2019 -- H 5688

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LC001919

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     STATE OF RHODE ISLAND

IN GENERAL ASSEMBLY

JANUARY SESSION, A.D. 2019

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A N   A C T

RELATING TO INSURANCE -- INSURER RECEIVERSHIP MODEL ACT

     Introduced By: Representatives Cassar, Shekarchi, Williams, Shanley, and Walsh

     Date Introduced: February 27, 2019

     Referred To: House Corporations

     It is enacted by the General Assembly as follows:

     SECTION 1. Title 27 of the General Laws entitled "INSURANCE" is hereby amended

by adding thereto the following chapter:

CHAPTER 14.6

INSURANCE RECEIVERSHIP MODEL ACT

     27-14.6-1. Short title.

     This chapter shall be known and may be cited as the "Insurer Receivership Model Act."

     27-14.6-2. Definitions.

     For the purposes of this chapter:

     (1) "Commodity contract" means:

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

subject to the rules of, a board of trade or contract market under the Commodity Exchange Act (7

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

     (ii) An agreement that is subject to regulation under the Commodity Exchange Act

(U.S.C. § 9, et seq.) and that is commonly known to the commodities trade as a margin account,

margin contract, leverage account or leverage contract;

     (iii) An agreement or transaction that is subject to regulation under the Commodity

Exchange Act (7 U.S.C. § 4(c)(b), et seq.), and that is commonly known to the commodities trade

as a commodity option;

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

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

     (2) "Netting Agreement" means:

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

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

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

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

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

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

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

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

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

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

described in this subsection; or

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

reimbursement obligation related to any contract or agreement described in subsections (2) or (3)

of this section; provided, that any contract or agreement described in subsections (2) or (3) of this

section relating to agreements or transactions that are not qualified financial contracts shall be

deemed to be a netting agreement only with respect to those agreements or transactions that are

qualified financial contracts.

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

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

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

the purposes of this chapter.

     27-14.6-3. Qualified financial contracts.

     (a) Notwithstanding any other provision of this chapter or chapters 14.3 or 14.4 of this

title to the contrary, including any other provision of this chapter permitting the modification of

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

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

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

an insurer because of:

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

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

     (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

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

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

     (3) Subject to any provision of § 27-14.6-4, any right to set off or net out any termination

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

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

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

Office (SVO) of the National Association of Insurance Commissioners (NAIC) as eligible for

netting; or

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

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

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

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

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

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

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

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

the receiver for the insurer, even if the insurer is the defaulting party, notwithstanding any

walkaway clause in the netting agreement or qualified financial contract. For purposes of this

subsection, the term "walkaway clause" means a provision in a netting agreement or a qualified

financial contract that, after calculation of a value of a party's position or an amount due to or

from one of the parties in accordance with its terms upon termination, liquidation or acceleration

of the netting agreement or qualified financial contract, either does not create a payment

obligation of a party or extinguishes a payment obligation of a party in whole or in part solely

because of the party's status as a non-defaulting party. Any limited two-way payment or first

method provision in a netting agreement or qualified financial contract with an insurer that has

defaulted shall be deemed to be a full two-way payment or second method provision as against

the defaulting insurer. Any such property or amount shall, except to the extent it is subject to one

or more secondary liens or encumbrances or rights of netting or setoff, be a general asset of the

insurer.

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

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

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

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

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

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

financial contract; and

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

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

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

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

counterparty and any affiliate of the counterparty).

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

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

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

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

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

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

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

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

qualified financial contract (or any pledge, security, collateral or guarantee agreement or any

other similar security arrangement or credit support document relating to a netting agreement or

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

proceeding under this chapter; provided, however, a transfer may be avoided if under § 27-14.6-5,

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

appointed for the insurer, or existing or future creditors.

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

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

for the insurer shall either:

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

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

proceeding; or

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

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

the person).

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

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

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

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

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

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

proceeding, as if the claim had arisen before the date of the filing of the petition for conservation

or rehabilitation. The amount of the claim shall be the actual direct compensatory damages

determined as of the date of the disaffirmance or repudiation of the netting agreement or qualified

financial contract. The term "actual direct compensatory damages" does not include punitive or

exemplary damages, damages for lost profit or lost opportunity or damages for pain and suffering,

but does include normal and reasonable costs of cover or other reasonable measures of damages

utilized in the derivatives, securities or other market for the contract and agreement claims.

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

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

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

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

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

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

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

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

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

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

insurer that is the subject of the proceeding.

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

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

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

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

     27-14.6-4. Setoffs.

     (a) For purposes of this chapter only, no setoff shall be allowed after the commencement

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

     (1) The claim against the insurer is disallowed;

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

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

filing of the receivership petition;

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

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

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before the filing of the petition for receivership;

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

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

before the filing of the petition for receivership;

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

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

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

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

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

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

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

appropriate because of specific circumstances relating to a transaction;

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

or

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

retrospectively rated earned premiums in accordance with § 27-14.3-3.

     27-14.6-5. Receiver as lien creditor.

     For the purposes of this chapter only, the receiver may avoid any transfer of or lien upon

the property of, or obligation incurred by, an insurer that the insurer or a policyholder, creditor,

member or stockholder of the insurer may have avoided without regard to any knowledge of the

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

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

     SECTION 2. This act shall take effect upon passage.

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LC001919

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EXPLANATION

BY THE LEGISLATIVE COUNCIL

OF

A N   A C T

RELATING TO INSURANCE -- INSURER RECEIVERSHIP MODEL ACT

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     This act would establish a process for insurers who wish to utilize receivership rather

than the other processes of liquidation or rehabilitation.

     This act would take effect upon passage.

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LC001919

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