Exhibit 10(ii)
OPERATING AGREEMENT
FOR
HSB-IRI PROPERTY INSURANCE BUSINESS
by and among
EMPLOYERS REINSURANCE CORPORATION
HSB INDUSTRIAL RISK INSURERS L.L.C.
INDUSTRIAL RISK INSURERS
THE HARTFORD STEAM BOILER
INSPECTION AND INSURANCE COMPANY
Effective as of January 1, 1998
TABLE OF CONTENTS
Page No.
ARTICLE I - DEFINITIONS
1.1 Definitions..........................................................2
ARTICLE II - GUIDELINES FOR OPERATING THE HSB-IRI BUSINESS
2.1 Operating Guidelines.................................................2
2.1.1 Trade Name...........................................................2
2.1.2 Business Strategy....................................................2
2.1.3 Operation and Management.............................................2
2.1.4 Insurance Policies Issued by HSB.....................................2
2.1.5 Reinsurance Contracts Issued by IRI..................................3
2.1.6 Apportionment of Insurance Risk......................................3
2.1.7 Loss Adjustment Expenses.............................................3
ARTICLE III - APPOINTMENT OF OPERATING MANAGER
3.1 HSB Licensed Status..................................................4
3.2 Appointment of HSB as Operating Manager..............................4
3.3 Performance of Duties................................................4
3.4 Access to Facilities, Property, Books and Records...................4
3.5 License to use IRI Trade Name, Trademarks and Service Marks..........4
3.6 License to use HSB Trade Name, Trademarks and Service Marks..........4
ARTICLE IV -UNDERWRITING, OUTWARD REINSURANCE, LOSS ADJUSTMENT AND ENGINEERING
RESPONSIBILITIES OF THE OPERATING MANAGER
4.1 Underwriting Responsibilities........................................5
4.2 Outward Reinsurance..................................................5
4.3 Loss Adjustment......................................................5
4.4 Engineering and Inspection Services..................................6
4.5 Disputes Involving Losses............................................6
ARTICLE V - ACCOUNTING AND REPORTING RESPONSIBILITIES
OF THE OPERATING MANAGER
5.1 Premium Collection..................................................6
5.2 Books and Records...................................................6
5.3 Periodic Reporting..................................................6
5.4 Statutory Accounting Principles.....................................7
5.5 Filings in Connection with the HSB-IRI BUSINESS. ...................7
ARTICLE VI - IRI WORKING CAPITAL FUND AND EXPENSE REIMBURSEMENT TO IRI
6.1 IRI Working Capital Fund............................................7
6.2 Funding Level.......................................................7
6.3 Funding of IRI Working Capital Fund Shortfall.......................7
6.4 IRI Claims Fund.....................................................7
6.5 Offsets from Reimbursement Obligation...............................7
6.6 Restructuring and Transitional Expenses. ...........................8
6.7 Reimbursement Payments to IRI.......................................9
6.8 Offset.............................................................10
6.9 Allocation of Investment Earnings..................................10
ARTICLE VII - COMPENSATION TO HSB
7.1 Ceding Commission for Reinsurance Ceded to IRI.....................10
7.2 Ceding Commission on Other Business................................10
7.3 Quarterly Sharing in Savings/Expenses..............................11
7.4 Adjustment to Ceding Commission....................................11
ARTICLE VIII - TERM AND TERMINATION OF AGREEMENT
8.1 Term of Agreement..................................................12
8.2 Termination........................................................12
8.3 Non-Solicitation of Employees......................................13
ARTICLE IX - DISPUTE RESOLUTION
9.1. Negotiation between Executives.....................................13
9.2 Mediation..........................................................13
9.3 Disputes Involving Losses..........................................14
ARTICLE X - MISCELLANEOUS
10.1 Indemnification....................................................14
10.2 Notices............................................................14
10.3 Confidentiality....................................................15
10.4 Invalidity or Unenforceability.....................................15
10.5 Assignablility.....................................................16
10.6 Headings and Exhibits.............................................16
10.7 Execution in Counterparts..........................................16
10.8 Amendments.........................................................16
10.9 Further Assurances.................................................16
10.10 Governing Law......................................................16
EXHIBIT A - Definitions
EXHIBIT B - Reinsurance Agreement between HSB and IRI
EXHIBIT C - Reinsurance Agreement between ERC and HSB
EXHIBIT D - Reinsurance Agreement between HSB and ERC
EXHIBIT E - Guarantee of ERC
EXHIBIT F - 1997 and 1998 Business Plans
OPERATING AGREEMENT
for
HSB-IRI PROPERTY INSURANCE BUSINESS
This Operating Agreement is entered into effective as of January 1,
1998, by and among Employers Reinsurance Corporation (ERC), a Missouri
corporation having a principal place of business at 0000 Xxxxxxx, Xxxxxxxx Xxxx,
Xxxxxx; HSB Industrial Risk Insurers L.L.C. (LLC), a Connecticut limited
liability corporation having a principal place of business at 00 Xxxxxxxx
Xxxxxx, Xxxxxxxx, Xxxxxxxxxxx; Industrial Risk Insurers (IRI), an unincorporated
joint underwriting association having a principal place of business at 00
Xxxxxxxx Xxxxxx, Xxxxxxxx, Xxxxxxxxxxx; and The Hartford Steam Boiler Inspection
and Insurance Company (HSB), a Connecticut corporation having a principal place
of business at Xxx Xxxxx Xxxxxx, Xxxxxxxx, Xxxxxxxxxxx.
WHEREAS, ERC, pursuant to the Asset and Capacity Sale Agreement and through its
subsidiary organization, IRI Management Services L.L.C. (IMS), has acquired,
effective as of January 1, 1998, certain of the tangible and intangible assets
of 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; and
WHEREAS, pursuant to the Asset and Capacity Sale Agreement, efffective January
1, 1998 IRI has been reconstituted with ERC having a 99.5% share and HSB having
a .5% share and ERC and HSB have agreed to reinsure the former members of IRI
for certain liabilities, as more specifically set forth in the Reinsurance
Agreement, in accordance with such shares;
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 have formed LLC by filing Articles of Organization with the
Secretary of State of Connecticut on February 2, 1998 (and as to LLC, this
Agreement takes effect from such date) for the purpose of operating a combined
venture offering property insurance for HPR industrial/manufacturing occupancies
and to which ERC has contributed the IRI book of business and a royalty-free
license to use the assets of IMS, and HSB has contributed its U.S. Special
Risk-Manufacturing book of business and a royalty-free license to use the HSB
trademark/tradename; and
WHEREAS, ERC and IRI desire to appoint HSB, and HSB desires to serve, as
operating manager for the HPR property insurance venture.
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. Capitalized terms used in this Agreement which are not
otherwise defined herein shall have the meanings given to such terms in Exhibit
A.
ARTICLE II
GUIDELINES FOR OPERATING THE HSB-IRI BUSINESS
2.1 Operating Guidelines. ERC and HSB, directly and through their Affiliates,
shall conduct the HSB-IRI BUSINESS in general accordance with Schedule 4.09 of
the Asset and Capacity Sale Agreement and the following:
2.1.1 Trade Name. The HSB-IRI BUSINESS will be conducted under the
trade name " HSB Industrial Risk Insurers" and/or variations thereof.
2.1.2 Business Strategy. Business strategy, products and underwriting
guidelines will be established by the Members of LLC.
2.1.3 Operation and Management. Day-to-day business operations will be
managed by HSB utilizing staff and other resources resident at or made
available to LLC, IRI and HSB. HSB shall have discretion in determining
the type, quantity, and source of services required to support the
HSB-IRI BUSINESS.
2.1.3.1 HSB will be paid the Ceding Commissions specified in
Article VII of this Agreement in connection with policies
issued by HSB pursuant to Paragraph 2.1.4 and reinsurance
assumed by IRI in accordance with Paragraph 2.1.5. Costs of
marketing, underwriting, and servicing the HSB-IRI BUSINESS,
including the reimbursement to IRI provided under Article VI,
except as specifically set forth in this Agreement or as
otherwise agreed to by the parties, shall be paid by HSB, or
deducted from the Ceding Commissions to be paid to HSB.
2.1.3.2 In operation of the HSB-IRI BUSINESS, it is the
general intent of the parties to perform, or to have performed
a) customer relationships, marketing, and underwriting
activities at IRI, and b) engineering and other technical
services at HSB, and c) back office and other business support
services at a combination of IRI, LLC, HSB and ERC.
2.1.4 Insurance Policies Issued by HSB. Insurance policies issued in
the conduct of the HSB-IRI BUSINESS will be issued on either IRI forms
or HSB forms, in either case with HSB (or HSB's subsidiary insurer, The
Boiler Inspection and Insurance Company of Canada (BI&I), in the case
of insurance covering Canadian locations), as the named insurer.
2.1.5 Reinsurance Contracts Issued by IRI. Reinsurance contracts issued
in the conduct of the HSB-IRI BUSINESS will be issued in the name of
IRI on behalf of the members of IRI.
2.1.6 Apportionment of Insurance Risk. Policies issued by HSB in
accordance with Paragraph 2.1.4 of this Agreement shall be reinsured
100% by IRI and policies issued by BI&I shall be reinsured 100% by CIRI
or IRI as determined by the Members of the LLC. Any policies reinsured
by CIRI will be reinsured 100% by IRI. Reinsurance by IRI of HSB, BI&I
or CIRI will be in accordance with the IRI Reinsurance Agreement
attached hereto as Exhibit B, and therefore, ERC and HSB, as the sole
members of IRI, will be liable for losses under IRI policy forms in
accordance with the Constitution of IRI in proportion to their
respective membership shares in the IRI. It is contemplated however,
that such risk will be reapportioned between ERC and HSB pursuant to
reinsurance agreements executed between each of ERC and HSB
substantially in the form attached hereto as Exhibit C and D such that
HSB will be liable for 85% of the boiler and machinery losses and 15%
of all other property insurance losses associated with the HSB-IRI
BUSINESS, and ERC will be responsible for 15% of the boiler and
machinery losses and 85% of all other property insurance losses
associated with the HSB-IRI BUSINESS. Notwithstanding the foregoing,
ERC and HSB at some future date may agree to apportion HSB-IRI BUSINESS
written by HSB pursuant to this Agreement in accordance with a
Reinsurance Agreement to be executed between ERC and HSB directly
without ceding 100% of such business to/or through IRI. Upon request of
any Intermediary, ERC agrees to furnish a Guarantee, substantially in
accordance with the form attached hereto as Exhibit E, which will
guarantee the direct payment to the insured of its IRI membership share
of liability for losses, net of any reinsurance recoverable from HSB,
pursuant to the HSB Reinsurance Agreement, unless ERC has a reasonable
basis for refusing to issue such a guarantee.
2.1.7 Loss Adjustment Expenses. Loss Adjustment Expenses shall be paid
by ERC and/or HSB in connection with, and in proportion to, any loss
paid in accordance with Paragraph 2.1.6, as adjusted for any
retrocession made to HSB and ERC or any direct reinsurance of HSB by
ERC as contemplated by Paragraph 2.1.6.
ARTICLE III
APPOINTMENT OF OPERATING MANAGER
3.1 HSB Licensed Status. HSB represents that it is licensed by the appropriate
insurance regulatory authority in all fifty states, the District of Columbia and
the territories of Puerto Rico and the U.S. Virgin Islands to write the lines of
insurance which comprise the HSB-IRI BUSINESS. BI&I is licensed to write similar
lines of insurance in each of the Canadian provinces and territories. With
respect to any HSB-IRI BUSINESS covering Canadian locations, HSB will cause such
business to be written by BI&I under HSB's direction and shall be treated for
purposes of this Agreement as insurance written directly by HSB in connection
with the HSB-IRI BUSINESS and apportioned between HSB and IRI in accordance with
Paragraph 2.1.5.
3.2 Appointment of HSB as Operating Manager. Except as expressly provided in
this Agreement and subject to those actions requiring the prior approval of the
Members of LLC, HSB shall be the sole and exclusive operating manager for the
HSB-IRI BUSINESS, with full authority on behalf of the parties hereto to manage,
conduct and operate the HSB-IRI BUSINESS, and to do all of those things which
are necessary, proper or desirable in support of the HSB-IRI BUSINESS.
3.3 Performance of Duties. In discharge of its authority and obligations
pursuant to Paragraph 3.2., HSB may perform activities directly, or indirectly
through IRI, LLC, Affiliates of the Members of LLC, or any other entity capable
of performing such activities.
3.4 Access to Facilities, Property, Books and Records. LLC and IRI shall make
available to HSB such space within and access to the physical facilities and
property owned, licensed to, or leased by LLC or IRI as is reasonably necessary
to permit HSB to fully discharge its duties under this Agreement. HSB shall have
full and complete access to the books and records of LLC and IRI, subject to the
confidentiality restrictions of Paragraph 10.3, in order to enable HSB to
discharge its duties hereunder. ERC shall also make available the books and
records of IMS in order to allow HSB to verify any reimbursable operating costs
of IRI which relate to the use of assets of IMS.
3.5 License to use IRI Trade Name, Trademarks and Service Marks. ERC shall
grant, or cause its Affiliates to grant, to LLC and HSB a royalty-free,
terminable license to use any and all necessary trade names, trademarks or
service marks which are related to the HSB-IRI BUSINESS, including but not
limited to the trade name "Industrial Risk Insurers", "IRI" and/or variations
thereof.
3.6 License to use HSB Trade Name, Trademarks and Service Marks. HSB shall
grant, or cause its Affiliates to grant, to IRI and LLC a royalty-free,
terminable license to use any and all necessary trade names, trademarks or
service marks which are related to the HSB-IRI BUSINESS, including but not
limited to the trade name "HSB" and/or variations thereof.
ARTICLE IV
UNDERWRITING, OUTWARD REINSURANCE, LOSS ADJUSTMENT AND ENGINEERING
RESPONSIBILITIES OF THE OPERATING MANAGER
4.1 Underwriting Responsibilities. HSB shall be responsible for and shall have
authority to perform, or cause to be performed, the following underwriting
functions in support of the HSB-IRI BUSINESS:
4.1.1 To accept applications, prepare quotes and issue policy forms or
other contracts for insurance and reinsurance in cooperation with the
management of IRI and in accordance with the underwriting guidelines,
rules and practices established by the Underwriting Committee of LLC.
4.1.2 To file such policy forms and endorsements, rating plans and
underwriting rules used in connection with the HSB-IRI BUSINESS as
required under the laws and regulations of the jurisdictions within
which the HSB-IRI BUSINESS is conducted.
4.1.3 To give and receive notices of cancellation and non-renewals and
process cancellations and non-renewals pursuant to the terms and
conditions of the policies and reinsurance contracts issued in
connection with the HSB-IRI BUSINESS and applicable laws and
regulations.
4.2 Outward Reinsurance. The parties will cooperate in the development of
Outward Reinsurance strategies and programs in support of the HSB-IRI BUSINESS
which HSB and ERC shall be free to participate in or not in accordance with
their respective needs.
4.3 Loss Adjustment. HSB shall, in cooperation with the management of IRI and
LLC, be responsible for and shall have authority to perform, or cause to be
performed, the following loss adjustment functions in support of the HSB-IRI
BUSINESS:
4.3.1 To control the investigation, establishment of reserves,
adjustment, including litigation, if necessary, settlement and payment
of all claims and expenses arising under policies and contracts of
insurance and reinsurance issued in connection with the HSB-IRI
BUSINESS.
4.3.2 To enforce the subrogation and recovery rights of HSB on its own
behalf as the policy issuing entity and on behalf of IRI and/or ERC as
reinsurer of such policies, or polices or contracts of insurance or
reinsurance issued by other insurers, to remit the proceeds thereof,
net of the costs and expenses of recovery and HSB's allocable portion,
to ERC (in its capacity as a direct reinsurer of HSB or as a member of
IRI) in accordance with the terms of this Agreement, the IRI
Reinsurance Agreement and/or of the ERC Reinsurance Agreement.
4.4 Engineering and Inspection Services. HSB shall, in cooperation with the
management of IRI and LLC, be responsible for and shall have authority to
perform, or cause to be performed, engineering and inspection services in
connection with the underwriting, loss prevention and loss adjustment activities
provided in support of the HSB-IRI BUSINESS.
4.5 Disputes Involving Losses. Any disputes between ERC and HSB involving
insurance losses in connection with the HSB-IRI BUSINESS shall be resolved in
accordance with the terms of the ERC Reinsurance Agreement and the HSB
Reinsurance Agreement.
ARTICLE V
ACCOUNTING AND REPORTING RESPONSIBILITIES
OF THE OPERATING MANAGER
5.1 Premium Collection. HSB shall (i) collect and account for, or cause to be
collected and accounted for, premiums and other remittances or amounts due from
policyholders, Outward Reinsurers, all former members of IRI and from any
collection facility, including Intermediaries and other persons or institutions
that receive remittances with respect to the HSB-IRI BUSINESS and pay
commissions related thereto; and (ii) disburse, or cause to be disbursed, such
premiums, subject to the offset provisions under Article VI, in accordance with
this Agreement.
5.2 Books and Records. HSB shall prepare and maintain, or cause to be prepared
and maintained, separate books and records for all transactions on behalf of HSB
and ERC relating to the HSB-IRI BUSINESS, including but not limited to
underwriting files, claim files, records pertaining to disbursements to third
parties and filings with regulatory authorities. Such books and records will be
available for inspection by IRI and ERC, and their auditors or designees, during
normal business hours upon reasonable notice. In the event of termination of
this Agreement, HSB will turn over the books and records relating to the HSB-IRI
BUSINESS to ERC, subject to HSB's rights to retain duplicates of such books and
records and to have access to the original records to the extent necessary to
satisfy any regulatory or contractual obligations.
5.3 Periodic Reporting. HSB will prepare and forward, or cause to be prepared
and forwarded, to ERC the following periodic reports relating to the HSB-IRI
BUSINESS:
5.3.1 Within thirty (30) days following the end of each month, a
monthly income statement which shows the aggregate written premium and
other revenues attributable to the HSB-IRI BUSINESS, losses paid (i.e.
gross losses less salvage, subrogation, and other recoveries), Loss
Adjustment Expenses paid, commissions, the Ceding Commission in
accordance with Paragraphs 7.1 and 7.2, any Restructuring or
Transitional Expenses paid in accordance with Paragraph 6.6, any other
expenses attributable to the HSB-IRI BUSINESS, and the net written
premiums due ERC and HSB under the ERC and HSB Reinsurance Agreements.
5.3.2 Within a reasonable period of time following a request by ERC,
such other reports, forms and additional information as may be
reasonably requested by ERC.
5.4 Statutory Accounting Principles. Reports furnished to ERC in accordance with
Paragraph 5.3 shall be prepared on the basis of statutory accounting principles.
5.5 Filings in Connection with the HSB-IRI BUSINESS. HSB shall prepare, or cause
to be prepared, and file all returns and reports relating to the HSB-IRI
BUSINESS which are required to be made with any governmental authorities,
including filings with insurance regulators, residual markets and guaranty
associations and filings and premium tax returns with taxing authorities.
ARTICLE VI
IRI WORKING CAPITAL FUND
AND EXPENSE REIMBURSEMENT TO IRI
6.1 IRI Working Capital Fund. ERC and HSB will establish an IRI Working Capital
Fund to be used to fund the day-to-day operations of IRI in performing services
delegated to it by HSB in accordance with this Agreement. The Working Capital
Fund will be funded by HSB and ERC in accordance with their respective
membership shares in IRI. The initial funding for the IRI Working Capital Fund
will be in the amount of $25 Million., of which ERC will contribute $24,875,000
and HSB will contribute $125,000.
6.2 Funding Level. The IRI Working Capital Fund shall be funded on an on-going
basis at a level reasonably estimated by IRI on the basis of its previous
experience to cover not more than two months' operating expenses for the HSB-IRI
BUSINESS. Reimbursements made by HSB pursuant to Paragraph 6.5 shall be credited
to such fund when received. Any cash on hand will be invested in short-term
instruments as directed by HSB and the investment earnings thereon will be
credited to the Fund.
6.3 Funding of IRI Working Capital Fund Shortfall. Within 15 days following the
end of each month IRI shall prepare and submit to HSB a detailed statement
supporting its claim for reimbursement of expenses paid by it during the
previous month in performing services in accordance with this Agreement. At the
same time IRI shall determine the amount of funds, if any, it requires to
maintain the funding level specified under Paragraph 6.2, taking into account
the reimbursement claim for such month that IRI anticipates submitting to HSB in
accordance with Paragraph 6.7 and any other receivables. Any shortfall in the
funding level shall be paid by HSB and ERC in accordance with their membership
shares within 15 days after receiving the statement reporting such shortfall.
6.4 IRI Claims Fund. There shall be established a Claims Fund from which claim
payments of $100,000 or less shall be made arising under policies or contracts
of insurance or reinsurance reinsured by IRI pursuant to the IRI Reinsurance
Agreement. Loss payments exceeding $100,000 shall be funded by ERC and HSB in
accordance with the provisions contained in Section 5.3 of the ERC Reinsurance
Agreement and Section 5.3 of the HSB Reinsurance Agreement. The Claims Fund
shall initially be funded .5% by HSB and 99.5% by ERC in an aggregate amount of
$1,000,000. Thereafter, any shortfall in the Fund will be funded in accordance
with each party's proportionate share of the losses giving rise to the shortfall
after taking into account the ERC and HSB Reinsurance Agreements. Such shortfall
will be determined within 15 days after the end of each month and will be funded
by the parties in accordance with the preceding sentence within 15 days after
receiving the statement reporting such shortfall. The Claims Fund will be
invested in short-term instruments as directed by HSB and the investment
earnings thereon will be credited thereto prior to determining any shortfall.
6.5 Offsets from Reimbursement Obligation. The following amounts shall be offset
against the reimbursement IRI is entitled to under this Article VI:
(i) any revenues for engineering, technical services, underwriting or
other similar administrative services performed by IRI or HSB in
connection with the issuance or servicing of an insurance policy or
reinsurance contract pursuant to the HSB-IRI BUSINESS collected by IRI;
and (ii) amounts receivable by IRI and ERC pursuant to the
Administrative Services Agreement to the extent that the expenses of
providing services under such agreement are reimbursable by HSB
hereunder.
Other "fee for service" revenues collected by IRI and not includable under
subparagraph (i) above will not be treated as an offset against HSB's
reimbursement obligation. Such revenues and any related expenses will be
accounted for in the manner determined by HSB and ERC pursuant to the LLC
Agreement.
6.6 Restructuring and Transitional Expenses. HSB shall not be responsible for
reimbursing IRI for any Restructuring Expenses or Transitional Expenses as
defined below.
6.6.1 For the purposes of this Paragraph 6.6 "Restructuring Expenses"
shall be defined as any cost incurred by ERC, or any of its Affiliates,
or IRI at the direction of HSB as operating manager hereunder or
otherwise, for the primary purpose of reducing the costs of operating
or supporting the HSB-IRI BUSINESS over time including, but not limited
to, the following:
(i) any severance benefits or other termination-related
payments payable by IRI, ERC or any of its Affiliates pursuant
to any plan, agreement or arrangement to an employee or former
employee of IRI in connection with such employee's termination
of employment;
(ii) any penalty payment incurred in connection with the early
termination of an office lease, equipment lease, software
license or other contract obligation relating to any
operational expense;
(iii) relocation and related expenses incurred in transferring
or relocating employees in connection with the HSB-IRI
BUSINESS; and
(iv) one-time costs to equalize benefits in connection with
the transfer or relocation of employees in connection with the
HSB-IRI BUSINESS.
6.6.2 To be excludable from reimbursement in accordance with this
Paragraph 6.6 a Restructuring Expense must be paid in accordance with a
restructuring plan approved in advance by ERC or otherwise be
specifically approved by ERC.
6.6.3 For the purposes of this Paragraph 6.6, "Transitional Expenses"
shall be defined as any costs incurred within twelve months following
the effective date of this Agreement by ERC, or any of its Affiliates,
or IRI at the direction of HSB as operating manager hereunder or
otherwise:
(i) which arise out of the reconstitution of IRI or changes
in its membership including, but not limited to, the costs of
new marketing materials, signage and stationary; or (ii) which
represent the costs of performing overdue certificate
inspections (including any fees and penalties payable to
jurisdictional authorities in connection with such
inspections) and overdue engineering service commitments under
IRI service plans in effect on the date of this Agreement.
Such costs will be determined in accordance with a methodology
to be developed and agreed upon by HSB and ERC within thirty
days following execution of this Agreement.
6.7 Reimbursement Payments to IRI.
6.7.1 Requests for reimbursement of expenses of IRI, supported by such
documentation and detail as HSB may reasonably request, shall be paid
by HSB within 30 days following receipt of such request, except for
such specific expense items which HSB is disputing pursuant to this
Paragraph 6.7.
6.7.2 Any allocated costs for the use of the assets of IMS in
connection with the HSB-IRI BUSINESS shall be calculated using proper
cost accounting methods and principles. Any rental payments in
connection with the lease dated June 28, 1982, as amended, between IRI
Holdings, Inc. (formerly known as 00 Xxxxxxxx Xxxxxx Corporation) and
IMS as assignee of IRI for the offices of IRI at 00 Xxxxxxxx Xxxxxx and
any other IMS leases for field offices of IRI shall be reimbursed by
HSB on a pass-through basis with no additional xxxx-up or allocation
for ERC or IMS overhead.
6.7.3 If HSB proposes to dispute a specific expense, it will notify IRI
of the basis of the denial within 15 days after receiving the
reimbursement request. The parties will make a good faith attempt to
settle such disputed claim within 30 days after IRI's receipt of the
notice referred to in the preceding sentence. If such disputed amount
remains outstanding after such 30 days, such dispute will be resolved
in the manner set forth under Article IX.
6.8 Offset. ERC, HSB or IRI may offset any balance(s), whether on account of
premium, commission, claims or losses, Loss Adjustment Expenses, other expenses,
salvage or subrogation recovery or any other amount due from one party to the
other under this Agreement, the ERC Reinsurance Agreement, the HSB Reinsurance
Agreement, the IRI Reinsurance Agreement, or any other agreement heretofore or
hereinafter entered into between or among the parties to this Agreement, which
relates to the HSB-IRI BUSINESS when making any payments to the other party
under this Agreement.
6.9 Allocation of Investment Earnings. There will be an allocation of investment
earnings to ERC and HSB proportionate to each party's ultimate share (after
application of the IRI, ERC and HSB Reinsurance Agreements) of the premium
dollars which are written in connection with the HSB-IRI BUSINESS.
ARTICLE VII
COMPENSATION TO HSB
7.1 Ceding Commission for Reinsurance Ceded to IRI. Subject to any agreement
between ERC and HSB under which ERC agrees to directly reinsure HSB with respect
to the HSB-IRI BUSINESS, HSB agrees to cede and IRI agrees to accept 100% of the
liability, including loss adjustment expenses, under policies written in
connection with the HSB-IRI BUSINESS in accordance with the terms and conditions
of the IRI Reinsurance Agreement attached hereto as Exhibit B. As premium for
the reinsurance, HSB shall pay to IRI 100% of the gross premiums written in
connection with such business, less a ceding commission of 33% which, together
with the Ceding Commissions provided under Paragraph 7.2, shall compensate HSB
for the services it performs in connection with this Agreement.
7.2 Ceding Commission on Other Business. With respect to reinsurance contracts
entered into in connection with the HSB-IRI BUSINESS under which IRI acts as the
assuming reinsurer, HSB shall be paid a Ceding Commission of 33% of the gross
written premium ceded to IRI pursuant to such reinsurance contracts.
7.3 Quarterly Sharing in Savings/Expenses.
7.3.1 In the event that the annual Expense Ratio for the HSB-IRI
BUSINESS is in excess of 30%, HSB and ERC will share equally in the
amount of Operating Costs comprising such excess. In the event that the
annual Expense Ratio is below 30%, HSB and ERC will share equally in
any savings in Operating Costs with respect to Expense Ratios below 30%
and at or above 26%, and will share in any savings in Operating Costs
below an Expense Ratio of 26% on the basis of ERC receiving a 75% share
and HSB receiving a 25% share.
7.3.2 Within 30 days following the end of each calendar quarter HSB
will calculate and notify ERC of the actual year-to date Expense Ratio
for operating the HSB-IRI BUSINESS. The Expense Ratio will be computed
as follows:
X / Y
where:
X= Operating Costs on a year-to-date basis Y= Gross Written Premiums on
a year-to date basis
7.3.3 On the basis of the notice prepared by HSB pursuant to Paragraph
7.3.2, ERC or HSB shall remit to the other, as the case may be, any
amounts owed to the other after giving effect to the allocation of any
expenses/costs savings set forth in Paragraph 7.3.1 above, taking into
account any amounts which have been remitted to each other for any
prior quarters within such calendar year.
7.3.4 Attached as Exhibit F is a pro forma business plan for 1997 and a
projected business plan for 1998 assuming the HSB-IRI BUSINESS had been
operated under this Agreement commencing on January 1, 1997. Exhibit F
illustrates the application of the calculation set forth in this
Paragraph 7.3.
7.4 Adjustment to Ceding Commission. It is the intent of the parties to operate
the HSB-IRI BUSINESS at an expense ratio of 33% or less of Gross Written
Premiums, inclusive of HSB's policy issuing and service costs calculated at 3%
of Gross Written Premiums, and to share equally, as illustrated in Paragraph
7.3, Operating Costs in excess of 30% and savings in Operating Costs below 30%.
However, in the event that the initial expense structure exceeds such 30%, or in
the event that any external factor, including but not limited to a change in the
commission structure paid brokers or agents (including incentive commissions),
causes the expense ratio to exceed the indicated 30% on a constant basis then
the parties agree to reexamine the level of commissions set forth in this
Article VII (and in the IRI, ERC and HSB Reinsurance Agreements) in a manner
that provides HSB with reimbursement of the policy issuing and service costs
calculated at 3% of Gross Written Premium as set forth above.
ARTICLE VIII
TERM AND TERMINATION OF AGREEMENT
8.1 Term of Agreement. This Agreement shall become effective as of January 1,
1998 and shall remain in effect until terminated in accordance with Paragraph
8.2 below.
8.2 Termination.
8.2.1 This Agreement is subject to termination by HSB upon written
notice to LLC and ERC, on the occurrence of any of the following
events:
(i) a voluntary or involuntary proceeding is commenced in any
state by or against ERC for the purpose of conserving,
rehabilitating or liquidating ERC;
(ii)ERC is no longer an accredited reinsurer and arrangements
to the satisfaction of HSB to enable it to obtain credit
for the reinsurance ceded under the IRI Reinsurance
Agreement and ERC Reinsurance Agreement pursuant to
applicable laws and regulations are not made;
(iii) there is a material breach by ERC, IRI or LLC of any
term or condition of this Agreement, and ERC, IRI or LLC
has not cured or taken reasonable steps to commence to
cure such breach within 20 days of receipt of written
notice from HSB of such breach;
8.2.2 This Agreement is subject to termination by ERC, IRI or LLC upon
written notice to HSB, on the occurrence of any of the following
events:
(i) a voluntary or involuntary proceeding is commenced in any
state by or against HSB for the purpose of conserving,
rehabilitating or liquidating HSB or HSB (or an HSB
subsidiary acceptable to ERC) is no longer a licensed
insurer in any of the jurisdictions in which direct
insurance policies are issued in connection with the
HSB-IRI BUSINESS, or an accredited reinsurer and
arrangements to the satisfaction of ERC to enable it to
obtain credit for the reinsurance ceded under the HSB
Reinsurance Agreement are not made;
(ii) there is a material breach by HSB of any term or
condition of this Agreement, and HSB has not cured or
taken reasonable steps to commence to cure such breach
within 20 days of receipt of written notice from ERC, IRI
or LLC of such breach.
8.2.3 This Agreement may be terminated at any time upon mutual written
consent of HSB and ERC, which writing shall state the effective date of
termination.
8.2.4 This Agreement will terminate automatically upon the closing date
of ERC's purchase of HSB's Member Interest in LLC pursunat to Section
6.2 of the LLC Agreement.
8.3 Non-Solicitation of Employees. During the term of this Agreement and for a
period of two years thereafter:
(i) HSB agrees that it will not solicit or recruit, nor cause any
Affiliate, the principal headquarters of which are located in the
United States, to solicit or recruit, any employees of IRI; and (ii)
ERC agrees that it will not solicit or recruit, nor cause any
Affiliate, the principal headquarters of which are located in the
United States, to solicit or recruit, any employees of HSB;
provided however, that the foregoing restrictions shall not preclude the
solicitation or recruitment by HSB of any former HSB employees who were
transferred to the employment of IRI or CIRI, or the solicitation by ERC, IRI or
CIRI of any former employees of IRI or CIRI who were transferred to the
employment of HSB, during the term of this Agreement.
ARTICLE IX
DISPUTE RESOLUTION
9.1. Negotiation between Executives. The parties 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 party may give the other party written notice of any dispute not resolved in
the normal course of business. Within 20 days after delivery of said notice,
executives of the parties 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 party's notice, or if the parties fail
to meet within 20 days, either party may initiate mediation of the controversy
or claim as provided hereinafter.
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.
9.2 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.
9.3 Disputes Involving Losses. Disputes involving losses under Policies and
contracts of insurance or reinsurance in connection with the HSB-IRI BUSINESS
shall be resolved in the manner set forth in the ERC Reinsurance Agreement and
the HSB Reinsurance Agreement.
ARTICLE X
MISCELLANEOUS
10.1 Indemnification.
10.1.1 IRI and ERC shall indemnify HSB and each of its officers,
directors, employees and agents (each an "Indemnified Party"), against
all judgments, fines, amounts paid in settlement, reasonable costs and
expenses, including attorneys' fees, and any other liabilities that may
be incurred as a result of any claim, action, suit or proceeding
against an Indemnified Party arising out of the provision of services
by HSB pursuant to this Agreement, provided, however, that an
Indemnified Party shall not 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 an Indemnified Party that involves
actual fraud or willful misconduct or (ii) any transaction from which
an Indemnified Party derives improper personal benefit. HSB shall
indemnify ERC and IRI against all judgments, fines, amounts paid in
settlement, reasonable costs and expenses, including attorneys' fees,
and any other liabilities that may be incurred as a result of any
claim, action, suit or proceeding against ERC or IRI arising out of
actual fraud or willful misconduct of HSB, its officers, directors,
employees or agents in the provision of services by HSB pursuant to
this Agreement. The indemnities provided hereunder shall survive
termination of the Company and this Agreement.
10.1.2 Any indemnification payment made by IRI pursuant to Paragraph
10.1.1 shall not be a reimbursable expense under Article VI hereunder.
10.1.3 This Paragraph 10.1 shall not apply with respect to the
liability of ERC or HSB under any policy or certificate of insurance or
contract of reinsurance issued pursuant to this Agreement in connection
with the HSB-IRI BUSINESS.
10.2 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
0000 Xxxxxxx
Xxxxxxxx Xxxx, Xxxxxx 00000
Attention: General Counsel
Facsimile No.: (000) 000-0000
If to HSB:
The Hartford Steam Boiler Inspection and Insurance Company
Xxx Xxxxx Xxxxxx
Xxxxxxxx, XX 00000
Attention: General Counsel
Facsimile No.: (000) 000-0000
If to LLC or IRI:
HSB Industrial Risk Insurers L.L.C.
00 Xxxxxxxx Xxxxxx
Xxxxxxxx, XX 00000
Attention: Chief Executive Officer
Facsimile No.: (000) 000-0000
10.3 Confidentiality. IRI will use its best efforts to obtain a waiver of any
confidentiality obligations to third parties in connection with the HSB-IRI
BUSINESS that would otherwise restrict HSB in performing its duties under this
agreement. HSB agrees that it will hold, and will cause its Affiliates and each
of their respective directors, officers, employees, partners, counsel, financial
advisors, accountants and other representatives to hold, any information so
obtained in confidence to the extent reasonably required by such third party.
10.4 Invalidity or Unenforceability. The invalidity or unenforceability of any
particular provision of this agreement shall not effect the other provisions and
it shall be construed in all respects as if any invalid or unenforceable
provision has been amended to the minimum extent necessary to render it valid
and enforceable.
10.5 Assignablility. This agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors, permitted assigns
and legal representatives. Neither this Agreement, nor any right, duty or
obligation hereunder, may be assigned by either party (in whole or in part)
without the prior written consent of the other party hereto.
10.6 Headings and Exhibits. Headings used herein are not a part of this
Agreement and shall not affect the terms hereof.
10.7 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.
10.8 Amendments. This Agreement cannot be modified changed or supplemented
except in writing and executed to the same degree of formality as that to which
this Agreement has been executed.
10.9 Further Assurances. Each of the parties hereto shall execute such documents
and other papers and perform such further acts as may be reasonably required to
carry out the provisions of this Agreement.
10.10 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Connecticut, without giving effect to
the principles of conflicts of laws thereof.
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.
EMPLOYERS REINSURANCE CORPORATION
By_______________________________________
Its:
HSB INDUSTRIAL RISK INSURERS L.L.C.
By_______________________________________
Its:
INDUSTRIAL RISK INSURERS
By_______________________________________
Its:
THE HARTFORD STEAM BOILER INSPECTION AND
INSURANCE COMPANY
By_______________________________________
Its:
EXHIBIT A
DEFINITIONS
The following definitions are applicable to both the singular and the plural
forms of each term defined below.
"Administrative Services Agreement" means the Administrative Services Agreement
by and among Industrial Risk Insurers, The Members of Industrial Risk Insurers
and Employers Reinsurance Corporation dated as of January 6, 1998.
"Agreement" has the meaning set forth in the introductory paragraph.
"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.
"Asset and Capacity Sale Agreement" means the Asset and Capacity Sale Agreement
entered into by and among Industrial Risk Insurers, The Members of Industrial
Risk Insurers and Employers Reinsurance Corporation dated as of December 11,
1997.
"Ceding Commissions" means the Ceding Commissions payable to HSB pursuant to
Article VII of the Agreement.
"Claims Fund" means the Claims Fund of IRI established pursuant to Paragraph
6.4.
"Constitution" means the Constitution of Industrial Risk Insurers as in effect
on the date of the Agreement, and as amended from time to time hereafter.
"ERC Reinsurance Agreement" means the Reinsurance Agreement dated as of January
1, 1998 between ERC as Reinsurer and HSB as Ceding Company relating to the
HSB-IRI BUSINESS.
"Gross Written Premiums" means the gross premiums written by IRI in connection
with the HSB-IRI BUSINESS.
"HSB-IRI BUSINESS" means the HPR property insurance business written pursuant to
this 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 this Agreement
"HSB Reinsurance Agreement" means the Reinsurance Agreement dated as of January
1, 1998 between HSB as Reinsurer and ERC as Ceding Company related to the
HSB-IRI BUSINESS.
"Intermediaries" means an individual or entity designated by a policyholder as
its broker of record or as the individual or entity that will act on such
policyholder's behalf, in some or all respects, in connection with such
policyholder's insurance policy.
"IRI Reinsurance Agreement" means the Reinsurance Agreement dated as of January
1, 1998 between IRI as Reinsurer and HSB as Ceding Company.
"LLC Agreement" means the Limited Liability Company Agreement of HSB Industrial
Risk Insurers LLC by and between ERC and HSB.
"Members" means the Members of LLC.
"Operating Costs" means the expenses of operating the HSB-IRI BUSINESS, net of
revenues received for engineering and technical services in support of the
HSB-IRI BUSINESS. Such costs include the fully allocated costs, plus a
proportionate share of overhead, of HSB to operate the HSB-IRI BUSINESS.
"Outward Reinsurance" means reinsurance on the HSB-IRI BUSINESS ceded by IRI on
behalf of its members.
"Outward Reinsurers" means the reinsurers on the Outward Reinsurance.
"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.
"Reinsurance Agreement" means the Reinsurance Agreement dated as of January 6,
1998 between ERC and HSB, as reinsurers, and the Members of Industrial Risk
Insuirers.
"Underwriting Committee" means the Underwriting Committee established pursuant
to Section 3.6 of the LLC Agreement.
"Working Capital Fund" means the Working Capital Fund of IRI described under
Paragraph 6.1. of this Agreement.
EXHIBIT B
[REINSURANCE AGREEMENT BETWEEN HSB AND IRI]
EXHIBIT C
[REINSURANCE AGREEMENT BETWEEN ERC AND HSB]
EXHIBIT D
[REINSURANCE AGREEMENT BETWEEN HSB AND ERC]
EXHIBIT E
[GUARANTEE OF ERC]
