EXHIBIT 10.3
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "AGREEMENT") is made and entered into as
of May 5, 2000, by and among FOLKSAMERICA HOLDING COMPANY, INC., a New York
corporation ("FHC"), FOLKSAMERICA REINSURANCE COMPANY, a New York domiciled
insurance company ("FRC," and, together with FHC, "BUYER") and a wholly owned
subsidiary of FHC, RISK CAPITAL REINSURANCE COMPANY, a Nebraska domiciled
reinsurance company ("SELLER"), and Citibank, N.A., as Escrow Agent (the "ESCROW
AGENT"). Certain capitalized terms have the meanings given to them in Annex A
hereto.
W I T N E S S E T H :
WHEREAS, Buyer, FHC, Seller and Risk Capital Holdings, Inc., a
Delaware corporation and the parent of Seller, are parties to an Asset Purchase
Agreement, dated as of January 10, 2000 (the "PURCHASE AGREEMENT");
WHEREAS, pursuant to the Purchase Agreement, on the date hereof (the
"CLOSING DATE") Buyer is purchasing all of the reinsurance operations of Seller;
WHEREAS, this is the Escrow Agreement referred to in the Purchase
Agreement;
WHEREAS, the execution and delivery by the parties hereto of, and
delivery by Seller into escrow of the Deposited Amount under, this Agreement is
a condition to closing under the Purchase Agreement;
NOW, THEREFORE, in consideration of the mutual promises and
agreements set forth in this Agreement, the parties hereto hereby agree as
follows:
1. APPOINTMENT OF ESCROW AGENT. Each of Buyer and Seller hereby
designates and appoints the Escrow Agent as escrow agent, and the Escrow Agent
hereby accepts such appointment, on the terms and subject to the conditions of
this Agreement.
2. DEPOSITED AMOUNT; ESCROWED FUNDS; ESCROW ACCOUNT.
(a) Concurrently with the execution and delivery of this
Agreement, Seller hereby delivers to the Escrow Agent, as custodian, the
Deposited Amount, the receipt of which the Escrow Agent hereby acknowledges. The
securities constituting the Deposited Amount are listed and described on
Schedule 1 hereto. The Deposited Amount constitutes a portion of the purchase
price received by Seller from Buyer under the Purchase Agreement.
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(b) The Escrow Agent shall establish a segregated account (the
"ESCROW ACCOUNT") at its office located at its address set forth in Section 11
in which to hold the Escrowed Funds and any securities in which the Escrowed
Funds may, from time to time, be invested. The Escrow Agent shall keep
appropriate books and records for the Escrow Account, including a list of
securities in which the Escrowed Funds are invested, any interest, dividends or
other distributions on or proceeds from any investment of Escrowed Funds and any
amounts released from the Escrow Account in accordance with Section 6. At the
written request of Buyer or Seller from time to time, the Escrow Agent shall
allow representatives of such party to inspect and make copies of such books and
records upon reasonable notice during normal business hours. In any event,
within 30 days of the end of each calendar quarter, the Escrow Agent shall, upon
request, provide to Buyer and Seller a statement of the list of securities in
which the Escrowed Funds are invested, the amount of any interest, dividends or
other distributions on or proceeds from any investment of Escrowed Funds and any
amounts released from the Escrow Account in accordance with Section 6. Escrowed
Funds shall not be available to, and shall not be used by, the Escrow Agent to
set off any obligations of either Buyer or Seller owing to the Escrow Agent in
any capacity, except as set forth in Sections 8(e) and 8(f).
3. INVESTMENT OF ESCROWED FUNDS.
(a) Except as provided in Section 3(d), all investments and
reinvestments of the Escrowed Funds shall be made exclusively in Permitted
Investments that are mutually selected by Buyer and Seller.
(b) From time to time, Buyer and Seller shall designate an entity
with the appropriate capacity to act as broker (the "BROKER") with respect to
the securities that constitute the Escrowed Funds. Broker will perform such acts
as requested by Buyer and Seller which are customarily performed by securities
brokers. The fees and expenses of Broker shall be borne one-half by Seller and
one-half by Buyer. If at any time or from time to time during the term of this
Agreement, Buyer or Seller determines that the Broker appointed pursuant to the
first sentence of this Section 3(b) should terminate acting in such capacity,
Buyer and Seller agree to cooperate with each other to jointly select and
appoint an entity which is capable of conducting the duties performed by Broker
to replace Broker. Upon any such replacement, all references to Broker in this
Agreement shall be deemed references to such entity. Broker shall not be deemed
the beneficial holder of any securities which may be in its possession as a
result of its activities pursuant to this Section 3(b), and Broker shall hold
any such securities as agent and may only act with respect to such securities
pursuant to the joint written instructions of Buyer and Seller.
(c) Promptly after the Escrow Agent receives written notice from
the issuer thereof (or any representative of such issuer) that any security that
is a component of the Escrowed Funds is to be redeemed or otherwise liquidated
by such issuer, the Escrow Agent
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shall deliver written notice thereof to Buyer and Seller. Promptly after receipt
of such notice, Buyer and Seller shall deliver to the Escrow Agent joint written
instructions as to whether the cash proceeds from any such redemption,
liquidation or maturation are (i) to be delivered to Broker for the purpose of
promptly reinvesting such proceeds or (ii) to be held in the Escrow Account in
the form of cash (which cash may be invested pursuant to the provisions of
Section 3(f)). In the case of clause (i), the Escrow Agent shall promptly
deliver to Broker such proceeds in accordance with such written instructions,
and promptly upon consummation of such reinvestment, Broker shall deliver to the
Escrow Agent the security or securities that Buyer and Seller have elected
to so purchase. In the event that Buyer and Seller do not provide the Escrow
Agent with written instructions pursuant to the provisions of this Section 3(c),
the proceeds from any such maturation, redemption or liquidation shall remain in
the Escrow Account in the form of cash (which cash may be invested pursuant to
the provisions of Section 3(f)).
(d) At any time that there is cash in the Escrow Account, the
Escrow Agent is hereby directed to invest such cash promptly in the Citibank
Money Market Deposit Account (the "CITIBANK MMDA") fund. All references to the
term "cash" in this Agreement shall be deemed to refer to cash as well as any
portion of the Escrowed Funds that are invested in the Citibank MMDA fund.
(e) The Escrow Agent shall have no obligation to invest or
reinvest any cash portion of Escrowed Funds (pursuant to Section 3(d)) if such
funds are deposited or delivered to the Escrow Agent after 11 a.m. (E.S.T.) on
such day of deposit or delivery until the following business day. Requests or
instructions of Buyer and Seller to deliver securities to the Broker, whether
pursuant to Section 3 or Section 6(g), received after 11 a.m. (E.S.T.) by the
Escrow Agent shall be treated as if received on the following business day, and
Escrow Agent will carry out such requests or instructions on such day.
(f) At any time and from time to time, Buyer and Seller may
jointly determine that any security that is a component of the Escrowed Funds is
to be liquidated or reinvested in a replacement security, or that any cash
(whether such cash constitutes investment income or otherwise) that is a
component of the Escrowed Funds is to be invested. Buyer and Seller shall
provide the Escrow Agent with joint written notice of such determination, which
shall identify such security or specify the dollar amount of such cash and
direct the Escrow Agent to deliver such security or dollar amount of such cash
to Broker for the purpose of the liquidation or reinvestment of such security or
the investment of such cash. Promptly upon the receipt of such notice, the
Escrow Agent shall promptly deliver such security or such cash to Broker and
Broker shall promptly effect such reinvestment or liquidation of such security
or investment of such cash, as the case may be. Promptly upon consummation of
such reinvestment, investment or liquidation, as the case may be, Broker shall
deliver to the Escrow Agent the security or securities that Buyer and Seller
have elected
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to so purchase or cash proceeds from such liquidation, as the case may be. Any
cash produced by the operation of this Section 3(f) may be invested pursuant to
the provisions hereof.
(g) In the event that the Escrow Agent receives written notice
from the issuer thereof (or any representative of the issuer) that a security
that is a component of the Escrowed Funds is to be exchanged for a new security,
the Escrow Agent shall promptly notify Buyer and Seller thereof in writing.
Unless otherwise directed in writing by Buyer and Seller (pursuant to the
provisions of Section 3(f)), such new security shall become a component of the
Escrowed Funds upon consummation of such exchange.
(h) The Escrow Agent shall have no responsibility for any
investment losses resulting from the investment, reinvestment or liquidation of
the Escrowed Funds. Any interest or other income received on such investment and
reinvestment of the Escrowed Funds shall become part of the Escrowed Funds.
(i) In the event that any decisions concerning voting, redemption
or other similar matters relating to the securities constituting the Escrowed
Funds are required to be made, the Escrow Agent shall promptly notify Seller
thereof in writing. Upon receipt of such notice, Seller shall instruct the
Escrow Agent in writing with respect to the making of such decision.
(j) Any securities that are delivered to any party pursuant to the
terms of this Agreement shall be accompanied by duly executed instruments of
transfer or assignment, or if such securities are held in book-entry form, other
appropriate action shall be taken by the entity delivering such securities to
effect the valid transfer of the title of such securities to the recipient of
such securities.
4. REPORTS ON PAID LOSSES, ENDING RESERVES AND RESERVE
DEFICIENCY/REDUNDANCY CALCULATION. As soon as practicable (but not later than
ninety (90) days) after the Valuation Date, Buyer shall deliver to Seller and
the Escrow Agent each of the following (it being understood that the Escrow
Agent shall have no duty to solicit the items listed below or verify their
content):
(i) A report of independent public accountants designated in
writing by Buyer (who may also be the independent public accountants of
Seller or Buyer) setting forth the amount of Paid Losses and showing in
reasonable detail the calculation thereof.
(ii) A report by an independent actuary designated in writing by
Buyer (who may also be the independent actuary of Seller or Buyer, but not
an employee of either) setting forth the amount of Ending Reserves and
showing in reasonable detail the calculation thereof.
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(iii) A report of independent public accountants designated in
writing by Buyer (who may also be the independent public accountants of
Seller or Buyer) setting forth the difference of (1) the Beginning
Reserves over (2) the sum of Paid Losses plus Ending Reserves. Such
difference shall be called "RESERVE DEFICIENCY" if it is negative and
"RESERVE Redundancy" if it is zero or positive. The Reserve Deficiency
shall not exceed the Deposited Amount. Such report shall show such
calculation in reasonable detail.
5. DISPUTES.
(a) If at any time within the Objection Period Seller gives an
Objection Notice, Appointed Experts shall be engaged to separately determine the
Reserve Deficiency/Reserve Redundancy, and/or Ending Reserves and confirm the
calculation of Paid Losses. The identity of such Appointed Experts shall be
disclosed to the Escrow Agent by Buyer and Seller in writing, and Buyer and
Seller shall arrange for the Escrow Agent to obtain an incumbency certificate or
other instrument satisfactory to the Escrow Agent for the purpose of verifying
the genuineness of signatures on any written instructions received from the
Appointed Experts. The Appointed Experts shall determine the Reserve
Deficiency/Reserve Redundancy, and/or Ending Reserves and confirm the
calculation of Paid Losses within forty-five (45) days of the date Seller gives
such notice. The determination by an actuary that is an Appointed Expert shall
be conducted (x) using its independent judgment based on prevailing facts,
circumstances and trends, (y) in accordance with generally accepted actuarial
standards and principles, and (z) to the extent not inconsistent with the
foregoing, in a manner and applying a method consistent with the determination
of the Beginning Reserves. It is understood that such actuary shall in no way be
inhibited in the use of its independent judgment. Except as provided in Section
5(c), the Appointed Experts' determinations and confirmations shall be final and
binding on all parties. Fees and expenses of the Appointed Experts shall be paid
equally by Buyer and Seller.
(b) Buyer and Seller agree to cooperate with and use all
commercially reasonable efforts to assist the Appointed Experts, including by
furnishing all information reasonably requested by them, in performing the
services specified hereby, and to negotiate in good faith to resolve the
disputes under Section 5(a).
(c) Seller shall be entitled to dispute Paid Losses the
calculation of which shall have been confirmed by the Appointed Experts only to
the extent that Seller can show Paid Losses shall not have been incurred by
Buyer in its exercise of the reasonable business judgment of a reasonable
reinsurer under similar circumstances without regard to the availability of the
Escrow Funds (it being recognized that Buyer's rights to control payment of
losses by cedents are limited).
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6. RELEASE OF ESCROWED FUNDS. Escrowed Funds shall be released
from the Escrow Account only in accordance with this Section 6.
(a) TAX DISTRIBUTIONS. Within two business days after the end of
each calendar quarter (beginning with December 31, 2000), the Escrow Agent
shall, upon its receipt of a written request from Seller, release from the
Escrow Account and deliver to Seller Escrowed Funds in an amount equal to the
tax that Seller notifies Buyer and the Escrow Agent in writing is actually
payable (after giving effect to Seller's net operating losses) by Seller in
respect of earnings on the Escrowed Funds since the end of the immediately
preceding calendar quarter (or, in the case of the first such calendar quarter,
since the date hereof) (such amounts, collectively, the "TAX DISTRIBUTIONS").
Buyer shall have no right to dispute the amount of taxes so notified by Seller.
(b) BY MUTUAL INSTRUCTIONS. The Escrow Agent shall release
Escrowed Funds from the Escrow Account in accordance with any joint written
instruction of both Buyer and Seller.
(c) INSURANCE ON RESERVE DEFICIENCY. The Escrow Agent shall
release to Seller all of the Escrowed Funds from the Escrow Account upon the
Escrow Agent's receipt of written confirmation and instructions from Seller and
Buyer (which Buyer shall not unreasonably withhold) that Seller has delivered to
Buyer an insurance policy for the benefit of Buyer from an insurance company
(which insurance company shall have a claims paying ability rating from Standard
& Poor's at such time at least as high as Buyer (but no less than "AA-") and a
combined capital and surplus at such time of at least as much as Buyer (but no
less than $500 million)) or other similar arrangement guaranteeing payment to
Buyer on the Settlement Date of the Reserve Deficiency plus interest on the
Reserve Deficiency from the Closing Date to the Settlement Date at the average
rate of return on the Escrow Funds from the date hereof to the date of such
release. Such insurance policy or other similar arrangement shall not detract
from or adversely affect the rights of Buyer or Seller provided for in this
Agreement and shall incorporate the relevant terms of this Agreement, which
shall under the terms of such insurance policy apply to such insurance policy
rather than to the Escrowed Funds.
(d) PAID LOSSES IN EXCESS OF BEGINNING RESERVES.
(i) At the end of the first calendar quarter in which Paid Losses
(calculated with the references to "Valuation Date" in the definition
thereof being to such quarter-end and subject to Section 5(c)) exceed
the Beginning Reserves (such excess, the "EXCESS"), Buyer may give
written notice of the Excess to Seller. Such notice shall be
accompanied by a report of independent public accountants designated by
Buyer (who may also be the independent public accountants of Seller or
Buyer) setting forth the amount of Paid Losses and showing in
reasonable detail the calculation thereof. If at
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any time within thirty (30) days of the receipt of such notice, Seller
gives written notice to Buyer that it disputes the Paid Losses or any
component thereof, Appointed Experts shall be engaged to confirm the
calculation of Paid Losses. The Appointed Experts shall confirm the
calculation of the Paid Losses within forty-five (45) days of the date
Seller gives such notice, and give written notice and instructions to the
Escrow Agent with respect to the amount of the Excess. Except as provided
in Section 5(c), the Appointed Experts' confirmation of the calculation
shall be final and binding on all parties. On the later of (A) the end of
the 30-day period referred to in this Section 6(d)(i) and (B) the delivery
by the Appointed Experts of their confirmation of the calculation of the
Excess, the Escrow Agent shall, upon its receipt of written instructions
from the Appointed Experts, release from the Escrow Account and deliver to
Buyer Escrowed Funds in an amount equal to any Excess.
(ii) Following the release of Escrowed Funds pursuant to Section
6(d)(i), from time to time, Buyer shall give written notice to Seller of
Paid Losses since the last such release to the end of any subsequent
calendar quarter ("ADDITIONAL PAID LOSSES"), accompanied by a reasonably
detailed report of Buyer's calculation of such Additional Paid Losses, at
the end of such calendar quarter. Upon the receipt of such report and
written instructions of Buyer, the Escrow Agent shall release from the
Escrow Account and deliver to Buyer Escrowed Funds in an amount equal to
such Additional Paid Losses.
(iii) The release of Escrowed Funds pursuant to Section 6(d) shall
not affect the right of Seller to dispute the amount of Paid Losses
included in any Reserve Deficiency or Reserve Redundancy submitted by or
on behalf of Buyer.
(e) RESERVE DEFICIENCY/REDUNDANCY. On the Settlement Date:
(i) if there is a Reserve Deficiency, (x) the Escrow Agent shall,
upon its receipt of joint written instructions of Buyer and Seller or
written instructions from the Appointed Experts, release from the Escrow
Account and deliver to Buyer the Buyer Portion in accordance with the
written instructions received by it and (y) the Escrow Agent shall, upon
its receipt of joint written instructions of Buyer and Seller or written
instructions from the Appointed Experts, release from the Escrow Account
and deliver to Seller the Seller Portion in accordance with the written
instructions received by it.
(ii) if there is a Reserve Redundancy, (x) the Escrow Agent shall,
upon its receipt of joint written instructions of Buyer and Seller or
written instructions from the Appointed Experts, release from the Escrow
Account and deliver to Seller all of the Escrowed Funds and (y) Buyer
shall deliver to Seller cash equal to the amount of Reserve Redundancy,
plus interest on such amount at the average rate of return on the Escrowed
Funds from the Closing Date to the Settlement Date.
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(f) INDEMNIFICATION. Upon the final determination of any Covered
Claim, the Escrow Agent shall, upon receipt of written instructions from Buyer
and Seller, release from the Escrow Account and deliver to Buyer Escrowed Funds
in an amount up to the amount payable to Buyer by Seller in respect of such
claim. If the amount so payable to Buyer by Seller in respect of the Covered
Claim exceeds the amount of Escrowed Funds, Seller shall deliver to Buyer cash
equal to the lesser of (A) the amount of such excess and (B) the total amount of
Tax Distributions released from the Escrow Account to Seller pursuant to Section
6(a), plus an amount of interest on such Tax Distributions from the release date
at a rate equal to the weighted average return on the Deposited Amount to the
Settlement Date, less any amounts paid to Buyer pursuant to clause (iii) of the
definition of Buyer's Portion. In such event, Buyer shall cooperate in any of
Seller's efforts to seek a refund of or tax benefit with respect to income taxes
paid or tax benefits used by Seller in respect of earnings on Escrowed Funds.
(g) PAYMENTS. All payments shall be made by wire transfer of
immediately available funds to the account specified by such payee; PROVIDED,
that the payee receiving such immediately available funds may (i) extend in
writing any payment period provided for in Section 6 in order to avoid any loss
of income or principal from a premature liquidation of any of the securities
constituting the Escrowed Funds and/or (ii) opt in writing to receive securities
from the Escrow Account rather than immediately available funds. If securities
are to be delivered to any payee, then appropriate delivery instructions shall
be delivered to the Escrow Agent by such payee not less than three business days
before such payment is made. In the event that it is necessary for the Escrow
Agent to liquidate securities in the Escrow Account in order to make a payment
pursuant to this Section 6, the Escrow Agent shall notify Buyer and Seller
thereof in writing. Promptly upon receipt of such written notice, Buyer and
Seller shall mutually select the requisite amount of securities to be liquidated
and notify the Escrow Agent of the identity of such securities in writing. Upon
receipt of such notice, the Escrow Agent shall deliver such security or
securities to Broker, and Broker shall liquidate such security or securities and
promptly deliver the cash proceeds therefrom to the Escrow Agent. Any cash
resulting from such liquidation which exceeds the amount of the payment to be
made pursuant to this Section 6(g) may be invested pursuant to the provisions of
Section 3(f). All wire transfers of immediately available funds shall be made to
the accounts specified by Buyer and Seller in Annex B hereto or to such other
accounts specified by Buyer or Seller, as the case may be, in accordance with
Section 11. For the avoidance of doubt, unless otherwise indicated in writing,
all releases of Escrowed Funds will be made in accordance with the wire
instructions appearing on Annex B.
(h) The Escrow Agent, in making a release of Escrowed Funds
pursuant to this Section 6, shall be entitled (and shall incur no liability in
relying upon) to rely on the written instructions given to it either jointly by
Buyer and Seller or the Appointed Experts.
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Neither Buyer nor Seller shall direct a release of the Escrowed Funds in a
manner inconsistent with the terms of this Agreement.
7. REPORTS; INSPECTION RIGHTS.
(a) Within 45 days of the end of each of the first three fiscal
quarters of Buyer of each year prior to the Valuation Date, Buyer shall deliver
to Seller a report setting forth (i) the Paid Losses (for such purposes, the
references to Valuation Date and financial statements in the definition thereof
being to such quarter-end and interim financial statements, respectively), (ii)
the Reserves as of such quarter-end, (iii) the calculation of each of the
foregoing in reasonable detail (including in the case of Paid Losses, a list of
all individual losses, if available from the ceding company), and (iv) such
other related matters as Seller reasonably requests, to the extent reasonably
available.
(b) Within 90 days of the end of each fiscal year of Buyer prior
to the Valuation Date, Buyer shall deliver to Seller a report setting forth (i)
the Paid Losses (for such purposes, the references to Valuation Date and
financial statements in the definition thereof being to such year-end and
year-end financial statements), (ii) the Reserves as of such year-end, (iii) the
difference of (1) the Beginning Reserves over (2) the sum of Paid Losses
(calculated with the references to "Valuation Date" in the definition thereof
being to such year-end) plus the Reserves as of such year-end, (iv) the
calculation of each of the foregoing in reasonable detail (including in the case
of Paid Losses, a list of all individual losses, if available from the ceding
company) and (v) such other related matters as Seller reasonably requests, to
the extent reasonably available.
(c) From time to time as Buyer and Seller may reasonably agree
(but not less frequently than once per year) upon reasonable notice during
normal business hours, representatives of Seller (including its independent
public accountants and actuary) shall be permitted to inspect Buyer's books and
records involving the CPIS Business, including those relating to settlement and
payment of claims and work papers of Buyer's independent public accountants and
actuary, and, at Seller's expense, to make copies of them, and to discuss them
with Buyer's representatives (including its independent public accountants and
actuaries).
(d) The parties agree that Seller's receipt of reports or
information pursuant to this Section 7 shall not affect Seller's rights under
Section 5 or 6.
(e) Buyer agrees that, without the prior approval of Seller (which
approval is not to be unreasonably withheld or unreasonably delayed), it will
not commute any reinsurance, retrocession or similar contracts, treaties,
agreements or arrangements covering the CPIS Business (it being understood that,
with respect to commutations of up to $500,000, Seller's failure to respond
within 30 Business Days to a request by Buyer for such approval shall be deemed
an unreasonable delay). Buyer shall not otherwise take any action which is
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other than in the ordinary course of business of Buyer with respect to the
Reserves. This Section 7(e) shall not limit a ceding company's ability to settle
claims in the ordinary course of business.
8. RESPONSIBILITY OF ESCROW AGENT.
(a) In the event of any ambiguity or uncertainty hereunder or in
any notice, instruction or other communication received by the Escrow Agent
hereunder, the Escrow Agent may, in its reasonable discretion, refrain from
taking any action, unless the Escrow Agent receives written instructions, signed
by both Buyer and Seller, which eliminates such ambiguity or uncertainty.
(b) The Escrow Agent shall be entitled to retain counsel both to
advise it and in connection with any court action, and such counsel's reasonable
attorneys' fees shall be borne by Buyer and Seller, jointly and severally,
pursuant to Section 9. The Escrow Agent shall be entitled to act in reliance
upon the advice of counsel in all matters pertaining to this Agreement, and
shall not be liable for any action taken, suffered or omitted by it in
accordance with such advice and in the absence of gross negligence or willful
misconduct by the Escrow Agent.
(c) In the event of any dispute between or conflicting claims by
or between Buyer and Seller and/or any other person or entity with respect to
any Escrowed Funds, the Escrow Agent shall be entitled, in its reasonable
discretion, to refuse to comply with any and all claims, demands or instructions
with respect to such Escrowed Funds so long as such dispute or conflict shall
continue, and the Escrow Agent shall not be or become liable in any way to Buyer
or Seller for failure or refusal to comply with such conflicting claims, demands
or instructions. The Escrow Agent shall be entitled to refuse to act until, in
its reasonable discretion, either (i) such conflicting or adverse claims or
demands shall have been determined by a final order, judgment or decree of a
court of competent jurisdiction, which order, judgment or decree is not subject
to appeal, or settled by agreement between the conflicting parties as evidenced
in a writing reasonably satisfactory to the Escrow Agent or (ii) the Escrow
Agent shall have received security or an indemnity reasonably satisfactory to it
sufficient to hold it harmless from and against any and all losses which it may
incur by reason of so acting. Any court order, judgment or decree shall be
accompanied by a legal opinion by counsel for the presenting party, reasonably
satisfactory to the Escrow Agent, to the effect that said order, judgment or
decree represents a final adjudication of the rights of the parties by a court
of competent jurisdiction, and that the time for appeal from such order,
judgment or decree has expired without an appeal having been perfected. The
Escrow Agent shall act on such court order and legal opinions without further
question. The Escrow Agent may, in addition, elect, in its reasonable
discretion, to commence an interpleader action or seek other judicial relief or
orders as it may deem, in its reasonable discretion, necessary. The costs and
expenses (including reasonable attorneys' fees and expenses) incurred in
connection with such
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proceeding shall be borne equally by, and shall be deemed a joint and several
obligation of, Buyer and Seller.
(d) If at any time the Escrow Agent is served with any judicial or
administrative order, judgment, decree, writ or other form of judicial or
administrative process which in any way affects the Escrowed Funds (including
but not limited to orders of attachment or garnishment or other forms of levies
or injunctions or stays relating to the transfer of the Escrowed Funds), the
Escrow Agent shall promptly provide written notice thereof to Buyer and Seller
and the Escrow Agent is authorized to comply therewith in any manner it or legal
counsel of its own choosing deems appropriate; and if the Escrow Agent complies
with any such judicial or administrative order, judgment, decree, writ or other
form of judicial or administrative process, the Escrow Agent shall not be liable
to any of the parties hereto or to any other person or entity even though such
order, judgment, decree, writ or process may be subsequently modified or vacated
or otherwise determined to have been without legal force or effect.
(e) If any fees under Section 10 hereof or obligations under
Section 9 hereof (which indemnification obligations are (i) determined by a
final order, judgment or decree of a court of competent jurisdiction, which
order, judgment or decree is not subject to appeal or (ii) settled by written
agreement among the parties) owed to Escrow Agent or its counsel hereunder are
not promptly paid when due, Escrow Agent may, upon 10 business days' written
notice to both Buyer and Seller, reimburse itself therefor from the Escrowed
Funds and may sell, convey or otherwise dispose of any Escrowed Funds for such
purpose. The Escrow Agent may in its sole discretion withhold from any
distribution of Escrowed Funds an amount of Escrowed Funds it believes would,
upon sale or liquidation, produce proceeds equal to any unpaid amounts to which
Escrow Agent is entitled hereunder.
(f) As security for the rights of the Escrow Agent under this
Agreement, Buyer and Seller, individually and collectively, hereby pledge,
assign and grant to Escrow Agent a continuing security interest in, and a lien
on, the Escrowed Funds. The security interest of Escrow Agent shall at all times
be valid, perfected and enforceable by Escrow Agent against Buyer and Seller and
all third parties in accordance with the terms of this Escrow Agreement.
(g) The duties and obligations of the Escrow Agent hereunder shall
be governed solely by the provisions of this Agreement, and the Escrow Agent
shall have no duties other than the duties expressly imposed herein and shall
not be required to take any action other than in accordance with the terms
hereof. The Escrow Agent shall not be bound by any notice of, or demand with
respect to, any waiver, modification, amendment, termination, cancellation,
rescission or supersession of this Agreement, unless in writing and signed by
Buyer, Seller and the Escrow Agent. The Escrow Agent shall not be required to
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expend or risk any of its own funds or otherwise incur any financial or other
liability in the performance of any of its duties hereunder.
(h) The Escrow Agent shall not be liable for any action taken or
omitted or for any loss or injury resulting from its actions or its performance
or lack of performance of its duties hereunder in the absence of gross
negligence or willful misconduct on its part. In no event shall the Escrow Agent
be liable (i) for acting in accordance with or relying upon any mutual written
instruction, notice, demand, certificate or document jointly from Buyer and
Seller or entities acting on their behalf, (ii) for any indirect, consequential,
punitive or special damages, regardless of the form of action and whether or not
any such damages were foreseeable or contemplated, (iii) for the acts or
omissions of its nominees, correspondents, designees, agents, subagents or
subcustodians, (iv) for the investment or reinvestment of any cash held by it
hereunder, in each case in good faith, in accordance with the terms hereof,
including without limitation any liability for any delays (not resulting from
its gross negligence or willful misconduct) in the investment or reinvestment of
the Escrowed Funds, or any loss of interest incident to any such delays, or (v)
for an amount in excess of the value of the Escrowed Funds, valued as of the
date of deposit, but only to the extent of direct money damages.
(i) The Escrow Agent shall not incur any liability for not
performing any act or fulfilling any duty, obligation or responsibility
hereunder by reason of any occurrence beyond the control of the Escrow Agent
(including but not limited to any act or provision of any present or future law
or regulation or governmental authority, any act of God or war, or the
unavailability of the Federal Reserve Bank wire or facsimile or other wire or
communication facility).
(j) The Escrow Agent shall be entitled to rely upon any order,
judgment, certification, demand, notice, instrument or other writing delivered
to it hereunder without being required to determine the authenticity or the
correctness of any fact stated therein or the propriety or validity or the
service thereof. The Escrow Agent may act in reliance upon any instrument or
signature believed by it to be genuine and may assume that any person purporting
to give receipt or advice to make any statement or execute any document in
connection with the provisions hereof has been duly authorized to do so by the
party giving such receipt or advice.
(k) The Escrow Agent shall not be responsible in any respect for
the form, execution, validity, value or genuineness of documents or securities
deposited hereunder, or for any description therein, or for the identity,
authority or rights of persons executing or delivering or purporting to execute
or deliver any such document, security or endorsement. The Escrow Agent shall
not be called upon to advise any party as to the wisdom in selling or retaining
or taking or refraining from any action with respect to any securities or other
property deposited hereunder.
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(l) The Escrow Agent does not have any interest in the Escrowed
Funds deposited hereunder but is serving as escrow holder only and having only
possession thereof. Buyer and Seller shall pay or reimburse, jointly and
severally, the Escrow Agent upon request for any transfer taxes and shall divide
the cost of such transfer taxes equally. Seller shall pay all income taxes
relating to the Escrowed Funds incurred in connection herewith (from the
distributions made to it pursuant to Section 6(a)) and Buyer and Seller, jointly
and severally, shall indemnify and hold harmless the Escrow Agent from any
amounts that it is obligated to pay in the way of such taxes. Any payments of
taxable income from this Escrow Account shall be subject to withholding
regulations then in force with respect to United States taxes. Seller will
provide the Escrow Agent with appropriate W-9 forms for tax I.D. number
certifications, or W-8 forms for non-resident alien certifications. This
paragraph shall survive notwithstanding any termination of this Agreement or the
resignation or removal of the Escrow Agent.
(m) The Escrow Agent shall not be under any duty to give the
Escrowed Funds held by it hereunder any greater degree of care than it gives its
own similar property and shall not be required to invest any funds held
hereunder except as directed in this Escrow Agreement. Uninvested funds held
hereunder shall not earn or accrue interest.
9. INDEMNIFICATION OF ESCROW AGENT. Buyer and Seller, jointly and
severally, shall be liable for and shall reimburse and indemnify Escrow Agent
(and any predecessor Escrow Agent) and hold Escrow Agent harmless from and
against any and all claims, losses, actions, liabilities, costs, damages or
expenses (including reasonable attorneys' fees and expenses) (collectively
"LOSSES") arising from or in connection with its administration of this
Agreement, provided, however, that nothing contained herein shall require Escrow
Agent to be indemnified for Losses caused by its own gross negligence or own
willful misconduct. In addition, when the Escrow Agent acts on any information,
instructions, communications, (including, but not limited to, communications
with respect to the delivery of securities or the wire transfer of funds) sent
by telex or facsimile, the Escrow Agent, absent gross negligence, shall not be
responsible or liable in the event such communication is not an authorized or
authentic communication of Buyer and Seller or is not in the form Buyer and
Seller sent or intended to send (whether due to fraud, distortion or otherwise).
Buyer and Seller shall jointly and severally indemnify the Escrow Agent against
any loss, liability, claim or expense (including legal fees and expenses) it may
incur with its acting in accordance with any such communication. This paragraph
shall survive the resignation or termination of this Escrow Agreement or the
removal of the Escrow Agent.
10. FEES OF ESCROW AGENT. Buyer and Seller shall pay the Escrow
Agent a fee of $12,500 per annum, payable upon execution of this Agreement and
thereafter on each anniversary date of this Agreement and Buyer and Seller agree
to reimburse the Escrow Agent for all reasonable expenses, disbursements and
advances incurred or made by the Escrow
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Agent in performance of its duties hereunder (including reasonable attorneys'
fees and expenses). It is understood that the Escrow Agent's fees may be
adjusted from time to time to conform to its then current guidelines. The fees
and expenses of the Escrow Agent (including the cost of any taxes referred to in
Section 8(i) and any indemnification obligations under Section 9) shall be paid
one-half by Buyer and one-half by Seller, but shall be joint and several
obligations of Buyer and Seller.
11. NOTICES AND COMMUNICATIONS. All notices, demands and other
communications hereunder shall be in writing, and shall be deemed to have been
duly given (1) if delivered by hand to a party at the address specified below,
upon delivery to a person authorized to receive mail for such party at such
address, (2) if sent by overnight courier to the address specified below, on the
next business day, (3) if mailed to the address specified below by certified
mail, return receipt requested, postage prepaid, on the fifth business day
following deposit in the mails, or (4) if sent by facsimile, upon receipt of
confirmation by the facsimile machine:
If to Buyer, to:
Folksamerica Holding Company, Inc.
Xxx Xxxxxxx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
Facsimile No.: (000) 000-0000
Attention: Xxxxxx X. Xxxx
with a copy to:
Xxxxxx Xxxxx & Bockius, LLP
000 Xxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Facsimile No: (000) 000-0000
Attention: X. Xxxxxxxx Xxxxxx
If to Seller, to:
Risk Capital Holdings, Inc.
00 Xxxxxxxxx Xxxx
Xxxxxxxxx, Xxxxxxxxxxx 00000
Facsimile No.: (000) 000-0000
Attention: Chief Operating Officer or General Counsel
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with a copy sent contemporaneously to:
Xxxxxx Xxxxxx & Xxxxxxx
00 Xxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Facsimile No.: (000) 000-0000
Attention: Xxxxxxxx Xxxx
If to the Escrow Agent, to:
Citibank, N.A.
Global Agency & Trust Services Department
000 Xxxx Xxxxxx, 0xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
Facsimile No.: (000) 000-0000
Attention: Escrow Administrator
or to such other address as such party shall designate by written notice to the
other parties hereto.
12. TERM; AMENDMENT; ASSIGNMENT. This Agreement shall continue
until the earlier of the date on which (a) all of the Escrowed Funds have been
released from the Escrow Account in accordance with Section 6 or (b) the Escrow
Agent receives a written notice of termination from Buyer and Seller; provided
that, as between Buyer and Seller, Section 6(e)(ii)(y) shall survive the
termination of this Agreement pursuant to the foregoing clause (a). This
Agreement may be amended only by a written instrument signed by all of the
parties hereto and shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
Notwithstanding anything to the contrary in the foregoing, Seller shall be
permitted to assign its right to receive Escrowed Funds in accordance with
Section 6.
13. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original and all of which taken together
shall constitute one and the same instrument. In making proof of this Agreement
it shall be necessary to produce or account for only one such counterpart signed
by or on behalf of the party sought to be charged herewith.
14. SUCCESSOR ESCROW AGENT. (a) Buyer and Seller may remove Escrow
Agent at any time by giving to Escrow Agent thirty (30) calendar days' prior
notice in writing signed by both Buyer and Seller. Escrow Agent may resign at
any time by giving Buyer and Seller thirty (30) calendar days' prior written
notice thereof. Such resignation shall be effective upon appointment of a
successor escrow agent pursuant to this Section 14.
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(b) Within thirty (30) calendar days after giving the foregoing
notice of removal to Escrow Agent or receiving the foregoing notice of
resignation from Escrow Agent, Buyer and Seller shall jointly agree on and
appoint a successor Escrow Agent, and provide written notice of such to the
resigning Escrow Agent. If a successor Escrow Agent has not accepted such
appointment by the end of such 30-day period, Escrow Agent may apply to a court
of competent jurisdiction for the appointment of a successor Escrow Agent or for
other appropriate relief. The costs and expenses (including reasonable
attorneys' fees and expenses) incurred by Escrow Agent in connection with such
proceeding shall be paid by, and be deemed a joint and several obligation of,
Buyer and Seller. In the event of any such resignation or removal, the Escrow
Agent shall have no further obligation with respect to the Escrowed Funds.
15. ENTIRE AGREEMENT. This Agreement and, in the case of Buyer and
Seller but not the Escrow Agent, together with the Purchase Agreement (including
the attachments thereto) and the Transfer and Assumption Agreement (as defined
in the Purchase Agreement), contains the entire agreement and understanding of
the parties with respect to the transactions contemplated hereby. No prior
agreement, either written or oral, shall be construed to change, amend, alter,
repeal or invalidate this Agreement.
16. REPRESENTATIONS OF BUYER AND SELLER. Each of Buyer and Seller
hereby represents and warrants (a) that this Agreement has been duly authorized,
executed and delivered on its behalf and constitutes its legal, valid and
binding obligation and (b) that the execution, delivery and performance of this
Agreement by it does not and will not violate any applicable law or regulation.
17. GOVERNING LAW. This Agreement shall be interpreted, construed,
enforced and administered in accordance with the internal substantive laws (and
not the choice of law rules) of the State of New York. Each of Buyer and Seller
hereby submits to the personal jurisdiction of, and each agrees that all
proceedings relating hereto shall be brought in, courts located within the City
and State of New York. Each of Buyer and Seller hereby waives the right to trial
by jury and to assert counterclaims in any such proceedings. To the extent that
in any jurisdiction that Buyer or Seller may be entitled to claim, for itself or
its assets, immunity from suit, execution, attachment (whether before or after
judgment) or other legal process, each hereby irrevocably agrees not to claim,
and hereby waives, such immunity. Each of Buyer and Seller waives personal
service of process and consents to service of process by certified or registered
mail, return receipt requested, directed to it at the address last specified for
notices hereunder, and such service shall be deemed completed ten (10) calendar
days after the same is so mailed. Any court order shall be accompanied by a
legal opinion by counsel for the presenting party satisfactory to the Escrow
Agent to the effect that said opinion is final and non-appealeable. The Escrow
Agent shall act on such court order and legal opinions without further question.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
BUYER:
FOLKSAMERICA HOLDING COMPANY, INC.
By: /s/ Xxxxxx X. Xxxxxx, Xx.
----------------------------------
Name: Xxxxxx X. Xxxxxx, Xx.
Title: Senior Vice President, General
Counsel and Secretary
FOLKSAMERICA REINSURANCE COMPANY
By: /s/ Xxxxxx X. Xxxxxx, Xx.
----------------------------------
Name: Xxxxxx X. Xxxxxx, Xx.
Title: Senior Vice President, General
Counsel and Secretary
SELLER:
RISK CAPITAL REINSURANCE COMPANY
By: /s/ Xxxxx X. Xxxxxxxx
----------------------------------
Name: Xxxxx X. Xxxxxxxx
Title: Vice President
ESCROW AGENT:
CITIBANK, N.A.
By: /s/ Xxxxxxx Xxxxx Day
----------------------------------
Name: Xxxxxxx Xxxxx Day
Title: Assistant Vice President
Schedule 1 to the Escrow Agreement
SECURITIES DELIVERED TO ESCROW AGENT ON CLOSING DATE
Annex A to the Escrow Agreement
DEFINITIONS
"APPOINTED EXPERTS" means (i) an independent actuary and/or (ii) a
firm of independent public accountants, which shall be one of the "Big Five"
firms of public accountants, each of which shall be satisfactory to Buyer and
Seller.
"BALANCE SHEET" means the Closing Date Balance Sheet of Seller
delivered to Buyer pursuant to Section 2.04(a) of the Purchase Agreement.
"BEGINNING DATE" means the Closing Date.
"BEGINNING RESERVES" means the Reserves as set forth on the
Balance Sheet.
"BUYER PORTION" means , subject to the last sentence of this
paragraph, all or a part of the (i) the Deposited Amount multiplied by a
fraction of which (x) the numerator is the Reserve Deficiency and (y) the
denominator is the Deposited Amount, plus (ii) the same fractional proportion of
interest, dividends and other distributions earned on the Deposited Amount to
the Settlement Date, plus (iii) to the extent that Buyer has not been fully
compensated for principal and interest on the Reserve Deficiency as calculated
pursuant to (i) and (ii) above, an amount equal to any Tax Distributions the
Escrow Agent has released to Seller for Tax Distributions including an amount of
interest on such Tax Distributions from the release date at a rate equal to the
average rate of return on the Deposited Amount to the Settlement Date. The final
amount paid to Buyer shall be reduced by amounts paid to Buyer pursuant to
Section 6(d) and the amount of interest in the Escrow Account shall be equitably
allocated to Buyer with the recognition that Buyer may have received all or a
part of Buyer Portion under clause (i) above prior to the Settlement Date. If
clause (iii) is applicable, Buyer shall cooperate in any of Seller's efforts to
seek a refund of or tax benefit with respect to income taxes paid or tax
benefits used by Seller in respect of earnings on Escrowed Funds.
It is the intention of the above calculations that Buyer receive all
or a part of the Deposited Amount equal to the Reserve Deficiency and that Buyer
(and Seller, if applicable) receive on the Settlement Date an equitable
apportionment of interest on the amount of the Deposited Amount (taking into
consideration any distributions from the Escrowed Funds) to which they are
entitled pursuant to this Agreement.
"COVERED CLAIM" means a claim for indemnification pursuant to
Section 9.03 of the Purchase Agreement (a) for a breach of a representation or
warranty contained in Section 3.06 or Section 3.17 of the Purchase Agreement or,
to the extent related to CPIS or the CPIS Business, any other section of the
Purchase Agreement, subject to (i) in each case (other than Section 3.17 of the
Purchase Agreement to the extent relating to Retrocession Agreements covering
the CPIS Business, the one-year survival period contained in Section 9.01 of the
Purchase Agreement, (ii) in each case (other than Section 3.17 of the
Purchase Agreement), subject to the $500,000 deductible and $5,000,000 cap
contained in Section 9.03 of the Purchase Agreement, and (iii) in each case,
subject to the other restrictions on indemnification contained in Section
9.03 of the Purchase Agreement or (b) with respect to Excluded Liabilities
arising out of or relating to CPIS referred to in Section 3.21(b) of the
Purchase Agreement.
"CPIS BUSINESS" means all business produced by Capital Protection
Insurance Services, LLC for the account of Seller.
"DEPOSITED AMOUNT" means securities, valued at their fair market
value as of the Closing Date, in an amount equal to $20,000,000.
"ENDING RESERVES" means the Reserves as of the Valuation Date. The
determination of Ending Reserves shall be (i) conducted by the independent
actuary making such determination (x) using its independent judgment based on
prevailing facts, circumstances and trends, (y) in accordance with generally
accepted actuarial standards and principles and (z) to the extent not
inconsistent with the foregoing, in a manner and applying a method consistent
with the determination of the Beginning Reserves and (ii) consistent with
Buyer's audited financial statements for the fiscal year that includes the
Valuation Date. It is understood that such actuary shall in no way be inhibited
in the use of its independent judgment.
"ESCROWED FUNDS" means the Deposited Amount, together with any
interest, dividends or other distributions on or proceeds from any investment
thereof under the Escrow Agreement, less the aggregate amount of Tax
Distributions.
"GAAP" means United States generally accepted accounting principles
applied on a basis consistent with those applied in preparing the Balance Sheet.
"OBJECTION NOTICE" means a written notice to Buyer and the Escrow
Agent that Seller disputes the Reserve Deficiency/Reserve Redundancy, Paid
Losses, Ending Reserves and/or any component of any of the foregoing, and
specifying in reasonable detail Seller's reasons for such dispute.
"OBJECTION PERIOD" means the period of sixty (60) days following
Seller's receipt of the latest of the reports referred to in Section 4.
"PAID LOSSES" means losses and loss adjustment expenses of the CPIS
Business actually paid by or on behalf of FRC from (but excluding) the Beginning
Date to (and including) the Valuation Date, less (x) any amounts actually
received as of the Valuation Date in respect of such losses and loss adjustment
expenses pursuant to insurance, reinsurance, retrocession or similar contracts,
treaties, agreements or arrangements and (y) salvage and subrogation actually
received as of the Valuation Date in respect of such losses and loss adjustment
expenses; PROVIDED that the portion of unallocated loss adjustment expenses
included in such loss adjustment expenses shall not exceed the amount of
unallocated loss
B-2
adjustment expenses included in the Beginning Reserves except as the result of
the recharacterization as unallocated loss adjustment expenses, pursuant to a
change prescribed by the National Association of Insurance Commissioners or the
New York Insurance Department, of an item that at the date hereof would
constitute allocated loss adjustment expenses. For purposes of this provision,
unallocated loss adjustment expenses shall mean internal expenses for
compensation of FRC's officers and employees and related overhead expenses. The
calculation of Paid Losses shall be (x) made in accordance with GAAP and (y)
consistent with Buyer's financial statements for the fiscal period ending with
the Valuation Date.
"PERMITTED INVESTMENTS" means investment grade securities issued,
fully guaranteed or fully insured by any State of the United States or any
political subdivision thereof (including "revenue" bonds) and money market funds
substantially all of whose assets consist of such securities, which shall not
(A) mature later than the Settlement Date or (B) be subject to any federal or
state income tax applicable to Seller.
"RESERVES" means, as of any date, (1) the reserve for unpaid losses,
including the case reserve and reserve for incurred but not reported (IBNR)
losses (including the reserve for unearned premium deficiency), plus (2) the
reserve for loss adjustment expenses; PROVIDED that the portion of unallocated
loss adjustment expenses included in such reserve shall not exceed the amount of
unallocated loss adjustment expenses included in the Beginning Reserves, plus
(3) unearned premium reserves, minus (4) anticipated salvage and subrogation,
minus (5) collectible reinsurance recoverables, in each case, on such date with
respect to the CPIS Business.
"RESERVE DEFICIENCY" has the meaning given to such term in
Section 4(iii).
"RESERVE REDUNDANCY" has the meaning given to such term in
Section 4(iii).
"SELLER PORTION" means all of the Escrowed Funds less Buyer
Portion.
"SETTLEMENT DATE" means (a) if Seller does not give an Objection
Notice within the Objection Period, the second business day following the end of
the Objection Period, and (b) if Seller gives an Objection Notice within the
Objection Period, the second business day following the later of (x) the
determinations and confirmations by the Appointed Experts pursuant to Section
5(a) or (y) the resolution of any dispute regarding Paid Losses.
"VALUATION DATE" means the fifth anniversary of the Closing Date.
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