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Third Substitute H.B. 263

Representative James A. Dunnigan proposes the following substitute bill:





Sponsor: John Dougall

             7      LONG TITLE
             8      General Description:
             9          This bill modifies the Insurance Code to address rehabilitation and liquidation.
             10      Highlighted Provisions:
             11          This bill:
             12          .    provides for mediation and arbitration;
             13          .    addresses what must be demonstrated by the liquidator in order to exercise the
             14      authority to seek an order to have the parties submit their commutation proposal to a
             15      panel of arbitrators; and
             16          .    makes technical changes.
             17      Monies Appropriated in this Bill:
             18          None
             19      Other Special Clauses:
             20          None
             21      Utah Code Sections Affected:
             22      AMENDS:
             23          31A-27-330.6, as last amended by Chapter 105, Laws of Utah 2004
             25      Be it enacted by the Legislature of the state of Utah:

             26          Section 1. Section 31A-27-330.6 is amended to read:
             27           31A-27-330.6. Reinsurance commutations.
             28          Notwithstanding Section 31A-27-330.5 , when the insurer has been a party to a
             29      reinsurance agreement[:] this section applies.
             30          (1) (a) The liquidator may negotiate a voluntary commutation and release of all
             31      obligations arising from the agreements.
             32          (b) (i) Subject to Subsection (1)(b)(ii), a commutation and release agreement
             33      voluntarily entered into by the parties shall be:
             34          (A) commercially reasonable;
             35          (B) actuarially sound; and
             36          (C) made in the best interests of the creditors of the insurer.
             37          (ii) A commutation and release agreement voluntarily entered into by the parties that
             38      exceeds $100,000 shall be:
             39          (A) reviewed by the court; and
             40          (B) approved if the agreement meets the standards described in Subsection (1)(b)(i).
             41          [(2) At any time following a five-year period subsequent to the entry of the order of
             42      liquidation]
             43          (2) (a) At any time after an eight-year period beginning on the day on which an order of
             44      liquidation is entered, the liquidator shall apply to the court, with notice to the other party, for
             45      an order requiring the parties to the reinsurance agreement to enter into nonbinding mediation
             46      to resolve any differences between the parties relating to a commutation and release of all
             47      obligations relating to:
             48          (i) open claim reserves; and
             49          (ii) incurred but not reported claim reserves.
             50          (b) Upon the request of the liquidator under this Subsection (2), the court shall appoint
             51      a mediator to mediate a resolution of the differences between the parties.
             52          (c) The expenses of the mediator shall be shared equally between the parties to the
             53      reinsurance agreement.
             54          (3) (a) Subject to Subsection (3)(b), the liquidator may apply to the court, with notice
             55      to the other party, for an order requiring that parties to the reinsurance agreement submit their
             56      commutation proposal to a panel of three arbitrators[.] at any time after:

             57          (i) a two-year period beginning on the day on which an order is issued under
             58      Subsection (2); and
             59          (ii) the court-appointed mediator certifies to the court that the parties are unable to
             60      resolve their differences.
             61          (b) The discretionary power of the liquidator provided for in Subsection (3)(a) may be
             62      exercised after approval by the court upon demonstration by the liquidator that:
             63          (i) a reinsurer is not negotiating in good faith;
             64          (ii) a reinsurer is unduly delaying the negotiation or settlement of a reinsurance
             65      agreement between the insolvent insurer and the reinsurer;
             66          (iii) a reinsurer ignores a properly presented bill for payment from the liquidator for
             67      more than 180 days;
             68          (iv) any conduct by a reinsurer unduly or unreasonably impacts the administration or
             69      closure of the estate of the insolvent insurer by the liquidator; or
             70          (v) conduct by a reinsurer is intended to delay or avoid negotiating settlement or
             71      payment of a proposal to commute a reinsurance agreement between the insolvent insurer and a
             72      reinsurer.
             73          [(3)] (4) (a) Venue for the arbitration shall be:
             74          (i) within the district of the liquidation court's jurisdiction; or
             75          (ii) such other location as may be agreed to by the parties.
             76          (b) [(i) Upon] Subject to Subsection (4)(e), upon the court's determination that
             77      commutation would be in the best interests of the creditors of the liquidation estate, the court
             78      shall require that the liquidator and the other party [each appoint an arbitrator within 30 days]
             79      to commence arbitration to be conducted pursuant to the Procedures for Resolution of United
             80      States Insurance and Reinsurance Disputes, Neutral Panel Version dated April 2004.
             81          [(ii) Within 30 days after appointment of the two arbitrators under Subsection (3)(b)(i),
             82      the court shall appoint an independent, impartial, disinterested arbitrator qualified by actuarial
             83      training in the insurance and reinsurance industry.]
             84          (c) [Within 60 days following the appointment of the third arbitrator under Subsection
             85      (3)(b), the] The parties shall submit to the arbitration panel their commutation proposals and
             86      other documents and information relevant to the determination of the parties' rights and
             87      obligations under the reinsurance agreement to be commuted, including:

             88          (i) a written review of open claim files; and
             89          (ii) an actuarial estimate of incurred-but-not-reported losses.
             90          [(d) (i) Within 60 days following the parties' submissions under Subsection (3)(c):]
             91          [(A) the] (d) (i) The arbitration panel shall issue an award specifying the general terms
             92      of a commercially reasonable and actuarially sound commutation and release agreement[;] and
             93      [(B)] the liquidator shall promptly submit the award to the court.
             94          (ii) The court shall confirm the arbitration panel's award absent proof of statutory
             95      grounds for vacating or modifying the award.
             96          [(e) The time periods established in this Subsection (3) may be extended upon the
             97      consent of the parties or by order of the court, for good cause shown.]
             98          (e) (i) If the reinsurance agreement contains an arbitration clause that is not in conflict
             99      with this section, the arbitration shall be conducted consistent with the reinsurance agreement
             100      arbitration clause, otherwise the arbitration shall be conducted as provided in this section.
             101          (ii) The award determined under this Subsection (4)(e) shall be submitted to the court
             102      as provided in Subsection (4)(d).
             103          (f) If the arbitration panel finds, upon request of either party, that payment of or
             104      enforcement of the arbitration panel's award would likely cause the insolvency of the affected
             105      reinsurer, the portion of the award related to outstanding and incurred but not reported losses
             106      may not be enforced and payment of the obligations may not be accelerated, except:
             107          (i) to the extent that the liquidator agrees to the payment, after consultation with the
             108      reinsurer's domiciliary commissioner; and
             109          (ii) on the liquidator's determination that enforcement of the award will not cause the
             110      reinsurer's insolvency.
             111          (g) Except as provided in Subsection [(4)] (5), nothing in this section may be construed
             112      to supersede or impair any provision in a reinsurance agreement that establishes a
             113      commercially reasonable and actuarially sound method for valuing and commuting the
             114      obligations of the parties to the reinsurance agreement by providing in the contract the specific
             115      methodology to be used for valuing and commuting the obligations.
             116          [(4)] (5) (a) A commutation provision is not effective if it is demonstrated to the court
             117      that the provision was entered into in contemplation of the insolvency of one or more of the
             118      parties.

             119          (b) A contractual commutation provision entered into within one year of the liquidation
             120      order of the insurer shall be rebuttably presumed to have been entered into in contemplation of
             121      insolvency.
             122          [(5)] (6) Sections 31A-27-330 and 31A-27-330.5 and this section apply to liquidation
             123      proceedings that are pending on April 29, 1996, and to all future liquidations.

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