Exhibit 10(ii)
LIMITED LIABILITY COMPANY AGREEMENT
OF
HSB INDUSTRIAL RISK INSURERS, L.LC.
THIS LIMITED LIABILITY COMPANY AGREEMENT ("Agreement") of HSB Industrial Risk
Insurers, L.L.C. (the "Company") dated as of _____________________________ is
between Employers Reinsurance Corporation ("ERC"), a Missouri corporation, with
principal offices at 5200 Metcalf, Overland Park, Kansas and The Hartford Steam
Boiler Inspection and Insurance Company ("HSB"), with principal offices at One
State Street, Hartford, Connecticut. ERC and HSB are sometimes individually
referred to in this Agreement as a "Member" and collectively as "Members".
WHEREAS, ERC, through its subsidiary organization, IRI Management Services
L.L.C. (IMS), has acquired certain of the tangible and intangible assets of
Industrial Risk Insurers ("IRI") and its affiliated Canadian association,
Canadian Industrial Risk Insurers ("CIRI"), both of which are joint underwriting
associations offering first party property insurance to highly protected risk
("HPR") accounts in industrial/manufacturing occupancies;
WHEREAS, HSB owns and operates a property insurance business known as HSB
Special Risks-Manufacturing Division offering first party property insurance to
HPR accounts in industrial/manufacturing occupancies with principal facilities
located in the United States;
WHEREAS, ERC and HSB desire to form a limited liability company for the purpose
of operating a combined venture offering property insurance for HPR
industrial/manufacturing occupancies and to which ERC will contribute the IRI
book of business and a royalty-free license to use the assets of IMS, including
the IRI trademark/tradename and HSB will contribute its U.S. Special
Risk-Manufacturing book of business and a royalty-free license to use the HSB
trademark/tradename; and
NOW THEREFORE, for and in consideration of the mutual promises and covenants
contained herein, the parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions.
In addition to terms otherwise defined herein, the following terms are used
herein as defined below. The following definitions are applicable to both
the singular and the plural forms of each term defined below.
"Affiliates" means, with respect to any Person, at the time in question,
any other Person controlling, controlled by or under common control with
such Person.
"Agreement" means this Limited Liability Company Agreement of HSB
Industrial Risk Insurers L.L.C., as the same may be amended or restated
from time to time.
"Announcement Date" means the first public announcement of the transaction
which culminates in a Change in Control.
"Board" means the Board of Managers of the Company.
"Capital Contributions" means, with respect to any Member, the property and
cash contributed as capital by such Member to the Company in accordance
with Article IV hereof.
"Change in Control" means the acquisition of 50% or more of the voting
securities of HSB Group, Inc., the parent company of HSB, other than by ERC
or any of its Affiliates.
"Connecticut Act" means the Connecticut Limited Liability Company Act, as
it may be amended from time-to-time.
"ERC Reinsurance Agreement" means the Reinsurance Agreement between ERC, as
ceding company, and HSB, as reinsurer, dated as of January 1, 1998.
"HSB-IRI Business" means HPR property insurance business written pursuant
to the Operating Agreement on industrial/manufacturing risks with principal
facilities located in the United States or Canada, and including any
multi-national locations of such risks, and which initially comprises the
business underwritten by IRI and the U.S. Special Risk Manufacturing
business underwritten by HSB on the effective date of the Operating
Agreement.
"HSB Reinsurance Agreement" means the Reinsurance Agreement between HSB as
reinsurer and ERC as ceding company dated as of January 1, 1998.
"Initial Members" means Employers Reinsurance Corporation and The Hartford
Steam Boiler Inspection and Insurance Company.
"Interest" means the ownership interest of a Member in the Company (which
shall be considered personal property for all purposes), consisting of (i)
such Member's Percentage Interest in profits, losses, allocations and
distributions, (ii) such Member's right to vote or grant or withhold
consents with respect to Company matters as provided herein or in the
Connecticut Act, and (iii) such Member's other rights and privileges as
herein provided.
"IRI Reinsurance Agreement" means the Reinsurance Agreement between HSB as
ceding company and IRI as reinsurer dated as of January 1, 1998.
"Majority in Interest of the Members" means Members whose Percentage
Interests aggregate to greater than 50 percent of the Percentage Interests
of all Members.
"Members" means the Initial Members and/or all other Persons admitted as
additional or substituted Members pursuant to this Agreement, so long as
they remain Members. All Members admitted as additional or substituted
Members must agree to the provisions of this Agreement by a written
acknowledgment signed by the Member before they may be admitted.
"Operating Agreement" means the Operating Agreement dated as of January
1,1998 by and among the Company, ERC, HSB and IRI.
"Percentage Interest" means a Member's share of the profits and losses of
the Company and the Member's percentage right to receive distributions of
the Company's assets. The Percentage Interest of the Initial Member shall
initially be the percentage set forth in Schedule I hereto and such
Schedule shall be amended from time to time in accordance with the
provisions hereof. The combined Percentage Interest of all Members shall at
all times equal 100 percent.
"Person" means a legal person, including any individual, corporation,
estate, partnership, joint venture, trust, unincorporated association, or
government or any agency or political subdivision thereof, or any other
entity of whatever nature.
"Related Agreements" means the IRI Reinsurance Agreement, the ERC
Reinsurance Agreement, the HSB Reinsurance Agreement and the Operating
Agreement.
"Two Thirds in Interest of the Members" means Members whose Percentage
Interests aggregate to greater than 66 2/3 percent of the Percentage
Interests of all Members.
ARTICLE II
FORMATION OF LLC
2.1 Name and Formation.
The Members hereby form a limited liability company pursuant to the Act on
the terms and for the purposes set forth in this Agreement. The name of the
Company shall be HSB Industrial Risk Insurers, L.L.C., or such other name
as the Members may from time to time hereafter designate. Mr. John M.
Connelly of Employers Reinsurance Corporation, as Organizer, has executed
and filed the Articles of Organization with the Secretary of State of the
State of Connecticut in compliance with ss.34-121 of the Connecticut Act.
The
Company will be formed and its existence will commence upon endorsement of
the Articles of Organization by the Secretary of the State.
2.2. Purposes.
The purposes of the Company shall be to engage in the HSB-IRI Business and
to engage in any other lawful act, activity or purpose for which LLC's may
be formed under the Connecticut Act, as such business activities may be
determined by the Member(s) from time to time.
2.3. Offices and Statutory Agent .
(a) The principal office of the Company shall be 85 Woodland Street,
Hartford, Connecticut 06102-5010, or such other place inside or
outside the State of Connecticut as the Members may designate from
time to time.
(b) The statutory agent for service of process within the State of
Connecticut is IRI Management Services, L.L.C. and doing business at
85 Woodland Street, Hartford, Connecticut 06102-5010.
2.4 Term.
The existence of IRI Management Services, L.L.C. will continue until
dissolved and terminated in accordance with Section 6.5 of this Agreement.
ARTICLE III
RIGHTS AND DUTIES OF THE MEMBERS AND CONDUCT OF THE BUSINESS OF THE COMPANY
3.1. Members.
The names, business addresses, Capital Contributions and Percentage
Interests of the Initial Members of the Company are set forth on Schedule I
attached hereto. Additional Members may be admitted as provided for herein
and Schedule I will be amended when other Members are admitted from time to
time to show the name, residence or business address, Capital Contribution
and Percentage Interest of the additional Member(s) and any agreed upon
changes in Percentage Interests.
3.2. Management of the Company.
(a) Except as otherwise provided herein, management of the Company shall
be conducted by a Board of Managers (collectively, "the Board" and
individually, a "Manager") which will be responsible for all the
business and affairs of the
Company. Members acting as Managers shall do so in their capacity as
Members and each Member-Manager shall be an agent of the Company. The
power to act for or bind the Company shall be vested exclusively in
the Board. The Board of Managers may delegate its authorities and
responsibilities for management of the business affairs of the Company
to third parties, but such delegation shall not relieve the Board of
any of its obligations under this Agreement. With respect to the
HSB-IRI Business, the Members expressly delegate to HSB those
authorities and responsibilities set forth in the Operating Agreement.
Except as otherwise provided in this Agreement or in the Related
Agreements, no Member shall have any authority to act for, or to
assume any obligations or responsibilities on behalf of, any other
Member.
(b) Subject to obtaining any necessary approvals hereunder, the Board
shall have the power and authority to execute and deliver contracts,
instruments, certificates, filings, notices or other documents on
behalf of the Company, including any document required to be filed
pursuant to the Connecticut Act. Except as otherwise required by
applicable law, any such document shall require the signature of only
one Manager.
(c) The number of Managers on the Board of Managers shall be seven (7).
Until another Member is admitted, the Board of Managers will be
comprised as follows: four (4) Managers will be designated by ERC
(each an "ERC Designated Manager") and three (3) Managers will be
designated by HSB (each an "HSB Designated Manager"). All Managers
shall serve at the pleasure of the Member which designated them. The
Managers designated by the Initial Members are listed on Schedule II
which shall be amended upon the admission of another Member and/or
designation of different Managers. All ERC Designated Managers shall
be employees of ERC or one or more of its Affiliates, including IRI,
and all HSB Designated Managers shall be employees of HSB or one of
its Affiliates. The number of Managers may be increased or decreased
from time to time by an amendment to this Agreement provided that the
relative proportion of ERC and HSB Designated Managers remains
constant, until such time that any new Members are admitted to the
Company. The number of Managers shall never be less than three (3).
Except as otherwise provided herein, decisions of the Board shall be
made by an affirmative vote of not less than a majority of the
Managers.
(d) Any Manager shall continue to serve in such capacity until the Member
appointing such Manager shall have notified the other Members in
writing of his replacement. In the event of the death or resignation
of a Manager, the Member who appointed that Manager shall elect a
successor within thirty (30) days.
(e) A Member may, by written notice to the other Members, designate a
person to serve as an Alternate for a Manager designated by such
Member, and each such Alternate shall be entitled to, in the absence
of the Manager for whom he has been
designated as an Alternate, to attend meetings, to have such
Alternate's presence counted for purposes of establishing a quorum and
to vote on behalf of the Manager for whom he is acting as Alternate at
any meeting of the Board of Managers.
3.3. Member Meetings.
The first annual Member meeting shall be held on February ___, 1998.
Thereafter the annual meeting of the Members shall be held on the last
working Monday in April of each year provided such day is not a legal
holiday. When such day is a legal holiday, the meeting shall be held on the
first working day following such holiday. At such annual meeting, the
Members shall elect Managers to succeed those whose terms expire or to fill
any vacancies and shall transact any other business that may properly come
before the meeting. Special meetings of the Members may be called for any
purpose at any time by any Member or by the Board. All Meetings shall be
held at the registered office of the Company or at such other place within
or without the State of Connecticut as shall be determined by the Members.
Meetings may be held by conference telephone or other means of
communication by means of which all participants can hear each other.
Participation in such meeting in such manner shall constitute attendance
and presence in person at the meeting of the person or persons so
participating.
A Member who is designated (at the prior meeting) the Secretary for each
meeting shall provide notice of the meeting to the Members, stating the
place, day and hour of the meeting, and in case of a special meeting, the
purpose(s) for which the meeting is called. The notice shall be mailed to
each Member of record at its address as it appears on the records of the
Company not less than ten days nor more than fifty days before the day of
the meeting.
At any meeting of the Members, the presence, in person or by proxy, of
persons entitled to vote a majority of the voting interest of the Company
shall constitute a quorum of the Members for all purposes, unless or except
the presence of Members holding a higher aggregate Percentage Interest is
required by this Agreement. If there are not enough Members present at a
meeting in person or by proxy to constitute a quorum, the holders of a
Majority in Interest of the Members present may adjourn the meeting to a
specified date not longer than thirty (30) days after the adjournment. An
additional notice regarding the rescheduled meeting shall be sent to all
Members. If a quorum is present at the rescheduled meeting, the Members may
transact any business which was to be transacted at the adjourned meeting.
At each meeting, the appointed Secretary shall furnish a complete list of
the Members present at the meeting in person or by proxy and their
respective Percentage Interest in the Company.
At each meeting of the Members, every Member shall be entitled to vote in
person or by a written proxy delivered to the Secretary of said meeting and
signed by such Member or by its duly authorized attorney and designating a
Member or Members of the Company as
such proxy. A written proxy shall be valid for three years unless the
person executing it specifies a different length of time.
Any action required or permitted to be taken at a meeting of the Members
may be taken without a meeting if each of the Members consent in writing to
such action.
3.4. Board Meetings.
The first meeting of the Board shall be held at the registered office of
the Company within thirty (30) days after the first Member meeting. The
Board may hold subsequent meetings and may have an office and keep the
books of the Company at the registered office of the Company or in such
place or places within or without the State of Connecticut (unless and
except as otherwise provided by the Connecticut Act) as the Managers may
determine. Meetings may be held by conference telephone or other means of
communication by means of which all participants can hear each other.
Participation in such meeting in such manner shall constitute attendance
and presence in person at the meeting of the person or persons so
participating.
The regular meetings of the Board shall be held quarter-annually, one after
the first Member meeting and the remaining three held on the last working
Monday of the months of April, July and October or as determined by
resolution of the Board.
The Board may hold special meetings whenever requested by one-third of the
Managers. No notice shall be required for any regular meeting of the Board.
The Board member appointed by the Board as Secretary shall give notice of
each special meeting by mailing the same at least five (5) days before the
meeting or by facsimile notice at least three (3) days before the meeting
to each Manager. Unless otherwise indicated in the notice, any and all
business to be performed by the Board pursuant to this Agreement may be
transacted at any special or regular Board meeting; provided however, that
if at least one Manager designated by each Member is not present at such
meeting, only such business as set forth in the notice for such meeting may
be considered and voted upon. A majority of the full Board as then
presently existing shall constitute a quorum for the transaction of
business, but if at any meeting of the Board there is less than a quorum
present, a majority of those present may adjourn the meeting and reschedule
the meeting for a date when a quorum is present.
Each Manager may bring one or more other advisors to any meeting, provided
that such advisors shall not have the right to vote on any matter brought
before the Board of Managers; and provided further, that the Managers shall
have the right to call executive sessions of the Board and to exclude any
person not a Manager from such executive session.
Any action required or permitted to be taken at a meeting of the Board of
Managers may be taken without a meeting if each of the Managers consent in
writing to such action.
3.5. Executive Committee and Other Committees.
The Board of Managers, by resolution adopted by a majority of the Board,
may designate three or more Managers (at least one of which must be a
Manager designated by HSB) to constitute an Executive Committee. The
Executive Committee shall have the powers and authority of the Board as
stated in the resolution; provided, however, such committee shall not do
any act not authorized by this Agreement to be done by the Board or not
otherwise delegated to the Board by the Members. The Executive Committee
shall serve at the pleasure of the Board and shall keep minutes of its
meetings and report the same to the Board.
The Board may, by resolution adopted by a majority of the Board, appoint
permanent or temporary committees and assign such duties and delegate such
powers to said committees as the Board deems necessary and proper and as
consistent with this Agreement, provided that no such committee shall have
any authority to make any determination, or designate any person to make
any determination, in each case, regarding any of the matters set forth in
Section 3.10 hereof without the approval of the Members in accordance with
such Section 3.10. HSB shall be entitled to designate at least one member
on each such committee.
3.6. Underwriting Committee and Claim Committee
The Board of Managers shall appoint an Underwriting Committee and a Claim
Committee.
(a) The Underwriting Committee shall be comprised of two standing members,
one of which shall be an employee of ERC designated by ERC and the
other shall be an employee of HSB designated by HSB. The initial
members of the Underwriting Committee are identified on Schedule II.
The standing members may designate one or more additional individuals
to serve as members on the committee as they may from time to time
deem useful in carrying out their assigned duties. The powers and
duties of the Underwriting Committee shall be to develop and recommend
for Member approval, underwriting guidelines, rules and practices for
the conduct of the HSB-IRI Business, including the appropriate
methodology for allocating written premium between property and boiler
and machinery coverages, and to exercise such other powers and
authority as the Board of Managers may determine and specify in
writing from time to time hereafter.
(b) The Claim Committee shall be comprised of two standing members, one of
which shall be an employee of ERC designated by ERC and the other
shall be an employee of HSB designated by HSB. The initial members of
the Claim Committee are identified on Schedule II. The standing
members may designate one or more additional individuals to serve as
members on the committee as they may from time to time deem useful in
carrying out their assigned duties. The
powers and duties of the Claim Committee shall be to develop claims
handling guidelines, rules and practices for the conduct of the
HSB-IRI Business, including the allocation of losses between property
and boiler and machinery coverages (consistent with Exhibit A to the
ERC Reinsurance Agreement), and to exercise such other powers and
authority as the Board of Managers may determine and specify in
writing from time to time hereafter.
3.7 Committee Governance.
Unless otherwise specified in the writing designating the committee, a
majority of the members of such committee may elect its Chair, fix its
rules of procedures, fix the time and place of meetings and specify what
notice of meetings, if any, shall be given. Written records of the
proceedings of any committee shall be maintained and furnished to the Board
of Managers. Any action required or permitted to be taken at any committee
meeting may be taken without a meeting if each of the members of such
committee consent in writing to such action.
3.8 No Compensation to Managers and Committee Members
The Managers and other committee members shall receive no compensation from
the Company for performing their services as Managers and committee
members. Each Member shall be solely responsible for the payment of
salaries, benefits, retirement allowances and travel and lodging expenses
for all Managers appointed by it.
3.9 Board Actions.
Subject to the provisions of this Agreement and the Operating Agreement,
the President and the other officers of the Company shall have the power,
acting individually or jointly, to represent and bind the Company in all
matters, in accordance with the scope of their respective duties, except
that the following actions or types of transactions shall not be taken or
consummated without the affirmative vote, approval or consent of at least a
majority of Managers on the Board:
(a) decisions regarding any capital expenditure or capital project in
excess of Five Hundred Thousand Dollars ($500,000);
(b) decisions regarding borrowing, finance leases, or the creation of
security interests, liens or mortgages in or on any property or assets
of the Company, in amounts that exceed Five Hundred Thousand Dollars
($500,000);
(c) decisions regarding any loan, advance or giving credit in amounts that
exceed Five Hundred Thousand Dollars ($500,000);
(d) decisions regarding the disposition of assets having either a book or
market value of more than Five Hundred Thousand Dollars ($500,000);
(e) material decisions regarding the initiation, defense, conduct or
settlement of litigations, arbitrations or other disputes involving
amounts in excess of Five Hundred Thousand Dollars ($500,000);
(f) entering into, making any material amendment to or terminating any
material contract or transaction;
(g) selection of independent auditors;
(h) acquiring, purchasing or subscribing for, or selling or otherwise
disposing of, any shares, debentures, mortgages or securities in any
company or any other entity;
(i) establishing any new branch, office or other permanent establishment
or forming any subsidiary company or entity of the Company;
(j) any other strategic issue or material decision that at least three (3)
Managers determine in good faith should require approval or other
determinations by the Board.
3.10 Member Actions.
The following matters in particular shall be determined by the unanimous
affirmative vote, approval or consent of the Members:
(a) any amendment to this Agreement or to the Articles of Organization of
the Company;
(b) the issuance of any additional Interests or, in connection with the
transfer/assignment of an Interest, the admission of any additional or
substitute Members and the terms and conditions of, and time for, such
admissions as well as the amount of the Capital Contribution of the
additional Member(s);
(c) authorizing a Member or a non-member Manager to do any act that
contravenes this Agreement or any amendment to this Agreement;
(d) any merger or consolidation of or involving the Company;
(e) any sale, exchange, lease, conveyance or other transfer or disposition
of all, or substantially all, of the assets of the Company;
(f) a change in name of the Company;
(g) engaging in a business other than as provided for in this Agreement or
as originally determined by the Initial Member;
(h) adoption of underwriting guidelines rules and practice, including the
appropriate methodology for allocating written premium between
property and boiler and machinery coverages; and
(i) approval of any annual budget, strategic plan or business plan for the
Company and any material changes thereto.
The following matters in particular shall be determined by the affirmative
vote, approval or consent of at least Two-Thirds in Interest of the Member;
or if the number of Members at the time a matter is to be voted on is less
than three, by the unanimous affirmative vote, approval or consent of the
Members:
(a) appointment or removal of the President and Chief Executive Officer
(b) creation of executive compensation and employee benefit programs
(c) payment of distributions to the Members (except distributions in
connection with the Related Agreements, routine year-end distributions
as provided herein and distributions in connection with the
dissolution and winding up of the Company);
(d) the withdrawal of a Member;
(e) the assignment of any of the property of the Company in trust for the
benefit of creditors, or the making or filing, or acquiescence in
making or filing by any other person, of a petition or other action
requesting the reorganization or liquidation of the Company under the
bankruptcy laws; and
(f) decisions regarding any capital expenditure or capital project in
excess of One Million Dollars ($1,000,000);
(g) decisions regarding borrowing, finance leases, or the creation of
security interests, liens or mortgages in or on any property or assets
of the Company, in amounts that exceed One Million Dollars
($1,000,000);
(h) decisions regarding any loan, advance or giving credit in amounts that
exceed One Million Dollars ($1,000,000);
(i) decisions regarding the disposition of assets having either a book or
market value of more than One Million Dollars ($1,000,000);
(j) material decisions regarding the initiation, defense, conduct or
settlement of litigations, arbitrations or other disputes involving
amounts in excess of One Million Dollars ($1,000,000);
(k) decisions concerning the allocation of revenues and expenses
attributable to any fee for service business of IRI not treated as an
offset from HSB's reimbursement obligation under paragraph 6.5 of the
Operating Agreement.
(l) entering into or amending any written contract, or consummating any
other transaction, with any Member or any Affiliate of any Member, or
in connection with which any Member or any Affiliate of any member has
a direct or indirect financial interest, other than the Related
Agreements;
(m) any other matter that is subject to the agreement, consent or approval
of the Members hereunder.
3.11 Membership of Board of Directors. Underwriting Committee and Claim
Committee of IRI
For as long as HSB and ERC (and/or their Affiliates) remain the only
Members of the Company and the only members of IRI, the same members as
serve on the Board of Managers of the Company shall serve as the members of
the Board of Directors of IRI and the same members that serve on any
committee of the Board of Managers shall serve as the members of the
committees of the Board of Directors of IRI having comparable duties and
authorizations.
3.12 President and Chief Executive Officer
From time to time as appropriate, the Members shall elect a President and
Chief Executive Officer of the Company who shall serve as such until the
earlier of his death or resignation or his removal in accordance with the
terms of this Agreement. The initial President and Chief Executive Officer
shall be Michael L. Downs. The President and Chief Executive Officer shall
have the responsibility for managing the day-to-day business operations and
affairs of the Company and supervising its other officers, subject to the
direction, supervision and control of the Board. In general, the President
shall have such other powers and perform such other duties as usually
pertain to the office of the President, and as from time to time may be
assigned to him by the Board, subject to the provisions of Sections 3.9 and
3.10 and the terms and conditions of the Operating Agreement.
The President and Chief Executive Officer of the Company shall also serve
as the President and Chief Executive Officer of IRI.
3.13 Conduct of the Business of the Company.
The Initial Members agree to cause the HSB-IRI Business to be conducted in
accordance with the underwriting guidelines, rules and practice approved by
the Members in accordance with Section 3.10 hereof and the Related
Agreements, as may be amended from time to time hereafter.
(a) If at some future date, one or both of the Initial Members desire to
integrate, combine, or incorporate the HSB-IRI Business, or any
portion thereof, with blended products (e.g. property insurance
combined with one or more other coverages, such as casualty or workers
compensation, or with financial products) the Initial Members agree to
preserve the rights and opportunities to which HSB is entitled with
respect to the HSB IRI Business under the Operating Agreement and the
Reinsurance Agreements in any such blended product business
activities.
(b) In the event that substantial and materially adverse developments
threaten to frustrate the commercial viability of the HSB-IRI Business
as structured, ERC and HSB agree to initiate discussions leading to
modification of this Agreement and the Related Agreements. Any such
modifications shall preserve, to the greatest extent possible, the
rights, obligations and opportunities to which the parties are
entitled under this Agreement and the Related Agreements.
ARTICLE IV
FINANCING; CAPITAL ACCOUNTS AND DISTRIBUTIONS
4.1. Capital Contributions.
The Initial Members have contributed to the Company the property and cash
set forth in Schedule I hereto. Persons or entities hereafter admitted as
Members of the Company shall make such contributions of cash (or promissory
obligations), property or services to the Company as shall be determined by
the Members, acting unanimously, at the time of each such admission. Except
as otherwise agreed by all Members, the Initial Members and any other
Member shall have no obligation to make any capital contributions beyond
their initial capital contribution to the Company.
4.2. Future Financing of the Company.
The Company may require additional funds for capital expenditures or
working capital requirements in the future and any such additional funding
shall be obtained from any of the following sources as the Members shall
unanimously agree: (a) cash reserves of the Company; (b) loans from banks
or other financial institutions; (c) additional Capital Contributions made
to the Company by the Members in proportion to their Percentage Interests
in amounts to be determined by the Members; (d) loans made to the Company
by Members and/or related companies of the Members; or (e) any other
funding source agreed upon by the Members.
4.3. Capital Accounts.
(a) A single, separate capital account shall be maintained for each
Member. Each Member's capital account shall be credited with the
amount of money and the fair
market value of property (net of any liabilities secured by such
contributed property that the Company assumes or takes subject to)
contributed by that Member to the Company; the amount of any Company
liabilities assumed by such Member (other than in connection with a
distribution of Company property) and such Member's distributive share
of Company profits (including tax exempt income) as determined by the
Member's Percentage Interest. Each Member's capital account shall be
debited with the amount of money and the fair market value of property
(net of any liabilities that such Member assumes or takes subject to)
distributed to such Member; the amount of any liabilities of such
Member assumed by the Company (other than in connection with a
contribution); and such Member's distributive share of Company losses
(including items that may be neither deducted nor capitalized for
federal income tax purposes) as determined by the Member's Percentage
Interest.
(b) The capital accounts shall be maintained and adjusted in accordance
with the Internal Revenue Code, Section 704(b) and (c) and the
Regulations (1.704-1(b)). In the event the Members or the Board
determine that it is prudent to modify the manner in which the capital
accounts or any debits or credits thereto are computed in order to
comply with such laws and regulations, the Members or the Board may
make such modification, provided that it is not likely to have a
material effect on the amounts distributed to any Member upon
dissolution as provided herein.
(c) Any Member, including any substitute Member, who shall receive an
Interest (or whose Interest shall be increased) by means of a transfer
to it of all or a part of the Interest of another Member, shall have a
capital account that reflects the capital account associated with the
transferred Interest.
4.4 Expenses of the Company.
All of the Company expenses shall be billed directly to and paid by the
Company. The Company is specifically authorized to make reimbursements to
any Member that provides goods, materials or services used for or by the
Company provided such are authorized in advance in writing or are paid
pursuant to a written agreement approved by the Members. In no event shall
any amount charged to the Company as a reimbursable expense by any Member
exceed the amount that the Company would be required to pay to independent
parties for comparable goods, materials or services.
4.5. Distributions.
Distributions of cash or other assets of the Company shall be made at such
times and in such amounts as the Members may determine, except that
distributions shall be routinely made at each year-end unless the Members
determine it would not be prudent to do so. Distributions shall be made to
(and profits and losses shall be allocated among) Members pro rata in
accordance with their respective Percentage Interests.
ARTICLE V
TAX AND ACCOUNTING MATTERS; BOOKS AND RECORDS
5.1 Tax Matters.
(a) The Board will designate a Member-Manager who will act as the "tax
matters partner" within the meaning of Section 6231 of the Internal
Revenue Code. The tax matters partner shall promptly advise each
Member and the Board of any audit proceeding proposed to be conducted
with respect to the Company.
(b) It is the intention of the Initial Members and shall be the intention
of all subsequently admitted Members that the Company shall be taxed
as a "partnership" for federal and state income tax purposes. All
provisions of this Agreement are to be construed so as to preserve
that tax status. The Members will take all reasonable actions,
including the amendment to this Agreement and the execution of other
documents, as may be required in order for the Company to qualify for
and receive "partnership" treatment for federal and state income tax
purposes.
(c) All items of Company income, gain, loss, deduction, credit or the like
shall be allocated among the Members in accordance with their
respective Percentage Interest as set forth in Schedule I.
(d) Each of the Members shall execute or cause to be executed from time to
time all other instruments, certificates, notices and documents, and
shall do or cause to be done all such filing, recording, publishing
and other acts, in each case, as may be necessary or appropriate from
time to time to comply with all applicable requirements for the
formation and/or operation and, when appropriate, termination of a
limited liability company in the State of Connecticut and all other
jurisdictions where the Company shall desire to conduct its business.
5.2 Books and Records.
The Company shall maintain or cause to be maintained separate, full and
accurate books and records of the Company, and the Members or any
authorized representatives of the members will have the right to inspect,
examine and copy the same, and to meet with employees of the Company
responsible for preparing the same, at reasonable times during business
hours and upon reasonable notice.
5.3 Reports to Members.
The Members Committee shall provide or shall cause to be provided to, each
Member such financial reports and statement in such form and with such
frequency as such Member may reasonably request. The fiscal year of the
Company shall be a calendar
year. The books and records of the Company shall be maintained in
accordance with generally accepted accounting principles and the Internal
Revenue Code and Regulations.
ARTICLE VI
TRANSFERS OF INTERESTS; BUY-OUT RIGHTS; WITHDRAWAL OF
MEMBERS; DISSOLUTION
6.1 Transfers of Company Interests.
No Member may sell, assign, pledge or otherwise transfer or encumber
(collectively "transfer") all or any part of its Interest in the Company,
and no transferee of all or any part of the Interest of a Member shall be
admitted as a substitute Member, without having obtained the prior written
consent of at least Two-Thirds in Interest of the non-transferring Members,
or in the event that there are less than three members, the consent of the
non-transferring Member. In no event shall a transfer of a Member's
Interest include an assignment or transfer of the right to participate in
the management and affairs of the Company or to become or exercise any
rights of a Member. Until the assignee of a Member's Interest becomes a
Member upon the consent of Members as described above, the assignor
continues to be a Member and have all the powers attendant to membership
provided herein. The Members shall amend Schedule I hereto from time to
time to reflect transfers made in accordance herewith. Any purported
transfer in violation of this Section shall be null and void and shall not
be recognized by the Company.
6.2 Buy-Out Rights.
(a) For a period of 180 days following the effective date of a Change in
Control of HSB, ERC shall have the right to purchase HSB's Member
Interest in the Company at a price equal to X times Y (the "Buy-Out
Price") where:
X = the total Pre-Tax Earnings (as defined herein) earned by HSB for
the four calendar quarters immediately preceding the calendar quarter
within which the Announcement Date occurs; and
Y = closing price of HSB Group, Inc. common stock on the day preceding
the Announcement Date divided by the aggregate net income per share
for the previous four quarters; provided that in no event shall Y be
less than 10 or more than 15.
"Pre-Tax Earnings" for the purpose of computing the Buy-Out Price
shall be the sum of :
(i) the net amount of ceding commission earned by HSB after performing
the calculation under Paragraph 7.3 of the Operating Agreement, less
Operating Costs as defined in the Operating Agreement;
(ii) the underwriting income of HSB ( which for purposes of this
formula will not be less than zero) on a GAAP basis earned by HSB
under the Reinsurance Agreements, after giving effect to any Outward
Reinsurance ceded in accordance with Paragraph 4.2 of the Operating
Agreement; and
(iii) an allocable portion of HSB's investment income attributable to
the cash held by IRI in connection with (i) and (ii).
(b) In order to exercise such right, ERC must deliver written notice
relating thereto to HSB within the 180 day period following the Change
in Control to HSB, and within thirty (30) days of receiving such
notice, HSB shall send a notice to ERC setting forth the Buy-Out
Price. Within fifteen (15) days of receiving such notice of the
Buy-Out Price, ERC shall send a notice to HSB stating that it has
either decided to (i) purchase HSB's Member Interest at the Buy-Out
Price (a "Buy-out Acceptance Notice") or (ii) not purchase HSB's
Member Interest. In the event that ERC fails to give such notice
within such fifteen (15) day period, ERC shall be deemed to have
elected not to purchase HSB's Member Interest.
(c) A purchase and sale of HSB's Member Interest pursuant to this Section
6.2, shall take place at the office of the Company on such date within
thirty (30) days of the date of delivery of the Buyout Acceptance
Notice as specified by ERC (subject to extension if required to obtain
any regulatory approvals and to permit the expiration of any
applicable statutory waiting periods).
(d) ERC may assign its right to purchase HSB's Member Interests pursuant
to this Section 6.2 to any of its Affiliates.
(e) On the closing date of any purchase of HSB's Member Interest pursuant
to this Section 6.2, the Operating Agreement shall be considered
terminated without any further action required on the part of the
parties thereto to effect such termination.
6.3 Withdrawal of Members.
No Member shall have the right to withdraw from the Company except with the
consent of two-thirds in Interest of all other Members, or in the event
that there are less than three Members at the time of such proposed
withdrawal, with the consent of the remaining Member, and upon such terms
and conditions as may be specifically agreed upon between such other
Members and the withdrawing Member. The withdrawing Member shall be
entitled to receive any distribution which the Member was entitled to
receive prior to the withdrawal. Unless otherwise agreed to by the
remaining Members, the
withdrawing Member shall not be entitled to payment for the Member's
Interest in the Company and, beginning on the date of withdrawal, the
withdrawing Member shall no longer be a Member of the Company.
6.4 Return of Capital.
No Member shall have any liability for the return of any Member's Capital
Contribution which Capital Contribution shall be payable solely from the
assets of the Company at the absolute discretion of the Members.
6.5. Dissolution.
Subject to the provisions of Section 6.6 of this Agreement, the Company
shall be dissolved and its affairs wound up and terminated upon the first
to occur of the following:
(a) the determination of all the Members to dissolve the Company;
(b) the insolvency of a Member or any other event causing a dissolution of
the Company under Section 34-180 of the Connecticut Act; or
(c) the occurrence of any event that makes it unlawful for the business of
the Company to be carried on or for the Members to carry it on as a
limited liability company.
6.6. Continuation of the Company.
Notwithstanding the provisions of Section 6.5(b) herein, the Company shall
not be dissolved if within ninety (90) days after the occurrence of an
event described in Section 6.5(b), the business of the Company is continued
by the agreement of all the remaining Members.
ARTICLE VII
DISPUTE RESOLUTION
7.1. Negotiation between Executives.
(a) The Members shall attempt in good faith to resolve any dispute arising
out of or relating to this Agreement promptly by negotiations between
executives who have authority to settle the controversy. Any Member
may give the other Members written notice of any dispute not resolved
in the normal course of business. Within 20 days after delivery of
said notice, executives of the Members shall meet at a mutually
acceptable time and place, and thereafter as often as they reasonably
deem necessary, to exchange relevant information and to attempt to
resolve the dispute. If the matter has not been resolved within 60
days of the disputing
Member's notice, or if the Members fail to meet within 20 days, any
Member may initiate mediation of the controversy or claim as provided
hereinafter.
(b) If a negotiator executive intends to be accompanied at a meeting by an
attorney, the other negotiator executive shall be given at least three
working days' notice of such intention and may also be accompanied by
an attorney. All negotiations pursuant to this clause are confidential
and shall be treated as compromise and settlement negotiations for
purposes of the Federal Rules of Evidence and state rules of evidence.
7.2 Mediation.
If the dispute has not been resolved by negotiation as provided above, the
parties shall endeavor to settle the dispute by submitting it to the Center
for Public Resources (CPR) Institute for Dispute Resolution, New York, New
York for mediation under the then current CPR Model Procedure for Mediation
of Business Disputes. The neutral third party will be selected from the CPR
Panel of Neutrals. If the parties encounter difficulty in agreeing on a
neutral, they will seek the assistance of CPR in the selection process.
ARTICLE VIII
MISCELLANEOUS
8.1 Limitation of Liability.
The debts, obligations and liabilities of the Company, whether arising in
contract, tort or otherwise shall be solely the debts, obligations and
liabilities of the Company and no Member of the Company shall be obligated
personally for any such debt, obligation or liability of the Company solely
by reason of being a Member.
8.2. Standard of Care and Indemnification of Members or non-Member Managers.
(a) No Member or member of the Board of Managers, or any committee there
of shall have any personal liability whatsoever to the Company or any
other Member on account of such Member's or Person's status thereof or
by reason of such Member's or Person's acts or omissions in connection
with the conduct of the business of the Company; provided, however,
that nothing contained herein shall protect any Member or member of
the Board of Managers, or any committee thereof, against any liability
to the Company or the Members to which such Member or non-Member
Manager would otherwise be subject by reason of: (i) any act or
omission of such Member or Person that involves actual fraud or
willful misconduct or (ii) any transaction from which such Member or
Person derived improper personal benefit.
(b) The Company shall indemnify and hold harmless each Member and
non-Member Manager and the affiliates of any Member (each an
"Indemnified Party") against any and all losses, claims, damages,
expenses and liabilities (including, but not limited to, any
investigation, attorneys' fees, expert witness fees and other
reasonable expenses incurred in connection with, and any amounts paid
in settlement of, any action, suits, proceedings, or claims) of any
kind or nature whatsoever that such Indemnified Party may at any time
become subject to or liable for by reason of the formation, operation
or termination of the Company or the Indemnified Party's actions in
connection with the conduct of the affairs of the Company (including,
without limitation, indemnification against negligence, gross
negligence or breach of duty); provided, however, that no Indemnified
Party shall be entitled to indemnification if and to the extent that
the liability otherwise to be indemnified for results from (i) any act
or omission of such Indemnified Party that involves actual fraud or
willful misconduct or (ii) any transaction from which such Indemnified
Party derives improper personal benefit. The indemnities provided
hereunder shall survive termination of the Company and this Agreement.
Each Indemnified Party shall have a claim against the property and
assets of the Company for payment of any indemnity amounts due
hereunder, which amounts shall be paid or properly reserved for prior
to the making of distributions by the Company to Members. Costs and
expenses that are subject to indemnification hereunder shall, at the
request of the Indemnified Party, be advanced by the Company to or on
behalf of such Indemnified Party prior to final resolution of a
matter, so long as such Indemnified Party shall have provided the
Company with a written undertaking to reimburse the Company for all
amounts so advanced if it is ultimately determined that the
Indemnified Party is not entitled to indemnification hereunder.
(c) The contract rights to indemnification and to the advancement of
expenses conferred in this Section 8.2 shall not be exclusive of any
other right that any party may have or hereafter acquire under any
statute, agreement, vote of the Members or otherwise.
(d) The Company may maintain insurance, at its expense, to protect itself
and any Member or non-Member Manager of the Company, or another
limited liability company, corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss,
whether or not the Company would have the power to indemnify such
party against such expense, liability or loss under the Connecticut
Act.
(e) The Company may, to the extent authorized from time to time by the
Members, grant rights to indemnification and to advancement of
expenses to any employee or agent of the Company to the fullest extent
of the provisions of this Section with respect to the indemnification
and advancement of expenses of Members and non-Member Managers of the
Company.
8.3 Notices.
Notices required or permitted by this Agreement shall be in writing and
shall be delivered personally (by courier or otherwise), sent by facsimile
transmission (confirmation received) or sent by certified, registered or
express mail, postage prepaid. Any such notice will be deemed given when so
delivered personally or sent by facsimile transmission or, if mailed, three
days after the date of deposit into the United States mails. All notices or
communications under this agreement shall be addressed as follows or to
such other address as any party may designate by notice given in accordance
with this agreement to the other parties.
If to ERC:
Employers Reinsurance Corporation
5200 Metcalf
Overland Park, Kansas 62201
Attention: General Counsel
Facsimile No.: (913) 676-5483
If to HSB:
The Hartford Steam Boiler Inspection and Insurance Company
P.O. Box 5024
One State Street
Hartford, CT 06102-5024
Attention: General Counsel
Facsimile No.: (860) 722-1818
If to LLC:
HSB Industrial Risk Insurers L.L.C.
85 Woodland Street
Hartford, CT 06102
Attention: Chief Executive Officer
Facsimile No.: (860) 520-7559
8.4. Amendments.
This Agreement may be amended only by the unanimous written consent of the
Members.
8.5 Execution in Counterparts.
This Agreement may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the
same instrument.
8.6. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Connecticut without giving effect to any choice of law
or conflict of law provision or rule (whether of the State of Connecticut
or any other jurisdiction) that would cause the application of the laws of
any jurisdiction other than the State of Connecticut.
8.7. Headings. The Section headings of this Agreement are for convenience only
and shall not in any way affect the interpretation hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives as of the date first above written.
MEMBER
EMPLOYERS REINSURANCE CORPORATION
------------------------------------
By: John M. Connelly
Title: Senior Vice President,
General Counsel and Secretary
MEMBER
THE HARTFORD STEAM BOILER
INSPECTION AND INSURANCE COMPANY
------------------------------------
By: Robert C. Walker
Title: Senior Vice President and
General Counsel
Schedule I
Member Name & Address Capital Percentage
Contribution Interest
Employers Reinsurance Corporation IRI Book of Business
5200 Metcalf with a value of $_________
Overland Park, Kansas 66201 $ [cash ]__________________ 90%
IRI trademark license
license to use IMS assets
The Hartford Steam Boiler HSB U.S. Special Risk
Inspection and Insurance Manufacturing Book of
Company Business with a value of
P.O. Box 5024 $ _________________ 10%
One State Street
Hartford, Connecticut 06102-5024 $ [cash] _________________
HSB trademark license
TOTAL: $__________________ 100%
Schedule II
Managers Designated By:
Kaj Ahlmann Employers Reinsurance Corporation
John M. Connelly Employers Reinsurance Corporation
Robert Dellinger Employers Reinsurance Corporation
Hoyt Wood Employers Reinsurance Corporation
Gordon W. Kreh The Hartford Steam Boiler Inspection
and Insurance Company
Saul L. Basch The Hartford Steam Boiler Inspection
and Insurance Company
Michael L. Downs The Hartford Steam Boiler Inspection
and Insurance Company
Members of Underwriting
Committee
Hoyt Wood Employers Reinsurance Corporation
Michael Downs The Hartford Steam Boiler Inspection
and Insurance Company
Members of Claim Committee
John M. Connelly Employers Reinsurance Corporation
Robert C. Walker The Hartford Steam Boiler Inspection
and Insurance Company