars in thousands)
Due in one year or less $5,108 $5,148
Due after one year through five years 46,142 47,012
Due after five years through ten years 76,941 78,610
Due after ten years 102,943 105,933
231,134 236,703
Mortgage-backed securities 43,381 43,461
Total $274,515 $280,164
At December 31, 1996, investments in Federal National
Mortgage Association securities aggregating $24.7 million
represented the only investments in any entity in excess of 10.0%
of stockholders' equity other than those investments issued or
guaranteed by the U.S. government.
Securities on Deposit
At December 31, 1996 and 1995, securities with a fair
value of approximately $18.6 million and $16.2 million,
respectively were on deposit with various state or governmental
insurance departments in order to comply with statutory insurance
laws.
3. Losses and Loss Adjustment Expenses
The following table provides a reconciliation of beginning
and ending loss and LAE reserve balances of the Company for each
of the years in the three-year period ended December 31, 1996 as
computed in accordance with GAAP.
<TABLE>
Reconciliation of Liability for Loss and Loss Adjustment Expenses
(Dollars in thousands)
<CAPTION>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Gross reserves for losses and LAE at the beginning of the year $308,886 $315,691 $275,660
Ceded reserves for losses and LAE at the beginning of the year 152,975 169,889 133,783
Net reserves for losses and LAE at the beginning of the year 155,911 145,802 141,877
Add:Provision for losses and LAE for claims occurring in:
The current year 53,402 50,424 49,047
Prior years 4,298 392 (8,510)
Total net incurred losses and LAE 57,700 50,816 40,537
Less:Losses and LAE payments for claims occurring in:
The current year 11,520 11,796 12,460
Prior years 30,784 28,911 24,152
Total net paid losses and LAE 42,304 40,707 36,612
Reserves for net losses and LAE at end of year 171,307 155,911 145,802
Reinsurance recoverable on unpaid losses 137,952 152,975 169,889
Reserves for gross losses and LAE at end of year $309,259 $308,886 $315,691
</TABLE>
The provision for losses and LAE for claims occurring in
prior years shows an unfavorable development of $4.3 million in
1996. The unfavorable development resulted principally from
additional losses and reserve strengthening for a truck leasing
program ($5.3 million) and used-car dealers program ($2.2
million), each discontinued during 1995; and an increase of $2.2
million in reserves for environmental impairment and asbestos-
related exposures on business written prior to 1985. Such
increases were partially offset by favorable development of A&E
reserves and a re-estimation of IBNR reserves pertaining to other
property business.
The following table provides a reconciliation of beginning
and ending loss and LAE reserve balances of the Company for each
of the years in the three-year period ended December 31, 1996 for
environmental impairment and asbestos-related liabilities.
<TABLE>
Reconciliation of Environmental Impairment and Asbestos-related
Liability for Loss and Loss Adjustment Expenses
(Dollars in thousands)
<CAPTION>
Year ended December 31,
Environmental Impairment Liability 1996 1995 1994
<S> <C> <C> <C>
Gross reserves for losses and LAE at the beginning of the year $11,938 $14,200 $15,000
Ceded reserves for losses and LAE at the beginning of the year 3,958 5,100 5,000
Net reserves for losses and LAE at the beginning of the year 7,980 9,100 10,000
Add: Provision for losses and LAE for claims
occurring in prior years 1,598 3 (58)
Less: Losses and LAE payments for claims
occurring in prior years 774 1,123 842
Reserves for net losses and LAE at end of year 8,804 7,980 9,100
Reinsurance recoverable on unpaid losses 4,177 3,958 5,100
Reserves for gross losses and LAE at end of year $12,981 $11,938 $14,200
<CAPTION>
Year ended December 31,
Asbestos-related Liability 1996 1995 1994
<S> <C> <C> <C>
Gross reserves for losses and LAE at the beginning of the year $1,700 $4,050 $5,000
Ceded reserves for losses and LAE at the beginning of the year 1,060 3,350 4,250
Net reserves for losses and LAE at the beginning of the year 640 700 750
Add: Provision for losses and LAE for claims occurring in the
prior years 583 612 (158)
Less: Losses and LAE payments for claims occurring in the prior
years 212 672 (108)
Reserves for net losses and LAE at end of year 1,011 640 700
Reinsurance recoverable on unpaid losses 3,110 1,060 3,350
Reserves for gross losses and LAE at end of year $4,121 $1,700 $4,050
</TABLE>
At December 31, 1996, the reserve for unpaid environmental
impairment losses and related loss adjustment expenses was
approximately $8.8 million, net of reinsurance recoverables
deemed probable of collection by the Company of approximately
$4.2 million. The range of gross reserves for unpaid
environmental impairment losses and loss adjustment expenses is
estimated to be $13.0 million to $22.0 million and the range of
reserves, net of reinsurance recoverable, for unpaid
environmental impairment losses and loss adjustment expenses is
estimated to be approximately $8.8 million to $13.3 million.
At December 31, 1996, the reserve for unpaid asbestos-
related losses and related loss adjustment expenses was $1.0
million, net of reinsurance recoverables deemed probable of
collection by the Company of approximately $3.1 million. The
range of gross reserves for unpaid asbestos-related losses and
loss adjustment expenses is estimated to be $4.1 million to $8.3
million and the range of reserves, net of reinsurance
recoverable, for unpaid asbestos-related losses and loss
adjustment expenses is estimated to be approximately $1.0 million
to $2.0 million.
There are significant uncertainties in estimating the
amount of the Company's environmental impairment and asbestos-
related liabilities resulting from a lack of historical data,
long reporting delays, uncertainty as to the number and identity
of insureds with potential exposure, and complex, unresolved
legal issues regarding policy coverage and the extent and timing
of any such contractual liability. Courts have reached different
and sometimes inconsistent conclusions as to when a loss occurred
and what policies provide coverage, what claims are covered,
whether there is an insured obligation to defend, how policy
limits are determined, how policy exclusions are applied and
interpreted, and whether cleanup costs are includible as insured
property damage. These issues are not likely to be resolved in
the near future. As a result of these issues, the ultimate
number and cost of these claims may generate losses that vary
materially from the amounts currently recorded and could have a
material adverse effect on the Company's results of operations
and financial condition. While management believes the Company's
reserves for these coverages are appropriately established,
because of the uncertainty of circumstances surrounding many
critical factors that affect environmental impairment and
asbestos-related liabilities, there can be no assurance that the
Company's reserves for and losses from these claims will not
increase in the future.
4. Reinsurance
Certain premiums and losses are assumed from and ceded to
other insurance companies under various reinsurance agreements.
The Company cedes a portion of its business through quota share
treaties, excess of loss treaties and facultative placements, and
generally retains net amounts of risk ranging from $100,000 to
$500,000 per risk.
The Company continually evaluates the credit risk related
to its reinsurers and has established a minimum A.M. Best rating
of "A-" for its domestic and Bermuda-based reinsurers and also
requires at least $50 million of policyholder surplus for all
domestic and foreign reinsurers. The Company works with
intermediaries to continually monitor the financial condition of
its reinsurers, as appropriate. If a reinsurer of the Company
were to become insolvent or unable to make payments under the
terms of a reinsurance agreement, it could have a material
adverse effect on the Company.
The following table sets forth the significant reinsurance
receivables due from reinsurers as of December 31, 1996.
Year ended December 31, 1996
(Dollars in thousands)
Reinsurance A.M. Best's
Reinsurer Receivables Rating
Munich American Reinsurance Company $18,411 A+
Kemper Reinsurance Company 13,590 A-
Odyssey Reinsurance Corporation 11,454 A-
St. Paul Fire and Marine Insurance Company 11,366 A+
Lloyd's Underwriters 11,329 *
Signet Star Reinsurance Corporation 10,994 A
American Re-Insurance Company 9,653 A+
Western Atlantic Reinsurance Corporation 7,869 A
* A.M. Best does not assign ratings to Lloyd's syndicates.
The amount and cost of reinsurance available to companies
specializing in property and casualty insurance are subject, in
large part, to prevailing market conditions beyond the control of
the Company. The Company's ability to provide insurance at
competitive premium rates and coverage limits on a continuing
basis depends to a significant extent upon its ability to obtain
adequate reinsurance in amounts and at rates that will not
adversely affect its competitive position.
For the years ended December 31, 1996, 1995 and 1994,
amounts relating to assumed and ceded reinsurance premiums
written and earned and losses and loss adjustment expenses
incurred reflected in the accompanying consolidated statements of
income approximated the following:
Year ended December 31,
1996 1995 1994
(Dollars in thousands)
Premiums Written:
Assumed $2,390 $2,076 $3,638
Ceded 62,330 66,805 69,964
Premiums Earned:
Assumed $2,209 $1,715 $3,661
Ceded 63,824 66,064 68,221
Losses & LAE Incurred:
Assumed $4,455 $2,585 $4,803
Ceded 42,052 52,089 92,796
At December 31, 1996 the Company held letters of credit of
approximately $9.1 million securing amounts due from reinsurers.
During 1996, Associated maintained a five-layer property
catastrophe reinsurance program which covered 95% of the annual
aggregate amount of property claims up to $115.0 million per
occurrence, subject to a retention of $2.5 million per
occurrence.
During 1996, Calvert maintained a four-layer property
catastrophe reinsurance program which covered 95% of any one
property loss occurrence exceeding $0.6 million, up to $5.5
million of any one occurrence, and up to a $10.0 million annual
aggregate loss.
Associated limits its net retention to $100,000 per risk
for difference in conditions ("DIC"). Until October 1, 1996,
Associated retained $250,000 per risk for casualty, architects'
and engineers' professional liability, specialty lines, and
commercial auto and up to $500,000 per risk for non-DIC property
policies. Calvert reinsured various lines of business through
quota share treaties, excess of loss treaties and facultative
placements which limited Calvert's net retention per risk to a
maximum of $200,000 for property and casualty.
Effective October 1, 1996, the Company's reinsurance
program was restructured to provide protection for loss events
covering property and casualty classes of business, excluding DIC
and certain other property business. The program provides for
$24.5 million of coverage in excess of the Company's retention of
$500,000 for each and every event. Certain businesses that are
excluded from this agreement are covered by quota share treaties
that limit the Company's net retention per risk to a maximum of
$250,000.
Reinsurance ceded contracts do not relieve the Company of
its obligations to policyholders. The Company remains liable to
its policyholders for the portion reinsured to the extent that
any reinsurer does not meet its obligations for reinsurance ceded
to it under the reinsurance agreements. Failure of reinsurers to
honor their obligations could result in losses to the Company.
In addition, as is often the case in the normal course of
business, the Company is involved in disputes with reinsurers
regarding certain loss recoverables. Although the Company
believes that such issues will be resolved in the Company's
favor, there can be no assurance that the Company will prevail.
5. Federal Income Taxes
Effective January 1, 1993, the Company adopted SFAS
No. 109, "Accounting for Income Taxes." SFAS No. 109 establishes
an asset and liability approach for financial accounting and
reporting for income taxes as compared to the concept of matching
tax expense to pretax income. Under the liability method,
deferred tax assets and liabilities are recorded based on the
difference between the financial statement and tax bases of
assets and liabilities and the tax rates in effect when these
temporary differences are expected to reverse. The principal
assets and liabilities giving rise to such differences are loss
and LAE reserves, unearned premiums, deferred policy acquisition
costs, and net unrealized investment gains (losses).
The components of the net deferred income tax asset are as
follows:
Year ended December 31,
1996 1995
(Dollars in thousands)
Discount on loss reserves $12,270 $12,239
Unearned premium reserve 3,477 3,015
Alternative minimum tax credit 1,099 56
Other, net 129 110
Deferred income tax asset 16,975 15,420
Deferred policy acquisitions costs (4,345) (4,264)
Unrealized gains on investments (1,977) (4,341)
Other, net (371) (233)
Deferred income tax liability (6,693) (8,838)
Net deferred income tax asset $10,282 $6,582
The Company has not established a valuation reserve
because the Company believes it is more likely than not that the
net deferred tax asset will be fully realized.
<TABLE>
A reconciliation of income taxes computed at the statutory
federal income tax rate to the income tax provision is presented
below:
<CAPTION>
1996 1995 1994
% of Pre-Tax % of Pre-Tax % of Pre-Tax
Amount Income Amount Income Amount Income
------- --------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Taxes based on statutory
federal income tax rate $2,176 35.0% $5,909 35.0% $2,240 35.0%
Add (deduct):
Tax-exempt interest (2,338) (37.6) (2,131) (12.6) (2,230) (34.8)
Other, net 215 3.5 181 1.1 159 2.4
Total income taxes $53 .9% $3,959 23.5% $169 2.6%
</TABLE>
6. Long-Term Debt
In September 1995, the Company purchased 1.5 million
shares of its common stock beneficially owned by Willis Corroon
for a purchase price of $25.5 million, including related
expenses. The Company financed its purchase through an unsecured
term loan from commercial lending institutions. This loan
matures in varying amounts through 2002 with interest payable at
least quarterly. The term loan interest rate is equivalent to
either the bank's prime rate or the London Interbank Offered Rate
("LIBOR") plus 1%, at the discretion of the Company. The term
loan agreement contains certain restrictive covenants, including
restrictions on the Company's ability to declare or pay any cash
dividends to its shareholders. As of December 31, 1996, the
weighted average interest rate was 6.91%, and the fair value of
the loan approximated the carrying value.
Principal payments due on the term loan are as follows:
Year ending December 31, Principal Amount
(Dollars in thousands)
1997 $3,500
1998 3,625
1999 4,125
2000 4,625
2001 5,000
Thereafter 3,750
Total $24,625
In October of 1995, the Company entered into an interest
rate swap agreement with a commercial lending institution in
order to reduce the impact of interest rate fluctuations on the
Company's term loan. The interest rate swap was effected with
respect to the first $15.5 million of scheduled principal
amortizations of the $25.5 million loan. The impact of the swap
was to create an effective fixed rate of 6.97% on the $15.5
million principal amount. As of December 31, 1996, the fair
value of the interest rate swap approximated the carrying value.
7. Fair Value of Financial Instruments
The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 119 "Disclosure
about Derivative Financial Instruments and Fair Value of
Financial Instruments." SFAS No. 119 requires disclosure of an
estimate of the fair value of financial instruments. The
Statement defines the fair value of financial instruments as the
amount at which the instruments could be exchanged in a current
transaction between willing parties. The following table
summarizes the carrying amount and estimated fair value of the
Company's financial instruments at December 31, 1996 and 1995.
Year ended December 31
1996 1995
(Dollars in thousands)
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Financial assets:
Investments and cash $303,869 $303,869 $288,602 $288,602
Financial liabilities:
Long-term debt 24,625 24,651 25,500 25,713
The following methods and assumptions were used to
estimate the fair value of each class of financial instrument:
Investments and cash
The fair values of fixed maturities are based on quoted
market prices. The fair value of short-term instruments
approximate amortized cost. The fair value of cash and cash
equivalents approximates amortized cost.
Long-term debt
The fair value of the Company's long-term debt is
estimated based on the quoted market prices for the same or
similar issues or on current rates offered to the Company for
debt of the same maturities. The fair value includes
the effect of the interest rate swap.
8. Commitments and Contingencies
Leases
The Company and its subsidiaries lease certain office
facilities and computer equipment. Minimum rental commitments for
these leases, exclusive of escalations due to real estate taxes
and operating expenses, are as follows:
Year ending December 31, (Dollars in thousands)
1997 $1,157
1998 1,163
1999 1,130
2000 964
2001 755
Thereafter 5,512
$10,681
Total rent expense for all leases was $1,310,000, $959,000
and $856,000 in 1996, 1995 and 1994, respectively.
9. Dividends and Stockholders' Equity
Dividends
Associated, a California domiciled company, and Calvert, a
Pennsylvania domiciled company, are required to file with the
Department of Insurance of various states an annual convention
statement, which is prepared in conformity with accounting
practices prescribed or permitted by the respective states.
These practices vary from GAAP principally in that policy
acquisition costs are charged to expense when incurred, deferred
federal income taxes are not recognized, investments are
reflected at amortized cost, and nonadmitted assets are excluded
from the balance sheet.
Under state insurance laws of Pennsylvania, the maximum
amount of dividends which can be paid by Pennsylvania domiciled
insurance companies without prior approval of the Insurance
Commissioner is limited to the greater of 10% of surplus as
regards policyholders as of the preceding year end or the
insurance company's net income for the previous year. Under
state insurance laws of California, Associated is permitted to
pay as dividends to the Company, after advance notice to the
California Insurance Department, an amount equal to the greater
of 10% of Associated's policyholders surplus at the end of the
preceding year or its statutory net income for the preceding
year. Dividends in excess of these amounts require the prior
approval of the California Insurance Department. Dividends may
be paid only out of earned surplus. As such, at December 31,
1996, the maximum amount of dividends that Associated could pay
in 1997 without California Insurance Department approval amounted
to approximately $6.6 million and the maximum amount of dividends
that Calvert could pay in 1997 without Pennsylvania Insurance
Department approval amounted to approximately $1.7 million.
Stockholders' Equity
<TABLE>
A reconciliation of the two insurance subsidiaries' net
income and stockholders' equity for each of the years in the
three years ended December 31, 1996 and as of December 31, 1996
and 1995, as reported to the various regulatory authorities in
accordance with SAP, to the related GAAP amounts included in the
accompanying consolidated financial statements is as follows:
<CAPTION>
Stockholders'
Net Income Equity
1996 1995 1994 1996 1995
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Associated's and Calvert's statutory-
basis amounts $7,298 $13,876 $5,296 $82,566 $83,433
Add (deduct):
Deferred policy acquisition costs 233 2,388 2,853 12,415 12,182
Deferred income taxes 341 (728) (12) 11,175 10,835
Nonadmitted assets 3,090 950
Unauthorized reinsurance 3,980 1,977
Foreign currency translation adjustment (68) (110) (74)
Unrealized investment gains 816 3,672 8,063
Other, net (67) 25 (33)
Associated's and Calvert's
GAAP amounts 8,553 15,451 8,063 116,865 117,440
Holding Company:
Non-insurance company expenses (2,390) (2,526) (1,832)
GAAP equity (21,729) (24,218)
Consolidated amounts -- GAAP basis $6,163 $12,925 $6,231 $95,136 $93,222
</TABLE>
10. Shareholder Rights Plan
In June 1995, the Board of Directors declared a dividend
of one right for each outstanding share of Common Stock. Each
right entitles the holder to purchase from the Company a unit
consisting of 1/100 of a share of Junior Participating Cumulative
Preferred Stock at a price of $50 per unit. Initially, the
rights will not be exercisable and will trade with the Common
Stock. In the event a person or group acquires 20% or more of
the Common Stock, or commences a tender offer for the outstanding
shares, the rights become exercisable.
If a person or group acquires 20% or more of the Common
Stock, the rights will entitle a holder (other than the acquiring
person or group of acquiring persons) to buy shares of Common
Stock having a market value of twice the exercise price of the
right. If the Company is subsequently involved in a merger or
other business combination with a holder of 20% or more of the
stock of the Company, the rights will entitle a holder to buy
shares of common stock of the acquiring corporation having a
market value of twice the exercise price of the right.
The rights may be redeemed by the Company at $.001 per
right at any time prior to the acquisition by any person or group
of 20% or more of the Company's shares. The rights have no
voting power and will expire in June 2005, if not previously
redeemed.
11. Property and Equipment
Property and equipment is classified with other assets in
the accompanying balance sheets and is stated at cost, net of
accumulated depreciation and amortization. Depreciation is
computed using the straight-line method over the estimated useful
lives of the related property and equipment and ranges
principally from three to seven years.
Property and equipment, included in other assets in the
balance sheet, is comprised of the following:
Year ended December 31,
1996 1995
(Dollars in thousands)
Furniture, fixtures and
leasehold improvements $2,475 $1,168
Computers 1,011 1,328
Office equipment 354 273
3,840 2,769
Less: Accumulated depreciation
and amortization 1,116 1,690
$2,724 $1,079
12. Stock Option and Restricted Stock Plans
The Company's stock option plans provide for granting of
stock options to key employees and non-employee directors.
Options are granted at a price not less than the market price on
the date of grant. Options that have been granted under the
plans will become exercisable in four annual installments of 25%
each commencing on the second anniversary of the date of grant
and will expire ten years from the date of grant.
The Company's restricted stock award plan provides for the
granting of up to 100,000 shares of common stock to key
employees, subject to restrictions as to continuous employment
except in the case of death or normal retirement. Restrictions
generally expire over a five-year period from date of grant.
Compensation expense is recognized over the restriction period.
As of December 31, 1996, 26,000 shares were outstanding under the
plan.
The Financial Accounting Standards Board has issued SFAS
No. 123 "Accounting for Stock-Based Compensation." SFAS No. 123
provides an option either to continue the Company's current
method of accounting for stock-based compensation, or to adopt
the fair value method of accounting for stock-based employee
compensation plans, which would require the Company to expense
the fair value of its stock options at the date of grant over the
vesting period.
The Company has elected to follow Accounting Principle
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its
stock option and restricted stock plans. Accordingly, no
compensation expense has been recognized for its stock-based
compensation plans other than for restricted stock awards.
Although the Company elected to continue to follow APB No. 25, it
is required to provide additional disclosures including pro forma
net income and earnings per share as if the Company adopted the
new fair value method for recognition purposes in 1995.
<TABLE>
A summary of stock option activity during the three years
ended December 31, 1996, follows:
<CAPTION>
Available Weighted
for Grant Outstanding Average of
Exercise Price
of Outstanding
Options
-------- ----------- -------------
<S> <C> <C> <C>
Balance, December 31, 1993 92,500 307,500 $13.00
Granted (59,500) 59,500 14.11
Canceled 1,000 (1,000) 13.88
Balance, December 31, 1994 34,000 366,000 13.18
Authorized 100,000
Granted (114,000) 114,000 14.89
Canceled 21,000 (21,000) 13.07
Balance, December 31, 1995 41,000 459,000 13.61
Authorized 250,000
Granted (162,500) 162,500 17.44
Exercised (3,925) 13.00
Canceled 59,250 (59,250) 15.03
Balance, December 31, 1996 187,750 558,325 $14.58
</TABLE>
<TABLE>
The following table summarizes outstanding and exercisable
options as of December 31, 1996.
<CAPTION>
Options Outstanding Options Excersiable
--------------------- ---------------------
Weighted
Year Range Number Average Weighted Number Weighted
of of Outstanding Remaining Average Exercisable Average
Grant Exercise Contractual Exercise Exercise
Prices Life Price Price
<S> <C> <C> <C> <C> <C> <C>
1993 $13 254,825 7.00 $13.00 125,450 $13.00
1994 $13 - $15 57,500 7.45 14.11 14,375 14.11
1995 $13 - $16 109,000 8.49 14.92 14.92
1996 $14 - $20 137,000 9.36 17.44 17.44
558,325 139,825
</TABLE>
The pro forma net income and earnings per share determined
consistent with SFAS No. 123 is as follows:
Pro forma (1) 1996 1995
Net income $5,974 $12,880
Earnings per share $.90 $1.68
(1) During the initial phase-in period of SFAS No. 123, the
effects of applying the standard for either recognizing
compensation cost or providing pro forma disclosures are not
likely to be representative of the effects on reported net income
for future years, based on the fact that options vest over
several years and additional awards generally are made each year.
The weighted average fair value of options granted during
1996 and 1995 were $7.64 and $6.29, respectively. The Black-
Scholes option-pricing model was used with the following weighted
average assumptions: volatility of 24.3%, risk-free interest rate
of 6.81% in 1996 and 6.18% in 1995, and expected life of 7 years.
13. Employee Benefits and Incentive Bonus Plans
The Company maintains a defined contribution retirement
401(k) & Profit Sharing Plan. Participation in the plan is
available to all employees upon their satisfaction of specified
eligibility requirements. Under the 401(k) component of the
plan, the Company matches, on a dollar-for-dollar basis, each
employee's contribution up to 3% of eligible compensation. Under
the profit sharing component of the plan, annual contributions
may be authorized by the Board of Directors based upon the
Company's performance for the relevant year. The Company's costs
are charged to income and amounted to $0.5 million in 1996, $0.4
million in 1995 and $0.3 million in 1994.
The Company maintains an annual incentive bonus plan for
officers and other key employees. Bonuses are based upon
predetermined objectives established by the Compensation
Committee. The Company's total incentive bonus plan expense for
the years ended December 31, 1996, 1995 and 1994 was $0.6
million, $1.6 million and $1.2 million, respectively.
14. Concentrations of Business
Gross premiums written in the State of California amounted
to approximately $68,663,000, $76,396,000 and $73,943,000 in
1996, 1995 and 1994, respectively. In the State of New York, the
Company's gross premiums written were $11,975,000, $20,141,000
and $16,821,000 for the years ended December 31, 1996, 1995 and
1994, respectively. Gross premiums written in any other state do
not exceed 10% of gross premiums written.
The Company's architects' and engineers' professional
liability insurance business is produced by Risk Administration
and Management Company ("RAMCO"), an unaffiliated managing
general agent. For the years ended December 31, 1996, 1995 and
1994, direct premiums written by RAMCO for the Company amounted
to approximately $17,843,000, $14,452,000 and $15,910,000,
respectively.
15. Quarterly Financial Information (unaudited)
<TABLE>
Quarterly financial information (unaudited) for the year
ended December 31, 1996 is presented below:
<CAPTION>
Three months ended
March 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996
(Dollars and shares in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross premiums written $34,919 $39,017 $44,807 $38,194
Net premiums written 21,213 22,585 28,165 22,644
Net premiums earned 21,951 21,180 22,292 22,506
Net investment income 4,159 3,921 4,065 4,308
Realized gains (losses)
on investments 802 (190) 4 587
Other income 270 285 389 115
Total revenues 27,182 25,196 26,750 27,516
Income (loss) before
income taxes 4,658 (294) 2,249 (397)
Net income 3,505 337 1,986 335
Net income per share $.53 $.05 $.30 $.05
Weighted average shares
outstanding 6,648 6,656 6,660 6,661
</TABLE>
<TABLE>
Quarterly financial information (unaudited) for the year
ended December 31, 1995 is presented below:
<CAPTION>
Three months ended
March 31, June 30, Sept. 30, Dec. 31,
1995 1995 1995 1995
(Dollars and shares in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross premiums written $35,209 $43,444 $43,747 $34,580
Net premiums written 17,872 25,703 25,086 21,514
Net premiums earned 17,697 21,019 20,324 24,359
Net investment income 3,666 4,133 4,030 4,010
Realized gains on investments 276 1,554 736 1,081
Total revenues 21,639 26,706 25,090 29,450
Income before income taxes 3,738 4,614 2,670 5,862
Net income 3,002 3,485 2,355 4,083
Net income per share $.37 $.43 $.31 $.61
Weighted average shares
outstanding 8,148 8,148 7,648 6,648
As a result of the Company's purchase of its Common Stock,
the average number of shares outstanding varies from quarter
to quarter, and the sum of the quarterly earnings per common
share may not equal the total for the year.
</TABLE>
At December 31, 1996
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN
RELATED PARTIES
COLUMN COLUMN COLUMN COLUMN
A B C D
Amount at
which
shown in
the balance
Type of Investment Cost Value sheet
(Dollars in thousands)
Fixed maturities:
Bonds:
United States Government and
government agencies and authorities $55,845 $56,584 $56,584
States, municipalities and political
subdivisions 141,686 146,335 146,335
Foreign governments 5,747 5,923 5,923
Mortgage-backed securities 43,381 43,461 43,461
Corporate bonds 27,856 27,861 27,861
Total fixed maturities 274,515 280,164 280,164
Short-term investments 307 307 307
Total investments $274,822 $280,471 $280,471
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Balance Sheets
December 31,
1996 1995
(Dollars in thousands)
Assets
Cash and cash equivalents $289 $469
Investment in subsidiaries 118,336 118,970
Income tax recoverable 439 660
Deferred income taxes 1,084 89
Other assets 268 215
Total assets $120,416 $120,403
Liabilities and stockholders' equity
Liabilities:
Other liabilities 655 $1,681
Long-term debt 24,625 25,500
Total liabilities 25,280 27,181
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued or outstanding
Common stock, $.01 par value; 15,000,000 shares authorized;
8,148,050 shares issued 81 81
Additional paid-in capital 30,847 30,850
Foreign currency translation
adjustment, net of tax (219) (209)
Net unrealized gains, net of tax 3,672 8,063
Deferred compensation (257) (193)
Retained earnings 86,271 80,108
Treasury stock, at cost;
shares 1996: 1,487,075:
1995: 1,500,000 (25,259) (25,478)
Total stockholders' equity 95,136 93,222
Total liabilities and
stockholders' equity $120,416 $120,403
Statements of Income
Year ended December 31,
1996 1995 1994
(Dollars in thousands)
Revenue
Net investment income $24 $28 $11
Total revenues 24 28 11
Expenses
Operating expenses 1,921 3,282 2,563
Interest expense 1,761 595
Total expenses 3,682 3,877 2,563
Loss before income taxes
and equity in undistributed
income of subsidiaries (3,658) (3,849) (2,552)
Income tax benefit 1,268 1,323 720
Loss before equity in undistributed income
of subsidiaries (2,390) (2,526) (1,832)
Equity in undistributed income
of subsidiaries 8,553 15,451 8,063
Net income $6,163 $12,925 $6,231
<TABLE>
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Statements of Cash Flows
<CAPTION>
Year ended December 31,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Operating activities
Loss before equity in undistributed
income of subsidiaries $(2,390) $(2,526) $(1,832)
Adjustments to reconcile net income to
net cash provided by operating activities:
Decrease (increase) in
income tax recoverable (487) 796
Deferred income tax provision (995) 261 (350)
Amortization and depreciation 68 85 88
Decrease (increase) in other
assets and liabilities (798) 825 (80)
Net cash used by operating activities (4,115) (1,842) (1,378)
Investing activities
Capital expenditures (2) (5) (114)
Net cash used by investing activities (2) (5) (114)
Financing activities
Dividends received 4,726 2,000 1,250
Proceeds from long-term debt 25,500
Common stock acquired for treasury (25,478)
Issuance of common stock 217
Deferred compensation (131)
Principal payment on long term debt (875)
Net cash provided
by financing activities 3,937 2,022 1,250
Increase (decrease) in cash and cash equivalents(180) 175 (242)
Cash and cash equivalents at beginning of year 469 294 536
Cash and cash equivalents at end of year $289 $469 $294
</TABLE>
<TABLE>
Year ended December 31,
SCHEDULE III--SUPPLEMENTAL INSURANCE INFORMATION
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J
Future
Policy Other
Benefits, Policy Benefits, Underwriting,
Deferred Losses, Claims Claims Acquisition,
Policy Claims and Net Losses & and
Year and Acquisition and Loss Unearned Benefits Premium Investment Settlement Insurance Premiums
Segment Costs Expenses Premiums Payable Revenue Income Expenses Expense Written
- -------- --------- -------- -------- -------- ------- -------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996
Property/Casualty $12,415 $309,259 $68,683 $0 $87,929 $16,453 $57,700 $40,967 $94,607
Total $12,415 $309,259 $68,683 $0 $87,929 $16,453 $57,700 $40,967 $94,607
1995
Property/Casualty $12,182 $308,886 $63,472 $0 $83,399 $15,839 $50,816 $34,590 $90,175
Total $12,182 $308,886 $63,472 $0 $83,399 $15,839 $50,816 $34,590 $90,175
1994
Property/Casualty $9,794 $315,691 $55,979 $0 $61,605 $13,099 $40,537 $25,721 $69,187
Total $9,794 $315,691 $55,979 $0 $61,605 $13,099 $40,537 $25,721 $69,187
</TABLE>
<TABLE>
Year ended December 31,
SCHEDULE IV--REINSURANCE
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Percentage
Assumed of Amount
Ceded to from Assumed
Direct Other Other Net to
Amount Companies Companies Amount Net
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1996
Premiums:
Property/Casualty
Insurance $154,547 $62,330 $2,390 $94,607 2.5%
Total Premiums $154,547 $62,330 $2,390 $94,607 2.5%
1995
Premiums:
Property/Casualty
Insurance $154,904 $66,805 $2,076 $90,175 2.3%
Total Premiums $154,904 $66,805 $2,076 $90,175 2.3%
1994
Premiums:
Property/Casualty
Insurance $135,513 $69,964 $3,638 $69,187 5.3%
Total Premiums $135,513 $69,964 $3,638 $69,187 5.3%
</TABLE>
<TABLE>
Year ended December 31,
SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY
INSURANCE OPERATIONS
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
Reserves for Claims & Claim Amortization
Unpaid Discount, Adjustment Expenses of
Deferred Claims if any, Incurred Related to Deferred Paid Claims
Affiliation Policy and Claim Deducted Net (1) (2) Policy and Claim
with Acquisition Adjustment in Unearned Earned Investment Current Prior Acquisition Adjustment Premiums
Company Costs Expenses Column C Premiums Premiums Income Year Years Costs Expenses Written
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996
Consolidated Property/
Casualty Entities $12,415 $309,259 $-0- $68,683 $87,929 $16,453 $53,402 $4,298 $30,062 $42,304 $94,607
1995
Consolidated Property/
Casualty Entities $12,182 $308,886 $-0- $63,472 $83,399 $15,839 $50,424 $392 $26,706 $40,707 $90,175
1994
Consolidated Property/
Casualty Entities $9,794 $315,691 $-0- $55,979 $61,605 $13,099 $49,047 $(8,510) $18,085 $36,612 $69,187
</TABLE>
R:\97RIL\11339.DOC
Property Excess Per Risk
Reinsurance Contract
Effective: January 1, 1997
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Hoboken, New Jersey
Timberline Insurance Company
Eugene, Oregon
and
any additional company established or acquired
by Associated International Insurance Company, Calvert Insurance
Company, Timberline Insurance Company or Gryphon Holdings, Inc.,
New York, New York,
to be included hereunder
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
Property Excess Per Risk
Reinsurance Contract
Effective: January 1, 1997
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Hoboken, New Jersey
Timberline Insurance Company
Eugene, Oregon
and
any additional company established or acquired
by Associated International Insurance Company, Calvert Insurance
Company, Timberline Insurance Company or Gryphon Holdings, Inc.,
New York, New York,
to be included hereunder
First Property Excess Per Risk Reinsurance
Reinsurers Participations
Allmerica Re, A Division of The Hanover Insurance Company 1.40%
AXA Reinsurance Company 34.40
First Excess and Reinsurance Corporation 6.00
Gerling Global Reinsurance Corporation, U. S. Branch 2.00
Great Lakes American Reinsurance Company 5.00
PMA Reinsurance Corporation 3.00
Republic Western Insurance Company 3.20
St. Paul Reinsurance Management Corporation
(for St. Paul Fire and Marine Insurance Company) 29.00
SOREMA North America Reinsurance Company 1.00
Through Denis M. Clayton & Co. Ltd.
Companies Per Signing Schedule(s) 15.00
Total 100.00%
Second Property Excess Per Risk Reinsurance
Reinsurers Participations
Allmerica Re, A Division of The Hanover Insurance Company 1.00%
AXA Reinsurance Company 30.00
Everest Reinsurance Company 10.80
First Excess and Reinsurance Corporation 5.00
Gerling Global Reinsurance Corporation, U. S. Branch 7.00
Hannover Ruckversicherungs-Aktiengesellschaft 5.00
Inter-Ocean Re-Insurance Company, Ltd. 7.00
Patriot Re Corporation (for Certain Underwriting Members of
Lloyd's) 3.00
PMA Reinsurance Corporation 3.00
Republic Western Insurance Company 3.20
St. Paul Reinsurance Management Corporation
(for St. Paul Fire and Marine Insurance Company) 7.00
SOREMA North America Reinsurance Company 2.00
USF RE Insurance Company 4.00
Through Denis M. Clayton & Co. Ltd.
Lloyd's Underwriters and Companies
Per Signing Schedule(s 12.00
Total 100.00%
Third Property Excess Per Risk Reinsurance
Reinsurers Participations
First Excess and Reinsurance Corporation 6.00%
Gerling Global Reinsurance Corporation, U. S. Branch 4.00
Great Lakes American Reinsurance Company 2.00
Hannover Ruckversicherungs-Aktiengesellschaft 1.25
Inter-Ocean Re-Insurance Company, Ltd. 40.00
Munich American Reinsurance Company 5.00
SOREMA North America Reinsurance Company 2.00
Transatlantic Reinsurance Company 18.75
USF RE Insurance Company 6.00
Through Swire Blanch - Australia
GIO Insurance Ltd. (trading as GIO Reinsurance) 10.00
Through Denis M. Clayton & Co. Ltd.
Companies Per Signing Schedule(s) 5.00
Total 100.00%
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
Table of Contents
Article Page
I Classes of Business Reinsured 1
II Term 1
III Territory 2
IV Exclusions 2
V Retention and Limit 4
VI Reinstatement: Third Property Excess Per Risk 5
VII Other Reinsurance 6
VIII Definitions 6
IX Losses and Loss Adjustment Expense 9
X Special Provisions 10
XI Salvage and Subrogation 10
XII Premium 10
XIII Offset (BRMA 36C) 12
XIV Access to Records (BRMA 1D) 12
XV Liability of the Reinsurer 12
XVI Net Retained Lines (BRMA 32E) 13
XVII Errors and Omissions (BRMA 14F) 13
XVIII Currency (BRMA 12A) 13
XIX Taxes (BRMA 50C) 13
XX Federal Excise Tax (BRMA 17A) 13
XXI Unauthorized Reinsurers 14
XXII Insolvency 15
XXIII Arbitration 16
XXIV Service of Suit (BRMA 49C) 17
XXV Agency Agreement 18
XXVI Intermediary (BRMA 23A) 18
Property Excess Per Risk
Reinsurance Contract
Effective: January 1, 1997
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Hoboken, New Jersey
Timberline Insurance Company
Eugene, Oregon
and
any additional company established or acquired
by Associated International Insurance Company, Calvert Insurance
Company, Timberline Insurance Company or Gryphon Holdings, Inc.,
New York, New York,
to be included hereunder
(hereinafter referred to collectively as the "Company")
by
The Subscribing Reinsurer(s) Executing the
Interests and Liabilities Agreement(s)
Attached Hereto
(hereinafter referred to as the "Reinsurer")
Article I - Classes of Business Reinsured
By this Contract the Reinsurer agrees to reinsure the excess
liability which may accrue to the Company under its policies,
contracts and binders of insurance or reinsurance (hereinafter
called "policies") in force at the effective date hereof or
issued or renewed on or after that date, and classified by the
Company as Property business underwritten by Associated
International Insurance Company, Woodland Hills, California,
subject to the terms, conditions and limitations hereinafter set
forth.
Article II - Term
A. This Contract shall become effective on January 1, 1997, with
respect to losses occurring on or after that date, and shall
remain in force until December 31, 1997, both days inclusive.
B. Unless the Company elects that the Reinsurer have no liability
for losses occurring after the effective date of expiration,
and so notifies the Reinsurer prior to or as promptly as
possible after the effective date of expiration, reinsurance
hereunder on business in force on the effective date of
expiration shall remain in full force and effect until
expiration, cancellation or next premium anniversary of such
business, whichever first occurs, but in no event beyond
12 months plus odd time (not exceeding 18 months in all as
respects Builders' Risk policies) following the effective date
of expiration.
Article III - Territory
This Contract shall apply to the territorial limits set forth in
the Company's policies reinsured hereunder.
Article IV - Exclusions
A. This Contract does not apply to and specifically excludes the
following:
1. Loss or liability excluded under the provisions of
the "Pools, Associations and Syndicates Exclusion Clause"
attached to and forming part of this Contract.
2. Nuclear risks as defined in the "Nuclear Incident
Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)"
and the "Nuclear Incident Exclusion Clause - Physical
Damage - Reinsurance (Canada)" attached to and forming
part of this Contract.
3. All reinsurance assumed, with the exception of intra-
company reinsurance and specific insureds whose
reinsurance is written through their own captive company
and quoted by a non-related entity.
4. Risks of war, whether or not declared, invasion,
civil war, insurrection, rebellion, revolution or
confiscation by duly constituted governmental or civil
authority as excluded under a standard policy containing a
standard War Exclusion Clause.
5. Hail insurance or reinsurance covering growing,
drying or standing crops when written as such.
6. Flood when written as such; however, this exclusion
shall not apply to flood when included in Difference in
Conditions, Inland Marine and All Risk policies.
7. All armored car business except when written in
excess of $500,000.
8. Credit, financial or insolvency guarantees.
9. Livestock insurance or reinsurance when written as
such.
10. Third Party Bodily Injury and Property Damage
Liability, Medical Payments, Workers' Compensation,
Fidelity and Surety, whether written separately or as part
of a Multiple Peril policy. However, nothing herein
contained shall be construed as excluding liability for
damage to property in an insured's care, custody or
control or for which the insured may be liable.
11. Ocean Marine when written as such.
12. Aircraft, meaning direct damage to hulls insured
under Aircraft Hull policies, but not to exclude aircraft
hulls insured under regular Fire, Inland Marine and All
Risk policies (other than Aircraft Hull policies). In no
event shall any liability attach to the Reinsurer
hereunder in respect of aircraft while in flight or
taxiing.
13. Offshore drilling rigs.
14. Automobile risks insured under Automobile policies
with the exception of floor plans.
15. Boiler and Machinery when written as such.
16. Space and space related risks for the intention of
ignition of the launch vehicle which includes taxiing
within the launch site area and in flight.
17. Grain elevators.
18. Mechanical breakdowns when written as such.
19. Petrochemical risks and refineries.
20. Underground mining.
21. Inland Marine policies covering jewelers block and
motor truck cargo.
22. Mortgage Impairment insurance.
23. 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, insolvency fund, plan, pool, association, fund or
other arrangement, however 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.
24. Kidnap and Ransom.
25. Residual Value and Credit insurance.
26. Crop insurance.
27. Burglary and Theft when written as such.
28. Strike insurance.
29. Product impairment, recall and tampering.
30. Data processing companies whose sole purpose is to
provide data processing services to other companies which
include media exposures defined as material on which data
is to be or is already stored (i.e., disks, magnetic and
paper tapes, drums, cores and programs).
31. Transmission and distribution lines.
B. These exclusions do not apply where the excluded class or
operations constitutes a minor part of or incidental to the
main operations of the insured except for exclusions 2, 3, 4,
8, 11, 12, 13, 16, 23 and 31 of paragraph A.
Article V - Retention and Limit
A. First Property Excess Per Risk Reinsurance
The Company shall retain and be liable for the first $100,000
of ultimate net loss as respects any one risk, each loss. The
Reinsurer shall then be liable for the amount by which such
ultimate net loss exceeds the Company's retention, but the
liability of the Reinsurer shall not exceed $2,400,000 as
respects any one risk, each loss, nor shall it exceed
$7,500,000 as respects all risks involved in any one loss
occurrence.
B. Second Property Excess Per Risk Reinsurance
The Company shall retain and be liable for the first
$2,500,000 of ultimate net loss as respects any one risk, each
loss. The Reinsurer shall then be liable for the amount by
which such ultimate net loss exceeds the Company's retention,
but the liability of the Reinsurer shall not exceed $2,500,000
as respects any one risk, each loss, nor shall it exceed
$10,000,000 as respects all risks involved in any one loss
occurrence.
C. Third Property Excess Per Risk Reinsurance
The Company shall retain and be liable for the first
$5,000,000 of ultimate net loss as respects any one risk, each
loss. The Reinsurer shall then be liable for the amount by
which such ultimate net loss exceeds the Company's retention,
but the liability of the Reinsurer shall not exceed $5,000,000
as respects any one risk, each loss, nor shall it exceed
$10,000,000 as respects all risks involved in any one loss
occurrence.
D. The Company shall be the sole judge of what constitutes "one
risk," except that in no event shall a building and its
contents be considered more than one risk.
Article VI - Reinstatement: Third Property Excess Per Risk
A. As respects the Third Property Excess Per Risk layer
hereunder, in the event all or any portion of the reinsurance
hereunder is exhausted by loss arising out of any one loss
occurrence, the amount so exhausted shall be reinstated
immediately from the time the loss occurrence commences
hereon.
1. For the first $10,000,000 of ultimate net loss so
reinstated the Company shall pay no additional premium.
2. For the second $10,000,000 of ultimate net loss so
reinstated the Company agrees to pay additional premium
equal to the product of the following:
a. The percentage of the occurrence limit reinstated
(based on the ultimate net loss paid by the Reinsurer);
times
b. One-half of the earned reinsurance premium for
that excess layer for the term of this Contract
(exclusive of reinstatement premium).
3. For the third $10,000,000 of ultimate net loss so
reinstated the Company agrees to pay additional premium
equal to the product of the following:
a. The percentage of the occurrence limit reinstated
(based on the ultimate net loss paid by the Reinsurer);
times
b. The earned reinsurance premium for that excess
layer for the term of this Contract (exclusive of
reinstatement premium).
B. Whenever the Company requests payment by the Reinsurer of any
ultimate net loss hereunder, the Company shall submit a
statement to the Reinsurer of reinstatement premium due the
Reinsurer. If the earned reinsurance premium for the term of
this Contract has not been finally determined as of the date
of any such statement, the calculation of reinstatement
premium due shall be based on the annual deposit premium and
shall be readjusted when the earned reinsurance premium for
the term of this Contract has been finally determined. Any
reinstatement premium shown to be due the Reinsurer as
reflected by any such statement (less prior payments, if any)
shall be payable by the Company concurrently with payment by
the Reinsurer of the requested loss. Any return reinstatement
premium shown to be due the Company shall be remitted by the
Reinsurer as promptly as possible after receipt and
verification of the Company's statement.
C. Notwithstanding anything stated herein, the liability of the
Reinsurer under the Third Property Excess Per Risk reinsurance
shall not exceed $10,000,000 as respects all risks involved in
any one loss occurrence, nor shall it exceed $40,000,000 in
all during the term of this Contract.
Article VII - Other Reinsurance
A. The Company shall be permitted to carry excess catastrophe
reinsurance, recoveries under which shall inure solely to the
benefit of the Company and be entirely disregarded in applying
all of the provisions of this Contract.
B. With regard to business written in the General E&S division of
the Company, the Company shall be permitted to carry excess
and/or pro rata reinsurance, recoveries under which shall
inure solely to the benefit of the Company and be entirely
disregarded in applying all of the provisions of this
Contract.
C. The Company shall be permitted to purchase facultative
reinsurance, recoveries under which may inure to the benefit
of this Contract. If such reinsurance does not inure to the
benefit of this Contract, it will be entirely disregarded as
respects this Contract.
Article VIII - Definitions
A. The term "ultimate net loss" shall mean the actual loss
incurred by the Company under policies covered hereunder.
Such loss shall include sums paid in settlement of claims and
suits and in satisfaction of judgments, including prejudgment
interest when added to a judgment. Such loss also shall
include any losses in excess of policy limits and any extra
contractual obligations incurred by the Company.
All salvages, recoveries, payments and reversals or reductions
of verdicts or judgments whether recovered, received or
obtained prior or subsequent to loss settlement under this
Contract, including amounts recoverable under other
reinsurance whether collected or not, shall be applied as if
recovered, received or obtained prior to the aforesaid
settlement and shall be deducted from the actual losses
sustained to arrive at the amount of the net loss. Nothing
herein shall be construed to mean losses are not recoverable
until the net loss to the Company finally has been
ascertained.
B. "Loss adjustment expense" as used herein shall include:
1. Expenses sustained in connection with settlement and
litigation of claims and suits, satisfaction of judgments,
resistance to or negotiations concerning a loss (which
shall include the pro rata share of the Company's outside
employees according to the time occupied in adjusting such
loss and the salaries and expenses of the Company's
employees while diverted from their normal duties to the
service of field adjustment, but shall not include any
salaries of officers nor normal overhead expenses of the
Company);
2. Legal expenses and costs incurred in connection with
coverage questions and legal actions, including
declaratory judgment actions, connected thereto;
3. All interest on judgments other than prejudgment
interest when added to a judgment, and;
4. Expenses sustained to obtain recoveries, salvages and
other reimbursements, or to secure the reversal or
reduction of a verdict or judgment.
C. "Loss in excess of policy limits" and "extra contractual
obligations" as used herein shall be defined as follows:
1. "Loss in excess of policy limits" shall mean 90% of
any amount paid or payable by the Company in excess of its
policy limits, but otherwise within the terms of its
policy, as a result of an action against it by its insured
or its insured's assignee to recover damages the insured
is legally obligated to pay to a third party claimant
because of the Company's alleged or actual negligence or
bad faith in rejecting a settlement within policy limits,
or in discharging its duty to defend or prepare the
defense in the trial of an action against its insured, or
in discharging its duty to prepare or prosecute an appeal
consequent upon such an action.
2. "Extra contractual obligations" shall mean 90% of any
punitive, exemplary, compensatory or consequential
damages, other than loss in excess of policy limits, paid
or payable by the Company as a result of an action against
it by its insured, its insured's assignee or a third party
claimant, which action alleges negligence or bad faith on
the part of the Company in handling a claim under a policy
subject to this Contract.
There will be no recovery hereunder for an extra contractual
obligation or loss in excess of policy limits that has been
incurred due to fraud committed by a member of the board of
directors or a corporate officer of the Company, acting
individually, collectively, or in collusion with a member of
the board of directors, a corporate officer, or a partner of
any other corporation, partnership, or organization involved
in the defense or settlement of a claim on behalf of the
Company.
The date on which any extra contractual obligation and/or loss
in excess of policy limits is incurred by the Company will be
deemed, in all circumstances, to be the date of the original
loss occurrence. Nothing in this Article will be construed to
create a separate or distinct loss occurrence apart from the
original covered loss occurrence that gave rise to the extra
contractual obligations and/or loss in excess of policy limits
discussed in the preceding paragraphs. In no event will the
total liability of the Reinsurer exceeds its applicable limit
of liability as set forth in Article V.
Recoveries from any form of insurance or inuring reinsurance,
if any, which protects the Company against claims the subject
matter of this paragraph shall inure to the benefit of this
Contract.
D. The term "loss occurrence" shall mean the sum of all
individual losses directly occasioned by any one disaster,
accident or loss or series of disasters, accidents or losses
arising out of one event which occurs anywhere in the world
but limited in the United States of America and Canada to the
area of one state of the United States or province of Canada
and states or provinces contiguous thereto and to one another.
However, the duration and extent of any one "loss occurrence"
shall be limited to all individual losses sustained by the
Company occurring during any period of 168 consecutive hours
arising out of and directly occasioned by the same event,
except that the term "loss occurrence" shall be further
defined as follows:
1. As regards windstorm, hail, tornado, hurricane,
cyclone, including ensuing collapse and water damage, all
individual losses sustained by the Company occurring
during any period of 72 consecutive hours arising out of
and directly occasioned by the same event. However, the
event need not be limited to one state or province or
states or provinces contiguous thereto.
2. As regards riot, riot attending a strike, civil
commotion, vandalism and malicious mischief, all
individual losses sustained by the Company occurring
during any period of 72 consecutive hours within the area
of one municipality or county and the municipalities or
counties contiguous thereto arising out of and directly
occasioned by the same event. The maximum duration of
72 consecutive hours may be extended in respect of
individual losses which occur beyond such
72 consecutive hours during the continued occupation of an
assured's premises by strikers, provided such occupation
commenced during the aforesaid period.
3. As regards earthquake (the epicenter of which need
not necessarily be within the territorial confines
referred to in the introductory portion of this
paragraph D) and fire following directly occasioned by the
earthquake, only those individual fire losses which
commence during the period of 168 consecutive hours may be
included in the Company's "loss occurrence."
4. As regards "freeze," only individual losses directly
occasioned by collapse, breakage of glass and water damage
(caused by bursting frozen pipes and tanks) may be
included in the Company's "loss occurrence."
Except for those "loss occurrences" referred to in
subparagraphs 1 and 2 above, the Company may choose the date
and time when any such period of consecutive hours commences,
provided that it is not earlier than the date and time of the
occurrence of the first recorded individual loss sustained by
the Company arising out of that disaster, accident or loss,
and provided that only one such period of
168 consecutive hours shall apply with respect to one event.
However, as respects those "loss occurrences" referred to in
subparagraphs 1 and 2 above, if the disaster, accident or loss
occasioned by the event is of greater duration than
72 consecutive hours, then the Company may divide that
disaster, accident or loss into two or more "loss
occurrences," provided that no two periods overlap and no
individual loss is included in more than one such period, and
provided that no period commences earlier than the date and
time of the occurrence of the first recorded individual loss
sustained by the Company arising out of that disaster,
accident or loss.
No individual losses occasioned by an event that would be
covered by 72 hours clauses may be included in any "loss
occurrence" claimed under the 168 hours provision.
E. "Net earned premium" as used herein is defined as the
Company's gross earned premium for the classes of business
subject to this Contract, less only the earned portion of
premiums, if any, ceded by the Company for reinsurance which
inures to the benefit of this Contract.
F. "Losses incurred" as used herein shall mean losses and loss
adjustment expense paid by the Reinsurer as of the effective
date of calculation, plus the ceded reserves for losses and
loss adjustment expense outstanding as of the same date, all
as respects losses occurring during the term of this Contract.
For all loss occurrences during the term of this Contract
which have two or fewer policies with loss subject to this
Contract, up to two policies having the largest subject loss
recoverables during the term of this Contract shall be deemed
to have a maximum loss and loss adjustment expense recovery of
$900,000 included in losses incurred hereunder.
Article IX - Losses and Loss Adjustment Expense
A. Whenever a loss sustained by the Company appears likely to
result in a claim hereunder, the Company shall notify the
Reinsurer, and the Reinsurer shall have the right to
participate in the adjustment of the loss at its own expense.
B. All loss settlements made by the Company, provided they are
within the terms of this Contract, shall be binding upon the
Reinsurer, and the Reinsurer agrees to pay all amounts for
which it may be liable upon receipt of reasonable evidence of
the amount paid (or scheduled to be paid) by the Company.
C. In the event of loss hereunder, loss adjustment expenses (as
defined in Article VIII) incurred by the Company in connection
therewith shall be shared by the Company and the Reinsurer in
the proportion the ultimate net loss paid or payable by the
Reinsurer bears to the total ultimate net loss paid or payable
by the Company, prior to any reinsurance recoveries, but after
deduction of all salvage and other recoveries. The
Reinsurer's liability for loss adjustment expenses shall be in
addition to its limit of liability for ultimate net loss.
D. In the event the ultimate net loss subject to recovery
hereunder includes an amount of loss in excess of policy
limits and/or extra contractual obligations, then the actual
ultimate net loss recovered hereunder shall be allocated among
indemnity loss, loss in excess of policy limits and/or extra
contractual obligations as follows:
1. When the limits defined in paragraphs A, B and/or C
of Article V with regard to all risks subject to recovery
hereunder involved in any one loss occurrence have not
been exceeded, the actual ultimate net loss recovered
hereunder as respects any one risk, each loss shall be
allocated to indemnity loss, loss in excess of policy
limits and/or extra contractual obligations in the same
proportion that each bears to the total ultimate net loss
subject to recovery on that risk.
2. When the limits defined in paragraphs A, B and/or C
of Article V with regard to all risks subject to recovery
hereunder involved in any one loss occurrence have been
exceeded, the actual ultimate net loss recovered hereunder
as respects any one loss occurrence shall be allocated to
indemnity loss, loss in excess of policy limits and/or
extra contractual obligations in the same proportion that
each bears, before application of the applicable per
occurrence limit, to the total ultimate net loss subject
to recovery on that loss occurrence.
Article X - Special Provisions
As respects loss or damage or costs or expenses arising from
asbestos or seepage and/or pollution and/or contamination, other
than contamination from smoke damage, the maximum sublimit shall
be $25,000 per risk, each loss, or so deemed. Nevertheless, this
does not preclude payment of the cost of removal of debris of
property damaged by a loss otherwise covered hereunder.
Article XI - Salvage and Subrogation
The Reinsurer shall be credited with salvage (i.e., reimbursement
obtained or recovery made by the Company, less the actual cost,
excluding salaries of officials and employees of the Company and
sums paid to attorneys as retainer, of obtaining such
reimbursement or making such recovery) on account of claims and
settlements involving reinsurance hereunder. Salvage thereon
shall always be used to reimburse the excess carriers in the
reverse order of their priority according to their participation
before being used in any way to reimburse the Company for its
primary loss. The Company hereby agrees to enforce its rights to
salvage or subrogation relating to any loss, a part of which loss
was sustained by the Reinsurer, and to prosecute all claims
arising out of such rights.
Article XII - Premium
A. First Property Excess Per Risk Reinsurance
1. As provisional premium for the First Property Excess
Per Risk Reinsurance provided hereunder, the Company shall
pay the Reinsurer a deposit premium of $1,980,000 in four
equal installments of $495,000 on January 1, April 1,
July 1 and October 1 of 1997. The provisional premium
paid by the Company shall be adjusted periodically in
accordance with the provisions set forth herein. For
purposes hereof, the "term of this Contract" shall be from
the effective date of this Contract through the date of
expiration if this Contract expires on a "cutoff" basis or
the end of the runoff period if this Contract expires on a
"runoff" basis.
2. The adjusted premium for the term of this Contract
shall be equal to the Reinsurer's losses incurred for the
term of this Contract, plus 2.75% of the Company's net
earned premium for the term of this Contract, but the
adjusted premium shall not be less than an amount equal to
2.75% of the Company's net earned premium for the term of
this Contract, nor shall it exceed an amount equal to
5.50% of the Company's net earned premium for the term of
this Contract.
3. In the event this Contract expires on a "runoff"
basis, on January 1, 1998, the Company shall pay an
additional deposit premium of 4.50% of the Company's
subject net unearned premium as of December 31, 1997. The
Company shall calculate and report the adjusted premium
for the term of this Contract in accordance with
subparagraph 2 within 60 days following 12 months after
the expiration of this Contract and within 60 days after
the end of each 12-month period thereafter until all
losses occurring during the term of this Contract have
been finally settled. If the adjusted premium exceeds the
reinsurance premiums previously paid for the term of this
Contract, the Company shall remit the difference to the
Reinsurer with its report. If the adjusted premium is
less than reinsurance premiums previously paid for the
term of this Contract, the Reinsurer shall remit the
difference to the Company as promptly as possible after
receipt and verification of the Company's report.
B. Second Property Excess Per Risk Reinsurance
1. As premium for the Second Property Excess Per Risk
Reinsurance provided hereunder during the period
January 1, 1997 through December 31, 1997, the Company
shall pay the Reinsurer 6.50% of its net earned premium
for such period.
2. The Company shall pay the Reinsurer a deposit premium
of $2,860,000 in four equal installments of $715,000 on
January 1, April 1, July 1 and October 1 of 1997.
3. As promptly as possible after December 31, 1997, the
Company shall provide a report to the Reinsurer setting
forth the premium due hereunder, computed in accordance
with subparagraph 1, and any additional premium due the
Reinsurer or return premium due the Company shall be
remitted promptly.
4. In the event this Contract expires on a "runoff"
basis, on January 1, 1998, the Company shall pay an
additional deposit premium of 6.50% of the Company's
subject net unearned premium as of December 31, 1997. The
Company shall calculate and report the adjusted premium
for the term of this Contract in accordance with
subparagraph 1 within 60 days following 12 months after
the expiration of this Contract and within 60 days after
the end of each 12-month period thereafter until all
losses occurring during the term of this Contract have
been finally settled. If the adjusted premium exceeds the
reinsurance premiums previously paid for the term of this
Contract, the Company shall remit the difference to the
Reinsurer with its report. If the adjusted premium is
less than reinsurance premiums previously paid for the
term of this Contract, the Reinsurer shall remit the
difference to the Company as promptly as possible after
receipt and verification of the Company's report.
C. Third Property Excess Per Risk Reinsurance
1. As premium for the Third Property Excess Per Risk
Reinsurance provided hereunder during the period
January 1, 1997 through December 31, 1997, the Company
shall pay the Reinsurer 2.80% of its net earned premium
for such period, subject to a minimum premium of
$1,000,000 for the term of this Contract.
2. The Company shall pay the Reinsurer a deposit premium
of $1,200,000 in four equal installments of $300,000 on
January 1, April 1, July 1 and October 1 of 1997.
3. As promptly as possible after December 31, 1997, the
Company shall provide a report to the Reinsurer setting
forth the premium due hereunder, computed in accordance
with subparagraph 1, and any additional premium due the
Reinsurer or return premium due the Company shall be
remitted promptly.
4. In the event this Contract expires on a "runoff"
basis, on January 1, 1998, the Company shall pay an
additional deposit premium of 2.80% of the Company's
subject net unearned premium as of December 31, 1997. The
Company shall calculate and report the adjusted premium
for the term of this Contract in accordance with
subparagraph 1 within 60 days following 12 months after
the expiration of this Contract and within 60 days after
the end of each 12-month period thereafter until all
losses occurring during the term of this Contract have
been finally settled. If the adjusted premium exceeds the
reinsurance premiums previously paid for the term of this
Contract, the Company shall remit the difference to the
Reinsurer with its report. If the adjusted premium is
less than reinsurance premiums previously paid for the
term of this Contract, the Reinsurer shall remit the
difference to the Company as promptly as possible after
receipt and verification of the Company's report.
Article XIII - Offset (BRMA 36C)
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 Contract. 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 XIV - Access to Records (BRMA 1D)
The Reinsurer or its designated representatives shall have access
at any reasonable time to all records of the Company which
pertain in any way to this reinsurance.
Article XV - Liability of the Reinsurer
A. The liability of the Reinsurer shall follow that of the
Company in every case and be subject in all respects to all
the general and specific stipulations, clauses, waivers and
modifications of the Company's policies and any endorsements
thereon. However, in no event shall this be construed in any
way to provide coverage outside the terms and conditions set
forth in this Contract.
B. Nothing herein shall in any manner create any obligations or
establish any rights against the Reinsurer in favor of any
third party or any persons not parties to this Contract.
Article XVI - Net Retained Lines (BRMA 32E)
A. This Contract applies only to that portion of any policy which
the Company retains net for its own account (prior to
deduction of any underlying reinsurance specifically permitted
in this Contract), and in calculating the amount of any loss
hereunder and also in computing the amount or amounts in
excess of which this Contract attaches, only loss or losses in
respect of that portion of any policy which the Company
retains net for its own account shall be included.
B. The amount of the Reinsurer's liability hereunder in respect
of any loss or losses shall not be increased by reason of the
inability of the Company to collect from any other
reinsurer(s), whether specific or general, any amounts which
may have become due from such reinsurer(s), whether such
inability arises from the insolvency of such other
reinsurer(s) or otherwise.
Article XVII - Errors and Omissions (BRMA 14F)
Inadvertent delays, errors or omissions made in connection with
this Contract or any transaction hereunder shall not relieve
either party from any liability which would have attached had
such delay, error or omission not occurred, provided always that
such error or omission is rectified as soon as possible after
discovery.
Article XVIII - Currency (BRMA 12A)
A. Whenever the word "Dollars" or the "$" sign appears in this
Contract, they shall be construed to mean United States
Dollars and all transactions under this Contract shall be in
United States Dollars.
B. Amounts paid or received by the Company in any other currency
shall be converted to United States Dollars at the rate of
exchange at the date such transaction is entered on the books
of the Company.
Article XIX - Taxes (BRMA 50C)
In consideration of the terms under which this Contract 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, the District of Columbia or Canada.
Article XX - Federal Excise Tax (BRMA 17A)
(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 XXI - Unauthorized Reinsurers
A. If the Reinsurer is unauthorized in any state of the United
States of America or the District of Columbia, the Reinsurer
agrees to fund its share of the Company's ceded United States
outstanding loss and loss adjustment expense reserves
(including incurred but not reported loss reserves) by:
1. Clean, irrevocable and unconditional letters of
credit issued and confirmed, if confirmation is required
by the insurance regulatory authorities involved, by a
bank or banks meeting the NAIC Securities Valuation Office
credit standards for issuers of letters of credit and
acceptable to said insurance regulatory authorities;
and/or
2. Escrow accounts for the benefit of the Company;
and/or
3. Cash advances;
if, without such funding, a penalty would accrue to the
Company on any financial statement it is required to file with
the insurance regulatory authorities involved. The Reinsurer,
at its sole option, may fund in other than cash if its method
and form of funding are acceptable to the insurance regulatory
authorities involved.
B. If the Reinsurer is unauthorized in any province or
jurisdiction of Canada, the Reinsurer agrees to fund 115% of
its share of the Company's ceded Canadian outstanding loss and
loss adjustment expense reserves (including incurred but not
reported loss reserves) by:
1. A clean, irrevocable and unconditional letter of
credit issued and confirmed, if confirmation is required
by the insurance regulatory authorities involved, by a
Canadian bank or banks meeting the NAIC Securities
Valuation Office credit standards for issuers of letters
of credit and acceptable to said insurance regulatory
authorities, for no more than 15/115ths of the total
funding required; and/or
2. Cash advances for the remaining balance of the
funding required;
if, without such funding, a penalty would accrue to the
Company on any financial statement it is required to file with
the insurance regulatory authorities involved.
C. With regard to funding in whole or in part by letters of
credit, it is agreed that each letter of credit will be in a
form acceptable to insurance regulatory authorities involved,
will be issued for a term of at least one year and will
include an "evergreen clause," which automatically extends the
term for at least one additional year at each expiration date
unless written notice of non-renewal is given to the Company
not less than 30 days prior to said expiration date. The
Company and the Reinsurer further agree, notwithstanding
anything to the contrary in this Contract, that said letters
of credit may be drawn upon by the Company or its successors
in interest at any time, without diminution because of the
insolvency of the Company or the Reinsurer, but only for one
or more of the following purposes:
1. To reimburse itself for the Reinsurer's share of
losses and/or loss adjustment expense paid under the terms
of policies reinsured hereunder, unless paid in cash by
the Reinsurer;
2. To reimburse itself for the Reinsurer's share of any
other amounts claimed to be due hereunder, unless paid in
cash by the Reinsurer;
3. To fund a cash account in an amount equal to the
Reinsurer's share of any ceded outstanding loss and loss
adjustment expense reserves (including incurred but not
reported loss reserves) funded by means of a letter of
credit which is under non-renewal notice, if said letter
of credit has not been renewed or replaced by the
Reinsurer 10 days prior to its expiration date;
4. To refund to the Reinsurer any sum in excess of the
actual amount required to fund the Reinsurer's share of
the Company's ceded outstanding loss and loss adjustment
expense reserves (including incurred but not reported loss
reserves), if so requested by the Reinsurer.
In the event the amount drawn by the Company on any letter of
credit is in excess of the actual amount required for C(1) or
C(3), or in the case of C(2), the actual amount determined to
be due, the Company shall promptly return to the Reinsurer the
excess amount so drawn.
Article XXII - Insolvency
A. In the event of the insolvency of one or more of the reinsured
companies, this reinsurance shall be payable directly to the
company 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 without diminution because of the insolvency of
the company or because the liquidator, receiver, conservator
or statutory successor of the company 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 shall give written notice to the Reinsurer of the
pendency of a claim against the company 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 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 as part of the
expense of conservation or liquidation to the extent of a pro
rata share of the benefit which may accrue to the company
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 Contract as though such expense had been
incurred by the company.
C. It is further understood and agreed that, in the event of the
insolvency of one or more of the reinsured companies, the
reinsurance under this Contract shall be payable directly by
the Reinsurer to the company or to its liquidator, receiver or
statutory successor, except as provided by Section 4118(a) of
the New York Insurance Law or except (1) where this Contract
specifically provides another payee of such reinsurance in the
event of the insolvency of the company or (2) where 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.
Article XXIII - Arbitration
A. As a condition precedent to any right of action hereunder, in
the event of any dispute or difference of opinion hereafter
arising with respect to this Contract, it is hereby mutually
agreed that such dispute or difference of opinion shall be
submitted to arbitration. One Arbiter shall be chosen by the
Company, the other by the Reinsurer, and an Umpire shall be
chosen by the two Arbiters before they enter upon arbitration,
all of whom shall be active or retired disinterested executive
officers of insurance or reinsurance companies or Lloyd's
London Underwriters. In the event that either party should
fail to choose an Arbiter within 30 days following a written
request by the other party to do so, the requesting party may
choose two Arbiters who shall in turn choose an Umpire before
entering upon arbitration. If the two Arbiters fail to agree
upon the selection of an Umpire within 30 days following their
appointment, each Arbiter shall nominate three candidates
within 10 days thereafter, two of whom the other shall
decline, and the decision shall be made by drawing lots.
B. Each party shall present its case to the Arbiters within
30 days following the date of appointment of the Umpire. The
Arbiters shall consider this Contract as an honorable
engagement rather than merely as a legal obligation and they
are relieved of all judicial formalities and may abstain from
following the strict rules of law. The decision of the
Arbiters shall be final and binding on both parties; but
failing to agree, they shall call in the Umpire and the
decision of the majority shall be final and binding upon both
parties. Judgment upon the final decision of the Arbiters may
be entered in any court of competent jurisdiction.
C. If more than one reinsurer is involved in the same dispute,
all such reinsurers shall 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 one party,
provided, however, that nothing herein 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 participating under the terms of this
Contract from several to joint.
D. Each party shall bear the expense of its own Arbiter, and
shall jointly and equally bear with the other the expense of
the Umpire and of the arbitration. In the event that the two
Arbiters are chosen by one party, as above provided, the
expense of the Arbiters, the Umpire and the arbitration shall
be equally divided between the two parties.
E. Any arbitration proceedings shall take place at Woodland
Hills, California, unless otherwise mutually agreed.
F. It is agreed that the jurisdiction of the Arbiters to make or
render any decision or award shall be limited by the limit of
liability expressly hereinbefore set forth, and that the
Arbiters shall have no jurisdiction to make any decision or
render any award exceeding such expressly stated limit of
liability of the Reinsurer, nor do they have the jurisdiction
to authorize any punitive, exemplary or consequential damage
awards between the parties hereto.
Article XXIV - Service of Suit (BRMA 49C)
(Applicable if the Reinsurer is not domiciled in the United
States of America, and/or is not authorized in any State,
Territory or District of the United States where authorization is
required by insurance regulatory authorities)
A. It is agreed that in the event the Reinsurer fails to pay any
amount claimed to be due hereunder, the Reinsurer, at the
request of the Company, will submit to the jurisdiction of any
court of competent jurisdiction within the United States.
Nothing in this Article constitutes or should be understood to
constitute a waiver of the Reinsurer's rights to commence an
action in any court of competent jurisdiction in the United
States, to remove an 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.
B. Further, pursuant to any statute of any state, territory or
district of the United States which makes provision therefor,
the Reinsurer hereby designates the party named in its
Interests and Liabilities Agreement, or if no party is named
therein, 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 Contract.
Article XXV - Agency Agreement
Associated International Insurance Company shall be deemed the
agent of the other reinsured companies for purposes of sending or
receiving notices required by the terms and conditions of this
Contract, and for purposes of remitting or receiving any monies
due any party.
Article XXVI - Intermediary (BRMA 23A)
E. W. Blanch Co. is hereby recognized as the Intermediary
negotiating this Contract 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 E. W. Blanch Co., Reinsurance Services, 3500 West 80th
Street, Minneapolis, Minnesota 55431. 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.
In Witness Whereof, the Company by its duly authorized
representative has executed this Contract as of the date
undermentioned at:
Woodland Hills, California,this _______ day of _______________________________
199___.
__________________________________________________
___
Associated International Insurance Company
Calvert Insurance Company
Timberline Insurance Company
POOLS, ASSOCIATIONS & SYNDICATES EXCLUSION CLAUSE
Section A:
Excluding:
(a) All business derived directly or indirectly from any
Pool, Association or Syndicate which maintains its own
reinsurance facilities.
(b) Any Pool or Scheme (whether voluntary or mandatory)
formed after March 1, 1968 for the purpose of insuring
property whether on a country-wide basis or in respect of
designated areas. This exclusion shall not apply to so-
called Automobile Insurance Plans or other Pools formed to
provide coverage for Automobile Physical Damage.
Section B:
It is agreed that business written by the Company for the
same perils, which is known at the time to be insured by, or in
excess of underlying amounts placed in the following Pools,
Associations or Syndicates, whether by way of insurance or
reinsurance, is excluded hereunder:
Industrial Risk Insurers,
Associated Factory Mutuals,
Improved Risk Mutuals,
Any Pool, Association or Syndicate formed for the purpose of
writing
Oil, Gas or Petro-Chemical Plants and/or Oil or Gas
Drilling Rigs,
United States Aircraft Insurance Group,
Canadian Aircraft Insurance Group,
Associated Aviation Underwriters,
American Aviation Underwriters.
Section B does not apply:
(a) Where The Total Insured Value over all interests of
the risk in question is less than $300,000,000.
(b) To interests traditionally underwritten as Inland
Marine or stock and/or contents written on a blanket
basis.
(c) To Contingent Business Interruption, except when the
Company is aware that the key location is known at the
time to be insured in any Pool, Association or Syndicate
named above, other than as provided for under Section
B(a).
(d) To risks as follows:
Offices, Hotels, Apartments, Hospitals, Educational
Establishments, Public Utilities (other than railroad
schedules) and builder's risks on the classes of risks
specified in this subsection (d) only.
Where this clause attaches to Catastrophe Excesses, the
following Section C is added:
Nevertheless the Reinsurer specifically agrees that
liability accruing to the Company from its participation in:
(1) The following so-called "Coastal Pools":
Alabama Insurance Underwriting Association
Florida Windstorm Underwriting Association
Louisiana Insurance Underwriting Association
Mississippi Insurance Underwriting Association
North Carolina Insurance Underwriting Association
South Carolina Windstorm and Hail Underwriting
Association
Texas Catastrophe Property Insurance Association
AND
(2) All "Fair Plan" business
for all perils otherwise protected hereunder shall not be
excluded, except, however, that this reinsurance does not include
any increase in such liability resulting from:
(i) The inability of any other participant in such
"Coastal Pool" or "Fair Plan" to meet its liability.
(ii) Any claim against such "Coastal Pool" or "Fair
Plan" or any participant therein, including the
Company, whether by way of subrogation or otherwise,
brought by or on behalf of any insolvency fund (as
defined in the Insolvency Fund Exclusion Clause
incorporated in this Contract).
E. W. BLANCH CO.
R:\97R\11341.DOC Reinsurance Services
Property Excess and Surplus Lines
Excess Per Risk Reinsurance Contract
Effective: January 1, 1997
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Hoboken, New Jersey
Timberline Insurance Company
Eugene, Oregon
and
any additional company established or acquired
by Associated International Insurance Company, Calvert Insurance
Company, Timberline Insurance Company or
Gryphon Holdings, Inc., New York, New York,
to be included hereunder
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
Property Excess and Surplus Lines
Excess Per Risk Reinsurance Contract
Effective: January 1, 1997
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Hoboken, New Jersey
Timberline Insurance Company
Eugene, Oregon
and
any additional company established or acquired
by Associated International Insurance Company, Calvert Insurance
Company, Timberline Insurance Company or
Gryphon Holdings, Inc., New York, New York,
to be included hereunder
Reinsurers Participations
American Re-Insurance Company 33.0%
Employers Reinsurance Corporation 8.0
First Excess and Reinsurance Corporation 3.5
Great Lakes American Reinsurance Company 6.5
Munich American Reinsurance Company 5.0
NAC Reinsurance Corporation 7.5
SOREMA North America Reinsurance Company 5.0
Transatlantic Reinsurance Company 7.5
Through Minet Burn & Roche Pty. Ltd.
GIO Insurance Ltd. (trading as GIO Reinsurance) 20.0
Through Denis M. Clayton & Co. Ltd.
Companies Per Signing Schedule(s) 4.0
Total 100.0%
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
Table of Contents
Article Page
I Classes of Business Reinsured 1
II Term 2
III Territory 2
IV Exclusions 2
V Retention and Limit 4
VI Other Reinsurance 5
VII Definitions 5
VIII Losses and Loss Adjustment Expense 8
IX Special Provisions 9
X Salvage and Subrogation 10
XI Commission (BRMA 10A) 10
XII Premium 10
XIII Profit Sharing 11
XIV Offset (BRMA 36C) 12
XV Access to Records (BRMA 1D) 12
XVI Liability of the Reinsurer 12
XVII Net Retained Lines (BRMA 32E) 13
XVIII Errors and Omissions (BRMA 14F) 13
XIX Taxes (BRMA 50C) 13
XX Federal Excise Tax (BRMA 17A) 13
XXI Unauthorized Reinsurers 14
XXII Insolvency 15
XXIII Arbitration 16
XXIV Service of Suit (BRMA 49C) 17
XXV Agency Agreement 17
XXVI Intermediary (BRMA 23A) 18
Appendix A
Property Excess and Surplus Lines
Excess Per Risk Reinsurance Contract
Effective: January 1, 1997
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Hoboken, New Jersey
Timberline Insurance Company
Eugene, Oregon
and
any additional company established or acquired
by Associated International Insurance Company, Calvert Insurance
Company, Timberline Insurance Company or
Gryphon Holdings, Inc., New York, New York,
to be included hereunder
(hereinafter referred to collectively as the "Company")
by
The Subscribing Reinsurer(s) Executing the
Interests and Liabilities Agreement(s)
Attached Hereto
(hereinafter referred to as the "Reinsurer")
Article I - Classes of Business Reinsured
A. By this Contract the Company obligates itself to cede to the
Reinsurer and the Reinsurer obligates itself to accept
reinsurance of the Company's liability under policies,
contracts and binders of insurance or reinsurance (hereinafter
called "policies") in force at the effective date hereof or
issued or renewed on or after that date, underwritten in the
General E&S Division and classified by the Company as Fire and
Allied Lines, Commercial Multiple Peril (property perils
only), Homeowners (property perils only) and Inland Marine,
subject to the terms, conditions and limitations set forth
herein and in Appendix A attached to and forming part of this
Contract.
B. It is understood that west coast earthquake business
underwritten in the General E&S Division, other than
earthquake on Course of Construction policies, is not subject
to this Contract.
Article II - Term
A. This Contract shall become effective on January 1, 1997, with
respect to losses occurring on or after that date, and shall
remain in force until December 31, 1997, both days inclusive.
B. Reinsurance hereunder on business in force on the effective
date of expiration shall remain in full force and effect until
expiration, cancellation or next premium anniversary of such
business, whichever first occurs, but in no event beyond the
effective date of expiration as follows:
1. As regards Course of Construction policies, 36
months;
2. As regards all other policies, 12 months plus odd
time not to exceed 18 months.
C. Notwithstanding the provisions of paragraph B above, the
Company shall have the option of reassuming the unexpired
liability of the Reinsurer hereunder on business in force on
the effective date of expiration, in which event the Reinsurer
shall return to the Company the ceded unearned premium
hereunder as of the effective date of termination (less ceding
commission allowed thereon) and the Reinsurer shall have no
liability hereunder with respect to losses occurring after the
date of expiration.
D. In the event renewal negotiations are not completed by
December 31, 1997, at the Company's option, this Contract
shall be extended through March 31, 1998.
Article III - Territory
This Contract shall apply to the territorial limits set forth in
the Company's policies reinsured hereunder.
Article IV - Exclusions
A. This Contract does not apply to and specifically excludes the
following:
1. Loss or liability excluded under the terms of the
"Pools, Associations & Syndicates Exclusion Clause"
attached to and forming part of this Contract.
2. Nuclear risks as defined in the "Nuclear Incident
Exclusion Clause - Physical Damage - Reinsurance
(U.S.A.)," the "Nuclear Incident Exclusion Clause -
Physical Damage - Reinsurance (Canada)," and the "Nuclear
Energy Risks Exclusion Clause - Reinsurance (Worldwide
Excluding U.S.A. & Canada)," attached to and forming part
of this Contract.
3. All reinsurance assumed, except intra-company
reinsurance. However, this exclusion shall not apply to
reinsurance of captive companies when pricing for business
reinsured is quoted by a non-related entity.
4. Risks of war, whether or not declared, invasion,
civil war, insurrection, rebellion, revolution or
confiscation by duly constituted governmental or civil
authority as excluded under a standard policy containing a
standard War Exclusion Clause.
5. Hail insurance or reinsurance covering growing,
drying or standing crops when written as such.
6. Flood when written as such. However, this exclusion
shall not apply to flood when included in Difference in
Conditions, Inland Marine and All Risk policies.
7. All armored car business, except when written in
excess of $500,000.
8. Credit, financial or insolvency guarantees.
9. Livestock insurance or reinsurance when written as
such.
10. Third Party Bodily Injury and Property Damage
Liability, Medical Payments, Workers' Compensation,
Fidelity and Surety, whether written separately or as part
of a Multiple Peril policy. However, nothing herein
contained shall be construed as excluding liability for
damage to property in an insured's care, custody or
control or for which the insured may be liable.
11. Ocean Marine when written as such.
12. Aircraft, meaning direct damage to hulls insured
under Aircraft Hull policies, but not to exclude aircraft
hulls insured under regular Fire, Inland Marine and All
Risk policies (other than Aircraft Hull policies). In no
event shall any liability attach to the Reinsurer
hereunder in respect of aircraft while in flight or
taxiing.
13. Offshore drilling rigs.
14. Onshore drilling rigs.
15. Grain elevators.
16. Petrochemical risks and refineries.
17. Underground mining.
18. Automobile risks insured under Automobile policies,
with the exception of "floor plans."
19. Space and space related risks for the intention of
ignition of the launch vehicle which includes taxiing
within the launch site area and in flight.
20. Inland Marine policies covering jeweler's block and
motor truck cargo.
21. Mortgage Impairment insurance.
22. 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, insolvency fund, plan, pool, association, fund or
other arrangement, however 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.
23. Kidnap and Ransom.
24. Residual Value and Credit insurance.
25. Crop Insurance.
26. Burglary and Theft when written as such.
27. Strike Insurance.
28. Product impairment, recall and tampering.
29. Data processing companies and media exposures.
30. Equipment maintenance, warranty or similar coverages.
However, this exclusion shall not be construed to apply to
business classified as Course of Construction or Utilities
where testing of equipment is involved.
31. Risks as detailed in the "Target Risks Exclusion
Clause" attached to and forming part of this Contract.
B. Notwithstanding the foregoing, any exclusion set forth in
paragraph A (except subparagraphs 2, 3, 4, 6, 8, 11, 12, 13,
19, 22 and 31) shall be waived automatically when, in the
opinion of the Company, the exposure excluded therein is
incidental to the principal exposure on the risk in question.
Article V - Retention and Limit
A. The Company shall retain and be liable for the first $500,000
of ultimate net loss as respects any one risk, each loss. The
Reinsurer shall then be liable for the amount by which such
ultimate net loss exceeds the Company's retention, but the
liability of the Reinsurer shall not exceed $9,500,000 as
respects any one risk, each loss, nor shall it exceed
$20,000,000 as respects all risks involved in any one loss
occurrence.
B. The Company shall be the sole judge of what constitutes "one
risk," except that in no event shall a building and its
contents be considered more than one risk.
Article VI - Other Reinsurance
A. The Company shall be permitted to carry excess catastrophe
reinsurance, recoveries under which shall inure solely to the
benefit of the Company and be entirely disregarded in applying
all of the provisions of this Contract.
B. The Company shall purchase or be deemed to have purchased
inuring excess reinsurance to limit its ultimate net loss
under any one policy so as to comply with the maximum policy
limits set forth in Article IX.
Article VII - Definitions
A. The term "ultimate net loss" shall mean the actual loss
incurred by the Company under policies covered hereunder.
Such loss shall include sums paid in settlement of claims and
suits and in satisfaction of judgments, including prejudgment
interest when added to a judgment. Such loss also shall
include any losses in excess of policy limits and any extra
contractual obligations incurred by the Company. It is
understood that the term "incurred" as used in this paragraph
shall mean those sums paid or imminent to be paid by the
Company.
All salvages, recoveries, payments and reversals or reductions
of verdicts or judgments whether recovered, received or
obtained prior or subsequent to loss settlement under this
Contract, including amounts recoverable under other
reinsurance whether collected or not, shall be applied as if
recovered, received or obtained prior to the aforesaid
settlement and shall be deducted from the actual losses
sustained to arrive at the amount of the net loss. Nothing
herein shall be construed to mean losses are not recoverable
until the net loss to the Company finally has been
ascertained.
B. "Loss adjustment expense" as used herein shall include:
1. Expenses sustained in connection with settlement and
litigation of claims and suits, satisfaction of judgments,
resistance to or negotiations concerning a loss (which
shall include the pro rata share of the Company's outside
employees according to the time occupied in adjusting such
loss and the salaries and expenses of the Company's
employees while diverted from their normal duties to the
service of field adjustment, but shall not include any
salaries of officers nor normal overhead expenses of the
Company);
2. Legal expenses and costs incurred in connection with
coverage questions and legal actions, including
declaratory judgment actions, connected thereto;
3. All interest on judgments other than prejudgment
interest when added to a judgment, and;
4. Expenses sustained to obtain recoveries, salvages and
other reimbursements, or to secure the reversal or
reduction of a verdict or judgment.
C. "Loss in excess of policy limits" and "extra contractual
obligations" as used herein shall be defined as follows:
1. "Loss in excess of policy limits" shall mean 90.0% of
any amount paid or payable by the Company in excess of its
policy limits, but otherwise within the terms of its
policy, as a result of an action against it by its insured
or its insured's assignee to recover damages the insured
is legally obligated to pay to a third party claimant
because of the Company's alleged or actual negligence or
bad faith in rejecting a settlement within policy limits,
or in discharging its duty to defend or prepare the
defense in the trial of an action against its insured, or
in discharging its duty to prepare or prosecute an appeal
consequent upon such an action.
2. "Extra contractual obligations" shall mean 90.0% of
any punitive, exemplary, compensatory or consequential
damages, other than loss in excess of policy limits, paid
or payable by the Company as a result of an action against
it by its insured, its insured's assignee or a third party
claimant, which action alleges negligence or bad faith on
the part of the Company in handling a claim under a policy
subject to this Contract. An extra contractual obligation
shall be deemed to have occurred on the same date as the
loss covered or alleged to be covered under the policy.
There will be no recovery hereunder for an extra contractual
obligation or loss in excess of policy limits that has been
incurred due to fraud committed by a member of the board of
directors or a corporate officer of the Company, acting
individually, collectively, or in collusion with a member of
the board of directors, a corporate officer, or a partner of
any other corporation, partnership, or organization involved
in the defense or settlement of a claim on behalf of the
Company.
The date on which any extra contractual obligation and/or loss
in excess of policy limits is incurred by the Company will be
deemed, in all circumstances, to be the date of the original
loss occurrence. Nothing in this Article will be construed to
create a separate or distinct loss occurrence apart from the
original covered loss occurrence that gave rise to the extra
contractual obligations and/or loss in excess of policy limits
discussed in the preceding paragraphs. In no event will the
total liability of the Reinsurer exceed its applicable limit
of liability as set forth in Article V.
Recoveries from any form of insurance or inuring reinsurance,
if any, which protects the Company against claims the subject
matter of this paragraph shall inure to the benefit of this
Contract.
D. The term "loss occurrence" shall mean the sum of all
individual losses directly occasioned by any one disaster,
accident or loss or series of disasters, accidents or losses
arising out of one event which occurs anywhere in the world
but limited in the United States of America and Canada to the
area of one state of the United States or province of Canada
and states or provinces contiguous thereto and to one another.
However, the duration and extent of any one "loss occurrence"
shall be limited to all individual losses sustained by the
Company occurring during any period of 168 consecutive hours
arising out of and directly occasioned by the same event,
except that the term "loss occurrence" shall be further
defined as follows:
1. As regards windstorm, hail, tornado, hurricane,
cyclone, including ensuing collapse and water damage, all
individual losses sustained by the Company occurring
during any period of 72 consecutive hours arising out of
and directly occasioned by the same event. However, the
event need not be limited to one state or province or
states or provinces contiguous thereto.
2. As regards riot, riot attending a strike, civil
commotion, vandalism and malicious mischief, all
individual losses sustained by the Company occurring
during any period of 72 consecutive hours within the area
of one municipality or county and the municipalities or
counties contiguous thereto arising out of and directly
occasioned by the same event. The maximum duration of 72
consecutive hours may be extended in respect of individual
losses which occur beyond such 72 consecutive hours during
the continued occupation of an assured's premises by
strikers, provided such occupation commenced during the
aforesaid period.
3. As regards earthquake (the epicenter of which need
not necessarily be within the territorial confines
referred to in the introductory portion of this
paragraph D) and fire following directly occasioned by the
earthquake, only those individual fire losses which
commence during the period of 168 consecutive hours may be
included in the Company's "loss occurrence."
4. As regards "freeze," only individual losses directly
occasioned by collapse, breakage of glass and water damage
(caused by bursting frozen pipes and tanks) may be
included in the Company's "loss occurrence."
Except for those "loss occurrences" referred to in
subparagraphs 1 and 2 above, the Company may choose the date
and time when any such period of consecutive hours commences,
provided that it is not earlier than the date and time of the
occurrence of the first recorded individual loss sustained by
the Company arising out of that disaster, accident or loss,
and provided that only one such period of 168 consecutive
hours shall apply with respect to one event.
However, as respects those "loss occurrences" referred to in
subparagraphs 1 and 2 above, if the disaster, accident or loss
occasioned by the event is of greater duration than
72 consecutive hours, then the Company may divide that
disaster, accident or loss into two or more "loss
occurrences," provided that no two periods overlap and no
individual loss is included in more than one such period, and
provided that no period commences earlier than the date and
time of the occurrence of the first recorded individual loss
sustained by the Company arising out of that disaster,
accident or loss.
No individual losses occasioned by an event that would be
covered by 72 hours clauses may be included in any "loss
occurrence" claimed under the 168 hours provision.
E. "Premiums earned" as used herein shall mean ceded net written
premium for policies which are in force on the effective date
of this Contract or have effective or renewal dates during the
term of this Contract, less the unearned portion thereof as of
the effective date of calculation, it being understood and
agreed that all premiums for policies which are in force on
the effective date of this Contract or have effective or
renewal dates during the term of this Contract shall be
credited to this Contract, unless this Contract expires on a
"cut-off" basis, in which event the unearned reinsurance
premium (less previously allowed commission) as of the date of
expiration shall be returned by the Reinsurer to the Company.
F. "Losses incurred" as used herein shall mean ceded losses and
loss adjustment expense paid as of the effective date of
calculation, plus:
1. The ceded reserves for losses and loss adjustment
expense outstanding as of the same date;
2. An amount representing Incurred But Not Reported
Losses (hereinafter called "IBNR") equal to 20.0% of the
premiums earned for Course of Construction business
hereunder for the term of this Contract (said IBNR factor
to be applied) until all premiums for Course of
Construction business are earned, at which time no further
amounts of IBNR will be added);
it being understood and agreed that all losses and related
loss adjustment expense under policies which are in force on
the effective date of this Contract or have effective or
renewal dates during the term of this Contract shall be
charged to this Contract, regardless of the date said losses
actually occur, unless this Contract expires on a "cutoff"
basis, in which event the Reinsurer shall have no liability
for losses occurring after the effective date of expiration.
Article VIII - Losses and Loss Adjustment Expense
A. Whenever a loss sustained by the Company appears likely to
result in a claim hereunder, the Company shall notify the
Reinsurer, and the Reinsurer shall have the right to
participate in the adjustment of the loss at its own expense.
B. All loss settlements made by the Company, provided they are
within the terms of this Contract, shall be binding upon the
Reinsurer, and the Reinsurer agrees to pay all amounts for
which it may be liable upon receipt of reasonable evidence of
the amount paid (or scheduled to be paid) by the Company.
C. In the event of loss hereunder, loss adjustment expenses (as
defined in Article VII) incurred by the Company in connection
therewith shall be shared by the Company and the Reinsurer in
the proportion the ultimate net loss paid or payable by the
Reinsurer bears to the total ultimate net loss paid or payable
by the Company, prior to any reinsurance recoveries, but after
deduction of all salvage and other recoveries. The
Reinsurer's liability for loss adjustment expenses shall be in
addition to its limit of liability for ultimate net loss.
Notwithstanding the foregoing, if the ultimate net loss to the
Company (exclusive of loss adjustment expenses) is less than
the Company's retention stated in Article V, then loss
adjustment expenses shall be included in the ultimate net loss
for purposes of recovery hereunder, but subject to the limit
of liability stated in Article V.
D. In the event the ultimate net loss subject to recovery
hereunder includes an amount of loss in excess of policy
limits and/or extra contractual obligations, then the actual
ultimate net loss recovered hereunder shall be allocated among
indemnity loss, loss in excess of policy limits and/or extra
contractual obligations as follows:
1. When the limit defined in paragraph A of Article V
with regard to all risks subject to recovery hereunder
involved in any one loss occurrence has not been exceeded,
the actual ultimate net loss recovered hereunder as
respects any one risk, each loss shall be allocated to
indemnity loss, loss in excess of policy limits and/or
extra contractual obligations in the same proportion that
each bears to the total ultimate net loss subject to
recovery on that risk.
2. When the limit defined in paragraph A of Article V
with regard to all risks subject to recovery hereunder
involved in any one loss occurrence has been exceeded, the
actual ultimate net loss recovered hereunder as respects
any one loss occurrence shall be allocated to indemnity
loss, loss in excess of policy limits and/or extra
contractual obligations in the same proportion that each
bears, before application of the per occurrence limit, to
the total ultimate net loss subject to recovery on that
loss occurrence.
Article IX - Special Provisions
A. The Company's maximum policy limits subject to this Contract
shall be as follows:
1. $10,000,000 for all policies except as outlined in
subparagraph 2 below, or so deemed;
2. As respects coverage for Transmission and
Distribution lines, the maximum policy limit subject
hereto shall not exceed $1,000,000 each risk, or so
deemed.
B. As respects loss or damage or costs or expenses arising from
asbestos or seepage and/or pollution and/or contamination,
other than contamination from smoke damage, the maximum
sublimit shall be $25,000 per risk, each loss except business
classified as Railroad in which case the sublimit shall be
$250,000 each risk, each loss. Nevertheless, this does not
preclude payment of the cost of removal of debris of property
damaged by a loss otherwise covered hereunder.
Article X - Salvage and Subrogation
The Reinsurer shall be credited with salvage (i.e., reimbursement
obtained or recovery made by the Company, less the actual cost,
excluding salaries of officials and employees of the Company and
sums paid to attorneys as retainer, of obtaining such
reimbursement or making such recovery) on account of claims and
settlements involving reinsurance hereunder. Salvage thereon
shall always be used to reimburse the excess carriers in the
reverse order of their priority according to their participation
before being used in any way to reimburse the Company for its
primary loss. The Company hereby agrees to enforce its rights to
salvage or subrogation relating to any loss, a part of which loss
was sustained by the Reinsurer, and to prosecute all claims
arising out of such rights.
Article XI - Commission (BRMA 10A)
A. The Reinsurer shall allow the Company a 30.0% commission 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 - Premium
A. With respect to business issued or renewed on or after the
effective date of this Contract, as premium for the
reinsurance provided hereunder, the Company shall pay to the
Reinsurer a reinsurance premium based on Appendix A and
calculated by applying the applicable Coded Excess Factor to
the gross written premium of each policy ceded hereunder.
With respect to business in force on the effective date of
this Contract, as premium for the reinsurance provided
hereunder, the Company shall pay to the Reinsurer a
reinsurance premium based on Appendix A and calculated by
applying the applicable Coded Excess Factor to the gross
unearned premium, as of January 1, 1997, of each policy ceded
hereunder.
1. The Coded Excess Factor will be determined based
upon:
a. The size of the gross policy limit (before all
other reinsurance);
b. The attachment point;
c. The Company's participation in the primary
insurance limit;
and will be in compliance with the Coded Excess
Factor Table included in Appendix A attached to and
forming part of this Contract. It is understood and
agreed that the Coded Excess Factor Table included in
Appendix A cannot contemplate each specific combination of
gross policy limit and attachment point for business
subject to this Contract. In the event the combination of
gross policy limit and attachment point on a specific risk
does not coincide with the Coded Excess Factor Tables, the
Company shall be permitted to utilize the original formula
methodology used to construct the Coded Excess Factor
Tables in determining the appropriate reinsurance premium
for such risk.
2. The gross written premium and gross unearned premium
will be the gross premium of the policy for the coverage
provided before deduction of premium for all other
reinsurance.
B. At inception, the Company shall report its gross unearned
premium applicable to subject business in force at inception.
The premium due the Reinsurer, based upon the cessions
outlined in paragraph A, shall be paid by the Company with its
report.
C. Within 60 days after the end of each calendar quarter, the
Company shall report its gross written premium for the
quarter. The premium due the Reinsurer, based upon the
cessions outlined in paragraph A above, shall be paid by the
Company with its report.
D. As respects business classified as "National Accounts," the
Company shall provide a quarterly report to the Reinsurer
detailing the following for each insured:
1. Total insured values and California, Texas, Florida
and Puerto Rico total insured values;
2. Overall gross rate for coverage provided;
3. Gross written premium for coverages provided; and
4. Premium split between earthquake and all other
perils/all other lines covered.
E. Annually, the Company shall furnish the Reinsurer with such
information as the Reinsurer may require to complete its
Annual Convention Statement.
Article XIII - Profit Sharing
A. The Reinsurer shall pay the Company profit sharing equal to
50.0% of the net profit, if any, accruing to the Reinsurer
during the term of this Contract.
B. The Reinsurer's net profit for the term of this Contract shall
be calculated in accordance with the following formula, it
being understood that a positive balance equals net profit and
a negative balance equals net loss:
1. Premiums earned for the term of this Contract; less
2. Ceding commission allowed the Company on premiums
earned for the term of this Contract; less
3. Expenses incurred by the Reinsurer at 30.0% of
premiums earned for the term of this Contract; less
4. Losses incurred for the term of this Contract.
C. The Company shall calculate and report the Reinsurer's net
profit no sooner than 12 months following the expiration of
this Contract, and no sooner than 12 months following the end
of each 12-month period thereafter until all premiums subject
hereto have earned and all losses subject hereto have been
finally settled. Each such calculation shall be based on
cumulative transactions hereunder from the beginning of the
term of this Contract through the date of calculation. As
respects the initial calculation referred to above, any profit
sharing shown to be due the Company shall be paid by the
Reinsurer as promptly as possible after receipt and
verification of the Company's report. As respects each
recalculation, any additional profit sharing shown to be due
the Company shall be paid by the Reinsurer as promptly as
possible after receipt and verification of the Company's
report. Any return profit sharing shown to be due the
Reinsurer shall be paid by the Company with its report.
Article XIV - Offset (BRMA 36C)
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 Contract. 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 XV - Access to Records (BRMA 1D)
The Reinsurer or its designated representatives shall have access
at any reasonable time to all records of the Company which
pertain in any way to this reinsurance.
Article XVI - Liability of the Reinsurer
A. The liability of the Reinsurer shall follow that of the
Company in every case and be subject in all respects to all
the general and specific stipulations, clauses, waivers and
modifications of the Company's policies and any endorsements
thereon. However, in no event shall this be construed in any
way to provide coverage outside the terms and conditions set
forth in this Contract.
B. Nothing herein shall in any manner create any obligations or
establish any rights against the Reinsurer in favor of any
third party or any persons not parties to this Contract.
Article XVII - Net Retained Lines (BRMA 32E)
A. This Contract applies only to that portion of any policy which
the Company retains net for its own account (prior to
deduction of any underlying reinsurance specifically permitted
in this Contract), and in calculating the amount of any loss
hereunder and also in computing the amount or amounts in
excess of which this Contract attaches, only loss or losses in
respect of that portion of any policy which the Company
retains net for its own account shall be included.
B. The amount of the Reinsurer's liability hereunder in respect
of any loss or losses shall not be increased by reason of the
inability of the Company to collect from any other
reinsurer(s), whether specific or general, any amounts which
may have become due from such reinsurer(s), whether such
inability arises from the insolvency of such other
reinsurer(s) or otherwise.
Article XVIII - Errors and Omissions (BRMA 14F)
Inadvertent delays, errors or omissions made in connection with
this Contract or any transaction hereunder shall not relieve
either party from any liability which would have attached had
such delay, error or omission not occurred, provided always that
such error or omission is rectified as soon as possible after
discovery.
Article XIX - Taxes (BRMA 50C)
In consideration of the terms under which this Contract 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, the District of Columbia or Canada.
Article XX - Federal Excise Tax (BRMA 17A)
(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 XXI - Unauthorized Reinsurers
A. If the Reinsurer is unauthorized in any state of the United
States of America or the District of Columbia, the Reinsurer
agrees to fund its share of the Company's ceded United States
unearned premium and outstanding loss and loss adjustment
expense reserves (including incurred but not reported loss
reserves) by:
1. Clean, irrevocable and unconditional letters of
credit issued and confirmed, if confirmation is required
by the insurance regulatory authorities involved, by a
bank or banks meeting the NAIC Securities Valuation Office
credit standards for issuers of letters of credit and
acceptable to said insurance regulatory authorities;
and/or
2. Escrow accounts for the benefit of the Company;
and/or
3. Cash advances;
if, without such funding, a penalty would accrue to the
Company on any financial statement it is required to file with
the insurance regulatory authorities involved. The Reinsurer,
at its sole option, may fund in other than cash if its method
and form of funding are acceptable to the insurance regulatory
authorities involved.
B. If the Reinsurer is unauthorized in any province or
jurisdiction of Canada, the Reinsurer agrees to fund 115% of
its share of the Company's ceded Canadian unearned premium and
outstanding loss and loss adjustment expense reserves
(including incurred but not reported loss reserves) by:
1. A clean, irrevocable and unconditional letter of
credit issued and confirmed, if confirmation is required
by the insurance regulatory authorities involved, by a
Canadian bank or banks meeting the NAIC Securities
Valuation Office credit standards for issuers of letters
of credit and acceptable to said insurance regulatory
authorities, for no more than 15/115ths of the total
funding required; and/or
2. Cash advances for the remaining balance of the
funding required;
if, without such funding, a penalty would accrue to the
Company on any financial statement it is required to file with
the insurance regulatory authorities involved.
C. With regard to funding in whole or in part by letters of
credit, it is agreed that each letter of credit will be in a
form acceptable to insurance regulatory authorities involved,
will be issued for a term of at least one year and will
include an "evergreen clause," which automatically extends the
term for at least one additional year at each expiration date
unless written notice of non-renewal is given to the Company
not less than 30 days prior to said expiration date. The
Company and the Reinsurer further agree, notwithstanding
anything to the contrary in this Contract, that said letters
of credit may be drawn upon by the Company or its successors
in interest at any time, without diminution because of the
insolvency of the Company or the Reinsurer, but only for one
or more of the following purposes:
1. To reimburse itself for the Reinsurer's share of
unearned premiums returned to insureds on account of
policy cancellations, unless paid in cash by the
Reinsurer;
2. To reimburse itself for the Reinsurer's share of
losses and/or loss adjustment expense paid under the terms
of policies reinsured hereunder, unless paid in cash by
the Reinsurer;
3. To reimburse itself for the Reinsurer's share of any
other amounts claimed to be due hereunder, unless paid in
cash by the Reinsurer;
4. To fund a cash account in an amount equal to the
Reinsurer's share of any ceded unearned premium and/or
outstanding loss and loss adjustment expense reserves
(including incurred but not reported loss reserves) funded
by means of a letter of credit which is under non-renewal
notice, if said letter of credit has not been renewed or
replaced by the Reinsurer 10 days prior to its expiration
date;
5. To refund to the Reinsurer any sum in excess of the
actual amount required to fund the Reinsurer's share of
the Company's ceded unearned premium and/or outstanding
loss and loss adjustment expense reserves (including
incurred but not reported loss reserves), if so requested
by the Reinsurer.
In the event the amount drawn by the Company on any letter of
credit is in excess of the actual amount required for C(1),
C(2) or C(4), or in the case of C(3), the actual amount
determined to be due, the Company shall promptly return to the
Reinsurer the excess amount so drawn.
Article XXII - Insolvency
A. In the event of the insolvency of one or more of the reinsured
companies, this reinsurance shall be payable directly to the
company 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 without diminution because of the insolvency of
the company or because the liquidator, receiver, conservator
or statutory successor of the company 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 shall give written notice to the Reinsurer of the
pendency of a claim against the company 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 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 as part of the
expense of conservation or liquidation to the extent of a pro
rata share of the benefit which may accrue to the company
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 Contract as though such expense had been
incurred by the company.
C. It is further understood and agreed that, in the event of the
insolvency of one or more of the reinsured companies, the
reinsurance under this Contract shall be payable directly by
the Reinsurer to the company or to its liquidator, receiver or
statutory successor, except as provided by Section 4118(a) of
the New York Insurance Law or except (1) where this Contract
specifically provides another payee of such reinsurance in the
event of the insolvency of the company or (2) where 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.
Article XXIII - Arbitration
A. As a condition precedent to any right of action hereunder, in
the event of any dispute or difference of opinion hereafter
arising with respect to this Contract, it is hereby mutually
agreed that such dispute or difference of opinion shall be
submitted to arbitration. One Arbiter shall be chosen by the
Company, the other by the Reinsurer, and an Umpire shall be
chosen by the two Arbiters before they enter upon arbitration,
all of whom shall be active or retired disinterested executive
officers of insurance or reinsurance companies or Lloyd's
London Underwriters. In the event that either party should
fail to choose an Arbiter within 30 days following a written
request by the other party to do so, the requesting party may
choose two Arbiters who shall in turn choose an Umpire before
entering upon arbitration. If the two Arbiters fail to agree
upon the selection of an Umpire within 30 days following their
appointment, each Arbiter shall nominate three candidates
within 10 days thereafter, two of whom the other shall
decline, and the decision shall be made by drawing lots.
B. Each party shall present its case to the Arbiters within 30
days following the date of appointment of the Umpire. The
Arbiters shall consider this Contract as an honorable
engagement rather than merely as a legal obligation and they
are relieved of all judicial formalities and may abstain from
following the strict rules of law. The decision of the
Arbiters shall be final and binding on both parties; but
failing to agree, they shall call in the Umpire and the
decision of the majority shall be final and binding upon both
parties. Judgment upon the final decision of the Arbiters may
be entered in any court of competent jurisdiction.
C. If more than one reinsurer is involved in the same dispute,
all such reinsurers shall 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 one party,
provided, however, that nothing herein 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 participating under the terms of this
Contract from several to joint.
D. Each party shall bear the expense of its own Arbiter, and
shall jointly and equally bear with the other the expense of
the Umpire and of the arbitration. In the event that the two
Arbiters are chosen by one party, as above provided, the
expense of the Arbiters, the Umpire and the arbitration shall
be equally divided between the two parties.
E. Any arbitration proceedings shall take place at Woodland
Hills, California, unless otherwise mutually agreed.
F. It is agreed that the jurisdiction of the Arbiters to make or
render any decision or award shall be limited by the limit of
liability expressly hereinbefore set forth, and that the
Arbiters shall have no jurisdiction to make any decision or
render any award exceeding such expressly stated limit of
liability of the Reinsurer, nor do they have the jurisdiction
to authorize any punitive, exemplary or consequential damage
awards between the parties hereto.
Article XXIV - Service of Suit (BRMA 49C)
(Applicable if the Reinsurer is not domiciled in the United
States of America, and/or is not authorized in any State,
Territory or District of the United States where authorization is
required by insurance regulatory authorities)
A. It is agreed that in the event the Reinsurer fails to pay any
amount claimed to be due hereunder, the Reinsurer, at the
request of the Company, will submit to the jurisdiction of any
court of competent jurisdiction within the United States.
Nothing in this Article constitutes or should be understood to
constitute a waiver of the Reinsurer's rights to commence an
action in any court of competent jurisdiction in the United
States, to remove an 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.
B. Further, pursuant to any statute of any state, territory or
district of the United States which makes provision therefor,
the Reinsurer hereby designates the party named in its
Interests and Liabilities Agreement, or if no party is named
therein, 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 Contract.
Article XXV - Agency Agreement
Associated International Insurance Company shall be deemed the
agent of the other reinsured companies for purposes of sending or
receiving notices required by the terms and conditions of this
Contract, and for purposes of remitting or receiving any monies
due any party.
Article XXVI - Intermediary (BRMA 23A)
E. W. Blanch Co. is hereby recognized as the Intermediary
negotiating this Contract 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 E. W. Blanch Co., Reinsurance Services, 3500 West 80th
Street, Minneapolis, Minnesota 55431. 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.
In Witness Whereof, the Company by its duly authorized
representative has executed this Contract as of the date
undermentioned at:
Woodland Hills, California, this ________ day of ______________________________
199___.
__________________________________________________
___
Associated International Insurance Company
Calvert Insurance Company
Timberline Insurance Company
Appendix A
Property Excess and Surplus Lines
Excess Per Risk Reinsurance Contract
Effective: January 1, 1997
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Hoboken, New Jersey
Timberline Insurance Company
Eugene, Oregon
and
any additional company established or acquired
by Associated International Insurance Company, Calvert Insurance
Company, Timberline Insurance Company or
Gryphon Holdings, Inc., New York, New York,
to be included hereunder
<TABLE>
General E&S Division
Property Rating Grid
<CAPTION>
XOL 9,500 Reten 500,00 Q.S. % 0% Placeme 100.00%
Limit ,000 tion 0 nt %
Limit
Exposed 50.00 80.00 90.00 93.33 95.00%63.33% 47.50% 38.00% 19.00% 9.50%
% % % %
Gross 1,000 2,500 5,000 7,500 10,00015,000, 20,000 25,000, 50,000,100,00
Limit ,000 ,000 ,000 ,000 ,000 000 ,000 000 000 0,000
Attachm
ent
Point
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 14.25 28.19 36.21 40.17 42.71% 27.17% 19.72% 15.40% 7.16% 3.34%
% % % %
100,000 26.88 47.45 57.10 61.36 63.93% 40.08% 28.78% 22.27% 10.06% 4.58%
% % % %
250,000 32.63 55.52 65.36 69.48 71.89% 45.26% 32.54% 25.17% 11.33% 5.12%
% % % %
500,000 37.42 62.09 71.93 75.85 78.08% 49.55% 35.76% 27.73% 12.51% 5.63%
% % % %
1,000,0 41.78 68.05 77.82 81.51 83.55% 53.60% 38.96% 30.35% 13.83% 6.24%
00 % % % %
2,500,0 45.92 73.86 83.59 87.03 88.86% 57.85% 42.50% 33.39% 15.56% 7.12%
00 % % % %
5,000,0 47.78 76.57 86.34 89.69 91.42% 60.03% 44.42% 35.10% 16.69% 7.78%
00 % % % %
7,500,0 48.47 77.62 87.42 90.75 92.44% 60.94% 45.24% 35.85% 17.22% 8.12%
00 % % % %
10,000, 48.83 78.17 88.01 91.33 93.01% 61.45% 45.71% 36.28% 17.55% 8.34%
000 % % % %
25,000, 49.52 79.24 89.16 92.47 94.13% 62.49% 46.68% 37.20% 18.28% 8.88%
000 % % % %
50,000, 49.76 79.61 89.57 92.89 94.55% 62.89% 47.07% 37.57% 18.60% 9.14%
000 % % % %
100,000 49.88 79.81 89.78 93.11 94.77% 63.11% 47.28% 37.78% 18.79% 9.30%
,000 % % % %
</TABLE>
When
AIIC
parti
cipat
es in
a
layer
of
insur
ance,
the
reins
uranc
e
premi
um
facto
r
from
the
above
table
will
be
calcu
lated
as
follo
ws:
Limit
Expos
ed
(AIIC
net)
/
Limit
Expos
ed
(Gros
s
Layer
) *
Facto
r for
Gross
Layer
at
given
attac
hment
.
Examp Layer $10M
le: : part
of
$100M
xs
$100M
R/I 95.0
Facto / 9.5
r * 9.3
=
93.0%
of
AIIC'
s
actua
l
gross
premi
um to
be
ceded
to
reins
urers
.
Examp
le is
for
the
combi
ned
1st
and
2nd
layer
s.
*Gross Rate applied to WP net of Fac. but before any Q/S.
POOLS, ASSOCIATIONS & SYNDICATES EXCLUSION CLAUSE
Section A:
Excluding:
(a) All business derived directly or indirectly from any
Pool, Association or Syndicate which maintains its own
reinsurance facilities.
(b) Any Pool or Scheme (whether voluntary or mandatory)
formed after March 1, 1968 for the purpose of insuring
property whether on a country-wide basis or in respect of
designated areas. This exclusion shall not apply to so-
called Automobile Insurance Plans or other Pools formed to
provide coverage for Automobile Physical Damage.
Section B:
It is agreed that business written by the Company for the
same perils, which is known at the time to be insured by, or in
excess of underlying amounts placed in the following Pools,
Associations or Syndicates, whether by way of insurance or
reinsurance, is excluded hereunder:
Industrial Risk Insurers,
Associated Factory Mutuals,
Improved Risk Mutuals,
Any Pool, Association or Syndicate formed for the purpose of
writing
Oil, Gas or Petro-Chemical Plants and/or Oil or Gas
Drilling Rigs,
United States Aircraft Insurance Group,
Canadian Aircraft Insurance Group,
Associated Aviation Underwriters,
American Aviation Underwriters.
Section B does not apply:
(a) Where The Total Insured Value over all interests of
the risk in question is less than $300,000,000.
(b) To interests traditionally underwritten as Inland
Marine or stock and/or contents written on a blanket
basis.
(c) To Contingent Business Interruption, except when the
Company is aware that the key location is known at the
time to be insured in any Pool, Association or Syndicate
named above, other than as provided for under Section
B(a).
(d) To risks as follows:
Offices, Hotels, Apartments, Hospitals, Educational
Establishments, Public Utilities (other than railroad
schedules) and builder's risks on the classes of risks
specified in this subsection (d) only.
Where this clause attaches to Catastrophe Excesses, the
following Section C is added:
Nevertheless the Reinsurer specifically agrees that
liability accruing to the Company from its participation in:
(1) The following so-called "Coastal Pools":
Alabama Insurance Underwriting Association
Florida Windstorm Underwriting Association
Louisiana Insurance Underwriting Association
Mississippi Insurance Underwriting Association
North Carolina Insurance Underwriting Association
South Carolina Windstorm and Hail Underwriting
Association
Texas Catastrophe Property Insurance Association
AND
(2) All "Fair Plan" business
for all perils otherwise protected hereunder shall not be
excluded, except, however, that this reinsurance does not include
any increase in such liability resulting from:
(i) The inability of any other participant in such
"Coastal Pool" or "Fair Plan" to meet its liability.
(ii) Any claim against such "Coastal Pool" or "Fair
Plan" or any participant therein, including the
Company, whether by way of subrogation or otherwise,
brought by or on behalf of any insolvency fund (as
defined in the Insolvency Fund Exclusion Clause
incorporated in this Contract).
R:\97R\11342.DOC
Franchise Excess of Loss
Reinsurance Contract
Effective: January 1, 1997
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Hoboken, New Jersey
Timberline Insurance Company
Eugene, Oregon
and
any additional company established or acquired
by Associated International Insurance Company, Calvert Insurance
Company, Timberline Insurance Company or
Gryphon Holdings, Inc., New York, New York,
to be included hereunder
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
Franchise Excess of Loss
Reinsurance Contract
Effective: January 1, 19967
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Hoboken, New Jersey
Timberline Insurance Company
Eugene, Oregon
and
any additional company established or acquired
by Associated International Insurance Company, Calvert Insurance
Company, Timberline Insurance Company or
Gryphon Holdings, Inc., New York, New York,
to be included hereunder
Reinsurers Participations
Underwriters Reinsurance Company 10.0%
Through Denis M. Clayton & Co. Ltd.
Lloyd's Underwriters and Companies
Per Signing Schedule(s) 90.0
Total 100.0%
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
Table of Contents
Article Page
I Classes of Business Reinsured 1
II Term 1
III Territory 2
IV Exclusions 2
V Retention and Limit 2
VI Definitions 2
VII Loss Notices and Settlements 4
VIII Special Provisions 4
IX Salvage and Subrogation 4
X Premium 4
XI Offset (BRMA 36C) 5
XII Access to Records (BRMA 1D) 5
XIII Net Retained Lines (BRMA 32B) 5
XIV Errors and Omissions (BRMA 14F) 5
XV Currency (BRMA 12A) 5
XVI Taxes (BRMA 50C) 6
XVII Federal Excise Tax (BRMA 17A) 6
XVIII Unauthorized Reinsurers 6
XIX Insolvency 7
XX Arbitration 8
XXI Service of Suit (BRMA 49C) 9
XXII Agency Agreement 9
XXIII Intermediary (BRMA 23A) 9
Franchise Excess of Loss
Reinsurance Contract
Effective: January 1, 19967
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Hoboken, New Jersey
Timberline Insurance Company
Eugene, Oregon
and
any additional company established or acquired
by Associated International Insurance Company, Calvert Insurance
Company, Timberline Insurance Company or
Gryphon Holdings, Inc., New York, New York,
to be included hereunder
(hereinafter referred to collectively as the "Company")
by
The Subscribing Reinsurer(s) Executing the
Interests and Liabilities Agreement(s)
Attached Hereto
(hereinafter referred to as the "Reinsurer")
Article I - Classes of Business Reinsured
By this Contract the Reinsurer agrees to reinsure the excess
liability which may accrue to the Company under its policies,
contracts and binders of insurance or reinsurance (hereinafter
called "policies") in force at the effective date hereof or
issued or renewed on or after that date, and classified by the
Company as Property business underwritten by Associated
International Insurance Company, Woodland Hills, California,
subject to the terms, conditions and limitations hereinafter set
forth. However, this Contract shall only apply to losses
sustained by the Company, either directly or indirectly, as a
result of seismic activity and/or volcanic eruption.
Article II - Term
A. This Contract shall become effective on January 1, 19967, with
respect to losses arising out of loss occurrences commencing
on or after that date, and shall remain in force until
December 31, 19967, both days inclusive.
B. If this Contract expires while a loss occurrence covered
hereunder is in progress, the Reinsurer's liability hereunder
shall, subject to the other terms and conditions of this
Contract, be determined as if the entire loss occurrence had
occurred prior to the expiration of this Contract, provided
that no part of such loss occurrence is claimed against any
renewal or replacement of this Contract.
Article III - Territory
This Contract shall apply to losses occurring anywhere within the
State of California.
Article IV - Exclusions
A. This Contract does not apply to and specifically excludes the
following:
1. Loss or liability excluded under the provisions of
the "Pools, Associations and Syndicates Exclusions Clause"
attached to and forming part of this Contract.
2. Nuclear risks as defined in the "Nuclear Incident
Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)"
and the "Nuclear Incident Exclusion Clause - Physical
Damage - Reinsurance (Canada)" attached to and forming
part of this Contract.
3. All reinsurance assumed, with the exception of intra-
company reinsurance and specific insureds whose
reinsurance is written through their own captive company
and quoted by a non-related entity.
4. Risks of war, whether or not declared, invasion,
civil war, insurrection, rebellion, revolution or
confiscation by duly constituted government of civil
authority as excluded under a standard policy containing a
standard War Exclusion Clause.
5. Hail insurance or reinsurance covering growing,
drying or standing crops when written as such.
6. Flood when written as such; however, this exclusion
shall not apply to flood when included in Difference in
Conditions, Inland Marine and All Risk policies.
7. All armored car business except when written in
excess of $500,000.
8. Credit, financial or insolvency guarantees.
9. Livestock insurance or reinsurance when written as
such.
10. Third Party Bodily Injury and Property Damage
Liability, Medical Payments, Workers' Compensation,
Fidelity and Surety, whether written separately or as part
of a Multiple Peril policy. However, nothing herein
contained shall be construed as excluding
liability for damage to property in an insured's care,
custody or control or for which the insured may be liable.
11. Ocean Marine when written as such.
12. Aircraft, meaning direct damage to hulls insured
under Aircraft Hull policies, but not to exclude aircraft
hulls insured under regular Fire, Inland Marine and All
Risk policies (other than Aircraft Hull policies). In no
event shall any liability attach to the Reinsurer
hereunder in respect of aircraft while in flight or
taxiing.
13. Offshore drilling rigs.
14. Automobile risks insured under Automobile policies.
15. Boiler and Machinery when written as such.
16. Space and space related risks for the intention of
ignition of the launch vehicle which includes taxiing
within the launch site area and in flight.
17. Grain elevators.
18. Mechanical breakdowns when written as such.
19. Petrochemical risks and refineries.
20. Underground mining.
21. Inland Marine policies covering jewelers block and
motor truck cargo.
22. Mortgage Impairment insurance.
23. 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 guarantee
fund, insolvency fund, plan, pool, association, fund or
other arrangement, however denominated, established or
governed, which provides for any assessment of or payment
or assumption by the Company of part of 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.
24. Kidnap or Ransom.
25. Residual Value and Credit Insurance.
26. Crop insurance.
27. Burglary and Theft when written as such.
28. Strike insurance.
29. Product impairment, recall and tampering.
30. Data processing companies whose sole purpose is to
provide data processing services to other companies which
include media exposures defined as material on which data
is to be or is already stored (i.e., disk, magnetic and
paper tapes, drums, cores and programs).
31. Transmission and distribution lines.
32. Mobile home parks.
33. Onshore drilling rigs.
34. Course of Construction risks covering dams, bridges,
tunnels, subways, construction work over water, or any
project involving water, unless the aforementioned
projects are incidental to the insured's total
construction project.
35. Rolling stock owned or operated by a railroad, but
this exclusion shall not apply to interests while
contained in buildings owned or leased by an insured.
36. Risks excluded under the provisions of the "Total
Insured Value Exclusion Clause" attached to and forming
part of this Contract.
37. Extra contractual obligations (i.e., any punitive,
exemplary, compensary or consequential damage paid or
payable by the Company as a result of an action against it
by its insured or its insured's assignee, which action
alleges negligence or bad faith on the part of the Company
in handling a claim under policy subject to this
Contract).
38. Loss in excess of policy limits (i.e., any amount
paid or payable by the Company in excess of its policy
limits, but otherwise within the terms of its policy, as a
result of an action against it by its insured or its
insured's assignee to recover damages the insured is
legally obligated to pay to a third party claimant because
of the Company's alleged or actual negligence or bad faith
in rejecting a settlement within policy limits, or in
discharging its duty to defend or prepare the defense in
the trial of an action against its insured, or in
discharging its duty to prepare or prosecute an appeal
consequent upon such action).
B. Notwithstanding the foregoing, any exclusions set forth in
paragraph A (except subparagraphs 2, 3, 4, 6, 8, 11, 12, 13,
16, 23, 37 and 38) shall be waived automatically when, in the
opinion of the Company, the exposure excluded therein is
incidental to the principal exposure on the risk in question.
C. As regards business underwritten in the General E&S Division
of the Company:
1. Exclusions 15, 18, 34 and 35 of paragraph A shall be
waived.
2. Exclusion 36 (Total Insured Value) and Section B of
Exclusion 1 (Pools, Associations) of paragraph A shall be
waived except for risks with total insured values greater
than $300,000,000 in the State of California. This
exception contained in this paragraph only applies to
risks in the State of California.
3. Exclusion 14 (Automobile) of paragraph A shall be
waived as regards Automobile Floor Plans.
D. The exclusions in this ArticleThis Contract shall follow in
all respects the exclusions under the Company's External Third
through Seventh Excess Catastrophe Reinsurance Contract,
effective January 1, 19967, including any interpretations given
the exclusions by the "Reinsurer" under that contract.
Article V - Retention and Limit
A. The Company shall retain and be liable for the first
$2,500,000 of ultimate net loss arising out of each loss
occurrence. The Reinsurer shall then be liable for the amount
by which such ultimate net loss exceeds the Company's
retention, but the liability of the Reinsurer shall not exceed
$10,000,000 as respects any one loss occurrence, nor shall it
exceed $10,000,000 in all during the term of this Contract.
B. There shall be no recovery under this Contract until the
Company's gross loss as respects business subject to its 19967
property catastrophe program from any one loss occurrence
exceeds $60,000,000.
Article VI - Definitions
A. "Ultimate net loss" as used herein is defined as the sum or
sums (including premium adjustments remitted by the Company
under the Company's Property Excess Per Risk Reinsurance
Contract, effective January 1, 19967, any reinstatement
premiums paid by the Company under the Company's Excess
Catastrophe Reinsurance Contract, effective January 1, 1994,
and External Third Through Seventh Excess Catastrophe
Reinsurance Contract, effective January 1, 19967, regardless
of whether the Company has an actual cash payment associated
with the same loss occurrence, and losses retained by the
Company under its 5.0% co-participation under the Excess
Catastrophe Reinsurance Contract, effective January 1, 1994)
paid or payable by the Company in settlement of claims and in
satisfaction of judgments rendered on account of such claims,
after deduction of all salvage, all recoveries and all claims
on inuring insurance or reinsurance, whether collectible or
not. Nothing herein shall be construed to mean that losses
under this Contract are not recoverable until the Company's
ultimate net loss has been ascertained.
B. The term "loss occurrence" shall mean the sum of all
individual losses directly occasioned by any one disaster,
accident or loss or series of disasters, accidents or losses
arising out of one event which occurs anywhere in the world
but limited in the United States of America and Canada to the
area of one state of the United States or province of Canada
and states or provinces contiguous thereto and to one another.
However, the duration and extent of any one "loss occurrence"
shall be limited to all individual losses sustained by the
Company occurring during any period of 168 consecutive hours
arising out of and directly occasioned by the same event,
except that the term "loss occurrence" shall be further
defined as follows:
1. As regards windstorm, hail, tornado, hurricane,
cyclone, including ensuing collapse and water damage, all
individual losses sustained by the Company occurring
during any period of 72 consecutive hours arising out of
and directly occasioned by the same event. However, the
event need not be limited to one state or province or
states or provinces contiguous thereto.
2. As regards riot, riot attending a strike, civil
commotion, vandalism and malicious mischief, all
individual losses sustained by the Company occurring
during any period of 72 consecutive hours within the area
of one municipality or county and the municipalities or
counties contiguous thereto arising out of and directly
occasioned by the same event. The maximum duration of 72
consecutive hours may be extended in respect of individual
losses which occur beyond such 72 consecutive hours during
the continued occupation of an assured's premises by
strikers, provided such occupation commenced during the
aforesaid period.
3. As regards earthquake (the epicentre of which need
not necessarily be within the territorial confines
referred to in the introductory portion of this paragraph)
and fire following directly occasioned by the earthquake,
only those individual fire losses which commence during
the period of 168 consecutive hours may be included in the
Company's "loss occurrence."
4. As regards "freeze," only individual losses directly
occasioned by collapse, breakage of glass and water damage
(caused by bursting frozen pipes and tanks) may be
included in the Company's "loss occurrence."
For all "loss occurrences," the Company may choose the date
and time when any such period of consecutive hours commences,
provided that it is not earlier than the date and time of the
occurrence of the first recorded individual loss sustained by
the Company arising out of that disaster, accident or loss,
and provided that only one such period of 168 consecutive
hours shall apply with respect to one event except for those
"loss occurrences" referred to in subparagraphs 1 and 2 above
where only one such period of 72 consecutive hours shall apply
with respect to one event.
No individual losses occasioned by an event that would be
covered by 72 hours clauses may be included in any "loss
occurrence" claimed under the 168 hours provision.
Article VII - Loss Notices and Settlements
A. Whenever losses sustained by the Company appear likely to
result in a claim hereunder, the Company shall notify the
Reinsurer, and the Reinsurer shall have the right to
participate in the adjustment of such losses at its own
expense.
B. All loss settlements made by the Company, provided they are
within the terms of this Contract, shall be binding upon the
Reinsurer, and the Reinsurer agrees to pay all amounts for
which it may be liable upon receipt of reasonable evidence of
the amount paid (or scheduled to be paid) by the Company.
Article VIII - WarrantieSpecial Provisions
A. As respects loss or damage or costs or expenses arising from
asbestos or seepage and/or pollution and/or contamination,
other than contamination from smoke damage, the maximum
sublimit shall be $25,000 per risk, each loss except business
classified as Railroad in which case the sublimit shall be
$250,000 each risk, each loss. Nevertheless, this does not
preclude payment of the cost of removal of debris of property
damaged by a loss otherwise covered hereunder.
B. The Company shall be the sole judge of what constitutes "one
risk," except that in no event shall a building and its
contents be considered more than one risk.
Article IIX - Salvage and Subrogation
The Reinsurer shall be credited with salvage (i.e., reimbursement
obtained or recovery made by the Company, less the actual cost,
excluding salaries of officials and employees of the Company and
sums paid to attorneys as retainer, of obtaining such
reimbursement or making such recovery) on account of claims and
settlements involving reinsurance hereunder. Salvage thereon
shall always be used to reimburse the excess carriers in the
reverse order of their priority according to their participation
before being used in any way to reimburse the Company for its
primary loss. The Company hereby agrees to enforce its rights to
salvage or subrogation relating to any loss, a part of which loss
was sustained by the Reinsurer, and to prosecute all claims
arising out of such rights.
Article X - Premium
A. As premium for the reinsurance provided hereunder, the Company
shall pay the Reinsurer $1,300,000 in four equal installments
of $325,000 on January 1, April 1, July 1 and October 1 of
1997.
B. In the event a loss becomes subject to this Contract, the
Company shall pay the Reinsurer an additional premium of
$500,000.
Article XI - Offset (BRMA 36C)
The Company and the Reinsurer shall have the right to offset any
balance or amounts due from one party to the other under the
terms of this Contract. The party asserting the right of offset
may exercise such right any time whether the balances due are on
account of premiums or losses or otherwise.
Article XII - Access to Records (BRMA 1D)
The Reinsurer or its designated representatives shall have access
at any reasonable time to all records of the Company which
pertain in any way to this reinsurance.
Article XIII - Net Retained Lines (BRMA 32B)
A. This Contract applies only to that portion of any policy which
the Company retains net for its own account, and in
calculating the amount of any loss hereunder and also in
computing the amount or amounts in excess of which this
Contract attaches, only loss or losses in respect of that
portion of any policy which the Company retains net for its
own account shall be included.
B. The amount of the Reinsurer''s liability hereunder in respect
of any loss or losses shall not be increased by reason of the
inability of the Company to collect from any other
reinsurer(s), whether specific or general, any amounts which
may have become due from such reinsurer(s), whether such
inability arises from the insolvency of such other
reinsurer(s) or otherwise.
Article XIV - Errors and Omissions (BRMA 14F)
Inadvertent delays, errors or omissions made in connection with
this Contract or any transaction hereunder shall not relieve
either party from any liability which would have attached had
such delay, error or omission not occurred, provided always that
such error or omission is rectified as soon as possible after
discovery.
Article XV - Currency (BRMA 12A)
A. Whenever the word "Dollars" or the "$""Dollars" or the "$"
sign appears in this Contract, they shall be construed to mean
United States Dollars and all transactions under this Contract
shall be in United States Dollars.
B. Amounts paid or received by the Company in any other currency
shall be converted to United States Dollars at the rate of
exchange at the date such transaction is entered on the books
of the Company.
Article XVI - Taxes (BRMA 50C)
In consideration of the terms under which this Contract 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, the District of Columbia or Canada.
Article XVII - Federal Excise Tax (BRMA 17A)
(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 XVIII - Unauthorized Reinsurers
A. If the Reinsurer is unauthorized in any state of the United
States of America or the District of Columbia, the Reinsurer
agrees to fund its share of the Company''s ceded outstanding
loss and loss adjustment expense reserves by:
1. Clean, irrevocable and unconditional letters of
credit issued and confirmed, if confirmation is required
by the insurance regulatory authorities involved, by a
bank or banks meeting the NAIC Securities Valuation Office
credit standards for issuers of letters of credit and
acceptable to said insurance regulatory authorities;
and/or
2. Escrow accounts for the benefit of the Company;
and/or
3. Cash advances;
3. Cash advances;
if, without such funding, a penalty would accrue to the
Company on any financial statement it is required to file with
the insurance regulatory authorities involved. The Reinsurer,
at its sole option, may fund in other than cash if its method
and form of funding are acceptable to the insurance regulatory
authorities involved.
B. With regard to funding in whole or in part by letters of
credit, it is agreed that each letter of credit will be in a
form acceptable to insurance regulatory authorities involved,
will be issued for a term of at least one year and will
include an "evergreen clause,""evergreen clause," which
automatically extends the term for at least one additional
year at each expiration date unless written notice of non-
-renewal is given to the Company not less than 30 days prior
to said expiration date. The Company and the Reinsurer further
agree, notwithstanding anything to the contrary in this
Contract, that said letters of credit may be drawn upon by the
Company or its successors in interest at any time, without
diminution because of the insolvency of the Company or the
Reinsurer, but only for one or more of the following purposes:
1. To reimburse itself for the Reinsurer''s share of
losses and/or loss adjustment expense paid under the terms
of policies reinsured hereunder, unless paid in cash by
the Reinsurer;
2. To reimburse itself for the Reinsurer''s share of any
other amounts claimed to be due hereunder, unless paid in
cash by the Reinsurer;
3. To fund a cash account in an amount equal to the
Reinsurer''s share of any ceded outstanding loss and loss
adjustment expense reserves funded by means of a letter of
credit which is under non--renewal notice, if said letter
of credit has not been renewed or replaced by the
Reinsurer 10 days prior to its expiration date;
4. To refund to the Reinsurer any sum in excess of the
actual amount required to fund the Reinsurer''s share of
the Company''s ceded outstanding loss and loss adjustment
expense reserves, if so requested by the Reinsurer.
In the event the amount drawn by the Company on any letter of
credit is in excess of the actual amount required for B(1) or
B(3), or in the case of B(2), the actual amount determined to
be due, the Company shall promptly return to the Reinsurer the
excess amount so drawn.
Article XIX - Insolvency
A. In the event of the insolvency of one or more of the reinsured
companies, this reinsurance shall be payable directly to the
company 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 without diminution because of the insolvency of
the company or because the liquidator, receiver, conservator
or statutory successor of the company 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 shall give written notice to the Reinsurer of the
pendency of a claim against the company 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 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 as part of the
expense of conservation or liquidation to the extent of a pro
rata share of the benefit which may accrue to the company
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 Contract as though such expense had been
incurred by the company.
C. It is further understood and agreed that, in the event of the
insolvency of one or more of the reinsured companies, the
reinsurance under this Contract shall be payable directly by
the Reinsurer to the company or to its liquidator, receiver or
statutory successor, except as provided by Section 4118(a) of
the New York Insurance Law or except (1) where this Contract
specifically provides another payee of such reinsurance in the
event of the insolvency of the company or (2) where 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.
Article XX - Arbitration
A. As a condition precedent to any right of action hereunder, in
the event of any dispute or difference of opinion hereafter
arising with respect to this Contract, it is hereby mutually
agreed that such dispute or difference of opinion shall be
submitted to arbitration. One Arbiter shall be chosen by the
Company, the other by the Reinsurer, and an Umpire shall be
chosen by the two Arbiters before they enter upon arbitration,
all of whom shall be active or retired disinterested executive
officers of insurance or reinsurance companies or Lloyd's
London Underwriters. In the event that either party should
fail to choose an Arbiter within 30 days following a written
request by the other party to do so, the requesting party may
choose two Arbiters who shall in turn choose an Umpire before
entering upon arbitration. If the two Arbiters fail to agree
upon the selection of an Umpire within 30 days following their
appointment, each Arbiter shall nominate three candidates
within 10 days thereafter, two of whom the other shall
decline, and the decision shall be made by drawing lots.
B. Each party shall present its case to the Arbiters within 30
days following the date of appointment of the Umpire. The
Arbiters shall consider this Contract as an honorable
engagement rather than merely as a legal obligation and they
are relieved of all judicial formalities and may abstain from
following the strict rules of law. The decision of the
Arbiters shall be final and binding on both parties; but
failing to agree, they shall call in the Umpire and the
decision of the majority shall be final and binding upon both
parties. Judgment upon the final decision of the Arbiters may
be entered in any court of competent jurisdiction.
C. If more than one reinsurer is involved in the same dispute,
all such reinsurers shall 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 one party,
provided, however, that nothing herein 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 participating under the terms of this
Contract from several to joint.
D. Each party shall bear the expense of its own Arbiter, and
shall jointly and equally bear with the other the expense of
the Umpire and of the arbitration. In the event that the two
Arbiters are chosen by one party, as above provided, the
expense of the Arbiters, the Umpire and the arbitration shall
be equally divided between the two parties.
E. Any arbitration proceedings shall take place at Woodland
Hills, California, unless otherwise mutually agreed.
Article XXI - Service of Suit (BRMA 49C)
(Applicable if the Reinsurer is not domiciled in the United
States of America, and/or is not authorized in any State,
Territory or District of the United States where authorization is
required by insurance regulatory authorities)
A. It is agreed that in the event the Reinsurer fails to pay any
amount claimed to be due hereunder, the Reinsurer, at the
request of the Company, will submit to the jurisdiction of any
court of competent jurisdiction within the United States.
Nothing in this Article constitutes or should be understood
to constitute a waiver of the Reinsurer''s rights to commence
an action in any court of competent jurisdiction in the United
States, to remove an 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.
B. Further, pursuant to any statute of any state, territory or
district of the United States which makes provision therefor,
the Reinsurer hereby designates the party named in its
Interests and Liabilities Agreement, or if no party is named
therein, 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 Contract.
Article XXII - Agency Agreement
Associated International Insurance Company shall be deemed the
agent of the other reinsured companies for purposes of sending or
receiving notices required by the terms and conditions of this
Contract, and for purposes of remitting or receiving any monies
due any party.
Article XXIII - Intermediary (BRMA 23A)
E. W. Blanch W. Blanch Co. is hereby recognized as the
Intermediary negotiating this Contract 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 E. W. Blanch W. Blanch Co., Reinsurance
Services, 3500 West 80th Street, Minneapolis, Minnesota 55431.
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.
In Witness Whereof, the Company hereto by its duly authorized
representative has executed this Contract as of the date
undermentioned at:
Woodland Hills, California,this _______ day of _______________________________
199___.
__________________________________________________
___
Associated International Insurance Company
Calvert Insurance Company
Timberline Insurance Company
R:\97RIL\11340.DOC
External Third through Seventh Catastrophe Excess
Reinsurance Contract
Effective: January 1, 1997
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Hoboken, New Jersey
Timberline Insurance Company
Eugene, Oregon
and
any additional company established or acquired
by Associated International Insurance Company, Calvert Insurance
Company, Timberline Insurance Company or Gryphon Holdings, Inc.,
New York, New York,
to be included hereunder
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
External Third through Seventh Catastrophe Excess
Reinsurance Contract
Effective: January 1, 1997
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Hoboken, New Jersey
Timberline Insurance Company
Eugene, Oregon
and
any additional company established or acquired
by Associated International Insurance Company, Calvert Insurance
Company, Timberline Insurance Company or Gryphon Holdings, Inc.,
New York, New York,
to be included hereunder
Third Excess Catastrophe Reinsurance
(With "No Claims Bonus")
Reinsurers Participations
Gerling Global Reinsurance Corporation, U. S. Branch 1.6600000%
PMA Reinsurance Corporation 1.3300000
Renaissance Reinsurance Ltd. 22.4000000
Republic Western Insurance Company 3.5000000
St. Paul Reinsurance Management Corporation
(for St. Paul Fire and Marine Insurance Company) 4.0000000
Sphere Drake Management
(for Sphere Drake Insurance Company, Ltd.) 5.0000000
Through Swire Blanch - Australia
Reinsurance Australia Corporation Limited 11.5000000
Total 49.3900000%
part of
100% share
in the
interests
and
liabilities
of the
"Reinsurer"
Third Excess Catastrophe Reinsurance
(Without "No Claims Bonus")
Reinsurers Participations
First Excess and Reinsurance Corporation 5.6600000%
Insurance Corporation of Hannover, An Illinois Corporation 2.5000000
LaSalle Re Limited 10.0000000
Partner Re 7.6500000
Sydney Reinsurance Corporation 3.0000000
United Fire & Casualty Company .3000000
Through Swire Blanch - Australia
GIO Insurance Ltd. (trading as GIO Reinsurance) 13.0000000
Through Swire Blanch Europe
Societe Parisienne de Souscription
(for La Reunion Francaise) 3.5000000
Total 45.6100000%
part of
100% share
in the
interests
and
liabilities
of the
"Reinsurer"
Fourth Excess Catastrophe Reinsurance
(With "No Claims Bonus")
Reinsurers Participations
Folksamerica Reinsurance Company 1.5000000%
Nationwide Mutual Insurance Company 2.1700000
Renaissance Reinsurance Ltd. 25.0000000
St. Paul Reinsurance Management Corporation
(for St. Paul Fire and Marine Insurance Company) 4.0000000
Sphere Drake Management
(for Sphere Drake Insurance Company, Ltd.) 2.5000000
Total 35.1700000%
part of
100% share
in the
interests
and
liabilities
of the
"Reinsurer"
Fourth Excess Catastrophe Reinsurance
(Without "No Claims Bonus")
Reinsurers Participations
LaSalle Re Limited 5.0000000%
Liberty Mutual Insurance Company .7000000
Partner Re 13.0000000
United Fire & Casualty Company .3000000
Through Park International Limited
Mid Ocean Reinsurance Company Ltd. 4.0000000
Through Swire Blanch - Australia
GIO Insurance Ltd. (trading as GIO Reinsurance) 1.7500000
Through Swire Blanch Europe
Cie Transcontinentale de Reassurance 2.0000000
Europa Re 1.5000000
EXKO Excess Ruckversicherungs-Kontor GmbH
(for Capacity XL Cover) 2.0000000
Societe Parisienne de Souscription
(for La Reunion Francaise) 3.5000000
Through Denis M. Clayton & Co. Ltd.
Lloyd's Underwriters and Companies
Per Signing Schedule(s 26.0800000
Total 59.8300000%
part of
100% share
in the
interests
and
liabilities
of the
"Reinsurer"
Fifth Excess Catastrophe Reinsurance
Reinsurers Participations
Allmerica Re, A Division of The Hanover Insurance Company 1.0000000%
AXA Reinsurance Company 1.2000000
Cat Limited 27.5000000
Everest Reinsurance Company 9.5000000
First Excess and Reinsurance Corporation 2.5000000
Liberty Mutual Insurance Company .3500000
Nationwide Mutual Insurance Company 1.0000000
Partner Re 7.5000000
Renaissance Reinsurance Ltd. 12.5000000
St. Paul Reinsurance Management Corporation
(for St. Paul Fire and Marine Insurance Company) 1.5000000
Sphere Drake Management
(for Sphere Drake Insurance Company, Ltd.) 3.0000000
Through Park International Limited
Mid Ocean Reinsurance Company Ltd. 4.0000000
Through Swire Blanch Europe
Cie Transcontinentale de Reassurance 2.0000000
Munchener Ruckversicherungs-Gesellschaft 2.0000000
Singapore Reinsurance Corporation Limited .2500000
Societe Parisienne de Souscription
(for La Reunion Francaise) 2.0000000
Through Denis M. Clayton & Co. Ltd.
Lloyd's Underwriters and Companies
Per Signing Schedule(s 17.2000000
Total 95.0000000%
part of
100% share
in the
interests
and
liabilities
of the
"Reinsurer"
Sixth Excess Catastrophe Reinsurance
Reinsurers Participations
Cat Limited 26.5517241%
First Excess and Reinsurance Corporation .3413793
Folksamerica Reinsurance Company .6897240
Gerling Global Reinsurance Corporation, U. S. Branch .3224138
Great Lakes American Reinsurance Company .9482759
Liberty Mutual Insurance Company .1422414
Nationwide Mutual Insurance Company .7586207
Partner Re 14.2241379
Patriot Re Corporation (for Certain Underwriting Members of
Lloyd's) .5215517
Renaissance Reinsurance Ltd. 9.4827586
St. Paul Reinsurance Management Corporation
(for St. Paul Fire and Marine Insurance Company) 1.4224138
Sydney Reinsurance Corporation .9482759
United Fire & Casualty Company .1896552
Through Park International Limited
Mid Ocean Reinsurance Company Ltd. 1.2931034
Through Swire Blanch - Australia
Reinsurance Australia Corporation Limited 2.3706897
Through Swire Blanch Europe
Cie Transcontinentale de Reassurance .9482759
The Copenhagen Reinsurance Company Ltd. 3.4051724
Europa Re .9482759
Munchener Ruckversicherungs-Gesellschaft 2.8448276
Sirius International Insurance Corporation .8620690
Societe Parisienne de Souscription
(for La Reunion Francaise) 1.4224138
Through Denis M. Clayton & Co. Ltd.
Lloyd's Underwriters and Companies
Per Signing Schedule(s 24.3620000
Total 95.0000000%
part of
100% share
in the
interests
and
liabilities
of the
"Reinsurer"
Seventh Excess Catastrophe Reinsurance
Reinsurers Participations
Liberty Mutual Insurance Company 1.6000000%
Nationwide Mutual Insurance Company 2.5000000
Partner Re 15.0000000
Renaissance Reinsurance Ltd. 8.3500000
United Fire & Casualty Company .3000000
Through Park International Limited
Mid Ocean Reinsurance Company Ltd. 10.0000000
Through Swire Blanch - Australia
Reinsurance Australia Corporation Limited 2.0000000
Through Swire Blanch Europe
Cie Transcontinentale de Reassurance 2.0000000
The Copenhagen Reinsurance Company Ltd. 4.0000000
Munchener Ruckversicherungs-Gesellschaft 5.0000000
Singapore Reinsurance Corporation Limited .2500000
Through Denis M. Clayton & Co. Ltd.
Lloyd's Underwriters and Companies
Per Signing Schedule(s 44.0000000
Total 95.0000000%
part of
100% share
in the
interests
and
liabilities
of the
"Reinsurer"
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
Table of Contents
Article Page
I Classes of Business Reinsured 1
II Term 1
III Territory 2
IV Exclusions 2
V Retention and Limit 5
VI Other Reinsurance 5
VII Definitions 6
VIII Reinstatement 7
IX Loss Notices and Settlements 8
X Special Provisions 9
XI Salvage and Subrogation 9
XII Premium 9
XIII Offset (BRMA 36C) 10
XIV Access to Records (BRMA 1D) 10
XV Net Retained Lines (BRMA 32E) 10
XVI Errors and Omissions (BRMA 14F) 11
XVII Currency (BRMA 12A) 11
XVIII Taxes (BRMA 50C) 11
XIX Federal Excise Tax (BRMA 17A) 11
XX Unauthorized Reinsurers 12
XXI Insolvency 13
XXII Arbitration 14
XXIII Service of Suit (BRMA 49C) 15
XXIV Agency Agreement 15
XXV Intermediary (BRMA 23A) 15
Schedule A
External Third through Seventh Catastrophe Excess
Reinsurance Contract
Effective: January 1, 1997
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Hoboken, New Jersey
Timberline Insurance Company
Eugene, Oregon
and
any additional company established or acquired
by Associated International Insurance Company, Calvert Insurance
Company, Timberline Insurance Company or Gryphon Holdings, Inc.,
New York, New York,
to be included hereunder
(hereinafter referred to collectively as the "Company")
by
The Subscribing Reinsurer(s) Executing the
Interests and Liabilities Agreement(s)
Attached Hereto
(hereinafter referred to as the "Reinsurer")
Article I - Classes of Business Reinsured
By this Contract the Reinsurer agrees to reinsure the excess
liability which may accrue to the Company under its policies,
contracts and binders of insurance or reinsurance (hereinafter
called "policies") in force at the effective date hereof or
issued or renewed on or after that date, and classified by the
Company as Property business underwritten by Associated
International Insurance Company, Woodland Hills, California,
subject to the terms, conditions and limitations set forth herein
and in Schedule A attached to and forming part of this Contract.
Article II - Term
A. This Contract shall become effective on January 1, 1997, with
respect to losses arising out of loss occurrences commencing
on or after that date, and shall remain in force until
December 31, 1997, both days inclusive.
B. If this Contract expires while a loss occurrence covered
hereunder is in progress, the Reinsurer's liability hereunder
shall, subject to the other terms and conditions of this
Contract, be determined as if the entire loss occurrence had
occurred prior to the expiration of this Contract, provided
that no part of such loss occurrence is claimed against any
renewal or replacement of this Contract.
Article III - Territory
As respects the External Third and Fourth Excess Catastrophe
Reinsurance layers hereunder and subject to all other terms and
conditions of this Contract, this Contract shall apply to the
territorial limits of the Company's policies reinsured hereunder.
As respects the External Fifth, Sixth and Seventh Excess
Catastrophe Reinsurance layers hereunder and subject to all other
terms and conditions of this Contract, this Contract shall apply
to losses occurring anywhere within the State of California.
Article IV - Exclusions
A. This Contract does not apply to and specifically excludes the
following:
1. Loss or liability excluded under the provisions of
the "Pools, Associations and Syndicates Exclusion Clause"
attached to and forming part of this Contract.
2. Nuclear risks as defined in the "Nuclear Incident
Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)"
and the "Nuclear Incident Exclusion Clause - Physical
Damage - Reinsurance (Canada)" attached to and forming
part of this Contract.
3. All reinsurance assumed, with the exception of intra-
company reinsurance and specific insureds whose
reinsurance is written through their own captive company
and quoted by a non-related entity.
4. Risks of war, whether or not declared, invasion,
civil war, insurrection, rebellion, revolution or
confiscation by duly constituted governmental or civil
authority as excluded under a standard policy containing a
standard War Exclusion Clause.
5. Hail insurance or reinsurance covering growing,
drying or standing crops when written as such.
6. Flood when written as such; however, this exclusion
shall not apply to flood when included in Difference in
Conditions, Inland Marine and All Risk policies.
7. All armored car business except when written in
excess of $500,000.
8. Credit, financial or insolvency guarantees.
9. Livestock insurance or reinsurance when written as
such.
10. Third Party Bodily Injury and Property Damage
Liability, Medical Payments, Workers' Compensation,
Fidelity and Surety, whether written separately or as part
of a Multiple Peril policy. However, nothing herein
contained shall be construed as excluding liability for
damage to property in an insured's care, custody or
control or for which the insured may be liable.
11. Ocean Marine when written as such.
12. Aircraft, meaning direct damage to hulls insured
under Aircraft Hull policies, but not to exclude aircraft
hulls insured under regular Fire, Inland Marine and All
Risk policies (other than Aircraft Hull policies). In no
event shall any liability attach to the Reinsurer
hereunder in respect of aircraft while in flight or
taxiing.
13. Offshore drilling rigs.
14. Automobile risks insured under Automobile policies.
15. Boiler and Machinery when written as such.
16. Space and space related risks for the intention of
ignition of the launch vehicle which includes taxiing
within the launch site area and in flight.
17. Grain elevators.
18. Mechanical breakdowns when written as such.
19. Petrochemical risks and refineries.
20. Underground mining.
21. Inland Marine policies covering jewelers block and
motor truck cargo.
22. Mortgage Impairment insurance.
23. 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, insolvency fund, plan, pool, association, fund or
other arrangement, however 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.
24 Kidnap and Ransom.
25. Residual Value and Credit insurance.
26. Crop insurance.
27. Burglary and Theft when written as such.
28. Strike insurance.
29. Product impairment, recall and tampering.
30. Data processing companies whose sole purpose is to
provide data processing services to other companies which
include media exposures defined as material on which data
is to be or is already stored (i.e., disks, magnetic and
paper tapes, drums, cores and programs).
31. Transmission and distribution lines.
32. Mobile home parks.
33. Onshore drilling rigs.
34. Course of Construction risks covering dams, bridges,
tunnels, subways, construction work over water, or any
project involving water, unless the aforementioned
projects are incidental to the insured's total
construction project.
35. Rolling stock owned or operated by a railroad, but
this exclusion shall not apply to interests while
contained in buildings owned or leased by an insured.
36. Risks excluded under the provisions of the "Total
Insured Value Exclusion Clause" attached to and forming
part of this Contract.
37. Extra contractual obligations (i.e., any punitive,
exemplary, compensatory or consequential damages paid or
payable by the Company as a result of an action against it
by its insured or its insured's assignee, which action
alleges negligence or bad faith on the part of the Company
in handling a claim under a policy subject to this
Contract).
38. Loss in excess of policy limits (i.e., any amount
paid or payable by the Company in excess of its policy
limits, but otherwise within the terms of its policy, as a
result of an action against it by its insured or its
insured's assignee to recover damages the insured is
legally obligated to pay to a third party claimant because
of the Company's alleged or actual negligence or bad faith
in rejecting a settlement within policy limits, or in
discharging its duty to defend or prepare the defense in
the trial of an action against its insured, or in
discharging its duty to prepare or prosecute an appeal
consequent upon such an action).
B. Notwithstanding the foregoing, any exclusion set forth in
paragraph A (except subparagraphs 2, 3, 4, 6, 8, 11, 12, 13,
16, 23, 37 and 38) shall be waived automatically when, in the
opinion of the Company, the exposure excluded therein is
incidental to the principal exposure on the risk in question.
C. As regards business underwritten in the General E&S Division
of the Company:
1. Exclusions 15, 18, 34 and 35 of paragraph A shall be
waived.
2. Exclusion 36 (Total Insured Value) and Section B of
Exclusion 1 (Pools, Associations) of paragraph A shall be
waived except for risks with total insured values greater
than $300,000,000 in the State of California. This
exception contained in this paragraph only applies to
risks in the State of California.
3. Exclusion 14 (Automobile) of paragraph A shall be
waived as regards Automobile Floor Plans.
Article V - Retention and Limit
A. As respects each excess layer of reinsurance coverage provided
by this Contract, the Company shall retain and be liable for
the first amount of ultimate net loss, shown as "Company's
Retention" for that excess layer in Schedule A attached
hereto, arising out of each loss occurrence. The Reinsurer
shall then be liable (subject to the provisions of paragraph B
below), as respects each excess layer, for the amount by which
such ultimate net loss exceeds the Company's applicable
retention, but the liability of the Reinsurer under each
excess layer shall not exceed the amount, shown as
"Reinsurer's Per Occurrence Limit" for that excess layer in
Schedule A attached hereto, as respects any one loss
occurrence.
B. No claim shall be made under any excess layer of reinsurance
coverage provided by this Contract in any one loss occurrence
unless at least two risks insured or reinsured by the Company
are involved in such loss occurrence. "Risk" to be defined as
all the values at one location unless otherwise stated in the
Company's risk file but not less than all the values within
four walls. For purposes of this Article, the Company shall
be the sole judge of what constitutes one risk, except that in
no event shall a building and its contents be considered more
than one risk.
Article VI - Other Reinsurance
A. The Company shall be permitted to carry underlying excess
catastrophe reinsurance, recoveries under which shall inure
solely to the benefit of the Company and be entirely
disregarded in applying all of the provisions of this
Contract.
B. As regards DIC business, the Company shall purchase or be
deemed to have purchased inuring excess per risk and/or pro
rata facultative reinsurance to limit its ultimate net loss on
any one risk, each loss (exclusive of extra contractual
obligations) to $100,000 subject to the following occurrence
limits by layer of inuring excess per risk reinsurance:
Layer Limit Retention Occurrence Limit
1 2,400,000 100,000 7,500,000Per
Occurrence
2 2,500,000 2,500,000 10,000,000 Per
Occurrence
3 5,000,000 5,000,000 10,000,000 Per
Occurrence
C. As regards business underwritten in the General E&S division,
the Company shall be permitted to purchase inuring coverage as
follows:
1. West Coast earthquake incurred loss shall be ceded to
the DIC Excess Per Risk noted in paragraph B above.
2. As regards all other incurred loss, $9,500,000 excess
$500,000 per risk; subject to a per occurrence limit of
$20,000,000.
3. The only exception to subparagraph 1 above is Course
of Construction (COC) policies written in the General E&S
division. The California earthquake portions of those
policies are ceded 100% to the E&S treaty.
Article VII - Definitions
A. "Ultimate net loss" as used herein is defined as the sum or
sums (including litigation expenses, interest on judgments and
all other loss adjustment expenses, including a pro rata share
of the salaries and expenses of the Company's field employees
according to the time occupied adjusting the loss and expenses
of the Company's officials incurred in connection with the
loss, but excluding office expenses and salaries of the
Company's officials and any normal overhead charges) paid or
payable by the Company in settlement of claims and in
satisfaction of judgments rendered on account of such claims,
after deduction of all salvage, all recoveries and all claims
on inuring insurance or reinsurance, whether collectible or
not. Nothing herein shall be construed to mean that losses
under this Contract are not recoverable until the Company's
ultimate net loss has been ascertained.
B. The term "loss occurrence" shall mean the sum of all
individual losses directly occasioned by any one disaster,
accident or loss or series of disasters, accidents or losses
arising out of one event which occurs anywhere in the world
but limited in the United States of America and Canada to the
area of one state of the United States or province of Canada
and states or provinces contiguous thereto and to one another.
However, the duration and extent of any one "loss occurrence"
shall be limited to all individual losses sustained by the
Company occurring during any period of 168 consecutive hours
arising out of and directly occasioned by the same event,
except that the term "loss occurrence" shall be further
defined as follows:
1. As regards windstorm, hail, tornado, hurricane,
cyclone, including ensuing collapse and water damage, all
individual losses sustained by the Company occurring
during any period of 72 consecutive hours arising out of
and directly occasioned by the same event. However, the
event need not be limited to one state or province or
states or provinces contiguous thereto.
2. As regards riot, riot attending a strike, civil
commotion, vandalism and malicious mischief, all
individual losses sustained by the Company occurring
during any period of 72 consecutive hours within the area
of one municipality or county and the municipalities or
counties contiguous thereto arising out of and directly
occasioned by the same event. The maximum duration of
72 consecutive hours may be extended in respect of
individual losses which occur beyond such
72 consecutive hours during the continued occupation of an
assured's premises by strikers, provided such occupation
commenced during the aforesaid period.
3. As regards earthquake (the epicentre of which need
not necessarily be within the territorial confines
referred to in the introductory portion of this paragraph)
and fire following directly occasioned by the earthquake,
only those individual fire losses which commence during
the period of 168 consecutive hours may be included in the
Company's "loss occurrence."
4. As regards "freeze," only individual losses directly
occasioned by collapse, breakage of glass and water damage
(caused by bursting frozen pipes and tanks) may be
included in the Company's "loss occurrence."
For all "loss occurrences," the Company may choose the date
and time when any such period of consecutive hours commences,
provided that it is not earlier than the date and time of the
occurrence of the first recorded individual loss sustained by
the Company arising out of that disaster, accident or loss,
and provided that only one such period of
168 consecutive hours shall apply with respect to one event
except for those "loss occurrences" referred to in
subparagraphs 1 and 2 above where only one such period of
72 consecutive hours shall apply with respect to one event.
No individual losses occasioned by an event that would be
covered by 72 hours clauses may be included in any "loss
occurrence" claimed under the 168 hours provision.
C. "Net earned premium" as used herein is defined as the
Company's gross earned premium on the classes of business
subject to this Contract, less only the earned portion of
premiums, if any, ceded by the Company for reinsurance which
inures to the benefit of this Contract.
Article VIII - Reinstatement
A. In the event all or any portion of the reinsurance under any
excess layer of reinsurance coverage provided by this Contract
is exhausted by loss, the amount so exhausted shall be
reinstated immediately from the time the loss occurrence
commences hereon. For each amount so reinstated the Company
agrees to pay additional premium equal to the product of the
following:
1. The percentage of the occurrence limit for the excess
layer reinstated (based on the loss paid by the Reinsurer
under that excess layer); times
2. The earned reinsurance premium for the excess layer
reinstated for the term of this Contract (exclusive of
reinstatement premium).
B. Whenever the Company requests payment by the Reinsurer of any
loss under any excess layer hereunder, the Company shall
submit a statement to the Reinsurer of reinstatement premium
due the Reinsurer for that excess layer. If the earned
reinsurance premium for any excess layer for the term of this
Contract has not been finally determined as of the date of any
such statement, the calculation of reinstatement premium due
for that excess layer shall be based on the annual deposit
premium for that excess layer and shall be readjusted when the
earned reinsurance premium for that excess layer for the term
of this Contract has been finally determined. Any
reinstatement premium shown to be due the Reinsurer for any
excess layer as reflected by any such statement (less prior
payments, if any, for that excess layer) shall be payable by
the Company concurrently with payment by the Reinsurer of the
requested loss for that excess layer. Any return reinstatement
premium shown to be due the Company shall be remitted by the
Reinsurer as promptly as possible after receipt and
verification of the Company's statement.
C. Notwithstanding anything stated herein, the liability of the
Reinsurer under any excess layer of reinsurance coverage
provided by this Contract shall not exceed either of the
following:
1. The percentage, shown as "Coverage Percent" for that
excess layer in Schedule A attached hereto, of the amount,
shown as "Reinsurer's Per Occurrence Limit" for that
excess layer in Schedule A attached hereto, as respects
loss or losses arising out of any one loss occurrence; or
2. The percentage, shown as "Coverage Percent" for that
excess layer in Schedule A attached hereto, of the amount,
shown as "Reinsurer's Annual Limit" for that excess layer
in Schedule A attached hereto, in all during the term of
this Contract.
Article IX - Loss Notices and Settlements
A. Whenever losses sustained by the Company appear likely to
result in a claim hereunder, the Company shall notify the
Reinsurer, and the Reinsurer shall have the right to
participate in the adjustment of such losses at its own
expense.
B. All loss settlements made by the Company, provided they are
within the terms of this Contract, shall be binding upon the
Reinsurer, and the Reinsurer agrees to pay all amounts for
which it may be liable upon receipt of reasonable evidence of
the amount paid (or scheduled to be paid) by the Company.
Article X - Special Provisions
As respects loss or damage or costs or expenses arising from
asbestos or seepage and/or pollution and/or contamination, other
than contamination from smoke damage, the maximum sublimit shall
be $25,000 per risk, each loss, or so deemed. Nevertheless, this
does not preclude payment of the cost of removal of debris of
property damaged by a loss otherwise covered hereunder.
Article XI - Salvage and Subrogation
The Reinsurer shall be credited with salvage (i.e., reimbursement
obtained or recovery made by the Company, less the actual cost,
excluding salaries of officials and employees of the Company and
sums paid to attorneys as retainer, of obtaining such
reimbursement or making such recovery) on account of claims and
settlements involving reinsurance hereunder. Salvage thereon
shall always be used to reimburse the excess carriers in the
reverse order of their priority according to their participation
before being used in any way to reimburse the Company for its
primary loss. The Company hereby agrees to enforce its rights to
salvage or subrogation relating to any loss, a part of which loss
was sustained by the Reinsurer, and to prosecute all claims
arising out of such rights.
Article XII - Premium
A. As premium for each excess layer of reinsurance coverage
provided by this Contract, the Company shall pay the Reinsurer
the greater of the following:
1. The amount, shown as "Annual Minimum Premium" for
that excess layer in Schedule A attached hereto; or
2. An amount equal to the sum of the percentages shown
as "DIC" and "AOP" percentages for that excess layer in
Schedule A attached hereto, of the Company's net earned
premium for the DIC business and AOP business respectively
for the term of this Contract.
B. The Company shall pay the Reinsurer an annual deposit premium
for each excess layer of an amount, shown as "Annual Deposit
Premium" for that excess layer in Schedule A attached hereto,
in two equal installments of an amount, shown as "Semiannual
Deposit Premium" for that excess layer in Schedule A attached
hereto, on January 1 and July 1 of 1997.
C. Within 60 days after the expiration of this Contract, the
Company shall provide a report to the Reinsurer setting forth
the premium due hereunder for each excess layer, computed in
accordance with paragraph A, and any additional premium due
the Reinsurer or return premium due the Company for each such
excess layer shall be remitted promptly.
D. As respects the Third and/or Fourth Excess Catastrophe
reinsurance layers hereunder, in the event that no claims
arise under this Contract, certain reinsurers participating
hereunder on the Third and/or Fourth Excess Catastrophe
reinsurance layers shall pay the Company a no claims bonus
equal to 20.0% of the adjusted premium under this Contract
subject to the following:
1. The Company shall only be entitled to the no claims
bonus if this Contract and the prior and subsequent
renewals are loss free for a continuous period of three
years.
2. When such no claims bonus is calculated, it shall be
calculated on the premium for this Contract and for the
prior and subsequent renewals. Payment of the no claims
bonus by the reinsurers to the Company shall constitute a
commutation of this Contract and such payment once
effected shall constitute a full and final release of the
reinsurers from all liability hereunder.
3. Should the Reinsurer decline to offer a renewal of
this Contract at similar terms as expiring in relation to
the exposure presented, the no claims bonus shall be
calculated for the years actually reinsured subject to the
above provisions.
It is understood that these no claims bonus provisions shall
only apply to certain reinsurers hereunder participating on
the Third and/or Fourth Excess Catastrophe reinsurance layers.
The figures listed under "With `No Claims Bonus'" in
Schedule A attached to and forming part of this Contract shall
apply to such reinsurers. The figures listed under "Without
`No Claims Bonus'" in Schedule A attached to and forming part
of this Contract shall apply to the remaining reinsurers on
those layers.
Article XIII - Offset (BRMA 36C)
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 Contract. 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 XIV - Access to Records (BRMA 1D)
The Reinsurer or its designated representatives shall have access
at any reasonable time to all records of the Company which
pertain in any way to this reinsurance.
Article XV - Net Retained Lines (BRMA 32E)
A. This Contract applies only to that portion of any policy which
the Company retains net for its own account (prior to
deduction of any underlying reinsurance specifically permitted
in this Contract), and in calculating the amount of any loss
hereunder and also in computing the amount or amounts in
excess of which this Contract attaches, only loss or losses in
respect of that portion of any policy which the Company
retains net for its own account shall be included.
B. The amount of the Reinsurer's liability hereunder in respect
of any loss or losses shall not be increased by reason of the
inability of the Company to collect from any other
reinsurer(s), whether specific or general, any amounts which
may have become due from such reinsurer(s), whether such
inability arises from the insolvency of such other
reinsurer(s) or otherwise.
Article XVI - Errors and Omissions (BRMA 14F)
Inadvertent delays, errors or omissions made in connection with
this Contract or any transaction hereunder shall not relieve
either party from any liability which would have attached had
such delay, error or omission not occurred, provided always that
such error or omission is rectified as soon as possible after
discovery.
Article XVII - Currency (BRMA 12A)
A. Whenever the word "Dollars" or the "$" sign appears in this
Contract, they shall be construed to mean United States
Dollars and all transactions under this Contract shall be in
United States Dollars.
B. Amounts paid or received by the Company in any other currency
shall be converted to United States Dollars at the rate of
exchange at the date such transaction is entered on the books
of the Company.
Article XVIII - Taxes (BRMA 50C)
In consideration of the terms under which this Contract 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, the District of Columbia or Canada.
Article XIX - Federal Excise Tax (BRMA 17A)
(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 XX - Unauthorized Reinsurers
A. If the Reinsurer is unauthorized in any state of the United
States of America or the District of Columbia, the Reinsurer
agrees to fund its share of the Company's ceded United States
outstanding loss and loss adjustment expense reserves by:
1. Clean, irrevocable and unconditional letters of
credit issued and confirmed, if confirmation is required
by the insurance regulatory authorities involved, by a
bank or banks meeting the NAIC Securities Valuation Office
credit standards for issuers of letters of credit and
acceptable to said insurance regulatory authorities;
and/or
2. Escrow accounts for the benefit of the Company;
and/or
3. Cash advances;
if, without such funding, a penalty would accrue to the
Company on any financial statement it is required to file with
the insurance regulatory authorities involved. The Reinsurer,
at its sole option, may fund in other than cash if its method
and form of funding are acceptable to the insurance regulatory
authorities involved.
B. If the Reinsurer is unauthorized in any province or
jurisdiction of Canada, the Reinsurer agrees to fund 115% of
its share of the Company's ceded Canadian outstanding loss and
loss adjustment expense reserves by:
1. A clean, irrevocable and unconditional letter of
credit issued and confirmed, if confirmation is required
by the insurance regulatory authorities involved, by a
Canadian bank or banks meeting the NAIC Securities
Valuation Office credit standards for issuers of letters
of credit and acceptable to said insurance regulatory
authorities, for no more than 15/115ths of the total
funding required; and/or
2. Cash advances for the remaining balance of the
funding required;
if, without such funding, a penalty would accrue to the
Company on any financial statement it is required to file with
the insurance regulatory authorities involved.
C. With regard to funding in whole or in part by letters of
credit, it is agreed that each letter of credit will be in a
form acceptable to insurance regulatory authorities involved,
will be issued for a term of at least one year and will
include an "evergreen clause," which automatically extends the
term for at least one additional year at each expiration date
unless written notice of non-renewal is given to the Company
not less than 30 days prior to said expiration date. The
Company and the Reinsurer further agree, notwithstanding
anything to the contrary in this Contract, that said letters
of credit may be drawn upon by the Company or its successors
in interest at any time, without diminution because of the
insolvency of the Company or the Reinsurer, but only for one
or more of the following purposes:
1. To reimburse itself for the Reinsurer's share of
losses and/or loss adjustment expense paid under the terms
of policies reinsured hereunder, unless paid in cash by
the Reinsurer;
2. To reimburse itself for the Reinsurer's share of any
other amounts claimed to be due hereunder, unless paid in
cash by the Reinsurer;
3. To fund a cash account in an amount equal to the
Reinsurer's share of any ceded outstanding loss and loss
adjustment expense reserves funded by means of a letter of
credit which is under non-renewal notice, if said letter
of credit has not been renewed or replaced by the
Reinsurer 10 days prior to its expiration date;
4. To refund to the Reinsurer any sum in excess of the
actual amount required to fund the Reinsurer's share of
the Company's ceded outstanding loss and loss adjustment
expense reserves, if so requested by the Reinsurer.
In the event the amount drawn by the Company on any letter of
credit is in excess of the actual amount required for C(1) or
C(3), or in the case of C(2), the actual amount determined to
be due, the Company shall promptly return to the Reinsurer the
excess amount so drawn.
Article XXI - Insolvency
A. In the event of the insolvency of one or more of the reinsured
companies, this reinsurance shall be payable directly to the
company 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 without diminution because of the insolvency of
the company or because the liquidator, receiver, conservator
or statutory successor of the company 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 shall give written notice to the Reinsurer of the
pendency of a claim against the company 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 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 as part of the
expense of conservation or liquidation to the extent of a pro
rata share of the benefit which may accrue to the company
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 Contract as though such expense had been
incurred by the company.
C. It is further understood and agreed that, in the event of the
insolvency of one or more of the reinsured companies, the
reinsurance under this Contract shall be payable directly by
the Reinsurer to the company or to its liquidator, receiver or
statutory successor, except as provided by Section 4118(a) of
the New York Insurance Law or except (1) where this Contract
specifically provides another payee of such reinsurance in the
event of the insolvency of the company or (2) where 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.
Article XXII - Arbitration
A. As a condition precedent to any right of action hereunder, in
the event of any dispute or difference of opinion hereafter
arising with respect to this Contract, it is hereby mutually
agreed that such dispute or difference of opinion shall be
submitted to arbitration. One Arbiter shall be chosen by the
Company, the other by the Reinsurer, and an Umpire shall be
chosen by the two Arbiters before they enter upon arbitration,
all of whom shall be active or retired disinterested executive
officers of insurance or reinsurance companies or Lloyd's
London Underwriters. In the event that either party should
fail to choose an Arbiter within 30 days following a written
request by the other party to do so, the requesting party may
choose two Arbiters who shall in turn choose an Umpire before
entering upon arbitration. If the two Arbiters fail to agree
upon the selection of an Umpire within 30 days following their
appointment, each Arbiter shall nominate three candidates
within 10 days thereafter, two of whom the other shall
decline, and the decision shall be made by drawing lots.
B. Each party shall present its case to the Arbiters within 30
days following the date of appointment of the Umpire. The
Arbiters shall consider this Contract as an honorable
engagement rather than merely as a legal obligation and they
are relieved of all judicial formalities and may abstain from
following the strict rules of law. The decision of the
Arbiters shall be final and binding on both parties; but
failing to agree, they shall call in the Umpire and the
decision of the majority shall be final and binding upon both
parties. Judgment upon the final decision of the Arbiters may
be entered in any court of competent jurisdiction.
C. If more than one reinsurer is involved in the same dispute,
all such reinsurers shall 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 one party,
provided, however, that nothing herein 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 participating under the terms of this
Contract from several to joint.
D. Each party shall bear the expense of its own Arbiter, and
shall jointly and equally bear with the other the expense of
the Umpire and of the arbitration. In the event that the two
Arbiters are chosen by one party, as above provided, the
expense of the Arbiters, the Umpire and the arbitration shall
be equally divided between the two parties.
E. Any arbitration proceedings shall take place at Woodland
Hills, California, unless otherwise mutually agreed.
Article XXIII - Service of Suit (BRMA 49C)
(Applicable if the Reinsurer is not domiciled in the United
States of America, and/or is not authorized in any State,
Territory or District of the United States where authorization is
required by insurance regulatory authorities)
A. It is agreed that in the event the Reinsurer fails to pay any
amount claimed to be due hereunder, the Reinsurer, at the
request of the Company, will submit to the jurisdiction of any
court of competent jurisdiction within the United States.
Nothing in this Article constitutes or should be understood to
constitute a waiver of the Reinsurer's rights to commence an
action in any court of competent jurisdiction in the United
States, to remove an 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.
B. Further, pursuant to any statute of any state, territory or
district of the United States which makes provision therefor,
the Reinsurer hereby designates the party named in its
Interests and Liabilities Agreement, or if no party is named
therein, 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 Contract.
Article XXIV - Agency Agreement
Associated International Insurance Company shall be deemed the
agent of the other reinsured companies for purposes of sending or
receiving notices required by the terms and conditions of this
Contract, and for purposes of remitting or receiving any monies
due any party.
Article XXV - Intermediary (BRMA 23A)
E. W. Blanch Co. is hereby recognized as the Intermediary
negotiating this Contract 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 E. W. Blanch Co., Reinsurance Services, 3500 West 80th
Street, Minneapolis, Minnesota 55431. 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.
In Witness Whereof, the Company by its duly authorized
representative has executed this Contract as of the date
undermentioned at:
Woodland Hills, California,this _______ day of _______________________________
199___.
__________________________________________________
___
Associated International Insurance Company
Calvert Insurance Company
Timberline Insurance Company
Schedule A
External Third through Seventh Catastrophe Excess
Reinsurance Contract
Effective: January 1, 1997
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Hoboken, New Jersey
Timberline Insurance Company
Eugene, Oregon
and
any additional company established or acquired
by Associated International Insurance Company, Calvert Insurance Company,
Timberline Insurance Company or Gryphon Holdings, Inc., New York, New York,
to be included hereunder
<TABLE>
Third Excess Fourth Excess Fifth Sixth Seventh
Excess Excess Excess
<CAPTION>
With "No Without With "No Without
Claims "No Claims Claims "No Claims
Bonus" Bonus" Bonus" Bonus"
<S> <C> <C> <C> <C> <C> <C> <C>
Company's $17,500,0 $17,500,00 $25,000,00 $25,000,00 $40,000,00 $60,000,00 $118,000,0
Retention 00 0 0 0 0 0 00
Reinsurer's Per $7,500,00 $7,500,000 $15,000,00 $15,000,00 $20,000,00 $58,000,00 $20,000,00
Occurrence Limit 0 0 0 0 0 0
Reinsurer's $15,000,0 $15,000,00 $30,000,00 $30,000,00 $40,000,00 $116,000,0 $40,000,00
Annual Limit 00 0 0 0 0 00 0
Annual Minimum $1,230,00 $1,080,000 $1,830,000 $1,740,000 $1,760,000 $3,480,000 $880,000
Premium 0
<CAPTION>
Third Excess Fourth Excess Fifth Sixth Seventh
Excess Excess Excess
With "No Without With "No Without
Claims "No Claims Claims "No Claims
Bonus" Bonus" Bonus" Bonus"
<S> <C> <C> <C> <C> <C> <C> <C>
Rate-DIC/CA EQ 4.110% 3.609% 6.115% 5.813% 5.881% 11.628% 2.941%
Business "DIC"
Rate-General E&S .878% .878% 1.313% 1.313% 1.277% 2.492% .629%
Business "AOP"
Annual Deposit $1,537,50 $1,350,000 $2,287,500 $2,200,000 $2,200,000 $4,350,000 $1,100,000
Premium 0
Semiannual $786,750 $675,000 $1,143,750 $1,100,000 $1,100,000 $2,175,000 $550,000
Deposit Premium
</TABLE>
The figures listed above for each excess layer shall apply to each Subscribing
Reinsurer in the percentage share for that excess layer as expressed in the
Interests and Liabilities Agreement attached hereto.
POOLS, ASSOCIATIONS & SYNDICATES EXCLUSION CLAUSE
Section A:
Excluding:
(a) All business derived directly or indirectly from any
Pool, Association or Syndicate which maintains its own
reinsurance facilities.
(b) Any Pool or Scheme (whether voluntary or mandatory)
formed after March 1, 1968 for the purpose of insuring
property whether on a country-wide basis or in respect of
designated areas. This exclusion shall not apply to so-
called Automobile Insurance Plans or other Pools formed to
provide coverage for Automobile Physical Damage.
Section B:
It is agreed that business written by the Company for the
same perils, which is known at the time to be insured by, or in
excess of underlying amounts placed in the following Pools,
Associations or Syndicates, whether by way of insurance or
reinsurance, is excluded hereunder:
Industrial Risk Insurers,
Associated Factory Mutuals,
Improved Risk Mutuals,
Any Pool, Association or Syndicate formed for the purpose of
writing
Oil, Gas or Petro-Chemical Plants and/or Oil or Gas
Drilling Rigs,
United States Aircraft Insurance Group,
Canadian Aircraft Insurance Group,
Associated Aviation Underwriters,
American Aviation Underwriters.
Section B does not apply:
(a) Where The Total Insured Value over all interests of
the risk in question is less than $300,000,000.
(b) To interests traditionally underwritten as Inland
Marine or stock and/or contents written on a blanket
basis.
(c) To Contingent Business Interruption, except when the
Company is aware that the key location is known at the
time to be insured in any Pool, Association or Syndicate
named above, other than as provided for under Section
B(a).
(d) To risks as follows:
Offices, Hotels, Apartments, Hospitals, Educational
Establishments, Public Utilities (other than railroad
schedules) and builder's risks on the classes of risks
specified in this subsection (d) only.
Where this clause attaches to Catastrophe Excesses, the
following Section C is added:
Nevertheless the Reinsurer specifically agrees that
liability accruing to the Company from its participation in:
(1) The following so-called "Coastal Pools":
Alabama Insurance Underwriting Association
Florida Windstorm Underwriting Association
Louisiana Insurance Underwriting Association
Mississippi Insurance Underwriting Association
North Carolina Insurance Underwriting Association
South Carolina Windstorm and Hail Underwriting
Association
Texas Catastrophe Property Insurance Association
AND
(2) All "Fair Plan" business
for all perils otherwise protected hereunder shall not be
excluded, except, however, that this reinsurance does not include
any increase in such liability resulting from:
(i) The inability of any other participant in such
"Coastal Pool" or "Fair Plan" to meet its liability.
(ii) Any claim against such "Coastal Pool" or "Fair
Plan" or any participant therein, including the
Company, whether by way of subrogation or otherwise,
brought by or on behalf of any insolvency fund (as
defined in the Insolvency Fund Exclusion Clause
incorporated in this Contract).
TOTAL INSURED VALUE EXCLUSION CLAUSE
It is the mutual intention of the parties to exclude risks, other
than Offices, Hotels, Apartments, Hospitals, Educational
Establishments and Public Utilities (except Railroad Schedules),
and Builders Risks on the above classes, where at the time of
cession, the Total Insured Value over all interests exceeds
$300,000,000. However, the Company shall be protected hereunder,
subject to the other terms and conditions of this Contract, if
subsequent to cession being made, the Company becomes acquainted
with the true facts of the case and discovers that the mutual
intention has been inadvertently breached; on condition that the
Company shall at the first opportunity, and certainly by next
anniversary of the original policy, exclude the risk in question.
It is agreed that this mutual intention does not apply to
Contingent Business Interruption or to interests traditionally
underwritten as Inland Marine or to Stock and/or Contents written
on a blanket basis except where the Company is aware that the
Total Insured Value of $300,000,000 is already exceeded for
buildings, machinery, equipment and direct use and occupancy at
the key location.
Notwithstanding anything contained herein to the contrary, it is
the mutual intention of the parties in respect of Bridges and
Tunnels to exclude such risks where the Total Insured Value over
all interests exceeds $300,000,000.
It is understood and agreed that this Clause shall not apply
hereunder where the Company writes 100% of the risk.
R:\97RIL\11873.DOC
Aggregate Excess of Loss
Reinsurance Contract
Effective: January 1, 1997
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Philadelphia, Pennsylvania
Timberline Insurance Company
Eugene Oregon
through the auspices of
Gryphon Insurance Group, Inc.
New York, New York
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
Aggregate Excess of Loss
Reinsurance Contract
Effective: January 1, 1997
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Philadelphia, Pennsylvania
Timberline Insurance Company
Eugene Oregon
through the auspices of
Gryphon Insurance Group, Inc.
New York, New York
Reinsurer Participation
Scandinavian Reinsurance Company, Ltd. 100.0%
Total 100.0%
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
Table of Contents
Article Page
I Business Reinsured 1
II Term 1
III Territory (BRMA 51A) 2
IV Exclusions 2
V Retention and Limit 3
VI Definitions 3
VII Other Reinsurance 5
VIII Loss Notices and Settlements 5
IX Salvage and Subrogation 6
X Reinsurance Premium 6
XI Late Payments 7
XII Experience Account 8
XIII Commutation 9
XIV Offset (BRMA 36C) 10
XV Access to Records (BRMA 1D) 10
XVI Net Retained Lines (BRMA 32B) 10
XVII Errors and Omissions (BRMA 14F) 11
XVIII Currency (BRMA 12A) 11
XIX Taxes (BRMA 50C) 11
XX Insolvency 11
XXI Arbitration 12
XXII Service of Suit (BRMA 49C) 13
XXIII Agency Agreement 14
XXIV Intermediary (BRMA 23A) 14
Aggregate Excess of Loss
Reinsurance Contract
Effective: January 1, 1997
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Philadelphia, Pennsylvania
Timberline Insurance Company
Eugene Oregon
through the auspices of
Gryphon Insurance Group, Inc.
New York, New York
(hereinafter referred to collectively as the "Company")
by
The Subscribing Reinsurer(s) Executing the
Interests and Liabilities Agreement(s)
Attached Hereto
(hereinafter referred to as the "Reinsurer")
Article I - Business Reinsured
A. By this Contract the Reinsurer agrees to reinsure and/or
indemnify the Company for the net excess liability which may
accrue to the Company during each accident year (as
hereinafter defined) under its policies, contracts and binders
of insurance or reinsurance (hereinafter called "policies") in
force on the effective date hereof, issued or renewed on or
after that date, for all business written by the Company
(direct and assumed), subject to the terms, conditions and
limitations hereinafter set forth.
B. Losses arising under policies covered hereunder shall be
allocated to an accident year according to the instructions
for compiling the Company's Annual Statement as filed with the
Company's state of domicile.
Article II - Term
A. This Contract shall become effective on January 1, 1997, with
respect to losses occurring during accident years commencing
on or after that date, and shall remain in force until
December 31, 1999, both days inclusive. Notwithstanding the
foregoing, in the event any state auditor determines this
Contract is not in compliance with any rule or regulation
pertaining to this reinsurance, this Contract may be rescinded
by the Company with not less than 30 days prior notice to the
Reinsurer by certified mail.
B. Either party may terminate this Contract at the end of any
accident year by giving the other party not less than 90 days
prior notice by certified mail.
Article III - Territory (BRMA 51A)
The territorial limits of this Contract shall be identical with
those of the Company's policies.
Article IV - Exclusions
This Contract does not apply to and specifically excludes the
following:
1. Reinsurance assumed by the Company (unless an assumed
program has been specifically declared and accepted by the
reinsurers of the Company's underlying per event
reinsurance program), except inter-company reinsurance
between any member companies of Gryphon Insurance Group,
Inc.
2. Financial guarantee and insolvency.
3. Business written by the Company on a co-indemnity
basis where the Company is not an equal or controlling
carrier.
4. Nuclear risks as defined in the "Nuclear Incident
Exclusion Clause - Physical Damage -Reinsurance (U.S.A.),"
the "Nuclear Incident Exclusion Clause - Physical Damage -
Reinsurance (Canada)," the "Nuclear Incident Exclusion
Clause - Liability - Reinsurance (U.S.A.)" and the
"Nuclear Incident Exclusion Clause - Liability -
Reinsurance (Canada)" attached to and forming part of this
Contract.
5. Liability as a member, subscriber or reinsurer of any
Pool, Syndicate or Association, which is not underwritten
or controlled by the Company. However, this exclusion
shall not apply to Assigned Risk Plans or similar plans.
6. 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, insolvency fund, plan, pool, association, fund or
other arrangement, however 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.
Article V - Retention and Limit
A. No claim shall be made under this Contract for any accident
year unless and until the Company shall have first incurred an
amount of ultimate net loss on business covered during the
accident year in excess of 55% of its net earned premium for
the accident year. The Reinsurer shall then be liable for the
amount by which the Company's ultimate net loss exceeds its
retention, but the liability of the Reinsurer shall not exceed
an amount of ultimate net loss equal to 300% of the
reinsurance premium hereunder for any one accident year, nor
shall it exceed an amount of ultimate net loss equal to 200%
of the reinsurance premium hereunder for the term of this
Contract as respects all loss subject to this Contract.
B. Notwithstanding paragraph A above, in the event this Contract
is commuted at the Company's option in accordance with Article
XIII, the aggregate limit provided hereunder shall be reduced
as follows:
1. If this Contract is terminated on December 31, 1997,
then the aggregate limit shall be reduced to 150% of the
reinsurance premium hereunder for the 12-month term of
this Contract;
2. If this Contract is terminated on December 31, 1998,
then the aggregate limit shall be reduced to 160% of the
reinsurance premium hereunder for the 24-month term of
this Contract.
C. It is also agreed that should the sum of the incurred losses
subject to this Contract in the first and second accident
years exceed $22,500,000, the Company's retention in the third
accident year shall be increased to 60% of the Company's net
earned premium for the third accident year.
D. As respects business subject to this Contract, in the event
that the subject net earned premium volume for the Property
Difference in Conditions book is below 15% of the total
subject net premium volume, then the Company's retention shall
be increased by 0.9% for every 1% that the Property Difference
in Conditions percentage share is below 15%.
E. With respect to business subject hereunder, the maximum policy
limit (except statutory) with respect to any one coverage, any
one policy shall be deemed not to exceed $5,000,000, with
limits written in excess of this amount deemed reinsured
elsewhere.
Article VI - Definitions
A. "Net excess liability" as used herein shall mean those amounts
payable by the Company as defined in the ultimate net loss
definition set forth in paragraph B below.
B. "Ultimate net loss" as used herein is defined as the sum or
sums (including loss in excess of policy limits, extra
contractual obligations, prejudgment interest if included as
part of an award or judgment and any loss adjustment expense,
as herein after defined) paid or payable by the Company in
settlement of claims and in satisfaction of judgments rendered
on account of such claims, after deduction of all salvage, all
recoveries and all claims on inuring insurance or reinsurance,
whether collectible or not. Nothing herein shall be construed
to mean that losses under this Contract are not recoverable
until the Company's ultimate net loss has been ascertained.
Notwithstanding anything to the contrary contained in this
Contract, in arriving at the ultimate net loss of the Company
hereunder, property catastrophe losses shall be limited to
$7,500,000 per event and in the aggregate for any one accident
year but under no circumstances shall property catastrophe
losses be more than $15,000,000 for the term of this Contract.
For purposes hereof, "property catastrophe loss" shall be
defined as net loss and allocated loss adjustment expense,
including incurred but not reported losses, on business
subject to this Contract arising from insured events
identified and numbered as property catastrophe losses by the
Property Claims Service, occurring during the term of this
Contract.
C. "Loss in excess of policy limits" and "extra contractual
obligations" as used herein shall mean:
1. "Loss in excess of policy limits" shall mean 90% of
any amount paid or payable by the Company under a policy
ceded to this Contract in excess of its policy limits, but
otherwise within the terms of its policy, as a result of
an action against it by its insured or its insured's
assignee to recover damages the insured is legally
obligated to pay to a third party claimant because of the
Company's alleged or actual negligence or bad faith in
rejecting a settlement within policy limits, or in
discharging its duty to defend or prepare the defense in
the trial of an action against its insured, or in
discharging its duty to prepare or prosecute an appeal
consequent upon such an action.
2. "Extra contractual obligations" shall mean 90% of any
punitive, exemplary, compensatory or consequential
damages, other than loss in excess of policy limits, paid
or payable by the Company under a policy ceded to this
Contract as a result of an action against it by its
insured, its insured's assignee or a third party claimant,
which action alleges negligence or bad faith on the part
of the Company in handling a claim under a policy subject
to this Contract.
Any loss in excess of policy limits or extra contractual
obligation shall be deemed to have occurred on the same date
as the loss covered or alleged to be covered under the policy.
Notwithstanding anything stated herein, this Contract shall
not apply to any loss incurred by the Company as a result of
any fraudulent and/or criminal act by any officer or director
of the Company acting individually or collectively or in
collusion with an individual or corporation or any other
organization or party involved in the presentation, defense or
settlement of any claim covered hereunder
D. "Loss adjustment expense" as used herein shall mean expenses
allocable to the investigation, defense and/or settlement of
specific claims, including 1) prejudgment interest, unless
included as part of the award or judgment; 2) post-judgment
interest; and 3) legal expenses and costs incurred in
connection with coverage questions and legal actions connected
thereto; but not including office expenses or salaries of the
Company's regular employees, except that allocated outside
costs of the Company's or RA&MCO's salaried adjusters shall be
included. Claim costs shall also be included which are
incurred by RA&MCO and billed hourly to the Company in
accordance with its management agreement.
With respect to legal expenses and costs incurred in direct
connection with declaratory judgment actions brought to
resolve policy language coverage disputes between the Company
and its insured, such expenses shall, for purposes of this
Contract, not exceed an amount equal to the applicable limit
of the policy or policies involved unless agreed to by the
Reinsurer.
E. "Accident year" as used herein shall mean the period from
January 1, 1997 to December 31, 1997, both days inclusive, and
each respective 12-month period thereafter that this Contract
remains in force.
F. "Net earned premium" as used herein is defined as gross earned
premium of the Company for the classes of business reinsured
hereunder, less the earned portion of premiums ceded by the
Company for reinsurance which inures to the benefit of this
Contract or increases the Company's available capacity.
Article VII - Other Reinsurance
A. Notwithstanding the provisions of paragraph E of Article V,
the Company is permitted, but not required, to purchase other
facultative and/or other treaty reinsurance on business
subject to this Contract. Premiums ceded by the Company for
reinsurance which inures to the benefit of this Contract or
increases the Company' s available capacity shall be deducted
in determining subject premium hereunder as provided in
Article X.
B. It is agreed by the Company that inuring reinsurance
agreements in force at the inception of this Contract shall
remain in force during the term of this Contract, or so
deemed.
Article VIII - Loss Notices and Settlements
A. Whenever losses sustained by the Company appear likely to
result in a claim hereunder, the Company shall notify the
Reinsurer, and the Reinsurer shall have the right to
participate in the adjustment of such losses at its own
expense.
B. All loss settlements made by the Company, provided they are
within the terms of this Contract, shall be binding upon the
Reinsurer, and the Reinsurer agrees to pay all amounts for
which it may be liable upon receipt of reasonable evidence of
the amount paid (or scheduled to be paid) by the Company.
C. Within 60 days after the end of each calendar quarter during
or after the end of each accident year, the Company shall
report to the Reinsurer its aggregate ultimate net loss paid
for the accident year as of the end of the quarter. If the
aggregate ultimate net loss paid exceeds an amount equal to
the Company's retention hereunder for the accident year based
on an estimate of the Company's net earned premium for the
accident year, the Reinsurer shall pay its portion of such
estimated excess (net of any prior payments for the accident
year). However, any such payment by the Reinsurer shall be
provisional, subject to adjustment when the Company's actual
ultimate net loss and net earned premium for the accident year
have been determined.
Article IX - Salvage and Subrogation
The Reinsurer shall be credited with salvage (i.e., reimbursement
obtained or recovery made by the Company, less the actual cost,
excluding salaries of officials and employees of the Company and
sums paid to attorneys as retainer, of obtaining such
reimbursement or making such recovery) on account of claims and
settlements involving reinsurance hereunder. Salvage thereon
shall always be used to reimburse the excess carriers in the
reverse order of their priority according to their participation
before being used in any way to reimburse the Company for its
primary loss. The Company hereby agrees to enforce its rights to
salvage or subrogation relating to any loss, a part of which loss
was sustained by the Reinsurer, and to prosecute all claims
arising out of such rights.
Article X - Reinsurance Premium
A. As premium for the reinsurance provided hereunder, the Company
shall pay the Reinsurer 7.0% of its net earned premium for
each accident year covered under this Contract.
B. As respects the first accident year, the Company shall pay the
Reinsurer an annual minimum and deposit premium of $7,500,000,
payable in equal semiannual installments of $3,750,000 at
January 1 and July 1, 1997. As respects the second and third
accident years, the annual minimum and deposit premium shall
be mutually agreed between the Company and Reinsurer.
C. Within 60 days after the end of each accident year, the
Company shall provide a report to the Reinsurer setting forth
the premium due hereunder, computed in accordance with
paragraph A, and if the premium so computed is greater than
the previously paid minimum and deposit premium, the balance
shall be remitted by the Company with its report.
Article XI - Late Payments
A. It is understood and agreed that the provisions of this
Article shall not be implemented unless specifically invoked,
in writing, by one of the parties to this Contract.
B. In the event any premium, loss or other payment due either
party is not received by the intermediary named in Article
XXIV (hereinafter referred to as the "Intermediary") by the
payment due date, the party to whom payment is due may, by
notifying the Intermediary in writing, require the debtor
party to pay, and the debtor party agrees to pay, an interest
penalty on the amount past due calculated for each such
payment on the last business day of each month as follows:
1. The number of full days which have expired since the
due date or the last monthly calculation, whichever the
lesser; times
2. 1/365th of the six month (or nearest thereto) U.S.
Treasury Bill rate, as quoted in The Wall Street Journal
on the first business day of the month for which the
calculation is being made; times
3. The amount past due, including accrued interest.
It is agreed that interest shall accumulate until payment of
the original amount due plus interest penalties have been
received by the Intermediary.
C. The establishment of the due date shall, for purposes of this
Article, be determined as follows:
1. As respects the payment of routine deposits and
premiums due the Reinsurer, the due date shall be as
provided for in the applicable section of this Contract.
In the event a due date is not specifically stated for a
given payment, it shall be deemed due 45 days after the
date of transmittal by the Intermediary of the initial
billing for each such payment.
2. Any claim or loss payment due the Company hereunder
shall be deemed due five business days following receipt
by the applicable Subscribing Reinsurer of written
notification that payment has been received from
Subscribing Reinsurers constituting at least 662/3% of the
interests and liabilities of all Subscribing Reinsurers
participating under the applicable layer of this Contract,
who are active as of the due date; it being understood
that said date shall not be later than 75 days from the
date of transmittal by the Intermediary of the initial
billing for each such payment.
3. As respects any payment, adjustment or return due
either party not otherwise provided for in subparagraphs 1
and 2 of paragraph C above, the due date shall be deemed
as five business days following receipt of written
notification that the provisions of this Article have been
invoked.
For purposes of interest calculations only, amounts due
hereunder shall be deemed paid upon receipt by the
Intermediary.
D. Nothing herein shall be construed as limiting or prohibiting
1) a Subscribing Reinsurer from contesting the validity of any
claim, or from participating in the defense or control of any
claim or suit; or 2) either party from contesting the validity
of any payment, or from initiating any arbitration or other
proceeding in accordance with the provisions of this Contract.
If the debtor party prevails in an arbitration or other
proceeding, then any interest penalties due hereunder on the
amount in dispute shall be null and void. If the debtor party
loses in such proceeding, then the interest penalty on the
amount determined to be due hereunder shall be calculated in
accordance with the provisions set forth above unless
otherwise determined by such proceedings. If a debtor party
advances payment of any amount it is contesting, and proves to
be correct in its contestation, either in whole or in part,
the other party shall reimburse the debtor party for any such
excess payment made plus interest on the excess amount
calculated in accordance with this Article.
E. As provided under Article VIII, it is understood and agreed
that the Company shall furnish the Reinsurer with usual and
customary claim information and nothing herein shall be
construed as limiting or prohibiting a Subscribing Reinsurer
from requesting additional information that it may deem
necessary.
F. As respects subparagraph 2 of paragraph C above, a Subscribing
Reinsurer shall be deemed not to be active when it 1) ceases
assuming new or renewal reinsurance business through the
Intermediary; 2) is declared insolvent, or put in liquidation,
conservatorship or rehabilitation by a competent regulatory
authority or court; 3) is declared insolvent, or is the
subject of an administrative order or enters provisional
liquidation and/or liquidation; or 4) has a reduction in its
statutory surplus or shareholders' funds of 50% or more from
its statutory surplus or shareholders' funds as of the
effective date of this Contract.
G. Interest penalties arising out of the application of this
Article that are $100 or less from any party shall be waived
unless there is a pattern of late payments consisting of three
or more items over the course of any 12-month period.
Article XII - Experience Account
A. An "Experience Account" shall be maintained for each accident
year covered under this Contract. The "Experience Account
Balance" shall equal the sum of the "Experience Account" for
the accident years covered under this Contract. The
"Experience Account" for an individual accident year shall, at
any point in time, be defined as:
1. 100% of the cumulative earned reinsurance premium
paid to the Reinsurer hereunder for the accident year;
less
2. The cumulative Reinsurer's Margin paid for the
accident year as defined herein; less
3. 100% of cumulative ultimate net loss payments for the
accident year made by the Reinsurer; plus
4. The cumulative Experience Account Investment Credit
for the accident year since the inception of this
Contract.
B. The Experience Account Investment Credit shall be computed
separately for each accident year and shall, for any accident
year, equal the average daily balance of the Experience
Account during that accident year (or portion thereof)
multiplied by the interest credit rate (or pro rata portion
thereof) applicable to the individual accident year, credited
annually, in arrears. The cumulative Experience Account
Investment Credit for any accident year shall equal the sum of
the Experience Account Investment Credit for such account for
each accident year since the inception of this Contract.
C. The interest credit rate applicable to the Experience Account
for an accident year covered under this Contract shall be
equal to the one (1) year U.S. Treasury note rate as published
in The Wall Street Journal on the first business day of such
accident year.
D. The "Reinsurer's Margin" for each accident year shall be an
amount equal to 12.5% of the earned reinsurance premium for
the accident year.
Article XIII - Commutation
A. Subject to the terms of this Article, the Company may, at its
sole option, commute this Contract at any December 31, with 90
days prior written notice by the Company to the Reinsurer.
B. If the Company elects to commute this Contract, the Reinsurer
shall pay to the Company the following amounts within 60
business days of the date of Commutation:
1. Commuted Value of ceded unpaid ultimate net loss:
a. If, at the time of Commutation, the ceded unpaid
ultimate net loss, as defined herein, is less than or
equal to the balance in the Experience Account, the
Reinsurer agrees to pay all ceded unpaid ultimate net
loss at the amount valued by the Company.
b. If, at the time of Commutation, the ceded unpaid
ultimate net loss is greater than the balance in the
Experience Account, the ceded unpaid ultimate net loss
shall be commuted at a present value amount to be
mutually agreed. If the present value amount of the
ceded unpaid ultimate net loss cannot be mutually
agreed by the Company and the Reinsurer, then a
mutually acceptable independent third party actuary
shall be called upon to make an independent estimation
of the present value amount of the ceded unpaid
ultimate net loss (the cost of which shall be shared
equally by the Company and Reinsurer). If the actuary's
estimation is acceptable to both Reinsurer and Company,
then this Contract shall be commuted at the value as
estimated by the actuary. If the actuary's value is
unacceptable to either the Company or the Reinsurer, or
if the parties cannot agree on the selection of the
actuary, then this Contract will not be commuted at
that time.
2. Profit Sharing - Upon Commutation under subparagraph
1 above, the Reinsurer shall pay to the Company a Profit
Sharing equal to the positive balance, if any, of the
Experience Account after deducting the value of the
commuted ceded unpaid ultimate net loss as per
subparagraph 1 above.
C. Payment of the ceded unpaid ultimate net loss and Profit
Sharing, if any, by the Reinsurer as described above shall
constitute a complete and final release of the Reinsurer in
respect of any and all of the Reinsurer's obligations of any
nature whatsoever to the Company under or related to this
Contract.
Article XIV - Offset (BRMA 36C)
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 Contract. 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 XV - Access to Records (BRMA 1D)
The Reinsurer or its designated representatives shall have access
at any reasonable time to all records of the Company which
pertain in any way to this reinsurance.
Article XVI - Net Retained Lines (BRMA 32B)
A. This Contract 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
Contract attaches, only loss or losses in respect of that
portion of any policy which the Company retains net for its
own account shall be included.
B. The amount of the Reinsurer's liability hereunder in respect
of any loss or losses shall not be increased by reason of the
inability of the Company to collect from any other
reinsurer(s), whether specific or general, any amounts which
may have become due from such reinsurer(s), whether such
inability arises from the insolvency of such other
reinsurer(s) or otherwise.
Article XVII - Errors and Omissions (BRMA 14F)
Inadvertent delays, errors or omissions made in connection with
this Contract or any transaction hereunder shall not relieve
either party from any liability which would have attached had
such delay, error or omission not occurred, provided always that
such error or omission is rectified as soon as possible after
discovery.
Article XVIII - Currency (BRMA 12A)
A. Whenever the word "Dollars" or the "$" sign appears in this
Contract, they shall be construed to mean United States
Dollars and all transactions under this Contract shall be in
United States Dollars.
B. Amounts paid or received by the Company in any other currency
shall be converted to United States Dollars at the rate of
exchange at the date such transaction is entered into the
books of the Company.
Article XIX - Taxes (BRMA 50C)
In consideration of the terms under which this Contract 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, the District of Columbia or Canada.
Article XX - Insolvency
A. In the event of the insolvency of one or more of the reinsured
companies, this reinsurance shall be payable directly to the
company 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 without diminution because of the insolvency of
the company or because the liquidator, receiver, conservator
or statutory successor of the company 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 shall give written notice to the Reinsurer of the
pendency of a claim against the company 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 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 as part of the
expense of conservation or liquidation to the extent of a pro
rata share of the benefit which may accrue to the company
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 Contract as though such expense had been
incurred by the company.
C. It is further understood and agreed that, in the event of the
insolvency of one or more of the reinsured companies, the
reinsurance under this Contract shall be payable directly by
the Reinsurer to the company or to its liquidator, receiver or
statutory successor, except as provided by Section 4118(a) of
the New York Insurance Law or except (1) where this Contract
specifically provides another payee of such reinsurance in the
event of the insolvency of the company or (2) where 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.
Article XXI - Arbitration
A. As a condition precedent to any right of action hereunder, any
dispute arising out of the interpretation, performance or
breach of this Contract, 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
two arbitrators will jointly petition the American Arbitration
Association to appoint the third arbitrator from the AAA's
Panel of Reinsurance Arbitrators.
D. All arbitrators shall be disinterested active or former
executive officers of insurance or reinsurance companies,
underwriters at Lloyd's of London, reinsurance intermediaries
and attorneys actively or formerly engaged in practicing law
in the areas of insurance or reinsurance.
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. The arbitration shall take place in Woodland Hills,
California or, if unanimously agreed by the panel, any other
mutually acceptable location.
G. If more than one reinsurer is involved in the same dispute,
all such reinsurers shall constitute and act as one party for
purposes of this article. However, nothing shall impair the
rights of such reinsurers to assert several rather than joint
defenses or claims, nor shall this provision be construed as
changing the liability of the reinsurers under the terms of
this Contract from several to joint.
H. The panel shall make its decision considering custom and
practice as promptly as possible following the termination of
hearings. The decision of any two arbitrators, when rendered
in writing shall be final and binding, and judgment upon the
award may be entered in any court having jurisdiction. The
panel is empowered to grant such interim relief as it may deem
appropriate.
I. Each party shall bear the expense of its own arbitrator and
shall jointly and equally with the other party bear 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 attorney's
fees and interest to the extent permitted by law. Insofar as
the arbitration panel chooses to look to substantive law, it
shall consider the law of the State of California.
Article XXII - Service of Suit (BRMA 49C)
(Applicable if the Reinsurer is not domiciled in the United
States of America, and/or is not authorized in any State,
Territory or District of the United States where authorization is
required by insurance regulatory authorities)
A. It is agreed that in the event the Reinsurer fails to pay any
amount claimed to be due hereunder, the Reinsurer, at the
request of the Company, will submit to the jurisdiction of a
court of competent jurisdiction within the United States.
Nothing in this Article constitutes or should be understood to
constitute a waiver of the Reinsurer's rights to commence an
action in any court of competent jurisdiction in the United
States, to remove an 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.
B. Further, pursuant to any statute of any state, territory or
district of the United States which makes provision therefor,
the Reinsurer hereby designates the party named in its
Interests and Liabilities Agreement, or if no party is named
therein, 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 Contract.
Article XXIII - Agency Agreement
Gryphon Insurance Group, Inc. shall be deemed the agent of the
other reinsured companies for purposes of sending or receiving
notices required by the terms and conditions of this Contract,
and for purposes of remitting or receiving any monies due any
party.
Article XXIV - Intermediary (BRMA 23A)
E. W. Blanch Co. is hereby recognized as the Intermediary
negotiating this Contract 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 E. W. Blanch Co., Reinsurance Services, 3500 West 80th
Street, Minneapolis, Minnesota 55431. 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.
In Witness Whereof, the Company by its duly authorized
representative has executed this Contract as of the date
undermentioned at:
New York, New York,this ____ day of ______________ 199___.
________________________________________
Gryphon Insurance Group, Inc., on behalf of
Associated International Insurance Company
Calvert Insurance Company
Timberline Insurance Company
R:\96RIL\11766.DOC
Per Event Reinsurance Contract
($250,000 xs $250,000)
Effective: October 1, 1996
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Philadelphia, Pennsylvania
Timberline Insurance Company
Eugene, Oregon
through the auspices of
Gryphon Insurance Group, Inc.
New York, New York
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
Per Event Reinsurance Contract
($250,000 xs $250,000)
Effective: October 1, 1996
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Philadelphia, Pennsylvania
Timberline Insurance Company
Eugene, Oregon
through the auspices of
Gryphon Insurance Group, Inc.
New York, New York
Reinsurer Participation
Scandinavian Reinsurance Company, Ltd. 100.0%
Total 100.0%
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
Table of Contents
Article Page
I Business Reinsured 1
II Term 1
III Territory (BRMA 51A) 2
IV Exclusions 2
V Retention and Limit 3
VI Definitions 3
VII Other Reinsurance 7
VIII Loss Settlements 7
IX Commutation 8
X Salvage and Subrogation 9
XI Reinsurance Premium 9
XII Experience Account 9
XIII Late Payments 10
XIV Offset (BRMA 36C) 12
XV Access to Records 12
XVI Liability of the Reinsurer 12
XVII Net Retained Lines 12
XVIII Errors and Omissions (BRMA 14F) 13
XIX Currency (BRMA 12A) 13
XX Taxes (BRMA 50B) 13
XXI Federal Excise Tax 13
XXII Unauthorized Reinsurers 13
XXIII Insolvency 14
XXIV Arbitration 15
XXV Service of Suit (BRMA 49C) 16
XXVI Agency Agreement 17
XXVII Intermediary (BRMA 23A) 17
Schedule A
Per Event Reinsurance Contract
($250,000 xs $250,000)
Effective: October 1, 1996
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Philadelphia, Pennsylvania
Timberline Insurance Company
Eugene, Oregon
through the auspices of
Gryphon Insurance Group, Inc.
New York, New York
(hereinafter referred to collectively as the "Company")
by
The Subscribing Reinsurer(s) Executing the
Interests and Liabilities Agreements
Attached Hereto
(hereinafter referred to as the "Reinsurer")
Article I - Business Reinsured
By this Contract the Reinsurer agrees to reinsure and/or
indemnify the Company for the net excess liability which may
accrue to the Company under its policies, contracts and binders
of insurance or reinsurance (hereinafter called "policies") in
force on the effective date hereof, or issued or renewed on or
after that date, for all lines of business (direct and assumed),
subject to the terms, conditions and limitations hereinafter set
forth.
Article II - Term
A. This Contract shall become effective on October 1, 1996, with
respect to occurrences arising out of loss events commencing
on or after that date, and shall remain in force until
December 31, 1996, both days inclusive. Notwithstanding the
foregoing, in the event any state auditor determines this
Contract is not in compliance with any rule or regulation
pertaining to this reinsurance, this Contract may be rescinded
by the Company with 30 days prior written notice to the
Reinsurer by certified mail.
B. Except as provided in paragraph C below, reinsurance hereunder
on business in force on the effective date of expiration shall
remain in full force and effect until expiration, cancellation
or next premium anniversary of such business, whichever first
occurs, but in no event beyond 36 months, plus odd time (not
exceeding 42 months in all) as respects multiple year
policies, nor 12 months plus odd time (not exceeding 18 months
in all) as respects policies of one year policy terms or less,
following the effective date of expiration. However, these
limitations shall not apply to any Extended Reporting Period
(hereinafter referred to as "ERP") or Extended Discovery
Endorsement (hereinafter referred to as "EDE") provisions or
policies classified by the Company as Project Specific
Coverage.
C. Notwithstanding the provisions of paragraph B above, the
Company shall have the option of reassuming the unexpired
liability of the Reinsurer hereunder on business in force on
the effective date of expiration, in which event the Reinsurer
shall not be liable for claims made or losses arising out of
loss events commencing after that date. As respects policies
providing an aggregate limit of liability which are in force
on the effective date of expiration, the Reinsurer shall be
liable for the entire aggregate loss under such policies if
the inception date of the policy period falls on or before the
effective date of expiration, as respects policies written on
an occurrence basis, or if the first claim is made on or
before the effective date of expiration as respects policies
written on a claims made basis.
D. If this Contract expires while a loss event covered hereunder
is in progress, the Reinsurer's liability hereunder shall,
subject to the other terms and conditions of this Contract, be
determined as if the entire loss event had occurred prior to
the expiration of this Contract, provided that no part of such
loss event is claimed against any renewal or replacement of
this Contract.
Article III - Territory (BRMA 51A)
The territorial limits of this Contract shall be identical with
those of the Company's policies.
Article IV - Exclusions
This Contract does not apply to and specifically excludes the
following:
1. Reinsurance assumed by the Company (unless an assumed
program has been specifically declared to this Contract
and accepted by the Reinsurer), except inter-company
reinsurance between any member companies of Gryphon
Insurance Group, Inc.
2. Financial guarantee and insolvency.
3. Business written by the Company on a co-indemnity
basis where the Company is not an equal or controlling
carrier.
4. Nuclear risks as defined in the "Nuclear Incident
Exclusion Clause - Liability - Reinsurance" and the
"Nuclear Incident Exclusion Clause - Physical Damage"
attached to and forming part of this Contract.
5. Liability as a member, subscriber or reinsurer of any
Pool, Syndicate or Association which is not underwritten
or controlled by the Company. However, this exclusion
shall not apply to Assigned Risk Plans or similar plans.
6. 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, insolvency fund, plan, pool, association, fund or
other arrangement, however 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.
Article V - Retention and Limit
A. As respects business subject to this Contract, the Company
shall retain and be liable for the first $250,000 of ultimate
net loss arising out of each loss event. The Reinsurer shall
then be liable for the amount by which such ultimate net loss
exceeds the Company's retention, but the liability of the
Reinsurer shall not exceed $250,000 as respects any one loss
event, nor shall it exceed $2,500,000 as respects all loss
events subject to this Contract.
B. With respect to business subject hereunder, the maximum policy
limit (except statutory) with respect to any one coverage, any
one policy shall be deemed not to exceed $5,000,000 any one
loss event, with limits in excess of this amount deemed
reinsured elsewhere.
Article VI - Definitions
A. "Net excess liability" as used herein shall mean those amounts
payable by the Company as defined in the ultimate net loss
definition set forth in paragraph B below.
B. "Ultimate net loss" as used herein is defined as the sum or
sums (including loss in excess of policy limits, extra
contractual obligations, prejudgment interest if included as
part of an award or judgment and any loss adjustment expense,
as herein after defined) paid or payable by the Company in
settlement of claims and in satisfaction of judgments rendered
on account of such claims, after deduction of all salvage, all
recoveries and all claims on inuring insurance or reinsurance,
whether collectible or not. Nothing herein shall be construed
to mean that losses under this Contract are not recoverable
until the Company's ultimate net loss has been ascertained.
C. "Loss in excess of policy limits" and "extra contractual
obligations" as used herein shall mean:
1. "Loss in excess of policy limits" shall mean 90% of
any amount paid or payable by the Company under a policy
ceded to this Contract in excess of its policy limits, but
otherwise within the terms of its policy, as a result of
an action against it by its insured or its insured's
assignee to recover damages the insured is legally
obligated to pay to a third party claimant because of the
Company's alleged or actual negligence or bad faith in
rejecting a settlement within policy limits, or in
discharging its duty to defend or prepare the defense in
the trial of an action against its insured, or in
discharging its duty to prepare or prosecute an appeal
consequent upon such an action.
2. "Extra contractual obligations" shall mean 90% of any
punitive, exemplary, compensatory or consequential
damages, other than loss in excess of policy limits, paid
or payable by the Company under a policy ceded to this
Contract as a result of an action against it by its
insured, its insured's assignee or a third party claimant,
which action alleges negligence or bad faith on the part
of the Company in handling a claim under a policy subject
to this Contract.
Any loss in excess of policy limits or extra contractual
obligation shall be deemed to have occurred on the same date
as the loss covered or alleged to be covered under the policy.
Notwithstanding anything stated herein, this Contract shall
not apply to any loss incurred by the Company as a result of
any fraudulent and/or criminal act by any officer or director
of the Company acting individually or collectively or in
collusion with an individual or corporation or any other
organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
D. "Loss adjustment expense" as used herein shall mean expenses
allocable to the investigation, defense and/or settlement of
specific claims, including 1) prejudgment interest, unless
included as part of the award or judgment; 2) post-judgment
interest; and 3) legal expenses and costs incurred in
connection with coverage questions and legal actions connected
thereto; but not including office expenses or salaries of the
Company's regular employees, except that allocated outside
costs of the Company's or RA&MCO's salaried adjusters shall be
included. Claim costs shall also be included which are
incurred by RA&MCO and billed hourly to the Company in
accordance with its management agreement.
With respect to legal expenses and costs incurred in direct
connection with declaratory judgment actions brought to
resolve policy language coverage disputes between the Company
and its insured, such expenses shall, for purposes of this
Contract, not exceed an amount equal to the applicable limit
of the policy or policies involved unless agreed to by the
Reinsurer.
E. The term "loss event" as used herein shall mean an accident,
occurrence, claim made, loss discovered or any other
circumstance that triggers coverage as provided, defined, or
interpreted in the Company's original policies, however:
1. Where the Company's policy provides for an aggregate
limit of liability, the term "loss event" shall mean all
losses subject to that aggregate limit, each aggregate
period. For purposes of this Contract, the date of loss
for purposes of this reinsurance will be the inception
date of each aggregate period, as respects policies
written on an occurrence basis and the date the first
claim is made as respects policies written on a claims
made basis. Nevertheless, the Company may extract from
any aggregate "loss event" a single loss so it may be
combined with losses from other policies and submitted as
a single "loss event."
In the event the Company's losses arising out of a
single "loss event" involve policies providing different
types of coverage such as an occurrence and a claims made
policy, all losses can be combined and submitted as a
single "loss event" utilizing the occurrence date of loss
for the purpose of reinsurance coverage. In the event the
Company's losses arising out of a single "loss event"
involve multiple claims made policies, all losses can be
combined and submitted as a single "loss event" utilizing
the date the first claim is made for the purpose of
reinsurance coverage.
2. As respects policies written on a claims made basis,
the date of loss shall be the date the claim is made under
the original policy. As respects any extended reporting
or discovery period provisions under a claims made policy
subject hereto, it is understood and agreed that the
following shall apply:
a. Claims made against and/or reported to the Company
during the extended reporting or discovery period shall
be deemed to have occurred on the last full day of the
applicable policy period;
b. If the Company issues a separate policy and/or
reinstates the aggregate limit provided under a policy,
premium and losses during the period to which said
separate policy and/or reinstated limit applies may, at
the time of issuance and at the Company's option, be
allocated to (i) the contract which is in effect at the
effective date of said separate policy and/or at the
beginning of the period to which the reinstated limit
applies, or (ii) the contract which was in effect at the
effective date of the original policy. If the Company
elects (i), said losses shall be subject to a separate
retention and limit (as specified in the Retention and
Limit Article) from that of the original policy period.
3. As respects multiple year policies, whether issued
with one limit or reinstatement of the limit, each 12-
month period within a multiple year policy shall be
considered a separate period as regards the Company's
retention and the aggregate policy limit. However, as
respects business classified by the Company as "Project
Specific" coverages, the entire multiple year term shall
be considered one period as regards the Company's
retention and the aggregate policy limit.
4. As respects property losses subject hereto, all
individual losses directly occasioned by any one disaster,
occurrence or loss or series of disasters, occurrences or
losses arising out of one occurrence which occurs anywhere
in the world, but limited in the United States of America
and Canada to the United States or province of Canada and
states or provinces contiguous thereto and to one another.
However, the duration and extent of any one "loss event"
shall be limited to all individual losses sustained by the
Company occurring during any period of 168 consecutive
hours arising out of and directly occasioned by the same
loss event, except that the term "loss event" shall be
further defined as follows:
a. As regards windstorm, hail, tornado, hurricane,
cyclone, including ensuing collapse and water damage,
all individual losses sustained by the Company occurring
during any period of 72 consecutive hours arising out of
and directly occasioned by the same loss event.
However, the loss event need not be limited to one state
or province or states or provinces contiguous thereto.
b. As regards riot, riot attending a strike, civil
commotion, vandalism and malicious mischief, all
individual losses sustained by the Company occurring
during any period of 72 consecutive hours within the
area of one municipality or county and the
municipalities or counties contiguous thereto arising
out of and directly occasioned by the same loss event.
The maximum duration of 72 consecutive hours may be
extended in respect of individual losses which occur
beyond such 72 consecutive hours during the continued
occupation of an assured's premises by strikers,
provided such occupation commenced during the aforesaid
period.
c. As regards earthquake (the epicenter of which need
not necessarily be within the territorial confines
referred to above) and fire following directly
occasioned by the earthquake, only those individual fire
losses which commence during the period of 168
consecutive hours may be included in the Company's "loss
event."
d. As regards "freeze," only individual losses
directly occasioned by collapse, breakage of glass and
water damage (caused by bursting frozen pipes and tanks
and melting snow) may be included in the Company's "loss
event."
Except for those "loss events" referred to in
subparagraphs (a) and (b) above, the Company may choose
the date and time when any such period of consecutive
hours commences, provided that it is not earlier than the
date and time of the occurrence of the first recorded
individual loss sustained by the Company arising out of
that disaster, occurrence or loss, and provided that only
one such period of 168 consecutive hours shall apply with
respect to one loss event.
However, as respects those "loss events" referred to
in subparagraphs (a) and (b) above, if the disaster,
occurrence or loss occasioned by the occurrence is of
greater duration than 72 consecutive hours, then the
Company may divide that disaster, occurrence or loss into
two or more "loss events," provided that no two periods
overlap and no individual loss is included in more than
one such period, and provided that no period commences
earlier than the date and time of the occurrence of the
first recorded individual loss sustained by the Company
arising out of that disaster, occurrence or loss.
It is understood that losses arising from a
combination of two or more perils as a result of the same
occurrence shall be considered as having arisen from one
"loss event." Notwithstanding the foregoing, the hourly
limitations as stated above shall not be exceeded as
respects the applicable perils and no single "loss event"
shall encompass a time period greater than 168 consecutive
hours.
Notwithstanding the foregoing, it is understood that the
Company shall be the sole judge of what constitutes a single
"loss event."
F. "Net earned premium" as used herein is defined as gross earned
premium of the Company for the classes of business reinsured
hereunder, less cancellations and return premiums, and less
the earned portion of premiums ceded by the Company for
reinsurance which inures to the benefit of this Contract or
increases the Company's available capacity.
Article VII - Other Reinsurance
A. The Company is permitted, but not required, to purchase other
facultative and/or other treaty reinsurance on business
subject to this Contract. Premiums ceded by the Company for
reinsurance which inures to the benefit of this Contract or
increases the Company's available capacity shall be deducted
in determining subject premium hereunder as provided in
Article XI.
B. It is agreed by the Company that inuring reinsurance
agreements in force at the inception of this Contract shall
remain in force during the term of this Contract, or so
deemed.
Article VIII - Loss Settlements
A. Wherever losses sustained by the Company appear, in the
opinion of the Company, likely to result in claim hereunder,
the Company shall notify the Reinsurer. The Reinsurer shall
have the right to participate in the adjustment of the loss at
its own expense.
B. All loss settlements made by the Company, provided they are
within the terms of this Contract, shall be binding upon the
Reinsurer, and the Reinsurer agrees to pay all amounts for
which it may be liable upon receipt of reasonable evidence of
the amount paid (or scheduled to be paid) by the Company.
Article IX - Commutation
A. Subject to the terms of this Article, the Company may, at its
sole option, commute this Contract at any December 31, with 90
days prior written notice by the Company to the Reinsurer.
B. If the Company elects to commute this Contract, the Reinsurer
shall pay to the Company the following amounts within 60
business days of the date of commutation:
1. Commuted value of ceded unpaid ultimate net loss:
a. If, at the time of Commutation, the ceded unpaid
ultimate net loss, as defined herein, is less than or
equal to the balance in the Experience Account, the
Reinsurer agrees to pay all ceded unpaid ultimate net
loss at the amount valued by the Company.
b. If, at the time of commutation, the ceded unpaid
ultimate net loss is greater than the balance in the
Experience Account, the ceded unpaid ultimate net loss
shall be commuted at a present value amount to be
mutually agreed. If the present value amount of the
ceded unpaid ultimate net loss cannot be mutually
agreed by the Company and the Reinsurer, then a
mutually acceptable independent third party actuary
shall be called upon to make an independent estimation
of the present value amount of the ceded unpaid
ultimate net loss (the cost of which shall be shared
equally by the Company and Reinsurer). If the
actuary's estimation is acceptable to both Reinsurer
and Company, then this Contract shall be commuted at
the value as estimated by the actuary. If the
actuary's value is unacceptable to either the Company
or the Reinsurer, or if the parties cannot agree on the
selection of the actuary, then this Contract will not
be commuted at that time.
2. Profit Sharing:
Upon commutation under subparagraph 1 above, the
Reinsurer shall pay to the Company a Profit Sharing equal
to the positive balance, if any, of the Experience Account
after deducting the value of the commuted ceded unpaid
ultimate net loss as per subparagraph 1 above.
C. Payment of the ceded unpaid ultimate net loss and Profit
Sharing, if any, by the Reinsurer as described above shall
constitute a complete and final release of the Reinsurer in
respect of any and all of the Reinsurer's obligations of any
nature whatsoever to the Company under or related to this
Contract.
Article X - Salvage and Subrogation
The Reinsurer shall be credited with salvage (i.e., reimbursement
obtained or recovery made by the Company, less the actual cost,
excluding salaries of officials and employees of the Company, and
sums paid to attorneys as retainer, of obtaining such
reimbursement or making such recovery) on account of claims and
settlements involving reinsurance hereunder. Salvage thereon
shall always be used to reimburse the excess carriers in the
reverse order of their priority according to their participation
before being used in any way to reimburse the Company for its
primary loss. The Company hereby agrees to enforce its rights to
salvage or subrogation relating to any loss, a part of which loss
was sustained by the Reinsurer, and to prosecute all claims
arising out of such rights.
Article XI - Reinsurance Premium
As premium for the reinsurance provided hereunder, the Company
shall pay the Reinsurer $1,250,000 as promptly as possible after
the inception of this Contract.
Article XII - Experience Account
A. An "Experience Account" shall be established and maintained by
the Reinsurer, the balance of which, at any point in time,
shall be defined as:
1. 100% of the cumulative earned reinsurance premium
paid to the Reinsurer hereunder; less
2. The cumulative Reinsurer's Margin paid hereunder;
less
3. 100% of cumulative ultimate net loss payments made by
the Reinsurer hereunder; plus
4. The cumulative Experience Account Investment Credit
since the inception of this Contract.
B. The Experience Account Investment Credit shall equal the
average daily balance of the Experience Account multiplied by
the interest credit rate (or pro rata portion thereof)
credited annually, in arrears.
C. The interest credit rate applicable to the Experience Account
shall be equal to the one-year U.S. Treasury note rate as
published in The Wall Street Journal on the inception date of
this Contract.
D. The "Reinsurer's Margin" shall be an amount equal to 12.5% the
earned reinsurance premium hereunder.
Article XIII - Late Payments
A. It is understood and agreed that the provisions of this
Article shall not be implemented unless specifically invoked,
in writing, by one of the parties to this Contract.
B. In the event any premium, loss or other payment due either
party is not received by the intermediary named in
Article XXVII (hereinafter referred to as the "Intermediary")
by the payment due date, the party to whom payment is due may,
by notifying the Intermediary in writing, require the debtor
party to pay, and the debtor party agrees to pay, an interest
penalty on the amount past due calculated for each such
payment on the last business day of each month as follows:
1. The number of full days which have expired since the
due date or the last monthly calculation, whichever the
lesser; times
2. 1/365th of the six month (or nearest thereto) U.S.
Treasury Bill rate, as quoted in the Wall Street Journal
on the first business day of the month for which the
calculation is being made; times
3. The amount past due, including accrued interest.
It is agreed that interest shall accumulate until payment of
the original amount due plus interest penalties have been
received by the Intermediary.
C. The establishment of the due date shall, for purposes of this
Article, be determined as follows:
1. As respects the payment of routine deposits and
premiums due the Reinsurer, the due date shall be as
provided for in the applicable section of this Contract.
In the event a due date is not specifically stated for a
given payment, it shall be deemed due 45 days after the
date of transmittal by the Intermediary of the initial
billing for each such payment.
2. Any claim or loss payment due the Company hereunder
shall be deemed due five business days following receipt
by the applicable Subscribing Reinsurer of written
notification that payment has been received from
Subscribing Reinsurers constituting at least 662/3% of the
interests and liabilities of all Subscribing Reinsurers
participating under the applicable layer of this Contract,
who are active as of the due date; it being understood
that said date shall not be later than 75 days from the
date of transmittal by the Intermediary of the initial
billing for each such payment.
3. As respects any payment, adjustment or return due
either party not otherwise provided for in subparagraphs 1
and 2 of paragraph C above, the due date shall be deemed
as five business days following receipt of written
notification that the provisions of this Article have been
invoked.
For purposes of interest calculations only, amounts due
hereunder shall be deemed paid upon receipt by the
Intermediary.
D. Nothing herein shall be construed as limiting or prohibiting
1) a Subscribing Reinsurer from contesting the validity of any
claim, or from participating in the defense or control of any
claim or suit; or 2) either party from contesting the validity
of any payment, or from initiating any arbitration or other
proceeding in accordance with the provisions of this Contract.
If the debtor party prevails in an arbitration or other
proceeding, then any interest penalties due hereunder on the
amount in dispute shall be null and void. If the debtor party
loses in such proceeding, then the interest penalty on the
amount determined to be due hereunder shall be calculated in
accordance with the provisions set forth above unless
otherwise determined by such proceedings. If a debtor party
advances payment of any amount it is contesting, and proves to
be correct in its contestation, either in whole or in part,
the other party shall reimburse the debtor party for any such
excess payment made plus interest on the excess amount
calculated in accordance with this Article.
E. As provided under Article VIII, it is understood and agreed
that the Company shall furnish the Reinsurer with usual and
customary claim information and nothing herein shall be
construed as limiting or prohibiting a Subscribing Reinsurer
from requesting additional information that it may deem
necessary.
F. As respects subparagraph 2 of paragraph C above, a Subscribing
Reinsurer shall be deemed not to be active when it 1) ceases
assuming new or renewal reinsurance business through the
Intermediary; 2) is declared insolvent, or put in liquidation,
conservatorship or rehabilitation by a competent regulatory
authority or court; 3) is declared insolvent, or is the
subject of an administrative order or enters provisional
liquidation and/or liquidation; or 4) has a reduction in its
statutory surplus or shareholders' funds of 50% or more from
its statutory surplus or shareholders' funds as of the
effective date of this Contract.
G. Interest penalties arising out of the application of this
Article that are $100 or less from any party shall be waived
unless there is a pattern of late payments consisting of three
or more items over the course of any 12-month period.
Article XIV - Offset (BRMA 36C)
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 Contract. 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 XV - Access to Records
The Reinsurer or its designated representatives shall have
access at any reasonable time to all records of the Company
which pertain in any way to this reinsurance.
Article XVI - Liability of the Reinsurer
A. The liability of the Reinsurer shall follow that of the
Company in every case and be subject in all respects to all
the general and specific stipulations, clauses, waivers and
modifications of the Company's policies and any endorsements
thereon. However, in no event shall this be construed in any
way to provide coverage outside the terms and conditions set
forth in this Contract.
B. Nothing herein shall in any manner create any obligations or
establish any rights against the Reinsurer in favor of any
third party or any persons not parties to this Contract.
Article XVII - Net Retained Lines
A. This Contract applies only to that portion of any insurance or
reinsurance (whether inter-company reinsurance and/or
reinsurance assumed which has been declared to this Contract
and accepted by the Reinsurer) the Company retains net for its
own account, and in calculating the amount of any loss
hereunder and also computing the amount or amounts in excess
of which this Contract attaches, only loss or losses in
respect of that portion of any insurance or reinsurance the
Company retains net for its own account shall be included.
B. The amount of the Reinsurer's liability hereunder in respect
of any loss or losses shall not be increased by reason of the
inability of the Company to collect from any other
reinsurer(s), whether specific or general, any amounts which
may be due from such reinsurer(s), whether such inability
arises from the insolvency of such other reinsurer(s) or
otherwise.
Article XVIII - Errors and Omissions (BRMA 14F)
Inadvertent delays, errors or omissions made in connection with
this Contract or any transaction hereunder shall not relieve
either party from any liability which would have attached had
such delay, error or omission not occurred, provided always that
such error or omission is rectified as soon as possible after
discovery.
Article XIX - Currency (BRMA 12A)
A. Whenever the word "Dollars" or the "$" sign appears in this
Contract, they shall be construed to mean United States
Dollars and all transactions under this Contract shall be in
United States Dollars.
B. Amounts paid or received by the Company in any other currency
shall be converted to United States Dollars at the rate of
exchange at the date such transaction is entered into the
books of the Company.
Article XX - Taxes (BRMA 50B)
In consideration of the terms under which this Contract 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
If the Reinsurer is subject to the Federal Excise Tax, the
Reinsurer agrees to allow the Company to withhold the required
amount for the purpose of paying the Tax. In the event of any
return premium becoming due hereunder, the Reinsurer will deduct
from the amount of the return premium the same percentage as it
allowed, and the Company or its agent should take steps to
recover the Tax from the U. S. Government.
Article XXII - Unauthorized Reinsurers
A. If the Reinsurer is unauthorized in any state of the United
States of America or the District of Columbia, the Reinsurer
agrees to fund its share of the Company's ceded outstanding
loss and loss adjustment expense reserves (including incurred
but not reported loss reserves) by clean, irrevocable and
unconditional letters of credit issued and confirmed, if
confirmation is required by the insurance regulatory
authorities involved, by a bank or banks meeting the NAIC
Securities Valuation Office credit standards for issuers of
letters of credit and acceptable to said insurance regulatory
authorities, if, without such funding, a penalty would accrue
to the Company on any financial statement it is required to
file with the insurance regulatory authorities involved. The
Reinsurer, at its sole option, may fund in other than cash if
its method and form of funding are acceptable to the insurance
regulatory authorities involved.
B. With regard to funding in whole or in part by letters of
credit, it is agreed that each letter of credit will be in a
form acceptable to insurance regulatory authorities involved,
will be issued for a term of at least one year and will
include an "evergreen clause," which automatically extends the
term for at least one additional year at each expiration date
unless written notice of non-renewal is given to the Company
not less than 30 days prior to said expiration date. The
Company and the Reinsurer further agree, notwithstanding
anything to the contrary in this Contract, that said letters
of credit may be drawn upon by the Company or its successors
in interest at any time, without diminution because of the
insolvency of the Company or the Reinsurer, but only for one
or more of the following purposes:
1. To reimburse itself for the Reinsurer's share of
losses and/or loss adjustment expense paid under the terms
of policies reinsured hereunder, unless paid in cash by
the Reinsurer;
2. To reimburse itself for the Reinsurer's share of any
other amounts claimed to be due hereunder, unless paid in
cash by the Reinsurer;
3. To fund a cash account in an amount equal to the
Reinsurer's share of any ceded outstanding loss and loss
adjustment expense reserves (including incurred but not
reported loss reserves) funded by means of a letter of
credit which is under non-renewal notice, if said letter
of credit has not been renewed or replaced by the
Reinsurer 10 days prior to its expiration date;
4. To refund to the Reinsurer any sum in excess of the
actual amount required to fund the Reinsurer's share of
the Company's ceded outstanding loss and loss adjustment
expense reserves (including incurred but not reported loss
reserves), if so requested by the Reinsurer.
In the event the amount drawn by the Company on any letter of
credit is in excess of the actual amount required for B(1) or
B(3), or in the case of B(2), the actual amount determined to
be due, the Company shall promptly return to the Reinsurer the
excess amount so drawn.
C. Notwithstanding the foregoing, the Company shall share in the
funding of the aforementioned letters of credit in an amount
not to exceed 25 basis points.
Article XXIII - Insolvency
A. In the event of the insolvency of one or more of the reinsured
companies, this reinsurance shall be payable directly to the
company 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 without diminution because of the insolvency of
the company or because the liquidator, receiver, conservator
or statutory successor of the company 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 shall give written notice to the Reinsurer of the
pendency of a claim against the company 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 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 as part of the
expense of conservation or liquidation to the extent of a pro
rata share of the benefit which may accrue to the company
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 Contract as though such expense had been
incurred by the company.
C. It is further understood and agreed that, in the event of the
insolvency of one or more of the reinsured companies, the
reinsurance under this Contract shall be payable directly by
the Reinsurer to the company or to its liquidator, receiver or
statutory successor, except as provided by Section 4118(a) of
the New York Insurance Law or except (1) where this Contract
specifically provides another payee of such reinsurance in the
event of the insolvency of the company or (2) where 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.
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 Contract, 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
two arbitrators will jointly petition the American Arbitration
Association to appoint the third arbitrator from the AAA's
Panel of Reinsurance Arbitrators.
D. All arbitrators shall be disinterested active or former
executive officers of insurance or reinsurance companies,
underwriters at Lloyd's of London, reinsurance intermediaries
and attorneys actively or formerly engaged in practicing law
in the areas of insurance or reinsurance.
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. The arbitration shall take place in Woodland Hills,
California or, if unanimously agreed by the panel, any other
mutually acceptable location.
G. If more than one reinsurer is involved in the same dispute,
all such reinsurers shall constitute and act as one party for
purposes of this article. However, nothing shall impair the
rights of such reinsurers to assert several rather than joint
defenses or claims, nor shall this provision be construed as
changing the liability of the reinsurers under the terms of
this Contract from several to joint.
H. The panel shall make its decision considering custom and
practice as promptly as possible following the termination of
hearings. The decision of any two arbitrators, when rendered
in writing shall be final and binding, and judgment upon the
award may be entered in any court having jurisdiction. The
panel is empowered to grant such interim relief as it may deem
appropriate.
I. Each party shall bear the expense of its own arbitrator and
shall jointly and equally with the other party bear 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 attorney's
fees and interest to the extent permitted by law. Insofar as
the arbitration panel chooses to look to substantive law, it
shall consider the law of the State of California.
Article XXV - Service of Suit (BRMA 49C)
(Applicable if the Reinsurer is not domiciled in the United
States of America, and/or is not authorized in any State,
Territory or District of the United States where authorization is
required by insurance regulatory authorities)
A. It is agreed that in the event the Reinsurer fails to pay any
amount claimed to be due hereunder, the Reinsurer, at the
request of the Company, will submit to the jurisdiction of any
court of competent jurisdiction within the United States.
Nothing in this Article constitutes or should be understood to
constitute a waiver of the Reinsurer's rights to commence an
action in any court of competent jurisdiction in the United
States, to remove an 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.
B. Further, pursuant to any statute of any state, territory or
district of the United States which makes provision therefor,
the Reinsurer hereby designates the party named in its
Interests and Liabilities Agreement, or if no party is named
therein, 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 Contract.
Article XXVI - Agency Agreement
Gryphon Insurance Group shall be deemed the agent of the
reinsured companies for purposes of sending or receiving
notices required by the terms and conditions of this Contract,
and for purposes of remitting or receiving any monies due any
party.
Article XXVII - Intermediary (BRMA 23A)
E. W. Blanch Co. is hereby recognized as the Intermediary
negotiating this Contract 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 E. W. Blanch Co., Reinsurance Services, 3500 West 80th
Street, Minneapolis, Minnesota 55431. 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.
In Witness Whereof, the Company by its duly authorized
representative has executed this Contract as of the date
undermentioned at:
New York, New York,this ___ day of_______________ 199___.
_________________________________________
Gryphon Insurance Group, Inc., on behalf of
Associated International Insurance Company
Calvert Insurance Company
Timberline Insurance Company
Schedule A
attached to the
Per Event Reinsurance Contract
($250,000 xs $250,000)
Effective: October 1, 1996
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Philadelphia, Pennsylvania
Timberline Insurance Company
Eugene, Oregon
through the auspices of
Gryphon Insurance Group, Inc.
New York, New York
A. Umbrella business produced by Jean Deal & Associates, Dallas,
Texas for the Specialty Lines Division of Gryphon Insurance
Group, Inc., Woodland Hills, California.
B. DIC business produced by the Pacific Coast DIC Division of
Gryphon Insurance Group, Inc., Woodland Hills, California.
C. General Property E&S business produced by the General E&S
Division of Gryphon Insurance Group, Inc., Woodland Hills,
California.
D. Animal Mortality business produced by American Equine
Insurance Group, Rolling Meadows, Illinois for Gryphon
Insurance Group, Inc., Hoboken, New Jersey.
E. Canadian business produced by KMS Insurance Services, Toronto,
Canada for Gryphon Insurance Group, Inc., Hoboken, New Jersey.
F. Midwest Garage program produced by Business Risk Services,
Geneva, Illinois for Gryphon Insurance Group, Inc., Hoboken,
New Jersey.
R:\96R\11104.DOC
"Working" Per Event Reinsurance Contract
Effective: October 1, 1996
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Philadelphia, Pennsylvania
Timberline Insurance Company
Eugene, Oregon
through the auspices of
Gryphon Insurance Group, Inc.
New York, New York
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
"Working" Per Event Reinsurance Contract
Effective: October 1, 1996
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Philadelphia, Pennsylvania
Timberline Insurance Company
Eugene, Oregon
through the auspices of
Gryphon Insurance Group, Inc.
New York, New York
Reinsurers Participations
First Excess and Reinsurance Corporation 12.0%
Folksamerica Reinsurance Company 12.5
Gerling Global Reinsurance Corporation, U. S. Branch 10.0
Great Lakes American Reinsurance Company 10.0
NAC Reinsurance Corporation 10.0
Swiss Reinsurance America Corporation 16.5
TIG Reinsurance Company 16.5
Through Denis M. Clayton & Co. Ltd.
Certain Companies Per Signing Schedule(s) 12.5%
Total 100.0%
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
Table of Contents
Article Page
I Business Reinsured 1
II Term 2
III Territory (BRMA 51A) 2
IV Exclusions 3
V Retentions and Limits 3
VI Definitions 4
VII Other Reinsurance 8
VIII Loss Settlements 8
IX Salvage and Subrogation 9
X Reinsurance Premium 9
XI Late Payments 10
XII Profit Sharing 12
XIII Offset (BRMA 36C) 12
XIV Access to Records 13
XV Liability of the Reinsurer 13
XVI Net Retained Lines 13
XVII Errors and Omissions (BRMA 14F) 13
XVIII Currency (BRMA 12A) 14
XIX Taxes (BRMA 50B) 14
XX Federal Excise Tax 14
XXI Unauthorized Reinsurers 14
XXII Insolvency 15
XXIII Arbitration 16
XXIV Service of Suit (BRMA 49C) 17
XXV Agency Agreement 18
XXVI Intermediary (BRMA 23A) 18
Schedule A
"Working" Per Event Reinsurance Contract
Effective: October 1, 1996
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Philadelphia, Pennsylvania
Timberline Insurance Company
Eugene, Oregon
through the auspices of
Gryphon Insurance Group, Inc.
New York, New York
(hereinafter referred to collectively as the "Company")
by
The Subscribing Reinsurer(s) Executing the
Interests and Liabilities Agreements
Attached Hereto
(hereinafter referred to as the "Reinsurer")
Article I - Business Reinsured
A. By this Contract the Reinsurer agrees to reinsure and/or
indemnify the Company for the net excess liability which may
accrue to the Company under its policies, contracts and
binders of insurance or reinsurance (hereinafter called
"policies") in force on the effective date hereof, or issued
or renewed on or after that date, and classified by the
Company as all lines of business (direct and assumed) as
respects programs managed by the Company, subject to the
terms, conditions and limitations hereinafter set forth.
Programs set forth in Schedule A attached to and forming part
of this Contract shall be excluded from coverage hereunder.
The Company shall have the option of excluding additional
programs from coverage hereunder in accordance with paragraph
B below.
B. The Company shall have the option to exclude any program from
this Contract by submitting each such program in writing to
the Reinsurer not more than 90 days after the inception of the
program as respects those programs eligible for coverage
hereunder. Casualty programs that generate $5,000,000 or less
of estimated annualized subject earned premium during the
first 12 months of the program will be deemed to have
automatic coverage under the terms and conditions hereinafter
set forth if not excluded from this Contract. All property
programs and those casualty programs that generate greater
than $5,000,000 of estimated annualized subject earned premium
during the first 12 months of the program must be submitted to
the lead reinsurer(s) hereunder for acceptance on behalf of
the Reinsurer of coverage under the terms and conditions
hereinafter set forth if declared to this Contract.
The Company shall be the sole judge of what constitutes a
"program."
Article II - Term
A. This Contract shall become effective on October 1, 1996, with
respect to occurrences arising out of loss events commencing
on or after that date, and shall remain in force until
December 31, 1997, both days inclusive. Notwithstanding the
foregoing, in the event negotiations for a renewal of this
Contract are not completed by December 31, 1997, at the
Company's option, this Contract shall be extended by addendum
through March 31, 1998.
B. Except as provided in paragraph C below, reinsurance hereunder
on business in force on the effective date of expiration shall
remain in full force and effect until expiration, cancellation
or next premium anniversary of such business, whichever first
occurs, but in no event beyond 36 months, plus odd time (not
exceeding 42 months in all) as respects multiple year
policies, nor 12 months plus odd time (not exceeding 18 months
in all) as respects policies of one year policy terms or less,
following the effective date of expiration. However, these
limitations shall not apply to any Extended Reporting Period
(hereinafter referred to as "ERP") or Extended Discovery
Endorsement (hereinafter referred to as "EDE") provisions or
policies classified by the Company as Project Specific
Coverage.
C. Notwithstanding the provisions of paragraph B above, the
Company shall have the option of reassuming the unexpired
liability of the Reinsurer hereunder on business in force on
the effective date of expiration, in which event the Reinsurer
shall not be liable for claims made or losses arising out of
loss events commencing after that date. As respects policies
providing an aggregate limit of liability which are in force
on the effective date of expiration, the Reinsurer shall be
liable for the entire aggregate loss under such policies if
the inception date of the policy period falls on or before the
effective date of expiration, as respects policies written on
an occurrence basis, or if the first claim is made on or
before the effective date of expiration as respects policies
written on a claims made basis.
D. If this Contract expires while a loss event covered hereunder
is in progress, the Reinsurer's liability hereunder shall,
subject to the other terms and conditions of this Contract, be
determined as if the entire loss event had occurred prior to
the expiration of this Contract, provided that no part of such
loss event is claimed against any renewal or replacement of
this Contract.
Article III - Territory (BRMA 51A)
The territorial limits of this Contract shall be identical with
those of the Company's policies.
Article IV - Exclusions
This Contract does not apply to and specifically excludes the
following:
1. Reinsurance assumed by the Company (unless an assumed
program has been specifically declared to this Contract
and accepted by the Reinsurer), except inter-company
reinsurance between any member companies of Gryphon
Insurance Group, Inc.
2. Financial guarantee and insolvency.
3. Business written by the Company on a co-indemnity
basis where the Company is not an equal or controlling
carrier.
4. Nuclear risks as defined in the "Nuclear Incident
Exclusion Clause - Liability - Reinsurance" and the
"Nuclear Incident Exclusion Clause - Physical Damage"
attached to and forming part of this Contract.
5. Liability as a member, subscriber or reinsurer of any
Pool, Syndicate or Association which is not underwritten
or controlled by the Company. However, this exclusion
shall not apply to Assigned Risk Plans or similar plans.
6. 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, insolvency fund, plan, pool, association, fund or
other arrangement, however 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.
Article V - Retentions and Limits
A. As respects business subject to this Contract, for each layer
of reinsurance coverage provided by this Contract the Company
shall retain and be liable for the first amount of ultimate
net loss arising out of each loss event identified as
"Company's Retention" for the excess layer in the schedule set
forth below. The Reinsurer shall then be liable for the
amount by which such ultimate net loss exceeds the Company's
retention, but the liability of the Reinsurer shall not exceed
the amount identified as "Reinsurer's Limit" for the excess
layer in the schedule set forth below as respects any one loss
event.
Reinsurer's Limit Company's
Retention
First Excess Layer: $500,000 xs $500,000
Second Excess Layer: $9,000,000 xs $1,000,000
B. With respect to business subject hereunder, the maximum policy
limit (except statutory) with respect to any one coverage, any
one policy shall be deemed not to exceed $5,000,000 any one
loss event, with limits in excess of this amount deemed
reinsured elsewhere.
Article VI - Definitions
A. "Net excess liability" as used herein shall mean those amounts
payable by the Company as defined in the ultimate net loss
definition set forth in paragraph B below.
B. "Ultimate net loss" as used herein is defined as the sum or
sums (including loss in excess of policy limits, extra
contractual obligations, prejudgment interest if included as
part of an award or judgment and any loss adjustment expense,
as herein after defined) paid or payable by the Company in
settlement of claims and in satisfaction of judgments rendered
on account of such claims, after deduction of all salvage, all
recoveries and all claims on inuring insurance or reinsurance,
whether collectible or not. Nothing herein shall be construed
to mean that losses under this Contract are not recoverable
until the Company's ultimate net loss has been ascertained.
C. "Loss in excess of policy limits" and "extra contractual
obligations" as used herein shall mean:
1. "Loss in excess of policy limits" shall mean 90% of
any amount paid or payable by the Company under a policy
ceded to this Contract in excess of its policy limits, but
otherwise within the terms of its policy, as a result of
an action against it by its insured or its insured's
assignee to recover damages the insured is legally
obligated to pay to a third party claimant because of the
Company's alleged or actual negligence or bad faith in
rejecting a settlement within policy limits, or in
discharging its duty to defend or prepare the defense in
the trial of an action against its insured, or in
discharging its duty to prepare or prosecute an appeal
consequent upon such an action.
2. "Extra contractual obligations" shall mean 90% of any
punitive, exemplary, compensatory or consequential
damages, other than loss in excess of policy limits, paid
or payable by the Company under a policy ceded to this
Contract as a result of an action against it by its
insured, its insured's assignee or a third party claimant,
which action alleges negligence or bad faith on the part
of the Company in handling a claim under a policy subject
to this Contract.
Any loss in excess of policy limits or extra contractual
obligation shall be deemed to have occurred on the same date
as the loss covered or alleged to be covered under the policy.
Notwithstanding anything stated herein, this Contract shall
not apply to any loss incurred by the Company as a result of
any fraudulent and/or criminal act by any officer or director
of the Company acting individually or collectively or in
collusion with an individual or corporation or any other
organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
D. "Loss adjustment expense" as used herein shall mean expenses
allocable to the investigation, defense and/or settlement of
specific claims, including 1) prejudgment interest, unless
included as part of the award or judgment; 2) post-judgment
interest; and 3) legal expenses and costs incurred in
connection with coverage questions and legal actions connected
thereto; but not including office expenses or salaries of the
Company's regular employees, except that allocated outside
costs of the Company's or RA&MCO's salaried adjusters shall be
included. Claim costs shall also be included which are
incurred by RA&MCO and billed hourly to the Company in
accordance with its management agreement.
With respect to legal expenses and costs incurred in direct
connection with declaratory judgment actions brought to
resolve policy language coverage disputes between the Company
and its insured, such expenses shall, for purposes of this
Contract, not exceed an amount equal to the applicable limit
of the policy or policies involved unless agreed to by the
Reinsurer.
E. The term "loss event" as used herein shall mean an accident,
occurrence, claim made, loss discovered or any other
circumstance that triggers coverage as provided, defined, or
interpreted in the Company's original policies, however:
1. Where the Company's policy provides for an aggregate
limit of liability, the term "loss event" shall mean all
losses subject to that aggregate limit, each aggregate
period. For purposes of this Contract, the date of loss
for purposes of this reinsurance will be the inception
date of each aggregate period, as respects policies
written on an occurrence basis and the date the first
claim is made as respects policies written on a claims
made basis. Nevertheless, the Company may extract from
any aggregate "loss event" a single loss so it may be
combined with losses from other policies and submitted as
a single "loss event."
In the event the Company's losses arising out of a
single "loss event" involve policies providing different
types of coverage such as an occurrence and a claims made
policy, all losses can be combined and submitted as a
single "loss event" utilizing the occurrence date of loss
for the purpose of reinsurance coverage. In the event the
Company's losses arising out of a single "loss event"
involve multiple claims made policies, all losses can be
combined and submitted as a single "loss event" utilizing
the date the first claim is made for the purpose of
reinsurance coverage.
2. As respects policies written on a claims made basis,
the date of loss shall be the date the claim is made under
the original policy. As respects any extended reporting
or discovery period provisions under a claims made policy
subject hereto, it is understood and agreed that the
following shall apply:
a. Claims made against and/or reported to the Company
during the extended reporting or discovery period shall
be deemed to have occurred on the last full day of the
applicable policy period;
b. If the Company issues a separate policy and/or
reinstates the aggregate limit provided under a policy,
premium and losses during the period to which said
separate policy and/or reinstated limit applies may, at
the time of issuance and at the Company's option, be
allocated to (i) the contract which is in effect at the
effective date of said separate policy and/or at the
beginning of the period to which the reinstated limit
applies, or (ii) the contract which was in effect at the
effective date of the original policy. If the Company
elects (i), said losses shall be subject to a separate
retention and limit (as specified in the Retention and
Limit Article) from that of the original policy period.
3. As respects multiple year policies, whether issued
with one limit or reinstatement of the limit, each 12-
month period within a multiple year policy shall be
considered a separate period as regards the Company's
retention and the aggregate policy limit. However, as
respects business classified by the Company as "Project
Specific" coverages, the entire multiple year term shall
be considered one period as regards the Company's
retention and the aggregate policy limit.
4. As respects property losses subject hereto, all
individual losses directly occasioned by any one disaster,
occurrence or loss or series of disasters, occurrences or
losses arising out of one occurrence which occurs anywhere
in the world, but limited in the United States of America
and Canada to the United States or province of Canada and
states or provinces contiguous thereto and to one another.
However, the duration and extent of any one "loss event"
shall be limited to all individual losses sustained by the
Company occurring during any period of 168 consecutive
hours arising out of and directly occasioned by the same
loss event, except that the term "loss event" shall be
further defined as follows:
a. As regards windstorm, hail, tornado, hurricane,
cyclone, including ensuing collapse and water damage,
all individual losses sustained by the Company occurring
during any period of 72 consecutive hours arising out of
and directly occasioned by the same loss event.
However, the loss event need not be limited to one state
or province or states or provinces contiguous thereto.
b. As regards riot, riot attending a strike, civil
commotion, vandalism and malicious mischief, all
individual losses sustained by the Company occurring
during any period of 72 consecutive hours within the
area of one municipality or county and the
municipalities or counties contiguous thereto arising
out of and directly occasioned by the same loss event.
The maximum duration of 72 consecutive hours may be
extended in respect of individual losses which occur
beyond such 72 consecutive hours during the continued
occupation of an assured's premises by strikers,
provided such occupation commenced during the aforesaid
period.
c. As regards earthquake (the epicenter of which need
not necessarily be within the territorial confines
referred to above) and fire following directly
occasioned by the earthquake, only those individual fire
losses which commence during the period of 168
consecutive hours may be included in the Company's "loss
event."
d. As regards "freeze," only individual losses
directly occasioned by collapse, breakage of glass and
water damage (caused by bursting frozen pipes and tanks
and melting snow) may be included in the Company's "loss
event."
Except for those "loss events" referred to in
subparagraphs (a) and (b) above, the Company may choose
the date and time when any such period of consecutive
hours commences, provided that it is not earlier than the
date and time of the occurrence of the first recorded
individual loss sustained by the Company arising out of
that disaster, occurrence or loss, and provided that only
one such period of 168 consecutive hours shall apply with
respect to one loss event.
However, as respects those "loss events" referred to
in subparagraphs (a) and (b) above, if the disaster,
occurrence or loss occasioned by the occurrence is of
greater duration than 72 consecutive hours, then the
Company may divide that disaster, occurrence or loss into
two or more "loss events," provided that no two periods
overlap and no individual loss is included in more than
one such period, and provided that no period commences
earlier than the date and time of the occurrence of the
first recorded individual loss sustained by the Company
arising out of that disaster, occurrence or loss.
It is understood that losses arising from a
combination of two or more perils as a result of the same
occurrence shall be considered as having arisen from one
"loss event." Notwithstanding the foregoing, the hourly
limitations as stated above shall not be exceeded as
respects the applicable perils and no single "loss event"
shall encompass a time period greater than 168 consecutive
hours.
Notwithstanding the foregoing, it is understood that the
Company shall be the sole judge of what constitutes a single
"loss event."
F. "Net earned premium" as used herein is defined as gross earned
premium of the Company for the classes of business reinsured
hereunder, less cancellations and return premiums, and less
the earned portion of premiums ceded by the Company for
reinsurance which inures to the benefit of this Contract or
increases the Company's available capacity.
G. "Losses incurred" as used herein for each excess layer shall
mean ceded losses and loss adjustment expense paid as of the
effective date of calculation for the excess layer, plus the
ceded reserves for losses and loss adjustment expense
outstanding as of the same date, all as respects losses
arising out of loss events commencing during the term of this
Contract, plus:
1. As respects the first calculation of the profit
sharing, an amount representing Incurred But Not Reported
Losses (hereinafter called "IBNR") equal to 50.0% of the
premiums earned hereunder as respects the First Excess
Layer, and 60.0% of the premium earned hereunder as
respects the Second Excess Layer;
2. As respects the first recalculation of the profit
sharing, an amount representing IBNR equal to 35.0% of the
premiums earned hereunder as respects the First Excess
Layer, and 45.0% of the premium earned hereunder as
respects the Second Excess Layer;
3. As respects the second recalculation of the profit
sharing, an amount representing IBNR equal to 20.0% of the
premiums earned hereunder as respects the First Excess
Layer, and 30.0% of the premium earned hereunder as
respects the Second Excess Layer;
4. As respects the third recalculation of the profit
sharing, an amount representing IBNR equal to 0% of the
premiums earned hereunder as respects the First Excess
Layer, and 15.0% of the premium earned hereunder as
respects the Second Excess Layer.
IBNR shall not be included in any subsequent recalculations of
the profit sharing.
Article VII - Other Reinsurance
Notwithstanding the provisions of paragraph B of Article V, the
Company is permitted, but not required, to purchase other
facultative and/or other treaty reinsurance on business subject
to this Contract. Premiums ceded by the Company for reinsurance
which inures to the benefit of this Contract or increases the
Company's available capacity shall be deducted in determining
subject premium hereunder as provided in Article X.
Article VIII - Loss Settlements
A. Wherever a claim is reserved by the Company for an amount of
ultimate net loss greater than 50% of the Company's retention
hereunder as respects policy limits or statutory benefits
applicable to the claim which are greater than the Company's
retention, and/or whenever, in the opinion of the Company, a
loss appears likely to result in claim hereunder, the Company
shall notify the Reinsurer. Within 90 days after any claim is
reported to the Reinsurer in accordance with the foregoing,
the Company shall advise the Reinsurer whether or not, in the
sole judgment of the Company, the claim is anticipated to
exceed its retention hereunder. Further, as respects claims
arising under Casualty business subject hereto, the Company
shall notify the Reinsurer whenever a claim involves a
fatality, amputation, spinal chord damage, brain damage,
blindness, extensive burns or multiple fractures, regardless
of liability, if the policy limits or statutory benefits
applicable to the claim are greater than the Company's
retention. The Company shall also notify the Reinsurer of any
declaratory judgment expense relating directly to a specific
claim brought against a policy reinsured under this Contract.
The Reinsurer shall have the right to participate in the
adjustment of the loss at its own expense.
B. All loss settlements made by the Company, provided they are
within the terms of the original policies (other than extra
contractual obligations and loss in excess of policy limits)
and the terms of this Contract, shall be binding upon the
Reinsurer, and the Reinsurer agrees to pay all ultimate net
loss amounts for which it may be liable upon receipt of
reasonable evidence of the amount paid (or scheduled to be
paid) by the Company. The Company may, however, give the
Reinsurer written notice of its intention to pay any loss on a
certain date and may require the Reinsurer to have its share
of such loss in the possession of the Company by such date;
provided that the Reinsurer shall have a period of five
business days after receipt of such written notice from the
Company to mail or otherwise dispatch its payment.
Article IX - Salvage and Subrogation
The Reinsurer shall be credited with salvage (i.e., reimbursement
obtained or recovery made by the Company, less the actual cost,
excluding salaries of officials and employees of the Company, and
sums paid to attorneys as retainer, of obtaining such
reimbursement or making such recovery) on account of claims and
settlements involving reinsurance hereunder. Salvage thereon
shall always be used to reimburse the excess carriers in the
reverse order of their priority according to their participation
before being used in any way to reimburse the Company for its
primary loss. The Company hereby agrees to enforce its rights to
salvage or subrogation relating to any loss, a part of which loss
was sustained by the Reinsurer, and to prosecute all claims
arising out of such rights.
Article X - Reinsurance Premium
A. As premium for each layer of reinsurance coverage provided by
this Contract, the Company shall pay the Reinsurer the
following:
1. As respects the First Excess Layer of reinsurance
provided by this Contract, the Company shall pay the
Reinsurer 8.0% of the Company's net earned premium for the
term of this Contract.
2. As respects the Second Excess Layer of reinsurance
provided by this Contract, the Company shall pay the
Reinsurer 3.0% of the Company's net earned premium for the
term of this Contract.
In the event this Contract expires on a "runoff" basis in
accordance with the provisions of paragraph B of Article II,
premium for the reinsurance provided under each excess layer
of reinsurance coverage shall be the respective rate set forth
in subparagraphs 1 and 2 above applied to the Company's net
earned premium for each 12-month period within the runoff
period, as respects business in force on the effective date of
expiration.
B. For each excess layer of reinsurance coverage provided by this
Contract, the Company shall pay the Reinsurer an annual
deposit premium as follows, in five equal quarterly
installments on October 1, 1996, January 1, April 1, July 1
and October 1, 1997:
1. As respects the First Excess Layer of reinsurance,
$10,890,000 in five quarterly installments of $2,178,000.
2. As respects the Second Excess Layer of reinsurance,
$4,085,340 in five quarterly installments of $817,068.
It is understood that no deposit premium shall be payable
during the runoff period, if any.
C. Within 60 days after the expiration of this Contract, the
Company shall provide a report to the Reinsurer setting forth
the premium due hereunder for each excess layer, computed in
accordance with paragraph A, and any additional premium due
the Reinsurer or return premium due the Company shall be
remitted promptly. Premium for the runoff period, if any,
shall be payable by the Company within 60 days after the end
of each 12-month period within the runoff period.
Article XI - Late Payments
A. It is understood and agreed that the provisions of this
Article shall not be implemented unless specifically invoked,
in writing, by one of the parties to this Contract.
B. In the event any premium, loss or other payment due either
party is not received by the intermediary named in
Article XXVI (hereinafter referred to as the "Intermediary")
by the payment due date, the party to whom payment is due may,
by notifying the Intermediary in writing, require the debtor
party to pay, and the debtor party agrees to pay, an interest
penalty on the amount past due calculated for each such
payment on the last business day of each month as follows:
1. The number of full days which have expired since the
due date or the last monthly calculation, whichever the
lesser; times
2. 1/365th of the six month (or nearest thereto) U.S.
Treasury Bill rate, as quoted in the Wall Street Journal
on the first business day of the month for which the
calculation is being made; times
3. The amount past due, including accrued interest.
It is agreed that interest shall accumulate until payment of
the original amount due plus interest penalties have been
received by the Intermediary.
C. The establishment of the due date shall, for purposes of this
Article, be determined as follows:
1. As respects the payment of routine deposits and
premiums due the Reinsurer, the due date shall be as
provided for in the applicable section of this Contract.
In the event a due date is not specifically stated for a
given payment, it shall be deemed due 45 days after the
date of transmittal by the Intermediary of the initial
billing for each such payment.
2. Any claim or loss payment due the Company hereunder
shall be deemed due five business days following receipt
by the applicable Subscribing Reinsurer of written
notification that payment has been received from
Subscribing Reinsurers constituting at least 662/3% of the
interests and liabilities of all Subscribing Reinsurers
participating under the applicable layer of this Contract,
who are active as of the due date; it being understood
that said date shall not be later than 75 days from the
date of transmittal by the Intermediary of the initial
billing for each such payment.
3. As respects any payment, adjustment or return due
either party not otherwise provided for in subparagraphs 1
and 2 of paragraph C above, the due date shall be deemed
as five business days following receipt of written
notification that the provisions of this Article have been
invoked.
For purposes of interest calculations only, amounts due
hereunder shall be deemed paid upon receipt by the
Intermediary.
D. Nothing herein shall be construed as limiting or prohibiting
1) a Subscribing Reinsurer from contesting the validity of any
claim, or from participating in the defense or control of any
claim or suit; or 2) either party from contesting the validity
of any payment, or from initiating any arbitration or other
proceeding in accordance with the provisions of this Contract.
If the debtor party prevails in an arbitration or other
proceeding, then any interest penalties due hereunder on the
amount in dispute shall be null and void. If the debtor party
loses in such proceeding, then the interest penalty on the
amount determined to be due hereunder shall be calculated in
accordance with the provisions set forth above unless
otherwise determined by such proceedings. If a debtor party
advances payment of any amount it is contesting, and proves to
be correct in its contestation, either in whole or in part,
the other party shall reimburse the debtor party for any such
excess payment made plus interest on the excess amount
calculated in accordance with this Article.
E. As provided under Article IX, it is understood and agreed that
the Company shall furnish the Reinsurer with usual and
customary claim information and nothing herein shall be
construed as limiting or prohibiting a Subscribing Reinsurer
from requesting additional information that it may deem
necessary.
F. As respects subparagraph 2 of paragraph C above, a Subscribing
Reinsurer shall be deemed not to be active when it 1) ceases
assuming new or renewal reinsurance business through the
Intermediary; 2) is declared insolvent, or put in liquidation,
conservatorship or rehabilitation by a competent regulatory
authority or court; 3) is declared insolvent, or is the
subject of an administrative order or enters provisional
liquidation and/or liquidation; or 4) has a reduction in its
statutory surplus or shareholders' funds of 50% or more from
its statutory surplus or shareholders' funds as of the
effective date of this Contract.
G. Interest penalties arising out of the application of this
Article that are $100 or less from any party shall be waived
unless there is a pattern of late payments consisting of three
or more items over the course of any 12-month period.
Article XII - Profit Sharing
A. Separately, as respects each excess layer of reinsurance
coverage provided by this Contract, the Reinsurer shall pay
the Company a Profit Sharing equal to 25.0% of the net profit,
if any, accruing to the Reinsurer individually under each
excess layer of reinsurance hereunder. The Reinsurer's net
profit for each excess layer hereunder shall be calculated in
accordance with the following formula, it being understood
that a positive balance equals net profit and a negative
balance equals net loss:
1. Earned reinsurance premium hereunder for the excess
layer; less
2. Expenses incurred by the Reinsurer at 15.0% of
premiums earned hereunder for the excess layer; less
3. Losses incurred hereunder for the excess layer.
B. The Company shall calculate and report the Reinsurer's net
profit for each excess layer within 60 days after 12 months
following the date of expiration of this Contract, and within
60 days after the end of each 12-month period thereafter until
all losses subject hereto have been finally settled. Each
such calculation shall be based on cumulative transactions
hereunder from the effective date of this Contract through the
date of calculation. As respects the initial calculation
referred to above, any profit sharing shown to be due the
Company for one or both of the excess layers shall be paid by
the Reinsurer as promptly as possible after receipt and
verification of the Company's report. As respects each
recalculation, any additional profit sharing shown to be due
the Company for one or both of the excess layers shall be paid
by the Reinsurer as promptly as possible after receipt and
verification of the Company's report. Any return Profit
Sharing shown to be due the Reinsurer shall be paid by the
Company with its report.
Article XIII - Offset (BRMA 36C)
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 Contract. 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 XIV - Access to Records
The Reinsurer or its designated representatives shall have
access at any reasonable time to all records of the Company
which pertain in any way to this reinsurance.
Article XV - Liability of the Reinsurer
A. The liability of the Reinsurer shall follow that of the
Company in every case and be subject in all respects to all
the general and specific stipulations, clauses, waivers and
modifications of the Company's policies and any endorsements
thereon. However, in no event shall this be construed in any
way to provide coverage outside the terms and conditions set
forth in this Contract.
B. Nothing herein shall in any manner create any obligations or
establish any rights against the Reinsurer in favor of any
third party or any persons not parties to this Contract.
Article XVI - Net Retained Lines
A. This Contract applies only to that portion of any insurance or
reinsurance (whether inter-company reinsurance and/or
reinsurance assumed which has been declared to this Contract
and accepted by the Reinsurer) the Company retains net for its
own account (prior to deduction of any underlying reinsurance
specifically permitted in the Contract), and in calculating
the amount of any loss hereunder and also computing the amount
or amounts in excess of which this Contract attaches, only
loss or losses in respect of that portion of any insurance or
reinsurance the Company retains net for its own account shall
be included.
B. The amount of the Reinsurer's liability hereunder in respect
of any loss or losses shall not be increased by reason of the
inability of the Company to collect from any other
reinsurer(s), whether specific or general, any amounts which
may be due from such reinsurer(s), whether such inability
arises from the insolvency of such other reinsurer(s) or
otherwise.
Article XVII - Errors and Omissions (BRMA 14F)
Inadvertent delays, errors or omissions made in connection with
this Contract or any transaction hereunder shall not relieve
either party from any liability which would have attached had
such delay, error or omission not occurred, provided always that
such error or omission is rectified as soon as possible after
discovery.
Article XVIII - Currency (BRMA 12A)
A. Whenever the word "Dollars" or the "$" sign appears in this
Contract, they shall be construed to mean United States
Dollars and all transactions under this Contract shall be in
United States Dollars.
B. Amounts paid or received by the Company in any other currency
shall be converted to United States Dollars at the rate of
exchange at the date such transaction is entered into the
books of the Company.
Article XIX - Taxes (BRMA 50B)
In consideration of the terms under which this Contract 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 XX - Federal Excise Tax
If the Reinsurer is subject to the Federal Excise Tax, the
Reinsurer agrees to allow the Company to withhold the required
amount for the purpose of paying the Tax. In the event of any
return premium becoming due hereunder, the Reinsurer will deduct
from the amount of the return premium the same percentage as it
allowed, and the Company or its agent should take steps to
recover the Tax from the U. S. Government.
Article XXI - Unauthorized Reinsurers
A. If the Reinsurer is unauthorized in any state of the United
States of America or the District of Columbia, the Reinsurer
agrees to fund its share of the Company's ceded outstanding
loss and loss adjustment expense reserves (including incurred
but not reported loss reserves) by:
1. Clean, irrevocable and unconditional letters of
credit issued and confirmed, if confirmation is required
by the insurance regulatory authorities involved, by a
bank or banks meeting the NAIC Securities Valuation Office
credit standards for issuers of letters of credit and
acceptable to said insurance regulatory authorities;
and/or
2. Escrow accounts for the benefit of the Company;
and/or
3. Cash advances;
if, without such funding, a penalty would accrue to the
Company on any financial statement it is required to file with
the insurance regulatory authorities involved. The Reinsurer,
at its sole option, may fund in other than cash if its method
and form of funding are acceptable to the insurance regulatory
authorities involved.
B. With regard to funding in whole or in part by letters of
credit, it is agreed that each letter of credit will be in a
form acceptable to insurance regulatory authorities involved,
will be issued for a term of at least one year and will
include an "evergreen clause," which automatically extends the
term for at least one additional year at each expiration date
unless written notice of non-renewal is given to the Company
not less than 30 days prior to said expiration date. The
Company and the Reinsurer further agree, notwithstanding
anything to the contrary in this Contract, that said letters
of credit may be drawn upon by the Company or its successors
in interest at any time, without diminution because of the
insolvency of the Company or the Reinsurer, but only for one
or more of the following purposes:
1. To reimburse itself for the Reinsurer's share of
losses and/or loss adjustment expense paid under the terms
of policies reinsured hereunder, unless paid in cash by
the Reinsurer;
2. To reimburse itself for the Reinsurer's share of any
other amounts claimed to be due hereunder, unless paid in
cash by the Reinsurer;
3. To fund a cash account in an amount equal to the
Reinsurer's share of any ceded outstanding loss and loss
adjustment expense reserves (including incurred but not
reported loss reserves) funded by means of a letter of
credit which is under non-renewal notice, if said letter
of credit has not been renewed or replaced by the
Reinsurer 10 days prior to its expiration date;
4. To refund to the Reinsurer any sum in excess of the
actual amount required to fund the Reinsurer's share of
the Company's ceded outstanding loss and loss adjustment
expense reserves (including incurred but not reported loss
reserves), if so requested by the Reinsurer.
In the event the amount drawn by the Company on any letter of
credit is in excess of the actual amount required for B(1) or
B(3), or in the case of B(2), the actual amount determined to
be due, the Company shall promptly return to the Reinsurer the
excess amount so drawn.
Article XXII - Insolvency
A. In the event of the insolvency of one or more of the reinsured
companies, this reinsurance shall be payable directly to the
company 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 without diminution because of the insolvency of
the company or because the liquidator, receiver, conservator
or statutory successor of the company 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 shall give written notice to the Reinsurer of the
pendency of a claim against the company 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 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 as part of the
expense of conservation or liquidation to the extent of a pro
rata share of the benefit which may accrue to the company
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 Contract as though such expense had been
incurred by the company.
C. It is further understood and agreed that, in the event of the
insolvency of one or more of the reinsured companies, the
reinsurance under this Contract shall be payable directly by
the Reinsurer to the company or to its liquidator, receiver or
statutory successor, except as provided by Section 4118(a) of
the New York Insurance Law or except (1) where this Contract
specifically provides another payee of such reinsurance in the
event of the insolvency of the company or (2) where 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.
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 Contract, 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
two arbitrators will jointly petition the American Arbitration
Association to appoint the third arbitrator from the AAA's
Panel of Reinsurance Arbitrators.
D. All arbitrators shall be disinterested active or former
executive officers of insurance or reinsurance companies,
underwriters at Lloyd's of London, reinsurance intermediaries
and attorneys actively or formerly engaged in practicing law
in the areas of insurance or reinsurance.
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. The arbitration shall take place in Woodland Hills,
California or, if unanimously agreed by the panel, any other
mutually acceptable location.
G. If more than one reinsurer is involved in the same dispute,
all such reinsurers shall constitute and act as one party for
purposes of this article. However, nothing shall impair the
rights of such reinsurers to assert several rather than joint
defenses or claims, nor shall this provision be construed as
changing the liability of the reinsurers under the terms of
this Contract from several to joint.
H. The panel shall make its decision considering custom and
practice as promptly as possible following the termination of
hearings. The decision of any two arbitrators, when rendered
in writing shall be final and binding, and judgment upon the
award may be entered in any court having jurisdiction. The
panel is empowered to grant such interim relief as it may deem
appropriate.
I. Each party shall bear the expense of its own arbitrator and
shall jointly and equally with the other party bear 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 attorney's
fees and interest to the extent permitted by law. Insofar as
the arbitration panel chooses to look to substantive law, it
shall consider the law of the State of California.
Article XXIV - Service of Suit (BRMA 49C)
(Applicable if the Reinsurer is not domiciled in the United
States of America, and/or is not authorized in any State,
Territory or District of the United States where authorization is
required by insurance regulatory authorities)
A. It is agreed that in the event the Reinsurer fails to pay any
amount claimed to be due hereunder, the Reinsurer, at the
request of the Company, will submit to the jurisdiction of any
court of competent jurisdiction within the United States.
Nothing in this Article constitutes or should be understood to
constitute a waiver of the Reinsurer's rights to commence an
action in any court of competent jurisdiction in the United
States, to remove an 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.
B. Further, pursuant to any statute of any state, territory or
district of the United States which makes provision therefor,
the Reinsurer hereby designates the party named in its
Interests and Liabilities Agreement, or if no party is named
therein, 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 Contract.
Article XXV - Agency Agreement
Gryphon Insurance Group, Inc. shall be deemed the agent of the
reinsured companies for purposes of sending or receiving
notices required by the terms and conditions of this Contract,
and for purposes of remitting or receiving any monies due any
party.
Article XXVI - Intermediary (BRMA 23A)
E. W. Blanch Co. is hereby recognized as the Intermediary
negotiating this Contract 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 E. W. Blanch Co., Reinsurance Services, 3500 West 80th
Street, Minneapolis, Minnesota 55431. 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.
In Witness Whereof, the Company by its duly authorized
representative has executed this Contract as of the date
undermentioned at:
New York, New York,this ____ day of _____________ 199___.
__________________________________________
Gryphon Insurance Group, Inc., on behalf of
Associated International Insurance Company
Calvert Insurance Company
Timberline Insurance Company
Schedule A
attached to the
"Working" Per Event Reinsurance Contract
Effective: October 1, 1996
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Philadelphia, Pennsylvania
Timberline Insurance Company
Eugene, Oregon
through the auspices of
Gryphon Insurance Group, Inc.
New York, New York
A. Umbrella business produced by Jean Deal & Associates, Dallas,
Texas for the Specialty Lines Division of Gryphon Insurance
Group, Inc., Woodland Hills, California.
B. DIC business produced by the Pacific Coast DIC Division of
Gryphon Insurance Group, Inc., Woodland Hills, California.
C. General Property E&S business produced by the General E&S
Division of Gryphon Insurance Group, Inc., Woodland Hills,
California.
D. Animal Mortality business produced by American Equine
Insurance Group, Rolling Meadows, Illinois for Gryphon
Insurance Group, Inc., Hoboken, New Jersey.
E. Canadian business produced by KMS Insurance Services, Toronto,
Canada for Gryphon Insurance Group, Inc., Hoboken, New Jersey.
F. Midwest Garage program produced by Business Risk Services,
Geneva, Illinois for Gryphon Insurance Group, Inc., Hoboken,
New Jersey.
R:\96RIL\11130.DOC
Excess Per Event Reinsurance Contract
Effective: October 1, 1996
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Philadelphia, Pennsylvania
Timberline Insurance Company
Eugene, Oregon
through the auspices of
Gryphon Insurance Group, Inc.
New York, New York
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
Excess Per Event Reinsurance Contract
Effective: October 1, 1996
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Philadelphia, Pennsylvania
Timberline Insurance Company
Eugene, Oregon
through the auspices of
Gryphon Insurance Group, Inc.
New York, New York
Reinsurers Participations
Folksamerica Reinsurance Company 10.0%
Gerling Global Reinsurance Corporation, U. S. Branch 10.0
St. Paul Reinsurance Management Corporation
(for St. Paul Fire and Marine Insurance Company) 15.0
Swiss Reinsurance America Corporation 17.5
TIG Reinsurance Company 15.0
Transatlantic Reinsurance Company 17.5
Winterthur Reinsurance Corporation of America 4.0
Through Denis M. Clayton & Co. Ltd.
Certain Companies Per Signing Schedule(s) 11.0%
Total 100.0%
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
Table of Contents
Article Page
I Business Reinsured 1
II Term 2
III Territory (BRMA 51A) 3
IV Exclusions 3
V Retention and Limit 3
VI Reinstatement 4
VII Definitions 4
VIII Other Reinsurance 8
IX Loss Settlements 8
X Salvage and Subrogation 9
XI Reinsurance Premium 9
XII Late Payments 10
XIII Offset (BRMA 36C) 12
XIV Access to Records 12
XV Liability of the Reinsurer 12
XVI Net Retained Lines 12
XVII Errors and Omissions (BRMA 14F) 13
XVIII Currency (BRMA 12A) 13
XIX Taxes (BRMA 50B) 13
XX Federal Excise Tax 13
XXI Unauthorized Reinsurers 14
XXII Insolvency 15
XXIII Arbitration 16
XXIV Service of Suit (BRMA 49C) 17
XXV Agency Agreement 17
XXVI Intermediary (BRMA 23A) 17
Schedule A
Excess Per Event Reinsurance Contract
Effective: October 1, 1996
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Philadelphia, Pennsylvania
Timberline Insurance Company
Eugene, Oregon
through the auspices of
Gryphon Insurance Group, Inc.
New York, New York
(hereinafter referred to collectively as the "Company")
by
The Subscribing Reinsurer(s) Executing the
Interests and Liabilities Agreements
Attached Hereto
(hereinafter referred to as the "Reinsurer")
Article I - Business Reinsured
A. By this Contract the Reinsurer agrees to reinsure and/or
indemnify the Company for the net excess liability which may
accrue to the Company under its policies, contracts and
binders of insurance or reinsurance (hereinafter called
"policies") in force on the effective date hereof, or issued
or renewed on or after that date, and classified by the
Company as all lines of business (direct and assumed) as
respects programs managed by the Company, subject to the
terms, conditions and limitations hereinafter set forth.
Programs set forth in Schedule A attached to and forming part
of this Contract shall be excluded from coverage hereunder.
The Company shall have the option of excluding additional
programs from coverage hereunder in accordance with paragraph
B below.
B. The Company shall have the option to exclude any program from
this Contract by submitting each such program in writing to
the Reinsurer not more than 90 days after the inception of the
program as respects those programs eligible for coverage
hereunder. Casualty programs that generate $5,000,000 or less
of estimated annualized subject earned premium during the
first 12 months of the program will be deemed to have
automatic coverage under the terms and conditions hereinafter
set forth if not excluded from this Contract. All property
programs and those casualty programs that generate greater
than $5,000,000 of estimated annualized subject earned premium
during the first 12 months of the program must be submitted to
the lead reinsurer(s) hereunder for acceptance on behalf of
the Reinsurer of coverage under the terms and conditions
hereinafter set forth if declared to this Contract.
The Company shall be the sole judge of what constitutes a
"program."
Article II - Term
A. This Contract shall become effective on October 1, 1996, with
respect to occurrences arising out of loss events commencing
on or after that date, and shall remain in force until
December 31, 1997, both days inclusive. Notwithstanding the
foregoing, in the event negotiations for a renewal of this
Contract are not completed by December 31, 1997, at the
Company's option, this Contract shall be extended by addendum
through March 31, 1998.
B. Except as provided in paragraph C below, reinsurance hereunder
on business in force on the effective date of expiration shall
remain in full force and effect until expiration, cancellation
or next premium anniversary of such business, whichever first
occurs, but in no event beyond 36 months, plus odd time (not
exceeding 42 months in all) as respects multiple year
policies, nor 12 months plus odd time (not exceeding 18 months
in all) as respects policies of one year policy terms or less,
following the effective date of expiration. However, these
limitations shall not apply to any Extended Reporting Period
(hereinafter referred to as "ERP") or Extended Discovery
Endorsement (hereinafter referred to as "EDE") provisions or
policies classified by the Company as Project Specific
Coverage.
C. Notwithstanding the provisions of paragraph B above, the
Company shall have the option of reassuming the unexpired
liability of the Reinsurer hereunder on business in force on
the effective date of expiration, in which event the Reinsurer
shall not be liable for claims made or losses arising out of
loss events commencing after that date. As respects policies
providing an aggregate limit of liability which are in force
on the effective date of expiration, the Reinsurer shall be
liable for the entire aggregate loss under such policies if
the inception date of the policy period falls on or before the
effective date of expiration, as respects policies written on
an occurrence basis, or if the first claim is made on or
before the effective date of expiration as respects policies
written on a claims made basis.
D. If this Contract expires while a loss event covered hereunder
is in progress, the Reinsurer's liability hereunder shall,
subject to the other terms and conditions of this Contract, be
determined as if the entire loss event had occurred prior to
the expiration of this Contract, provided that no part of such
loss event is claimed against any renewal or replacement of
this Contract.
Article III - Territory (BRMA 51A)
The territorial limits of this Contract shall be identical with
those of the Company's policies.
Article IV - Exclusions
This Contract does not apply to and specifically excludes the
following:
1. Reinsurance assumed by the Company (unless an assumed
program has been specifically declared to this Contract
and accepted by the Reinsurer), except inter-company
reinsurance between any member companies of Gryphon
Insurance Group, Inc.
2. Financial guarantee and insolvency.
3. Business written by the Company on a co-indemnity
basis where the Company is not an equal or controlling
carrier.
4. Nuclear risks as defined in the "Nuclear Incident
Exclusion Clause - Liability - Reinsurance" and the
"Nuclear Incident Exclusion Clause - Physical Damage"
attached to and forming part of this Contract.
5. Liability as a member, subscriber or reinsurer of any
Pool, Syndicate or Association which is not underwritten
or controlled by the Company. However, this exclusion
shall not apply to Assigned Risk Plans or similar plans.
6. 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, insolvency fund, plan, pool, association, fund or
other arrangement, however 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.
Article V - Retention and Limit
A. As respects business subject to this Contract, the Company
shall retain and be liable for the first $10,000,000 of
ultimate net loss arising out of each loss event. The
Reinsurer shall then be liable for the amount by which such
ultimate net loss exceeds the Company's retention, but the
liability of the Reinsurer shall not exceed $15,000,000 as
respects any one loss event.
B. With respect to business subject hereunder, the maximum policy
limit (except statutory) with respect to any one coverage, any
one policy shall be deemed not to exceed $5,000,000 any one
loss event, with limits in excess of this amount deemed
reinsured elsewhere.
Article VI - Reinstatement
A. In the event all or any portion of the reinsurance hereunder
is exhausted by loss, the amount so exhausted shall be
reinstated immediately from the time the loss event commences
hereon. As respects each amount so reinstated, the Company
shall pay the Reinsurer additional premium equal to the
product of the following:
1. The percentage of the loss event limit reinstated
(based on the loss paid by the Reinsurer); times
2. The earned reinsurance premium for the term of this
Contract (exclusive of reinstatement premium and exclusive
of the earned reinsurance premium for the runoff period,
if any), it being understood and agreed that if the loss
event commences during the runoff period, reinstatement
premium shall be based on the earned reinsurance premium
during the runoff period for business in force on the
effective date of expiration of this Contract.
B. Whenever the Company requests payment by the Reinsurer of any
loss hereunder, the Company shall submit a statement to the
Reinsurer of reinstatement premium due the Reinsurer. If the
earned reinsurance premium for the term of this Contract or
the runoff period, if applicable, has not been finally
determined as of the date of any such statement, the
calculation of reinstatement premium due shall be based on the
annual deposit premium and shall be readjusted when the earned
reinsurance premium for the term of this Contract has been
finally determined. Any reinstatement premium shown to be due
the Reinsurer as reflected by any such statement (less prior
payments, if any) shall be payable by the Company concurrently
with payment by the Reinsurer of the requested loss. Any
return reinstatement premium shown to be due the Company shall
be remitted by the Reinsurer as promptly as possible after
receipt and verification of the Company's statement.
C. Notwithstanding anything stated herein, the liability of the
Reinsurer hereunder shall not exceed $15,000,000 as respects
loss or losses arising out of any one loss event, nor shall it
exceed $45,000,000 as respects all losses arising out of loss
events subject to this Contract.
Article VII - Definitions
A. "Net excess liability" as used herein shall mean those amounts
payable by the Company as defined in the ultimate net loss
definition set forth in paragraph B below.
B. "Ultimate net loss" as used herein is defined as the sum or
sums (including loss in excess of policy limits, extra
contractual obligations, prejudgment interest if included as
part of an award or judgment and any loss adjustment expense,
as herein after defined) paid or payable by the Company in
settlement of claims and in satisfaction of judgments rendered
on account of such claims, after deduction of all salvage, all
recoveries and all claims on inuring insurance or reinsurance,
whether collectible or not. Nothing herein shall be construed
to mean that losses under this Contract are not recoverable
until the Company's ultimate net loss has been ascertained.
C. "Loss in excess of policy limits" and "extra contractual
obligations" as used herein shall mean:
1. "Loss in excess of policy limits" shall mean 90% of
any amount paid or payable by the Company under a policy
ceded to this Contract in excess of its policy limits, but
otherwise within the terms of its policy, as a result of
an action against it by its insured or its insured's
assignee to recover damages the insured is legally
obligated to pay to a third party claimant because of the
Company's alleged or actual negligence or bad faith in
rejecting a settlement within policy limits, or in
discharging its duty to defend or prepare the defense in
the trial of an action against its insured, or in
discharging its duty to prepare or prosecute an appeal
consequent upon such an action.
2. "Extra contractual obligations" shall mean 90% of any
punitive, exemplary, compensatory or consequential
damages, other than loss in excess of policy limits, paid
or payable by the Company under a policy ceded to this
Contract as a result of an action against it by its
insured, its insured's assignee or a third party claimant,
which action alleges negligence for bad faith on the part
of the Company in handling a claim under a policy subject
to this Contract.
Any loss in excess of policy limits or extra contractual
obligation shall be deemed to have occurred on the same date
as the loss covered or alleged to be covered under the policy.
Notwithstanding anything stated herein, this Contract shall
not apply to any loss incurred by the Company as a result of
any fraudulent and/or criminal act by any officer or director
of the Company acting individually or collectively or in
collusion with an individual or corporation or any other
organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
D. "Loss adjustment expense" as used herein shall mean expenses
allocable to the investigation, defense and/or settlement of
specific claims, including 1) prejudgment interest, unless
included as part of the award or judgment; 2) post-judgment
interest; and 3) legal expenses and costs incurred in
connection with coverage questions and legal actions connected
thereto; but not including office expenses or salaries of the
Company's regular employees, except that allocated outside
costs of the Company's or RA&MCO's salaried adjusters shall be
included. Claim costs shall also be included which are
incurred by RA&MCO and billed hourly to the Company in
accordance with its management agreement.
With respect to legal expenses and costs incurred in direct
connection with declaratory judgment actions brought to
resolve policy language coverage disputes between the Company
and its insured, such expenses shall, for purposes of this
Contract, not exceed an amount equal to the applicable limit
of the policy or policies involved unless agreed to by the
Reinsurer.
E. The term "loss event" as used herein shall mean an accident,
occurrence, claim made, loss discovered or any other
circumstance that triggers coverage as provided, defined, or
interpreted in the Company's original policies, however:
1. Where the Company's policy provides for an aggregate
limit of liability, the term "loss event" shall mean all
losses subject to that aggregate limit, each aggregate
period. For purposes of this Contract, the date of loss
for purposes of this reinsurance will be the inception
date of each aggregate period, as respects policies
written on an occurrence basis and the date the first
claim is made as respects policies written on a claims
made basis. Nevertheless, the Company may extract from
any aggregate "loss event" a single loss so it may be
combined with losses from other policies and submitted as
a single "loss event."
In the event the Company's losses arising out of a
single "loss event" involve policies providing different
types of coverage such as an occurrence and a claims made
policy, all losses can be combined and submitted as a
single "loss event" utilizing the occurrence date of loss
for the purpose of reinsurance coverage. In the event the
Company's losses arising out of a single "loss event"
involve multiple claims made policies, all losses can be
combined and submitted as a single "loss event" utilizing
the date the first claim is made for the purpose of
reinsurance coverage.
2. As respects policies written on a claims made basis,
the date of loss shall be the date the claim is made under
the original policy. As respects any extended reporting
or discovery period provisions under a claims made policy
subject hereto, it is understood and agreed that the
following shall apply:
a. Claims made against and/or reported to the Company
during the extended reporting or discovery period shall
be deemed to have occurred on the last full day of the
applicable policy period;
b. If the Company issues a separate policy and/or
reinstates the aggregate limit provided under a policy,
premium and losses during the period to which said
separate policy and/or reinstated limit applies may, at
the time of issuance and at the Company's option, be
allocated to (i) the contract which is in effect at the
effective date of said separate policy and/or at the
beginning of the period to which the reinstated limit
applies, or (ii) the contract which was in effect at the
effective date of the original policy. If the Company
elects (i), said losses shall be subject to a separate
retention and limit (as specified in the Retention and
Limit Article) from that of the original policy period.
3. As respects multiple year policies, whether issued
with one limit or reinstatement of the limit, each 12-
month period within a multiple year policy shall be
considered a separate period as regards the Company's
retention and the aggregate policy limit. However, as
respects business classified by the Company as "Project
Specific" coverages, the entire multiple year term shall
be considered one period as regards the Company's
retention and the aggregate policy limit.
4. As respects property losses subject hereto, all
individual losses directly occasioned by any one disaster,
occurrence or loss or series of disasters, occurrences or
losses arising out of one occurrence which occurs anywhere
in the world, but limited in the United States of America
and Canada to the United States or province of Canada and
states or provinces contiguous thereto and to one another.
However, the duration and extent of any one "loss event"
shall be limited to all individual losses sustained by the
Company occurring during any period of 168 consecutive
hours arising out of and directly occasioned by the same
loss event, except that the term "loss event" shall be
further defined as follows:
a. As regards windstorm, hail, tornado, hurricane,
cyclone, including ensuing collapse and water damage,
all individual losses sustained by the Company occurring
during any period of 72 consecutive hours arising out of
and directly occasioned by the same loss event.
However, the loss event need not be limited to one state
or province or states or provinces contiguous thereto.
b. As regards riot, riot attending a strike, civil
commotion, vandalism and malicious mischief, all
individual losses sustained by the Company occurring
during any period of 72 consecutive hours within the
area of one municipality or county and the
municipalities or counties contiguous thereto arising
out of and directly occasioned by the same loss event.
The maximum duration of 72 consecutive hours may be
extended in respect of individual losses which occur
beyond such 72 consecutive hours during the continued
occupation of an assured's premises by strikers,
provided such occupation commenced during the aforesaid
period.
c. As regards earthquake (the epicenter of which need
not necessarily be within the territorial confines
referred to above) and fire following directly
occasioned by the earthquake, only those individual fire
losses which commence during the period of 168
consecutive hours may be included in the Company's "loss
event."
d. As regards "freeze," only individual losses
directly occasioned by collapse, breakage of glass and
water damage (caused by bursting frozen pipes and tanks
and melting snow) may be included in the Company's "loss
event."
Except for those "loss events" referred to in
subparagraphs (a) and (b) above, the Company may choose
the date and time when any such period of consecutive
hours commences, provided that it is not earlier than the
date and time of the occurrence of the first recorded
individual loss sustained by the Company arising out of
that disaster, occurrence or loss, and provided that only
one such period of 168 consecutive hours shall apply with
respect to one loss event.
However, as respects those "loss events" referred to
in subparagraphs (a) and (b) above, if the disaster,
occurrence or loss occasioned by the occurrence is of
greater duration than 72 consecutive hours, then the
Company may divide that disaster, occurrence or loss into
two or more "loss events," provided that no two periods
overlap and no individual loss is included in more than
one such period, and provided that no period commences
earlier than the date and time of the occurrence of the
first recorded individual loss sustained by the Company
arising out of that disaster, occurrence or loss.
It is understood that losses arising from a
combination of two or more perils as a result of the same
occurrence shall be considered as having arisen from one
"loss event." Notwithstanding the foregoing, the hourly
limitations as stated above shall not be exceeded as
respects the applicable perils and no single "loss event"
shall encompass a time period greater than 168 consecutive
hours.
Notwithstanding the foregoing, it is understood that the
Company shall be the sole judge of what constitutes a single
"loss event."
F. "Net earned premium" as used herein is defined as gross earned
premium of the Company for the classes of business reinsured
hereunder, less cancellations and return premiums, and less
the earned portion of premiums ceded by the Company for
reinsurance which inures to the benefit of this Contract or,
increases the Company's available capacity.
Article VIII - Other Reinsurance
Notwithstanding the provisions of paragraph B of Article V, the
Company is permitted, but not required, to purchase other
facultative and/or other treaty reinsurance on business subject
to this Contract. Premiums ceded by the Company for reinsurance
which inures to the benefit of this Contract or increases the
Company's available capacity shall be deducted in determining
subject premium hereunder as provided in Article XI.
Article IX - Loss Settlements
A. Wherever a claim is reserved by the Company for an amount of
ultimate net loss greater than 50% of the Company's retention
hereunder as respects policy limits or statutory benefits
applicable to the claim which are greater than the Company's
retention, and/or whenever, in the opinion of the Company, a
loss appears likely to result in claim hereunder, the Company
shall notify the Reinsurer. Within 90 days after any claim is
reported to the Reinsurer in accordance with the foregoing,
the Company shall advise the Reinsurer whether or not, in the
sole judgment of the Company, the claim is anticipated to
exceed its retention hereunder. Further, as respects claims
arising under Casualty business subject hereto, the Company
shall notify the Reinsurer whenever a claim involves a
fatality, amputation, spinal chord damage, brain damage,
blindness, extensive burns or multiple fractures, regardless
of liability, if the policy limits or statutory benefits
applicable to the claim are greater than the Company's
retention. The Company shall also notify the Reinsurer of any
declaratory judgment expense relating directly to a specific
claim brought against a policy reinsured under this Contract.
The Reinsurer shall have the right to participate in the
adjustment of the loss at its own expense.
B. All loss settlements made by the Company, provided they are
within the terms of the original policies (other than extra
contractual obligations and loss in excess of policy limits)
and the terms of this Contract, shall be binding upon the
Reinsurer, and the Reinsurer agrees to pay all ultimate net
loss amounts for which it may be liable upon receipt of
reasonable evidence of the amount paid (or scheduled to be
paid) by the Company. The Company may, however, give the
Reinsurer written notice of its intention to pay any loss on a
certain date and may require the Reinsurer to have its share
of such loss in the possession of the Company by such date;
provided that the Reinsurer shall have a period of five
business days after receipt of such written notice from the
Company to mail or otherwise dispatch its payment.
Article X - Salvage and Subrogation
The Reinsurer shall be credited with salvage (i.e., reimbursement
obtained or recovery made by the Company, less the actual cost,
excluding salaries of officials and employees of the Company, and
sums paid to attorneys as retainer, of obtaining such
reimbursement or making such recovery) on account of claims and
settlements involving reinsurance hereunder. Salvage thereon
shall always be used to reimburse the excess carriers in the
reverse order of their priority according to their participation
before being used in any way to reimburse the Company for its
primary loss. The Company hereby agrees to enforce its rights to
salvage or subrogation relating to any loss, a part of which loss
was sustained by the Reinsurer, and to prosecute all claims
arising out of such rights.
Article XI - Reinsurance Premium
A. As premium for the reinsurance coverage provided hereunder,
the Company shall pay the Reinsurer 1.03% of the Company's net
earned premium for the term of this Contract, subject to a
minimum of $1,120,000 In the event this Contract expires on a
"runoff" basis in accordance with the provisions of paragraph
B of Article II, premium for the reinsurance provided
hereunder shall be 1.03% of the Company's net earned premium
for each 12-month period within the runoff period, as respects
business in force on the effective date of expiration.
B. The Company shall pay the Reinsurer an annual deposit premium
of $1,402,360 in five equal quarterly installments of $280,472
on October 1, 1996, January 1, April 1, July 1 and October 1,
1997. It is understood that no deposit premium shall be
payable during the runoff period, if any.
C. Within 60 days after the expiration of this Contract, the
Company shall provide a report to the Reinsurer setting forth
the premium due hereunder, computed in accordance with
paragraph A, and any additional premium due the Reinsurer or
return premium due the Company shall be remitted promptly..
Premium for the runoff period, if any, shall be payable by the
Company within 60 days after the end of each 12-month period
within the runoff period.
Article XII - Late Payments
A. It is understood and agreed that the provisions of this
Article shall not be implemented unless specifically invoked,
in writing, by one of the parties to this Contract.
B. In the event any premium, loss or other payment due either
party is not received by the intermediary named in
Article XXVII (hereinafter referred to as the "Intermediary")
by the payment due date, the party to whom payment is due may,
by notifying the Intermediary in writing, require the debtor
party to pay, and the debtor party agrees to pay, an interest
penalty on the amount past due calculated for each such
payment on the last business day of each month as follows:
1. The number of full days which have expired since the
due date or the last monthly calculation, whichever the
lesser; times
2. 1/365th of the six month (or nearest thereto) U.S.
Treasury Bill rate, as quoted in the Wall Street Journal
on the first business day of the month for which the
calculation is being made; times
3. The amount past due, including accrued interest.
It is agreed that interest shall accumulate until payment of
the original amount due plus interest penalties have been
received by the Intermediary.
C. The establishment of the due date shall, for purposes of this
Article, be determined as follows:
1. As respects the payment of routine deposits and
premiums due the Reinsurer, the due date shall be as
provided for in the applicable section of this Contract.
In the event a due date is not specifically stated for a
given payment, it shall be deemed due 45 days after the
date of transmittal by the Intermediary of the initial
billing for each such payment.
2. Any claim or loss payment due the Company hereunder
shall be deemed due five business days following receipt
by the applicable Subscribing Reinsurer of written
notification that payment has been received from
Subscribing Reinsurers constituting at least 662/3% of the
interests and liabilities of all Subscribing Reinsurers
participating under the applicable layer of this Contract,
who are active as of the due date; it being understood
that said date shall not be later than 75 days from the
date of transmittal by the Intermediary of the initial
billing for each such payment.
3. As respects any payment, adjustment or return due
either party not otherwise provided for in subparagraphs 1
and 2 of paragraph C above, the due date shall be deemed
as five business days following receipt of written
notification that the provisions of this Article have been
invoked.
For purposes of interest calculations only, amounts due
hereunder shall be deemed paid upon receipt by the
Intermediary.
D. Nothing herein shall be construed as limiting or prohibiting
1) a Subscribing Reinsurer from contesting the validity of any
claim, or from participating in the defense or control of any
claim or suit; or 2) either party from contesting the validity
of any payment, or from initiating any arbitration or other
proceeding in accordance with the provisions of this Contract.
If the debtor party prevails in an arbitration or other
proceeding, then any interest penalties due hereunder on the
amount in dispute shall be null and void. If the debtor party
loses in such proceeding, then the interest penalty on the
amount determined to be due hereunder shall be calculated in
accordance with the provisions set forth above unless
otherwise determined by such proceedings. If a debtor party
advances payment of any amount it is contesting, and proves to
be correct in its contestation, either in whole or in part,
the other party shall reimburse the debtor party for any such
excess payment made plus interest on the excess amount
calculated in accordance with this Article.
E. As provided under Article IX, it is understood and agreed that
the Company shall furnish the Reinsurer with usual and
customary claim information and nothing herein shall be
construed as limiting or prohibiting a Subscribing Reinsurer
from requesting additional information that it may deem
necessary.
F. As respects subparagraph 2 of paragraph C above, a Subscribing
Reinsurer shall be deemed not to be active when it 1) ceases
assuming new or renewal reinsurance business through the
Intermediary; 2) is declared insolvent, or put in liquidation,
conservatorship or rehabilitation by a competent regulatory
authority or court; 3) is declared insolvent, or is the
subject of an administrative order or enters provisional
liquidation and/or liquidation; or 4) has a reduction in its
statutory surplus or shareholders' funds of 50% or more from
its statutory surplus or shareholders' funds as of the
effective date of this Contract.
G. Interest penalties arising out of the application of this
Article that are $100 or less from any party shall be waived
unless there is a pattern of late payments consisting of three
or more items over the course of any 12-month period.
Article XIII - Offset (BRMA 36C)
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 Contract. 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 XIV - Access to Records
The Reinsurer or its designated representatives shall have
access at any reasonable time to all records of the Company
which pertain in any way to this reinsurance.
Article XV - Liability of the Reinsurer
A. The liability of the Reinsurer shall follow that of the
Company in every case and be subject in all respects to all
the general and specific stipulations, clauses, waivers and
modifications of the Company's policies and any endorsements
thereon. However, in no event shall this be construed in any
way to provide coverage outside the terms and conditions set
forth in this Contract.
B. Nothing herein shall in any manner create any obligations or
establish any rights against the Reinsurer in favor of any
third party or any persons not parties to this Contract.
Article XVI - Net Retained Lines
A. This Contract applies only to that portion of any insurance or
reinsurance (whether inter-company reinsurance and/or
reinsurance assumed which has been declared to this Contract
and accepted by the Reinsurer) the Company retains net for its
own account (prior to deduction of any underlying reinsurance
specifically permitted in the Contract), and in calculating
the amount of any loss hereunder and also computing the amount
or amounts in excess of which this Contract attaches, only
loss or losses in respect of that portion of any insurance or
reinsurance the Company retains net for its own account shall
be included.
B. The amount of the Reinsurer's liability hereunder in respect
of any loss or losses shall not be increased by reason of the
inability of the Company to collect from any other
reinsurer(s), whether specific or general, any amounts which
may be due from such reinsurer(s), whether such inability
arises from the insolvency of such other reinsurer(s) or
otherwise.
Article XVII - Errors and Omissions (BRMA 14F)
Inadvertent delays, errors or omissions made in connection with
this Contract or any transaction hereunder shall not relieve
either party from any liability which would have attached had
such delay, error or omission not occurred, provided always that
such error or omission is rectified as soon as possible after
discovery.
Article XVIII - Currency (BRMA 12A)
A. Whenever the word "Dollars" or the "$" sign appears in this
Contract, they shall be construed to mean United States
Dollars and all transactions under this Contract shall be in
United States Dollars.
B. Amounts paid or received by the Company in any other currency
shall be converted to United States Dollars at the rate of
exchange at the date such transaction is entered into the
books of the Company.
Article XIX - Taxes (BRMA 50B)
In consideration of the terms under which this Contract 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 XX - Federal Excise Tax
If the Reinsurer is subject to the Federal Excise Tax, the
Reinsurer agrees to allow the Company to withhold the required
amount for the purpose of paying the Tax. In the event of any
return premium becoming due hereunder, the Reinsurer will deduct
from the amount of the return premium the same percentage as it
allowed, and the Company or its agent should take steps to
recover the Tax from the U. S. Government.
Article XXI - Unauthorized Reinsurers
A. If the Reinsurer is unauthorized in any state of the United
States of America or the District of Columbia, the Reinsurer
agrees to fund its share of the Company's ceded outstanding
loss and loss adjustment expense reserves (including incurred
but not reported loss reserves) by:
1. Clean, irrevocable and unconditional letters of
credit issued and confirmed, if confirmation is required
by the insurance regulatory authorities involved, by a
bank or banks meeting the NAIC Securities Valuation Office
credit standards for issuers of letters of credit and
acceptable to said insurance regulatory authorities;
and/or
2. Escrow accounts for the benefit of the Company;
and/or
3. Cash advances;
if, without such funding, a penalty would accrue to the
Company on any financial statement it is required to file with
the insurance regulatory authorities involved. The Reinsurer,
at its sole option, may fund in other than cash if its method
and form of funding are acceptable to the insurance regulatory
authorities involved.
B. With regard to funding in whole or in part by letters of
credit, it is agreed that each letter of credit will be in a
form acceptable to insurance regulatory authorities involved,
will be issued for a term of at least one year and will
include an "evergreen clause," which automatically extends the
term for at least one additional year at each expiration date
unless written notice of non-renewal is given to the Company
not less than 30 days prior to said expiration date. The
Company and the Reinsurer further agree, notwithstanding
anything to the contrary in this Contract, that said letters
of credit may be drawn upon by the Company or its successors
in interest at any time, without diminution because of the
insolvency of the Company or the Reinsurer, but only for one
or more of the following purposes:
1. To reimburse itself for the Reinsurer's share of
losses and/or loss adjustment expense paid under the terms
of policies reinsured hereunder, unless paid in cash by
the Reinsurer;
2. To reimburse itself for the Reinsurer's share of any
other amounts claimed to be due hereunder, unless paid in
cash by the Reinsurer;
3. To fund a cash account in an amount equal to the
Reinsurer's share of any ceded outstanding loss and loss
adjustment expense reserves (including incurred but not
reported loss reserves) funded by means of a letter of
credit which is under non-renewal notice, if said letter
of credit has not been renewed or replaced by the
Reinsurer 10 days prior to its expiration date;
4. To refund to the Reinsurer any sum in excess of the
actual amount required to fund the Reinsurer's share of
the Company's ceded outstanding loss and loss adjustment
expense reserves (including incurred but not reported loss
reserves), if so requested by the Reinsurer.
In the event the amount drawn by the Company on any letter of
credit is in excess of the actual amount required for B(1) or
B(3), or in the case of B(2), the actual amount determined to
be due, the Company shall promptly return to the Reinsurer the
excess amount so drawn.
Article XXII - Insolvency
A. In the event of the insolvency of one or more of the reinsured
companies, this reinsurance shall be payable directly to the
company 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 without diminution because of the insolvency of
the company or because the liquidator, receiver, conservator
or statutory successor of the company 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 shall give written notice to the Reinsurer of the
pendency of a claim against the company 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 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 as part of the
expense of conservation or liquidation to the extent of a pro
rata share of the benefit which may accrue to the company
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 Contract as though such expense had been
incurred by the company.
C. It is further understood and agreed that, in the event of the
insolvency of one or more of the reinsured companies, the
reinsurance under this Contract shall be payable directly by
the Reinsurer to the company or to its liquidator, receiver or
statutory successor, except as provided by Section 4118(a) of
the New York Insurance Law or except (1) where this Contract
specifically provides another payee of such reinsurance in the
event of the insolvency of the company or (2) where 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.
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 Contract, 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
two arbitrators will jointly petition the American Arbitration
Association to appoint the third arbitrator from the AAA's
Panel of Reinsurance Arbitrators.
D. All arbitrators shall be disinterested active or former
executive officers of insurance or reinsurance companies,
underwriters at Lloyd's of London, reinsurance intermediaries
and attorneys actively or formerly engaged in practicing law
in the areas of insurance or reinsurance.
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. The arbitration shall take place in Woodland Hills,
California or, if unanimously agreed by the panel, any other
mutually acceptable location.
G. If more than one reinsurer is involved in the same dispute,
all such reinsurers shall constitute and act as one party for
purposes of this article. However, nothing shall impair the
rights of such reinsurers to assert several rather than joint
defenses or claims, nor shall this provision be construed as
changing the liability of the reinsurers under the terms of
this Contract from several to joint.
H. The panel shall make its decision considering custom and
practice as promptly as possible following the termination of
hearings. The decision of any two arbitrators, when rendered
in writing shall be final and binding, and judgment upon the
award may be entered in any court having jurisdiction. The
panel is empowered to grant such interim relief as it may deem
appropriate.
I. Each party shall bear the expense of its own arbitrator and
shall jointly and equally with the other party bear 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 attorney's
fees and interest to the extent permitted by law. Insofar as
the arbitration panel chooses to look to substantive law, it
shall consider the law of the State of California.
Article XXIV - Service of Suit (BRMA 49C)
(Applicable if the Reinsurer is not domiciled in the United
States of America, and/or is not authorized in any State,
Territory or District of the United States where authorization is
required by insurance regulatory authorities)
A. It is agreed that in the event the Reinsurer fails to pay any
amount claimed to be due hereunder, the Reinsurer, at the
request of the Company, will submit to the jurisdiction of any
court of competent jurisdiction within the United States.
Nothing in this Article constitutes or should be understood to
constitute a waiver of the Reinsurer's rights to commence an
action in any court of competent jurisdiction in the United
States, to remove an 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.
B. Further, pursuant to any statute of any state, territory or
district of the United States which makes provision therefor,
the Reinsurer hereby designates the party named in its
Interests and Liabilities Agreement, or if no party is named
therein, 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 Contract.
Article XXV - Agency Agreement
Gryphon Insurance Group, Inc. shall be deemed the agent of the
reinsured companies for purposes of sending or receiving
notices required by the terms and conditions of this Contract,
and for purposes of remitting or receiving any monies due any
party.
Article XXVI - Intermediary (BRMA 23A)
E. W. Blanch Co. is hereby recognized as the Intermediary
negotiating this Contract 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 E. W. Blanch Co., Reinsurance Services, 3500 West 80th
Street, Minneapolis, Minnesota 55431.
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.
In Witness Whereof, the Company by its duly authorized
representative has executed this Contract as of the date
undermentioned at:
New York, New York,this ____ day of _____________ 199___.
__________________________________________
Gryphon Insurance Group, Inc., on behalf of
Associated International Insurance Company
Calvert Insurance Company
Timberline Insurance Company
Schedule A
attached to the
Excess Per Event Reinsurance Contract
Effective: October 1, 1996
issued to
Associated International Insurance Company
Woodland Hills, California
Calvert Insurance Company
Philadelphia, Pennsylvania
Timberline Insurance Company
Eugene, Oregon
through the auspices of
Gryphon Insurance Group, Inc.
New York, New York
A. Umbrella business produced by Jean Deal & Associates, Dallas,
Texas for the Specialty Lines Division of Gryphon Insurance
Group, Inc., Woodland Hills, California.
B. DIC business produced by the Pacific Coast DIC Division of
Gryphon Insurance Group, Inc., Woodland Hills, California.
C. General Property E&S business produced by the General E&S
Division of Gryphon Insurance Group, Inc., Woodland Hills,
California.
D. Animal Mortality business produced by American Equine
Insurance Group, Rolling Meadows, Illinois for Gryphon
Insurance Group, Inc., Hoboken, New Jersey.
E. Canadian business produced by KMS Insurance Services, Toronto,
Canada for Gryphon Insurance Group, Inc., Hoboken, New Jersey.
F. Midwest Garage program produced by Business Risk Services,
Geneva, Illinois for Gryphon Insurance Group, Inc., Hoboken,
New Jersey.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Gryphon Holdings Inc.:
We consent to the incorporation by reference in the Registration
Statements (Nos. 333-12775, 33-96922, and 33-83630) on Form S-8
of Gryphon Holdings Inc. of our report dated February 14, 1997,
relating to the consolidated balance sheets of Gryphon Holdings
Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the two year period then
ended, and all related schedules as of and for the years ended
December 31, 1996 and 1995, which report appears in the December
31, 1996 annual report on Form 10-K of Gryphon Holdings Inc.
KPMG Peat Marwick LLP
New York, New York
March 26, 1997
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 333-12775, 33-96922, and 33-83630)
pertaining to the 1995 Non-Employee Director Stock Option Plan of
Gryphon Holdings Inc., 401(k) and Profit Sharing Plan of Gryphon
Holdings Inc., and the 1993 Stock Option Plan and Restricted
Stock Plan of Gryphon Holdings Inc., respectively, of our report
dated February 21, 1995, with respect to the 1994 consolidated
financial statements and schedules of Gryphon Holdings Inc.
included in the Annual Report (Form 10-K) for the year ended
December 31, 1996.
ERNST & YOUNG LLP
New York, New York
March 19, 1997
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