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NO. 49. AN ACT RELATING TO RECIPROCAL INSURERS AND CAPTIVE INSURANCE COMPANIES.

(H.529)

It is hereby enacted by the General Assembly of the State of Vermont:

Sec. 1. 8 V.S.A. 4833 is amended to read:

4833. INSURING POWERS OF RECIPROCALS

(a) A reciprocal insurer may, upon qualifying therefor as provided for by this title, transact any kind or kinds of insurance defined by this title, other than life or title insurances.

(b) Such an insurer may purchase reinsurance upon the risk of any subscriber or subscribers, and may *[grant]* assume or cede reinsurance as to any kind of insurance it is authorized to transact direct.

Sec. 2. 8 V.S.A. 4834 is amended to read:

4834. NAME; SUITS

A reciprocal insurer shall:

(1) Have and use a business name. The name shall include the word "reciprocal," or "interinsurer," or "interinsurance," or "exchange," or "underwriters," or "*[underwritings]* underwriting," or "association."

(2) Sue and be sued in its own name.

Sec. 3. 8 V.S.A. 4836(a) is amended to read:

(a) *[Twenty-five]* Two or more persons *[domiciled in this state]* may organize a domestic reciprocal insurer and make application to the commissioner for a certificate of authority to transact insurance.

Sec. 4. 8 V.S.A. 4840(b) is amended to read:

(b) The bond shall be in the penal sum of *[$25,000.00]* $250,000.00 aggregate in form, conditioned that the attorney will faithfully account for all monies and other property of the insurer coming into his or her hands, and that he or she will not withdraw or appropriate to his or her own use from the funds of the insurer, any monies or property to which he or she is not entitled under the power of attorney.

Sec. 5. 8 V.S.A. 4841 is amended to read:

4841. DEPOSIT IN LIEU OF BOND

In lieu of the bond required under section 4840 of this title, the attorney may maintain on deposit *[$25,000.00]* $250,000.00 in the office of the commissioner, a like amount in cash or in value of securities qualified under this title as insurers’ investments, subject to the same conditions as the bond.

Sec. 6. 8 V.S.A. 4846 is amended to read:

4846. SUBSCRIBERS

Individuals, partnerships, and corporations of this state may make application, enter into agreement for and hold policies or contracts in or with and be a subscriber of any domestic, foreign, or alien reciprocal insurer. Any corporation organized under the laws of this state, including nonprofit corporations organized under the provisions of Title 11B, shall, in addition to the rights, powers, and franchises specified in its articles of incorporation, have full power and authority as a subscriber to exchange insurance contracts through such reciprocal insurer. The right to exchange such contracts is declared to be incidental to the purposes for which such corporations are organized and to be as fully granted as the rights and powers expressly conferred upon such corporations. Government or governmental agencies, state or political subdivisions thereof, boards, associations, estates, trustees or fiduciaries are authorized to exchange nonassessable reciprocal interinsurance contracts with each other and with individuals, partnerships and corporations to the same extent that individuals, partnerships and corporations are herein authorized to exchange reciprocal interinsurance contracts. Any officer, representative, trustee, receiver, or legal representative of any such subscriber shall be recognized as acting for or on its behalf for the purpose of such contract but shall not be personally liable upon such contract by reason of acting in such representative capacity.

Sec. 7. 8 V.S.A. 6001(12) is amended to read:

(12) "Pure captive insurance company" means any company that insures risks of its parent and affiliated companies or controlled unaffiliated business.

Sec. 8. 8 V.S.A. 6001(13) is added to read:

(13) "Controlled unaffiliated business" means any company:

(A) that is not in the corporate system of a parent and affiliated companies;

(B) that has an existing contractual relationship with a parent or affiliated company; and

(C) whose risks are managed by a pure captive insurance company in accordance with section 6019 of this title.

Sec. 9. 8 V.S.A. 6002(a), (b) and (c) are amended to read:

(a) Any captive insurance company, when permitted by its articles of association *[or]*, charter, or other organizational document, may apply to the commissioner for a license to do any and all insurance comprised in subdivisions (1), (2), (3)(A)-(C), (3)(E)-(R) and (4)-(9) of section 3301(a) of this titles; provided, however, that:

(1) no pure captive insurance company may insure any risks other than those of its parent and affiliated companies or controlled unaffiliated business;

(2) no association captive insurance company may insure any risks other than those of the member organizations of its association, and their affiliated companies;

(3) no industrial insured captive insurance company may insure any risks other than those of the industrial insureds that comprise the industrial insured group, and their affiliated companies;

(4) no captive insurance company may provide personal motor vehicle or homeowner's insurance coverage or any component thereof;

(5) no captive insurance company may accept or cede reinsurance except as provided in section 6011 of this title;

(6) any captive insurance company may provide excess workers' compensation insurance to its parent and affiliated companies, unless prohibited by the laws of the state having jurisdiction over the transaction. Any captive insurance company may reinsure workers' compensation of a qualified self-insured plan of its parent and affiliated companies; and

(7) any captive insurance company which insures risks described in subdivisions (1)and (2) of section 3301(a) of this title shall comply with all applicable state and federal laws.

(b) No captive insurance company shall do any insurance business in this state unless:

(1) it first obtains from the commissioner a license authorizing it to do insurance business in this state;

(2) its board of directors, or in the case of a reciprocal insurer its subscribers’ advisory committee, holds at least one meeting each year in this state;

(3) it maintains its principal place of business in this state; and

(4) it appoints a registered agent to accept service of process and to otherwise act on its behalf in this state. In the case of a captive insurance company:

(A) *[Whenever]* formed as a corporation, whenever such registered agent cannot with reasonable diligence be found at the registered office of the captive insurance company, the secretary of state shall be an agent of such captive insurance company upon whom any process, notice, or demand may be served;

(B) formed as a reciprocal insurer, whenever such registered agent cannot with reasonable diligence be found at the registered office of the captive insurance company, the commissioner shall be an agent of such captive insurance company upon whom any process, notice, or demand may be served.

(c)(1) Before receiving a license, a captive insurance company

(A) formed as a corporation shall file with the commissioner a certified copy of its charter and bylaws, a statement under oath of its president and secretary showing its financial condition, and any other statements or documents required by the commissioner;

(B) formed as a reciprocal insurer shall:

(i) file with the commissioner a certified copy of the power of attorney of its attorney-in-fact, a certified copy of its subscribers’ agreement, a statement under oath of its attorney-in-fact showing its financial condition and any other statements or documents required by the commissioner; and

(ii) submit to the commissioner for approval a description of the coverages, deductibles, coverage limits, and rates, together with such additional information as thecommissioner may reasonably require. In the event of any subsequent material change in any item in such description, the reciprocal captive insurance company shall submit to the commissioner for approval an appropriate revision and shall not offer any additional kinds of insurance until a revision of such description is approved by the commissioner. The reciprocal captive insurance company shall inform the commissioner of any material change in rates within thirty (30) days of the adoption of such change.

(2) In addition to the information required by subdivision (1) of subsection (c), each applicant captive insurance company shall file with the commissioner evidence of the following:

(A) the amount and liquidity of its assets relative to the risks to be assumed;

(B) the adequacy of the expertise, experience, and character of the person or persons who will manage it;

(C) the overall soundness of its plan of operation;

(D) the adequacy of the loss prevention programs of its parent, member organizations, or industrial insureds as applicable; and

(E) such other factors deemed relevant by the commissioner in ascertaining whether the proposed captive insurance company will be able to meet its policy obligations.

(3) Information submitted pursuant to this subsection shall be and remain confidential, and may not be made public by the commissioner or an employee or agent of the commissioner without the written consent of the company, except that:

(A) such information may be discoverable by a party in a civil action or contested case to which the captive insurance company that submitted such information is a party, upon a showing by the party seeking to discover such information that (i) the information sought is relevant to and necessary for the furtherance of such action or case, (ii) the information sought is unavailable from other nonconfidential sources, and (iii) a subpoena issued by a judicial or administrative officer of competent jurisdiction has been submitted to the commissioner; provided, however, that the provisions of this subdivision shall not apply to any industrial insured group as defined in subdivision 6001(9)(B) of thistitle; and

(B) the commissioner may, in his or her discretion, disclose such information to a public officer having jurisdiction over the regulation of insurance in another state, provided that (i) such public official shall agree in writing to maintain the confidentiality of such information and (ii) the laws of the state in which such public official serves require such information to be and to remain confidential.

Sec. 10. 8 V.S.A. 6005 is amended to read:

6005. MINIMUM SURPLUS; LETTER OF CREDIT

(a) No captive insurance company shall be issued a license unless it shall possess and thereafter maintain free surplus of:

(1) in the case of a pure captive insurance company, not less than $150,000.00,

(2) in the case of an association captive insurance company incorporated as a stock insurer, not less than $350,000.00,

(3) in the case of an industrial insured captive insurance company incorporated as a stock insurer, not less than $300,000.00,

(4) in the case of an association captive insurance company incorporated as a mutual insurer, not less than $750,000.00, and

(5) in the case of an industrial insured captive insurance company incorporated as a mutual insurer, not less than $500,000.00. Such surplus may be in the form of cash or an irrevocable letter of credit issued by a bank chartered by the state of Vermont or member bank of the Federal Reserve System and approved by the commissioner.

(b) Notwithstanding the requirements of subsection (a) of this section, no captive insurance company organized as a reciprocal insurer under this chapter shall be issued a license unless it shall possess and thereafter maintain free surplus of $1,000,000.00.

*[(b)]*(c) The commissioner may prescribe additional surplus based upon the type, volume, and nature of insurance business transacted, which *[capital]* surplus may be in the form of an irrevocable letter of credit issued by a bank chartered in the state of Vermont, or a member bank of the Federal Reserve System.

Sec. 11. 8 V.S.A. 6006 is amended to read:

6006. FORMATION OF CAPTIVE INSURANCE COMPANIES IN THIS STATE

(a) A pure captive insurance company shall be incorporated as a stock insurer with its capital divided into shares and held by the stockholders

(b) An association captive insurance company or an industrial insured captive insurance company may be *[incorporated]*

(1) incorporated as a stock insurer with its capital divided into shares and held by the stockholders, or

(2) incorporated as a mutual insurer without capital stock, the governing body of which is elected by the member organizations of its association, or

(3) organized as a reciprocal insurer in accordance with chapter 132 of this title.

(c) A captive insurance company shall have not less than three incorporators *[of whom not less than two shall be residents of this state]* or two organizers of whom not less than one shall be a resident of this state.

(d) In the case of a captive insurance company:

(1) *[Before]* formed as a corporation, before the articles of association are transmitted to the secretary of state, the incorporators shall petition the commissioner to issue a certificate setting forth *[his]* the commissioner’s finding that the establishment and maintenance of the proposed corporation will promote the general good of the state. In arriving at such a finding the commissioner shall consider:

*[(1)]*(A) the character, reputation, financial standing and purposes of the incorporators;

*[(2)]*(B) the character, reputation, financial responsibility, insurance experience, and business qualifications of the officers and directors; and

*[(3)]*(C) such other aspects as the commissioner shall deem advisable.

*[(e)]* The articles of association, such certificate, and the organization fee shall be transmitted to the secretary of state, who shall thereupon record both the articles of incorporation and the certificate.

(2) formed as a reciprocal insurer, the organizers shall petition the commissioner toissue a certificate setting forth the commissioner’s finding that the establishment and maintenance of the proposed association will promote the general good of the state. In arriving at such a finding the commissioner shall consider:

(A) the character, reputation, financial standing and purposes of the organizers;

(B) the character, reputation, financial responsibility, insurance experience, and business qualifications of the attorney-in-fact; and

(C) such other aspects as the commissioner shall deem advisable.

*[(f)]*(e) The capital stock of a captive insurance company incorporated as a stock insurer shall be issued at not less than par value.

*[(g)]*(f) In the case of a captive insurance company

*[At]* (1) formed as a corporation in this state, at least one of the members of the board of directors *[of a captive insurance company incorporated in this state]* shall be a resident of this state;

(2) formed as a reciprocal insurer in this state, at least one of the members of the subscribers’ advisory committee shall be a resident of this state.

*[(h)]*(g) Captive insurance companies formed as corporations under the provisions of this chapter shall have the privileges and be subject to the provisions of the general corporation law as well as the applicable provisions contained in this chapter. In the event of conflict between the provisions of said general corporation law and the provisions of this chapter, the latter shall control. The provisions of subchapter 3, chapter 101 of this title, pertaining to mergers, consolidations, conversions, mutualizations and redomestications, shall apply in determining the procedures to be followed by captive insurance companies in carrying out any of the transactions described therein, except the commissioner may waive or modify the requirements for public notice and hearing in accordance with rules which the commissioner may adopt addressing categories of transactions. If a notice of public hearing is required, but no one requests a hearing, then the commissioner may cancel the hearing.

(h)(1) Captive insurance companies formed as reciprocal insurers under the provisions of this chapter shall have the privileges and be subject to the provisions of chapter 132 ofthis title in addition to the applicable provisions of this chapter. In the event of a conflict between the provisions of chapter 132 and the provisions of this chapter, the latter shall control. To the extent a reciprocal insurer is made subject to other provisions of this title pursuant to chapter 132, such provisions shall not be applicable to a reciprocal insurer formed under this chapter unless such provisions are expressly made applicable to captive insurance companies under this chapter.

(2) In addition to the provisions of subdivision (1) of this subsection, captive insurance companies organized as reciprocal insurers that are industrial insured groups as defined in subdivision 6001(9)(B) of this title shall have the privileges and be subject to the provisions of chapter 142 of this title in addition to the applicable provisions of this title.

(i) The articles of incorporation or bylaws of a captive insurance company formed as a corporation may authorize a quorum of a board of directors to consist of no fewer than one-third of the fixed or prescribed number of directors determined under section 8.24(a) of Title 11A, or under section 8.24 of Title 11B.

(j) The subscribers’ agreement or other organizing document of a captive insurance company formed as a reciprocal insurer may authorize a quorum of a subscribers’ advisory committee to consist of no fewer than one-third of the number of its members.

Sec. 12. 8 V.S.A. 6007(b) is amended to read:

(b) Prior to March 1 of each year, each captive insurance company shall submit to the commissioner a report of its financial condition, verified by oath of two of its executive officers. Each association captive insurance company and each industrial insured group defined in subdivision 6001(9)(B) of this title shall file its report in the form required by section 3561 of this title. Each industrial insured group defined in subdivision 6001(9)(B) of this title shall comply with the requirements set forth in section 3569 of this title. The commissioner shall by rule propose the form in which pure captive insurance companies and industrial insured captive insurance companies defined in subdivision 6001(9)(A) shall report. Subdivision 6002(c)(3) of this title shall apply to each report filed pursuant to this section, except that such subdivision shall not apply to reports filed by industrial insuredgroups as defined in subdivision 6001(9)(B) of this title.

Sec. 13. 8 V.S.A. 6008(c) is added to read:

(c) All examination reports, preliminary examination reports or results, working papers, recorded information, documents and copies thereof produced by, obtained by or disclosed to the commissioner or any other person in the course of an examination made under this section are confidential and are not subject to subpoena and may not be made public by the commissioner or an employee or agent of the commissioner without the written consent of the company, except to the extent provided in this subsection. Nothing in this subsection shall prevent the commissioner from using such information in furtherance of the commissioner's regulatory authority under this title. The commissioner may, in his or her discretion, grant access to such information to public officers having jurisdiction over the regulation of insurance in any other state or country, or to law enforcement officers of this state or any other state or agency of the federal government at any time, so long as such officers receiving the information agree in writing to hold it in a manner consistent with this section.

Sec. 14. 8 V.S.A. 6009(a) is amended to read:

6009. GROUNDS AND PROCEDURES FOR SUSPENSION OR REVOCATION OF LICENSE

(a) The license of a captive insurance company to do an insurance business in this state may be suspended or revoked by the commissioner for any of the following reasons:

* * *

(4) Failure to comply with the provisions of its own charter *[or]*, bylaws or other organizational document;

(5) Failure to submit to examination or any legal obligation relative thereto, as required by section 6008 of this title;

(6) Refusal or failure to pay the cost of examination as required by section 6008;

(7) Use of methods that, although not otherwise specifically prohibited by law, nevertheless render its operation detrimental or its condition unsound with respect to the public or to its policyholders;

(8) Failure otherwise to comply with the laws of this state.

Sec. 15. 8 V.S.A. 6013 is amended to read:

6013. EXEMPTION FROM COMPULSORY ASSOCIATIONS

No captive insurance company, including a captive insurance company organized as a reciprocal insurer under this chapter, shall be permitted to join or contribute financially to any plan, pool, association, or guaranty or insolvency fund in this state, nor shall any such captive insurance company, or its insured, or its parent or any affiliated company, or any member organization of its association, or in the case of a captive insurance company organized as a reciprocal insurer, any subscriber thereof, receive any benefit from any such plan, pool, association, or guaranty or insolvency fund for claims arising out of the operations of such captive insurance company.

Sec. 16. 8 V.S.A. 6019 is added to read:

6019. RULES FOR CONTROLLED UNAFFILIATED BUSINESS

The commissioner shall adopt rules establishing standards to ensure that a parent or affiliated company is able to exercise control of the risk management function of any controlled unaffiliated business to be insured by the pure captive insurance company; provided, however, that, until such time as rules under this section are adopted, the commissioner may by temporary order grant authority to a pure captive insurance company to insure such risks.

Sec. 17. 8 V.S.A. 6052(d) is added to read:

(d) The provisions of section 6008(c) of this title shall apply to risk retention groups chartered in this state, except that such provisions shall not apply to final examination reports relating to risk retention groups.

Sec. 18. POSITION AUTHORIZED

The establishment of one (1) permanent classified position - Examiner III - is authorized in fiscal year 1998 in the captive insurance division of the department of banking, insurance, securities, and health care administration, which shall be transferred and converted from existing vacant positions in the executive branch of state government by the secretary of administration.

Sec. 19. EFFECTIVE DATE

This act shall take effect from passage.

Approved: June 26, 1997