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EXHIBIT 10(19)
Directors' and Officers'
and
Errors and Omissions
Liability
QUOTA SHARE REINSURANCE AGREEMENT
issued to
WESTERN SURETY COMPANY
A South Dakota Corporation
2
ARTICLE CONTENTS PAGE
- ------- -------- ----
I Business Covered 1
II Net Retained Lines 1
Limits
Maximum Limits of Liability
III Commencement 2
Termination
Termination on Cut-Off Basis
Commutation Option
Special Termination
IV Territory 3
V Exclusions 3
VI Premium and Commission 3
VII Reinsurer's Liability 3
Reinsurer to Follow Company 4
VIII Accounts and Statistical Reports 4
IX Funding of Reserves 4
X Losses and Loss Settlements 5
Cash Losses 6
Definition of Occurrence
XI Extra Contractual Obligations 6
XII Taxes 6
XIII Currency 7
XIV Access to Records 7
XV Errors and Omissions 7
XVI Insolvency 7
XVII Arbitration 8
XVIII Offset Clause 8
XIX Choice of Law 9
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Directors' and Officers' and
Errors and Omissions Liability
QUOTA SHARE REINSURANCE AGREEMENT
issued to
WESTERN SURETY COMPANY
A South Dakota Corporation
(hereinafter referred to as the "Company")
by
UNITED CAPITOL INSURANCE COMPANY
A Wisconsin Corporation
(hereinafter referred to as the "Reinsurer")
ARTICLE I
Business Covered
The Company obligates itself to cede to the Reinsurer and the Reinsurer
obligates itself to accept as reinsurance from the Company the net retained
liability which may accrue to the Company under all policies, binders,
contracts and agreements of insurance whether oral or written (hereinafter
called "policies") written by the Company during the continuance of this
Agreement and covering insurance underwritten by United Capitol Managers, Inc.
and classified by the Company as Directors' and Officers' ("D&O") and Errors
and Omissions ("E&O") Liability insurance. The reinsurance agreement does not
cover notary public, tax preparer or agent's E&O insurance underwritten by the
Company and its agents.
ARTICLE II
Net Retained Lines
This Agreement applies only to that portion of any insurance covered by this
Agreement which the Company retains net for its own account and in calculating
the amount of any loss hereunder only loss or losses in respect of that portion
of any insurance which the Company retains net for its own account shall be
included. It being understood and agreed that the Reinsurer's Liability
hereunder in respect of any loss or losses shall not be increased by reason of
the inability of the Company to collect from any other reinsurance whether
specific or general, any amounts which may have become due from them, whether
such inability arises from the insolvency of such other reinsurer or otherwise.
Limits
The Reinsurers shall accept as Quota Share reinsurance 100% of the net retained
liability of the Company as respects D&O and E&O insurance.
Maximum Limits of Liability
The Company shall limit the maximum policy issued subject to this Treaty to
$5,000,000. This limit may be increased and made subject to this agreement as
a special acceptance, by mutual agreement of both parties. The Company may
also increase these limits by use of facultative reinsurance or increased net
retention by the Company.
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WESTERN SURETY COMPANY
Directors' and Officers' and Errors and Omissions Liability
QUOTA SHARE REINSURANCE
Effective: August 15, 1994
Page 2
ARTICLE III
Commencement
This Agreement shall take effect 12:01 A.M., Central Standard Time, August 15,
1994 and shall apply to all losses occurring on and after this date in respect
of new and renewal business written on and after this date and shall remain
continuously in force, unless cancelled in accordance with the Termination or
Special Termination provisions of this Agreement.
Termination
This Agreement may be terminated by either party by giving 90 days notice in
writing by certified mail to the other party to take effect 12:01 A.M., Local
Standard Time August 15, 1994 or any August 15 thereafter.
Notwithstanding the options available solely to the Company, termination of
this Agreement shall be on a run-off basis and the Reinsurer shall remain
liable as respects business in-force at the date of termination for losses
occurring subsequent thereto; however, the liability of the Reinsurer shall
cease at the expiration of the business in-force at the time of cancellation
but not to extend beyond twelve months, plus odd time, after the date of
termination. Special acceptances exceeding twelve months plus odd time may be
agreed to by the Reinsurer.
Termination on Cut-Off Basis
Solely at the option of the Company, this Agreement may be terminated on a
cut-off basis, and the Reinsurer shall incur no liability for losses occurring
subsequent to the effective date of termination. Should the Company exercise
its option to terminate this Agreement on a cut-off basis, the Company shall
prepare a statement of the unearned premium, calculated on the daily pro rata
basis, and the Reinsurer shall return to the Company such unearned premium less
the ceding commission stated in Article VI.
Commutation Option
Solely at the option of the Company, the Company may reassume from the
Reinsurer the losses outstanding under this Agreement at the date of
termination. Should the Company exercise this option, a settlement shall be
made by the Reinsurer to the Company based on the Company's estimate of losses
outstanding as of the date of termination. Such payment shall be considered
final by mutual agreement of the parties hereto. Otherwise, further periodic
adjustments shall be made so that the total amounts paid by the Reinsurer shall
equal the actual loss settlement made by the Company for losses outstanding as
of the date of termination.
Special Termination
It is understood and agreed that should at any time the Company or the
Reinsurer lose 20% or more of its policyholders' surplus, become insolvent, or
be placed in conservation, rehabilitation or liquidation, or have a receiver
appointed, or be acquired or controlled by, merged with, or reinsure its entire
business with any other company or corporation, the other party shall have the
right to terminate this Agreement forthwith upon the giving of thirty (30) days
notice in writing, which shall be in accordance with the termination provisions
of this Article.
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WESTERN SURETY COMPANY
Directors' and Officers' and Errors and Omissions Liability
QUOTA SHARE REINSURANCE
Effective: August 15, 1994
Page 3
This Agreement may be terminated by the Company on a cut-off basis should the
Reinsurer's rating by A.M. Best Company be lowered a letter grade or more. The
Company shall have the right to exercise its option to commute the losses
outstanding under this Agreement at the date of any termination under this
paragraph pursuant to the commutation provisions set forth above. Thirty (30)
days written notice by the Company shall be given to the Reinsurer by Certified
Mail.
If any law or regulation of the federal or state or local government of any
jurisdiction in which the Company is doing business shall render illegal the
arrangements made in this Agreement, this Agreement can be terminated
immediately insofar as it applies to such jurisdiction by the Company giving
notice to the Reinsurer to such effect.
ARTICLE IV
Territory
The liability of the Reinsurer under this Agreement shall be limited to losses
located in the United States of America, its territories and possessions,
including U.S. Embassies and Military Bases outside the United States of
America and Canada.
ARTICLE V
Exclusions
This agreement shall exclude business accepted by the Company as assumed
reinsurance.
ARTICLE VI
Premium and Commission
The Company shall cede to the Reinsurer 100% of the original net written
premium charged by the Company for the business covered hereunder. The
Reinsurer shall allow the Company a commission equal to 30%. The commission
allowances shall cover direct commissions, premium taxes of all kinds, local
board assessments, and all other expenses and charges whatsoever based upon
premium (except losses and loss adjustment expenses) ceded under this
Agreement.
The term "original net written premium" shall be understood to mean all written
premium subject to this Treaty less cancellations, returns, and premiums paid
to the Company's facultative reinsurers (if any).
ARTICLE VII
Reinsurer's Liability
The liability of the Reinsurer shall commence obligatorily and simultaneously
with that of the Company; the premium on account of such liability shall be
credited to the Reinsurer form the original date of the Company's liability.
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WESTERN SURETY COMPANY
Directors' and Officers' and Errors and Omissions Liability
QUOTA SHARE REINSURANCE
Effective: August 15, 1994
Page 4
Reinsurer to Follow Company
All reinsurances for which the Reinsurer shall be liable by virtue of this
Agreement shall be subject in all respects to the same rates, terms,
conditions, interpretations adopted by the Company, waivers, modifications,
alterations, and cancellations, as the respective insurances of the Company to
which such reinsurances relate. The true intent of this Agreement is that the
Reinsurer shall in every case to which the Agreement applies and in the
proportion specified, follow the fortunes of the Company.
ARTICLE VIII
Accounts and Statistical Reports
The Company shall render a monthly account to the Reinsurer within thirty (30)
days after the close of each month, summarizing premium, return premium,
allowance for commission, losses paid, loss adjustment expenses paid and
salvage recovered, and showing the net balance due from either party. Balances
shall be paid by the debtor party within forty-five (45) days following the end
of the quarter.
The Company agrees to furnish unearned premium and outstanding loss figures
monthly as soon as possible after the close of the corresponding month, and the
customary year end statistics for completion of the Reinsurer's annual
statement within thirty (30) days after the close of the calendar year.
ARTICLE IX
(Applies only to the Reinsurer when it does not qualify for full credit as
admitted reinsurance by any State or any other governmental authority having
jurisdiction over the Company's reserves.)
Funding of Reserves
As regards policies issued by the Company coming within the scope of this
Agreement, the Company agrees that when it shall file with the South Dakota
Insurance Division or set up on its books reserves for unearned premium and
losses covered hereunder which it shall be required by law to set up, it will
forward to the Reinsurer a statement showing the proportion of such reserves
which is applicable to the Reinsurer. The Reinsurer hereby agrees to fund such
reserves in respect of unearned premium and known outstanding losses that have
been reported to the Reinsurer and allocated loss expenses relating thereto
(excluding reserves for losses incurred but not reported ("IBNR")), as shown in
the statement prepared by the Company, by either funds withheld or cash
advances deposited with a bank or trust company pursuant to the terms of a
separate Trust Agreement. The Reinsurer shall have the option of determining
the method of funding provided it is acceptable to the insurance regulatory
authorities involved.
Notwithstanding any other provision of this Agreement, the Company or its
successors in interest may draw upon such reserve funding at any time without
diminution because of the insolvency of the Company or of the Reinsurer for one
or more of the following purposes only, unless otherwise provided for in a
separate Trust Agreement:
(a) To pay the Reinsurer's share or to reimburse the Company for
the Reinsurer's share of any loss reinsured by the Agreement, the
payment of which has been agreed by the reinsurer and which has not
otherwise been paid.
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WESTERN SURETY COMPANY
Directors' and Officers' and Errors and Omissions Liability
QUOTA SHARE REINSURANCE
Effective: August 15, 1994
Page 5
(b) To make refund of any sum which is in excess of the actual
amount required to pay the Reinsurer's share of any liability
reinsured by this Agreement.
(c) To establish a deposit of the Reinsurer's share of unearned
premium and known and reported outstanding losses and allocated
expenses relating thereto excluding reserves for losses incurred but
not reported under this Agreement. Such cash deposit shall be held
in an interest bearing account separate from the Company's other
assets, and interest thereon shall accrue to the benefit of the
Reinsurer.
(d) To pay or reimburse the Company for the Reinsurer's share of
any other amounts which are due the Company under the terms of this
Agreement, but not to include IBNR.
The bank or trust company holding any cash advance pursuant to a separate Trust
Agreement shall have no responsibility whatsoever in connection with the
propriety of withdrawals made by the Company or the disposition of funds
withdrawn, except to ensure that withdrawals are made only upon the order of
properly authorized representatives of the Company.
At annual intervals, or more frequently as agreed but never more frequently
than quarterly, the Company shall prepare a specific statement, for the sole
purpose of adjusting the amount of any cash funding, of the Reinsurer's share
of unearned premium and known and reported outstanding losses and allocated
expenses relating thereto excluding reserves for losses incurred but not
reported. If the statement shows that the Reinsurer's share of such unearned
premium and losses and allocated loss expenses excluding reserves for losses
incurred but not reported exceeds the balance of credit as of the statement
date, the Reinsurer shall, within thirty (30) days after receipt of notice of
such excess, increase any cash funding by the amount of such difference. If,
however, the statement shows that the Reinsurer's share of unearned premium and
known and reported outstanding losses and allocated loss expenses relating
thereto, excluding reserves for losses incurred but not reported is less than
the balance of credit as of the statement date, the Company shall, within
thirty (30) days after receipt of written request from the Reinsurer, release
such excess credit by reducing any cash funding by the amount of such
difference.
ARTICLE X
Losses and Loss Settlements
The Company or its designated representatives shall adjust, settle or
compromise all losses hereunder. All such adjustments, settlements and
compromises, including ex-gratia payments shall be binding on the Reinsurer, in
proportion to its participation and the Reinsurer shall benefit proportionately
in all salvage, subrogation and recoveries.
The Reinsurer shall bear its proportionate share of all loss adjustment
expenses incurred by the Company, (but not including office expenses or
salaries of and expenses incurred by the Company's regular employees) in the
investigation, adjustment, appraisal or defense of all claims under policies
reinsured hereunder and the Reinsurer shall receive its proportionate share of
any and all recoveries of such expense, excluding office expenses or salaries
of and expenses incurred by the Company's regular employees.
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WESTERN SURETY COMPANY
Directors' and Officers' and Errors and Omissions Liability
QUOTA SHARE REINSURANCE
Effective: August 15, 1994
Page 6
Cash Losses
It is understood that when the amount of loss paid by the Company under
policies subject to this Agreement as a result of any one occurrence exceeds
$100,000, the Reinsurer's share will, at the option and demand of the Company,
be paid by special remittance immediately, but the Reinsurer shall have the
right to deduct from such special remittance any overdue balance due the
Reinsurer by the Company. Any special remittance made pursuant to this
provision is to be credited to the Reinsurer in the account in which the paid
loss appears.
Definition of Occurrence
Occurrence, as used herein, shall be defined as a loss or losses per insured.
ARTICLE XI
Extra Contractual Obligations
This Agreement shall protect the Company, within the limits hereof, where the
loss includes any Extra Contractual Obligations incurred by the Company.
"Extra Contractual Obligations" are defined as those liabilities not covered
under any other provisions of this Agreement and which arise from the handling
of any claim on business covered hereunder, such liabilities arising because
of, but not limited to, the following: failure by the Company to settle within
the policy limit, or by reason of alleged or actual negligence, fraud or bad
faith in rejecting an offer of settlement, or in the preparation of the
defense, or in the trial of any action against its insured, or in the
preparation or prosecution of an appeal consequent upon such action.
The date on which any Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original loss.
However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively 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.
However, only 80% of any loss as described above may be included in the loss
hereon, the remaining 20% to be retained by the Company and not reinsured in
any way.
ARTICLE XII
Taxes
It is understood and agreed that in consideration of the terms under which this
Agreement is issued, the Company undertakes not to claim any deduction with
respect to the premium hereon when making tax returns, other than income or
profits tax returns, to the appropriate tax authorities.
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WESTERN SURETY COMPANY
Directors' and Officers' and Errors and Omissions Liability
QUOTA SHARE REINSURANCE
Effective: August 15, 1994
Page 7
ARTICLE XIII
Currency
All payments made under this Agreement shall be in currency of the United
States of America.
ARTICLE XIV
Access to Records
The Reinsurer, or its duly appointed representatives, shall at all reasonable
times have free access to the books and records of the Company so far as they
relate to the business reinsured under this Agreement.
ARTICLE XV
Errors and Omissions
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made, provided such delay, omission or
error is rectified immediately upon discovery.
ARTICLE XVI
Insolvency
In the event of the insolvency of the Company this reinsurance shall be payable
by the Reinsurer directly to the Company or 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 insolvent Company indicating the policy
reinsured which claim would involve a possible liability on the part of the
Reinsurer within a reasonable time after such claim is filed in the
conservation or liquidation proceedings or in the receivership, and that during
the pendency of such claims the Reinsurer may investigate such claims and
interpose, at its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses which it may deem available to the Company
or its liquidator, receiver, conservator or statutory successor; that the
expense thus incurred by the Reinsurer shall be chargeable subject to court
approval against the insolvent Company as part of the expense of liquidation to
the extent of a proportionate share of the benefit which may accrue to the
Company solely as a result of the defense undertaken by the Reinsurer.
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
proportioned in accordance with the terms of the reinsurance agreement as
though such expense had been incurred by the Company.
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WESTERN SURETY COMPANY
Directors' and Officers' and Errors and Omissions Liability
QUOTA SHARE REINSURANCE
Effective: August 15, 1994
Page 8
This reinsurance shall be payable by the Reinsurer directly to the Company, or
to its liquidator, receiver, conservator or statutory successor, except (a)
where the Agreement specifically provides another payee of such reinsurance in
the event of the insolvency of the Company, and (b) 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 XVII
Arbitration
As a precedent to any right of action hereunder, if any differences shall arise
between the contracting parties with reference to the interpretation of this
Agreement or the rights with respect to any transaction involved, whether
arising before or after termination of this Agreement, such differences shall
be submitted to arbitration upon the written request of one of the contracting
parties.
Each party shall appoint an arbitrator within thirty (30) days of being
requested to do so, and the two named shall select a third arbitrator before
entering upon the arbitration. If either party refuses or neglects to appoint
an arbitrator within the time specified, the other party may appoint the second
arbitrator. If the two arbitrators fail to agree on a third arbitrator within
thirty (30) days of their appointment, each of them shall name three
individuals, of whom the other shall decline two, and the choice shall be made
by drawing lots. All arbitrators shall be active or retired disinterested
officers of insurance or reinsurance companies or Underwriters at Lloyd's,
London not under the control of either party to this Agreement.
Each party shall submit its case to its arbitrator within thirty (30) days of
the appointment of the third arbitrator or within such period as may be agreed
by the arbitrators. All arbitrators shall interpret this Agreement as an
honorable engagement rather than as merely a legal obligation. They are
relieved of all judicial formalities and may abstain from following the strict
rules of law. They shall make their award with a view to effecting the general
purpose of this Agreement rather than in accordance with a literal
interpretation of the language.
The decision in writing of any two arbitrators, when filed with the contracting
parties, shall be final and binding on both parties. Judgment upon the award
rendered may be entered in any Court having jurisdiction thereof. Each party
shall bear the expense of its own arbitrator and shall jointly and equally bear
with the other party the expense of the third arbitrator and of the
arbitration. In the event that two arbitrators are chosen by one party as
above provided, the expense of the arbitrators and the arbitration shall be
equally divided between the two parties. Any arbitration shall take place in
Sioux Falls, South Dakota unless some other place is mutually agreed upon by
the contracting parties.
ARTICLE XVIII
Offset Clause
The Company and the Reinsurer, each at its option, may offset any balance or
balances, whether on account of premiums, claims and losses, loss expenses or
salvages due from one party to the other under this Agreement, provided,
however, that in the event of the insolvency of a party hereto, offsets shall
only be allowed in accordance with the provisions of the statutes and/or
regulations of the state having jurisdiction over the insolvency.
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WESTERN SURETY COMPANY
Directors' and Officers' and Errors and Omissions Liability
QUOTA SHARE REINSURANCE
Effective: August 15, 1994
Page 9
ARTICLE XIX
Choice of Law
This Agreement shall be governed by and interpreted in accordance with the laws
of the State of South Dakota.
* * * *
Signed and accepted, effective August 15, 1994 on behalf of
Western Surety Company, "the Company"
by /s/ Joe P. Kirby, President, this 16th day of August, 1994.
----------------
Joe P. Kirby
President and CEO
Signed and accepted, effective August 15, 1994 on behalf of
United Capitol Insurance Company, "the Reinsurer"
by /s/ Bruce A. Esselborn , this 15th day of August , 1994.
--------------------------
Bruce A. Esselborn
President and CEO