520-1 LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION

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LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION MODEL ACT

Table of Contents

Section 1. Title

Section 2. Purpose

Section 3. Coverage and Limitations

Section 4. Construction

Section 5. Definitions

Section 6. Creation of the Association

Section 7. Board of Directors

Section 8. Powers and Duties of the Association

Section 9. Assessments

Section 10. Plan of Operation

Section 11. Duties and Powers of the Commissioner

Section 12. Prevention of Insolvencies

Section 13. Credits for Assessments Paid (Tax Offsets)—OPTIONAL

Section 14. Miscellaneous Provisions

Section 15. Examination of the Association; Annual Report

Section 16. Tax Exemptions

Section 17. Immunity

Section 18. Stay of Proceedings; Reopening Default Judgments

Section 19. Prohibited Advertisement of Insurance Guaranty Association Act in Insurance Sales; Notice to Policy

Owners

Section 20. Prospective Application

Appendix Alternative Provisions

Section 1. Title

This Act shall be known and may be cited as the [State] Life and Health Insurance Guaranty Association Act.

Section 2. Purpose

A. The purpose of this Act is to protect, subject to certain limitations, the persons specified in Section 3A

against failure in the performance of contractual obligations, under life, health, and annuity policies, plans,

or contracts specified in Section 3B, because of the impairment or insolvency of the member insurer that

issued the policies, plans, or contracts.

B. To provide this protection, an association of member insurers is created to pay benefits and to continue

coverages as limited by this Act, and members of the Association are subject to assessment to provide

funds to carry out the purpose of this Act.

Drafting Note: The primary purpose of this model act is to protect policy or contract owners, insureds, beneficiaries, health care providers, annuitants,

payees and assignees against losses (both in terms of paying claims and continuing coverage) which might otherwise occur due to an impairment or

insolvency of an insurer. Unlike the property and liability lines of business, life and annuity contracts in particular are long-term arrangements for security.

An insured may have impaired health or be at an advanced age so as to be unable to obtain new and similar coverage from other insurers. The payment of

cash values alone does not adequately meet such needs. Thus it is essential that coverage be continued. It is also essential that the guaranty association

assesses insurers in a fair and reasonable manner and that the guaranty association has sufficient assessment capacity for all insolvencies.

Section 3. Coverage and Limitations

A. This Act shall provide coverage for the policies and contracts specified in Subsection B:

(1) To persons who, regardless of where they reside (except for nonresident certificate holders under

group policies or contracts), are the beneficiaries, assignees or payees, including health care

providers rendering services covered under health insurance policies or certificates, of the persons

covered under Paragraph (2);

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(2) To persons who are owners of or certificate holders or enrollees under the policies or contracts

(other than unallocated annuity contracts, and structured settlement annuities) and in each case

who:

(a) Are residents; or

(b) Are not residents, but only under all of the following conditions:

(i) The member insurer that issued the policies or contracts is domiciled in this

State;

(ii) The States in which the persons reside have associations similar to the

association created by this Act;

(iii) The persons are not eligible for coverage by an association in any other State

due to the fact that the insurer or the health maintenance organization was not

licensed in the State at the time specified in the State’s guaranty association law.

(3) For unallocated annuity contracts specified in Subsection B; Paragraphs (1) and (2) of this

subsection shall not apply, and this Act shall (except as provided in Paragraphs (5) and (6) of this

subsection) provide coverage to:

(a) Persons who are the owners of the unallocated annuity contracts if the contracts are

issued to or in connection with a specific benefit plan whose plan sponsor has its

principal place of business in this State; and

(b) Persons who are owners of unallocated annuity contracts issued to or in connection with

government lotteries if the owners are residents.

Drafting Note: It is believed that coverage of unallocated annuities is a policy decision that should be made by each individual State. Attached as an

Appendix are alternative Sections 3, 5 and 6, which specifically exclude all unallocated annuities from coverage.

(4) For structured settlement annuities specified in Subsection B; Paragraphs (1) and (2) of this

subsection shall not apply, and this Act shall (except as provided in Paragraphs (5) and (6) of this

subsection) provide coverage to a person who is a payee under a structured settlement annuity (or

beneficiary of a payee if the payee is deceased), if the payee:

(a) Is a resident, regardless of where the contract owner resides; or

(b) Is not a resident, but only under both of the following conditions:

(i) (I) The contract owner of the structured settlement annuity is a resident; or

(II) The contract owner of the structured settlement annuity is not a

resident; but

a. The insurer that issued the structured settlement annuity is

domiciled in this State; and

b. The State in which the contract owner resides has an

association similar to the association created by this Act; and

(ii) Neither the payee (or beneficiary) nor the contract owner is eligible for coverage

by the association of the State in which the payee or contract owner resides.

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(5) This Act shall not provide coverage to:

(a) A person who is a payee (or beneficiary) of a contract owner resident of this State, if the

payee (or beneficiary) is afforded any coverage by the association of another State; or

(b) A person covered under Paragraph (3) of this subsection, if any coverage is provided by

the association of another State to the person; or

factoring transaction as defined in 26 U.S.C. 5891(c)(3)(A), regardless of whether the

transaction occurred before or after such section became effective.

(6) This Act is intended to provide coverage to a person who is a resident of this State and, in special

circumstances, to a nonresident. In order to avoid duplicate coverage, if a person who would

otherwise receive coverage under this Act is provided coverage under the laws of any other State,

the person shall not be provided coverage under this Act. In determining the application of the

provisions of this paragraph in situations where a person could be covered by the association of

more than one State, whether as an owner, payee, enrollee, beneficiary or assignee, this Act shall

be construed in conjunction with other State laws to result in coverage by only one association.

Drafting Note: The exclusion from coverage in Section 3A(5)(c) of any person who has purchased from an original structured settlement annuity payee his

or her rights to receive structured settlement annuity benefits and the exclusion of such benefits from covered benefits under Section 3B(2)(n) recognize that

the protections afforded by guaranty associations are intended for insurance consumers, such as the original payees of structured settlement annuities.

Guaranty association protection does not extend to sophisticated investors who acquire rights to receive structured settlement annuity benefits in the

secondary market. These exclusions, however, do not apply to structured settlement annuity benefits that are transferred to children, present or former

spouses or

other dependents as part of domestic relations settlements or orders, or to other transferees (including donees) who acquire rights to receive

structured settlement annuity benefits without providing any monetary consideration. Thus, Section

3A(5)(c) and Section 3B(2)(n) clarify that guaranty

association coverage protects structured settlement annuity benefits to which the original payee and his or her family members retain the rights.

B. (1) This Act shall provide coverage to the persons specified in Subsection A for policies or contracts

of direct, non-group life insurance, health insurance (which for the purposes of this Act includes

health maintenance organization subscriber contracts and certificates), or annuities, and

supplemental contracts to any of these, for certificates under direct group policies and contracts,

and for unallocated annuity contracts issued by member insurers, except as limited by this Act.

Annuity contracts and certificates under group annuity contracts include but are not limited to

guaranteed investment contracts, deposit administration contracts, unallocated funding

agreements, allocated funding agreements, structured settlement annuities, annuities issued to or

in connection with government lotteries and any immediate or deferred annuity contracts.

(2) Except as otherwise provided in Paragraph (3) of this subsection, this Act shall not provide

coverage for:

(a) A portion of a policy or contract not guaranteed by the member insurer, or under which

the risk is borne by the policy or contract owner;

(b) A policy or contract of reinsurance, unless assumption certificates have been issued

pursuant to the reinsurance policy or contract;

or the interest rate, crediting rate or similar factor determined by use of an index or other

external reference stated in the policy or contract employed in calculating returns or

changes in value;

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(i) Averaged over the period of four (4) years prior to the date on which the

member insurer becomes an impaired or insolvent insurer under this Act,

whichever is earlier, exceeds the rate of interest determined by subtracting two

(2) percentage points from Moody’s Corporate Bond Yield Average averaged

for that same four-year period or for such lesser period if the policy or contract

was issued less than four (4) years before the member insurer becomes an

impaired or insolvent insurer under this Act, whichever is earlier; and

(ii) On and after the date on which the member insurer becomes an impaired or

insolvent insurer under this Act, whichever is earlier, exceeds the rate of interest

determined by subtracting three (3) percentage points from Moody’s Corporate

Bond Yield Average as most recently available;

(d) A portion of a policy or contract issued to a plan or program of an employer, association

or other person to provide life, health or annuity benefits to its employees, members or

others, to the extent that the plan or program is self-funded or uninsured, including but

not limited to benefits payable by an employer, association or other person under;

(i) A multiple employer welfare arrangement as defined in 29 U.S.C. § 1144;

(ii) A minimum premium group insurance plan;

(iii) A stop-loss group insurance plan; or

(iv) An administrative services only contract;

(e) A portion of a policy or contract to the extent that it provides for

(i) Dividends or experience rating credits;

(ii) Voting rights; or

(iii) Payment of any fees or allowances to any person, including the policy or

contract owner, in connection with the service to or administration of the policy

or contract;

(f) A policy or contract issued in this State by a member insurer at a time when it was not

licensed or did not have a certificate of authority to issue the policy or contract in this

State;

(g) An unallocated annuity contract issued to or in connection with a benefit plan protected

under the federal Pension Benefit Guaranty Corporation, regardless of whether the

federal Pension Benefit Guaranty Corporation has yet become liable to make any

payments with respect to the benefit plan;

(h) A portion of an unallocated annuity contract that is not issued to or in connection with a

specific employee, union or association of natural persons benefit plan or a government

lottery;

(i) A portion of a policy or contract to the extent that the assessments required by Section 9

with respect to the policy or contract are preempted by federal or State law;

(j) An obligation that does not arise under the express written terms of the policy or contract

issued by the member insurer to the enrollee, certificate holder, contract owner or policy

owner, including without limitation:

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(i) Claims based on marketing materials;

(ii) Claims based on side letters, riders or other documents that were issued by the

member insurer without meeting applicable policy or contract form filing or

approval requirements;

(iii) Misrepresentations of or regarding policy or contract benefits;

(iv) Extra-contractual claims; or

(v) A claim for penalties or consequential or incidental damages;

(k) A contractual agreement that establishes the member insurer’s obligations to provide a

book value accounting guaranty for defined contribution benefit plan participants by

reference to a portfolio of assets that is owned by the benefit plan or its trustee, which in

each case is not an affiliate of the member insurer;

(l) A portion of a policy or contract to the extent it provides for interest or other changes in

value to be determined by the use of an index or other external reference stated in the

policy or contract, but which have not been credited to the policy or contract, or as to

which the policy or contract owner’s rights are subject to forfeiture, as of the date the

member insurer becomes an impaired or insolvent insurer under this Act, whichever is

earlier. If a policy’s or contract’s interest or changes in value are credited less frequently

than annually, then for purposes of determining the values that have been credited and

are not subject to forfeiture under Section 3B(2)(l), the interest or change in value

determined by using the procedures defined in the policy or contract will be credited as if

the contractual date of crediting interest or changing values was the date of impairment

or insolvency, whichever is earlier, and will not be subject to forfeiture;

(m) A policy or contract providing any hospital, medical, prescription drug or other health

care benefits pursuant to Part C or Part D of Subchapter XVIII, Chapter 7 of Title 42 of

the United States Code (commonly known as Medicare Part C& D), or Subchapter XIX,

Chapter 7 of Title 42 of the United States Code (commonly known as Medicaid), or any

regulations issued pursuant thereto; or

(n) Structured settlement annuity benefits to which a payee (or beneficiary) has transferred

his or her rights in a structured settlement factoring transaction as defined in 26 U.S.C.

5891(c)(3)(A), regardless of whether the transaction occurred before or after such section

became effective.

(3) The exclusion from coverage referenced in Paragraph (2)(c) of this subsection shall not apply to

any portion of a policy or contract, including a rider, that provides long-term care or any other

health insurance benefits.

Drafting Note: Some life insurance policies and annuity contracts covered by this Act provide for interest or other changes in value to be determined by the

use of an index or other external reference stated in the policy or contract. Sections 3B(2)(c) and 3B(2)(l) clarify the treatment of such policies or contracts in

order to limit increases in interest in a manner that parallels the treatment provided other policies and contracts under this Act. Section 3B(2)(c) explicitly

states that the application of the limit on “rate of interest” includes returns and changes in value determined by equity index or other reference. Section

3B(2)(l) excludes from coverage any interest or change in value that, as of the date the member insurer becomes an impaired or insolvent insurer under this

Act, whichever is earlier, has not been credited to the policy or contract. It excludes from coverage any interest or change in value as to which the right of the

policy or contract owner is subject to forfeiture on the date the member insurer becomes an impaired or insolvent insurer under this Act, whichever is earlier.

However, for policies or contracts that credit interest or changes in value less than annually, Section 3B(2)(1) clarifies that crediting will be done according

to the procedures set forth in the

policy or contract except that the date of impairment or insolvency under this Act, whichever is earlier, will be deemed the

final date for crediting interest of changes in value. Section 3B(3) is added to clarify that the interest limitation in Section 3B(2)(c) does not apply to long-

term care or any other health insurance benefits.

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C. The benefits that the Association may become obligated to cover shall in no event exceed the lesser of:

(1) The contractual obligations for which the member insurer is liable or would have been liable if it

were not an impaired or insolvent insurer; or

(2) (a) With respect to one life, regardless of the number of policies or contracts:

(i) $300,000 in life insurance death benefits, but not more than $100,000 in net

cash surrender and net cash withdrawal values for life insurance;

(ii) For health insurance benefits:

(I) $100,000 for coverages not defined as disability income insurance or

health benefit plans or long-term care insurance as defined in [section

of State law dealing with health insurance/disability income

insurance/long-term care insurance] including any net cash surrender

and net cash withdrawal values;

(II) $300,000 for disability income insurance as defined in [section of State

law dealing with health insurance/ disability income insurance], and

$300,000 for long-term care insurance as defined in [section of State

law dealing with health insurance/ long-term care insurance];

(III) $500,000 for health benefit plans;

(iii) $250,000 in the present value of annuity benefits, including net cash surrender

and net cash withdrawal values; or

(b) With respect to each individual participating in a governmental retirement benefit plan

established under Section 401, 403(b) or 457 of the U.S. Internal Revenue Code covered

by an unallocated annuity contract or the beneficiaries of each such individual if

deceased, in the aggregate, $250,000 in present value annuity benefits, including net cash

surrender and net cash withdrawal values;

beneficiaries of the payee if deceased), $250,000 in present value annuity benefits, in the

aggregate, including net cash surrender and net cash withdrawal values, if any;

(d) However, in no event shall the Association be obligated to cover more than (i) an

aggregate of $300,000 in benefits with respect to any one life under Paragraphs 2(a), 2(b)

and 2(c) of this subsection except with respect to benefits for health benefit plans under

Paragraph 2(a)(ii) of this subsection, in which case the aggregate liability of the

Association shall not exceed $500,000 with respect to any one individual, or (ii) with

respect to one owner of multiple non-group policies of life insurance, whether the policy

or contract owner is an individual, firm, corporation or other person, and whether the

persons insured are officers, managers, employees or other persons, more than

$5,000,000 in benefits, regardless of the number of policies and contracts held by the

owner;

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(e) With respect to either (i) one contract owner provided coverage under Subsection

A(3)(b) of this section; or (ii) one plan sponsor whose plans own directly or in trust one

or more unallocated annuity contracts not included in Paragraph (2)(b) of this subsection,

$5,000,000 in benefits, irrespective of the number of contracts with respect to the

contract owner or plan sponsor. However, in the case where one or more unallocated

annuity contracts are covered contracts under this Act and are owned by a trust or other

entity for the benefit of two (2) or more plan sponsors, coverage shall be afforded by the

Association if the largest interest in the trust or entity owning the contract or contracts is

held by a plan sponsor whose principal place of business is in this State and in no event

shall the Association be obligated to cover more than $5,000,000 in benefits with respect

to all these unallocated contracts.

(f) The limitations set forth in this subsection are limitations on the benefits for which the

Association is obligated before taking into account either its subrogation and assignment

rights or the extent to which those benefits could be provided out of the assets of the

impaired or insolvent insurer attributable to covered policies. The costs of the

Association’s obligations under this Act may be met by the use of assets attributable to

covered policies or reimbursed to the Association pursuant to its subrogation and

assignment rights.

(g) For purposes of this Act, benefits provided by a long-term care rider to a life insurance

policy or annuity contract shall be considered the same type of benefits as the base life

insurance policy or annuity contract to which it relates.

D. In performing its obligations to provide coverage under Section 8 of this Act, the Association shall not be

required to guarantee, assume, reinsure, reissue or perform, or cause to be guaranteed, assumed, reinsured,

or reissued or performed, the contractual obligations of the insolvent or impaired insurer under a covered

policy or contract that do not materially affect the economic values or economic benefits of the covered

policy or contract.

Drafting Note: This section and Section 8 are key sections of the Act. Section 3 identifies who and what are covered and not covered by the Act. Section 8

specifies the responsibilities of the Association toward covered persons with covered policies.

Protection of this Act is primarily extended to resident persons but certain nonresidents under specific circumstances will be protected by this Act if the

insolvent insurer was domiciled in this State.

This model does not apply to reinsurance unless assumption certificates were issued to the direct insureds or enrollees. Furthermore, it applies only to direct

individual or group certificate insurance issued or written by member insurers licensed to transact business in this State at any time.

Persons to whom coverage is typically provided are resident enrollees, policy or contract owners, or their beneficiaries, assignees or payees. For group

contracts or policies, coverage is provided to resident enrollees, and certificate holders and not to the owners of the group contracts or policies; this avoids

the possibility of double coverage and indirect coverage of nonresident enrollees, and certificate holders through resident group policy or contract owners.

However, for unallocated annuities, coverage is provided under Subsection A(3) to plan sponsors whose principal place of business is in this State, rather

than to contract owners. No coverage is provided to individuals who have or might have an interest in the plan or unallocated annuity contract because there

is no contractual guaranty by the insurer to individuals under those contracts. Subsection A(4) provides coverage for structured settlement annuities to

resident payees rather than to the contract owners.

Subsection A(3) providing unallocated annuity contract coverage to plan sponsors whose principal place of business is in the State and Subsection A(4)

providing structured settlement annuity coverage to resident payees are significant changes from previous versions of this Model Act intended to place the

coverage in the State of the resident persons to be protected rather than in the State where the nominal owner of the contract resides. Subsections A(5) and

(6) avoid the possibility of double coverage due to differing approaches for determining the covered persons in different State statutes and provide

mechanisms for resolving which State’s statutes will be used to determine the existence and limits of coverage.

Policies and contracts covered by the model act are life insurance, health insurance and annuity policies and contracts, and policies or contracts supplemental

thereto. The use of the term health insurance is intended to include “accident and health” insurance, “sickness and accident” insurance, “disability income”

insurance, health maintenance organization contracts, etc. The use of the term disability income insurance is intended to include insurance policies and

contracts that cover the loss of income due to a disability. The individual State may want to adjust this language to fit its particular terminology.

Subsection B(2) identifies certain types of contracts or policies or portions of contracts or policies that are specifically not covered by this Act. If a portion of

a contract or policy is not covered, the remainder of the contract or policy is covered unless excluded otherwise. Subsection B(2) also provides a ready means

by which an individual State can exempt from the Act those policies and contracts issued by member insurers or similar organizations deemed appropriate

for exemption by the State.

Subsection B(2)(h) excludes coverage for any unallocated annuity contract not used to fund a benefit plan for natural persons or governmental lottery.

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Subsection B(2)(k) is intended to exclude from coverage those products commonly referred to as “financial guaranty” products.

Subsection C provides the maximum limitations of the Association’s liability by type of contract or policy or line of business and overall per one life, plan

sponsor or owner. The limits may be reached through cash surrender payments, benefit payments, or continuing coverage or a combination thereof. The

maximum limits for each type of coverage should be set at an appropriate level after review by each State.

Section 4. Construction

This Act shall be construed to effect the purpose under Section 2.

Section 5. Definitions

As used in this Act:

A. “Account” means either of the two accounts created under Section 6.

B. “Association” means the [State] Life and Health Insurance Guaranty Association created under Section 6.

C. “Authorized assessment” or the term “authorized” when used in the context of assessments means a

resolution by the Board of Directors has been passed whereby an assessment will be called immediately or

in the future from member insurers for a specified amount. An assessment is authorized when the

resolution is passed.

D. “Benefit plan” means a specific employee, union or association of natural persons benefit plan.

E. “Called assessment” or the term “called” when used in the context of assessments means that a notice has

been issued by the Association to member insurers requiring that an authorized assessment be paid within

the time frame set forth within the notice. An authorized assessment becomes a called assessment when

notice is mailed by the Association to member insurers.

F. “Commissioner” means the Commissioner of Insurance of this State.

Drafting Note: Insert the title of the chief insurance regulatory official whenever the term “commissioner” appears.

G. “Contractual obligation” means an obligation under a policy or contract or certificate under a group policy

or contract, or portion thereof for which coverage is provided under Section 3.

H. “Covered contract” or “covered policy” means a policy or contract or portion of a policy or contract for

which coverage is provided under Section 3.

I. “Extra-contractual claims” shall include, for example, claims relating to bad faith in the payment of claims,

punitive or exemplary damages or attorneys’ fees and costs.

J. “Health benefit plan” means any hospital or medical expense policy or certificate, or health maintenance

organization subscriber contract or any other similar health contract. “Health benefit plan” does not

include:

(1) Accident only insurance:

(2) Credit insurance;

(3) Dental only insurance;

(4) Vision only insurance;

(5) Medicare Supplement insurance;

(6) Benefits for long-term care, home health care, community-based care, or any combination thereof;

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(7) Disability income insurance;

(8) Coverage for on-site medical clinics; or

(9) Specified disease, hospital confinement indemnity, or limited benefit health insurance if the types

of coverage do not provide coordination of benefits and are provided under separate policies or

certificates.

K. “Impaired insurer” means a member insurer which, after the effective date of this Act, is not an insolvent

insurer, and is placed under an order of rehabilitation or conservation by a court of competent jurisdiction.

L. “Insolvent insurer” means a member insurer which after the effective date of this Act, is placed under an

order of liquidation by a court of competent jurisdiction with a finding of insolvency.

M. “Member insurer” means an insurer or health maintenance organization licensed or that holds a certificate

of authority to transact in this State any kind of insurance or health maintenance organization business for

which coverage is provided under Section 3, and includes an insurer or health maintenance organization

whose license or certificate of authority in this State may have been suspended, revoked, not renewed or

voluntarily withdrawn, but does not include:

(1) A hospital or medical service organization, whether profit or non-profit;

(2) A fraternal benefit society;

(3) A mandatory State pooling plan;

(4) A mutual assessment company or other person that operates on an assessment basis;

(5) An insurance exchange;

(6) An organization that has a certificate or license limited to the issuance of charitable gift annuities

under [insert the appropriate section of the State code]; or

(7) An entity similar to any of the above.

Drafting Note: States that license Health Care Service Corporations or similar organizations that undertake to provide basic health care services may want to

address these entities in this Act.

N. “Moody’s Corporate Bond Yield Average” means the Monthly Average Corporates as published by

Moody’s Investors Service, Inc., or any successor thereto.

O. “Owner” of a policy or contract and “policyholder,” “policy owner” and “contract owner” mean the person

who is identified as the legal owner under the terms of the policy or contract or who is otherwise vested

with legal title to the policy or contract through a valid assignment completed in accordance with the terms

of the policy or contract and properly recorded as the owner on the books of the member insurer. The terms

owner, contract owner, policyholder and policy owner do not include persons with a mere beneficial

interest in a policy or contract.

P. “Person” means an individual, corporation, limited liability company, partnership, association,

governmental body or entity or voluntary organization.

Q. “Plan sponsor” means:

(1) The employer in the case of a benefit plan established or maintained by a single employer;

(2) The employee organization in the case of a benefit plan established or maintained by an employee

organization; or

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(3) In a case of a benefit plan established or maintained by two (2) or more employers or jointly by

one or more employers and one or more employee organizations, the association, committee, joint

board of trustees, or other similar group of representatives of the parties who establish or maintain

the benefit plan.

R. “Premiums” means amounts or considerations (by whatever name called) received on covered policies or

contracts less returned premiums, considerations and deposits and less dividends and experience credits.

“Premiums” does not include amounts or considerations received for policies or contracts or for the

portions of policies or contracts for which coverage is not provided under Section 3B except that

assessable premium shall not be reduced on account of Sections 3B(2)(c) relating to interest limitations and

3C(2) relating to limitations with respect to one individual, one participant and one policy or contract

owner. “Premiums” shall not include:

(1) Premiums in excess of $5,000,000 on an unallocated annuity contract not issued under a

governmental retirement benefit plan (or its trustee) established under Section 401, 403(b) or 457

of the United States Internal Revenue Code, or

(2) With respect to multiple non-group policies of life insurance owned by one owner, whether the

policy or contract owner is an individual, firm, corporation or other person, and whether the

persons insured are officers, managers, employees or other persons, premiums in excess of

$5,000,000 with respect to these policies or contracts, regardless of the number of policies or

contracts held by the owner.

S. (1) “Principal place of business” of a plan sponsor or a person other than a natural person means the

single State in which the natural persons who establish policy for the direction, control and

coordination of the operations of the entity as a whole primarily exercise that function, determined

by the Association in its reasonable judgment by considering the following factors:

(a) The State in which the primary executive and administrative headquarters of the entity is

located;

(b) The State in which the principal office of the chief executive officer of the entity is

located;

entity conducts the majority of its meetings;

(d) The State in which the executive or management committee of the board of directors (or

similar governing person or persons) of the entity conducts the majority of its meetings;

(e) The State from which the management of the overall operations of the entity is directed;

and

(f) In the case of a benefit plan sponsored by affiliated companies comprising a consolidated

corporation, the State in which the holding company or controlling affiliate has its

principal place of business as determined using the above factors.

However, in the case of a plan sponsor, if more than fifty percent (50%) of the participants in the

benefit plan are employed in a single State, that State shall be deemed to be the principal place of

business of the plan sponsor.

(2) The principal place of business of a plan sponsor of a benefit plan described in Subsection Q(3) of

this section shall be deemed to be the principal place of business of the association, committee,

joint board of trustees or other similar group of representatives of the parties who establish or

maintain the benefit plan that, in lieu of a specific or clear designation of a principal place of

business, shall be deemed to be the principal place of business of the employer or employee

organization that has the largest investment in the benefit plan in question.

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T. “Receivership court” means the court in the insolvent or impaired insurer’s State having jurisdiction over

the conservation, rehabilitation or liquidation of the member insurer.

U. “Resident” means a person to whom a contractual obligation is owed and who resides in this State on the

date of entry of a court order that determines a member insurer to be an impaired insurer or a court order

that determines a member insurer to be an insolvent insurer, whichever occurs first. A person may be a

resident of only one State, which in the case of a person other than a natural person shall be its principal

place of business. Citizens of the United States that are either (i) residents of foreign countries, or (ii)

residents of United States possessions, territories or protectorates that do not have an association similar to

the Association created by this Act, shall be deemed residents of the State of domicile of the member

insurer that issued the policies or contracts.

V. “Structured settlement annuity” means an annuity purchased in order to fund periodic payments for a

plaintiff or other claimant in payment for or with respect to personal injury suffered by the plaintiff or other

claimant.

W “State” means a State, the District of Columbia, Puerto Rico, and a United States possession, territory or

protectorate.

X. “Supplemental contract” means a written agreement entered into for the distribution of proceeds under a

life, health or annuity policy or contract.

Y. “Unallocated annuity contract” means an annuity contract or group annuity certificate which is not issued

to and owned by an individual, except to the extent of any annuity benefits guaranteed to an individual by

an insurer under the contract or certificate.

Drafting Note: Each State will wish to examine its own statutes to determine whether these definitions are applicable and to determine whether some should

be deleted and others added.

Section 6. Creation of the Association

A. There is created a nonprofit legal entity to be known as the [State] Life and Health Insurance Guaranty

Association. All member insurers shall be and remain members of the Association as a condition of their

authority to transact insurance or a health maintenance organization business in this State. The Association

shall perform its functions under the plan of operation established and approved under Section 10 and shall

exercise its powers through a board of directors established under Section 7. For purposes of

administration and assessment, the Association shall maintain two (2) accounts:

(1) The life insurance and annuity account which includes the following subaccounts:

(a) Life insurance account;

(b) Annuity account which shall include annuity contracts owned by a governmental

retirement plan (or its trustee) established under Section 401, 403(b) or 457 of the United

States Internal Revenue Code, but shall otherwise exclude unallocated annuities; and

retirement benefit plan (or its trustee) established under Section 401, 403(b) or 457 of the

United States Internal Revenue Code.

(2) The health account.

B. The Association shall come under the immediate supervision of the commissioner and shall be subject to

the applicable provisions of the insurance laws of this State. Meetings or records of the Association may be

opened to the public upon majority vote of the board of directors of the Association.

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Section 7. Board of Directors

A. The board of directors of the Association shall consist of not less than seven (7) nor more than eleven (11)

member insurers serving terms as established in the plan of operation. The insurer members of the board

shall be selected by member insurers subject to the approval of the commissioner. In addition, two (2)

persons who must be public representatives shall be appointed by the commissioner to the board of

directors. A “public representative” may not be an officer, director or employee of an insurance company

or a health maintenance organization or any person engaged in the business of insurance.

Vacancies on the board shall be filled for the remaining period of the term by a majority vote of the

remaining board members, for member insurers subject to the approval of the commissioner, and by the

commissioner for public representatives. To select the initial board of directors, and initially organize the

Association, the commissioner shall give notice to all member insurers of the time and place of the

organizational meeting. In determining voting rights at the organizational meeting each member insurer

shall be entitled to one vote in person or by proxy. If the board of directors is not selected within sixty (60)

days after notice of the organizational meeting, the commissioner may appoint the initial insurer members

in addition to the public representatives.

B. In approving selections or in appointing members to the board, the commissioner shall consider, among

other things, whether all member insurers are fairly represented.

C. Members of the board may be reimbursed from the assets of the Association for expenses incurred by them

as members of the board of directors but members of the board shall not otherwise be compensated by the

Association for their services.

Drafting Note: Subsection A provides that the number and term of the members of the board of directors shall be determined in the plan of operation. To

avoid problems in initially selecting the board, this section includes a provision for a start-up meeting which will be called by the commissioner. To

determine voting rights at the organizational meeting each member would have one vote. Thereafter the plan of operation will establish the voting

procedures, by-laws, etc. governing the conduct of the Association. States that are amending an existing statute should provide for a continuation of the

board.

States may consider including language in Subsection B to effectuate the fair representation of guaranty association members.

Section 8. Powers and Duties of the Association

A. If a member insurer is an impaired insurer, the Association may, in its discretion, and subject to any

conditions imposed by the Association that do not impair the contractual obligations of the impaired

insurer and that are approved by the commissioner:

(1) Guarantee, assume, reissue, or reinsure, or cause to be guaranteed, assumed, reissued, or

reinsured, any or all of the policies or contracts of the impaired insurer; or

(2) Provide such monies, pledges, loans, notes, guarantees or other means as are proper to effectuate

Paragraph (1) and assure payment of the contractual obligations of the impaired insurer pending

action under Paragraph (1).

B. If a member insurer is an insolvent insurer, the Association shall, in its discretion, either:

(1) (a) (i) Guaranty, assume, reissue, or reinsure, or cause to be guaranteed, assumed,

reissued, or reinsured, the policies or contracts of the insolvent insurer; or

(ii) Assure payment of the contractual obligations of the insolvent insurer; and

(b) Provide monies, pledges, loans, notes, guarantees, or other means reasonably necessary

to discharge the Association’s duties; or

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(2) Provide benefits and coverages in accordance with the following provisions:

(a) With respect to policies and contracts, assure payment of benefits that would have been

payable under the policies or contracts of the insolvent insurer, for claims incurred:

(i) With respect to group policies and contracts, not later than the earlier of the next

renewal date under those policies or contracts or forty-five (45) days, but in no

event less than thirty (30) days, after the date on which the Association becomes

obligated with respect to the policies and contracts;

(ii) With respect to non-group policies, contracts, and annuities not later than the

earlier of the next renewal date (if any) under the policies or contracts or one

year, but in no event less than thirty (30) days, from the date on which the

Association becomes obligated with respect to the policies or contracts;

(b) Make diligent efforts to provide all known insureds, enrollees or annuitants (for non-

group policies and contracts), or group policy or contract owners with respect to group

policies and contracts, thirty (30) days notice of the termination (pursuant to

Subparagraph (a) of this paragraph) of the benefits provided;

available to each known insured, enrollee, or annuitant, or owner if other than the

insured or annuitant, and with respect to an individual formerly an insured, enrollee or

annuitant under a group policy or contract who is not eligible for replacement group

coverage, make available substitute coverage on an individual basis in accordance with

the provisions of Subparagraph (d), if the insureds, enrollees or annuitants had a right

under law or the terminated policy, contract, or annuity to convert coverage to individual

coverage or to continue an individual policy, contract, or annuity in force until a

specified age or for a specified time, during which the insurer or health maintenance

organization had no right unilaterally to make changes in any provision of the policy,

contract, or annuity or had a right only to make changes in premium by class:

(d) (i) In providing the substitute coverage required under Subparagraph (c), the

Association may offer either to reissue the terminated coverage or to issue an

alternative policy or contract at actuarially justified rates[, subject to the prior

approval of the commissioner];

(ii) Alternative or reissued policies or contracts shall be offered without requiring

evidence of insurability, and shall not provide for any waiting period or

exclusion that would not have applied under the terminated policy or contract;

(iii) The Association may reinsure any alternative or reissued policy or contract.

(e) (i) Alternative policies or contracts adopted by the Association shall be subject to

the approval of the commissioner. The Association may adopt alternative

policies or contracts of various types for future issuance without regard to any

particular impairment or insolvency.

(ii) Alternative policies or contracts shall contain at least the minimum statutory

provisions required in this State and provide benefits that shall not be

unreasonable in relation to the premium charged. The Association shall set the

premium in accordance with a table of rates that it shall adopt

. The premium

shall reflect the amount of insurance to be provided and the age and class of risk

of each insured, but shall not reflect any changes in the health of the insured

after the original policy or contract was last underwritten.

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(iii) Any alternative policy or contract issued by the Association shall provide

coverage of a type similar to that of the policy or contract issued by the impaired

or insolvent insurer, as determined by the Association.

(f) If the Association elects to reissue terminated coverage at a premium rate different from

that charged under the terminated policy or contract, the premium shall be actuarially

justified and set by the Association in accordance with the amount of insurance or

coverage provided and the age and class of risk[, subject to prior approval of the

commissioner ];

(g) The Association’s obligations with respect to coverage under any policy or contract of

the impaired or insolvent insurer or under any reissued or alternative policy or contract

shall cease on the date the coverage or policy or contract is replaced by another similar

policy or contract by the policy or contract owner, the insured, the enrollee, or the

Association;

(h) When proceeding under this Subsection B(2) with respect to a policy or contract carrying

guaranteed minimum interest rates, the Association shall assure the payment or crediting

of a rate of interest consistent with Section 3B(2)(c).

C. Nonpayment of premiums within thirty-one (31) days after the date required under the terms of any

guaranteed, assumed, alternative or reissued policy or contract or substitute coverage shall terminate the

Association’s obligations under the policy, contract, or coverage under this Act with respect to the policy,

contract, or coverage, except with respect to any claims incurred or any net cash surrender value which

may be due in accordance with the provisions of this Act.

D. Premiums due for coverage after entry of an order of liquidation of an insolvent insurer shall belong to and

be payable at the direction of the Association. If the liquidator of an insolvent insurer requests, the

Association shall provide a report to the liquidator regarding such premium collected by the Association.

The Association shall be liable for unearned premiums due to policy or contract owners arising after the

entry of the order.

E. The protection provided by this Act shall not apply where any guaranty protection is provided to residents

of this State by the laws of the domiciliary State or jurisdiction of the impaired or insolvent insurer other

than this State.

F. In carrying out its duties under Subsection B, the Association may:

(1) Subject to approval by a court in this State, impose permanent policy or contract liens in

connection with a guarantee, assumption or reinsurance agreement, if the Association finds that

the amounts which can be assessed under this Act are less than the amounts needed to assure full

and prompt performance of the Association’s duties under this Act, or that the economic or

financial conditions as they affect member insurers are sufficiently adverse to render the

imposition of such permanent policy or contract liens, to be in the public interest;

(2) Subject to approval by a court in this State, impose temporary moratoriums or liens on payments

of cash values and policy loans, or any other right to withdraw funds held in conjunction with

policies or contracts, in addition to any contractual provisions for deferral of cash or policy loan

value. In addition, in the event of a temporary moratorium or moratorium charge imposed by the

receivership court on payment of cash values or policy loans, or on any other right to withdraw

funds held in conjunction with policies or contracts, out of the assets of the impaired or insolvent

insurer, the Association may defer the payment of cash values, policy loans or other rights by the

Association for the period of the moratorium or moratorium charge imposed by the receivership

court, except for claims covered by the Association to be paid in accordance with a hardship

procedure established by the liquidator or rehabilitator and ap

proved by the receivership court.

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G. A deposit in this State, held pursuant to law or required by the commissioner for the benefit of creditors,

including policy or contract owners, not turned over to the domiciliary liquidator upon the entry of a final

order of liquidation or order approving a rehabilitation plan of a member insurer domiciled in this State or

in a reciprocal State, pursuant to [insert citation to this State’s law dealing with the handling of special

deposits] shall be promptly paid to the Association. The Association shall be entitled to retain a portion of

any amount so paid to it equal to the percentage determined by dividing the aggregate amount of policy or

contract owners’ claims related to that insolvency for which the Association has provided statutory benefits

by the aggregate amount of all policy or contract owners’ claims in this State related to that insolvency and

shall remit to the domiciliary receiver the amount so paid to the Association less the amount retained

pursuant to this subsection. Any amount so paid to the Association and retained by it shall be treated as a

distribution of estate assets pursuant to applicable State receivership law dealing with early access

disbursements.

H. If the Association fails to act within a reasonable period of time with respect to an insolvent insurer, as

provided in Subsection B of this section, the commissioner shall have the powers and duties of the

Association under this Act with respect to the insolvent insurer.

I. The Association may render assistance and advice to the commissioner, upon the commissioner’s request,

concerning rehabilitation, payment of claims, continuance of coverage, or the performance of other

contractual obligations of an impaired or insolvent insurer.

J. The Association shall have standing to appear or intervene before a court or agency in this State with

jurisdiction over an impaired or insolvent insurer concerning which the Association is or may become

obligated under this Act or with jurisdiction over any person or property against which the Association

may have rights through subrogation or otherwise. Standing shall extend to all matters germane to the

powers and duties of the Association, including, but not limited to, proposals for reinsuring, reissuing,

modifying or guaranteeing the policies or contracts of the impaired or insolvent insurer and the

determination of the policies or contracts and contractual obligations. The Association shall also have the

right to appear or intervene before a court or agency in another State with jurisdiction over an impaired or

insolvent insurer for which the Association is or may become obligated or with jurisdiction over any

person or property against whom the Association may have rights through subrogation or otherwise.

K. (1) A person receiving benefits under this Act shall be deemed to have assigned the rights under, and

any causes of action against any person for losses arising under, resulting from or otherwise

relating to, the covered policy or contract to the Association to the extent of the benefits received

because of this Act, whether the benefits are payments of or on account of contractual obligations,

continuation of coverage or provision of substitute or alternative policies, contracts, or coverages.

The Association may require an assignment to it of such rights and cause of action by any

enrollee, payee, policy or contract owner, beneficiary, insured or annuitant as a condition

precedent to the receipt of any right or benefits conferred by this Act upon the person.

(2) The subrogation rights of the Association under this subsection shall have the same priority

against the assets of the impaired or insolvent insurer as that possessed by the person entitled to

receive benefits under this Act.

(3) In addition to Paragraphs (1) and (2) above, the Association shall have all common law rights of

subrogation and any other equitable or legal remedy that would have been available to the

impaired or insolvent insurer or owner, beneficiary, enrollee, or payee of a policy or contract with

respect to the policy or contracts (including without limitation, in the case of a structured

settlement annuity, any rights of the owner, beneficiary or payee of the annuity, to the extent of

benefits received pursuant to this Act, against a person originally or by succession responsible for

the losses arising from the personal injury relating to the annuity or payment therefore), excepting

any such person responsible solely by reason of serving as an assignee in respect of a qualified

assignment under Internal Revenue Code Section 130).

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(4) If the preceding provisions of this subsection are invalid or ineffective with respect to any person

or claim for any reason, the amount payable by the Association with respect to the related covered

obligations shall be reduced by the amount realized by any other person with respect to the person

or claim that is attributable to the policies or contracts (or portion thereof) covered by the

Association.

(5) If the Association has provided benefits with respect to a covered obligation and a person recovers

amounts as to which the Association has rights as described in the preceding paragraphs of this

subsection, the person shall pay to the Association the portion of the recovery attributable to the

policies or contracts (or portion thereof) covered by the Association.

L. In addition to the rights and powers elsewhere in this Act, the Association may:

(1) Enter into such contracts as are necessary or proper to carry out the provisions and purposes of

this Act;

(2) Sue or be sued, including taking any legal actions necessary or proper to recover any unpaid

assessments under Section 9 and to settle claims or potential claims against it;

(3) Borrow money to effect the purposes of this Act; any notes or other evidence of indebtedness of

the Association not in default shall be legal investments for domestic member insurers and may be

carried as admitted assets;

(4) Employ or retain such persons as are necessary or appropriate to handle the financial transactions

of the Association, and to perform such other functions as become necessary or proper under this

Act;

(5) Take such legal action as may be necessary or appropriate to avoid or recover payment of

improper claims;

(6) Exercise, for the purposes of this Act and to the extent approved by the commissioner, the powers

of a domestic life insurer, health insurer, or health maintenance organization, but in no case may

the Association issue policies or contracts other than those issued to perform its obligations under

this Act;

(7) Organize itself as a corporation or in other legal form permitted by the laws of the State;

(8) Request information from a person seeking coverage from the Association in order to aid the

Association in determining its obligations under this Act with respect to the person, and the

person shall promptly comply with the request;

(9) Unless prohibited by law, in accordance with the terms and conditions of the policy or contract,

file for actuarially justified rate or premium increases for any policy or contract for which it

provides coverage under this Act; and

(10) Take other necessary or appropriate action to discharge its duties and obligations under this Act or

to exercise its powers under this Act.

M. The Association may join an organization of one or more other State associations of similar purposes, to

further the purposes and administer the powers and duties of the Association.

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N. (1) (a) At any time within one hundred eighty (180) days of the date of the order of liquidation,

the Association may elect to succeed to the rights and obligations of the ceding member

insurer that relate to policies, contracts, or annuities covered, in whole or in part, by the

Association, in each case under any one or more reinsurance contracts entered into by the

insolvent insurer and its reinsurers and selected by the Association. Any such assumption

shall be effective as of the date of the order of liquidation. The election shall be effected

by the Association or the National Organization of Life and Health Insurance Guaranty

Associations (NOLHGA) on its behalf sending written notice, return receipt requested, to

the affected reinsurers.

(b) To facilitate the earliest practicable decision about whether to assume any of the

contracts of reinsurance, and in order to protect the financial position of the estate, the

receiver and each reinsurer of the ceding member insurer shall make available upon

request to the Association or to NOLHGA on its behalf as soon as possible after

commencement of formal delinquency proceedings (i) copies of in-force contracts of

reinsurance and all related files and records relevant to the determination of whether such

contracts should be assumed, and (ii) notices of any defaults under the reinsurance

contacts or any known event or condition which with the passage of time could become a

default under the reinsurance contracts.

assumed by the Association:

(i) The Association shall be responsible for all unpaid premiums due under the

reinsurance contracts for periods both before and after the date of the order of

liquidation, and shall be responsible for the performance of all other obligations

to be performed after the date of the order of liquidation, in each case which

relate to policies, contracts, or annuities covered, in whole or in part, by the

Association. The Association may charge policies, contracts, or annuities

covered in part by the Association, through reasonable allocation methods, the

costs for reinsurance in excess of the obligations of the Association and shall

provide notice and an accounting of these charges to the liquidator;

(ii) The Association shall be entitled to any amounts payable by the reinsurer under

the reinsurance contracts with respect to losses or events that occur in periods

after the date of the order of liquidation and that relate to policies, contracts, or

annuities covered, in whole or in part, by the Association, provided that, upon

receipt of any such amounts, the Association shall be obliged to pay to the

beneficiary under the policy, contracts, or annuity on account of which the

amounts were paid a portion of the amount equal to the lesser of:

(I) The amount received by the Association; and

(II) The excess of the amount received by the Association over the amount

equal to the benefits paid by the Association on account of the policy,

contracts, or annuity less the retention of the insurer applicable to the

loss or event.

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(iii) Within thirty (30) days following the Association’s election (the “election

date”), the Association and each reinsurer under contracts assumed by the

Association shall calculate the net balance due to or from the Association under

each reinsurance contract as of the election date with respect to policies,

contracts, or annuities covered, in whole or in part, by the Association, which

calculation shall give full credit to all items paid by either the member insurer or

its receiver or the reinsurer prior to the election date. The reinsurer shall pay the

receiver any amounts due for losses or events prior to the date of the order of

liquidation, subject to any set-off for premiums unpaid for periods prior to the

date, and the Association or reinsurer shall pay any remaining balance due the

other, in each case within five (5) days of the completion of the aforementioned

calculation. Any disputes over the amounts due to either the Association or the

reinsurer shall be resolved by arbitration pursuant to the terms of the affected

reinsurance contracts or, if the contract contains no arbitration clause, as

otherwise provided by law. If the receiver has received any amounts due the

Association pursuant to Subparagraph (c)(ii) of this Paragraph (1), the receiver

shall remit the same to the Association as promptly as practicable.

(iv) If the Association or receiver, on the Association’s behalf, within sixty (60)

days of the election date, pays the unpaid premiums due for periods both before

and after the election date that relate to policies, contracts, or annuities covered,

in whole or in part, by the Association, the reinsurer shall not be entitled to

terminate the reinsurance contracts for failure to pay premium insofar as the

reinsurance contracts relate to policies, contracts, or annuities covered, in whole

or in part, by the Association, and shall not be entitled to set off any unpaid

amounts due under other contracts, or unpaid amounts due from parties other

than the Association, against amounts due the Association.

(2) During the period from the date of the order of liquidation until the election date (or, if the

election date does not occur, until one hundred eighty (180) days after the date of the order of

liquidation),

(a) (i) Neither the Association nor the reinsurer shall have any rights or obligations

under reinsurance contracts that the Association has the right to assume under

Subsection (1), whether for periods prior to or after the date of the order of

liquidation; and

(ii) The reinsurer, the receiver and the Association shall, to the extent practicable,

provide each other data and records reasonably requested;

(b) Provided that once the Association has elected to assume a reinsurance contract, the

parties’ rights and obligations shall be governed by Subsection (1).

(3) If the Association does not elect to assume a reinsurance contract by the election date pursuant to

Subsection (1), the Association shall have no rights or obligations, in each case for periods both

before and after the date of the order of liquidation, with respect to the reinsurance contract.

(4) When policies, contracts, or annuities, or covered obligations with respect thereto, are transferred

to an assuming insurer, reinsurance on the policies, contracts, or annuities may also be transferred

by the Association, in the case of contracts assumed under Subsection (1), subject to the

following:

(a) Unless the reinsurer and the assuming insurer agree otherwi

se, the reinsurance contract

transferred shall not cover any new policies of insurance, contracts, or annuities in

addition to those transferred;

(b) The obligations described in Subsection (1) of this Section shall no longer apply with

respect to matters arising after the effective date of the transfer; and

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affected reinsurer not less than thirty (30) days prior to the effective date of the transfer.

(5) The provisions of this Section N shall supersede the provisions of any State law or of any affected

reinsurance contract that provides for or requires any payment of reinsurance proceeds, on

account of losses or events that occur in periods after the date of the order of liquidation, to the

receiver of the insolvent insurer or any other person. The receiver shall remain entitled to any

amounts payable by the reinsurer under the reinsurance contracts with respect to losses or events

that occur in periods prior to the date of the order of liquidation, subject to applicable setoff

provisions.

(6) Except as otherwise provided in this section, nothing in this Section N shall alter or modify the

terms and conditions of any reinsurance contract. Nothing in this section shall abrogate or limit

any rights of any reinsurer to claim that it is entitled to rescind a reinsurance contract. Nothing in

this section shall give a policyholder, contract owner, enrollee, certificate holder, or beneficiary an

independent cause of action against a reinsurer that is not otherwise set forth in the reinsurance

contract. Nothing in this section shall limit or affect the Association’s rights as a creditor of the

estate against the assets of the estate. Nothing in this section shall apply to reinsurance agreements

covering property or casualty risks.

O. The Board of Directors of the Association shall have discretion and may exercise reasonable business

judgment to determine the means by which the Association is to provide the benefits of this Act in an

economical and efficient manner.

P. Where the Association has arranged or offered to provide the benefits of this Act to a covered person under

a plan or arrangement that fulfills the Association’s obligations under this Act, the person shall not be

entitled to benefits from the Association in addition to or other than those provided under the plan or

arrangement.

Q. Venue in a suit against the Association arising under the Act shall be in [insert name of county] County.

The Association shall not be required to give an appeal bond in an appeal that relates to a cause of action

arising under this Act.

Drafting Note: Along with Section 3, this section is a key to the specific responsibilities of the Association toward covered persons. That responsibility

varies by type of policy or contract involved.

The Association is primarily intended to act after the entry of an order of liquidation with the finding of insolvency against a member insurer. However, the

Association may act (Section 8A) in the case of an impaired insurer to guarantee, assume, reissue, or reinsure any or all policies or contracts or otherwise

provide money to the member insurer.

Subsection B details the main role of the Association in the instance of an order of liquidation against an insolvent insurer. The responsibilities of the

Association vary depending on the kind of coverage and type of policy or contract—group or individual. The Association may offer alternative policies or

contracts or change the premiums or benefits of existing policies or contracts. “New contracts or policies” shall be offered without new underwriting and

with coverage for existing conditions. This subsection also details that any rate changes, including rates for new or replacement contracts or policies, must be

actuarially justified and, if specified by the State, the commissioner must approve the rates prior to the rates becoming effective. In order to facilitate the sale

of blocks of business for which the Association is responsible, the cooperation of the domestic receiver may be necessary.

Subsection F relates to the imposition of policy and contract liens, moratoriums, etc. These are devices which have been used in the past in connection with

continuation of the insolvent insurer’s coverage. Since, by definition, the assets of the insolvent insurer were not adequate to support its contractual

obligations, liens were used to reduce those obligations to a level where the assets would be adequate. However, in the past there was no means to infuse

additional funds where needed to make whole policy or contract owners, insureds, enrollees, and beneficiaries. The purpose of the model act is to provide

timely payment and protect against losses due to an insolvency, by providing prompt fulfillment of insurance or health maintenance organization benefits to

the extent of the Association’s obligations under this Act. To the extent that liens and moratoriums are sanctioned, the model act retreats from this principle.

On the one hand, it can be argued that if liens and moratoriums cannot be used, there will be a run on the assets of the impaired or insolvent company. In the

past this seems to have been true. However, unlike the past, the performance of the member insurer’s contractual obligations would be guaranteed.

Also, the standard nonforfeiture laws provide that an insurer in its policies shall reserve the right to defer the payment of cash values for a period of six

months after demand therefor with surrender of the policy. Similarly, it is common to require an insurer to reserve for a period of six months the right to

defer the granting of any policy loan (other than to pay premiums). For those various reasons, the model act does not encourage the use of liens and

moratoriums in ordinary situations.

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On the other hand, in periods of severe liquidity problems and economic stress, perhaps of even catastrophic proportions, such devices may become essential.

While the model act concentrates on the protection of those to whom the impaired or insolvent insurer has a contractual obligation, the impact of assessments

on the policyholders, contract owners, certificate holders, or enrollees of assessed companies is also an important consideration (e.g., significant sales of

depressed value assets in a tight money market). Consequently Subsection F(1) authorizes the Association to cause to be imposed liens and moratoriums (or

other similar means):

1. If the Court finds that the amounts assessable are less than what is needed, or that the economic or financial conditions as they affect member

insurers are sufficiently adverse to render the use of such tools in the public interest; and

2. The Court approves the use of the specific lien, moratorium, etc.

This provides a highly flexible mechanism while at the same time it avoids impairing the contractual obligations of the impaired or insolvent insurer as a

routine matter under ordinary economic and financial conditions. The provision also recognizes that while contractual rights of policy owners, contract

owners, certificate holders, or enrollees may not constitutionally be impaired, when the impaired or insolvent insurer’s obligation under the contract is

assumed by another insurer the policy owner, contract owners, certificate holders, or enrollees has two options. The policy owner, contract owners,

certificate holders, or enrollees may accept the new contract with such liens or moratoriums as permitted by the court, or accept such pro rata payment as is

available from the estate of the insolvent insurer.

Furthermore, to provide added flexibility in a temporary situation (e.g., run on assets), Subsection F(2) provides for temporary moratoriums or liens on

payment of cash values and policy loans, but not on the payment of other benefits, with the Court’s approval.

Subsection J, to enable the Association to protect its interest and the best interests of the policyholders, contract owners, certificate holders, or enrollees in

the handling of an impairment or insolvency, provides that the Association shall have standing to appear in courts with jurisdiction over an insolvent insurer

and such standing will extend to any matters concerning the duties of the Association.

Subsection L(9) was added to clarify that the Association has the authority to request rate increases under Section 8 in accordance with the terms of the

policies or contracts, unless prohibited by law. States should determine whether it would be consistent with other provisions of State law to make this power

of the Association subject to prior approval of the commissioner. States that have adopted long-term care insurance laws and regulations similar to the

NAIC’s Long-Term Care Insurance Model Act and Long-Term Care Insurance Model Regulation should consider whether this language should be changed

to conform to any applicable notice and approval requirements for premium rate schedule increases for long-term care insurance policies.

Subsection M explicitly recognizes that prompt and efficient discharge of the Association’s obligations will be greatly facilitated, especially in multistate

insolvencies by acting in concert through the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) to develop and, where

appropriate, carry out coordinated plans.

Subsection N has been revised to conform to the provisions of Section 612 of the Insurer Receivership Model Act. Section 612 represents a compromise

among receivers, reinsurers and guaranty associations regarding reinsurance of life and health insurance contracts. The revisions of Section 8N are intended

to preserve that compromise in this Act insofar as the Association is concerned.

R. In carrying out its duties in connection with guaranteeing, assuming, reissuing, or reinsuring policies or

contracts under Subsections A or B, the Association may issue substitute coverage for a policy or contract

that provides an interest rate, crediting rate or similar factor determined by use of an index or other external

reference stated in the policy or contract employed in calculating returns or changes in value by issuing an

alternative policy or contract in accordance with the following provisions:

(1) In lieu of the index or other external reference provided for in the original policy or contract, the

alternative policy or contract provides for (i) a fixed interest rate or (ii) payment of dividends with

minimum guarantees or (iii) a different method for calculating interest or changes in value;

(2) There is no requirement for evidence of insurability, waiting period or other exclusion that would

not have applied under the replaced policy or contract, and;

(3) The alternative policy or contract is substantially similar to the replaced policy or contract in all

other material terms

Section 9. Assessments

A. For the purpose of providing the funds necessary to carry out the powers and duties of the Association, the

board of directors shall assess the member insurers, separately for each account, at such time and for such

amounts as the board finds necessary. Assessments shall be due not less than thirty (30) days after prior

written notice to the member insurers and shall accrue interest at [insert amount] percent per annum on and

after the due date.

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B. There shall be two (2) classes of assessments, as follows:

(1) Class A assessments shall be authorized and called for the purpose of meeting administrative and

legal costs and other expenses. Class A assessments may be authorized and called whether or not

related to a particular impaired or insolvent insurer.

(2) Class B assessments shall be authorized and called to the extent necessary to carry out the powers

and duties of the Association under Section 8 with regard to an impaired or an insolvent insurer.

C. (1) The amount of a Class A assessment shall be determined by the board and may be authorized and

called on a pro rata or non-pro rata basis. If pro rata, the board may provide that it be credited

against future Class B assessments.

(2) The amount of a Class B assessment, except for assessments related to long-term care insurance,

shall be allocated for assessment purposes between the accounts and among the subaccounts of

the life insurance and annuity account, pursuant to an allocation formula which may be based on

the premiums or reserves of the impaired or insolvent insurer or any other standard deemed by the

board in its sole discretion as being fair and reasonable under the circumstances.

(3) The amount of the Class B assessment for long-term care insurance written by the impaired or

insolvent insurer shall be allocated according to a methodology included in the Plan of Operation

and approved by the Commissioner. The methodology shall provide for 50% of the assessment to

be allocated to accident and health member insurers and 50% to be allocated to life and annuity

member insurers.

Drafting Note: The purpose of Subsection C(3) is to allocate the responsibility for an insolvency of a long-term care member insurer evenly between

member insurers in the health industry and member insurers in the life and annuity industries. As it is likely that life and annuity member insurers will be

subject to assessments from the health account, and accident and health member insurers will be subject to assessments from the life account, the formula

below should be utilized by guaranty associations so that member insurers in the health industry pay 50% of the assessment and member insurers in the life

and annuity industries pay 50% of the assessment.

In determining the shares that shall be allocated to the life and annuity account pursuant to Subsection C(3), guaranty associations should use the following

formula:

(.50 - Life and annuity member insurers’ share of HA) / (Life and annuity member insurers’ share of LIAA - Life and annuity member insurers’ share of HA)

For the purposes of the formula above and Subsection C(3) only, a “life and annuity member insurer” means a member insurer for which (i) the sum of its

assessable life insurance premiums and annuity premiums is greater than or equal to (ii) its assessable health insurance premiums, which shall include its

assessable health maintenance organization premiums but shall exclude its assessable premiums written for disability income and long-term care insurance.

For purposes of this definition, assessable premiums shall be measured within the state. An “accident and health member insurer” means any member insurer

not defined as a “life and annuity member insurer.” HA represents the guaranty association Health Account and LIAA represents the guaranty association

Life Insurance and Annuity Account.

(4) Class B assessments against member insurers for each account and subaccount shall be in the

proportion that the premiums received on business in this State by each assessed member insurer

on policies or contracts covered by each account for the three (3) most recent calendar years for

which information is available preceding the year in which the member insurer became insolvent

(or, in the case of an assessment with respect to an impaired insurer, the three (3) most recent

calendar years for which information is available preceding the year in which the member insurer

became impaired) bears to premiums received on business in this State for those calendar years by

all assessed member insurers.

(5) Assessments for funds to meet the requirements of the Association with respect to an impaired or

insolvent insurer shall not be authorized or called until necessary to implement the purposes of

this Act. Classification of assessments under Subsection B and computation of assessments under

this subsection shall be made with a reasonable degree of accuracy, recognizing that exact

determinations may not always be possible. The Association shall notify each member insurer of

its anticipated pro rata share of an authorized assessment not yet called within one hundred eighty

(180) days after the assessment is authorized.

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D. The Association may abate or defer, in whole or in part, the assessment of a member insurer if, in the

opinion of the board, payment of the assessment would endanger the ability of the member insurer to fulfill

its contractual obligations. In the event an assessment against a member insurer is abated, or deferred in

whole or in part, the amount by which the assessment is abated or deferred may be assessed against the

other member insurers in a manner consistent with the basis for assessments set forth in this section. Once

the conditions that caused a deferral have been removed or rectified, the member insurer shall pay all

assessments that were deferred pursuant to a repayment plan approved by the Association.

E. (1) (a) Subject to the provisions of Subparagraph (b) of this paragraph, the total of all

assessments authorized by the Association with respect to a member insurer for each

subaccount of the life insurance and annuity account and for the health account shall not

in one calendar year exceed two percent (2%) of that member insurer’s average annual

premiums received in this State on the policies and contracts covered by the subaccount

or account during the three (3) calendar years preceding the year in which the member

insurer became an impaired or insolvent insurer.

(b) If two (2) or more assessments are authorized in one calendar year with respect to

member insurers that become impaired or insolvent in different calendar years, the

average annual premiums for purposes of the aggregate assessment percentage limitation

referenced in Subparagraph (a) of this paragraph shall be equal and limited to the higher

of the three-year average annual premiums for the applicable subaccount or account as

calculated pursuant to this section.

account, does not provide in one year in either account an amount sufficient to carry out

the responsibilities of the Association, the necessary additional funds shall be assessed as

soon thereafter as permitted by this Act.

(2) The board may provide in the plan of operation a method of allocating funds among claims,

whether relating to one or more impaired or insolvent insurers, when the maximum assessment

will be insufficient to cover anticipated claims.

(3) If the maximum assessment for a subaccount of the life and annuity account in one year does not

provide an amount sufficient to carry out the responsibilities of the Association, then pursuant to

Subsection C(2), the board shall access the other subaccounts of the life and annuity account for

the necessary additional amount, subject to the maximum stated in Paragraph (1) above.

F. The board may, by an equitable method as established in the plan of operation, refund to member insurers,

in proportion to the contribution of each member insurer to that account, the amount by which the assets of

the account exceed the amount the board finds is necessary to carry out during the coming year the

obligations of the Association with regard to that account, including assets accruing from assignment,

subrogation, net realized gains and income from investments. A reasonable amount may be retained in any

account to provide funds for the continuing expenses of the Association and for future losses claims.

G. It shall be proper for any member insurer, in determining its premium rates and policy owner dividends as

to any kind of insurance or health maintenance organization business within the scope of this Act, to

consider the amount reasonably necessary to meet its assessment obligations under this Act.

H. The Association shall issue to each member insurer paying an assessment under this Act, other than a Class

A assessment, a certificate of contribution, in a form prescrib

ed by the commissioner, for the amount of the

assessment so paid. All outstanding certificates shall be of equal dignity and priority without reference to

amounts or dates of issue. A certificate of contribution may be shown by the member insurer in its financial

statement as an asset in such form and for such amount, if any, and period of time as the commissioner may

approve.

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I. (1) A member insurer that wishes to protest all or part of an assessment shall pay when due the full

amount of the assessment as set forth in the notice provided by the Association. The payment shall

be available to meet Association obligations during the pendency of the protest or any subsequent

appeal. Payment shall be accompanied by a statement in writing that the payment is made under

protest and setting forth a brief statement of the grounds for the protest.

(2) Within sixty (60) days following the payment of an assessment under protest by a member insurer,

the Association shall notify the member insurer in writing of its determination with respect to the

protest unless the Association notifies the member insurer that additional time is required to

resolve the issues raised by the protest.

(3) Within thirty (30) days after a final decision has been made, the Association shall notify the

protesting member insurer in writing of that final decision. Within sixty (60) days of receipt of

notice of the final decision, the protesting member insurer may appeal that final action to the

commissioner.

(4) In the alternative to rendering a final decision with respect to a protest based on a question

regarding the assessment base, the Association may refer protests to the commissioner for a final

decision, with or without a recommendation from the Association.

(5) If the protest or appeal on the assessment is upheld, the amount paid in error or excess shall be

returned to the member insurer. Interest on a refund due a protesting member insurer shall be paid

at the rate actually earned by the Association.

J. The Association may request information of member insurers in order to aid in the exercise of its power

under this section and member insurers shall promptly comply with a request.

Drafting Note: The Association is authorized to raise funds to fulfill its obligations under this Model Act with respect to an impaired or insolvent insurer by

assessing the member insurers on the basis of the premiums they write in the State. This corresponds to the Association’s liability which, in most cases, is

limited to covered policies of residents. This assessment system provides a base broad enough to meet fairly large demands on the Association. Equally

important, since it reflects the market share of each member insurer in the State including health maintenance organizations, it is an equitable method of

apportioning the burden of the assessments.

Subsection E provides some limitations on the amounts that can be assessed in a given year. The maximum assessment per year may be varied from State to

State depending on the size of the base and the concentration of the business. The two percent (2%) maximum assessment per year should produce an

adequate amount while at the same time not impose an undue strain in any given year on the assessed member insurers and their policy owners, contract

owners, certificate holders, or enrollees. The maximum is applied to the amount of assessments authorized in a given year, and not the amount called; this

allows the Association the flexibility to utilize current capacity for future obligations without collecting assessments from the member insurers until required.

The Model Act provides additional discretion and flexibility for the Association in fulfilling its responsibilities by authorizing it to borrow funds that later

can be paid out of future assessments.

Subsection G provides that a member insurer may consider in its premium rates and dividend scale an amount reasonably necessary to meet its assessment

obligations. This makes it clear that the cost can be ultimately passed on to the policy owners, contract owners, certificate holders, or enrollees—i.e., to

persons who enjoy the protection provided by the Act. Subsection H provides that the Association shall issue to assessed member insurers certificates of

contribution in the amount levied. The certificates may be carried by a member insurer in its annual statement as an asset in such form, amount and period as

may be approved by the commissioner. By permitting the member insurers to carry these certificates as an asset, to the extent of their estimated value, the

impact on member insurers will be lessened.

States may consider establishing a pre-funding arrangement for both insurance companies and health maintenance organizations that write health benefit

plans to meet their assessment obligations to the Association. To pre-fund, member insurers writing health benefit plans would collect a set amount per

member or per certificate per month and remit that amount directly to the Association. The pre-funded amounts would be utilized by the member insurers to

satisfy Class B assessment obligations for future insolvencies. When the fund reaches a statutory cap, the pre-funding would stop. In the event of a depletion

of the fund below the statutory cap, the pre-funding assessment would be reinstated.

Establishing a pre-funding arrangement allows for the use of interest and investment income to lessen the impact of insolvencies on State taxpayers. Pre-

funding also spreads the assessment obligations amongst policyholders prior to an insolvency and does not require the member health insurers or health

maintenance organizations to look to the State taxpayers for recoupment. In addition, member insurers in the health industry that do not pay income or

premium taxes would be offered a recoupment methodology that is the same as other member insurers in their markets. If a pre-funding arrangement is

established, the funds should be legally insulated to avoid diversion for any other purposes, and ensure that they are held exclusively for the Association’s

obligations.

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Section 10. Plan of Operation

A. (1) The Association shall submit to the commissioner a plan of operation and any amendments thereto

necessary or suitable to assure the fair, reasonable and equitable administration of the Association.

The plan of operation and any amendments thereto shall become effective upon the

commissioner’s written approval or unless it has not been disapproved within thirty (30) days.

(2) If the Association fails to submit a suitable plan of operation within 120 days following the

effective date of this Act or if at any time thereafter the Association fails to submit suitable

amendments to the plan, the commissioner shall, after notice and hearing, adopt and promulgate

such reasonable rules as are necessary or advisable to effectuate the provisions of this Act. The

rules shall continue in force until modified by the commissioner or superseded by a plan

submitted by the Association and approved by the commissioner.

B. All member insurers shall comply with the plan of operation.

C. The plan of operation shall, in addition to requirements enumerated elsewhere in this Act:

(1) Establish procedures for handling the assets of the Association;

(2) Establish the amount and method of reimbursing members of the board of directors under Section

(3) Establish regular places and times for meetings including telephone conference calls of the board

of directors;

(4) Establish procedures for records to be kept of all financial transactions of the Association, its

agents, and the board of directors;

(5) Establish the procedures whereby selections for the board of directors will be made and submitted

to the commissioner;

(6) Establish any additional procedures for assessments under Section 9;

(7) Contain additional provisions necessary or proper for the execution of the powers and duties of

the Association;

(8) Establish procedures whereby a director may be removed for cause, including in the case where a

member insurer director becomes an impaired or insolvent insurer;

(9) Require the Board of Directors to establish a policy and procedures for addressing conflicts of

interests.

D. The plan of operation may provide that any or all powers and duties of the Association, except those under

Section 8L(3) and Section 9, are delegated to a corporation, association or other organization which

performs or will perform functions similar to those of this Association, or its equivalent, in two (2) or more

States. Such a corporation, association, or organization shall be reimbursed for any payments made on

behalf of the Association and shall be paid for its performance of any function of the Association. A

delegation under this subsection shall take effect only with the approval of both the board of directors and

the commissioner, and may be made only to a corporation, association, or organization which extends

protection not substantially less favorable and effective than that provided by this Act.

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Section 11. Duties and Powers of the Commissioner

In addition to the duties and powers enumerated elsewhere in this Act,

A. The commissioner shall:

(1) Upon request of the board of directors, provide the Association with a statement of the premiums

in this and any other appropriate States for each member insurer;

(2) When an impairment is declared and the amount of the impairment is determined, serve a demand

upon the impaired insurer to make good the impairment within a reasonable time; notice to the

impaired insurer shall constitute notice to its shareholders, if any; the failure of the impaired

insurer to promptly comply with such demand shall not excuse the Association from the

performance of its powers and duties under this Act.

B. The commissioner may suspend or revoke, after notice and hearing, the certificate of authority to transact

business in this State of any member insurer which fails to pay an assessment when due or fails to comply

with the plan of operation. As an alternative the commissioner may levy a forfeiture on any member insurer

that fails to pay an assessment when due. The forfeiture shall not exceed five percent (5%) of the unpaid

assessment per month, but no forfeiture shall be less than $100 per month.

C. A final action of the board of directors or the Association may be appealed to the commissioner by a

member insurer if the appeal is taken within sixty (60) days of its receipt of notice of the final action being

appealed. A final action or order of the commissioner shall be subject to judicial review in a court of

competent jurisdiction in accordance with the laws of this State that apply to the actions or orders of the

commissioner.

D. The liquidator, rehabilitator or conservator of an impaired or insolvent insurer may notify all interested

persons of the effect of this Act.

Drafting Note: Subsection A(2) requires that the commissioner give notice of an impairment to the impaired insurer, and hence to its stockholders, and serve

a demand that the impairment be made good. If the company and stockholders fail to raise the necessary funds, this will be a factor bearing upon the

stockholder’s ownership rights under Section 14E.

State Proceedings for the liquidation, rehabilitation or conservation of member insurers present several difficulties that both acts seek to solve. Briefly, the

difficulties have two sources. First, in some States the liquidator, rehabilitator or ancillary receiver may be a person unfamiliar with insurance or health

benefit plan regulation. Inefficient administration of the proceedings may result.

Second, the laws of more than one State may be applied to the proceedings, particularly regarding ownership of assets and preferences for payment. The

result is confusion and inequity in the collection and distribution of the assets. The Insurers Rehabilitation and Liquidation Model Act and the Uniform

Insurers Liquidation Act meet the first source of problems by designating the insurance commissioner as the receiver of a domestic insurer or the ancillary

receiver of a foreign insurer. To solve the problem of multiple laws and marshaling of assets, both acts give the receiver title to the assets. The ancillary

receiver is then required to forward all assets to the receiver. Both acts also detail the laws under which preferences in the distribution of assets will be

determined.

In drafting this model guaranty act, particular effort was made to avoid (to the extent possible) disrupting existing State liquidation and rehabilitation laws.

However, each individual State may want to consider adopting the Insurers Rehabilitation and Liquidation Model Act or the Uniform Insurers Liquidation

Act, if it has not already done so.

Section 12. Prevention of Insolvencies

To aid in the detection and prevention of member insurer insolvencies or impairments,

A. It shall be the duty of the commissioner:

(1) To notify the commissioners of all the other States, territories of the United States and the District

of Columbia within thirty (30) days following the action taken or the date the action occurs, when

the commissioner takes any of the following actions against a member insurer:

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(a) Revocation of license;

(b) Suspension of license; or

additional contributions to surplus, withdraw from the State, reinsure all or any part of its

business, or increase capital, surplus, or any other account for the security of policy

owners, contract owners, certificate holders, or creditors.

(2) To report to the board of directors when the commissioner has taken any of the actions set forth in

Paragraph (1) or has received a report from any other commissioner indicating that any such

action has been taken in another State. The report to the board of directors shall contain all

significant details of the action taken or the report received from another commissioner.

(3) To report to the board of directors when the commissioner has reasonable cause to believe from

an examination, whether completed or in process, of any member insurer that the insurer may be

an impaired or insolvent insurer.

(4) To furnish to the board of directors the NAIC Insurance Regulatory Information System (IRIS)

ratios and listings of companies not included in the ratios developed by the National Association

of Insurance commissioners, and the board may use the information contained therein in carrying

out its duties and responsibilities under this section. The report and the information contained

therein shall be kept confidential by the board of directors until such time as made public by the

commissioner or other lawful authority.

B. The commissioner may seek the advice and recommendations of the board of directors concerning any

matter affecting the duties and responsibilities of the commissioner regarding the financial condition of

member insurers and insurers or health maintenance organizations seeking admission to transact business

in this State.

C. The board of directors may, upon majority vote, make reports and recommendations to the commissioner

upon any matter germane to the solvency, liquidation, rehabilitation or conservation of any member insurer

or germane to the solvency of any insurer or health maintenance organization seeking to do business in this

State. The reports and recommendations shall not be considered public documents.

D. The board of directors may, upon majority vote, notify the commissioner of any information indicating a

member insurer may be an impaired or insolvent insurer.

E. The board of directors may, upon majority vote, make recommendations to the commissioner for the

detection and prevention of member insurer insolvencies.

[Section 13. Credits for Assessments Paid (Tax Offsets)—OPTIONAL

A. A member insurer may offset against its [premium, franchise or income] tax liability to this State an

assessment described in Section 9H to the extent of twenty percent (20%) of the amount of the assessment

for each of the five (5) calendar years following the year in which the assessment was paid. In the event a

member insurer should cease doing business, all uncredited assessments may be credited against its

[premium, franchise, or income] tax liability for the year it ceases doing business.

B. A member insurer that is exempt from taxes referenced in Subsection A above may recoup its assessments

by a surcharge on its premiums in a sum reasonably calculated to recoup the assessments over a reasonable

period of time, as approved by the commissioner. Amounts recouped shall not be considered premiums for

any other purpose, including the computation of gross premium tax, the medical loss ratio, or agent

commission. If a member insurer collects excess surcharges, the insurer shall remit the excess amount to

the association, and the excess amount shall be applied to reduce future assessments in the appropriate

account.

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C. Any sums that are acquired by refund, pursuant to Section 9F, from the Association by member insurers,

and that have been offset against [premium, franchise or income] taxes as provided in Subsection A above,

shall be paid by the member insurers to this State in such manner as the tax authorities may require. The

Association shall notify the commissioner that refunds have been made.]

Drafting Note: Subsection A provides an offset against future premium, franchise or income taxes of assessments, over a five-year period. The timing of the

credit is dependent on the year the assessment is paid. It also allows the member insurer to select the applicable tax (premium, franchise or income) against

which the credit may be applied and it permits member insurers going out of business to make use of the credit in their final year of operations.

Life insurance premiums, and premiums for certain forms of health insurance, cannot be changed on existing policyholders. Thus, a suitable and practical

method of recoupment available to companies writing life and health insurance lies in offsets against premium or other taxes on such companies. The method

suggested in this section is not only equitable to the companies involved but also reduces the impact on State revenue by the partial offset over a period of

years. To the extent the recovery from the insolvent company exceeds the tax credit received, the State would be the ultimate beneficiary. The equitable

treatment of assessments for tax purposes would have additional positive effects: (1) the State legislature would have an additional incentive for providing

adequate funds for insurance department personnel and administration, and (2) participation in the economic loss would be shared, to some degree, by the

general public rather than solely by insureds, thus minimizing what might otherwise be a penalty on thrift and savings. It may be advisable in some

jurisdictions to provide a cross-reference to the premium or other tax statutes to avoid questions of conflicting statutory provisions.

Subsection B provides an alternative mechanism for tax-exempt member insurers to recoup funds paid for assessments, and is intended to avoid

disadvantaging tax-exempt or non-profit member insurers that are not subject to a [premium, franchise or income] tax liability, and thus would not benefit

from a premium tax offset. The amount and duration of a surcharge is subject to approval by the commissioner, and any such surcharge cannot be considered

premium for any purpose. Building assessments into surcharges for future policyholders or contract owners has proven to be an effective way for insurers to

recoup funds, and a surcharge mechanism is necessary to provide tax-exempt and non-profit member insurers with a meaningful opportunity to recoup funds

paid for assessments.

This section is optional, and the NAIC neither endorses nor rejects the tax credit or the surcharge concept. Each State will wish to consider this provision in

the light of its own regulatory experience.

Section 14. Miscellaneous Provisions

A. This Act shall not be construed to reduce the liability for unpaid assessments of the insureds of an impaired

or insolvent insurer operating under a plan with assessment liability.

B. Records shall be kept of all meetings of the board of directors to discuss the activities of the Association in

carrying out its powers and duties under Section 8. The records of the Association with respect to an

impaired or insolvent insurer shall not be disclosed prior to the termination of a liquidation, rehabilitation

or conservation proceeding involving the impaired or insolvent insurer, except (i) upon the termination of

the impairment or insolvency of the member insurer, or (ii) upon the order of a court of competent

jurisdiction. Nothing in this subsection shall limit the duty of the Association to render a report of its

activities under Section 15.

C. For the purpose of carrying out its obligations under this Act, the Association shall be deemed to be a

creditor of the impaired or insolvent insurer to the extent of assets attributable to covered policies reduced

by any amounts to which the Association is entitled as subrogee pursuant to Section 8K. Assets of the

impaired or insolvent insurer attributable to covered policies shall be used to continue all covered policies

and pay all contractual obligations of the impaired or insolvent insurer as required by this Act. Assets

attributable to covered policies or contracts, as used in this subsection, are that proportion of the assets

which the reserves that should have been established for such policies or contracts bear to the reserves that

should have been established for all policies of insurance or health benefit plans written by the impaired or

insolvent insurer.

D. As a creditor of the impaired or insolvent insurer as established in Subsection C of this section and

consistent with [insert cite of applicable State receivership law provision dealing with early access

disbursements], the Association and other similar associations shall be entitled to receive a disbursement of

assets out of the marshaled assets, from time to time as the assets become available to reimburse it, as a

credit against contractual obligations under this Act. If the liquidator has not, within 120 days of a final

determination of insolvency of a member insurer by the receivership court, made an application to the court

for the approval of a proposal to disburse assets out of marshaled assets to guaranty associations having

obligations because of the insolvency, then the Association shall be entitled to make application to the

receivership court for approval of its own proposal to disburse these assets.

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E. (1) Prior to the termination of any liquidation, rehabilitation or conservation proceeding, the court

may take into consideration the contributions of the respective parties, including the Association,

the shareholders, contract owners, certificate holders, enrollees and policy owners of the insolvent

insurer, and any other party with a bona fide interest, in making an equitable distribution of the

ownership rights of the insolvent insurer. In such a determination, consideration shall be given to

the welfare of the policy owners, contract owners, certificate holders, and enrollees of the

continuing or successor member insurer.

(2) No distribution to stockholders, if any, of an impaired or insolvent insurer shall be made until and

unless the total amount of valid claims of the Association with interest thereon for funds expended

in carrying out its powers and duties under Section 8 with respect to the member insurer have

been fully recovered by the Association.

[F. (1) If an order for liquidation or rehabilitation of a member insurer domiciled in this State has been

entered, the receiver appointed under the order shall have a right to recover on behalf of the

member insurer, from any affiliate that controlled it, the amount of distributions, other than stock

dividends paid by the member insurer on its capital stock, made at any time during the five (5)

years preceding the petition for liquidation or rehabilitation subject to the limitations of

Paragraphs (2) to (4).

(2) No such distribution shall be recoverable if the member insurer shows that when paid the

distribution was lawful and reasonable, and that the member insurer did not know and could not

reasonably have known that the distribution might adversely affect the ability of the member

insurer to fulfill its contractual obligations.

(3) Any person who was an affiliate that controlled the member insurer at the time the distributions

were paid shall be liable up to the amount of distributions received. Any person, who was an

affiliate that controlled the member insurer at the time the distributions were declared, shall be

liable up to the amount of distributions which would have been received if they had been paid

immediately. If two (2) or more persons are liable with respect to the same distributions, they shall

be jointly and severally liable.

(4) The maximum amount recoverable under this subsection shall be the amount needed in excess of

all other available assets of the insolvent insurer to pay the contractual obligations of the insolvent

insurer.

(5) If any person liable under Paragraph (3) is insolvent, all its affiliates that controlled it at the time

the distribution was paid, shall be jointly and severally liable for any resulting deficiency in the

amount recovered from the insolvent affiliate.]

Drafting Note: Subsection A is intended to preserve the assessment liability of the insureds of assessment mutuals.

Subsection B addresses record-keeping by the Association. The Association should be held publicly accountable for its actions. On the other hand, effective

handling of the rehabilitation or liquidation effort requires minimum publicity. Thus, such records will be made public only after the liquidation,

rehabilitation or conservation proceeding is terminated, the impairment or insolvency is terminated or there is a prior order by a court of competent

jurisdiction.

Since this Act imposes the obligation upon the Association to continue coverage for policyholders, contract owners, certificate holders, or enrollees of

insolvent insurers, the assets of the insolvent insurer ought to be used, to the extent available, for the purpose of continuing such coverage. Subsections C

and D are designed to accomplish this purpose.

Subsection E, in conjunction with Section 11A(2), is intended to prevent the shareholders of an impaired or insolvent insurer from sitting back and doing

nothing and then reaping the benefits of funds put up by the Association. These stockholders should not obtain a more advantageous position than they

would have occupied in the absence of this Act. The court is empowered to modify and distribute the ownership rights of an impaired or insolvent insurer in

order to do equity as between the interested parties.

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Subsection F, which should be deleted if the State has adopted Section 602 of the NAIC Insurers Receivership Model Act dealing with affiliated

transactions, is designed to recapture excessive dividend payments to affiliates that exercised control over the impaired or insolvent insurer. The NAIC

Insurance Holding Company System Regulatory Model Act in large measure prevents improper distribution of dividends by an insurer to its holding

company since extraordinary dividends are subject to the prior approval of the commissioner, and ordinary dividends are required to be reported to the

commissioner. If, however, dividends are paid under circumstances that the member insurer should have reasonably known that such payment could

reasonably be expected to affect its ability to perform its contractual obligation to its policyholders, contract owners, certificate holders, or enrollees the

holding company and affiliates should be required to repay such dividends subject to certain reasonable limitations.

If a State has the NAIC Insurance Holding Company System Regulatory Model Act, the definitions therein could be referred to by this subsection. States

without the Model Act could incorporate the relevant definitions in this subsection.

Section 15. Examination of the Association; Annual Report

The Association shall be subject to examination and regulation by the commissioner. The board of directors shall submit to

the commissioner each year, not later than 120 days after the Association’s fiscal year, a financial report in a form approved

by the commissioner and a report of its activities during the preceding fiscal year. Upon the request of a member insurer, the

Association shall provide the member insurer with a copy of the report.

Section 16. Tax Exemptions

The Association shall be exempt from payment of all fees and all taxes levied by this State or any of its subdivisions, except

taxes levied on real property.

Section 17. Immunity

There shall be no liability on the part of and no cause of action of any nature shall arise against any member insurer or its

agents or employees, the Association or its agents or employees, members of the board of directors, or the commissioner or

the commissioner’s representatives, for any action or omission by them in the performance of their powers and duties under

this Act. This immunity shall extend to the participation in any organization of one or more other State associations of

similar purposes and to any such organization and its agents or employees.

Drafting Note: This drafting note is for the purpose of clarifying the intent of the drafters of Section 17. As the courts have indicated, this provision was

never intended to protect the Association from actions seeking to enforce its statutory obligations to pay covered claims. See, e.g., Mendes v. Hawaii

Insurance Guaranty Association, 950 P.2d 1214, 1218 (Haw. Sup. Ct. 1998), (“HIGA is amenable to suit for the limited purpose of compelling it to perform

its statutory duty to deal with the covered claims of insolvent insurers”); PIE Mutual Insurance Company v. Ohio Insurance Guaranty Association, 611 N.E.

2d. 313, 317 (Ohio Sup. Ct. 1993) (“ … insured or third-party claimant is entitled to judicial relief to force OIGA to perform its statutory duties”).

Nor was the provision ever intended to protect the Association from contract actions to enforce express obligations of the Association under contracts

entered into by the Association.

Each State may wish to review its own statutes to determine whether its Tort Claims Act, if it has one, could be used as an alternative to this section insofar

as it applies to the commissioner or his representative.

Section 18. Stay of Proceedings; Reopening Default Judgments

All proceedings in which the insolvent insurer is a party in any court in this State shall be stayed one hundred eighty (180)

days from the date an order of liquidation, rehabilitation or conservation is final to permit proper legal action by the

Association on any matters germane to its powers or duties. As to judgment under any decision, order, verdict or finding

based on default the Association may apply to have such judgment set aside by the same court that made such judgment and

shall be permitted to defend against such suit on the merits.

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Section 19. Prohibited Advertisement of Insurance Guaranty Association Act in Insurance Sales; Notice to

Policy Owners

A. No person, including a member insurer, agent or affiliate of a member insurer shall make, publish,

disseminate, circulate or place before the public, or cause directly or indirectly, to be made, published,

disseminated, circulated or placed before the public, in any newspaper, magazine or other publication, or in

the form of a notice, circular, pamphlet, letter or poster, or over any radio station or television station, or in

any other way, any advertisement, announcement or statement, written or oral, which uses the existence of

the Insurance Guaranty Association of this State for the purpose of sales, solicitation or inducement to

purchase any form of insurance or other coverage covered by the [State] Life and Health Insurance

Guaranty Association Act. However, this section shall not apply to the [State] Life and Health Insurance

Guaranty Association or any other entity which does not sell or solicit insurance or coverage by a health

maintenance organization.

B. Within one hundred eighty (180) days of the effective date of this Act, the Association shall prepare a

summary document describing the general purposes and current limitations of the Act and complying with

Subsection C of this section. This document shall be submitted to the commissioner for approval. At the

expiration of the sixtieth day after the date on which the commissioner approves the document, a member

insurer may not deliver a policy or contract to a policy owner, contract owner, certificate holder, or

enrollee unless the summary document is delivered to the policy owner, contract owner, certificate holder,

or enrollee at the time of delivery of the policy or contract. The document shall also be available upon

request by a policy owner, contract owner, certificate holder, or enrollee. The distribution, delivery or

contents or interpretation of this document does not guarantee that either the policy or the contract or the

policy owner, contract owner, certificate holder, or enrollee is covered in the event of the impairment or

insolvency of a member insurer. The description document shall be revised by the Association as

amendments to the Act may require. Failure to receive this document does not give the policy owner,

contract owner, certificate holder, enrollee, or insured any greater rights than those stated in this Act.

C. The document prepared under Subsection B shall contain a clear and conspicuous disclaimer on its face.

The commissioner shall establish the form and content of the disclaimer. The disclaimer shall:

(1) State the name and address of the Life and Health Insurance Guaranty Association and insurance

department;

(2) Prominently warn the policy owner, contract owner, certificate holder, or enrollee that the Life

and Health Insurance Guaranty Association may not cover the policy or contract or, if coverage is

available, it will be subject to substantial limitations and exclusions and conditioned on continued

residence in this State;

(3) State the types of policies or contracts for which guaranty funds will provide coverage;

(4) State that the member insurer and its agents are prohibited by law from using the existence of the

Life and Health Insurance Guaranty Association for the purpose of sales, solicitation or

inducement to purchase any form of insurance or health maintenance organization coverage;

(5) State that the policy owner, contract owner, certificate holder, or enrollee should not rely on

coverage under the Life and Health Insurance Guaranty Association when selecting an insurer or

health maintenance organization;

(6) Explain rights available and procedures for filing a complaint to allege a violation of any

provisions of this Act; and

(7) Provide other information as directed by the commissioner i

ncluding but not limited to, sources

for information about the financial condition of insurers provided that the information is not

proprietary and is subject to disclosure under that State’s public records law.

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D. A member insurer shall retain evidence of compliance with Subsection B for so long as the policy or

contract for which the notice is given remains in effect.

Drafting Note: Subsection A continues the prohibition of using the existence of the Association in the inducement of sale of insurance or health

maintenance organization coverage. However, Subsection B requires notification to new policyholders concerning the general parameters of the association

law and responsibility thereunder.

The following form for the disclaimer notice is suggested:

LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION DISCLAIMER

The [insert name of the Life and Health Insurance Guaranty Association] provides coverage of claims under some

types of policies or contracts if the insurer or health maintenance organization becomes impaired or insolvent.

COVERAGE MAY NOT BE AVAILABLE FOR YOUR POLICY. Even if coverage is provided, there are

significant limits and exclusions. Coverage is always conditioned on residence in this State. Other conditions may

also preclude coverage.

The Life and Health Insurance Guaranty Association will respond to any questions you may have which are not

answered by this document. Your insurer or health maintenance organization and agent are prohibited by law from

using the existence of the association or its coverage to sell you an insurance policy or health maintenance

organization coverage.

You should not rely on availability of coverage under the Life and Health Insurance Guaranty Association when

selecting an insurer or a health maintenance organization.

[Insert addresses of the Association and department.]

Insurers, health maintenance organizations and agents should be required to deliver the document and disclaimer described

under Subsections B and C when a customer is solicited if a “free look” period is not required by State law.

Computer programs or other evidence of established procedures for including the notice required under Subsection 19B in

the policy or contract in the printing, assembly or issue process would be considered evidence of the compliance required

under Subsection 19D.

Section 20. Prospective Application

This Act shall not apply to any member insurer that is insolvent or unable to fulfill its contractual obligations on the effective

date of this Act.

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APPENDIX

ALTERNATIVE PROVISIONS

Drafting Note: The underlining and overstrikes in the following provisions show the necessary changes from the model if a State decides to eliminate

coverage for unallocated annuities.

Alternative Section 3. Coverage and Limitations

A. This Act shall provide coverage for the policies and contracts specified in Subsection B:

(1) To persons who, regardless of where they reside (except for nonresident certificate holders under

group policies or contracts), are the beneficiaries, assignees or payees including health care

providers rendering services covered under health insurance policies or certificates, of the persons

covered under Paragraph (2);

(2) To persons who are owners of or certificate holders or enrollees under the policies or contracts

(other than structured settlement annuities) and in each case who

(a) Are residents; or

(b) Are not residents, but only under all of the following conditions:

(i) The member insurer that issued the policies or contracts is domiciled in this

State;

(ii) The States in which the persons reside have associations similar to the

association created by this Act;

(iii) The persons are not eligible for coverage by an association in any other State

due to the fact that the insurer or the health maintenance organization was not

licensed in the State at the time specified in the State’s guaranty association law.

(3) For structured settlement annuities specified in Subsection B; Paragraphs (1) and (2) of this

subsection shall not apply, and this Act shall (except as provided in Paragraphs (5) and (6) of this

subsection) provide coverage to a person who is a payee under a structured settlement annuity (or

beneficiary of a payee if the payee is deceased), if the payee:

(a) Is a resident, regardless of where the contract owner resides; or

(b) Is not a resident, but only under both of the following conditions;

(i) (I) The contract owner of the structured settlement annuity is a resident; or

(II) The contract owner of the structured settlement annuity is not a

resident; but

a. The insurer that issued the structured settlement annuity is

domiciled in this State; and

b. The State in which the contract owner resides has an

association similar to the association created by this Act; and

(ii) Neither the payee (or beneficiary) nor the contract owner is eligible for coverage

by the association of the State in which the payee or contract owner resides.

(4) This Act shall not provide coverage to a person who is a payee (or beneficiary) of a contract

owner resident of this State, if the payee (or beneficiary) is afforded any coverage by the

association of another State.

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(5) This Act is intended to provide coverage to a person who is a resident of this State and, in special