2021 -- S 0061

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LC000443

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     STATE OF RHODE ISLAND

IN GENERAL ASSEMBLY

JANUARY SESSION, A.D. 2021

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A N   A C T

RELATING TO INSURANCE -- INSURERS' REHABILITATION AND LIQUIDATION ACT

-- INSURANCE RECEIVERSHIP MODEL ACT

     

     Introduced By: Senator Roger Picard

     Date Introduced: January 19, 2021

     Referred To: Senate Judiciary

     It is enacted by the General Assembly as follows:

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     SECTION 1. Section 27-14.3-3 of the General Laws in Chapter 27-14.3 entitled "Insurers'

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Rehabilitation and Liquidation Act" is hereby amended to read as follows:

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     27-14.3-3. Definitions.

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     For the purposes of this chapter:

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     (1) "Ancillary state" means any state other than a domiciliary state;

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     (2) "Commissioner" means the director of the department of business regulation;

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     (3) "Commodity contract" means:

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     (i) A contract for the purchase or sale of a commodity for the future delivery on, or subject

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to the rules of, a board of trade or contract market under the Commodity Exchange Act (U.S.C. §

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1, et seq.) or a board of trade outside the United States;

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     (ii) An agreement that is subject to regulation under Section 9 of the Commodity Exchange

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Act (U.S.C. § 1, et seq.) and that is commonly known to the commodities trade as a margin account,

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margin contract, leverage account or leverage contract;

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     (iii) An agreement or transaction that is subject to regulation under Section 4c(b) of the

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Commodity Exchange Act (U.S.C. § 1, et seq.) and that is commonly known to the commodities

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trade as a commodity option;

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     (iv) Any combination of the agreements or transactions referred to in this subsection; or

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     (v) Any option to enter into an agreement or transaction referred to in this subsection;

 

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     (3)(4) "Creditor" is a person having any claim, whether matured or unmatured, liquidated

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or unliquidated, secured or unsecured, absolute, fixed, or contingent;

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     (4)(5) "Delinquency proceeding" means any proceeding instituted against an insurer for

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the purpose of liquidating, rehabilitating, reorganizing, or conserving that insurer, and any

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summary proceeding under § 27-14.3-10. "Formal delinquency proceeding" means any liquidation

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or rehabilitation proceeding;

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     (5)(6) "Doing business" includes any of the following acts, whether effected by mail or

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otherwise:

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     (i) The issuance or delivery of contracts of insurance to persons resident in this state;

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     (ii) The solicitation of applications for those contracts, or other negotiations preliminary to

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the execution of those contracts;

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     (iii) The collection of premiums, membership fees, assessments, or other consideration for

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those contracts;

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     (iv) The transaction of matters subsequent to the execution of those contracts and arising

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out of them;

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     (v) Operating under a license, approval, or certificate of authority, as an insurer, issued by

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the insurance department; or

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     (vi) Those other acts defined in § 27-16-1.2(b);

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     (6)(7) "Domiciliary state" means the state in which an insurer is incorporated or organized;

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or, in the case of an alien insurer, its state of entry;

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     (7)(8) "Fair consideration" is given for property or obligation:

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     (i) When in exchange for the property or obligation, as a fair equivalent for these, and in

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good faith, property is conveyed or services are rendered or an obligation is incurred or an

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antecedent debt is satisfied; or

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     (ii) When the property or obligation is received in good faith to secure a present advance

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or antecedent debt in an amount not disproportionately small as compared to the value of the

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property or obligation obtained;

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     (8)(9) "Foreign country" means any other jurisdiction not in any state of the United States;

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     (9)(10) "General assets" means all property, real, personal, or otherwise, not specifically

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mortgaged, pledged, deposited, or encumbered for the security or benefit of specified persons or

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classes of persons. As to specifically encumbered property, "general assets" includes all property

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or its proceeds in excess of the amount necessary to discharge the sum or sums secured by those

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assets. Assets held in trust and on deposit for the security or benefit of all policyholders or all

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policyholders and creditors in more than a single state, shall be treated as general assets;

 

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     (10)(11) "Guaranty association" means the Rhode Island insurers' insolvency fund property

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& casualty insurance guarantee association created by the Rhode Island Insurers' Insolvency Fund

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Property & Casualty Insurance Guaranty Association Act, chapter 34 of this title, and the Rhode

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Island life and health insurance guaranty association, created by the Rhode Island Life and Health

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Insurance Guaranty Association Act, chapter 34.1 34.3 as previously established and approved

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under chapter 34.1 of title 27 [repealed], of this title, and any other similar entity now or after this

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created by the legislature of this state for the payment of claims of insolvent insurers. "Foreign

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guaranty association" means any similar entities now in existence in or after this created by the

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legislature of any other state;

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     (11)(12) "Insolvency" or "insolvent" means:

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     (i) For an insurer issuing only assessable fire insurance policies:

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     (A) The inability to pay any obligation within thirty (30) days after it becomes payable; or

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     (B) If an assessment is made within thirty (30) days after that date, the inability to pay the

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obligation thirty (30) days following the date specified in the first assessment notice issued after

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the date of loss;

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     (ii) For any other insurer, including those referenced in § 27-14.3-2(8), that it is unable to

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pay its obligations when they are due, or when its admitted assets do not exceed its liabilities plus

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the greater of:

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     (A) Any capital and surplus required by law for its organization and continued operation;

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or

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     (B) The total par or stated value of its authorized and issued capital stock;

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     (iii) For the purposes of this subdivision, "liabilities" includes, but is not limited to, reserves

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required by statute or by insurance department general regulations or specific requirements

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imposed by the commissioner upon a subject company at the time of admission or subsequent to

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admission;

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     (12)(13) "Insurer" means any person who has done, purports to do, is doing, or is licensed

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or approved to do an insurance business, and is or has been subject to the authority of, or to

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liquidation, rehabilitation, reorganization, supervision, or conservation by, any insurance

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commissioner. For the purposes of this chapter, any other persons included under § 27-14.3-2 shall

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be deemed to be insurers and for the purposes of this chapter, guaranty associations shall not be

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deemed to be doing the business of insurance or the insurer;

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     (14) "Netting agreement" means:

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     (i) A contract or agreement (including terms and conditions incorporated by reference

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therein), including a master agreement (which master agreement, together with all schedules,

 

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confirmations, definitions and addenda thereto and transactions under any thereof, shall be treated

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as one netting agreement), that documents one or more transactions between the parties to the

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agreement for or involving one or more qualified financial contracts and that provides for the

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netting, liquidation, setoff, termination, acceleration, or close out under or in connection with one

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or more qualified financial contracts or present or future payment or delivery obligations or

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payment or delivery entitlements thereunder (including liquidation or close out values relating to

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such obligations or entitlements) among the parties to the netting agreement;

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     (ii) Any master agreement or bridge agreement for one or more master agreements

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described in this subsection; or

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     (iii) Any security agreement or arrangement or other credit enhancement or guarantee or

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reimbursement obligation related to any contract or agreement described in subsection (14)(ii) or

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(14)(iii) of this section; provided, that any contract or agreement described in subsection (14)(ii) or

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(14)(iii) of this section relating to agreements or transactions that are not qualified financial

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contracts shall be deemed to be a netting agreement only with respect to those agreements or

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transactions that are qualified financial contracts;

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     (13)(15) "Person" includes any natural person, corporation, association, partnership, trust,

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or other legal entity;

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     (14)(16) "Preferred claim" means any claim with respect to which the terms of this chapter

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accord priority of payment from the general assets of the insurer;

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     (17) "Qualified financial contract" means any commodity contract, forward contract,

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repurchase agreement, securities contract, swap agreement and any similar agreement that the

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commissioner determines by regulation, resolution or order to be a qualified financial contract for

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the purposes of this chapter.

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     (15)(18) "Receiver" means receiver, liquidator, rehabilitator, or conservator, as the context

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requires;

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     (16)(19) "Reciprocal state" means any state other than this state in which in substance and

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effect §§ 27-14.3-22(a), 27-14.3-56, 27-14.3-57 and 27-14.3-59 -- 27-14.3-61 are in force, and in

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which provisions are in force requiring that the commissioner or equivalent official is the receiver

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of a delinquent insurer, and in which some provision exists for the avoidance of fraudulent

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conveyances and preferential transfers;

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     (17)(20) "Secured claim" means any claim secured by mortgage, trust deed, pledge, deposit

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as security, escrow, or otherwise, but not including special deposit claims or claims against general

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assets. The term also includes claims, which have become liens upon specific assets by reason of

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judicial process;

 

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     (18)(21) "Special deposit claim" means any claim secured by a deposit made pursuant to

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statute for the security or benefit of a limited class or classes of persons, but not including any claim

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secured by general assets;

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     (19)(22) "State" means any state, district, or territory of the United States and the Panama

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canal zone; and

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     (20)(23) "Transfer" includes the sale and every other and different mode, direct or indirect,

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or disposing of or of parting with property or with an interest in property, or with the possession of

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property or of fixing a lien upon property or upon an interest in it absolutely or conditionally,

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voluntarily, by or without judicial proceedings. The retention of a security title to property delivered

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to a debtor shall be deemed a transfer suffered by the debtor.

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     SECTION 2. Chapter 27-14.3 of the General Laws entitled "Insurers' Rehabilitation and

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Liquidation Act" is hereby amended by adding thereto the following sections:

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     27-14.3-25.1. Qualified financial contracts.

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     (a) Notwithstanding any other provision of this chapter or chapter 14.4 of this title to the

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contrary, including any other provision of this chapter permitting the modification of contracts, or

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other law of this state, no person shall be stayed or prohibited from exercising:

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     (1) A contractual right to cause the termination, liquidation, acceleration or close out of

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obligations under or in connection with any netting agreement or qualified financial contract with

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an insurer because of:

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     (i) The insolvency, financial condition or default of the insurer at any time; provided, that

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the right is enforceable under applicable law other than this chapter; or

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     (ii) The commencement of a formal delinquency proceeding under this chapter;

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     (2) Any right under a pledge, security, collateral, reimbursement or guarantee agreement

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or arrangement or any other similar security arrangement or arrangement or other credit

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enhancement relating to one or more netting agreements or qualified financial contracts;

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     (3) Subject to any provision of § 27-14.3-25.2, any right to set off or net out any termination

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value, payment amount, or other transfer obligation arising under or in connection with one or more

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qualified financial contracts where the counterparty or its guarantor is organized under the laws of

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the United States or a state or a foreign jurisdiction approved by the Securities Valuation Office

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(SVO) of the National Association of Insurance Commissioners (NAIC) as eligible for netting; or

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     (4) If a counterparty to a master netting agreement or a qualified financial contract with an

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insurer subject to a proceeding under this chapter terminates, liquidates, closes out or accelerates

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the agreement or contract, damages shall be measured as of the date or dates of termination,

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liquidation, close out or acceleration. The amount of a claim for damages shall be actual direct

 

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compensatory damages calculated in accordance with subsection (f) of this section.

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     (b) Upon termination of a netting agreement or qualified financial contract, the net or

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settlement amount, if any, owed by a non-defaulting party to an insurer against which an application

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or petition has been filed under this chapter shall be transferred to or on the order of the receiver

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for the insurer, even if the insurer is the defaulting party, notwithstanding any walkaway clause in

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the netting agreement or qualified financial contract. For purposes of this subsection, the term

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"walkaway clause" means a provision in a netting agreement or a qualified financial contract that,

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after calculation of a value of a party's position or an amount due to or from one of the parties in

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accordance with its terms upon termination, liquidation or acceleration of the netting agreement or

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qualified financial contract, either does not create a payment obligation of a party or extinguishes

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a payment obligation of a party in whole or in part solely because of the party's status as a non-

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defaulting party. Any limited two (2)-way payment or first method provision in a netting agreement

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or qualified financial contract with an insurer that has defaulted shall be deemed to be a full two

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(2)-way payment or second method provision as against the defaulting insurer. Any such property

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or amount shall, except to the extent it is subject to one or more secondary liens or encumbrances

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or rights of netting or setoff, be a general asset of the insurer.

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     (c) In making any transfer of a netting agreement or qualified financial contract of an

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insurer subject to a proceeding under this chapter, the receiver shall either:

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     (1) Transfer to one or more parties (other than an insurer subject to a proceeding under this

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chapter) all netting agreements and qualified financial contracts between a counterparty or any

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affiliate of the counterparty and the insurer that is the subject of the proceeding, including:

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     (i) All rights and obligations of each party under each netting agreement and qualified

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financial contract; and

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     (ii) All property, including any guarantees or other credit enhancement, securing any

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claims of each party under each netting agreement and qualified financial contract; or

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     (2) Transfer none of the netting agreements, qualified financial contracts, rights,

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obligations or property referred to in subsection (a)(1) of this section (with respect to the

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counterparty and any affiliate of the counterparty).

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     (d) If a receiver for an insurer makes a transfer of one or more netting agreements or

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qualified financial contracts, then the receiver shall use its best efforts to notify any person who is

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party to the netting agreements or qualified financial contracts of the transfer by twelve o'clock

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(12:00) p.m. (the receiver's local time) on the business day following the transfer. For purposes of

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this subsection, "business day" means a day other than a Saturday, Sunday or any day on which

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either the New York Stock Exchange or the Federal Reserve Bank of New York is closed.

 

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     (e) Notwithstanding any other provision of this chapter, a receiver may not avoid a transfer

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of money or other property arising under or in connection with a netting agreement or qualified

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financial contract (or any pledge, security, collateral or guarantee agreement or any other similar

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security arrangement or credit support document relating to a netting agreement or qualified

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financial contract) that is made before the commencement of a formal delinquency proceeding

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under this chapter; provided, however, a transfer may be avoided if under § 27-14.3-25.3, the

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transfer was made with actual intent to hinder, delay or defraud the insurer, a receiver appointed

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for the insurer, or existing or future creditors.

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     (f)(1) In exercising the rights of disaffirmance or repudiation of a receiver with respect to

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any netting agreement or qualified financial contract to which an insurer is a party, the receiver for

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the insurer shall either:

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     (i) Disaffirm or repudiate all netting agreements and qualified financial contracts between

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a counterparty or any affiliate of the counterparty and the insurer that is the subject of the

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proceeding; or

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     (ii) Disaffirm or repudiate none of the netting agreements and qualified financial contracts

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referred to in subsection (a) of this section (with respect to the person or any affiliate of the person).

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     (2) Notwithstanding any other provision of this chapter, any claim of a counterparty against

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the estate arising from the receiver's disaffirmance or repudiation of a netting agreement or

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qualified financial contract that has not been previously affirmed in the liquidation or immediately

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preceding conservation or rehabilitation case shall be determined and shall be allowed or

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disallowed as if the claim had arisen before the date of the filing of the petition for liquidation or,

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if a conservation or rehabilitation proceeding is converted to a liquidation proceeding, as if the

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claim had arisen before the date of the filing of the petition for conservation or rehabilitation. The

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amount of the claim shall be the actual direct compensatory damages determined as of the date of

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the disaffirmance or repudiation of the netting agreement or qualified financial contract. The term

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"actual direct compensatory damages" does not include punitive or exemplary damages, damages

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for lost profit or lost opportunity or damages for pain and suffering, but does include normal and

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reasonable costs of cover or other reasonable measures of damages utilized in the derivatives,

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securities or other market for the contract and agreement claims.

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     (g) The term "contractual right" as used in this section includes any right set forth in a rule

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or bylaw of a derivatives clearing organization (as defined in the Commodity Exchange Act), a

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multilateral clearing organization (as defined in the Federal Deposit Insurance Corporation

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Improvement Act of 1991), a national securities exchange, a national securities association, a

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securities clearing agency, a contract market designated under the Commodity Exchange Act, a

 

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derivatives transaction execution facility registered under the Commodity Exchange Act, or a board

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of trade (as defined in the Commodity Exchange Act) or in a resolution of the governing board

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thereof and any right, whether or not evidenced in writing, arising under statutory or common law,

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or under law merchant, or by reason of normal business practice.

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     (h) The provisions of this section shall not apply to persons who are affiliates of the insurer

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that is the subject of the proceeding.

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     (i) All rights of counterparties under this chapter shall apply to netting agreements and

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qualified financial contracts entered into on behalf of the general account or separate accounts if

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the assets of each separate account are available only to counterparties to netting agreements and

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qualified financial contracts entered into on behalf of that separate account.

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     27-14.3-25.2. Setoffs.

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     (a) For purposes of this chapter and chapter 14.4 of this title only, no setoff shall be allowed

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after the commencement of a delinquency proceeding under this chapter in favor of any person if:

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     (1) The claim against the insurer is disallowed;

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     (2) The claim against the insurer was purchased by or transferred to the person on or after

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the filing of the receivership petition or within one hundred twenty (120) days preceding the filing

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of the receivership petition;

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     (3) The obligation of the insurer is owed to an affiliate or entity other than the person,

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absent written assignment of the obligation made more than one hundred twenty (120) days before

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the filing of the petition for receivership;

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     (4) The obligation of the person is owed to an affiliate or entity other than the insurer,

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absent written assignment of the obligation made more than one hundred twenty (120) days before

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the filing of the petition for receivership;

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     (5) The obligation of the person is to pay an assessment levied against the members or

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subscribers of the insurer, or is to pay a balance upon a subscription to the capital stock of the

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insurer, or is in any other way in the nature of a capital contribution;

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     (6) The obligations between the person and the insurer arise out of transactions by which

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either the person or the insurer has assumed risks and obligations from the other party and then has

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ceded back to that party substantially the same risks and obligations. Notwithstanding the

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provisions of this subsection, the receiver may permit setoffs if in his or her discretion a setoff is

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appropriate because of specific circumstances relating to a transaction;

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     (7) The obligation of the person arises out of any avoidance action taken by the receiver;

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or

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     (8) The obligation of the insured is for the payment of earned premiums or retrospectively

 

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rated earned premiums in accordance with § 27-14.3-37(a)(2).

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     27-14.3-25.3. Receiver as lien creditor.

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     For the purposes of this chapter and chapter 14.4 of this title only, the receiver may avoid

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any transfer of or lien upon the property of, or obligation incurred by, an insurer that the insurer or

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a policyholder, creditor, member or stockholder of the insurer may have avoided without regard to

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any knowledge of the receiver, the commissioner, the insurer or any policyholder, creditor, member

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or stockholder of the insurer and whether or not such a policyholder, creditor, member or

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stockholder exists.

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     SECTION 3. This act shall take effect upon passage.

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LC000443

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EXPLANATION

BY THE LEGISLATIVE COUNCIL

OF

A N   A C T

RELATING TO INSURANCE -- INSURERS' REHABILITATION AND LIQUIDATION ACT

-- INSURANCE RECEIVERSHIP MODEL ACT

***

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     This act would adopt a portion of the National Association of Insurance Commissioners

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(NAIC) model act with respect to receiverships, specifically with regards to how derivative

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contracts are treated in cases of insurance receiverships.

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     This act would take effect upon passage.

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LC000443

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