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Session Law

2004

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Chapter 497 AN ACT RELATIVE TO REINSURANCE AGREEMENTS.

Be it enacted by the Senate and House of Representatives in General Court assembled, and by the authority of the same, as follows:

SECTION 1. Chapter 175 of the General Laws is hereby amended by striking out section 20, as appearing in the 2002 Official Edition, and inserting in place thereof the following section:-

Section 20. (a) A domestic company, except as herein provided, may reinsure in any other company any part or all of any risks assumed by it, and shall file with the annual statement required by section 25 and at such other times as the commissioner may require, schedules of all reinsurance. A contract of reinsurance, other than life, made by a domestic company or by a company incorporated in a foreign country and having its principal office in the commonwealth, ceding more than 75 per cent of its total outstanding risks, shall be subject to the written approval of the commissioner. A reinsurance contract made by a domestic life company shall not cede more than 90 per cent of the risks covered by the reinsurance contract without the permission of the commissioner.

(b) When reinsurance is so effected the ceding company, other than a life company, shall thereafter be charged on the gross premium basis with an unearned premium liability, and a life company shall be charged thereafter with a reserve liability, both the unearned premium and reserve liability representing the proportion of the obligation retained by it. Reinsurance credits shall be established in accordance with section 20A.

(c) A company ceding reinsurance to a mutual company shall not, unless the contract of reinsurance so provides, become thereby a member of the company accepting the reinsurance or be entitled to any dividend or expiration return of premium or be subject to liability to assessment.

(d) A company and any officer or agent thereof effecting or acting in the negotiation of reinsurance in violation of this section shall severally be punished by a fine of $5,000.

SECTION 2. Section 20A of said chapter 175, as so appearing, is hereby amended by striking out subsection (4) and inserting in place thereof the following subsection:-

4. (A) A credit shall not be allowed, as an admitted asset or deduction from liability, to any ceding insurer for reinsurance unless the reinsurance contract provides, in substance, that in the event of the insolvency of the ceding insurer, the reinsurance shall be payable under a contract(s) reinsured by the assuming insurer on the basis of claims filed and allowed in the liquidation proceeding, without diminution because of the insolvency of the ceding insurer. The payments shall be made directly to the ceding insurer or to its domiciliary liquidator except: (1) where the contract of insurance or reinsurance specifically provides another payee of such reinsurance in the event of the insolvency of the ceding insurer, or (2) where the assuming insurer, with the consent of the direct insured, has assumed the policy obligations of the ceding insurer as direct obligations of the assuming insurer to the payees under the policies and in substitution for the obligations of the ceding insurer to the payees.

(B) Notwithstanding paragraph (A), if a life and health insurance guaranty association has made the election to succeed to the rights and obligations of the insolvent insurer under the contract of reinsurance, the reinsurer's liability to pay covered reinsured claims shall continue under the contract of reinsurance, subject to the payment to the reinsurer of the reinsurance premiums for the coverage. Payment for the reinsured claims shall only be made by the reinsurer pursuant to the direction of the guaranty association or its designated successor. Any payment made at the direction of the guaranty association or its designated successor by the reinsurer shall discharge the reinsurer of all further liability to any other party for the claim payment.

(C) A reinsurance agreement may provide that the liquidator or receiver or statutory successor of an insolvent ceding insurer shall give written notice of the pendency of a claim against the insolvent ceding insurer on the policy or contract reinsured within a reasonable time after the claim is filed in the insolvency proceeding and during the pendency of the claim the assuming insurer may investigate the claim and interpose, at its own expense, in the proceedings where the claim is to be adjudicated any defense or defenses which it may consider available to the ceding company or its liquidator or receiver or statutory successor. Subject to court approval, the expense thus incurred by the assuming insurer shall be chargeable, against the insolvent ceding insurer as part of the expense of liquidation, to the extent of a proportionate share of the benefit, which may accrue to the ceding insurer solely as a result of the defense undertaken by the assuming insurer. Where 2 or more assuming insurers are involved in the same claim and a majority in interest elect to interpose a defense to the claim, the expense shall be apportioned in accordance with the terms of the reinsurance agreement as though the expense had been incurred by the ceding insurer.

Approved January 7, 2005.

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