2019 -- S 0788

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LC002301

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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 -- INSURERS' REHABILITATION AND LIQUIDATION ACT-

-INSURANCE RECEIVERSHIP MODEL ACT

     Introduced By: Senator Erin Lynch Prata

     Date Introduced: April 04, 2019

     Referred To: Senate Judiciary

     It is enacted by the General Assembly as follows:

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

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

     27-14.3-3. Definitions.

     For the purposes of this chapter:

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

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

     (3) "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

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

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

Exchange Act (U.S.C. § 1, 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 Section 4c(b) of the

Commodity Exchange Act (U.S.C. § 1, 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;

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

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

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

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

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

liquidation or rehabilitation proceeding;

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

otherwise:

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

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

to the execution of those contracts;

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

for those contracts;

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

out of them;

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

the insurance department; or

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

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

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

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

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

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

antecedent debt is satisfied; or

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

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

property or obligation obtained;

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

States;

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

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

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

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

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;

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

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

Insolvency Fund Property & Casualty Insurance Guaranty Association Act, chapter 34 of this

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

Island Life and Health Insurance Guaranty Association Act, chapter 34.1 34.3 as previously

established and approved under chapter 34.1 of title 27 [repealed], of this title, and any other

similar entity now or after this created by the legislature of this state for the payment of claims of

insolvent insurers. "Foreign guaranty association" means any similar entities now in existence in

or after this created by the legislature of any other state;

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

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

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

or

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

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

the date of loss;

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

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

the greater of:

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

or

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

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

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

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

subsequent to admission;

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

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

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

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

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

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

     (14) "Netting agreement" means:

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     (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 subsection (14)(ii) or

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

or (14)(iii) 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;

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

or other legal entity;

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

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

     (17) "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.

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

context requires;

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

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

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

fraudulent conveyances and preferential transfers;

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

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

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against general assets. The term also includes claims, which have become liens upon specific

assets by reason of judicial process;

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

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

claim secured by general assets;

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

canal zone; and

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

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

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

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

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

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

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

     27-14.3-25.1. Qualified financial contracts.

     (a) Notwithstanding any other provision of this chapter or chapter 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;

     (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 § 27-14.3-25.2, 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

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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 (2)-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 (2)-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

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)(1) of this section (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

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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 § 27-14.3-

25.3, 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

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.

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     (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.

     27-14.3-25.2. Setoffs.

     (a) For purposes of this chapter and chapter 14.4 of this title 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

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

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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 § 27-14.3-37(a)(2).

     27-14.3-25.3. Receiver as lien creditor.

     For the purposes of this chapter and chapter 14.4 of this title 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 3. This act shall take effect upon passage.

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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

***

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

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

contracts are treated in cases of insurance receiverships.

     This act would take effect upon passage.

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