DEAN M BLAKE
Attorney-at-Law
15124 Dickens Street
Sherman Oaks, California 91403
(818) 995-7260
[old address]
March 2, 1990
Xxxxxxx Xxxxxxxxx Life Insurance Company
#### Xxxxxxxx Blvd.
Santa Monica, California
Att: Mr. Xxx Xxxxxx, V-P
Re: Proposed Treaty with Xxxxxxxx Xxxxxx Life Ins. Co.
Dear Mr. Xxxxxx,
I have received an unnumbered copy of a specimen proposed 90% Quota Share treaty with the above captioned carrier for review and critique.
The form and style of the treaty is not the usual in that it begins with recitations of contract on the cover page and is interrupted by the table of contents. Article twelve (XII) in the table of contents is mislabeled in the text on page eight (8) as Article thirteen (XIII). This should be corrected.
Where the table of contents does not provide the page numbers, there is the chance of lost, misplaced and substituted pages, excepting that there is a repeated reference to "Agreement No." in the attachments. In this instance I would like to see the first two pages numbered, and table of contents refer to page number. Ideally a footnote would identify the pages using the document number on each page.
Article I, Scope of Agreement encompasses ideas which are not at issue in California as the courts have ruled within the last six months that a policyholder does not have a direct right of cause of action against a reinsurer. The case law has rendered the third sentence of the first paragraph and second paragraph, subsection (2) moot. The clause is overly broad in the second paragraph, subsection (1) in that it can be read to include a blanket exemption for 'damages' or participation in damages found elsewhere in the document regarding liability for extra-contractual damages, etc. This title is usually reserved under a more familiar term of Business Reinsured, but as that has been removed to the Exhibit 'A'. Someone has been creative and used this opening space for covering a matter which is now only of historical significance. This needs to be corrected and a proper reference to the business covered substituted, or at least a reference to the Exhibit 'A' placed here since the 'scope of agreement' is about the subject matter of the agreement and the extent and type of policies covered. As written, it is a term of limitation without first identifying what is being limited!Signatures on Exhibit page
Article II, paragraph (c), second sentence on page 4 is overly broad in that it could encompass liability for lawsuit where the original sale is contested and claim denied. This also is probably an attempt to exclude a potential problem that has been solved by statute in California with 1989 legislation forbidding an insurer from rescinding an entire group where they fail to report a single disabled individual. The group would not qualify under the underwriting rules because it has a disabled individual at the time of sale ('business reported but not reinsured'). Under the change in law failure to fully disclose can NOT be enforced without proper wording in the policy application, which is still restricted to 'knowledge and belief' (unenforceable). The law would enforce the policy, but the reinsurer would identify the group as unqualified. This clause needs to be modified to take into account the above circumstance.Where the group is otherwise qualified by the reinsurer, and an individual has misrepresented his eligibility, the reinsurer will cover the group and will follow the Company in rescinding the individual's coverage.Re-evaluation shall not result in a rate increase for cases prior to re-evaluation. Prospective cases received by the underwriter prior to re-evaluation, if will be underwritten and accepted by the reinsurer, subject to a ninty (90) day suspension of accepting new prospective cases while a substitute underwriter is secured for the block.Excluded industries list to be attached
Article II, subparagraph (e) weds you to Western Insurance Resources. I recommend that a paragraph be added, after your arrangements are fixed with WIR, to substitute a mutually agreed upon underwriter under circumstances where WIR becomes unavailable through no fault of the parties or in the event of wrongdoing by WIR. This Treaty effectively ties its continuance to what will amount to be a personal services contract for service which, quit frankly, are not unique, which is the prerequisite for a 'personal services' contract. The Reinsurer should not unreasonably withhold its approval for the hiring of a reliable underwriter to continue the business in the event of a falling out with WIR.The reinsurer shall not unreasonably withhold its approval for the contracting of an underwriter in the event of a termination of agreement with WIR.
Article III, paragraph five is non-standard in that it seems to limit its pro-rata share of liability to judgments for damages in equity, to the exclusion of judgments for damages at law. This distinction should not be made as you intend to cover cities and municipalities which are NOT covered by ERISA which is governed by equitable principles, i.e. the penalties are at law. It is not normal that the division of liability be proportionately shared as in the Treaty, but it is in your favor as the usual is to share liability according to fault! Since the insurer sees the claim first, and the treaty charges you in paragraph two to "settle or defend" you usually have a greater than 10% fault since the error starts from the first. This is to your advantage.
Accrued interest is excluded under paragraph three, and under ERISA, no accrued interest is permitted, at least as of 1989. There is a matter of Court rules regarding interest on a judgment. These would accrue in the event of appeal.
Paragraph 5, line 9, the word "damamages" should read damages.
Article VI works to your disadvantage in the event the Reinsurer is a bankrupt. You would be committed to paying premiums even though American United were unable to pay back. Recognize that this clause is intended to avoid your using premiums as leverage against a disputed claim or delay in payment. The cross-referenced article IX fails to take into account the Reinsurer's bankruptcy. These should be modified.Insolvency of the reinsurer clause.
Article XI Term and Cancellation should state the beginning time of day for the treaty as 12:01 a.m. PST. New Year's Eve parties inevitably result in drunk drivers and deaths and injury which tend to crossover treaty periods and cause confusion regarding liability for what can be substantial claims.Realign to a April 1, 12:01 PST with Northwestern Life contract changed.
The term of this treaty is unusual. I suggest that the first year be a short year and the subsequent years full 12 month terms to be renewed for twelve month terms, contemplated to be continuous. This will permit annual statements to coincide with accounting periods and the upper layer with Northwestern Life. Make the NWL Treaty effective April 1
Throughout the document I ask that you verify that you are able to comply with the time periods for reporting, notice and other changes as these are shorter than for the underlying layer of reinsurance. The layers should be matched as the shorter time periods for the upper layer dictate that the work be completed for the lower layer. I think all the periods for reporting and notice are short and you may have difficulty with compliance.
There is clearly a conflict regarding punitive damages. The reinsurer can not both insist in participation with the decision making at the 50% of trigger level and not be liable for the consequences of their actions. If they want to participate in solving the problem, they must participate in the risk of making an error. Understand that the risk is probably directly proportional to the number of non-ERISA cases placed on the books.
The treaty uses 'following language' with regard to the policies covered, but makes no mention of following legally mandated changes in policy coverage. It would appear from the proposed language that a copy of the policy must be attached to the treaty as an exhibit.
I am concerned that Article XI regarding "apply to losses incurred and/or paid" can be misread. I don't like 'and/or' language. Should this read "apply to losses incurred or incurred and paid?",following the contracts issued by the company.
The agreement does not contain a governing law clause and therefor the location of the last act to place this contract into effect will govern. I would prefer a California location expressly stated so familiar law will govern.
There should be a multiple signing integration clause for the signing sheets for the various parties. As written, it would appear that the agreement does not correspond in form to the stated idea that the other reinsurers are writing the business directly to Assured as a portfolio of reinsurers. If there are other reinsurers, the current form would indicate that American United is a front for others to whom the risk is passed under a retrocession. This presents a risk which should be taken into consideration. There is the matter of admitted reinsurers. Understand that under current law, the company's reinsurance treaties must be filed with the California Department of Insurance.
There need to be changes to correct clauses, add clauses, bring the treaty into concordance with the direct/indirect nature of the obligations, and match clauses between layers. We have discussed in greater detail items in paragraphs numbered 13, 14 and 15. I have numbered the paragraphs so that we may speak about these other items in greater detail. Shall I proposed clauses to correct the deficiencies or just do the work that an intermediary would do by re-doing the treaties properly?
Very truly yours,
[signed}
Dean M. Blake
cc: file