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Exhibit 10.3
QUOTA SHARE REINSURANCE AGREEMENT
This QUOTA SHARE REINSURANCE AGREEMENT (the "Agreement") is made and
entered into as of the 1st day of January, 1997, by and between:
THE AETNA CASUALTY AND SURETY COMPANY, a Connecticut corporation,
having its principal office at One Tower Square, Hartford, Connecticut
06183 ("Aetna"); and
EXECUTIVE RISK INDEMNITY INC., a Delaware corporation, having its
principal office at 82 Hopmeadow Street, Simsbury, Connecticut 06070
("ERII")
on the following terms and conditions:
ARTICLE 1 -- BUSINESS COVERED
This Agreement applies to all Policies (as defined below) of Aetna
incepting or renewed on or after January 1, 1997 which are or have been written
on behalf of Aetna by Executive Risk Management Associates ("ERMA") pursuant to
the Agency and Insurance Services Agreement between Aetna and ERMA dated as of
January 1, 1997 (the "1997 Agency Agreement") (the "Covered Business.")
For the purpose of this Agreement, the term "Policies" shall mean all
binders, policies, contracts, agreements, endorsements and other evidences of
insurance or reinsurance constituting Covered Business.
ARTICLE 2 -- COVER AND RETENTION
Aetna shall cede, and ERII shall accept by way of quota share
reinsurance under this Agreement, one hundred percent (100%) of Aetna's Ultimate
Net Loss (as defined in Article 5 below) under all Policies reinsured hereunder.
ARTICLE 3 -- TERRITORY
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This Agreement shall apply to Policies covering risks wherever
situated.
ARTICLE 4 -- PERIOD
This Agreement covers all claims made on Policies incepting or renewed
on and after 12:01 a.m. on January 1, 1997, including discovery period coverage
and/or extended reporting endorsements attaching to such.
This Agreement shall terminate at 11:59 p.m. on the effective date of
termination of the 1997 Agency Agreement.
In the event this Agreement is terminated for any reason (i) ERII shall
remain liable for claims made under Policies reinsured hereunder and (ii) ERII
shall maintain security for its obligations to Aetna so long as it is required
to do so pursuant to Article 10 hereof.
ARTICLE 5 -- ULTIMATE NET LOSS
The term "Ultimate Net Loss" shall mean the amount paid or payable by
Aetna in the resolution of claims under the Policies. Ultimate Net Loss shall
include all costs, charges and expenses (other than unallocated loss adjustment
expenses) incurred by Aetna, consistent with the terms of the 1997 Agency
Agreement, in connection with the resistance to, defense of, investigation of,
or negotiations concerning, trial or settlement of, or recovery on, any claims
or suits in respect of the Policies.
For the purposes hereof, all salvages and recoveries by Aetna first
shall be deducted from Aetna's loss to arrive at the amount of Aetna's Ultimate
Net Loss. All salvages, recoveries or payments recovered or received subsequent
to a claim resolution under this Agreement shall be applied as if recovered or
received prior to the settlement, and all necessary adjustments shall be made by
the parties to this Agreement. Nothing in this clause, however, shall be
construed to mean that losses under this Agreement are not recoverable from ERII
until Aetna's Ultimate Net Loss has been finally ascertained.
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ARTICLE 6 -- PREMIUM
In consideration of the liabilities undertaken by ERII in accordance
with the terms of this Agreement, Aetna shall pay to ERII a reinsurance premium
equal to ERII's one hundred percent (100%) quota share of Aetna's Original Gross
Written Premiums in respect of each and every Policy.
As used herein, the term "Original Gross Written Premiums" shall mean
the gross premium written by Aetna in respect of the Policies, less
cancellations and return premiums.
ARTICLE 7 -- CEDING COMMISSION
With regard to each Policy ceded to ERII under this Agreement, Aetna
shall be entitled to a ceding commission equal to the aggregate of (i) the
actual amount of producers' commissions with respect to such Policy and (ii)
3.5% of the Original Gross Written Premiums, as an allowance for premium taxes
and all other costs and expenses whatsoever. Payment of such amounts shall be
effected, on behalf of ERII, by ERMA which, pursuant to Article IV of the 1997
Agency Agreement, shall pay such producers' commissions (to the extent such
commissions are not deducted by such producers) and, pursuant to Article VIII of
the 1997 Agency Agreement, shall pay to Aetna such 3.5% of Original Gross
Written Premiums.
ARTICLE 8 -- ACCOUNTS AND REMITTANCES
ERII will, or will cause its affiliate ERMA to, render to Aetna such
accounts and reports with respect to the Covered Business, and remit to Aetna
all amounts owed to Aetna hereunder, in accordance with the Reporting and
Accounting Convention attached to the Restructuring Agreement, dated February
13, 1997, by and among Aetna, Executive Risk Inc. and the other parties thereto,
as Exhibit C thereto.
ARTICLE 9 -- LOSS ADJUSTMENT EXPENSE
(a) All legal defense costs and loss adjustment expenses (including
both pre-judgment and post-judgment interest paid by Aetna, but excluding
unallocated loss adjustment expenses) incurred by Aetna,
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consistent with the terms of the 1997 Agency Agreement, in connection with any
resistance to, defense of, investigation of, or negotiations concerning trial or
settlement of, or recovery on, any claims in respect of Policies are covered
hereunder.
(b) In the event that only external legal or external loss adjustment
expense (including, for example, rescission and declaratory judgment expense) is
incurred by Aetna in connection with an attempt to mitigate any loss or
potential loss covered by a Policy, and such expense is not otherwise covered
under the original Policy, then such expense shall be treated as if it was a
loss for the purposes of determining any recovery under this Agreement. In the
event that such an expense is incurred by Aetna in addition to a loss covered by
the original Policy, such expense will be paid in addition to such loss.
ARTICLE 10 -- LETTER OF CREDIT
(a) On or before March 1, 1997, ERII shall, at its expense, deliver to
Aetna a clean, irrevocable and unconditional letter of credit in the form
attached as Exhibit A to this Agreement or in a form reasonably acceptable to
Aetna (the "Letter of Credit") for the benefit of Aetna in the amount of
$25,000,000. Subject to the terms of paragraphs (b) and (d) of this Article 10,
the Letter of Credit shall be maintained in an amount equal to the lesser of (i)
$25,000,000 or (ii) the aggregate amount of ERII's reserves for known
outstanding losses and allocated loss adjustment expenses with respect to the
Policies reinsured hereunder and the business ceded to ERII by Aetna under the
Amended and Restated Quota Share Reinsurance Agreement between Aetna and ERII
dated as of January 1, 1994, as amended (the "1994 Quota Share Reinsurance
Agreement") (the "Case Reserves").
(b) In the event that (i) ERII is assigned a claims paying rating by
either A.M. Best Company, Inc. or Standard & Poor's Corporation, the first
letter of which is "B" or lower or (ii) ERII is no longer an authorized
reinsurer for purposes of credit for reinsurance under the Insurance Law of the
State of Connecticut (in either case, a "Triggering Event"), the amount of the
Letter of Credit shall be adjusted to the aggregate of the Case
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Reserves and ERII's reserves for unearned premiums with respect to the Policies
reinsured hereunder and the business reinsured by ERII under the 1994 Quota
Share Reinsurance Agreement. In the event that a Triggering Event has been
cured, ERII shall provide to Aetna evidence reasonably satisfactory to Aetna
that such Triggering Event has been cured and thereafter ERII and Aetna promptly
shall cause the Letter of Credit to be adjusted to the amount required under
paragraph (a) of this Article 10.
(c) On a quarterly basis beginning June 30, 1997, ERII shall
recalculate the Case Reserves and, if necessary pursuant to paragraph (b) of
this Article 10, the unearned premium reserves and, if such recalculation
results in a reduction in the required amount of the Letter of Credit, shall
furnish such recalculation to Aetna, including the claim number and reserve
amount for each claim. After each quarterly recalculation, ERII shall notify
Aetna of any adjustments required to the amount of the Letter of Credit and ERII
and Aetna promptly shall cause appropriate adjustments to be made to the Letter
of Credit.
(d) During any period that the Case Reserves are less than the
aggregate amount of the reserves for known outstanding losses and allocated loss
adjustment expenses ceded to Aetna by ERII and Executive Risk Specialty
Insurance Company ("ERSIC") pursuant to the Quota Share Reinsurance Agreement
between ERII and Aetna dated as of January 1, 1994, as amended, and the Quota
Share Reinsurance Agreement between ERSIC and Aetna dated as of January 1, 1994,
as amended, as determined in good faith by ERII, the obligation of ERII to
maintain the Letter of Credit hereunder shall cease and ERII and Aetna promptly
shall take such actions as are necessary to terminate the Letter of Credit. The
obligations of ERII to maintain the Letter of Credit shall be reinstated if Case
Reserves subsequently exceed the aggregate amount of reserves for known
outstanding losses and allocated loss adjustment expenses ceded to Aetna by ERII
and ERSIC under such agreements.
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(e) The Letter of Credit procured pursuant to this Agreement shall be
issued by Chase Manhattan Bank or another bank which is a member of the Federal
Reserve and which is reasonably acceptable to Aetna.
(f) Subject to the provisions of this Article 10, the Letter of Credit
shall be "evergreen" in that it shall be issued for an initial period of not
less than one year and shall be extended automatically for one year from its
original expiration date and subsequently from its extended expiration dates
unless and until, at least thirty days before any expiration date, the issuing
bank gives written notice to Aetna that the issuing bank elects not to extend
the life of the Letter of Credit in question beyond its forthcoming expiration
date.
(g) In consideration of the agreement of ERII to furnish the Letter of
Credit to Aetna under this Agreement, Aetna hereby undertakes to use and apply
the proceeds of any such drawings solely for the purpose of paying ERII's share
or reimbursing Aetna for that share of any liability for loss or allocated loss
expense reinsured by this Agreement or the 1994 Quota Share Reinsurance
Agreement. Thereafter, Aetna shall refund to ERII any balance by which the
amount drawn under the Letter of Credit exceeds ERII's liability for loss or
allocated loss expense reinsured by this Agreement and the 1994 Quota Share
Reinsurance Agreement or any other amount owing by ERII to Aetna under this
Agreement or the 1994 Quota Share Agreement.
ARTICLE 11 -- CURRENCY
The currency to be used for all purposes of this Agreement shall be
United States of America dollars.
ARTICLE 12 -- EXTRA CONTRACTUAL OBLIGATIONS
This Agreement shall protect Aetna where the losses include any Extra
Contractual Obligations. "Extra Contractual Obligations" means those liabilities
not covered under another provision of this Agreement and which arise from the
handling of any claim under Policies, such liabilities arising because of, but
not limited to, the following: failure by Aetna to settle within the policy
limit, or by reason of alleged or actual negligence, fraud
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or bad faith in rejecting an offer of settlement or in the preparation of the
defense or in the trial of any action against its insured or in the preparation
or production of an appeal consequent upon such action.
The date on which an Extra Contractual Obligation is incurred by Aetna
shall be deemed to be the date the original claim was made against any Policy.
This Article shall not apply where the loss is due to the fraud of any
member of the Board of Directors or corporate officer of Aetna acting
individually or collectively with any individual or corporation or other
organization or party involved in the presentation, defense or settlement of any
claim covered hereunder.
ARTICLE 13 -- EXCESS OF ORIGINAL POLICY LIMITS
This Agreement shall protect Aetna for loss in excess of the limit of
Aetna's original policy, such loss in excess of the limit having been incurred
because of failure by Aetna to settle within the policy limit or by reason of
alleged or actual negligence, fraud or bad faith in rejecting an offer of
settlement or in the preparation of the defense or in the trial of any action
against its insured or in the preparation or prosecution of an appeal consequent
upon such action.
This Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of Aetna
acting individually or collectively with any individual or corporation or any
other organization or party involved in the presentation, defense or settlement
of any claim covered hereunder.
For purposes of this Article, the word "loss" shall mean any amounts
for which Aetna would have been contractually liable to pay had it not been for
the limit of the original policy.
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ARTICLE 14 -- INADVERTENT DELAY
No inadvertent delay, error or omission shall be held to relieve either
party hereto of any liability which would have attached to such party under this
Agreement if such delay, error or omission had not been made, provided that any
such delay, error or omission is rectified promptly upon discovery.
ARTICLE 15 -- ACCESS TO RECORDS
Each of Aetna and ERII shall place at the disposal of the other for
inspection, at its respective offices, at all reasonable times, all books,
records and papers in its possession regarding any insurance, reinsurance, or
claims in connection with Policies ceded hereunder. It is hereby expressly
agreed that the rights given to each party under this Article shall survive the
termination of this Agreement for any reason.
ARTICLE 16 -- ORIGINAL CONDITIONS
The liability of ERII shall follow that of Aetna, subject in all
respects to the terms and conditions of the original Policies and the terms and
conditions of this Agreement. Notwithstanding the foregoing, it is understood
and acknowledged that this Agreement is a contract of reinsurance separate and
distinct from the original Policies. Except as provided in Article 19 below,
ERII will not, under any circumstances whatsoever, be or be deemed to be
directly liable to the original insureds.
ARTICLE 17 -- AMENDMENTS AND ALTERATIONS
The terms and provisions contained in this Agreement comprise the
entire agreement between Aetna and ERII concerning the subject matter hereof. No
amendment, modification or waiver of this Agreement or any provision hereof
shall be binding unless in writing and signed by both parties.
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ARTICLE 18 -- RIGHT OF OFFSET
Aetna or ERII may offset any balance or amount due from one party to
the other, whether on account of premiums, losses or otherwise, to the extent
permitted by law. This provision shall not be affected by the insolvency of
either party to this Agreement.
ARTICLE 19 -- INSOLVENCY
Notwithstanding any provision to the contrary in this Agreement, in the
event of the insolvency of Aetna, the reinsurance provided by this Agreement
shall be payable by ERII on the basis of the liability of Aetna for the business
reinsured hereunder without diminution because of such insolvency, directly to
Aetna or its liquidator, receiver or statutory successor, except as provided by
Section 4118(a) of the New York Insurance Law or except (a) where a contract
specifically provides for another payee of such reinsurance in the event of the
insolvency of Aetna and (b) where ERII, with the consent of the direct insured
or insureds, has assumed such policy obligations of Aetna as direct obligations
of ERII to the payees under such policies and in substitution for the
obligations of Aetna to such payees.
ERII shall be given written notice of the pendency of each claim or
loss which may involve the reinsurance provided by this Agreement within a
reasonable time after such claim or loss is filed in the insolvency proceeding.
ERII shall have the right to investigate each such claim or loss and interpose,
at its own expense, in the proceeding where the claim or loss is to be
adjudicated, any defense available to Aetna, its liquidator, receiver or
statutory successor. The expense thus incurred by ERII shall be chargeable,
subject to court approval, against the insolvent Aetna as part of the expense of
liquidation to the extent of a proportionate share of the benefit which may
accrue to Aetna solely as a result of the defense undertaken by ERII.
To the extent permitted by law, should Aetna go into liquidation, or
should a conservator, liquidator or statutory successor be appointed, ERII shall
be entitled to deduct from any sums which may be, or may become, due to Aetna
under this Agreement, any sums which are due to ERII from Aetna under this
Agreement
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and which are payable at a fixed or stated date, as well as any other sums due
to ERII which are permitted to be offset under applicable law.
ARTICLE 20 -- MISCELLANEOUS
(a) Arbitration. Any dispute arising out of this Agreement shall be
resolved in accordance with the arbitration procedures set forth in Section 11.3
of the 1997 Agency Agreement.
(b) Notices. Any notice or communication to be given hereunder by any
party to another shall be in writing and shall be delivered by hand delivery,
certified or registered mail (return receipt requested), facsimile transmission
(receipt confirmed), or overnight express service, addressed to the respective
party as follows:
If to ERII, at: Executive Risk Indemnity Inc.
82 Hopmeadow Street
Simsbury, CT 06070-7683
Facsimile No.: (860) 408-2502
Attention: Robert V. Deutsch
Executive Vice President
If to Aetna, at: The Aetna Casualty and Surety Company
One Tower Square
Hartford, Connecticut 06183
Facsimile No.: (860) 277-3944
Attention: Joseph P. Kiernan
President & Chief Executive
Officer, Bond
or to such other address or addresses as any party may designate to the others
by like notice as set forth above. Any notice given hereunder will be deemed
received on the date of hand delivery or receipt of facsimile transmission or
certified or registered mailing, or one (1) business day after delivery to an
overnight express service for next day delivery, as the case may be.
(c) Reinsurance Intermediaries. No reinsurance intermediaries are
involved in this Agreement.
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(d) Amendment and Waiver. The parties hereto may amend any provision of
this Agreement only by written instrument executed by each party. Any party may
grant consents or waive any of its rights under this Agreement; provided,
however, that each such consent or waiver shall be in writing.
(e) Governing Law. This Agreement shall be governed and construed in
accordance with the internal laws of the State of Connecticut.
(f) Severability. If any term or provision of this Agreement is for any
reason deemed illegal or invalid, such illegality shall not affect the validity
of the remainder of this Agreement, and each such term or provision shall be
valid and enforceable to the fullest extent permitted by law. In the event one
of the parties hereto becomes subject to any legal requirement, including,
without limitation, any regulation or administrative interpretation of any
insurance or other regulatory agency having authority over it, which materially
adversely affects its ability to enjoy its rights under this Agreement, the
parties shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties with respect to such rights as closely as
possible in an acceptable manner.
(g) Binding Effect; Assignment. This Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and permitted assigns; provided that neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by either of
the parties hereto without the prior written consent of the other party.
(h) Modifications. This Agreement may not be modified verbally, nor may
it be modified by any subsequent practice or course of dealing by the parties,
or in any manner other than in writing signed by the parties hereto. No waiver
may modify this Agreement or affect the rights of one party with respect to any
subsequent default or failure of performance by the other party.
(i) Entire Agreement. This Agreement and related documents identified
herein set forth the complete understanding of the parties relating to the
specific subject matter addressed herein.
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(j) Counterparts. This Agreement may be signed in any number of
counterparts, and each of the counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute the same
Agreement.
(k) Financial Information. Any reference in this Agreement to any
financial information (including any financial ratios) relating to any party
hereto shall be deemed to refer to such financial information as it is prepared
in accordance with generally accepted statutory accounting principles and, where
applicable, as contained in the statutory-basis financial documents filed by the
applicable insurer with its state of domicile.
(l) Interpretation. This Agreement is a result of arm's-length
negotiations between the parties hereto and has been prepared jointly by the
parties. In applying and interpreting the provisions of the Agreement, there
shall be no presumption that this Agreement was prepared by any one party or
that the Agreement should be construed by or in favor of any one party.
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IN WITNESS WHEREOF, the parties hereto have, by their duly authorized
representatives, executed this Agreement as of the date first above written.
EXECUTIVE RISK INDEMNITY INC.
By:___________________________________
Its:
THE AETNA CASUALTY AND SURETY COMPANY
By:___________________________________
Its:
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