<PAGE>
________________________________________________________________________________
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998
Commission file number 0-28214
MEDICAL DEFENSE HOLDING CO.
(Exact name of registrant as specified in its charter)
Missouri 43-1696112
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1311 East Woodhurst, Springfield, Missouri 65804
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (417) 887-3120
__________________________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
----- -----
As of November 9, 1998 there were 999,998 shares of the Registrant's Class
A Common Stock, $.50 par value outstanding and there were 1,460,174 shares
outstanding of the Registrant's Class B Common Stock, $.50 par value.
________________________________________________________________________________
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
----------
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity investments, at market value (amortized
cost of $67,426,628 and $73,477,904, respectively) $69,765,030 $74,091,837
Short-term investments, at market 9,071,229 7,242,682
----------- -----------
Total investments 78,836,259 81,334,519
Other assets:
Cash and cash equivalents 3,428,828 2,955,161
Accrued investment income 700,188 998,833
Premium receivable 1,656,526 1,521,050
Reinsurance recoverable on loss and loss expenses:
Unpaid claims 1,240,000 1,373,000
Property and equipment, net of accumulated depreciation
of $1,312,234 and $1,250,772, respectively 989,464 1,028,089
Federal income tax:
Current 145,879 383,879
Deferred 238,000
Other assets 397,568 336,094
----------- -----------
Total assets $87,632,712 $89,930,625
=========== ===========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30, 1998 and December 31, 1997
________
<TABLE>
<CAPTION>
(Unaudited)
LIABILITIES & September 30, December 31,
STOCKHOLDERS' EQUITY 1998 1997
------------- ------------
<S> <C> <C>
Liabilities:
Claims and policy liabilities:
Unpaid losses and loss adjustment expenses $54,656,265 $58,654,324
Unearned premiums 6,205,109 6,059,398
----------- -----------
Total claims and policy liabilities 60,861,374 64,713,722
Other liabilities:
Retrospective premium due reinsurers 1,113,047 1,113,047
Amounts withheld or retained by Company
for account of others 202,155 252,429
Other liabilities 425,465 1,496,619
----------- -----------
Total liabilities 62,602,041 67,575,817
----------- -----------
Stockholders' equity:
Preferred stock, par value $1.00 per share;
12,000,000 shares authorized; 7,426,010 and
7,436,095 shares issued and outstanding, respectively 7,426,010 7,436,095
Class A common stock, $0.50 per share;
2,000,000 shares authorized; 999,998 shares
issued and outstanding 499,999 499,999
Class B common stock, $0.50 per share;
48,000,000 shares authorized; 53,400 and 33,230
shares issued and outstanding, respectively 26,700 16,615
Additional paid-in capital 2,728,369 2,728,369
Accumulated comprehensive income;
unrealized gains on investments, net of deferred
taxes of $797,181 and $208,872, respectively 1,547,468 405,456
Retained earnings 12,802,125 11,268,274
----------- -----------
Total stockholders' equity 25,030,671 22,354,808
----------- -----------
Total liabilities, redeemable preferred
stock, and stockholders' equity $87,632,712 $89,930,625
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
________
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $1,325,249 $2,783,336 $5,884,923 $ 8,688,523
Investment income 1,189,311 1,340,868 3,644,880 3,987,970
Net realized investment gains 2,381 22,797 33,389 29,740
Other income 2,591 71 2,951 536
---------- ---------- ---------- -----------
Total revenues 2,519,532 4,147,072 9,566,143 12,706,769
---------- ---------- ---------- -----------
Expenses:
Losses and loss adjustment expenses,
net of reinsurance recoveries of $133,000,
$(40,000), $133,000 and $540,000, respectively 1,048,707 3,766,912 6,555,933 10,194,156
Amortization of policy acquisition costs 58,687 6,592 116,395 6,592
Other underwriting and insurance
expenses 474,659 446,479 1,552,197 1,508,060
Investment expenses 54,349 59,017 175,688 179,968
Other operating expenses 94,212 39,125 220,388 138,929
---------- ---------- ---------- -----------
Total expenses 1,730,614 4,318,125 8,620,601 12,027,705
---------- ---------- ---------- -----------
Income/(Loss) before provision
for federal income taxes 788,918 (171,053) 945,542 679,064
---------- ---------- ---------- -----------
Provision for federal income taxes:
Current 238,000 (22,000) 238,000 92,000
Deferred (761,838) (191,446) (826,309) (305,446)
---------- ---------- ---------- -----------
Total tax benefit (523,838) (213,446) (588,309) (213,446)
---------- ---------- ---------- -----------
Net Income $1,312,756 $ 42,393 $1,533,851 $ 892,510
========== ========== ========== ===========
Earnings per common share and common
equivalent share (Note 9):
Basic earnings per common share $1.25 $0.04 $1.46 $0.87
===== ===== ===== =====
Diluted earnings per common share and
common share equivalent $0.09 $0.01 $0.10 $0.05
===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
________
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Net Income $1,312,756 $ 42,393 $1,533,851 $ 892,510
---------- -------- ---------- ----------
Other comprehensive income, net of tax:
Unrealized holding gains arising during the
period net of tax 1,018,432 528,101 1,164,049 433,965
Less: reclassification adjustment for gains included
in net income, net of tax (1,572) (15,046) (22,037) (19,628)
---------- -------- ---------- ----------
Other comprehensive income 1,016,860 513,055 1,142,012 414,337
---------- -------- ---------- ----------
Comprehensive income $2,329,616 $555,448 $2,675,863 $1,306,847
========== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED STATEMENTS OF CASH FLOW
for the nine months ended September 30, 1998 and 1997
(Unaudited)
________
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
-------------- --------------
<S> <C> <C>
Operating activities:
Net income $ 1,533,851 $ 892,510
Adjustments to reconcile net income to net cash provided
by operating activities:
Realized investment gains (33,389) (29,740)
Depreciation and amortization of deferred policy
acquisition costs 61,462 86,633
Provision for deferred income tax (826,309) (305,446)
Change in assets and liabilities:
Accrual and amortization of investment income 136,008 66,196
Premiums receivable from policyholders (135,476) (438,787)
Deferral of policy acquisition costs (119,689)
Reinsurance recoverable on loss & loss expenses:
Paid claims 2,798
Unpaid claims 133,000 540,000
Unpaid losses & loss adjustment expenses (3,998,059) (1,663,734)
Unearned premiums 145,711 (867,538)
Amounts withheld or retained by Company on account
of others (50,274) (49,694)
Income tax 238,000 2,199,197
Other assets (61,474) (79,636)
Other liabilities (1,071,154) 599,187
------------ ------------
Net cash (used) provided by operating activities (3,928,103) 832,257
------------ ------------
Investing activities:
Proceeds from:
Fixed maturity investments - Sales 6,053,867 4,563,750
Fixed maturity investments - Maturities 10,167,978 6,733,977
Short-term investments 15,225,000 12,050,000
Purchase of investments:
Fixed maturity investments (10,263,965) (8,795,898)
Short-term investments (16,758,273) (15,849,247)
Purchases of property and equipment (net) (22,837) (19,015)
------------ ------------
Net cash provided (used) by investing activities 4,401,770 (1,316,433)
------------ ------------
Net increase (decrease) in cash and cash equivalents 473,667 (484,176)
Cash and cash equivalents, beginning of period 2,955,161 3,514,854
------------ ------------
Cash and cash equivalents, end of period $ 3,428,828 $ 3,030,678
============ ===========
Federal income taxes paid (refunded) $ 0 $(2,107,197)
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
________
1. Organization and Related Matters:
Medical Defense Holding Co. (the "Company" or "MDHC") is a Missouri general
business corporation formed on November 28, 1994, for the purpose of
facilitating the consummation of a series of transactions whereby Medical
Defense Associates ("MDA") converted from a mutual assessment insurance
organization under Chapter 383 RSMo to a wholly-owned stock insurance company
subsidiary of the Company. MDA's conversion was completed on June 26, 1995 in
accordance with an agreement and plan of conversion dated November 29, 1994.
The agreement and plan of conversion was approved by eligible policyholders
at a special meeting on April 3, 1995.
MDA was organized in 1976 as a mutual assessment insurance organization for
the purpose of providing protection against loss from medical professional
liability claims for Missouri health care professionals. MDA's wholly-owned
subsidiary, Medical Defense Services Corp. ("MDS") provides management
services primarily to MDA. Medical Defense Services Corp.'s wholly-owned
subsidiary, Medical Defense Insurance Company ("MDIC"), is a stock insurance
company organized under Chapter 379 RSMo for the purpose of providing
protection against loss from medical professional liability claims. MDIC is
licensed to operate in Missouri and Kansas but only wrote business in Kansas
from its inception in 1982 until September 1, 1988 when it ceased writing
business. In June of 1994, MDIC again began writing policies in Kansas.
2. Basis of Presentation:
All September 30, 1998 and 1997 information contained in the following
footnotes is unaudited. It is management's opinion that the financial
statements as of September 30, 1998 and 1997 reflect all adjustments which
are necessary to present a fair statement of results for the interim periods
presented. The financial statements of MDA and its subsidiaries as of
September 30, 1998 and 1997, have been consolidated with the Company in a
manner similar to a pooling of interests to reflect the conversion of MDA to
a wholly-owned stock subsidiary of the Company, effective on June 26, 1995.
All significant intercompany transactions have been eliminated. All other
adjustments made are of a normal recurring nature.
3. Summary of Significant Accounting Policies:
The following is a description of the significant accounting policies under
generally accepted accounting principles followed by the Company in the
preparation of the accompanying consolidated financial statements:
A. Pervasiveness of Estimates:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
__________
B. Investments:
The Company has classified all investments in fixed maturities as
available for sale. Should the Company experience declines in market
value that are other than temporary, the difference between amortized
cost and market would be recognized through current earnings and
included in comprehensive income.
Fair value is defined as market value based on third-party quoted market
prices or when unavailable, on similar investments.
Investment income includes amortization of premium and accretion of
discount relating to fixed maturities acquired at other than par value.
C. Income Taxes:
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in
the financial statements or tax returns.
D. Unpaid Losses and Loss Adjustment Expenses:
The Company's accounting policies relating to unpaid losses and loss
adjustment expenses are described in Note 8.
4. Capital Stock:
The Company has issued shares of $1.00 par value redeemable convertible
preferred stock to the eligible policyholders of MDA in exchange for their
mutual policyholders' rights in MDA. Each share of preferred stock is
convertible into two shares of Medical Defense Holding Co. Class B Common
Stock, at the holder's option, and may be converted at any time prior to
redemption. Each share of preferred stock is redeemable, at the Company's
option, after three years from the date of issuance, at a price per share of
$1.00. The preferred stock does not provide a stated dividend and no
dividends may be paid on any Company common stock while there are preferred
stock shares outstanding. Subsequent to the conversion of MDA to a stock
company, 730,087 shares of preferred stock were converted to 1,460,174 shares
of Class B common stock.
The Company has issued 999,998 shares of $0.50 par value Class A common stock
in accordance with the agreement and plan of conversion dated November 29,
1994, in exchange for cash.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
________
5. Investments, continued:
-----------
The following information summarizes the difference between amortized cost
and market value of fixed maturities investments:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
September 30, 1998
------------------
U.S. Treasury debt securities and obligations
of U.S. Government corporations and
agencies $32,884,510 $1,570,530 $34,455,040
Corporate debt securities 2,798,703 141,694 2,940,397
Mortgage-backed securities 25,810,199 463,553 $ 8,301 26,265,451
Other debt securities 5,933,216 173,044 2,118 6,104,142
----------- ---------- -------- -----------
$67,426,628 $2,348,821 $ 10,419 $69,765,030
=========== ========== ======== ===========
December 31, 1997
-----------------
U.S. Treasury debt securities and obligations
of U.S. Government corporations and
agencies $36,435,311 $ 417,449 $ 85,125 $36,767,635
Corporate debt securities 5,126,604 81,809 2,942 5,205,471
Mortgage-backed securities 27,129,137 270,152 92,807 27,306,482
Other debt securities 4,786,852 40,073 14,676 4,812,249
----------- ---------- -------- -----------
$73,477,904 $ 809,483 $195,550 $74,091,837
=========== ========== ======== ===========
</TABLE>
The change in net unrealized holding gain or loss on available for sale
securities, net of deferred taxes, for the nine months ended September 30,
1998 and the year ended December 31, 1997, is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
$ 1,142,012 $643,376
=========== ========
</TABLE>
The amortized cost and estimated market value of debt securities by
contractual maturity are shown as follows:
<TABLE>
<CAPTION>
Amortized Estimated Market
Cost Value
----------- ----------------
<S> <C> <C>
September 30, 1998
------------------
Due in one year or less $ 8,158,239 $ 8,271,815
Due after one year through five years 31,443,208 32,342,339
Due after five years through ten years 19,754,221 20,873,414
Due after ten years 8,070,960 8,277,462
----------- -----------
$67,426,628 $69,765,030
=========== ===========
</TABLE>
For purposes of the above, bonds without prepayment characteristics have been
included at their stated maturity date. Bonds with prepayment features are
included at their estimated maturity date as supplied by the Company's
investment adviser. Actual prepayment experience may differ from estimates.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
-----------
5. Investments, continued:
Accrued investment income at September 30, 1998 and December 31, 1997, is
as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
U.S. Treasury securities $448,168 $705,909
Corporate bonds 54,996 114,506
Mortgage-backed securities 171,018 159,026
Other debt securities 26,006 19,392
-------- --------
$700,188 $998,833
======== ========
</TABLE>
Securities on Deposit With Statutory Authorities:
To comply with the Missouri Department of Insurance, MDA had a U.S.
Treasury Note with a par value of $1,400,000 as of September 30, 1998
and December 31, 1997 on deposit with the State of Missouri. In
addition, to comply with a special agreement with the Missouri
Department of Insurance related to the conversion of MDA to a Chapter
379 stock insurance company and the release of MDA members from
potential future assessment liability, MDA had U.S. Treasury Notes
with a total par value of $5,000,000, on deposit with the State of
Missouri at September 30, 1998 and December 31, 1997.
To comply with the Missouri Department of Insurance, MDIC had a U.S.
Treasury Note with a par value of $850,000 as of September 30, 1998
and December 31, 1997, on deposit with the State of Missouri.
Escrow Funds:
Pursuant to the settlement agreement for a specific claim, MDA has
deposited $400,000 in escrow to guarantee future annuity payments. The
Company receives all earnings on the escrowed funds. At September 30,
1998 and December 31, 1997, the escrowed funds were invested in a
$400,000 par value U.S. Treasury Note with a fair value of $418,064
and $406,248, respectively, which is included with investments on the
balance sheet. This U.S. Treasury Note matures April 30, 2001.
Net investment income by source was as follows for the nine months ended
September 30, 1998 and 1997:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Investment income:
Fixed maturity investments $3,253,490 $3,667,168
Short-term investments 391,390 320,802
---------- ----------
Total investment income 3,644,880 3,987,970
Less investment expenses 175,688 179,968
---------- ----------
Net investment income $3,469,192 $3,808,002
========== ==========
</TABLE>
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO FINANCIAL STATEMENTS, Continued
(Unaudited)
________
5. Investments, continued:
Realized gains on investments reflected in the results of operations for the
nine months ended September 30, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Sale of fixed maturity investments:
Realized gains $ 43,553 $38,253
Realized losses (10,164) (8,513)
-------- -------
Net realized gains $ 33,389 $29,740
======== =======
</TABLE>
6. Statutory Disclosures:
Net income and surplus reported by MDA separately in its reports filed or to
be filed with the Missouri Department of Insurance utilizing statutory
accounting principles and practices prescribed or permitted by the Missouri
Department of Insurance are as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Net income for nine months ended September 30 $ 626,741 $ 319,691
=========== ===========
Surplus as regards policyholders (including equity in MDS and
MDIC), September 30 $18,081,374 $18,962,189
=========== ===========
</TABLE>
Net income and surplus reported by MDIC separately in its reports filed or to
be filed with the Missouri Department of Insurance utilizing statutory
accounting principles and practices prescribed or permitted by the Missouri
Department of Insurance are as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Net income for nine months ended September 30 $ 30,377 $ 44,044
========== ==========
Surplus as regards policyholders, September 30 $4,447,723 $4,376,742
========== ==========
</TABLE>
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
________
7. Federal Income Tax:
------------------
The Company files a consolidated federal income tax return. MDA and MDIC are
statutorily exempt from state income taxes. State income taxes relating to
the Company and MDS are included in other operating expenses in the
consolidated statement of income. None of the Company's income tax filings
are currently under examination.
The following table accounts for the differences between the total actual tax
provision and the amounts obtained by applying the statutory U.S. federal
income tax rate to income before income taxes:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
---------------------- ----------------------
Income Effective Income Effective
Taxes Tax Rate Taxes Tax Rate
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Pre-tax income calculated at
statutory tax rates $ 321,484 34.00% $ 230,882 34.00%
Net operating loss carryforward 76,853 8.13 (4,468) (.66)
Change in valuation allowance (986,646) (104.35) (439,860) (64.77)
--------- ------- --------- -------
Provision for income taxes $(588,309) (62.22)% $(213,446) (31.43)%
========= ======= ========== =======
</TABLE>
The components of the net deferred tax asset at September 30, 1998 and
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-------------------------- --------------------------
Deferred Deferred Deferred Deferred
Tax Asset Tax Liability Tax Asset Tax Liability
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Tax discounting of loss reserves $3,400,972 $3,571,217
Tax acceleration of unearned premium 421,947 412,039
Unrealized gain/loss $797,181 $208,872
---------- -------- ---------- --------
$3,822,919 $797,181 $3,983,256 $208,872
========== ======== ========== ========
Net deferred federal income tax asset $3,025,738 $3,774,384
Valuation allowance (2,787,738) (3,774,384)
---------- ----------
Net realized deferred tax asset $ 238,000 $ 0
========== ==========
</TABLE>
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
________
7. Federal Income Tax, continued:
------------------
The valuation allowance represents the difference between the total deferred
tax asset related to loss reserve discounting required by the Internal
Revenue Service and the amount that is more likely than not to be realized.
Medical malpractice is a long tail line of business. MDA's payout pattern as
well as the industry payout pattern for this line of business is expected to
be 15 years or longer.
Management evaluates the payout pattern based on advice from its outside
actuary concerning trends in claim frequencies and severities and needed
changes in future premium rates, industry trends and experience of direct
Missouri competitors in these matters.
Projection of future income is inherently uncertain and the achievability of
any projection is made more difficult by the length of the discount period.
Historical losses cannot be adjusted precisely to future cost levels and the
impacts of future emergence of new classes of losses or types of losses
which may not be represented sufficiently in MDA's data base or which are
not yet quantifiable, cannot be precisely anticipated. Utilizing an outside
actuary, management believes that it can reasonably estimate the amount of
the loss reserves which will likely settle in the next two years. Based on
this estimate, management determines how much of the discount will likely
reverse and could be recovered, if necessary, from taxes paid in the two-
year carryback period.
Management does not believe it can reasonably determine the amount of loss
reserve deferred tax benefit which can be recovered from future taxable
income arising more than two years in the future, using a more likely than
not standard.
The change in the valuation allowance is as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------- -------------
<S> <C>
$(986,646) $(439,860)
========= =========
</TABLE>
8. Unpaid Losses and Loss Adjustment Expenses:
------------------------------------------
The Company's reserves for loss and loss adjustment expenses represent the
estimated ultimate cost of all losses and loss adjustment expenses which are
unpaid at the balance sheet date, on a consolidated basis, for MDA and MDIC.
The reserves include estimates of future trends in claim frequency, severity
and cash flow, which could vary as the losses are ultimately settled; thus,
the ultimate liability may be in excess of, or less than, the amounts
provided in the accompanying financial statement.
Company management believes the reserves are reasonably stated to cover the
ultimate net cost of unpaid losses and loss adjustment expenses; however, as
the reserves are based on estimates, there can be no assurance that the
ultimate liability will not differ from such estimates.
MDIC's reserves for loss and loss adjustment expenses have not been
actuarially reviewed due to the few number of claims outstanding. MDIC's
reserves represent less than 1% of total reserves for the periods
represented by the financial statements.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
---------
8. Unpaid Losses and Loss Adjustment Expenses, continued:
------------------------------------------
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Balance at January 1 $58,654,324 $63,205,000
Less reinsurance recoverables 1,373,000 1,951,000
----------- -----------
Net balance at January 1 57,281,324 61,254,000
----------- -----------
Incurred related to:
Current year 7,759,140 13,505,569
Prior years (1,203,207) (204,632)
----------- -----------
Total incurred 6,555,933 13,300,937
----------- -----------
Paid related to:
Current year 119,691 265,569
Prior years 10,301,301 17,008,044
----------- -----------
Total paid 10,420,992 17,273,613
----------- -----------
Net balance at end of period 53,416,265 57,281,324
Plus reinsurance recoverables 1,240,000 1,373,000
----------- -----------
Balance at end of period $54,656,265 $58,654,324
=========== ===========
</TABLE>
9. Net Income Per Common Share:
---------------------------
Basic EPS is computed by dividing income (loss) available to common
shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS is computed by dividing income (loss) available
to shareholders by the weighted-average number of common shares plus the
weighted-average number of common share equivalents outstanding for the
period. Anti-dilutive amounts are not shown.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
___________
9. Net Income Per Common Share, continued:
All shares of the Company's preferred stock are convertible to common stock
at a ratio of two shares of common stock to one share of preferred stock,
and since the Company's preferred stock has no stated dividend rate, and
thus, no effective yield, these securities are considered common stock
equivalents for the purpose of computing diluted net income per common
share. Net income per common share is computed using net income divided by
the weighted average number of common shares and common share equivalents
outstanding.
Net income per common share for the nine months ended September 30, is as
follows:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Net income $ 1,533,851 $ 892,510
=========== ===========
Weighted average common shares outstanding 1,051,403 1,030,283
Weighted average common stock options
expressed as common stock equivalents 14,854,015 18,407,021
----------- -----------
Weighted average common and
equivalent shares outstanding 15,905,418 19,437,304
=========== ===========
Basic earnings per share $ 1.46 $ 0.87
=========== ===========
Diluted earnings per share $ 0.10 $ 0.05
=========== ===========
</TABLE>
10. Commitments and Contingencies:
-----------------------------
The Company is party to a number of insurance claims arising in the normal
course of business. While the results of litigation cannot be predicted with
certainty, management, based upon the advice of Company's counsel, believes
that the final outcome of such litigation will not have a material adverse
effect on the consolidated financial position or results of operations of
the Company.
Under employment agreements with certain officers and directors, payments
totaling approximately $500,000 are to be made if the number of insureds
fall below 913. At September 30, 1998, the number of insureds totaled
approximately 1,045. Such payments are forfeited in whole or part if the
individual does not remain employed for a period of 36 months following the
payment date.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General
Medical Defense Holding Co. ("MDHC") is a Missouri general business corporation
formed for the purpose of facilitating the conversion of Medical Defense
Associates ("MDA") from a mutual insurance association to a stock insurance
company. On June 26, 1995, the conversion was completed with the exchange of the
policyholders' rights in MDA, the mutual insurance association, for shares of
convertible Preferred Stock in MDHC, the parent holding company. MDHC owns all
of the outstanding shares of MDA.
The accompanying consolidated financial statements and related discussion
include the accounts of MDHC and its wholly-owned insurance subsidiary, MDA, and
have been consolidated with MDHC in a manner similar to a pooling of interests
to reflect the conversion of MDA to a wholly-owned stock subsidiary of MDHC.
MDHC does not have any significant revenue producing operations of its own other
than through its ownership of MDA. Cash flow within MDHC consists of investment
income and operating expenses. Also included in the accompanying consolidated
financial statements are MDA's wholly-owned subsidiaries, Medical Defense
Services Corp. ("MDS") and Medical Defense Insurance Company ("MDIC"). MDS is a
wholly-owned subsidiary of MDA and provides management services primarily to
MDA. MDIC is a wholly-owned subsidiary of MDS and is a stock insurance company
organized under Chapter 379 RSMo for the purpose of providing protection against
loss from medical professional liability claims. During the past 12 months, MDIC
has written a small amount of premium, less than $100,000, entirely in the state
of Kansas.
"Safe Harbor" Statement
Except for the historical information contained herein, this Form 10-Q contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Act of 1995. These statements typically, but not exclusively, are
identified by the inclusion of phrases such as "the company anticipates," "the
company believes," "the company expects," "the company plans," "the company
intends," and other phrases of similar meaning. Such forward-looking statements
involve known and unknown risks, uncertainties, contingencies and other factors
that may cause the company's actual results of operations, financial condition
or business performance to be materially different from the results of
operation, financial condition or business performance expressed or implied by
such forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to the outcome of the transaction with
MAI, the redemption and the tender offer, market competition and consolidation,
government regulation and health care reform, changes in key management, the
year 2000 issue, and other factors discussed elsewhere in this report.
Results of Operations
MDHC recorded a 39.2% decrease in total revenues in the third quarter of 1998
and a 24.7% decrease in total revenue for the nine months ended September 30,
1998, compared with the same periods in the prior year. The decrease in total
revenues during the quarter and the nine months ended September 30, 1998, was
primarily due to a decrease in premium revenue. This decrease in premiums earned
was due to a decline in premiums written during the first nine months of 1998 of
approximately $1,720,000 or 22.6% compared to the same time period in 1997. This
decrease in premiums written was the result of a decline in total policyholders
of approximately 10%, which was concentrated in the higher premium surgical
classifications. The remaining decreases were the result of various other
changes in the Company's book of business which primarily relate to specialty
classifications and discounts which policyholders are eligible to receive. The
Company's premium revenue has declined over the past several periods although
the Company has continued to intensify its services to its existing
policyholders and has worked aggressively to try to add new policyholders. This
continued decline in insureds has been primarily the result of two factors.
First, many Missouri physicians and surgeons have joined large health care
networks which have, in many cases, decided to self-insure their professional
liability risks and secondly, a number of the Company's competitors have
continued to engage in significant discounting in an effort to acquire market
share. The Company's philosophy continues to be to maintain actuarially sound
pricing integrity and not to engage in unwarranted price discounting. As a
result of this shrinking of the market and intense price competition the Company
entered into an agreement on September 29, 1998, with Medical Assurance, Inc.
("MAI") to sell its renewal rights with respect to the Company's outstanding
medical malpractice insurance policies effective January 1, 1999. See "Planned
Transaction With MAI" for more information.
Investment income decreased 11.3% for the quarter ended September 30, 1998, and
decreased by 8.6% for the nine months ended September 30, 1998, compared to the
same periods in 1997. This variation was primarily the result of a reduced level
of total invested assets and declines in market interest rates during the first
nine months of 1998. Net realized investment gains were $2,381 in the third
quarter and $33,389 for the nine months ended September 30, 1998, compared to
$22,797 and $29,740 in the same prior year periods, respectively.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued
Results of Operations, continued
MDHC's total expenses for the third quarter and nine-month period ended
September 30, 1998 represented approximately 69% and 90% of total revenues,
respectively, compared to 104% and 95% during the same periods in 1997. Actual
expenses and expenses as a percentage of revenues decreased compared to the same
periods in 1997. For the quarter and the nine months ended September 30, 1998,
actual expenses declined from the previous year by 59.9% and 28.3%,
respectively. The decrease in expenses during the first nine months of 1998,
compared to the same period in 1997, is almost entirely the result of decreases
in loss and loss adjustment expenses, which are directly related to the decline
in the Company's earned premium and an actuarial reserve study performed by the
Company's independent consulting actuary. The Company's most recent actuarial
study, which was completed as of September 30, 1998, indicated slight
improvement in projected ultimate loss and loss adjustment expenses for accident
years prior to 1998 and is reflected in the Company's results as of September
30, 1998. The Company continues to monitor the level of claim severity and to
seek input from actuaries as appropriate. There can be no assurance, however,
that the estimates of the actuaries will not have to be revised, or that the
Company's reserve for loss and loss adjustment expense will not differ from the
total of amounts ultimately paid out. Other underwriting and insurance expenses
for the quarter and nine months ended September 30, 1998 were generally
consistent, in total, with the same periods in 1997, however, as a percentage of
total revenue these expenses were up approximately 8% and 4% for the quarter and
nine months ended September 30, 1998, respectively, compared to the same periods
in 1997. This increase in other underwriting and insurance expenses as a
percentage of total revenue is due to the decline in premiums earned discussed
earlier. As a result of the decline in total expenses discussed above, the
Company's net income before taxes increased to $788,918 and $945,542 for the
quarter and nine months ended September 30, 1998, compared to a net loss before
taxes of $171,053 and net income before taxes of $679,064 for the same periods
in 1997.
Financial Condition
MDHC's total consolidated assets were $87,632,712 as of September 30, 1998
consisting primarily of cash and investments which comprised approximately 94%
of total assets. Approximately 84% of MDHC's total assets consisted of cash,
U.S. Treasury bonds, U.S. government agency bonds, and other investments either
collateralized or guaranteed by U.S. government agencies or securities. MDHC's
total assets declined approximately $2.3 million during the nine months ended
September 30, 1998, which was due primarily to claim related payments in excess
of claim related incurred liabilities of approximately $3.9 million, payment of
other liabilities of over $1.0 million, coupled with an increase in the net
market value of the Company's fixed maturity investments of approximately $1.7
million, and net income of over $1.5 million. MDHC does not hold, either
directly or indirectly, any real estate owned for investment purposes or any
fixed maturity investments rated below AA by nationally recognized rating
agencies. The composition of MDHC's total investments is not anticipated to
change substantially in the near future.
MDHC's total consolidated liabilities as of September 30, 1998, were $62,602,041
which was a decline of approximately 7% from December 31, 1997. This decline was
the result of the decrease in unpaid loss and loss adjustment expenses noted
above, and the reduction of other liabilities also discussed earlier.
Approximately 87% of MDHC's total liabilities at September 30, 1998, relate to
unpaid loss and loss adjustment expenses.
Stockholders' equity increased approximately 12% as of September 30, 1998,
compared with the prior year-end. This increase was primarily the result of net
income for the nine months ended September 30, 1998 of $1,533,851 and the
increase in the net unrealized gain on the Company's investment portfolio which
was discussed earlier.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued
Liquidity and Capital Resources
MDHC's cash flow is generated from its operations and investment portfolio. Net
cash provided by operating activities for the nine months ended September 30,
1998 decreased $4,760,360 from the comparable period in 1997. This decrease in
cash provided by operating activities was caused primarily by a decrease in
amounts received relating to current federal income taxes of approximately $2.0
million, a net decrease in unpaid loss and loss adjustment expenses of
approximately $2.3 million, a net decrease in other liabilities of approximately
$1.7 million, coupled with an increase in the unearned premium reserve of $0.8
million which relates to the reserve for future utilization of the Company's
death, disability, and retirement free reporting endorsement, an increase in net
income of approximately $0.6 million for the nine months ended September 30,
1998 as compared to the same period in 1997, and other minor variations in cash
flow between the comparable periods.
MDHC's investing activities resulted in an increase in cash provided by
investing activities of $4,401,770 at September 30, 1998 compared to a decrease
in cash provided by investing activities of $1,316,433 for the same period in
1997. This variation was due to the net proceeds from fixed maturity investments
of approximately $6.0 million for the 1998 period which were utilized to fund
operating activities coupled with net purchases of short-term investments of
approximately $1.5 million for the nine months ended September 30, 1998,
compared to net proceeds of fixed maturity investments for the nine months ended
September 30, 1997 of approximately $2.5 million combined with net purchases
from short-term investments of approximately $3.8 million.
Under employment agreements with certain officers and directors, payments
totaling approximately $500,000 are to be made if the number of insureds falls
below 913. Such payments are forfeited in whole or in part if the individual
does not remain as an employee or as a consultant for a period of 36 months
following the payment date. At September 30, 1998, the number of insureds was
approximately 1,045. As of November 9, 1998, the number of insureds was
approximately 1,050.
MDHC's cash flow from operations and its investment portfolio are utilized to
meet its obligations related to payment of losses and loss adjustment expenses,
payment of operating expenses, and other needs as deemed necessary from time to
time. In conjunction with the redemption of MDHC's outstanding preferred stock
the Company has obtained a $3 million letter of credit from Commerce Bank, N.A.
and, in addition MDA has requested permission from the Missouri Department of
Insurance to pay an additional dividend to MDHC of $5 million. If MDHC receives
the $5 million dividend authorization from the Missouri Department of Insurance
the Company will not need to utilize the bank letter of credit discussed above.
See "Preferred Redemption" for more information. MDHC anticipates that its
future cash flow will be sufficient to meet the Company's ongoing obligations
for the foreseeable future.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued
Planned Transaction With MAI
As discussed earlier, the current status of the professional liability market in
Missouri is one of intense competition. Medical malpractice business is
cyclical, and the "soft" portion of the cycle is occurring now. Over the past
few years, the Company has seen increased and intense competition for its
business, with many competitors offering premium rates well below levels Company
management believes to be prudent. Based on the Company's experience, the demise
of other insurance companies and the advice of the Company's independent
actuary, MDHC determined not to attempt to compete on price. Instead, MDHC has
maintained its actuarially sound pricing policy, while attempting to intensify
services to policyholders. In addition to the intense price competition, many
physicians, surgeons and dentists, the Company's primary clients, have become
employees of hospitals or other health care networks, where they no longer
obtain their own medical professional liability insurance. As a result, the
Company's market share has declined over the past three years.
In response to this environment, the Company's board of directors began
evaluating a number of ways to maximize shareholder value, while protecting
policyholders. After discussions with a number of other insurance companies,
about a variety of different alternatives, on September 29, 1998, the Company
signed an agreement with Mutual Assurance, Inc. ("MAI") and its parent, Medical
Assurance, Inc., which the board of directors believes is the best alternative
to preserve the value of the Company for shareholders, by preventing further
erosion of surplus. Under the agreement, effective January 1, 1999, MDA and MDIC
will sell to MAI for $3.5 million their renewal rights with respect to their
outstanding medical malpractice insurance policies. MAI also will acquire the
right to use the name "Medical Defense" and all related trade names and logos.
MAI will not acquire any stock interests in the Company. MDA and MDIC will
continue to be fully licensed as Missouri insurance companies.
MAI also will enter into a quota-share reinsurance agreement with MDA and MDIC
which will reinsure 100% of the loss and loss adjustment expense (both allocated
and unallocated) for the remainder of the policy periods in force as of January
1, 1999. As consideration for reinsuring such obligations, MDA and MDIC will pay
the unearned premium on the policies, on a monthly basis as the premiums are
earned, less a ceding commission of 8%, on a monthly basis. MDA and MDIC also
will enter into an aggregate excess of loss reinsurance agreement under which
MAI will reinsure all of the loss and allocated loss adjustment expense ("ALAE")
exposure of MDA and MDIC incurred prior to January 1, 1999 which exceeds the
total of (i) the combined reserves for losses and ALAE of MDA and MDIC on
January 1, 1999, without discount and (ii) the amount by which MDA's and MDIC's
loss and ALAE reserves would be discounted on an actuarial basis using an
assumed investment rate of 5% compounded semi-annually and an assumed payment
rate consistent with MDA's and MDIC's claims payment history. MDA and MDIC each
remain directly liable for its insurance obligations or risks under the
contracts of insurance.
MAI will become responsible for fulfilling the obligations of MDA and MDIC to
issue Extended Reporting Endorsements with respect to the "claims-made"
insurance policies previously issued by MDA and MDIC. While MDA and MDIC will
pay $1.8 million to MAI at closing to assume the portion of this obligation
which results from death, disability or retirement, an equivalent $1.8 million
reduction in net liability reserves will be effected. Consequently, the transfer
by MDA and MDIC to MAI of the $1.8 million in assets and reduction of $1.8
million in net liabilities will not affect the surplus as regards policyholders
of MDA and MDIC.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued
Planned Transaction With MAI, continued
MDA and MDIC also will enter into a management agreement for MAI to manage
claims incurred both before and after January 1, 1999 under policies written by
MDA and MDIC. As consideration for the management of claims incurred prior to
that date, MDA and MDIC will pay to MAI an amount equal to the ULAE reserves of
MDA and MDIC as of January 1, 1999, over a period of four years. The expenses of
MAI in managing claims incurred on and after January 1, 1999, are included
within the payments by MDA and MDIC under the quota-share reinsurance agreement.
MDS also will lease a portion of the facilities in Springfield, Missouri used by
MDA and MDIC, to MAI.
The current MDA and MDIC claims committees will continue to monitor and deal
with existing claims for the next several years, and the board of directors will
continue to manage the Company's investments and its day-to-day operations.
While MAI will have claims settlement authority, MAI will have no authority or
responsibility with respect to any non-claim functions of MDA or MDIC, (e.g.,
investments, accounting and any future underwriting). In order to drastically
reduce costs, the Company will terminate the employment of virtually all current
employees (other than the claims committee personnel). MAI plans to hire
employees to perform those services, to perform underwriting services and to
promote renewal of MDA and MDIC policies. MDHC will enter into consulting
agreements with certain of its executive officers, who will remain available to
provide assistance with financial and regulatory reporting, as well as with
investigating additional corporate opportunities.
Consummation of the transaction is subject to regulatory approval, and certain
other conditions, but the Company has no reason to believe that those conditions
will not be met.
The members of the Company's board of directors will investigate a number of
alternative lines of business in which the Company might engage. No decision has
been made at this time as to MDHC's future plans or lines of business, other
than the limits imposed by the Company's agreement not to compete with MAI.
It is currently MDHC's intention to have MDA file an application in 1999 for
exempt status under Internal Revenue Code section 501(c)(15). That section
provides that non-life insurance companies with direct written premiums (or, if
greater, net written premiums) less than $350,000 should be exempt from federal
income tax. It is the present plan of MDA and MDIC to either not write new
policies in calendar year 1999 or to limit the written premium to less than
$350,000 during year 1999.
Preferred Redemption
On October 19, 1998, in accordance with the redemption provisions of the
Company's articles of incorporation, the Company mailed to all preferred
shareholders of record, as of October 15, 1998, a Notice of Redemption.
The Preferred Shares were initially issued by the Company to eligible
policyholders of MDA upon conversion of their policyholders' membership rights
and surplus interests in MDA.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued
Preferred Redemption, continued
In each of the last two years, the Company has conducted a tender offer,
allowing holders of Preferred Stock who so desired to sell their shares to the
Company. Even after those tender offers, a number of the Company's preferred
shareholders contacted the Company asking for help in liquidating their
investment in the Preferred Stock. Those persons have indicated that they do not
want a long-term stake in MDHC, but would prefer to take cash now, and devote
those funds to other uses. The redemption provides the Company with a way to
meet those shareholders' needs, by providing immediate liquidity to them. In
addition, management believes the redemption could eliminate many costs
associated with being a public company. If the total number of MDHC shareholders
falls below 300, the Company will no longer be required to make periodic filings
with the Securities and Exchange Commission, which will significantly reduce
outside legal expenses as well as time demands on management. Of course, any
shareholders who wish to retain a stake in the Company have the alternative of
converting their shares of Preferred Stock into shares of Class B Common Stock.
Third Party Tender Offer
The Company has been informed that Ivy Medical, LLC ("Ivy") has initiated an
unsolicited tender offer to purchase up to 3,500,000 shares of the Company's
Class B Common Stock, for a price of $1.00 per share. The tender offer materials
are dated November 10, 1998, and state that the shares will be accepted and paid
for on a first-come, first-served basis. In those materials, Ivy states that it
is negotiating to borrow the funds to pay the tender offer price. According to
the tender offer materials, Ivy is owned by Ivy Insurance Group, Inc. and
Enrique P. Perinetti, MD., and is an affiliate of Bush-O'Donnell & Co., Inc., a
merchant and investment banking firm.
Year 2000 Compliance
Many computer systems world-wide are not currently equipped to properly handle
the change in calendar years from 1999 to 2000. This problem is commonly
referred to as the Year 2000 Compliance issue. The Company has an active program
in place to address the Year 2000 Compliance issue as it relates to the various
computer systems which the Company either uses or is dependent upon. By
September 1996, the Company had migrated its application system software to a
hardware platform that could properly support dates after 1999. By November
1997, all application software had been converted to be Year 2000 compliant. The
Company's computer operating system has been upgraded during 1998. With the
exception of the installation of ongoing software patches provided by the
Company's hardware manufacturer, which will continue to be installed throughout
1999 and beyond January 1, 2000, the Company's primary computer system is fully
Year 2000 compliant. The total cost to the Company to become Year 2000 compliant
is approximately $275,000.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued
Year 2000 Compliance, continued
In addition, the Company has held discussions with various of its external
vendors, including its independent actuary and outside investment adviser, upon
whom the Company is dependent, and the Company believes that these vendors will
also be Year 2000 compliant in an appropriately timely fashion. The Company has
not yet contacted the law firms which handle the defense of the claims against
its policyholders regarding Year 2000 compliance, but intends to seek compliance
certificates from those service providers over the next several months. However,
due to the general inherent uncertainty in the Year 2000 issue, resulting in
part from the uncertainty of third-party vendors and suppliers, and their third
party vendors and suppliers, the Company is unable to determine at this time
what impact, if any, the Year 2000 issues will have on the Company's results of
operations, financial condition, or liquidity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
See accompanying Exhibit Index incorporated by reference.
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Medical Defense Holding Co.
(Registrant)
November 10, 1998 /s/ Ronald G. Benson
- ---------------------------------- ----------------------------------------
Date Ronald G. Benson
President, CEO, and Chairman
of the Board (principal
executive officer); Director
November 10, 1998 /s/ Samuel J. Pippin
- ---------------------------------- ----------------------------------------
Date Samuel J. Pippin
Director of Accounting and
Finance (principal financial
and accounting officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
No. Description No.
--- ----------- ---
<S> <C> <C>
3.1 Articles of Incorporation of Medical Defense Holding Co. (Filed as Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 (file #33-87444) and hereby incorporated
by reference.)....................................................................................
3.2 Bylaws of Medical Defense Holding Co. (Filed as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.)........
4.1 Right of First Refusal Agreement (Filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.).....................
4.2 Specimen Stock Certificate for Preferred Stock (Filed as Exhibit 4.2 to the Registrant's
Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.)........
4.3 Specimen Stock Certificate for Class A Common Stock (Filed as Exhibit 4.3 to the
Registrant's Registration Statement on Form S-1 (file #33-87444) and hereby incorporated
by reference.)....................................................................................
4.4 Specimen Stock Certificate for Class B Common Stock (Filed as Exhibit 4.4 to the
Registrant's Registration Statement on Form S-1 (file #33-87444) and hereby incorporated
by reference.)....................................................................................
10.1 1983 Management Agreement between Medical Defense Associates and Medical Defense Services
Corp., as amended (Filed as Exhibit 10.1 to the Registrant's Registration Statement on
Form S-1 (file #33-87444) and hereby incorporated by reference.)..................................
10.2 1983 Management Agreement between Medical Defense Insurance Company and Medical Defense
Services Corp., as amended (Filed as Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.).....................
10.3 Amended and Restated Employment Agreement between Ronald G. Benson and Medical Defense
Services Corp., dated January 1, 1993 (Filed as Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.)........
10.4 Amended and Restated Employment Agreement between Geraldine Hatfield (Morrison) and
Medical Defense Services Corp., dated January 1, 1993 (Filed as Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1 (file #33-87444) and hereby incorporated
by reference.)....................................................................................
10.5 Amended and Restated Employment Agreement between Arlen D. Winsky and Medical Defense
Services Corp., dated January 1, 1993 (Filed as Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.)........
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
No. Description No.
--- ----------- ---
<S> <C> <C>
10.6 Amended and Restated Employment Agreement between David W. Brown and Medical Defense
Services Corp., dated January 1, 1993 (Filed as Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.).....
10.7 Amended and Restated Employment Agreement between Gary L. Robinson and Medical Defense
Services Corp., dated January 1, 1993 (Filed as Exhibit 10.7 to the Registrant's
Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.).....
10.8 Amended and Restated Employment Agreement between John J. Stamatis and Medical Defense
Services Corp., dated January 1, 1993 (Filed as Exhibit 10.8 to the Registrant's
Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.).....
10.9 Medical Defense Services Corp. Integrated Money Purchase Pension and Trust Agreement,
between Medical Defense Services Corp. and Boatmen's Trust Company, as amended, dated
December 31, 1990 (Filed as Exhibit 10.9 to the Registrant's Registration Statement on
Form S-1 (file #33-87444) and hereby incorporated by reference.)...............................
10.10 Carnahan, Evans, Cantwell & Brown, P.C. Defined Contribution Prototype Plan and Trust
Agreement, adopted December 31, 1990 (Filed as Exhibit 10.10 to the Registrant's
Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.).....
10.11 Form of Deposit Agreement between Medical Defense Associates and Central Bank, Jefferson
City, Missouri (Filed as Exhibit 10.12 to the Registrant's Registration Statement on Form
S-1 (file #33-87444) and hereby incorporated by reference.)....................................
10.12 Form of Employment Guaranty Agreement by Medical Defense Holding Co. guaranteeing
existing Medical Defense Services Corp.'s employment agreements (Filed as Exhibit 10.13
to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (file
#0-28214) and hereby incorporated by reference.)...............................................
10.13 Medical Defense Services Corp. Executive Compensation Plan II (Filed as Exhibit 10.14 to
the Registrant's 1997 Annual Report on Form 10-K (file #0-28214) and hereby incorporated
by reference.).................................................................................
10.14 Agreement dated September 29, 1998, with Mutual Assurance, Inc. and affiliates relating
to the sale of Medical Defense Associates and Medical Defense Insurance Company's
renewal business, effective January 1, 1999....................................................
11.1 Statement re computation of per share earnings (Disclosed in Note 9 to the Registrant's
accompanying unaudited consolidated financial statements included in Part I of this Form
10-Q.).........................................................................................
21.1 Subsidiaries of the registrant (Filed as Exhibit 21.1 to the Registrant's 1997 Annual
Report on Form 10-K (file #0-28214) and hereby incorporated by reference.).....................
27 Financial Data Schedule........................................................................
</TABLE>
E-2
<PAGE>
EXHIBIT 10.14
AGREEMENT FOR PURCHASE AND SALE OF CERTAIN ASSETS
This Agreement is made and entered into as of September 28, 1998, by and
between Mutual Assurance, Inc. ("Purchaser"), an Alabama stock insurer, and
Medical Assurance, Inc. ("MAI"), a Delaware corporation, having its principal
place of business at 100 Brookwood Place, Birmingham, Alabama 35209, and Medical
Defense Associates, a Missouri stock insurer ("MDA"), Medical Defense Insurance
Company ("MDIC"), a Missouri stock insurer, Medical Defense Services Corp.
("MDS"), a Missouri corporation, and Medical Defense Holding Co., a Missouri
corporation ("MDHC"), each having their principal place of business at 1311 E.
Woodhurst, Springfield, Missouri 65804. MDA and MDIC may hereinafter sometimes
be referred to collectively as the "Sellers".
W I T N E S S E T H
WHEREAS, the Purchaser and the Sellers each offer professional liability
insurance and related liability insurance for physicians and other health care
providers; and
WHEREAS, the Purchaser desires to purchase, and the Sellers desire to sell,
the recurring book of medical professional liability insurance business of
Sellers pursuant to the terms, conditions, representations, warranties and
agreements set forth herein (collectively the "Book of Business").
NOW, THEREFORE, in consideration of these premises, the mutual covenants
and agreements hereinafter set forth, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties hereto
do hereby agree as follows:
1. Purchased Assets.
1.01 Book of Business. On the terms and subject to the conditions
hereinafter set forth, on the Closing Date (as defined in Section 9.01), Sellers
shall sell to Purchaser, and Purchaser shall purchase, all of Sellers' right,
title and interest in and to the recurring book of medical professional
liability insurance business of Sellers (the "Book of Business"), free and clear
of all liens, claims and encumbrances except as herein contemplated. The Book
of Business shall include, without limitation, the following:
(a) Assumed Contracts. To the extent assignable, all rights and
interest of the Sellers in and to the contracts, agreements, arrangements
between either of the Sellers and licensed insurance agents relating to the Book
of Business, including without limitation, the contracts, agreements and
arrangements identified on Schedule 1.01(a) of this Agreement (the "Assumed
Contracts").
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(b) Documents and Records. All documents and records, wherever
located, used by each of the Sellers in or relating to the Book of Business,
whether recorded in hard copy, in computerized or electronic databases, or
otherwise, including without limitation the following:
(i) all underwriting files and manuals with respect to any
professional liability insurance polices ("Policies") currently in force
and with respect to any Policies which have been in force at any time;
(ii) all claims files with respect to Policies, both open and
closed. Such files shall include all historical claims information on
Policies, including information on paid losses, 180-day letters, incident
reports, notices of pending litigation, litigation material, consents to
settle, and all other related information;
(iii) all actuarial information with respect to Policies which
are currently in force and which have been in force at any time to the
extent not prohibited by the Actuary (herein defined);
(iv) all minutes from the meetings of the Claims and
Underwriting Committees and reports submitted to such Committees of each of
the Sellers;
(v) all forms of policies and endorsements thereto with
respect to Policies currently in force and which have been in force at any
time;
(vi) all accounting records relating to applicants for, and
insureds under, Policies;
(vii) all risk management reports and files including without
limitation practice reviews;
(viii) all risk management material utilized in connection with
risks insured by the Policies currently in force and which have been in
force at any time, including without limitation, survey forms, videos,
practice guidelines, and questionnaires;
(ix) all customer marketing and sales material, including agent
appointment contracts, recruiting information, and application
correspondence for persons insured under Policies currently in effect or
which previously been insured under Polices;
(x) a complete listing of the insureds under Policies
currently in effect (including physicians, dentist, nurses, CRNA's, and
other health care professionals), with names, addresses, types of coverage,
premiums, limits and specialty.
The Sellers and Purchaser agree and understand that it may be necessary for the
Sellers to retain the originals of certain of the records because of the
requirements of insurance regulatory and
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taxing authorities, and that it may be reasonable for the Sellers to retain the
originals of certain other records. In order to facilitate a smooth transition
of insurance operations contemplated by this Agreement, Purchaser has granted to
Sellers a license to use and maintain possession of original records under
Section 7.02 of this Agreement. The Sellers and Purchaser agree they will
cooperate in determining what original records may be retained by Sellers under
said license and the sequencing of the transfer of original records to the
Purchaser. Sellers and Purchaser shall each have access to and the right to make
copies of all of the originals of all of the Documents and Records in accordance
with Section 7.02 hereof.
(c) Intellectual Property. All trade secrets, proprietary rights, and
other proprietary knowledge and know-how relating to the Book of Business; all
trademarks, service marks, trade names, copyrights, marks, symbols, logos and
packaging designs relating to the Book of Business; all information systems and
data bases owned by Sellers and used in the Book of Business, including all
electronic data bases relating to the Book of Business in machine readable form;
all other intellectual property and intangible property rights relating to the
Book of Business; and all applications therefor and registrations thereof with
or by any federal, state, local or foreign regulatory, administrative or
governmental office or offices, in each case that are used in or related to the
Book of Business and which either of the Sellers owns (the "Intellectual
Property") including, without limitation, the Intellectual Property described on
Schedule 4.11.
(d) Names. All of the Sellers' rights in and to the names Medical
Defense Associates, Medical Defense Insurance Company, and any variations
thereof as well as any other trade names used in connection with the Book of
Business including without limitation "MDA" and "MDIC." Any right of the
Purchaser to use any such name shall be subject to any statutory or regulatory
requirements, including but not limited to the Unfair Trade Practice Act,
Sections 375.930 to 375.948, RSMo. Sellers, MDS and MDHC agree that they will
cause their corporate names to be changed after the Closing Date so as to delete
the words "Medical Defense" from said corporate names.
(e) DDR Reserves. Cash or cash equivalent in an amount equal to the
reserves associated with the liability under Extended Reporting Endorsements (as
defined in Section 2.01(b) hereof) relating to the death, disability or
retirement of insureds with policies which have been issued by the Sellers prior
to the Effective Date (the "DDR Reserves"), it being agreed by the Sellers and
the Purchaser that this amount shall be $1,800,000, which amount shall be
transferred and delivered to Purchaser on the Closing Date (as defined in
Section 9.01 hereof).
2. Assumed and Retained Liabilities.
2.01 Assumption of Liabilities. Purchaser is not and shall not be
required to assume or pay any liabilities, insured risks, accounts payable,
debts, claims, security interests, liens, encumbrances or other obligations of
Sellers relating to the Book of Business or otherwise, whether known, unknown,
accrued, contingent or otherwise, except that, as of the Effective Date
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(as defined in Section 9.01 hereof), Purchaser will assume only the following
(the "Assumed Liabilities").
(a) Assumed Contracts. At Closing Purchaser will assume the
obligations of Sellers accruing after the Effective Date under the Assumed
Contracts referred to in Section 1.01(a) and listed on Schedule 1.01(a) of this
Agreement, except for compensation payable with respect to policies issued prior
to the Closing Date; provided however that (i) nothing herein contained shall
require Purchaser to pay, perform or discharge any Assumed Liabilities so long
as Purchaser shall in good faith, contest or cause to be contested the amount or
validity thereof, and (ii) no liabilities will be assumed that otherwise
constitute a breach of any covenant, representation or warranty of Sellers
herein.
(b) Reporting Endorsements. Purchaser shall assume all obligations of
the Sellers to issue endorsements to allow for the reporting of claims after the
expiration of the policy period for "claims-made" insurance policies ("Extended
Reporting Endorsements") that accrue on or after the Effective Date in
accordance with the terms of any medical malpractice insurance policies issued
by either of the Sellers that are in force on the Effective Date ("Outstanding
Policies") and in accordance with Missouri or Kansas laws and regulations
relating to the obligation of insurers to issue endorsements to "claims-made"
policies allowing for the reporting of claims after the policy period with
respect to such Outstanding Policies. Such obligations shall include (i)
Sellers' liability to issue the Extended Reporting Endorsements under any of
Sellers' Outstanding Policies upon the death, disability or retirement of the
insured under such policies after the Effective Date, (ii) Sellers' obligation
to issue Extended Reporting Endorsements on Outstanding Policies that are not
renewed after the Effective Date, and (iii) Sellers' obligation to issue
subsequent endorsements to Extended Reporting Endorsements issued prior to the
Effective Time; provided that Purchaser shall not assume the responsibility for,
and Sellers shall remain liable for, the issuance of subsequent endorsements to
Extended Reporting Endorsements that were issued prior to the Effective Date,
without charge, upon the death, disability or retirement of an insured under
policies issued by Sellers. Such obligations will be fulfilled by the Purchaser
issuing endorsements or special insurance policy forms so as to afford such
Extended Reporting Endorsements on the same terms and conditions that Sellers'
would be obligated to provide under the Outstanding Policies; provided that
neither of Sellers shall be relieved of its obligation to issue an Extended
Reporting Endorsement if an insured under an Outstanding Policy refuses to
accept the endorsement or policy offered by Purchaser in which event Purchaser
shall fulfill its obligation by reinsuring Extended Reporting Endorsements so
required to be issued by Sellers under the reinsurance treaty described in
Section 7.04(a) hereof. All premium payments for Extended Reporting
Endorsements or policies issued by Purchaser as herein required shall be paid
directly to the Purchaser and not to the Sellers.
2.02 Retained Liabilities. Except for the Assumed Liabilities, Purchaser
will not assume or otherwise be responsible for any liabilities or obligations
of either or both of Sellers (the "Retained Liabilities") regardless of nature,
and whether or not in existence or hereafter arising.
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2.03 Reinsurance. Purchaser will reinsure rather than assume certain
losses and loss adjustment expenses incurred under medical professional
liability insurance policies issued by Sellers prior to the Effective Date in
accordance with and subject to the provisions of Section 7.04 hereof.
3. Consideration for Book of Business.
3.01 Consideration. The consideration to be paid by Purchaser for the
Book of Business shall be:
(a) $3,500,000 payable in immediately available funds in two
installments as follows: $2,000,000 on the Closing Date (as defined in Section
9.01 hereof); and $1,500,000 on the first anniversary of the Closing Date; and
(b) the assumption by Purchaser of the Assumed Liabilities in
accordance with Section 2.01 hereof; and
(c) the excess of loss reinsurance to be provided by Purchaser to
Sellers in accordance with Section 7.04(b) hereof.
4. Representations and Warranties of Sellers. In consideration of
Purchaser's agreement to purchase the Purchased Assets from Sellers as herein
contemplated, Sellers and MDHC hereby jointly and severally warrant to the
Purchaser that the statements contained in this Section 4 are correct and
complete as of the date of this Agreement and will be correct and complete as of
the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section). None of
the representations and warranties made hereunder shall be deemed to explicitly
or implicitly represent that any or all of Sellers' current policyholders will
renew their insurance with Purchaser upon the expiration of their respective
insurance policies or that the number of Sellers' insureds or the amount of
Sellers' written premium have not, or will not decrease in the ordinary course
of Sellers' business prior to the Effective Date. Certain representations are
limited to the knowledge of Sellers. For purposes of this Agreement, "Sellers'
knowledge" shall mean the conscious awareness of facts or other information of
any officer or director of Sellers, MDS or MDHC or any other person functioning
as a senior manager or administrator with respect to the business of Sellers
without regard to whether such person is employed by either of Sellers.
4.01 Organization. Each of Sellers, MDS and MDHC is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Missouri and has the requisite corporate power to carry on its business as now
being conducted. Each of Sellers, MDS and MDHC is duly qualified, and is the
authorized holder of every necessary permit, authorization or license (including
permits, authorizations and licenses from applicable insurance departments), to
do business, and is in good standing, in every jurisdiction in which it writes
business except where the failure to be so qualified or have such permit,
authorization, or license would not have a
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material adverse effect on Sellers' Book of Business. Schedule 4.01 sets forth
each state in which either of the Sellers is licensed to write medical
professional liability insurance.
4.02 Shares of Sellers.
(a) MDHC holds of record and owns beneficially 1,200,000 shares of
common stock of MDA, par value $1.00 per share, which shares comprise all of the
issued and outstanding shares of capital stock of MDA. All of the issued and
outstanding shares of common stock of MDA have been duly authorized, validly
issued, are fully paid and nonassessable, and there are no outstanding or
authorized options, warrants, rights, contracts, calls, puts, rights to
subscribe, conversion rights or other agreements or commitments to which MDA or
MDHC is a party or which are binding upon either of them providing for the
issuance, disposition or acquisition of any of MDA's capital stock.
(b) MDS holds of record and owns beneficially 805 shares of common
stock of MDIC, par value $1,000 per share, which shares comprise all of the
issued and outstanding shares of capital stock of MDIC. All of the issued and
outstanding shares of common stock of MDIC have been duly authorized, validly
issued, are fully paid and nonassessable, and there are no outstanding or
authorized options, warrants, rights, contracts, calls, puts, rights to
subscribe, conversion rights or other agreements or commitments to which MDIC or
MDS is a party or which are binding upon either of them providing for the
issuance, disposition or acquisition of any of MDIC's capital stock.
(c) MDA owns beneficially all of the issued and outstanding shares of
capital stock of MDS, all of which have been duly authorized and are validly
issued. There are no outstanding options, warrants, rights, calls, puts, rights
to subscribe, conversion rights, or other agreements or commitments to which MDA
or MDS is a party or which is binding on either of them providing for the
issuance, disposition or acquisition of any of MDS's stock.
4.03 Authority.
(a) At the time of Closing, all corporate proceedings or actions
necessary to authorize the execution and delivery of, and the performance of the
obligations of each of the Sellers, MDS and MDHC under this Agreement will have
been duly and validly taken and completed. Each of the Sellers, MDS and MDHC
has the corporate power and authority to execute, deliver and perform this
Agreement. This Agreement has been duly and validly executed and delivered on
behalf of each of Sellers, MDS and MDHC and, assuming the due authorization,
execution and delivery hereof by Purchaser and the approval of the Sellers
shareholders, will constitute the legal, valid and binding obligation of each of
the Sellers enforceable as to each of them in accordance with its terms and
conditions, subject to the enforcement of remedies, to the discretion of the
courts in awarding equitable relief and to applicable bankruptcy,
reorganization, insolvency, moratorium and similar laws affecting the rights of
creditors generally. None of Sellers or MDHC is required to give any notice to,
or make any filing with, or obtain any
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authorization, consent or approval from, any governmental agency in order to
consummate the transactions contemplated by this Agreement, except for the
notice required to be filed under the Hart-Scott-Rodino Act of 1976, if any, and
the necessary filings with and approvals of the Departments of Insurance of
Missouri, Kansas and Alabama, if any, including, but not limited to, the
preacquisition notice required under Section 382.095 of the Missouri Insurance
Code.
(b) The execution and delivery of their Agreement by Sellers, and the
performance by Sellers of the transactions contemplated hereby, will not require
approval of any class of the capital stock of MDHC.
4.04 Noncontravention. The execution, delivery and performance of this
Agreement by each of the Sellers, MDS and MDHC, and the consummation of the
transactions contemplated hereby, does not and will not, with the passage of
time, the giving of notice or otherwise, (a) to the best of Sellers' knowledge,
violate any statute, regulation, rule, judgment, order, decree, stipulation,
injunction, charge or other restriction of any government, governmental agency,
or court to which any of the Sellers, MDS or MDHC is subject; or (b) violate or
result in breach of any term or provision of the Articles of Incorporation or
the Bylaws, as heretofore amended, of either of Sellers; or (c) violate, result
in a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify or cancel, or
require any notice under any contract, mortgage, lease, sublease, license,
sublicense, franchise, permit, indenture, agreement, reinsurance agreement,
agreement or mortgage for borrowed money, instrument of indebtedness, security
interest, or other arrangement to which either of Sellers is now a party or by
which either of them is bound or to which any of their assets is subject; or (d)
result in the creation or imposition of any lien, charge or encumbrance on
either of Sellers or any asset thereof, except in the case of each of clauses
(a), (b), (c) and (d) above, for such violations, conflicts, breaches, defaults,
terminations, accelerations, or creations of liens, security interests, charges,
encumbrances which, in the aggregate, would not have a material adverse effect
on the business or prospects of the Book of Business.
4.05 Litigation. There is no action, suit, proceeding or investigation,
pending or threatened, in any court or before any governmental agency or
instrumentality against, by or affecting any of Sellers, MDS or MDHC, which, if
adversely determined, could reasonably be expected to prevent or delay the
consummation of this Agreement or the transactions contemplated hereby, or could
reasonably be expected to declare the same to be unlawful or cause a rescission
thereof.
4.06 Financial Statements and Other Reports.
(a) Each of Sellers has delivered to the Purchaser (i) their
respective Annual Statements as filed with the Missouri Department of Insurance
pursuant to Sections 379.105 of the Missouri Insurance Code for each of the
years ended December 31, 1993, 1994, 1995, 1996 and 1997; (ii) the quarterly
statements as of June 30, 1998, of each of Sellers, as filed with the Missouri
Department of Insurance; (iii) the audited financial statements of MDA for the
years
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ended December 31, 1997, 1996 and 1995, together with a report thereon by
Coopers & Lybrand LLP, independent accountants, which audited financial
statements include balance sheets, statements of operations, changes in
shareholders equity, and cash flows for the years then ended and notes thereto,
prepared in accordance with regulatory accounting principles; (iv) the audited
consolidated financial statements of MDHC and its subsidiaries for the years
ended December 31, 1997, 1996 and 1995, which financial statements include
balance sheets, statements of operations, changes in shareholders' equity and
cash flows for the year then ended and notes thereto together with a report
thereon from Coopers & Lybrand LLP, prepared in accordance with generally
accepted accounting principles; and (v) unaudited consolidated financial
statements of MDHC for the quarter ended June 30, 1998, which consolidated
financial statements shall include a balance sheet and statements of income,
changes in shareholders' equity, and cash flows for the quarter ended June 30,
1998, prepared in accordance with generally accepted accounting principles (the
items described in (i), (ii), (iii), (iv), and (v) above are collectively
referred to as the "Sellers' Financial Statements"). To the knowledge of the
Sellers, all the Sellers' Financial Statements are materially correct and
complete, are consistent with the books and records of the Sellers (which books
and records are correct and complete) and fairly reflect the financial condition
of each of Sellers as of each of said dates and the results of operations of
each of them for the years (or such shorter period) then ended; provided,
however, that the quarterly Financial Statements are subject to normal year end
adjustments.
(b) Schedule 4.06(b) lists all financial examinations that the
Missouri Department of Insurance has conducted with respect to either of Sellers
since 1988. Sellers have provided to the Purchaser correct and complete copies
of reports issued by the Missouri Department of Insurance with respect to the
examinations listed on the Schedule 4.06(b).
(c) MDA has delivered to the Purchaser a correct and complete copy of
the registration statement of MDA on Form B under the Missouri Insurance Holding
Company Act, including all amendments thereto for periods ended after December
31, 1992. The registration statement (as amended to date) includes all of the
information required under Chapter 382 of the Missouri Insurance Code and the
regulations promulgated thereunder and does not omit any information, the
omission of which would make the information included therein materially
misleading. Neither of Sellers has paid any dividend in violation of the
Missouri Insurance Laws. MDA has disclosed all contracts, real estate leases,
or other arrangements or transactions between MDH or either of Sellers or any of
their affiliates (as such term is defined in Rule 405 of the SEC) that are
required to be disclosed in such registration statements under the Missouri
Insurance Code and rules and regulations promulgated thereunder.
(d) Except as disclosed on Schedule 4.06(d), neither of Sellers has
received from any person a Form A or such other form as may be prescribed under
Chapter 382 of the Missouri Insurance Code indicating that such person intends
to make or has made a tender offer for or a request or invitation for tenders
of, or intends to or has entered into any agreement to exchange securities for,
or intends to acquire or has acquired in the open market or otherwise, any
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voting security of either of Sellers, if after the consummation thereof such
person would directly or indirectly be in control of the subject Seller.
4.07 Absence of Certain Changes. Since June 30, 1998, except as set forth
in Schedule 4.07, there has not been:
(a) Any change or changes in the financial condition, assets,
liabilities or business of either of Sellers that have been materially adverse
to the Book of Business, other than changes in the ordinary course of business;
(b) Any mortgage, pledge, or subjection to lien, charge or
encumbrance of any material kind of any assets, tangible or intangible, relating
to the Book of Business of either of Sellers;
(c) Any sale, assignment or transfer by either of Sellers of any
trademarks, trade names, or other intangible assets relating to the Book of
Business;
(d) Any material amendment to or termination of any material
contract, agreement, instrument or license relating to the Book of Business to
which either of Sellers is a party; or
(e) Any other event or condition of any character materially and
adversely affecting the Book of Business.
4.08 Loss Reserves and Premium Rates for Professional Liability Insurance.
(a) MDA has engaged Tillinghast as its independent consulting actuary
(the "Actuary") for each fiscal year commencing after December 31, 1992. In
connection with such engagement, the Actuary has reviewed MDA's reserve for
losses and loss adjustment expenses in each of said years and has made a written
recommendation as to the amount that MDA should maintain in such reserves in
each of said years. As to premium rates the Actuary has reviewed such rates and
provided written recommendations regarding rates MDA should charge for
professional liability insurance in each of said years. The amount of the
reserve for losses and loss adjustment expenses maintained by MDA and the
premiums charged by MDA for professional liability insurance were within the
recommended range of the Actuary for the fiscal year ended December 31, 1997.
(b) The Sellers are required to submit to the Missouri Department of
Insurance all policies, endorsements, underwriting manuals, and premium rates
for the professional liability insurance offered by them, if any, within 10 days
after they become effective, except that a change of more than 25% of any of the
foregoing items requires filing with the Missouri Department at least 60 days
prior to the effective date of such change and approval thereof by the Director
of the Department. Except as set forth in Schedule 4.08(b), no increases in
premium rates have been
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questioned by the Missouri Department of Insurance during the most recent five
years, and during such five year period, MDA has not received any correspondence
or communication from the Missouri Department of Insurance requesting or
suggesting that its premium rates, if applicable, for professional liability
insurance should be reduced below the current approved premium levels.
(c) Schedule 4.08(c) lists all forms of insurance policies and
endorsements (excluding manuscript endorsements) which have been issued to the
insureds of the Sellers and under which claims have or may be made. None of such
policies and endorsements (including manuscript endorsements) provide for the
issuance of an Extended Reporting Endorsement without additional premium other
than upon the death, disability or retirement of an insured. Sellers have
provided correct and complete copies of all forms listed on the Schedule
4.08(c).
4.09 Reinsurance. Schedule 4.09 sets forth all reinsurance treaties that
are currently in effect with respect to claims incurred under professional
liability insurance policies of the Sellers prior to June 30, 1998, and the
consummation of the transaction contemplated herein will not result in the
termination of any such reinsurance treaties. Sellers have provided to Purchaser
true and correct copies of all such reinsurance treaties. The reserve for unpaid
losses, loss adjustment expenses and unearned premiums as reflected in the
unaudited consolidated balance sheet of MDHC at June 30, 1998, are stated gross
of reinsurance ceded amounts. To the knowledge of Sellers, all reinsurance
recoverable amounts reflected in the consolidated balance sheet of MDHC at June
30, 1998, are collectible. Sellers have no knowledge of any material adverse
change in the financial condition of Sellers' reinsurers that might raise
concern regarding the ability to honor their reinsurance commitments.
4.10 Investments. There has been no material change in Sellers'
investment policy or in the composition of the investments of Sellers since
December 31, 1997.
4.11 Intellectual Property.
(a) Each of the Sellers owns all Intellectual Property listed on
Schedule 4.11 and such intellectual property includes all such property used in
connection with the medical professional liability insurance business of each of
Sellers other than information data processing systems and programs of third
parties which either Seller has the right to use pursuant to a license,
sublicense, lease or other agreement.
(b) To the best of the Sellers' knowledge, neither of Sellers has
interfered with, infringed upon, misappropriated or otherwise come into conflict
with any intellectual property rights of third parties and neither of Sellers,
nor any of their respective directors or officers (and employees with
responsibility for intellectual property matters) has ever received any charge,
complaint, claim or notice alleging any such interference, infringement,
misappropriation or violation. To the knowledge of the directors and officers
(and employees with responsibility for intellectual property matters) of the
Sellers, no third party has interfered with, infringed upon,
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misappropriated or otherwise come into conflict with any intellectual property
rights of either or Sellers.
4.12 Contracts and Commitments. Schedule 4.12 lists the following written
(unless otherwise noted) contracts, agreements, and other arrangements relating
to the Book of Business of Sellers to which either of Sellers is a party:
(a) Any written arrangement concerning confidentiality or non-
competition; or
(b) Any written arrangement under which the consequences of a default
or termination could have a material adverse affect on the business, financial
condition, operations, results of operations or future prospects of the Book of
Business; or
(c) Any written or oral agreement or understanding with the Missouri
Department of Insurance or the Department of Insurance of any state relating to
the continued operation of the medical professional liability insurance business
of either of Sellers; or
(d) Any written or oral understanding or agreement with respect to the
retention of any law firms or other organizations relating to the defense of
claims made against insureds of either of Sellers; or
(e) Any material written or oral understanding between either of
Sellers and any independent contractors acting as agents for either of them in
the sale of its insurance products.
Except as otherwise noted in Schedule 4.12, Seller has made available to
the Purchaser a correct and complete copy of each written arrangement listed
therein. With respect to each written arrangement so listed: (i) the written
arrangement is legal, valid, binding, enforceable, and in full force and effect
in all material respects (subject to the enforcement of remedies to the
discretion of the courts in awarding equitable relief and to applicable
bankruptcy, reorganization, insolvency, moratorium and similar laws affecting
the rights of creditors generally); (ii) the written arrangement will continue
to be legal, valid, binding, enforceable and in full force and effect in all
material respects at the time of the Closing (subject to the enforcement of
remedies to the discretion of the courts in awarding equitable relief and to
applicable bankruptcy, reorganization, insolvency, moratorium and similar laws
affecting the rights of creditors generally); (iii) no party is in breach or
default, and no event has occurred with which notice or lapse of time would
constitute a breach or default or permit termination, modification, or
acceleration, under any written arrangement which would have a material adverse
effect on the Sellers' Book of Business; and (iv) no party has repudiated any
provision of a material written arrangement. Neither of Sellers is a party to
any verbal contract, agreement or other arrangement which if reduced to written
form would be required to be listed in Schedule 4.12 under the terms of this
Section 4.12.
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4.13 Legal Compliance.
(a) To Sellers' knowledge, each of Sellers has complied with all laws
(including rules and regulations thereunder) of federal, state, local and
foreign governments (and all agencies thereof) except those that would not have
a material adverse effect on the business or prospects of the Book of Business,
and no charge, complaint, action, suit, proceeding, hearing, investigation,
claim, demand, or notice has been filed or commenced against either of them
alleging any failure to comply with any such law or regulation except those that
would not have a material adverse effect on the business or prospects of the
Book of Business.
(b) Sellers have possession of all records and documents they are
required to retain under all applicable laws (including rules and regulations
thereunder) except where the failure to do so would not have a material adverse
effect on the Book of Business.
4.14 Employee Relations, Employment Agreements and Benefit Plans.
Schedule 4.14 is a true and complete payroll roster of all employees of Sellers
and MDS performing services in connection with the operation of Sellers' medical
professional liability insurance business as of June 30, 1998; and correctly
sets forth with respect to each such employee to the best knowledge of the
Sellers the: (1) name; (2) social security number; (3) employment position with
the Seller or MDS; (4) rate of pay for each such person entitled to receive
compensation from the Seller or MDS; and (5) a description of any bonus or other
incentive compensation plans currently in effect for such employees. The
records to be transferred by Sellers as part of the "Book of Business" include
correct and complete records that will reflect each such employee's (i) age and
correct address; (ii) date of employment with a Seller or MDS; (iii) current
base compensation on an annual basis; (iv) number of days taken as vacation or
sick leave during the period beginning January 1, 1998 through the Effective
Date; and (v) liability of a Seller or MDS, if any, for accrued vacation and
sick leave. No increases have been given in such salaries, other than
adjustments in accordance with prior practice.
4.15 Documents and Records of Sellers. The documents and records included
in the Book of Business that are described in Section 1.01(b) hereof have been
maintained in the ordinary course of Sellers' medical professional liability
insurance businesses; are correct and complete in all material respects; and, to
the best of Sellers' knowledge, include an accurate and complete listing of all
persons who have been insured under Policies issued by either of the Sellers and
a record of all incident reports that have been made by Sellers' insureds,
orally or in writing, prior to the Effective Date.
4.16 Brokerage Fees. Neither of Sellers has any liability or obligation
to pay any fees or commissions to any broker, finder, or agent with respect to
the transactions contemplated by this Agreement for which the Purchaser could
become liable or obligated.
5. Representations and Warranties of the Purchaser. In consideration of
the Sellers' agreement to sell the Purchased Assets to Purchaser and the
representations, warranties
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and covenants made by the Sellers for the benefit of Purchaser, the Purchaser
and MAI jointly and severally represent and warrant to the Sellers that the
statements contained in this Section 5 are correct and complete as of the date
of this Agreement and will be correct and complete as of the Closing Date (as
though made then and as though the Closing Date were substituted for the date of
this Agreement throughout this section). Certain representations are limited to
the knowledge of Purchaser. For purposes of this Agreement, "Purchaser's
knowledge" shall mean the conscious awareness of facts or other information of
any officer or director of Purchaser or MAI, or any other person functioning as
a senior manager or administrator with respect to the business of Purchaser,
without regard as to whether such person is employed by Purchaser.
5.01 Organization and Authority. The Purchaser is a stock insurer duly
organized and validly existing in good standing under the laws of the State of
Alabama. The Purchaser is authorized to conduct business and is in good
standing as a property and casualty insurer in the states of Alabama, Missouri,
and Kansas. Purchaser has the corporate power to own its property and to carry
on its business as presently conducted.
5.02 Authorization of this Transaction. At the time of Closing, all
corporate proceedings or actions necessary to authorize the execution and
delivery of, and performance of its obligations under, the Agreement will have
been duly and validly taken and completed. The Purchaser has full corporate
power and authority to execute, deliver and perform this Agreement. This
Agreement has been duly and validly executed and delivered on behalf of
Purchaser, and assuming the due authorization, execution and delivery hereof by
Sellers, will constitute the legal, valid and binding obligation of the
Purchaser, enforceable in accordance with its terms and conditions (subject to
the enforcement of remedies to the discretion of the courts in awarding
equitable relief and to applicable bankruptcy, reorganization, insolvency,
moratorium and similar laws affecting the rights of creditors generally).
Neither MAI nor Purchaser need give any notice to, or make any filing with, or
obtain any authorization, consent, or approval of any governmental agency in
order to consummate the transactions contemplated by this Agreement except for
the notice required to be filed under the Hart-Scott-Rodino Act of 1976, if any,
and the necessary filings with and approvals of the Departments of Insurance of
Missouri, Kansas and Alabama, if any, including, but not limited to, the
preacquisition notice required under Section 382.095 of the Missouri Insurance
Code, and the request for approval of or an exemption from a Form A under
Section 382.080 of the Missouri Insurance Code.
5.03 Non-Contravention. The execution and delivery and performance of
this Agreement, and the consummation of the transactions contemplated hereby,
does not and will not, with the passage of time, the giving of notice or
otherwise: (a) to the best of Purchaser's knowledge, violate any statute,
regulation, rule, judgment, order, decree, stipulation, injunction, charge or
other restriction of any government, governmental agency, or court to which
either MAI or Purchaser is subject; or (b) violate or result in breach of any
term or provision of the Articles of Incorporation or the Bylaws of Purchaser,
as heretofore amended; or (c) violate, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify or cancel, or require any notice under any
contract, mortgage, lease,
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sublease, license, sublicense, franchise, permit, indenture, reinsurance
agreement, agreement or mortgage for borrowed money, instrument of indebtedness,
security interest, or other arrangement to which the Purchaser is now a party or
by which it is bound or to which any of its assets is subject; or (d) result in
the creation or imposition of any lien, charge or encumbrance on Purchaser or
any of its assets.
5.04 Absence of Certain Changes. Since June 30, 1998, there has not been:
(a) Any change in the financial condition, assets, liabilities or
business of the Purchaser which individually or in the aggregate has been
materially adverse; or
(b) Any other event or condition of any character materially and
adversely affecting the business or properties of Purchaser.
5.05 Brokerage Fees. Neither MAI nor Purchaser has any liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which the Sellers
could become liable or obligated.
5.06 Litigation. There is no action, suit, proceeding or investigation,
pending or threatened, in any court or before any governmental agency or
instrumentality against, by or affecting Purchaser or MAI which, if adversely
determined, could reasonably be expected to prevent or delay the consummation of
this Agreement or the transactions contemplated hereby, or could reasonably be
expected to declare the same to be unlawful or cause a rescission thereof.
5.07 SEC Reports. Purchaser and MAI have filed all reports required to be
filed under the Securities Exchange Act of 1934 for all periods after December
31, 1992. Except as modified by subsequent reports, such reports comply in all
material respects with the then current disclosure requirements of the
Securities and Exchange Commission and such reports do not contain any untrue
statement of a material fact or omit to state any fact necessary to make the
statements made in said reports not misleading.
5.08 Rating Agencies. MAI and its subsidiaries as a group are currently
rated by A.M. Best as A (Excellent) and Standard & Poor's currently rates the
claims paying ability of MAI and its subsidiaries as a group as A+. MAI will
advise Sellers of any future change of the rating of MAI and its subsidiaries by
A.M. Best or Standard & Poor's prior to Closing.
5.09 Regulatory Filings. Purchaser and MAI have filed the reports
required to be filed under the insurance laws of Alabama, Missouri, and Kansas,
and the regulations promulgated under each of them, that are necessary to
maintain its status as a licensed property and casualty insurer in each of said
states.
6. Pre-Closing Covenants. The Parties agree as follows with respect to
the period prior to the Closing.
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6.01 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper or advisable to
consummate and make effective the transactions contemplated by this Agreement
(including satisfying the closing conditions set forth in Section 8 below).
6.02 Hart-Scott-Rodino Act. If required, each of the Purchaser (or MAI)
and the Sellers (or MDHC) will file any notification and report forms and
related material that it may be required to file with the Federal Trade
Commission and the Anti-Trust Division of the United States Department of
Justice under the Hart-Scott-Rodino Act of 1976, will use its reasonable best
efforts to obtain an early termination of the applicable waiting period, and
will make any further filings pursuant thereto that may be necessary, proper or
advisable.
6.03 Missouri Department of Insurance. Each of the Parties shall have
made all filings with and received all approvals, if any, from the Departments
of Insurance as may be required by the insurance laws of Missouri, Kansas, and
Alabama, and the regulations promulgated thereunder. Purchaser hereby covenants
and agrees to promptly file with the Director of the Missouri Department of
Insurance (the "Director") an application for an order to the effect that
Section 382.070 exempts the purchase of the Book of Business from the
requirements of Sections 382.040, 382.050, 382.060 and 382.095 under the
Missouri Insurance Code by reason of the fact that the transaction will not
result in a change of control of Sellers. In the event that the application for
the order is denied, Purchaser and MAI will file a Form A and related documents
pursuant to Section 382.050 of the Missouri Insurance Code and the
preacquisition notice and report forms and related material pursuant to Section
382.095 of the Missouri Insurance Code. Sellers and MDHC will cooperate with
Purchaser and MAI in providing information necessary to complete such filings
and in obtaining approval of the Director to the transactions herein
contemplated, including without limitation, giving notice of the public hearing
regarding this transaction to any persons required by the Director and in the
manner prescribed by the Director, having its representatives attend the public
hearing of the Director and testify at such hearing if required, and submit such
information as may be reasonably available to Sellers and MDHC and their agents
as may be requested by the Director in connection with such hearing. The
Parties will cooperate with each other in making such filings and each of them
shall submit such information as may be reasonably available to it and as is
required to be included in said filings.
6.04 Preservation of Corporate Existence. Each of the Sellers shall
maintain its corporate existence and good standing in the State of Missouri and
maintain its certificate of authority to write property and casualty insurance
in its domicile state of Missouri and in the states listed on Schedule 4.01.
6.05 Preservation of Business. Each of the Sellers will use its
reasonable best efforts to keep its medical professional liability insurance
business substantially intact, including its present operations, physical
facilities, working conditions and relationships with lessors, licensors,
suppliers, policyholders, and employees. The aforesaid covenant shall require
Sellers to use marketing efforts, apply underwriting criteria, and charge
premium rates consistent with past
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practices and shall not be construed as a guarantee or warranty as to the
renewals of their respective policies upon their expiration dates.
6.06 Full Access. Each of the Sellers will permit representatives of the
Purchaser to have full access at all reasonable times and in a manner so as not
to interfere with their normal business operations to all premises, properties,
books, records, contracts, tax records and documents of or pertaining to the
Book of Business.
6.07 Notice of Developments. Each of the Parties will give prompt written
notice to the others of any material development affecting the ability of the
Parties to consummate the transactions contemplated by this Agreement. No
disclosure by any party pursuant to this Section 6.07 shall be deemed to amend
or supplement any of Sellers' Schedules unless delivered prior to Closing or to
prevent or cure any misrepresentation, breach of warranty or breach of covenant.
6.08 Exclusivity. Neither of the Sellers will prior to Closing or the
earlier termination of this Agreement:
(a) solicit, initiate or encourage the submission of any proposal or
offer from any person relating to the sale of any of the Book of Business
whether by means of (i) a liquidation, dissolution or recapitalization of either
of Sellers; (ii) a merger or consolidation of either of Sellers with any third
party; (iii) the acquisition or purchase of securities or assets of either of
Sellers; or (iv) a similar transaction or business combination involving either
of Sellers; or
(b) participate in any discussions or negotiations regarding, furnish
any information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any person to do or seek any of the
foregoing. The Sellers will notify the Purchaser immediately if any person
makes any proposal, offer, inquiry, or contact to either of them with respect to
any of the foregoing.
6.09 Employee Relations. Between the date of this Agreement and the
Closing Date, except with the written consent of Purchaser or MAI, none of the
Sellers or MDS shall (i) increase, or authorize an increase in, the base
compensation (including bonus and commissions) paid or provided to any of their
respective employees, agents or representatives, or (ii) adopt or enter into any
new employee retirement, welfare or other employee benefit plan.
6.10 Reporting of Claims. Sellers shall disclose to Purchaser all
incidents relating to potential claims under Sellers' policies that are reported
by Sellers' insureds, orally or in writing, prior to the Effective Date.
Purchaser shall refrain from making any communication to Sellers' insureds that
directly or indirectly solicits or encourages such insureds to report all
incidents relating to potential claims under Sellers' Outstanding Policies prior
to the Effective Date.
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7. Post-Closing Covenants. The Parties agree as follows with respect to
the period following the Closing.
7.01 General. In case at any time after the Closing any further action is
reasonably necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting Party
(unless the requesting Party is entitled to indemnification therefor under
Section 10 below).
7.02 License to Use Documents and Records. Effective upon the Closing
Date, the Purchaser hereby grants to Sellers a non-exclusive, nontransferable
perpetual right and license to use the documents and records included in the
Book of Business as described in Section 1.01(b) hereof for the purpose of the
management of claims made under Policies issued by Sellers prior to the Closing
Date, preparing and filing reports with regulatory authorities, reinsurers and
rating agencies, and preparing financial statements and tax returns for each of
Sellers. The license herein granted shall include the right to maintain
possession of the original copies of the documents and records at the offices of
Sellers so long as Sellers deem it necessary and appropriate, including allowing
a third party administrator or reinsurer to possess photocopies (not originals)
of the records necessary for them to perform claims administration. Sellers
shall at all times permit Purchaser and its successors and assigns and their
respective representatives reasonable access to such records for the purpose of
inspecting, using, copying, and retrieving at a reasonable cost of such records.
The license shall not include the right for Sellers or any of its successors or
assigns to use the information included in such documents and records for the
purpose of offering or issuing medical professional liability insurance to
prospective insureds at any time after the date of this Agreement.
7.03 Confidentiality. Each of Sellers and Purchaser (as the case may be,
the "Disclosing Party") may disclose to the other party (as the case may be, the
"Receiving Party") confidential, important, and/or proprietary trade secret
information concerning the Disclosing Party and its activities in connection
with the transactions contemplated hereby. As a condition to the provision of
such confidential information by the Disclosing Party, the Receiving Party
hereby agrees as follows:
(a) For purposes of this Agreement, "Confidential Information" shall
include all information or material that has or could have commercial value or
other utility in the business or prospective business of the Disclosing Party or
its subsidiaries or affiliates. Confidential Information also includes all
information regarding the business of the Disclosing Party that the Disclosing
Party has used reasonable efforts to maintain as confidential and that is
likely to provide the Receiving Party an unfair advantage that would be
detrimental to the conduct of the Disclosing Party's business. For purposes of
this Agreement, the term "Receiving Party" shall include the Receiving Party and
all affiliates, subsidiaries, and related companies of the Receiving Party,
including, but not limited to, in the case of Sellers, MDS and MDHC and in the
case of Purchaser, MAI. For purposes of this
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Agreement, the term "Representative" shall include the Receiving Party's
directors, officers, employees, agents, and financial, legal, actuarial and
other advisors.
(b) Confidential Information does not include information that the
Receiving party can demonstrate: (a) was in the Receiving Party's possession
prior to its being furnished to the Receiving Party in anticipation of or in
connection with this Agreement, provided the source of that information was not
known by the Receiving Party to be bound by a confidentiality agreement with
other continual, legal or fiduciary obligation of confidentiality to the
Disclosing Party; (b) is now, or hereafter becomes, through no act or failure to
act on the part of the Receiving Party, generally known to the public; (c) is
rightfully obtained by the Receiving Party from a third party, without breach of
any obligation to the Disclosing Party; or (d) is independently developed by the
Receiving Party without use of or reference to the Confidential Information.
(c) The Receiving Party and its Representatives shall not disclose
any of the Confidential Information in any manner whatsoever, except as provided
in subparagraphs (d) and (e) of this Section 7.03, and shall hold and maintain
the Confidential Information in strictest confidence.
(d) The Receiving Party may disclose the Disclosing Party's
Confidential Information to the Receiving party's responsible Representatives
with a bona fide need to know such Confidential Information, if such
Representatives are advised of the confidential nature of such Confidential
Information and the terms of this Agreement.
(e) The Receiving Party may disclose the Disclosing Party's
Confidential Information if, and to the extent that, such disclosure is required
by court order, provided that the Receiving Party uses reasonable efforts to
limit disclosure and to obtain confidential treatment or a protective order and
has allowed the Disclosing Party to participate in the proceeding pursuant to
which such court order issues.
(f) The provisions of this Section 7.03 shall not be applicable to
Purchaser or any of its Affiliates with respect to the information included in
the Book of Business acquired from Sellers after the Closing Date; provided that
Sellers and Purchaser shall each cause their respective Representatives to use
reasonable efforts to preserve the confidentiality of any information of
Sellers' insureds that is recognized as privileged under any federal or state
law, regulation or interpretation thereof.
(g) The Receiving Party shall be responsible for any breach of this
Agreement by any of its Representatives and shall, at its sole expense, take all
necessary measures (including but not limited to court proceedings) to restrain
its Representatives from prohibited disclosure or use of the Confidential
Information. The Receiving Party understands and acknowledges that any
disclosure or misappropriation of any of the Confidential Information in
violation of this Agreement may cause the Disclosing Party irreparable harm, the
amount of which may be difficult to ascertain, and therefore agrees that the
Disclosing Party shall have the right to apply to a court of competent
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jurisdiction for specific performance and/or an order restraining and enjoining
any such further disclosure or breach and for such other relief as the
Disclosing Party shall deem appropriate. Such right of the Disclosing Party is
to be in addition to the remedies otherwise available to the Disclosing Party at
law or in equity. The Receiving Party expressly waives the defense that a
remedy in damages will be adequate and any requirement in an action for specific
performance or injunction for the posting of a bond by the Disclosing Party.
7.04 Reinsurance.
(a) Purchaser will enter into a Reinsurance Treaty with Sellers
pursuant to which Purchaser will reinsure 100% of the "net liability" of Sellers
arising or incurred on or after the Effective Date under the Outstanding
Policies. The terms of said Reinsurance Treaty shall be in substantially the
form attached hereto as Schedule 7.04(a).
(b) Purchaser will enter into a reinsurance treaty with Sellers
pursuant to which Purchaser will reinsure on an excess of loss basis all losses
arising or incurred prior to the Effective Date under policies of Sellers issued
prior to the Effective Date and all allocated loss adjustment expenses with
respect to such losses that are in excess of the sum of the following: (i)
combined reserves for losses and allocated loss adjustment expenses of Sellers
as of the Effective Date determined without discount in accordance with
statutory accounting principles which Sellers are required to follow under the
statutes and regulations of Missouri in preparing their 1998 Annual Statements
for filing with the Missouri Department of Insurance ("Sellers Loss and ALAE
Reserves"); plus (ii) the amount by which Sellers' Loss and ALAE Reserves would
be discounted on an actuarial basis using an assumed investment rate of 5%
compounded semi-annually and an assumed payment rate consistent with Sellers'
claims payment history. The Reinsurance Treaty shall be in substantially the
form as is attached hereto as Schedule 7.04(b).
7.05 Employees. Subject to the Closing of the transactions contemplated
hereby, Purchaser agrees to offer employment to the employees of MDS listed on
Schedule 7.05 from and after the Effective Date if such persons are employed by
MDS on December 31, 1998 ("Retained Employees") in accordance with the following
parameters: (i) the persons listed in section (A) of Schedule 7.05 shall be
offered employment under terms of written employment agreements providing for an
initial salary at their current salary and bonus (or commission) with a minimum
initial term of three years with severance compensation payable for the shorter
of one year or the unexpired portion of the term if Purchaser terminates
employment without "cause" or if the employee terminates employment for "good
reason;" (ii) the persons listed in section (B) of Schedule 7.05 shall be
offered employment at current base compensation levels for an initial term of
one year with severance compensation payable for the unexpired portion of the
term if Purchaser terminates the employment without cause; and (iii) all other
Retained Employees will be offered "at will" employment with Purchaser at
current base compensation levels with severance compensation for three months if
Purchaser terminates employment without cause during the first year of
employment. The employees listed in Section (A) and Section (B) shall not be
required to relocate from Springfield, Missouri, during their initial term of
employment.
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Sellers and MDS shall terminate the employment of all Retained Employees of
Sellers and MDS as of the Effective Date. Sellers and MDS shall be responsible
for the payment of all severance and accrued retirement benefits payable to the
Retained Employees as a result of termination of employment by MDS. Retained
Employees will be entitled to substantially the same welfare and retirement
benefits as are generally available to employees of Purchaser and its
affiliates.
7.06 Management Agreement. The Purchaser (the "Manager"), and each of
Sellers shall enter into a Management Agreement on the Closing Date of this
Agreement pursuant to which the Manager will agree to manage the claims on
Sellers' insurance policies for a period of four years from the Effective Date.
The Management Agreement will be in the form attached hereto as Schedule 7.06.
7.07 Covenant Not to Compete.
(a) During the five (5) year period following the Closing Date,
neither of the Sellers shall, directly or indirectly through any affiliate
(including MDHC and MDS), (i) sell, offer, provide or distribute insurance
products (herein defined) offered by Purchaser at any place within the Territory
(herein defined); (ii) own, manage, operate, control, invest in, participate in,
or be connected in any manner with any business or activity which is the same
as, similar to or competitive with the insurance products offered by Purchaser,
other than such an investment in or ownership of 10% or less of any publicly
held company; or (iii) solicit any customers of Sellers for the sale of any
insurance products; or (iv) hire any Retained Employees or solicit any of them
for employment with Sellers or an affiliate; provided that a person shall not be
deemed to be a "Retained Employee" if his or her employment with Purchaser or
its affiliate has been terminated for a period equal to or greater than the
period for which Seller is, or would have been, obligated to pay severance
compensation for termination of such person without cause.
(b) The term Territory shall include each state listed on Schedule
4.01. The management of claims under Sellers' insurance policies issued or
renewed prior to Closing shall not be deemed to be a competitive business. The
term "insurance products" shall mean the insurance and reinsurance products that
are then being written by Mutual Assurance and any other subsidiary of MAI,
which, on date hereof, include the following: physician and surgeon liability
(medical malpractice), hospital professional liability, general and umbrella
liability, directors and officers, errors and omissions and managed care
liability, workmen's compensation, and accident and health insurance.
(c) Sellers acknowledge that a breach of their obligations under this
Section 7.07 would result in irreparable injury to Purchaser for which damages
would not be an adequate remedy. Therefore, Sellers consent to the issuance of
injunctive relief in the event of a breach of their obligations under this
Section 7.07, in addition to any other remedies to which Purchaser may be
entitled by law.
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(d) Any provision of the foregoing covenant that is prohibited or
unenforceable, including without limitation, as to time, geographic area, or
scope of activity, shall be void to the extent of that prohibition or
unenforceability only and the remaining provisions, including the remainder of
any provision found only partially invalid or unenforceable, shall continue to
be in full force and effect and shall not be affected by such invalidity or
unenforceability.
(e) Sellers acknowledge that this covenant not-to-compete is a
material inducement to Purchaser to enter into this Agreement and consummate the
transactions contemplated hereby. Sellers further acknowledge that they have
benefitted from the Agreement and will benefit from the transactions
contemplated hereby and that such benefits are adequate consideration to support
this covenant not to compete.
7.08 MDHC Financial Information.
(a) MDHC shall, at its expense, deliver to the Purchaser on or before
March 31, 1999, audited consolidated financial statements of MDHC and its
subsidiaries for the year ended December 31, 1998, prepared in accordance with
generally accepted accounting principles, which financial statements shall
include a balance sheet at December 31, 1998, and statements of operations,
changes in shareholders' equity, and cash flows for the year then ended and
notes thereto together with a report thereon from PricewaterhouseCoopers LLP.
Sellers shall, at its expense, deliver to Purchaser on or before June 1, 1999,
audited financial statements of MDA for the year ended December 31, 1998,
prepared in accordance with regulatory accounting principles, which financial
statements shall include a balance sheet at December 31, 1998, statement of
operations, changes in surplus, and cash flows for the year then ended and notes
thereto together with a report thereon by PricewaterhouseCoopers LLP.
(b) MDHC hereby consents to the inclusion in any filings or reports
of Purchaser with any governmental agency the audited consolidated financial
statements of MDHC and its subsidiaries for years ended prior to the Effective
Date and the unaudited consolidated condensed financial statements of MDHC and
its subsidiaries included in any Report on Form 10-Q for quarters ended prior to
the Effective Date to the extent that such financial statements are required to
be included in such filing or report under the applicable laws, rules and
regulations relating thereto. MDHC shall provide Purchaser and its accountants,
actuaries and other representatives reasonable access to the financial records
of MDHC and its subsidiaries to the extent that Purchaser is required to include
financial statements or other financial information of MDHC and its subsidiaries
regarding any period or periods prior to the Effective Date in any filing or
report with any governmental agency.
8. Conditions to Obligation to Close.
8.01 Conditions to Obligation of the Purchaser. The obligation of the
Purchaser to consummate the transactions under this Agreement is subject to the
satisfaction of the following conditions:
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(a) The representations and warranties of Sellers set forth in
Section 4 above shall be true and correct in all material respects at and as of
the Closing Date;
(b) The Sellers shall have performed and complied with all of their
covenants hereunder in all material respects through the Closing Date;
(c) No action, suit, or proceeding shall be pending before any court
or quasi-judicial or administrative agency of any federal, state, local, or
foreign jurisdiction nor shall Sellers or Purchaser have received any written
threat of any such action, suit or proceeding, wherein an unfavorable judgment,
order, decree, stipulation, injunction, or charge would (i) prevent consummation
of any of the transactions contemplated by this Agreement, (ii) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, or (iii) affect adversely the right of the Purchaser to own,
operate, or control the Book of Business (and no such judgment, order, decree,
stipulation, injunction or charge shall be in effect);
(d) The Sellers shall have delivered to the Purchaser a certificate
to the effect that they have satisfied the conditions set forth in subparagraphs
(a), (b), and (c) in all respects;
(e) If applicable, all waiting periods (and any extensions thereof)
under the Hart-Scott-Rodino Act of 1976 shall have expired or otherwise been
terminated;
(f) If applicable, all approvals shall have been received and all
waiting periods (and any extensions thereof) shall have expired pursuant to the
requirements of the insurance laws and regulations of the states of Alabama,
Missouri, and Kansas;
(g) The Sellers and Purchaser shall have entered into the Reinsurance
Treaties in substantially the form attached hereto as Schedule 7.04(a) and
Schedule 7.04(b) and said Treaties shall be in effect on the Effective Date;
(h) The Sellers and Purchaser shall have entered into the Management
Agreement in the form attached hereto as Schedule 7.06 and said Agreement shall
be in effect on date of Closing;
(i) Seller shall have delivered an Assignment and Bill of Sale
transferring the Book of Business of Purchaser free and clear of all liens,
claims and encumbrances, except as herein contemplated;
(j) All required consents of third parties to transaction shall have
been obtained at or prior to Closing;
(k) Sellers shall have delivered an opinion of their counsel, Husch &
Eppenberger, LLC, addressed to Purchaser and to the reasonable satisfaction of
Purchaser as to
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the matters addressed in Sections 4.01 (excluding qualification as a casualty
insurer in states other than Missouri), 4.02, 4.03, 4.04 and 4.05 of this
Agreement; and
(l) All actions to be taken by the Seller in connection with the
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to the
Purchaser.
8.02 Conditions to Obligations of Sellers. The obligations of the Sellers
to consummate the transactions to be performed by and in connection with the
Closing is subject to satisfaction of the following conditions:
(a) The representations and warranties of Purchaser set forth in
Section 5 above shall be true and correct in all material respects at and as of
the Closing Date;
(b) The Purchaser shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing Date;
(c) No action, suit, or proceeding shall be pending before any court
or quasi-judicial or administrative agency of any federal, state, local, or
foreign jurisdiction, nor shall Purchaser or Sellers have received any written
threat of any such action, suit or proceeding, wherein an unfavorable judgment,
order, decree, stipulation, injunction, or charge would (i) prevent consummation
of any of the transactions contemplated by this Agreement, or (ii) cause any of
the transactions contemplated by this Agreement to be rescinded following
consummation (and no such judgment, order, decree, stipulation, injunction, or
charge shall be in effect);
(d) The Purchaser shall have delivered to the Sellers a certificate
to the effect that each of the conditions specified above in subparagraphs (a)
through (c) above is satisfied in all respects;
(e) If applicable, the waiting periods (and any extensions thereof)
under the Hart-Scott-Rodino Act of 1976 shall have expired or otherwise been
terminated;
(f) If applicable, all approvals shall have been received and all
waiting periods (and any extensions thereof) shall have expired pursuant to the
requirements of the insurance laws and regulations of the states of Alabama,
Missouri and Kansas;
(g) The Sellers and Purchaser shall have entered into the Reinsurance
Treaties in substantially the form attached hereto as Schedule 7.04(a) and
Schedule 7.04(b), and said Treaties shall continue to be in effect on the
Effective Date;
23
<PAGE>
(h) The Sellers and Purchaser shall have entered into the Management
Agreement in the form attached hereto as Schedule 7.06 and such Agreement shall
be in effect on the Effective Date;
(i) Purchaser shall have delivered an opinion of its counsel, Burr &
Forman LLP, addressed to Sellers and to the reasonable satisfaction of Sellers
as to the matters addressed in Sections 5.01 (excluding qualification as a
property and casualty insurer in states other than Alabama, Missouri, and
Kansas), 5.02, 5.03 and 5.07; and
(j) All actions to be taken by the Purchaser in connection with the
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to the
Sellers.
8.03 Waivers. The Purchaser or Sellers may waive any conditions specified
in this Section 8 if executed in writing so stating at or prior to the Closing.
9. Closing; Closing Date.
---------------------
9.01 Date and Time. The closing of the transactions contemplated by this
Agreement ("Closing") will take place in Springfield, Missouri at a mutually
agreeable time and place on January 5, 1999 (the "Closing Date"); provided that
the Effective Date of the transactions contemplated by this Agreement for
accounting purposes shall be January 1, 1999 (the "Effective Date").
9.02 Further Assurances. Sellers will, from time to time after the Closing
Date, upon the reasonable request of Purchaser, execute, acknowledge, and
deliver all such further acts, deeds, assignments, transfers, conveyances, and
assurances as may be reasonably required to transfer to and to vest in Purchaser
all of Sellers' right, title and interest in and to the Purchased Assets and to
protect Purchaser's right, title and interest in and to all of the Purchased
Assets. Sellers further agree that they will cooperate with Purchaser for a
reasonable time after the Closing Date in connection with the renewal,
extension, and renegotiation of any of the Assumed Contracts to which Seller is
a party and the maintenance of favorable relations with all customers included
in the Book of Business.
9.03 Taxes. Sellers will pay all sales and use taxes and transfer taxes, if
any, applicable to the transactions contemplated by this Agreement. Each party
shall bear their own filing fees if a notification is filed under the
Hart-Scott-Rodino Act of 1976 and their own filing fees for any notifications
required by the Missouri Insurance Code or the Missouri Department of Insurance.
24
<PAGE>
10. Survival of Representations, Warranties, and Covenants;
-------------------------------------------------------
Indemnification.
- ---------------
10.01 Survival. The representations, warranties and covenants made by
Sellers and Purchaser in this Agreement will survive the Closing Date and any
investigation or inquiry made by either party for a period of one year from the
Closing Date; provided that any claim for indemnification under the provisions
of Section 10.03(d) shall not be subject to the aforesaid one year limitation.
10.02 Definition. As used herein, "Damages" shall mean any obligations,
losses, liabilities, security interests, liens, claims, encumbrances, charges,
damages, costs, and expenses (including, without limitation, attorneys' fees and
other costs and expenses incident to and paid by an indemnified party in
connection with the investigation, trial or settlement of any claim, suit,
action or proceedings) incurred, suffered or sustained or paid or required to be
paid by an indemnified party.
10.03 Indemnification by Sellers. After Closing, Sellers, MDHC and
their successors and assigns, jointly and severally, agree to and shall pay,
defend and promptly indemnify Purchaser against, and save and hold Purchaser
harmless from any and all Damages resulting from, arising out of or in
connection with (a) any breach or inaccuracy of any of the representations and
warranties made by Sellers in this Agreement, the schedules hereto, and the
certificates and documents executed by them in connection herewith, (b) any
liability or obligation of Sellers, whatsoever, other than the Assumed
Liabilities, (c) any liability to any employees of Sellers or MDS under (i) any
outstanding contracts that are not cancelable by it on notice of not longer than
thirty days and without liability, penalty, or premium; (ii) any agreement or
arrangement providing for the payment of any bonus or commission based on sales
or earnings; (iii) any agreements that contain any severance or termination pay
liabilities or obligations; or (iv) any deferred compensation, profit-sharing or
retirement arrangements with respect to such employees; or (d) any liability to
any third person in his or her capacity as a shareholder of MDHC that is
incurred by Purchaser or any of its affiliates in connection with this
transaction or in connection with any arrangement between the Retained Employees
and MDHC or its subsidiaries after the Effective Date.
10.04 Indemnification by Purchaser. After Closing, Purchaser, MAI, and
their successors and assigns agree to pay, defend and promptly indemnify Sellers
against, and save and hold them harmless from, any and all Damages resulting
from, arising out of or in connection with (a) any breach or inaccuracy of any
of the representations or warranties made by Purchaser in this Agreement, the
schedules hereto, and the certificates and documents executed by them in
connection therewith, or (b) the assertion against Sellers of any of the Assumed
Liabilities after Closing. The indemnification herein set forth shall not limit
any obligation of Purchaser to indemnify Sellers under the Reinsurance Treaties
described in Section 7.04 hereof and the Management Agreement described in
Section 7.06 hereof.
25
<PAGE>
10.05 Third Party Claims. Any party seeking indemnification (the
"Indemnified Party") with respect to a third party claim shall give written
notice (the "Notice") to the parties from whom indemnification is sought (the
"Indemnifying Party") of the claim for indemnification. Upon receipt of a
Notice, the Indemnifying Party shall have the option to, and at the request of
the Indemnified Party, shall defend and/or protest any such claim at the
Indemnifying Party's own cost and expense, including, but not limited to,
subject to the rights of or duties to any insurer having liability therefor, the
option to defend, with attorneys reasonably acceptable to the Indemnified Party,
provided that (i) the Indemnifying Party agrees in writing to be bound by and to
promptly pay the full amount of any final judgment or settlement and (ii) no
settlement or compromise of any matter shall be made without the consent of the
Indemnified Party, which consent shall not be unreasonably withheld. In
addition, the Indemnified Party may also participate, at its expense, in such
contest or defense. If the Indemnifying Party does not elect (or, if required,
does not agree) to assume the defense of the claim within ten days of the
Indemnifying Party's receipt of a notice, the party against whom the claim was
asserted will have the right, at the expense of the Indemnifying Party, to
undertake the defense and to compromise or settle the claim as it deems
appropriate.
11. Termination.
-----------
11.01 Termination of Agreement. Certain of the parties may terminate
this Agreement as provided below.
(a) The Purchaser and the Sellers may terminate this Agreement by
mutual written consent at any time prior to Closing;
(b) The Purchaser may terminate this Agreement by giving written
notice to the Sellers at any time prior to the Closing in the event the Sellers
or either of them is in breach of any representation, warranty or covenant
contained in this Agreement in any material respect;
(c) Sellers may terminate this Agreement by giving written notice to
the Purchaser at any time prior to the Closing in the event the Purchaser is in
breach of any representation, warranty, or covenant contained in this Agreement
in any material respect;
(d) Purchaser may terminate this Agreement on written notice to the
Sellers if the conditions set forth in Section 8.01 have not been satisfied or
waived by Purchaser on or before the Closing Date.
(e) Sellers may terminate this Agreement on written notice to
Purchaser if the conditions set forth in Section 8.02 have not been satisfied or
waived by Sellers on or before the Closing Date.
11.02 Effect of Termination. If any party terminates this Agreement
pursuant to subparagraphs (a), (d) or (e) of Section 11.01 above, all
obligations of the parties hereunder shall
26
<PAGE>
terminate without any liability of any party to the other party. If any party
terminates this Agreement pursuant to subparagraphs (b) or (c) of Section 11.01
above, such party shall have all rights and remedies available at law or in
equity against the other party.
12. Miscellaneous.
-------------
12.01 Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement among the parties and
supersedes any prior understandings, agreements, or representation by or among
the Parties, written or oral, that may have related in any way to the subject
matter hereof.
12.02 Succession and Assignment. This Agreement shall be binding upon
and inure to the benefit of the Parties and their respective successors and
permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the Purchaser and the Sellers.
12.03 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
12.04 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim
or other communication if addressed to the intended recipient as set forth below
shall be deemed to be duly given either when (i) it is personally delivered if
it is sent by hand, (ii) it is signed for or the U.S. Postal Service leaves
notice of attempted delivery if it is sent by registered or certified mail,
return receipt requested, postage prepaid, (iii) it is delivered or there has
been a confirmed attempted delivery if it is sent by a commercial overnight
courier, or (iv) the transmission is confirmed if it is sent by facsimile:
If to Sellers, MDS or MDHC:
Medical Defense Associates
1311 E. Woodhurst
Springfield, Missouri 65804
(Mailing Address)
P. O. Box 3817
Springfield, Missouri 65808
Attention: President
Facsimile: (417) 887-0300
27
<PAGE>
If to Purchaser or MAI:
Mutual Assurance, Inc.
100 Brookwood Place
Birmingham, Alabama 35209
(Mailing Address)
P. O. Box 590009
Birmingham, Alabama 35259-0009
Attention: Chief Financial Officer
Facsimile: (205) 868-4033
Any Party may give any notice, request, demand, claim, or other communication
hereunder using any other means, but no such notice, request, demand, claim, or
other communication shall be deemed to have been duly given unless and until it
is actually received by the Party for whom it is intended. Any Party may change
the address to which such notices, requests, demands, claims, or other
communications are to be delivered by giving the other Parties notice in the
manner herein set forth.
12.05 Amendments and Waivers. No amendment of any provisions of this
Agreement shall be valid unless the same shall be in writing and signed by the
Purchaser, and the Sellers. No waiver by any party of any default,
misrepresentation or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenants hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
12.06 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgement of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration or area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and this Agreement
shall be enforceable as so modified after the expiration of the time within
which the judgment may be appealed.
12.07 Expenses. Each of the Sellers and the Purchaser will bear its own
costs and expenses (including legal fees and expenses) incurred in connection
with this Agreement and the transactions contemplated hereby.
12.08 Construction. The language used in this Agreement will be deemed
to be the language chosen by the Parties to express their mutual intent, and no
rule of strict construction
28
<PAGE>
shall be applied against any Party. The term "Party" shall refer to any of the
persons executing this Agreement and their respective successors and assigns and
the term "Parties" shall collectively refer to all of the aforesaid.
12.09 Incorporation of Exhibits and Schedules. The exhibits and
schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
12.10 Arbitration. All disputes arising out of or relating to this
Agreement or the Parties' relationship, including the termination thereof, shall
be resolved by final and binding arbitration in St. Louis, Missouri, under the
commercial arbitration rules then in effect of the American Arbitration
Association, and judgment upon an award rendered by the arbitration panel may be
entered in any court having jurisdiction thereof. The arbitration panel shall
consist of three members, one of whom shall be selected by the complaining
Party, one of whom shall be selected by the Party alleged to be in breach, and
the third of whom shall be selected by the other two members and shall have
relevant experience in the medical malpractice insurance industry. In reaching
its decision, the arbitration panel shall have no authority to change or modify
any provision of this Agreement or any other written agreement between the
Parties. The arbitrators shall be empowered to award actual money damages and to
award specific performance, injunctive relief or other equitable relief. The
prevailing party in such an arbitration proceeding shall be entitled to recover
its attorneys' fees, all reasonable out-of-pocket costs and disbursements, as
well as any and all charges which may be made for the cost of the arbitration
and the fees of the arbitrators.
[Signatures on following page.]
29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
MUTUAL ASSURANCE, INC.
By: /s/A. Derrill Crowe
-------------------------------------------
Its: President
-------------------------------------------
MEDICAL ASSURANCE, INC.
By: /s/A. Derrill Crowe
-------------------------------------------
Its: President
-------------------------------------------
MEDICAL DEFENSE ASSOCIATES
By: /s/Ronald G. Benson
------------------------------------------
Its: President & Chief Executive Officer
------------------------------------------
MEDICAL DEFENSE INSURANCE COMPANY
By: /s/Ronald G. Benson
------------------------------------------
Its: President & Chief Executive Officer
------------------------------------------
MEDICAL DEFENSE SERVICES CORP.
By: /s/Ronald G. Benson
------------------------------------------
Its: President & Chief Executive Officer
------------------------------------------
MEDICAL DEFENSE HOLDING CO.
By: /s/Ronald G. Benson
------------------------------------------
Its: President & Chief Executive Officer
------------------------------------------
30
<PAGE>
MEDICAL DEFENSE ASSOCIATES ("MDA")
MEDICAL DEFENSE INSURANCE COMPANY ("MDIC")
SEPTEMBER 28, 1998
AGREEMENT FOR PURCHASE AND SALE OF CERTAIN ASSETS
SCHEDULES
Schedule 1.01(a) - Assumed Contracts
- ------------------------------------
None other than confidentiality agreements signed by all employees at time of
hire.
<PAGE>
MEDICAL DEFENSE ASSOCIATES ("MDA")
MEDICAL DEFENSE INSURANCE COMPANY ("MDIC")
SEPTEMBER 28, 1998
AGREEMENT FOR PURCHASE AND SALE OF CERTAIN ASSETS
SCHEDULES
Schedule 4.01 - States Licensed to do Business
- ----------------------------------------------
MDA MDIC
--- ----
Kansas Kansas
Missouri Missouri
<PAGE>
MEDICAL DEFENSE ASSOCIATES ("MDA")
MEDICAL DEFENSE INSURANCE COMPANY ("MDIC")
SEPTEMBER 28, 1998
AGREEMENT FOR PURCHASE AND SALE OF CERTAIN ASSETS
SCHEDULES
Schedule 4.06 (b) - Missouri State Financial Examinations (since January 1,
- ---------------------------------------------------------------------------
1988)
- -----
Medical Defense Associates
--------------------------
Two years ended December 31, 1995
Two years ended December 31, 1993
Four years ended December 31, 1991
Medical Defense Insurance Company
---------------------------------
Two years ended December 31, 1995
Three years ended December 31, 1993
Three years ended December 31, 1990
Copies of all the examinations listed above have been provided to MAI personnel.
Note: Medical Defense Associates and Medical Defense Insurance Company are
both currently undergoing routine state financial examinations
for the two year period ended December 31, 1997.
<PAGE>
MEDICAL DEFENSE ASSOCIATES ("MDA")
MEDICAL DEFENSE INSURANCE COMPANY ("MDIC")
SEPTEMBER 28, 1998
AGREEMENT FOR PURCHASE AND SALE OF CERTAIN ASSETS
SCHEDULES
Schedule 4.06 (d) - Tender Offers
- ---------------------------------
Neither of Sellers has received a Form A or other form indicating any person
intends to make or has made a tender offer for any of the Sellers voting
securities or indicated any other intent to acquire any of the Sellers voting
securities.
<PAGE>
MEDICAL DEFENSE ASSOCIATES ("MDA")
MEDICAL DEFENSE INSURANCE COMPANY ("MDIC")
SEPTEMBER 28, 1998
AGREEMENT FOR PURCHASE AND SALE OF CERTAIN ASSETS
SCHEDULES
Schedule 4.07 - Certain Changes
- -------------------------------
(a) No material changes.
(b) None.
(c) None.
(d) None.
(e) None.
<PAGE>
MEDICAL DEFENSE ASSOCIATES ("MDA")
MEDICAL DEFENSE INSURANCE COMPANY ("MDIC")
SEPTEMBER 28, 1998
AGREEMENT FOR PURCHASE AND SALE OF CERTAIN ASSETS
SCHEDULES
Schedule 4.08 (a) - Reserves and Rates Within Actuary's Recommended Range
- -------------------------------------------------------------------------
Medical Defense Associates
--------------------------
Since December 31, 1992, reserves for losses and loss adjustment expenses for
MDA have been maintained within the actuary's recommended range.
For the 1998 policy period MDA had a rate study performed by its independent
actuary which was completed in November 1997. The results of this study
indicated a collected rate change of approximately +8.4%. In discussions with
the company's independent actuary it was noted that MDA's current marketing
environment was very competitive and that any rate increase would be difficult
to support in the marketplace. It was further noted that by utilizing a portion
of MDA's investment income from surplus the company could offset the needed rate
increase and achieve the desired underwriting result indicated by the rate
study. Following these discussions with the company's independent actuary it was
agreed that MDA would not change any rates effective January 1, 1998.
Medical Defense Insurance Company
---------------------------------
Due to its small volume of business and its small number of outstanding claims
MDIC has not had any actuarial rate or reserve studies conducted since December
31, 1992.
<PAGE>
MEDICAL DEFENSE ASSOCIATES ("MDA")
MEDICAL DEFENSE INSURANCE COMPANY ("MDIC")
SEPTEMBER 28, 1998
AGREEMENT FOR PURCHASE AND SALE OF CERTAIN ASSETS
SCHEDULES
Schedule 4.08 (b) - Correspondence from Missouri Insurance Department on Rates
- ------------------------------------------------------------------------------
Neither MDA nor any of its affiliates have received any correspondence from the
Missouri Department of Insurance concerning its premium rates for the five year
period ending September 28, 1998. See Schedule 4.08(a) for a discussion of MDA's
1998 filed rates in relation to the rate study performed by the company's
independent actuary for 1998.
<PAGE>
MEDICAL DEFENSE ASSOCIATES ("MDA")
MEDICAL DEFENSE INSURANCE COMPANY ("MDIC")
SEPTEMBER 28, 1998
AGREEMENT FOR PURCHASE AND SALE OF CERTAIN ASSETS
SCHEDULES
Schedule 4.08 (c) - Policy Forms and Endorsements
- -------------------------------------------------
Schedules of MDA and MDIC policy
forms and endorsements attached.
Copies of MDA and MDIC policy forms and endorsements
previously provided to MAI personnel.
<PAGE>
Medical Defense Associates
Letterhead
MEDICAL DEFENSE ASSOCIATES
FORMS AND ENDORSEMENTS
CLAIMS MADE COVERAGE
MDA-101 CM R894 Application for Physicians and Surgeons
Professional Liability Insurance
MDA-101 A189 Supplemental Claim Information Form
MDA 102 CM R06/95 Physicians, Surgeons, & Dentists
Professional Liability Insurance Policy
MDA 104 CM R0597 Certificate of Professional Liability
Insurance
MDA 104A CM 989 Employee Certificate of Professional
Liability Insurance
MDA104 CM R1286 Health Care Provider in Kansas Certificate
of Medical Malpractice Insurance
MDA 105 CM R1286 Additional Insured Endorsement
MDA 116 CM R695 Installment Payments Endorsement
MDA 119 Blank Endorsement
MDA 119 Extended Reporting Period Coverage:
Coverage B - Partnership Liability
MDA 120 CM R1286 Non-Kansas Resident Health Care Provider
Endorsement
MDA 121 CM R695 Declarations Page
MDA 122 CM R695 Physician Employees of Emergency Service
Contractors
MDA 124 CM R1286 Unsupervised CRNA Exclusion Endorsement
MDA 125 CM R695 Contractual Defense Rider
MDA 126 CM Full-Time Equivalency Addition
MDA 127 CM R1286 Full-Time Equivalency Deletion
<PAGE>
Medical Defense Associates
Letterhead
MDA 128 CM R695 Limited Prior Acts Endorsement
MDA 129 CM R1286 Extended Reporting Period Endorsement
MDA 130 CM R1286 Policy Delivery Receipt
MDA 131 CM R988 Locum Tenens Endorsement
MDA 135 CM R 8/94 Application for Dentists and Oral Surgeons
Professional Liability Insurance
MDA 136 CM R1286 $100,000 Deductible Endorsement
MDA 137 CM R1286 $50,000 Deductible Endorsement
MDA 138 CM R1286 $25,000 Deductible Endorsement
MDA 139 CM R887 Sharing in Limits Endorsement
MDA 140 CM 687 Increased Limits Questionnaire
MDA 141 CM 695 Change of Practice Endorsement
MDA 143 CM R489 Application for Professional Liability
Insurance Nurse Anesthetists
MDA 144D CM 889 Conditional Extended Reporting Endorsement
Without Additional Premium (Corporation
Dissolution)
MDA 145 CM 12/90 Full-Time Military Duty Endorsement
MDA 146 CM 2/93 Reporting Endorsement Partnership Liability
Endorsement
MDA 147 CM 793 Partnership Policy Endorsement
MDA 150 CM 695 Missouri Property and Casualty Insurance
Guaranty Association Coverage Limitations
Endorsement
<PAGE>
Medical Defense Associates
Letterhead
MEDICAL DEFENSE ASSOCIATES
FORMS AND ENDORSEMENTS
OCCURRENCE COVERAGE
MDA-101 Rev. 12/85 Application for Professional Liability
Insurance
MDA-102 R1083 Policy
MDA 103 R488 Bylaws
MDA 104 R682 Certificate of Insurance
MDA 105 R1083 Additional Insured Endorsement
MDA 106 Hospital Staff Certification
MDA 107 R-1 $5,000 Deductible Endorsement
MDA 108 Membership Endorsement
MDA 112 Discovery Coverage Endorsement
MDA 115-R 1081 Excess Liability Endorsement
MDA 116 R1083 Installment Payments Endorsement
MDA 117 R 282 Renewal Certificate
MDA 119 No Deductible Endorsement
MDA 120 7/84 Health Care Provider in Kansas Endorsement
MDA 121 Declarations Page
MDA 122 R1283 Physician Employees of Emergency Service
Contractors
MDA 124 Unsupervised CRNA Endorsement
MDA 125 Contractual Defense Rider
<PAGE>
Medical Defense Insurance Company
Letterhead
MEDICAL DEFENSE INSURANCE COMPANY
FORMS AND ENDORSEMENTS
MDI 1000 KS 4/93 Application for Professional Liability
Insurance for Physicians and Surgeons
MDI 1001 KS R493 Declarations Page
MDI 1002 KS R784 Policy
MDI 1010 KS R493 Additional Insured Endorsement
MDA 104-R682 Certificate of Insurance
MDI 1013 KS784 Change of Limits Endorsement
MDI 1014 KS 784 Declarations Page (Excess Coverage)
MDI 1016 KS R493 Installment Payments Endorsement
MDI 1041 KS1086 Gap in Coverage Endorsement
MDI 1047 KS 793 Partnership Policy Endorsement
Notice of Basic Coverage Form
<PAGE>
MEDICAL DEFENSE ASSOCIATES ("MDA")
MEDICAL DEFENSE INSURANCE COMPANY ("MDIC")
SEPTEMBER 28, 1998
AGREEMENT FOR PURCHASE AND SALE OF CERTAIN ASSETS
SCHEDULES
Schedule 4.09 - Reinsurance
- ---------------------------
Copies of each reinsurance agreement listed previously provided to MAI
personnel.
Medical Defense Associates
--------------------------
. November 1, 1980 through October 31, 1981 - GHV 274/180 (Excess of Loss)
Retention
---------
Initial Retention - $250,000
Indexed Amount Each 12 Months - $25,000
Current Retention - $675,000
Treaty Allocation
-----------------
. Underwriting Members of Lloyd's - 62.14%
. Turegum Insurance Company - 22.27%
. Yasuda Fire & Marine Ins. Co. (U.K.) Ltd. - 8.91%
. Sovereign Marine & General Ins. Co. Ltd. - 6.68%
. August 1, 1981 through October 31, 1984 - GHV 274/281 (Excess of Loss over
Medical Defense Associates, Momedico, and Medical Protective)
Retention
---------
Flat 10%
Treaty Allocation
-----------------
. Underwriting Members of Lloyd's - 35.76%
. Munchener Ruckversicherungs-Gesellschaft - 24.15%
. CNA Reinsurance of London Ltd. - 19.32%
. Unionamerica Ins. Co. Ltd. - 9.66%
. The Dominion Ins. Co. Ltd. - 4.83%
. Trenwick Reinsurance Company - 4.83% (until 10-31-83)
. Kansa General Ins. Co. Ltd. - 4.83% (beginning 11-01-83)
. Yasuda Fire and Marine Ins. Co. (U.K.) Ltd. - 1.45%
<PAGE>
MEDICAL DEFENSE ASSOCIATES ("MDA")
MEDICAL DEFENSE INSURANCE COMPANY ("MDIC")
SEPTEMBER 28, 1998
AGREEMENT FOR PURCHASE AND SALE OF CERTAIN ASSETS
SCHEDULES
Schedule 4.09 - Reinsurance (cont.)
- -------------------------------------
. November 1, 1981 through October 31, 1984 - GHV 274/381 (Excess of Loss)
Retention
---------
Initial Retention - $250,000
Indexed Amount Each 12 Months - $25,000
Current Retention - $650,000 (11/01/1981 to 10/31/82)
Current Retention - $625,000 (11/01/1982 to 10/31/83)
Current Retention - $600,000 (11/01/1983 to 10/31/84)
Treaty Allocation
-----------------
. Underwriting Members of Lloyd's - 57.41%
. CNA Reinsurance of London Ltd. - 16.23%
. Unionamerica Ins. Co. Ltd. - 12.17%
. Yasuda Fire and Marine Ins. Co. (U.K.) Ltd. - 8.11%
. Sovereign Marine & General Ins. Co. Ltd. - 6.08%
. November 1, 1984 through October 31, 1987 - GHV 274/484 (Excess of Loss)
Retention
---------
Initial Retention - $250,000
Indexed Amount Each 12 Months - $25,000
Current Retention - $575,000 (All three years)
Treaty Allocation
-----------------
12 Months Ended October 31, 1985 (100% Participation)
. Underwriting Members of Lloyd's - 55.60%
. Turegum Ins. Co. Ltd. - 20.00%
. CNA Reinsurance of London Ltd. - 20.00%
. Terra Nova Ins. Co. Ltd. - 4.40%
12 Months Ended October 31, 1986 (74.60% Participation)
. Underwriting Members of Lloyd's - 54.60%
. Turegum Ins. Co. Ltd. - 15.00%
. Terra Nova Ins. Co. Ltd. - 5.00%
12 Months Ended October 31, 1987 (57.10% Participation)
. Underwriting Members of Lloyd's - 42.10%
. Terra Nova Ins. Co. Ltd. - 10.00%
. Turegum Ins. Co. Ltd. - 5.00%
<PAGE>
MEDICAL DEFENSE ASSOCIATES ("MDA")
MEDICAL DEFENSE INSURANCE COMPANY ("MDIC")
SEPTEMBER 28, 1998
AGREEMENT FOR PURCHASE AND SALE OF CERTAIN ASSETS
SCHEDULES
Schedule 4.09 - Reinsurance (cont.)
- -------------------------------------
Medical Defense Insurance Company
---------------------------------
No current reinsurance contracts in effect.
<PAGE>
MEDICAL DEFENSE ASSOCIATES ("MDA")
MEDICAL DEFENSE INSURANCE COMPANY ("MDIC")
SEPTEMBER 28, 1998
AGREEMENT FOR PURCHASE AND SALE OF CERTAIN ASSETS
SCHEDULES
Schedule 4.11 - Intellectual Property
- -------------------------------------
1) The following trade names and related logos:
. Medical Defense
. Medical Defense Holding Co.
. Medical Defense Associates
. Medical Defense Services Corp.
. Medical Defense Insurance Company
2) Various advertising and marketing materials used for the promotion of
the business of Medical Defense Associates and related entities.
3) The policies, endorsements, and other material referenced in Schedule
4.08(c).
4) All underwriting manuals and guidelines.
5) All claims manuals and guidelines.
6) All risk management manuals and guidelines.
7) Personnel standards and related employee benefit documents.
8) Business and marketing plans.
9) Various computer software programs.
10) Customer lists and related business information.
<PAGE>
MEDICAL DEFENSE ASSOCIATES ("MDA")
MEDICAL DEFENSE INSURANCE COMPANY ("MDIC")
SEPTEMBER 28, 1998
AGREEMENT FOR PURCHASE AND SALE OF CERTAIN ASSETS
SCHEDULES
Schedule 4.12 - Contracts and Commitments
- -------------------------------------------
(a) At time of hire each employee signs a confidentiality agreement. A copy of
the form of this confidentiality agreement was previously provided to MAI
personnel. Also, incorporated within the employment contracts of Ronald
Benson, Geri Morrison, David Brown, Gary Robinson, John Stamatis, and Arlen
Winsky are non-compete agreements. None of such non-compete or
confidentiality agreements conflict with the transactions contemplated by
this Agreement or related agreements, and no copies of such agreements
(other than the form of confidentiality agreement signed by all employees)
are being provided to MAI.
On February 15, 1991, MDA entered into a confidential settlement agreement
with Risk Control Associates (now Intermed) and RCA Insurance Services of
Springfield, Missouri. Although MDA is not permitted to provide a copy of
the agreement, MDA may disclose (i) the fact that settlement occurred, (ii)
the terms of the settlement agreement, which required RCA to provide a
mailing to certain MDA insureds and to refrain from using lists of MDA
insureds for competitive purposes, and (iii) a copy of the text of the
letter sent by RCA (attached). In exchange, MDA released RCA and its
employees and affiliates from liability for use of lists of MDA insureds
prior to the date of the agreement. Although the agreement does not have a
termination date, MDA believes that all terms of the agreement have been
satisfied, and that the agreement is of no further force and effect.
(b) None
(c) In connection with MDA's conversion from a mutual insurance company to a
stock insurance company, MDA entered into a special deposit agreement with
the Missouri Department of Insurance relating to policies written under the
former mutual company, which is described in the notes to the financial
statements included in MDHC's 10K filings with the Securities and Exchange
Commission. This agreement does not make reference to MDA's continued
operation (copy not provided).
(d) None
(e) None
<PAGE>
EXHIBIT "A"
Date
Dr. Abcdef
Address
City, State, Zip
Dear Dr. Abcdef:
I recently sent a letter which reflected adversely on Medical Defense
Associates concerning the Insurance Regulatory Information System ("IRIS")
ratios developed by the National Association of Insurance Commissioners
("NAIC"). My letter was misleading. I used the IRIS ratios in a fashion in which
they were not intended to be used. I drew and expressed conclusions from the
IRIS ratios that were inaccurate and which I was not qualified to draw because I
am not a financial examiner.
The NAIC has stated that "it is not unusual for financially sound
insurers to have several ratios outside the usual range," and that "in normal
years, about 15 percent of the companies included in the system are expected to
be outside the usual range on four or more ratios." My letter should have, but
did not include these caveats. I should also have made it clear that I was
expressing my opinion, not that of the NAIC or others.
On September 5, 1990, the Missouri Division of Insurance issued a
statement of charges in Case No. MDI-90-08-277, asserting that, because of my
letter, Risk Control Associates, Inc. and I had "each committed an unfair method
of competition or an unfair or deceptive act or practice" because we had
"willfully made, published, disseminated or circulated a written statement which
was false or maliciously critical or derogatory to the financial condition" of
Medical Defense Associates.
On October 12, 1990, these charges were dismissed on the express
condition that Risk Control Associates, Inc., and I give written assurance to
the Missouri Division of Insurance that neither it nor I will make any false or
critical or derogatory statements about the financial condition of Medical
Defense Associates in the future. This has been done.
Sincerely,
Cliff Stepp
Marketing Manager
<PAGE>
MEDICAL DEFENSE ASSOCIATES ("MDA")
MEDICAL DEFENSE INSURANCE COMPANY ("MDIC")
SEPTEMBER 28, 1998
AGREEMENT FOR PURCHASE AND SALE OF CERTAIN ASSETS
SCHEDULES
Schedule 4.14 - MDS Employee Roster
- -------------------------------------
Unless otherwise noted salary is based on a normal 37.5 hour work week
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Special 1998 Total
Social Compensation Projected
Name Security No. Position (See Footnote) Annual Salary
---- ------------ -------- -------------- --------------
<S> <C> <C> <C> <C>
Geri H. Morrison ###-##-#### Chief Operating Officer See Contract See Contract
Robert E. Morrison ###-##-#### Director of Risk Mangmnt (a) 3,600 76,500
Samuel J. Pippin ###-##-#### Director of Acctng/Finance (a) 3,900 81,800
David W. Jackson ###-##-#### Director of Claims (a) 4,700 98,600
Patricia A. Savard 331-54-2702 Senior Accounting Clerk 23,205
Cynthia E. Bousman ###-##-#### Senior Claims Clerk 20,787
Carol A. Cruise ###-##-#### Policyholder Services Supvr 22,815
Michelle R. Todd ###-##-#### Executive Assistant (b) 8,000 38,000
Kathryn L. Twibell ###-##-#### Information Systems Mngr 54,100
Claudia J. Kelsey ###-##-#### Senior Underwriting Asst. 22,601
Elizabeth D. Binder ###-##-#### Claims Clerk (Part-time) 9,828
Dona L. Alfultis ###-##-#### Senior Claims Specialist 35,875
Barbara J. Adams ###-##-#### Secretary to Claims Director 22,913
Phillip E. Moppert ###-##-#### St. Louis Field Service Rep. (c) 18,000 116,100
Donald D. Buckholz ###-##-#### K. C. Field Service Rep. (c) 13,500 79,500
Teri L. Young ###-##-#### Policyholder Services Clerk 17,745
Cheryl A. Patterson ###-##-#### Financial Accntng Specialist 30,420
Steven A. Brown ###-##-#### Claims Supervisor 43,500
Gerald T. Waggoner ###-##-#### Claims Specialist 40,500
Kaysha F. Morgan ###-##-#### Receptionist 13,163
</TABLE>
Footnotes: (a) - Senior managers year-end incentive bonus.
(b) - Overtime compensation.
(c) - Field service representatives incentive
compensation plan.
(5)
(a) As a part of their total compensation package, senior managers participate
in a manager incentive program. The incentive plan is based on a combination of
company and individual performance. A copy of the calculation worksheet is
attached.
(b) As a part of their total compensation package, field service representatives
participate in a quarterly bonus program. Copies of the calculation worksheets
are attached.
<PAGE>
Attachment to Schedule 4.14 - (5)(a)
page 1 of 1
MEDICAL DEFENSE SERVICES
MANAGER INCENTIVE PROGRAM
<TABLE>
<CAPTION>
Bonus Calculation Possible Actual
- ----------------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
I. GOALS AND OBJECTIVES 100
280 1.00% POSS ACTL
---- ----
290 1.50%
300 2.00% AMBITION 30
310 2.50% ACHIEVEMENT 30
320 3.00% CONTRIBUTION TO
330 3.50% CORP OBJECTIVES 40
340 4.00%
350 4.50% II. EMPLOYEE EVALUATION 150
360 5.00%
370 5.50% III. FINANCIAL STATISTICS 200
380 6.00% 1. BUDGET POSS ACTL
---- ----
A. OVER 15% 0
B. + OR - 15% 20
C. UNDER 15% 40
2. RESERVE TO SURPLUS
POSS ACTL
---- ----
A. OVER 6:1 0
B. 6:1 TO 4:1 20
C. UNDER 4:1 40
3. POLICYHOLDER COUNT POSS ACTL
---- ----
A. [LESS THAN] 10% DROP 0
B. + OR - 10% 20
C. [LESS THAN] 10% GAIN 40
4. IRIS RATIOS POSS ACTL
---- ----
A. PASS [GREATER THAN] 8 0
B. PASS = 8 20
C. PASS [THAN THAN] 8 40
5. PREMIUM TO SURPLUS POSS ACTL
---- ----
A. OVER 5% 0
B. 5:1 TO 3:1 20
C. UNDER 3:1 40
-------- ------
GRAND TOTALS 450
======== ======
</TABLE>
<PAGE>
page 1 of 3
St. Louis Territory
BONUS PROGRAM
(Quarterly Basis)
<TABLE>
<S> <C> <C>
I. Performance Bonus:
A. Accountabilities:
-----------------
1. Service (Customer Visits)
100% to 90% 6%
89% to 80% 4%
79% to 70% 3%
2. Retention (Policies in Force)
100% to 93% 5%
92% to 85% 4%
84% to 77% 2%
3. New Business (Policies in Force)
31 or more 5%
16 to 30 4%
5 to 15 3%
4. Solicitations (Prospect Visits)
46 or more 4%
26 to 45 3%
13 to 25 2%
II. Quota Bonus:
A. Accountabilities Quota Weight
---------------- ----- ------
1. Service 100% 30.0
2. Retention 100% 25.0
3. New Policyholders 31 25.0
4. Solicitations 46 20.0
Quota
B. Total Weighted Performance Bonus
-------------------------- -----
95.0 or more 5%
90.0 to 94.9 4%
80.0 to 89.9 3%
70.0 to 79.9 2%
50.0 to 69.9 1%
</TABLE>
01/07/91
<PAGE>
page 2 of 3
Kansas City Territory
BONUS PROGRAM
(Quarterly Basis)
<TABLE>
<S> <C> <C>
I. Performance Bonus:
A. Accountabilities:
-----------------
1. Service (Customer Visits)
100% to 90% 6%
89% to 80% 4%
79% to 70% 3%
2. Retention (Policies in Force)
100% to 93% 5%
92% to 85% 4%
84% to 77% 2%
3. New Business (Policies in Force)
25 or more 5%
13 to 24 4%
4 to 12 3%
4. Solicitations (Prospect Visits)
37 or more 4%
21 to 36 3%
10 to 20 2%
II. Quota Bonus:
A. Accountabilities Quota Weight
---------------- ----- ------
1. Service 100% 30.0
2. Retention 100% 25.0
3. New Policyholders 25 25.0
4. Solicitations 37 20.0
Quota
B. Total Weighted Performance Bonus
-------------------------- ------
95.0 or more 5%
90.0 to 94.9 4%
80.0 to 89.9 3%
70.0 to 79.9 2%
50.0 to 69.9 1%
</TABLE>
01/07/91
<PAGE>
Attachment to Schedule 4.14-(5)(b)
page 3 of 3
BONUS PROGRAM
Calculation Sheet
------------------
I. Performance Bonus
Actual
Accountabilities Performance Bonus %
---------------- ----------- -------
<TABLE>
<CAPTION>
<S> <C>
1. Service
2. Retention
3. New Policies
4. Solicitations
----------
Total Performance Bonus =
</TABLE>
II. Quota Bonus
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(A) (B) (C) (D) (E)
% of Weighted
Actual Quota Performance
Quota Performance (B)/(A) Weight (c)x(b)
----- ----------- ------- ------ -----------
1. Service 30.0
2. Retention 25.0
3. New Policies 25.0
4. Solicitations 20.0
-----------
Column (E) Total =
Quota Bonus (from Table)
-----------
Performance Bonus %
Quota Bonus %
-------
Total Bonus %
</TABLE>
<PAGE>
SCHEDULE 7.04(a)
100% Quota Share
Reinsurance Contract
Effective: January 1, 1999
issued to
Medical Defense Associates
Medical Defense Insurance Company
<PAGE>
100% Quota Share
Reinsurance Contract
Effective: January 1, 1999
issued to
Medical Defense Associates
Medical Defense Insurance Company
Springfield, Missouri
<TABLE>
<CAPTION>
Reinsurer Participation
<S> <C>
Mutual Assurance, Inc. 100.0%
Total 100.0%
</TABLE>
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Article Page
<S> <C>
Article I - Parties to the Agreement..................................... 4
Article II - Business Reinsured.......................................... 4
Article III - Commencement and Termination............................... 5
Article IV - Exclusions.................................................. 5
Article V - Ceded Liability.............................................. 6
Article VI - Loss in Excess of Policy Limits/ECO......................... 6
Article VII - Claims and Loss Adjustment Expense......................... 6
Article VIII - Salvage and Subrogation................................... 7
Article IX - Original Conditions......................................... 7
Article X - Commission (BRMA 10A)........................................ 7
Article XI - Reports and Remittances..................................... 8
Article XII - Offset (BRMA 36C).......................................... 8
Article XIII - Access to Records (BRMA 1D)............................... 9
Article XIV - Errors and Omissions (BRMA 14E)............................ 9
Article XV - Taxes (BRMA 50B)............................................ 9
Article XVI - Unauthorized Reinsurers.................................... 9
Article XVII - Insolvency................................................ 10
Article XVIII - Arbitration (BRMA 6J).................................... 11
Article XIX - Service of Suit (BRMA 49C)................................. 12
Article XX - Notice...................................................... 12
</TABLE>
3
<PAGE>
100% Quota Share
Reinsurance Contract
Effective: January 1, 1999
issued to
Medical Defense Associates
Medical Defense Insurance Company
(hereinafter referred to as the "Company")
by
MUTUAL ASSURANCE, INC.
(hereinafter referred to as the "Reinsurer")
Article I - Parties to the Agreement
This Agreement is solely between the Company and the Reinsurer. When more than
one reinsured company is named as a party to this Agreement, the first company
named shall be the agent of the other companies as to all matters pertaining to
this Agreement. Performance of the obligations of each party under this
Agreement shall be rendered solely to the other party. In no instance shall any
insured of the Company or any claimant against any insured of the Company have
any rights under this Agreement.
Article II - Business Reinsured
A. By this Contract the Company obligates itself to cede to the Reinsurer and
the Reinsurer obligates itself to accept quota share reinsurance of the
Company's net liability for loss arising from claims incurred after 12:01
a.m. CST on January 1, 1999, under policies, contracts and binders of
insurance (hereinafter called "policies") issued by the Company which are
in force on and after 12:01 a.m. CST on January 1, 1999, and classified by
the Company as Medical Professional Liability and any ancillary coverages.
B. For purposes of this Contract, a claim will be deemed to have been
"incurred" in the year to which the claim is assigned for financial
reporting purposes in accordance with the regulatory reporting requirements
of the Missouri Department of Insurance. Notwithstanding the foregoing, any
claim under a covered claims-made policy that arises out of or is related
to an incident communicated to the Company, orally or in writing, during
the period beginning on September 29, 1998, and ending December 31, 1998,
shall be deemed to have been incurred prior to 12:01 a.m. CST on January 1,
1999, notwithstanding the Company's prior practice of requiring a written
report of the incident before any claim arising
4
<PAGE>
therefrom or related thereto is deemed to have been incurred under a
"claims made" policy of the Company.
C. The liability of the Reinsurer with respect to each cession hereunder shall
commence obligatorily and simultaneously with that of the Company, subject
to the terms, conditions and limitations hereinafter set forth.
Article III - Commencement and Termination
This Contract shall become effective at 12:01 a.m. CST on January 1, 1999,
Reinsurer shall have no right to terminate this Agreement.
Article IV - Exclusions
This Contract does not apply to and specifically excludes the following:
1. Reinsurance assumed by the Company.
2. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause -
Liability - Reinsurance" attached to and forming part of this
Contract.
3. Liability as a member, subscriber or reinsurer of any Pool, Syndicate
or Association, but this exclusion shall not apply to Assigned Risk
Plans or similar plans.
4. 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
another 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.
5. Any claims under the Company's policies covered by the Aggregate
Excess of Loss Reinsurance Agreement, effective January 1, 1999,
issued to the Company by the Reinsurer (the "Excess of Loss
Agreement"). In the event an incident from which a Claim arises
involves both a Claim that is covered by this Contract and a Claim
that is also covered under the Excess of Loss Agreement, the amount of
the ultimate net loss payable with respect to the claim covered by
this Contract shall be determined by a reasonable allocation of the
responsibility for the liability arising from the applicable incident
among the claimants under the policies covered by this Contract and
the Excess of Loss Agreement. Notwithstanding the foregoing, the
Reinsurer
5
<PAGE>
shall have no liability under this Contract for that portion of claims
that would have otherwise been covered by the Excess of Loss Agreement
in the event that the Excess of Loss Agreement is terminated prior to
the expiration of this Contract.
Article V - Ceded Liability
As respects business subject to this Contract, the Company shall cede to the
Reinsurer and the Reinsurer agrees to accept 100% of the Company's net
liability. "Net liability" as used herein is defined as the Company's gross
liability (including all loss and loss adjustment expenses, both allocated and
unallocated) with respect to Claims after giving effect to cessions, if any, to
other reinsurers under other reinsurance treaties in force on the Effective
Date.
Article VI - Loss in Excess of Policy Limits/ECO
A. In the event the Company pays or is held liable to pay an amount of loss in
excess of its policy limit, but otherwise within the terms of its policy
(hereinafter called "loss in excess of policy limits") or any punitive,
exemplary, compensatory or consequential damages, other than loss in excess
of policy limits (hereinafter called "extra contractual obligations")
because of alleged or actual bad faith or negligence on its part 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
policyholder, or in discharging its duty to prepare or prosecute an appeal
consequent upon such an action, or in otherwise handling a claim under a
policy subject to this Contract, the loss in excess of policy limits and/or
the extra contractual obligations shall be added to the Company's loss, if
any, under the policy involved, and the sum thereof shall be subject to the
provisions of Article V.
B. 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.
C. Notwithstanding anything stated herein, this Contract shall not apply to
any loss in excess of policy limits or any extra contractual obligation
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 any individual or corporation or any
other organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
D. Recoveries from any form of insurance or reinsurance which protects the
Company against claims the subject matters of this Article shall inure to
the benefit of this Contract.
Article VII - Claims and Loss Adjustment Expense
A. All decisions to settle or defend Claims under policies covered by this
Agreement shall be made by the Reinsurer. The Company shall provide such
information regarding Claims as
6
<PAGE>
may be reasonably requested by Reinsurer. The Reinsurer shall have the
exclusive power and authority to assume the Company's defense of any Claim
and to direct any and all actions to be taken by or on behalf of the
Company in connection with the settlement or defense of Claims, except to
the extent that the authority to settle or defend Claims may from time to
time be delegated to the Company by Reinsurer.
B. The Reinsurer shall be liable for its proportionate share of losses and
allocated and unallocated loss adjustment expense incurred in connection
with the defense and settlement of Claims as herein provided. Reinsurer
agrees to pay or allow as the case may be its proportionate share of all
such losses and loss adjustment expenses in accordance with Article XI
hereof.
C. Notwithstanding anything in this Article VII to the contrary, nothing in
this Contract shall be construed as an assignment of the Company's rights
and non-delegable duties and obligations under the Company's policies
relating to the claims reinsured hereunder.
Article VIII - Salvage and Subrogation
The Reinsurer shall be credited with its proportionate share of 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. 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 IX - Original Conditions
A. All reinsurance under this Contract shall be subject to the same rates,
terms, conditions and waivers, and to the same modifications and
alterations as the respective policies of the Company. However, in no event
shall this be construed in any way to provide coverage outside the terms
and conditions set forth in this Contract. The Reinsurer shall be credited
with its exact proportion of the original premiums received by the Company,
prior to disbursement of any dividends, but after deduction of premiums, if
any, ceded by the Company for insuring reinsurance.
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 X - Commission (BRMA 10A)
A. The Reinsurer shall allow the Company an 8% commission on the ceded premium
in accordance with Article XI below. The Company shall allow the Reinsurer
return commission on return premiums at the same rate.
7
<PAGE>
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 XI - Reports and Remittances
A. Within 30 days after the end of each calendar month, the Company shall
report to the Reinsurer:
1. The Company's earned premium on the policies for the preceding
calendar month as determined in accordance with the accounting
requirements of the Missouri Department of Insurance;
2. Commission payable to the Company in accordance with Article X
hereof.
The positive balance of (1) less (2) shall be remitted by the Company to
the Reinsurer with its report.
B. The Company will provide a weekly report that will reflect all losses and
allocated loss adjustment expenses that have been incurred by the Company
but not previously reported to Reinsurer. Reinsurer will pay to the Company
or to such parties as may be directed by the Company in writing all losses
and allocated loss adjustment expenses reflected on said report provided
that the same have been incurred by the Company in accordance with Article
VII hereof.
C. Reinsurer and the Company have entered into a Management Agreement of even
date herewith (the "Management Agreement") pursuant to which the Company
has engaged Reinsurer to manage, settle and defend claims covered by this
Contract. So long as the Management Agreement remains in effect, the
provisions in the Management Agreement relating to the funding and payment
of losses and allocated and unallocated loss adjustment expenses by the
Reinsurer shall be binding upon the Company and the Reinsurer to the extent
of any conflict in the provisions of this Agreement and the Management
Agreement.
D. Annually, the Company shall furnish the Reinsurer with such information as
the Reinsurer may require to complete its Annual Convention Statement.
Article XII - 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.
8
<PAGE>
Article XIII - 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 XIV - Errors and Omissions (BRMA 14E)
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made, provided such delay, omission or
error is rectified upon discovery.
Article XV - 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 XVI - Unauthorized Reinsurers
A. If the Reinsurer is unauthorized in Missouri or Kansas, the Reinsurer
agrees to fund its share of the Company's ceded unearned premium and
outstanding loss and loss adjustment expenses reserves, whether allocated
or unallocated, (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 acceptable to the
insurance regulatory authorities; 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 this
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
9
<PAGE>
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 B(1), B(2) or B(4), or in the case
of B(3), the actual amount determined to be due, the Company shall promptly
return to the Reinsurer the excess amount so drawn.
Article XVII - Insolvency
A. In the event of the insolvency of the Company, 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
10
<PAGE>
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
the Company, 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 XVIII - Arbitration (BRMA 6J)
A. Any unresolved difference of opinion between the Reinsurer and the Company,
whether such difference of opinion arises before or after the termination
of this Agreement, shall be submitted to arbitration by three arbitrators.
One arbitrator shall be chosen by the Reinsurer, and one shall be chosen by
the Company. The third arbitrator shall be chosen by the other two
arbitrators within 10 days after they have been appointed. If the two
arbitrators cannot agree upon a third arbitrator, each arbitrator shall
nominate three persons of whom the other shall reject two. The third
arbitrator shall then be chosen by drawing lots. If either party fails to
choose an arbitrator within 30 days after receiving the written request of
the other party to do so, the latter shall choose both arbitrators, who
shall choose the third arbitrator. The arbitrators shall be impartial and
shall be an officer, partner or principal of any entity who, in such
capacity, has devoted significant time to property and casualty insurance
or reinsurance matters.
B. The party requesting arbitration (the "Petitioner") shall submit its brief
to the arbitrators within 30 days after notice of the selection of the
third arbitrator. Upon receipt of the Petitioner's brief, the other party
(the "Respondent") shall have 30 days to file a reply brief. On receipt of
the brief, the Petitioner shall have 20 days to file a rebuttal brief.
Respondent shall have 20 days from the receipt of Petitioner's rebuttal
brief to file its
11
<PAGE>
rebuttal brief. The arbitrators may extend the time for filing of briefs at
the request of either party.
C. The arbitrators are relieved from judicial formalities and, in addition to
considering the rules of law and the customs and practices of the insurance
and reinsurance business, shall make their award with a view to effecting
the intent of this Agreement. The decision of the majority shall be final
and binding upon the parties. Judgment upon the final decision of the
arbitrators may be entered in any court of competent jurisdiction.
D. The costs of arbitration, including the fees of the arbitrators, shall be
shared equally unless the arbitrators decide otherwise. The arbitration
shall be held at the times and places agreed upon by the arbitrators.
Notwithstanding the location of the arbitration, all proceedings hereto
shall be governed by the law of the state in which the Company is
domiciled.
Article XIX - 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 XX - Notice
All notices, requests, demands, claims, and other communications hereunder will
be in writing. Any notice, request, demand, claim or other communication if
addressed to the intended recipient as set forth below shall be deemed to be
duly given either when (i) it is personally delivered if it is sent by hand,
(ii) it is signed for or the U.S. Postal Service leaves notice of attempted
delivery if it is sent by registered or certified mail, return receipt
requested, postage prepaid, (iii) it is delivered or there has been a confirmed
attempted delivery if it is sent by a commercial overnight courier, or (iv) the
transmission is confirmed if it is sent by facsimile:
12
<PAGE>
If to the Company:
Medical Defense Associates
1311 E. Woodhurst
Springfield, Missouri 65804
(Mailing Address)
P. O. Box 3817
Springfield, Missouri 65808
Attention: President
Facsimile: (417) 887-0300
If to the Reinsurer:
Mutual Assurance, Inc.
100 Brookwood Place
Birmingham, Alabama 35209
(Mailing Address)
P. O. Box 590009
Birmingham, Alabama 35259-0009
Attention: Chief Financial Officer
Facsimile: (205) 868-4033
Any party may give any notice, request, demand, claim, or other communication
hereunder using any other means, but no such notice, request, demand, claim, or
other communication shall be deemed to have been duly given unless and until it
is actually received by the party for whom it is intended. Any person may change
the address to which such notices, requests, demands, claims, or other
communications are to be delivered by giving the other parties notice in the
manner herein set forth.
13
<PAGE>
In Witness Whereof, the Company by its duly authorized representative has
executed this Contract as of the date undermentioned at:
__________________________, this _____ day of _____________________________,
1998.
THE REINSURER:
MUTUAL ASSURANCE, INC.
By:____________________________________
Its:______________________________
THE COMPANY:
MEDICAL DEFENSE ASSOCIATES
By:____________________________________
Its:______________________________
MEDICAL DEFENSE INSURANCE
COMPANY
By:____________________________________
Its:______________________________
14
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE
(Approved by Lloyd's Underwriters' Non-Marine Association - NMA1590)
(1) This reinsurance does not cover any loss or liability accruing to the
Reassured as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
(2) Without in any way restricting the operation of paragraph (1) of this
Clause it is understood and agreed that for all purposes of this reinsurance all
the original policies of the Reassured (new, renewal and replacement) of the
classes specified in Clause II of this paragraph (2) from the time specified in
Clause III in this paragraph (2) shall be deemed to include the following
provision (specified as the Limited Exclusion Provision):
LIMITED EXCLUSION PROVISION.
I. It is agreed that the policy does not apply under any liability
coverage
to {injury, sickness, disease, death or destruction
{bodily injury or property damage
with respect to which an insured under the policy is also an insured
under a nuclear energy liability policy issued by Nuclear Energy Liability
Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear
Insurance Association of Canada, or would be an insured under any such policy
but for its termination upon exhaustion of its limit of liability.
II. Family Automobile Policies (liability only), Special Automobile
Policies (private passenger automobiles, liability only), Farmers Comprehensive
Personal Liability Policies (liability only). Comprehensive Personal Liability
Policies (liability only) or policies of a similar nature; and the liability
portion of combination forms related to the four classes of policies stated
above, such as the Comprehensive Dwelling Policy and the applicable types of
Homeowners Policies.
III. The inception dates and thereafter of all original policies as
described in II above, whether new, renewal or replacement, being policies which
either
(a) become effective on or after 1st May, 1960, or
(b) become effective before that date and contain the Limited
Exclusion Provision set out above;
Provided this paragraph (2) shall not be applicable to Family
Automobile Policies, Special Automobile Policies, or policies or combination
policies of a similar nature, issued by the Reassured on New York risks, until
90 days following approval of the Limited Exclusion Provision by the
Governmental Authority having jurisdiction thereof.
15
<PAGE>
(3) Except for those classes of policies specified in Clause II of
paragraph (2) and without in any way restricting the operation of paragraph (1)
of this Clause, it is understood and agreed that for all purposes of this
reinsurance the original liability policies of the Reassured (new, renewal and
replacement) affording the following coverages:
Owners, Landlords and Tenants Liability, Contractual Liability,
Elevator Liability, Owners or Contractors (including railroad) Protective
Liability, Manufacturers and Contractors Liability, Product Liability,
Professional and Malpractice Liability, Storekeepers Liability, Garage
Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage
Liability) shall be deemed to include with respect to such coverages, from the
time specified in Clause V of this paragraph (3), the following provision
(specified as the Broad Exclusion Provision):
BROAD EXCLUSION PROVISION.
It is agreed that the policy does not apply:
I. Under any Liability Coverage, to:
{injury, sickness, disease, death or destruction
{bodily injury or property damage
(a) with respect to which an insured under the policy is also an
insured under a nuclear energy liability policy issued by Nuclear Energy
Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or
Nuclear Insurance Association of Canada, or would be an insured under any such
policy but for its termination upon exhaustion of its limit of liability; or
(b) resulting from the hazardous properties of nuclear material and
with respect to which (1) any person or organization is required to maintain
financial protection pursuant to the Atomic Energy Act of 1954, or any law
amendatory thereof, or (2) the insured is, or had this policy not been issued
would be, entitled to indemnity from the United States of America, or any agency
thereof, under any agreement entered into by the United States of America, or
any agency thereof, with any person or organization.
II. Under any Medical Payments Coverage, or under any Supplementary
Payments Provision relating to:
{immediate medical or surgical relief,
{first aid,
to expenses incurred with respect to:
{bodily injury, sickness, disease or death,
{bodily injury
16
<PAGE>
resulting from the hazardous properties of nuclear material and
arising out of the operation of a nuclear facility by any person or
organization.
III. Under any Liability Coverage, to:
{injury, sickness, disease, death or destruction
{bodily injury or property damage
resulting from the hazardous properties of nuclear material, if
(a) the nuclear material (1) is at any nuclear facility owned by, or
operated by or on behalf of, an insured or (2) has been discharged or dispersed
therefrom;
(b) the nuclear material is contained in spent fuel or waste at any
time possessed, handled, used, processed, stored, transported or disposed of by
or on behalf of an insured; or
(c) the
{injury, sickness, disease, death or destruction
{bodily injury or property damage
arises out of the furnishing by an insured of services,
materials, parts or equipment in connection with the planning, construction,
maintenance, operation or use of any nuclear facility, but if such facility is
located within the United States of America, its territories, or possessions or
Canada, this exclusion (c) applies only to:
{injury to or destruction of property at such nuclear facility
{property damage to such nuclear facility and any property
thereat.
IV. As used in this endorsement:
"hazardous properties" include radioactive, toxic or explosive
properties; "nuclear material" means source material, special nuclear material
or byproduct material; "source material", "special nuclear material", and
"byproduct material" have the meanings given them in the Atomic Energy Act of
1954 or in any law amendatory thereof; "spent fuel" means any fuel element or
fuel component, solid or liquid, which has been used or exposed to radiation in
a nuclear reactor; "waste" means any waste material (1) containing byproduct
material and (2) resulting from the operation by any person or organization of
any nuclear facility included within the definition of nuclear facility; under
paragraph (a) or (b) thereof "nuclear facility" means:
(a) any nuclear reactor,
17
<PAGE>
(b) any equipment or device designed or used for (1) separating the
isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3)
handling, processing or packaging waste,
(c) any equipment or device used for the processing, fabricating or
alloying of special nuclear material if at any time the total amount of such
material in the custody of the insured at the premises where such equipment or
device is located consists of or contains more than 25 grams of plutonium or
uranium 233 or any combination thereof, or more than 250 grams of uranium 235,
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste,
and includes the site on which any of the foregoing is located, all
operations conducted on such site and all premises used for such operations;
"nuclear reactor" means any apparatus designed or used to sustain nuclear
fission in a self-supporting chain reaction or to contain a critical mass of
fissionable material;
{With respect to injury to or destruction of property, the word
"injury" or "destruction",
"property damage" includes all forms of radioactive contamination of
property,
{includes all forms of radioactive contamination of property
V. The inception dates and thereafter of all original policies affording
coverages specified in this paragraph (3), whether new, renewal, or replacement,
being policies which become effective on or after 1st May, 1960, provided this
paragraph (3) shall not be applicable to
(i) Garage and Automobile Policies issued by the Reassured on New
York risks, or
(ii) statutory liability insurance required under Chapter 90, General
Laws of Massachusetts,
until 90 days following approval of the Broad Exclusion Provision by
the Governmental Authority having jurisdiction thereof.
(4) Without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above are not
applicable to original liability policies of the Reassured in Canada and that
with respect to such policies this Clause shall be deemed to include the Nuclear
Energy Liability Exclusion Provisions adopted by the Canadian Underwriters'
Association or the Independent Insurance Conference of Canada.
18
<PAGE>
- --------------------------------------------------------------------------------
NOTE: The words printed in italics in the Limited Exclusion Provision and in
the Broad Exclusion Provision shall apply only in relation to original liability
policies which include a Limited Exclusion Provision or a Broad Exclusion
Provision containing those words.
- --------------------------------------------------------------------------------
19
<PAGE>
SCHEDULE 7.04(b)
AGGREGATE EXCESS OF LOSS
REINSURANCE AGREEMENT
between
MEDICAL DEFENSE ASSOCIATES
MEDICAL DEFENSE INSURANCE COMPANY
(hereinafter referred to as the "Company")
and
MUTUAL ASSURANCE, INC.
(hereinafter referred to as the "Reinsurer")
In consideration of the promises set forth in this Agreement, the parties
agree as follows:
ARTICLE 1
---------
SCOPE OF AGREEMENT
------------------
As a condition precedent to the Reinsurer's obligations under this
Agreement, the Company shall reinsure with the Reinsurer the business described
in the article entitled BUSINESS REINSURED, and the Reinsurer shall accept such
business as reinsurance from the Company. The terms of this Agreement shall
determine the rights and obligations of the parties.
ARTICLE 2
---------
PARTIES TO THE AGREEMENT
------------------------
This Agreement is solely between the Company and the Reinsurer. When more
than one reinsured company is named as a party to this Agreement, the first
company named shall be the agent of the other companies as to all matters
pertaining to this Agreement. Performance of the obligations of each party
under this Agreement shall be rendered solely to the other party. In no
instance shall any insured of the Company or any claimant against an insured of
the Company have any rights under this Agreement.
<PAGE>
ARTICLE 3
---------
BUSINESS REINSURED
------------------
This Agreement applies to the Company's net retained liability for loss
arising from claims incurred prior to 12:01 a.m. CST January 1, 1999
(hereinafter referred to as "Claims") under all binders and/or policies and/or
contracts of insurance (hereinafter called "covered policies") issued by the
Company prior to 12:01 a.m. CST January 1, 1999, and classified by the Company
as Medical Malpractice business. For purposes of this Agreement, a claim will
be deemed to have been "incurred" in the year to which the claim is assigned for
financial reporting purposes in accordance with the regulatory reporting
requirements of the Missouri Department of Insurance. Notwithstanding the
foregoing, any claim under a covered claims-made policy that arises out of or is
related to an incident communicated to the Company, orally or in writing, during
the period beginning on September 29, 1998, and ending December 31, 1998, shall
be deemed to have been incurred prior to 12:01 a.m. CST on January 1, 1999,
notwithstanding the Company's prior practice of requiring a written report of
the incident before any claim arising therefrom or related thereto is deemed to
have been incurred under a "claims made" policy of the Company.
ARTICLE 4
---------
COMPANY RETENTION
-----------------
The Reinsurer shall indemnify the Company, with respect to ultimate net
loss unpaid as of 12:01 a.m. CST January 1, 1999, arising from Claims that are
in excess of the Company's retention of 100% of the first $___________ of
ultimate net loss arising from said Claims.
ARTICLE 5
---------
WARRANTY
--------
No applicable other reinsurance in force or previously in force with
respect to the Company's liabilities shall be commuted, or so deemed, unless
mutually agreed.
ARTICLE 6
---------
DEFINITIONS
-----------
(a) Ultimate Net Loss
This term shall mean the sum actually paid by the Company on its net
retained liability with respect to Claims, including extra contractual
obligations as defined in this Article, and including allocated loss adjustment
expenses, as defined in this Article, in the settlement of covered losses or
liabilities after making deduction for all salvages and recoveries and amounts
reinsured under any other contracts of specific reinsurance or under any
2
<PAGE>
other reinsurance treaties in force or previously in force including catastrophe
reinsurance agreements, whether or not such amounts are collectible.
All salvages, recoveries and payments recovered or received subsequent to a
loss settlement under this Agreement shall be applied as if recovered or
received prior to the said settlement and all necessary adjustments shall be
made by the parties hereto.
Nothing, however, in this definition shall be construed as meaning that
losses are not recoverable hereunder until the ultimate net loss to the Company
has been ascertained.
(b) Allocated Loss Adjustment Expenses
The term "allocated loss adjustment expenses" shall mean and refer to the
types and categories of expenses reported as "allocated loss adjustment expense"
in the Annual Statement filed by the Sellers with the Missouri Insurance
Department for the year ended December 31, 1998, but which amount shall not
include salaries of officials, administrators or other employees or normal
overhead charges such as rent, postage, telephone, lighting, cleaning, heating
or similar expenses.
(c) Net Retained Liability
This term shall mean that portion of any Claim, including extra contractual
obligations as defined in this Article, and including allocated loss adjustment
expenses as defined in this Article which the Company retains net for its own
account, and in calculating the amount of any loss hereunder, only loss or
losses with respect to that portion of any Claim which the Company retains net
for its own account shall be included.
(d) Extra Contractual Obligations
In the event the Company pays or is held liable to pay an amount of loss in
excess of its policy limit but otherwise within the terms of its policy, or any
punitive, exemplary, compensatory, or consequential damages (herein collectively
referred to as "extra contractual obligations") because of alleged or actual bad
faith or negligence on its part 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 policyholder, or in discharging its duty to prepare or
prosecute an appeal consequent upon such action, or in otherwise handling a
Claim subject to this Agreement, the extra contractual obligations shall be
added to the Company's loss, if any, under the policy involved and the sum
thereof shall be subject to the provisions of Article 4.
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.
Notwithstanding anything stated herein, this Agreement shall not apply to
any extra contractual obligation incurred by the Company as a result of any
fraudulent and/or criminal act by
3
<PAGE>
any officer or director of the Company acting individually or collectively in
collusion with any individual or corporation or any other organization or party
involved in the presentation, defense or settlement of any claim covered
hereunder.
ARTICLE 7
---------
EXCLUSIONS
----------
This Agreement shall not apply to:
(a) Any loss or damage which is occasioned by war, invasion,
hostilities, acts or foreign enemies, civil war, rebellion, insurrection,
military or usurped power, or martial law or confiscation by order of any
government or public authority, however this exclusion shall not apply to any
policy which contains a standard war exclusion;
(b) Nuclear incident per the following clauses attached hereto:
(1) Nuclear Incident Exclusion Clause - Liability - Reinsurance -
U.S.A. NMA 1590;
(c) Ultimate net loss amounts paid by the Company on or prior to 12:01
a.m. CST January 1, 1999.
(d) Fines, penalties, punitive damages and levies of any kind or
description, other than those included in the definition of Extra Contractual
Obligations in Article 6(d) hereof.
(e) Any and 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 or plan. "Insolvency Fund or
Plan" includes any guaranty fund, insolvency fund, plan, pool, association, fund
or other arrangement however denominated or styled, established or governed,
which provides for any assessment of or payment or assumption by the Company of
part or all of any claims, debt, charge, fee, or the 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.
(f) Assumed Reinsurance of any kind or description.
(g) Any claims under the Company's policies covered by the 100% Quota
Share Reinsurance Contract, effective January 1, 1999, issued to the Company by
the Reinsurer (the "Quota Share Agreement"). In the event an incident from
which a Claim arises involves both a Claim that is covered by this Agreement and
a claim that is also covered under the Quota Share Agreement, the amount of the
ultimate net loss payable with respect to the Claim covered by this Agreement
shall be determined by a reasonable allocation of the responsibility for the
liability
4
<PAGE>
arising from the applicable incident among the claimants under the policies
covered by this Agreement and the Quota Share Agreement.
ARTICLE 8
---------
CLAIMS AND ADJUSTMENT EXPENSES
------------------------------
All decisions to settle or defend Claims under policies covered by this
Agreement shall be made by the Reinsurer unless otherwise required by law to be
made by the Company. The Company shall provide such information regarding Claims
as may reasonably be requested by the Reinsurer. Reinsurer shall have the
exclusive power and authority to defend any Claim on behalf of the Company and
to direct any and all actions to be taken by or on behalf of the Company in
connection with the settlement or defense of Claims, except to the extent the
authority to settle or defend Claims may from time to time be delegated to the
Company by the Reinsurer.
Reinsurers and the Company have entered into a Management Agreement of even
date herewith (the "Management Agreement") pursuant to which the Company has
engaged Reinsurer to manage, settle and defend Claims covered by this Agreement.
So long as the Management Agreement remains in effect, the procedures relating
to the settlement or defense of Claims by or on behalf of the Company shall be
in accordance with the Management Agreement.
ARTICLE 9
---------
REINSURANCE PREMIUM
-------------------
The Reinsurer has entered into this Reinsurance Agreement as partial
consideration for the purchase of the "book of business" of the Company pursuant
to the terms and conditions of the Agreement for the Purchase and Sale of
Certain Assets among Reinsurer, Medical Assurance, Inc., the Company, Medical
Defense Services Corp., and Medical Defense Holding Co., dated September 28,
1998 (the "Asset Purchase Agreement").
ARTICLE 10
----------
REPORTS AND REMITTANCES
-----------------------
Within 30 days after the close of each 3 month period following the
commencement date of this Agreement, the Company shall render to the Reinsurer a
report of the ultimate net loss paid by the Company during the 3 month period
and the Reinsurer's portion thereof; provided, however, that the Company shall
have no responsibility to provide reports to the Reinsurer during the term of
the Management Agreement between Reinsurer, the Company and Medical Defense
Holding Co.
Any amount due the Company shall be remitted by the Reinsurer as promptly
as possible after receipt and verification of the Company's report.
5
<PAGE>
ARTICLE 11
----------
CURRENCY SETTLEMENTS
--------------------
All payments hereunder whether in respect of premium or losses shall be
made in U.S. dollars.
ARTICLE 12
----------
TERRITORY
---------
This Agreement shall follow the Company's policy in all territorial
respects and shall cover wherever the original policies provide coverage.
ARTICLE 13
----------
ERRORS AND OMISSIONS
--------------------
Any inadvertent error or omission on the part of either the Company or the
Reinsurer shall not relieve the other party from any liability which would have
attached hereunder, provided that such error or omission is rectified
immediately upon discovery, and shall not impose any greater liability on the
Reinsurer than would have attached hereunder if the error or omission had not
occurred.
ARTICLE 14
----------
INSPECTION OF RECORDS
---------------------
The Company shall allow the Reinsurer or their authorized representatives
to inspect, at reasonable times, the records of the Company relevant to the
business reinsured under this Agreement, including Company files concerning
claims, losses or legal proceedings which involve or are likely to involve the
Reinsurer.
ARTICLE 15
----------
ARBITRATION
-----------
Any unresolved difference of opinion between the Reinsurer and the Company,
whether such difference of opinion arises before or after the termination of
this Agreement, shall be submitted to arbitration by three arbitrators. One
arbitrator shall be chosen by the Reinsurer, and one shall be chosen by the
Company. The third arbitrator shall be chosen by the other two arbitrators
within 10 days after they have been appointed. If the two arbitrators cannot
agree upon a third arbitrator, each arbitrator shall nominate three persons of
whom the other shall reject two. The third arbitrator shall
6
<PAGE>
then be chosen by drawing lots. If either party fails to choose an arbitrator
within 30 days after receiving the written request of the other party to do so,
the latter shall choose both arbitrators, who shall choose the third arbitrator.
The arbitrators shall be impartial and shall be an officer, partner or principal
of any entity who, in such capacity, has devoted significant time to property
and casualty insurance or reinsurance matters.
The party requesting arbitration (the "Petitioner") shall submit its brief
to the arbitrators within 30 days after notice of the selection of the third
arbitrator. Upon receipt of the Petitioner's brief, the other party (the
"Respondent") shall have 30 days to file a reply brief. On receipt of the
Respondent's brief, the Petitioner shall have 20 days to file a rebuttal brief.
Respondent shall have 20 days from the receipt of Petitioner's rebuttal brief to
file its rebuttal brief. The arbitrators may extend the time for filing of
briefs at the request of either party.
The arbitrators are relieved from judicial formalities and, in addition to
considering the rules of law and the customs and practices of the insurance and
reinsurance business, shall make their award with a view to effecting the intent
of this Agreement. The decision of the majority shall be final and binding upon
the parties. Judgment upon the final decision of the arbitrators may be entered
in any court of competent jurisdiction.
The costs of arbitration, including the fees of the arbitrators, shall be
shared equally unless the arbitrators decide otherwise. The arbitration shall
be held at the times and places agreed upon by the arbitrators. Notwithstanding
the location of the arbitration, all proceedings hereto shall be governed by the
law of the state in which the Company is domiciled.
ARTICLE 16
----------
COMMENCEMENT AND TERMINATION
----------------------------
This Agreement shall become effective at 12:01 a.m., CST January 1, 1999,
unless sooner terminated as follows:
(a) The Company may terminate this Agreement at any time by delivery
of written notice to Reinsurer in which event termination shall be effective on
the date of delivery of said notice; or
(b) In the event that the Management Agreement is terminated by the
Company prior to the expiration of its term, this Agreement shall immediately
and automatically terminate as of the date of termination of the Management
Agreement without any action by the Reinsurer.
In the event of any termination of this Agreement, neither the Reinsurer
nor the Company shall have any further liability hereunder.
7
<PAGE>
ARTICLE 17
----------
UNAUTHORIZED REINSURER
----------------------
(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 that are
acceptable to the insurance regulatory authorities; 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
8
<PAGE>
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 18
----------
TAXES
-----
In addition to the premium hereon, the Company shall pay any and all taxes,
levies and fees of any kind or description associated with this Agreement and/or
the business reinsured hereunder, except profit taxes which may be levied upon
the profits of the Reinsurer.
ARTICLE 19
----------
INSOLVENCY
----------
In the event of the insolvency of the Company, this reinsurance shall be
payable directly to the Company, or to its liquidator, receiver, conservator or
statutory successor 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 insured, which claim would involve a possible liability on
the part of Reinsurer within a reasonable time after such claim is filed in the
conservation or liquidation proceeding or in the receivership, and that during
the pendency of such claim, 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.
Should the Company go into liquidation or should a receiver be appointed
the Reinsurer shall be entitled to deduct from any sums which may be due or may
become due to the Company under
9
<PAGE>
this reinsurance Agreement, any sums which are due to the Reinsurer by the
Company under this Reinsurance Agreement and which are payable at a fixed or
stated date, as well as any other sums due the Reinsurer which are permitted to
be offset under applicable law.
ARTICLE 20
----------
NOTICE
------
All notices, requests, demands, claims, and other communications hereunder
will be in writing. Any notice, request, demand, claim or other communication if
addressed to the intended recipient as set forth below shall be deemed to be
duly given either when (i) it is personally delivered if it is sent by hand,
(ii) it is signed for or the U.S. Postal Service leaves notice of attempted
delivery if it is sent by registered or certified mail, return receipt
requested, postage prepaid, (iii) it is delivered or there has been a confirmed
attempted delivery if it is sent by a commercial overnight courier, or (iv) the
transmission is confirmed if it is sent by facsimile:
If to the Company:
Medical Defense Associates
1311 E. Woodhurst
Springfield, Missouri 65804
(Mailing Address)
P. O. Box 3817
Springfield, Missouri 65808
Attention: President
Facsimile: (417) 887-0300
If to the Reinsurer:
Mutual Assurance, Inc.
100 Brookwood Place
Birmingham, Alabama 35209
(Mailing Address)
P. O. Box 590009
Birmingham, Alabama 35259-0009
Attention: Chief Financial Officer
Facsimile: (205) 868-4033
Any party may give any notice, request, demand, claim, or other
communication hereunder using any other means, but no such notice, request,
demand, claim, or other communication shall be deemed to have been duly given
unless and until it is actually received by the party for whom it is intended.
Any person may change the address to which such notices, requests, demands,
10
<PAGE>
claims, or other communications are to be delivered by giving the other parties
notice in the manner herein set forth.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate.
Signed in _____________________, this ________ day of __________________, 1998.
For and on behalf of the:
MEDICAL DEFENSE ASSOCIATES MEDICAL DEFENSE INSURANCE
COMPANY
By: _________________________________ By: ____________________________________
President President
Signed in _____________________, this ________ day of __________________, 1998.
For and on behalf of:
MUTUAL ASSURANCE, INC.
By: _________________________________
______________________________
11
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE
(Approved by Lloyd's Underwriters' Non-Marine Association - NMA1590)
(1) This reinsurance does not cover any loss or liability accruing to the
Reassured as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
(2) Without in any way restricting the operation of paragraph (1) of this
Clause it is understood and agreed that for all purposes of this reinsurance all
the original policies of the Reassured (new, renewal and replacement) of the
classes specified in Clause II of this paragraph (2) from the time specified in
Clause III in this paragraph (2) shall be deemed to include the following
provision (specified as the Limited Exclusion Provision):
LIMITED EXCLUSION PROVISION.
I. It is agreed that the policy does not apply under any liability
coverage to {injury, sickness, disease, death or destruction
{bodily injury or property damage
with respect to which an insured under the policy is also an insured
under a nuclear energy liability policy issued by Nuclear Energy Liability
Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear
Insurance Association of Canada, or would be an insured under any such policy
but for its termination upon exhaustion of its limit of liability.
II. Family Automobile Policies (liability only), Special Automobile
Policies (private passenger automobiles, liability only), Farmers Comprehensive
Personal Liability Policies (liability only). Comprehensive Personal Liability
Policies (liability only) or policies of a similar nature; and the liability
portion of combination forms related to the four classes of policies stated
above, such as the Comprehensive Dwelling Policy and the applicable types of
Homeowners Policies.
III. The inception dates and thereafter of all original policies as
described in II above, whether new, renewal or replacement, being policies which
either
(a) become effective on or after 1st May, 1960, or
(b) become effective before that date and contain the Limited
Exclusion Provision set out above;
Provided this paragraph (2) shall not be applicable to Family
Automobile Policies, Special Automobile Policies, or policies or combination
policies of a similar nature, issued by the Reassured on New York risks, until
90 days following approval of the Limited Exclusion Provision by the
Governmental Authority having jurisdiction thereof.
12
<PAGE>
(3) Except for those classes of policies specified in Clause II of
paragraph (2) and without in any way restricting the operation of paragraph (1)
of this Clause, it is understood and agreed that for all purposes of this
reinsurance the original liability policies of the Reassured (new, renewal and
replacement) affording the following coverages:
Owners, Landlords and Tenants Liability, Contractual Liability,
Elevator Liability, Owners or Contractors (including railroad) Protective
Liability, Manufacturers and Contractors Liability, Product Liability,
Professional and Malpractice Liability, Storekeepers Liability, Garage
Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage
Liability) shall be deemed to include with respect to such coverages, from the
time specified in Clause V of this paragraph (3), the following provision
(specified as the Broad Exclusion Provision):
BROAD EXCLUSION PROVISION.
It is agreed that the policy does not apply:
I. Under any Liability Coverage, to:
{injury, sickness, disease, death or destruction
{bodily injury or property damage
(a) with respect to which an insured under the policy is also an
insured under a nuclear energy liability policy issued by Nuclear Energy
Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or
Nuclear Insurance Association of Canada, or would be an insured under any such
policy but for its termination upon exhaustion of its limit of liability; or
(b) resulting from the hazardous properties of nuclear material and
with respect to which (1) any person or organization is required to maintain
financial protection pursuant to the Atomic Energy Act of 1954, or any law
amendatory thereof, or (2) the insured is, or had this policy not been issued
would be, entitled to indemnity from the United States of America, or any agency
thereof, under any agreement entered into by the United States of America, or
any agency thereof, with any person or organization.
II. Under any Medical Payments Coverage, or under any Supplementary
Payments Provision relating to:
{immediate medical or surgical relief,
{first aid,
to expenses incurred with respect to:
{bodily injury, sickness, disease or death,
{bodily injury
13
<PAGE>
resulting from the hazardous properties of nuclear material and
arising out of the operation of a nuclear facility by any person or
organization.
III. Under any Liability Coverage, to:
{injury, sickness, disease, death or destruction
{bodily injury or property damage
resulting from the hazardous properties of nuclear material, if
(a) the nuclear material (1) is at any nuclear facility owned by, or
operated by or on behalf of, an insured or (2) has been discharged or dispersed
therefrom;
(b) the nuclear material is contained in spent fuel or waste at any
time possessed, handled, used, processed, stored, transported or disposed of by
or on behalf of an insured; or
(c) the
{injury, sickness, disease, death or destruction
{bodily injury or property damage
arises out of the furnishing by an insured of services,
materials, parts or equipment in connection with the planning, construction,
maintenance, operation or use of any nuclear facility, but if such facility is
located within the United States of America, its territories, or possessions or
Canada, this exclusion (c) applies only to:
{injury to or destruction of property at such nuclear facility
{property damage to such nuclear facility and any property
thereat.
IV. As used in this endorsement:
"hazardous properties" include radioactive, toxic or explosive
properties; "nuclear material" means source material, special nuclear material
or byproduct material; "source material", "special nuclear material", and
"byproduct material" have the meanings given them in the Atomic Energy Act of
1954 or in any law amendatory thereof; "spent fuel" means any fuel element or
fuel component, solid or liquid, which has been used or exposed to radiation in
a nuclear reactor; "waste" means any waste material (1) containing byproduct
material and (2) resulting from the operation by any person or organization of
any nuclear facility included within the definition of nuclear facility; under
paragraph (a) or (b) thereof "nuclear facility" means:
(a) any nuclear reactor,
14
<PAGE>
(b) any equipment or device designed or used for (1) separating the
isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3)
handling, processing or packaging waste,
(c) any equipment or device used for the processing, fabricating or
alloying of special nuclear material if at any time the total amount of such
material in the custody of the insured at the premises where such equipment or
device is located consists of or contains more than 25 grams of plutonium or
uranium 233 or any combination thereof, or more than 250 grams of uranium 235,
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste,
and includes the site on which any of the foregoing is located, all
operations conducted on such site and all premises used for such operations;
"nuclear reactor" means any apparatus designed or used to sustain nuclear
fission in a self-supporting chain reaction or to contain a critical mass of
fissionable material;
{With respect to injury to or destruction of property, the word
"injury" or "destruction",
"property damage" includes all forms of radioactive contamination of
property,
{includes all forms of radioactive contamination of property
V. The inception dates and thereafter of all original policies affording
coverages specified in this paragraph (3), whether new, renewal, or replacement,
being policies which become effective on or after 1st May, 1960, provided this
paragraph (3) shall not be applicable to
(i) Garage and Automobile Policies issued by the Reassured on New
York risks, or
(ii) statutory liability insurance required under Chapter 90, General
Laws of Massachusetts,
until 90 days following approval of the Broad Exclusion Provision by
the Governmental Authority having jurisdiction thereof.
(4) Without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above are not
applicable to original liability policies of the Reassured in Canada and that
with respect to such policies this Clause shall be deemed to include the Nuclear
Energy Liability Exclusion Provisions adopted by the Canadian Underwriters'
Association or the Independent Insurance Conference of Canada.
15
<PAGE>
- --------------------------------------------------------------------------------
NOTE: The words printed in italics in the Limited Exclusion Provision and in
the Broad Exclusion Provision shall apply only in relation to original liability
policies which include a Limited Exclusion Provision or a Broad Exclusion
Provision containing those words.
- --------------------------------------------------------------------------------
16
<PAGE>
MEDICAL DEFENSE ASSOCIATES ("MDA")
MEDICAL DEFENSE INSURANCE COMPANY ("MDIC")
SEPTEMBER 28, 1998
AGREEMENT FOR PURCHASE AND SALE OF CERTAIN ASSETS
SCHEDULES
Schedule 7.05 - Retained Employees
- ------------------------------------
Separate Employment Agreement
-----------------------------
Geri H. Morrison
Section A - Three Year Employment Agreements
--------------------------------------------
Robert E. Morrison
Samuel J. Pippin
David W. Jackson
Section B
---------
Michelle R. Todd
Kathryn L. Twibell
Philip E. Moppert
Cheryl A. Patterson
Steven A. Brown
Section C
---------
Patricia A. Savard Cynthia E. Bousman
Carol A.Cruise Claudia J. Kelsey
Elizabeth D. Binder Dona L. Alfultis
Barbara J. Adams Donald D. Buckholz
Teri L. Young Gerald T. Waggoner
Kaysha F. Morgan
<PAGE>
SCHEDULE 7.06
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT is made and entered into as of January 1, 1999
(the "Effective Date"), by and among Medical Defense Associates ("MDA"), a
Missouri stock insurer, Medical Defense Insurance Company ("MDIC"), a Missouri
stock insurer, Medical Defense Services Corp. ("MDS"), a Missouri corporation,
and Medical Defense Holding Co. ("MDHC"), a Missouri corporation, and Mutual
Assurance, Inc., an Alabama stock insurer (the "Manager"). MDA and MDIC may
hereinafter sometimes be referred to collectively as the "Insurers" and
separately as "Insurer," when no distinction is required.
RECITALS:
Manager has acquired from the Insurers the recurring book of medical
professional liability business of Insurers pursuant to the terms and conditions
of that certain Agreement for Purchase and Sale of Assets (the "Purchase
Agreement"), by and among the Manager, Medical Assurance, Inc., the Insurers,
MDHC and MDS. Pursuant to the terms and conditions of the Purchase Agreement,
Manager has entered into an Excess of Loss Reinsurance Treaty ("Excess Treaty")
with Insurers pursuant to which Manager has agreed to reinsure certain losses
and loss adjustment expenses of the Insurers in excess of a fixed amount to be
determined, which amount shall approximate the sum of the Insurers' combined
reserves for losses and allocated loss adjustment expenses at the Effective Date
(as defined in Section 9.01 of the Purchase Agreement) and the anticipated
investment income on said reserves pending payment of losses and allocated loss
adjustment expenses on claims covered by the Excess Treaty (the "Prior Claims").
In addition, the Manager has entered into a Quota Share Reinsurance Treaty (the
"Quota Share Treaty") pursuant to which the Insurers have ceded to the Manager
100% of the net liability with respect to claims incurred or arising after the
Effective Date under policies of the Insurers that are outstanding on the
Effective Date (the "Current Claims"). The Manager has employed a substantial
number of the former employees of the Insurers and MDS to manage the book of
business acquired from the Insurers under the Purchase Agreement. The Insurers
have requested the Manager to provide management services for and on behalf of
the Insurers in connection with the administration of Insurers' outstanding
policies and the management of Prior Claims and Current Claims (hereinafter
collectively called "Claims" where no distinction is required). Manager has
agreed to provide such management services to the Insurers on the terms and
conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties do hereby agree as follows:
1. Appointment of Manager. Insurers hereby designate and appoint Manager
to manage Claims for and on behalf of the Insurers under the terms and
conditions of this Agreement. Manager
<PAGE>
hereby accepts such appointment subject to, and agrees to perform the duties of
Manager in accordance with, the terms and conditions of this Agreement.
2. Duties and Responsibilities of Manager.
--------------------------------------
(a) The Manager shall have the right and duty to direct and supervise
the administration and management of Claims, and in connection therewith, shall
have full power and authority to take any and all actions authorized under
Section 4 hereof.
(b) The Manager shall provide to Insurers and to their actuaries and
accountants such information regarding Claims and related information as may be
relevant to or useful for future reserve studies of the Insurers or for the
timely preparation of Insurers' interim and year-end financial statements, tax
returns, and reports required by statute or regulation.
(c) The Manager shall provide to reinsurers of the Insurers such
reports regarding Claims and related information as are required to be provided
by the Insurers in accordance with their respective reinsurance treaties.
(d) The Manager shall have no responsibility to perform any of the
following on behalf of the Insurers:
(i) to invest any of the Insurers' assets or manage the
Insurers' invested assets;
(ii) to prepare any financial or regulatory reports for or on
behalf of the Insurers, except that the Manager shall be required to
provide the Insurers the information required under subparagraph (b) above;
and
(iii) to perform any actions on behalf of the Insurers not
relating to the management and administration of Claims.
3. Responsibilities of Insurers.
----------------------------
(a) The Board of Directors of MDA shall establish and maintain a
claims committee (the "Claims Committee") at all times during the term of this
Management Agreement. The Claims Committee will be made up of individuals with
qualifications similar to those of the members of the current claims committee
of the Board of Directors of MDA. The Claims Committee shall regularly consult
with the Manager regarding Prior Claims and shall make recommendations as to the
settlement and defense of Prior Claims.
(b) The Insurers shall fund all allocated loss adjustment expenses
(herein defined) as and when they are incurred in connection with the
administration, settlement, or defense of Prior Claims; provided such expenses
are incurred solely in connection with the liabilities of the Insurers covered
by this Agreement. "Allocated loss adjustment expenses" shall mean and refer to
the types
2
<PAGE>
and categories of expenses reported as "allocated loss adjustment expense" in
the Annual Statement filed by the Sellers with the Missouri Insurance Department
for the year ended December 31, 1998, but which amount shall not include
salaries of officials, administrators or other employees or normal overhead
charges such as rent, postage, telephone, lighting, cleaning, heating or similar
expenses.
(c) The Insurers shall fund the payment of all losses and all
allocated loss adjustment expenses with respect to Prior Claims except to the
extent that all or any portion of a loss is recoverable from the Manager under
the terms and conditions of the Excess Treaty.
(d) Insurers shall prepare and file all reports and financial
statements, and shall file all tax returns and pay all taxes indicated thereon,
as may be necessary to maintain good standing of each Insurer in all states in
which it has qualified to do business as a property and casualty insurer and in
which it has policies under which Claims may be asserted.
4. Authority of Manager. Manager shall perform the duties described in
Section 2 hereof which shall include without limitation the following:
(a) Manager shall receive and record all reports from insureds under
policies of the Insurers that may result in the assertion of a Claim under such
policies; shall perform such investigations as Manager deems reasonable and
necessary with respect to such reported incidents; and shall record and maintain
information regarding such reports and investigations as is customary in the
insurance industry.
(b) Manager shall authorize the settlement or defense of all Claims,
including the appeal of any judgment with respect to a Claim, in accordance with
the following procedures:
(i) Prior Claims. Manager shall provide such information as may
be reasonably requested by the Claims Committee with regard to Prior
Claims; shall consult with the Claims Committee with respect to Prior
Claims; and shall solicit the recommendation of the Claims Committee with
respect to the settlement or defense of Prior Claims. Manager shall have
the right to accept or reject the recommendation of the Claims Committee
after giving consideration to the interests of the policyholder, the
Insurers, and the interests of the Manager under the Excess Treaty. In the
event that the Manager rejects the recommendation of the Claims Committee,
the Manager shall have full power and authority to take any and all actions
necessary to settle or defend said Claim; provided that Manager shall
advise the Claims Committee of its proposed actions with respect to such
Claim.
(ii) Current Claims. Manager shall have full power and authority
to take any and all actions necessary to settle or defend Current Claims
without the advice or recommendation of the Claims Committee.
(c) Manager shall have the authority to monitor and supervise the
defense of all Claims, and in connection therewith, to retain defense counsel
for insureds and to consult with
3
<PAGE>
defense counsel with regard to defense strategy, including without limitation
participation in responses to discovery requests served upon insureds,
recommendations of discovery requests on behalf of insureds, and retention of
experts.
(d) Manager shall have the authority to pay all losses and loss
adjustment expenses incurred in connection with the settlement or defense of
Claims as contemplated herein.
5. Provision of Facilities and Data Processing Services.
----------------------------------------------------
(a) MDS shall provide Manager office space in Insurers' home office
building in Springfield, Missouri, and such furniture, equipment, and utilities
services (exclusive of supplies and the data processing system) as shall be
reasonably necessary for the Manager's employees to perform the services to be
provided hereunder. Manager shall pay to MDS a facilities fee in the amount of
$11,800 per month in advance, plus 50% of the cost of trash removal and snow
removal that are actually incurred and paid by MDS in connection with the
operation of the building. Manager shall be responsible for the cost of
utilities (power, gas and water), telephone service, and all supplies and other
materials used in the performance of its services hereunder, including without
limitation, paper, copier and facsimile supplies, postage, and other consumable
supplies; provided that MDHC shall reimburse Manager for the cost of any such
supplies used by MDHC or any of its subsidiaries for any purpose other than the
administration of Claims. Either MDS or Manager may terminate such space and
services upon ninety (90) days advance written notice; provided that either MDS
or Manager may terminate such space and services upon thirty (30) days advance
written notice at any time after the termination of this Agreement.
(b) MDS shall provide data processing services for the Manager
utilizing MDS' computer equipment, software system, and data bases. Such data
processing services shall be provided for a usage fee at the rate of $1,500 in
advance per month and shall include processing information that is related to
management of Claims and outstanding policies, and shall include daily, weekly,
and monthly processing consistent with past practices of the Insurers with
respect to policy maintenance, Claims processing, and standard reporting,
production of standard reports and other reports that have been used to manage
Claims and policies for the Insurers. MDS shall provide such data processing
services to Manager during the term of this Management Agreement provided that
the Manager may, at its election, sooner terminate MDS' obligation to provide
data processing services upon 180 days advance written notice. In the event
either party elects to terminate the obligation of MDS to provide Manager space
and services as provided in subparagraph (a) above, MDS shall continue to
provide data processing services as herein contemplated, in which event MDS
shall allow such access to its computer equipment and software as may be
reasonably necessary to fulfill its obligations hereunder.
6. Management Fee. In exchange for the services provided by Manager,
Insurers shall pay Manager a management fee in an amount equal to the aggregate
amount of the unallocated loss adjustment expense ("ULAE") reserve included in
the Insurers reserves for losses and loss adjustment expenses as of the
Effective Date which shall be payable in accordance with the following schedule:
4
<PAGE>
40% of the ULAE during the first consecutive twelve months of the term
of this Agreement;
30% of the ULAE during the next consecutive twelve months commencing
January 1, 2000;
20% of the ULAE during the next consecutive twelve months commencing
January 1, 2001; and
10% of the ULAE during the next consecutive twelve months commencing
January 1, 2002.
The management fee shall be paid in quarterly installments in advance on the
first day of each calendar quarter. In the event that this Agreement is
terminated in accordance with Section 8 below, the management fee shall be pro
rated to the date of termination and any unpaid amount shall be paid to Manager
by Insurers within ten (10) days of such termination. The parties understand
that the ULAE reserve as of the date of execution of this Agreement is
approximately $3,500,000, but that actual ULAE reserve will vary from that
amount. The parties agree that the ULAE reserve will be computed in accordance
with past practices and will be based upon the midpoint calculation in the
Insurers' actuary's year-end reserve report. The first quarterly payment will be
made on January 5, 1999, in the amount of $350,000, and the second quarterly
payment will be adjusted based on the amount of the ULAE reserve as so
determined.
7. Payment of Losses and Adjustment Expenses.
-----------------------------------------
(a) Prior Claims. Manager shall provide the Insurers reports on a
periodic basis, but in no event more frequently than weekly, of the allocated
loss adjustment expenses and the losses required to be paid with respect to the
settlement or defense of Prior Claims ("Reports") and shall present to the
Insurers checks drawn on the account of the Insurers ("Checks") in the
appropriate amounts and to the appropriate parties in accordance with the
Reports. Upon delivery of each of the Reports and Checks to the Insurers, the
Insurers shall cause the Checks to be signed and delivered to Manager for
payment to the appropriate parties and shall promptly deposit immediately
available funds into all bank accounts upon which such Checks have been drawn so
that payment will be properly and timely made on such Checks.
(b) Current Claims. Manager shall deposit into a segregated bank
account that shall include the name of the Insurers in the name of the account
(the "Management Account") funds sufficient to pay all allocated loss adjustment
expenses and all losses with respect to Current Claims under the Quota Share
Treaty. Manager shall apply and/or disburse funds from the Management Account on
a weekly basis to pay the allocated loss adjustment expenses and losses with
respect to the Current Claims. The funds deposited in the Management Account
shall be the property of the Insurers. Such monies shall not be commingled with
other funds of the Manager except to the extent that such monies are paid to or
for the benefit of Manager pursuant to the terms of this Agreement.
5
<PAGE>
(c) Limitation of Liability. Manager shall not be obligated to
advance any of its own funds for the account of the Insurers except to the
extent required under the Excess Treaty and the Quota Share Treaty. Manager
shall pay directly to the Insurers all amounts recoverable under the Excess
Treaty.
8. Term. This Agreement shall continue in effect from the Effective Date
until December 31, 2002; provided that the Insurers may terminate this Agreement
at any time, with or without cause, upon delivery of written notice to Manager.
Termination of this Agreement shall be effective ninety (90) days after delivery
of said notice unless otherwise agreed in writing by Manager and the Insurers.
9. Employees.
---------
(a) Manager shall have the duty to hire, pay, supervise, and
discharge the personnel necessary to be employed in order to perform the duties
of the Manager in accordance with the terms of this Agreement. Such personnel
shall in every instance be employees of the Manager and not of Insurers and
shall be employed solely at the expense of Manager. Manager shall be responsible
for the compensation and fringe benefits for such employees and for all payroll
taxes, FICA, and similar items with respect to such employees. Manager shall
directly control the time and manner of work and services to be performed by the
employees of Manager.
(b) Manager agrees to make certain employees of Manager available to
Insurers and to MDHC for the purpose of preparing financial statements and other
regulatory filings for Insurers and MDHC. These employees shall be made
available as needed by the Insurers and MDHC and only for the time required to
prepare such documents. The employees to be made available are Geri Morrison,
Samuel Pippin, and Cheryl Patterson, provided that the individual is employed by
Manager at the time of the request. MDHC shall provide Manager reasonable notice
of its need to use such employees for the purposes herein stated. MDHC and
Manager shall cooperate with each other as to the time or times such employees
are to be made available to MDHC after giving due consideration to the
requirements of each of them; provided, however, that Manager agrees that Cheryl
Patterson shall be permitted to perform services for MDHC for at least one-half
day during each payroll period of MDHC. MDHC shall directly control the manner
of work and services to be performed by such employees during the time they are
made available to MDHC for the purpose herein stated.
10. Insurance.
---------
(a) Fidelity Bond. Manager shall, at Manager's expense, provide and
maintain crime insurance on persons employed by Manager in connection with all
business and affairs arising out of or in connection with performance of its
duties hereunder.
(b) Workers' Compensation Insurance. Manager shall provide and
maintain workers' compensation insurance and employer's liability insurance with
respect to all persons employed by Manager to perform the services hereunder.
6
<PAGE>
11. Indemnification.
---------------
(a) Manager shall indemnify and hold each of the Insurers and each of
their officers and directors harmless against all claims, actions, liabilities,
losses, damages, costs, expenses, including attorneys' fees and expenses, by
reason of Manager's negligence or willful misconduct in the performance of its
duties hereunder. This indemnity shall not be applicable with respect to any
liability of the Insurers for the payment of claims in accordance with the terms
of the policies issued by the Insurers, nor shall it be applicable with respect
to acts of Manager duly authorized by Insurers in writing in advance or done in
good faith by the Manager in the exercise of prudent judgment not in violation
of the express terms and provisions of this Agreement. The aforesaid indemnity
shall only be applicable to the extent that loss, damage, or liability suffered
by Insurers in excess of insurance proceeds payable in respect thereof.
(b) Insurers shall jointly and severally indemnify and hold Manager
and each of its officers, directors, and employees harmless against all claims,
actions, liabilities, losses, damages, costs, or expenses, including attorneys'
fees and expenses, by reason of (i) Insurers' negligence or willful misconduct,
or (ii) any actions taken by employees of Manager at the direction of MDHC as
contemplated in Section 9(b) hereof. This indemnity shall not be applicable with
respect to any liability of Manager with respect to acts of Insurers duly
authorized by Manager in writing or done in good faith by Insurers in the
exercise of prudent judgment not in violation of the express terms and
provisions of this Agreement. The aforesaid indemnity shall only be applicable
to the extent that the loss, damage, or liability suffered by the Manager is in
excess of insurance proceeds payable in respect thereof.
(c) Any party seeking indemnification (the "Indemnified Party")
hereunder shall give written notice (the "Notice") to the parties from whom the
indemnification is sought (the "Indemnifying Party") of the claim for
indemnification. Upon receipt of a Notice, the Indemnifying Party shall have the
option to, and at the request of the Indemnified Party shall, defend and/or
protest any such claim at the Indemnifying Party's own cost and expense,
including but not limited to, subject to the rights of or duties to any insurer
having liability therefor, the option to defend, with attorneys reasonably
acceptable to the Indemnified Party, provided that (i) the Indemnifying Party
agrees in writing to be bound by and to promptly pay the full amount of any
final judgment or settlement and (ii) no settlement or compromise of any matter
shall be made without the consent of the Indemnified Party, which consent shall
not unreasonably be withheld. In addition, the Indemnified Party may also
participate, at its expense, in such contest or defense. If the Indemnifying
Party does not elect (or if required, does not agree) to assume the defense of
the claim within ten days of the Indemnifying Party's receipt of a Notice, the
party against whom the claim was asserted will have the right, at the expense of
the Indemnifying Party, to undertake the defense and to compromise or settle the
claim as it deems appropriate.
7
<PAGE>
12. Miscellaneous.
-------------
(a) Binding Agreement. The terms, covenants, conditions, provisions
and agreements herein contained shall be binding upon and inure to the benefit
of the parties hereto, their successors and assigns.
(b) Relationship of Parties. Nothing contained in this Agreement
shall constitute or be construed to be or to create a partnership, joint venture
or lease between Manager and either or both of Insurers. The relationship of
Manager to the Insurers under this Agreement is that of an independent
contractor, not that of an agent, and nothing contained herein shall be
construed to create a relationship of agency between Manager and Insurers
(except to the extent Manager is authorized to act on behalf of Insurers as
manager under this Agreement).
(c) Notices. All notices, demands and requests contemplated hereunder
by either party to the other shall be given in the manner and at the address set
forth in Section 12.04 of the Purchase Agreement.
(d) Entire Agreement: Amendment. This Agreement, together with the
Purchase Agreement, the Excess Treaty, and the Quota Share Treaty referred to
herein, and the documents executed in connection with the foregoing, contain the
entire agreement between the parties hereto, and no prior oral or written, and
no contemporaneous oral representations or agreements between the parties with
respect to the subject matter of this Agreement shall be of any force and
effect. Any additions, amendments or modifications to this agreement shall be of
no force and effect unless in writing and signed by Manager and Insurers.
(e) Sale and/or Assignment of Agreement. This Agreement may be
assigned by Manager only with the prior written consent of Insurers.
(f) Captions and Headings. The captions and headings throughout this
Agreement are for convenience and reference only, and the words contained
therein shall in no way be held or deemed to define, limit, describe, explain,
modify, amplify, or add to the interpretation, construction or meaning of any
provisions of or the scope of intent of this Agreement nor in any way affect
this Agreement.
(g) Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Missouri, without regard to
conflicts of laws principles.
(h) Authorization of Agreement. Manager and each of Insurers
represent and warrant, each to the other, with respect to itself, that the
execution and delivery of this Agreement has been duly authorized by all
respective and necessary parties to this action, and will not currently nor with
the passage of time, violate or conflict with (i) the provisions of the Articles
of Incorporation and Bylaws, of Manager or Insurers, (ii) any other instrument
to which either party is bound or by which any of their property or assets is
subject, or (iii) any existing law, regulations,
8
<PAGE>
court order or consent decree to which either party is bound or any of their
property or assets are subject.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed,
by their respective duly authorized officers, as of the day and year first above
written.
MUTUAL ASSURANCE, INC.
By:_________________________________________
Its:________________________________________
MEDICAL DEFENSE ASSOCIATES
By:_________________________________________
Its:________________________________________
MEDICAL DEFENSE
INSURANCE COMPANY
By:_________________________________________
Its:________________________________________
MEDICAL DEFENSE SERVICES CORP.
By:_________________________________________
Its:________________________________________
MEDICAL DEFENSE HOLDING CO.
By:_________________________________________
Its:________________________________________
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 69,765,030
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 78,836,259
<CASH> 3,428,828
<RECOVER-REINSURE> 1,240,000
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 87,632,712
<POLICY-LOSSES> 54,656,265
<UNEARNED-PREMIUMS> 6,205,109
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 202,155
<NOTES-PAYABLE> 0
<COMMON> 526,699
0
7,426,010
<OTHER-SE> 17,077,962
<TOTAL-LIABILITY-AND-EQUITY> 87,632,712
5,884,923
<INVESTMENT-INCOME> 3,644,880
<INVESTMENT-GAINS> 33,389
<OTHER-INCOME> 2,951
<BENEFITS> 6,555,933
<UNDERWRITING-AMORTIZATION> 116,395
<UNDERWRITING-OTHER> 1,552,197
<INCOME-PRETAX> 945,542
<INCOME-TAX> (588,309)
<INCOME-CONTINUING> 1,533,851
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,533,851
<EPS-PRIMARY> 1.46
<EPS-DILUTED> .10
<RESERVE-OPEN> 58,654,324
<PROVISION-CURRENT> 7,759,140
<PROVISION-PRIOR> (1,203,207)
<PAYMENTS-CURRENT> 119,691
<PAYMENTS-PRIOR> 10,301,301
<RESERVE-CLOSE> 54,656,265
<CUMULATIVE-DEFICIENCY> (1,203,207)
</TABLE>
