Utah Admin. Code 590-173-12

Current through Bulletin 2024-19, October 1, 2024

Section R590-173-12 - Trust Agreement Qualified UnderR590-173-11

(1) A trust agreement qualified under Section R590-173-11 shall:

(a) be between a beneficiary, a grantor, and a trustee that is a qualified United States financial institution;

(b) create a trust account where assets are deposited;

(c) require that all assets in the trust account be held by a trustee in the trustee's office in the United States;

(d) provide that:

(i) the beneficiary may withdraw assets from the trust account at any time, without notice to the grantor, subject only to written notice from the beneficiary to the trustee;

(ii) no other statement or document is required to be presented to withdraw assets, except that the beneficiary may be required to acknowledge receipt of withdrawn assets;

(iii) it is not subject to a condition or qualification outside of the trust agreement; and

(iv) it may not contain a reference to another agreement or document except as provided for in Subsections (k) and (l);

(e) be established for the sole benefit of the beneficiary;

(f) require the trustee to:

(i) receive and hold all assets in a safe place;

(ii) place assets in a form that allows the beneficiary, or the trustee upon direction by the beneficiary, to negotiate the assets without consent or signature from the grantor or any other person or entity;

(iii) furnish to the grantor and the beneficiary a statement of all assets in the trust account upon its inception and at intervals no less frequent than the end of each calendar quarter;

(iv) notify the grantor and the beneficiary within 10 days of a deposit to or withdrawal from the trust;

(v) on a beneficiary's written request, immediately take steps necessary to transfer absolutely and unequivocally all right, title, and interest in the assets held in the trust account to the beneficiary and deliver physical custody of the assets to the beneficiary; and

(vi) not allow a substitution or withdrawal of an asset from the trust account, except:

(A) on written instruction from the beneficiary; and

(B) the trustee may, without the consent of but with notice to the beneficiary, upon call or maturity of any trust asset, withdraw such asset upon condition that the proceeds are paid into the trust account;

(g) provide written notification of termination at least 30 days, but not more than 45 days, before termination of the trust, to the trustee and to the beneficiary;

(h) be subject to the laws of the state in which the trust is domiciled;

(i) prohibit invasion of the trust corpus for the purpose of paying commission to, or reimbursing the expenses of, the trustee, except that in order for a letter of credit to qualify as an asset of the trust, the trustee shall have the right and the obligation pursuant to the deed of trust or some other binding agreement to immediately draw down the full amount of the letter of credit and hold the proceeds in trust for the beneficiaries of the trust if the letter of credit expires without being renewed or replaced;

(j) provide that the trustee is liable for its:

(i) negligence or willful misconduct, including the failure of the trustee to draw against the letter of credit in circumstances where the draw would be required; and

(ii) lack of good faith;

(k) notwithstanding other provisions of this rule, when a trust agreement is established in conjunction with a reinsurance agreement covering risks other than life, annuity, and accident and health, where a trust agreement is provided for a specific purpose, the trust agreement may provide that the ceding insurer undertake to use and apply amounts drawn upon the trust account, without diminution because of the insolvency of the ceding insurer or the assuming insurer, only for the following purposes:

(i) to pay or reimburse the ceding insurer for:

(A) the assuming insurer's share under the specific reinsurance agreement regarding any losses and allocated loss expenses paid by the ceding insurer, but not recovered from the assuming insurer; and

(B) the unearned premiums due to the ceding insurer if not paid by the assuming insurer;

(ii) to pay the assuming insurer any amount held in the trust account that exceeds 102% of the actual amount required to fund the assuming insurer's obligations under the specific reinsurance agreement; or

(iii) to withdraw amounts equal to the obligations and deposit those amounts in a separate account, in the name of the ceding insurer in any qualified United States financial institution separate from its general assets, in trust for such uses and purposes specified in Subsections (1)(k)(i) and (1)(k)(ii) as may remain executory after such withdrawal and for any period after the termination date where:

(A) the ceding insurer received notification of termination of the trust account; and

(B) the assuming insurer's entire obligations under the specific reinsurance agreement remain unliquidated and undischarged 10 days before the termination date;

(l) notwithstanding other provisions of this rule, when a trust agreement is established to meet the requirements of Subsection (2) in conjunction with a reinsurance agreement covering life, annuity, or accident and health risks, where a trust agreement is provided for a specific purpose, the trust agreement may provide that the ceding insurer undertake to use and apply amounts drawn upon the trust account, without diminution because of the insolvency of the ceding insurer or the assuming insurer, only for the following purposes:

(i) to pay or reimburse the ceding insurer for:

(A) the assuming insurer's share under the specific reinsurance agreement of premiums returned, but not yet recovered from the assuming insurer, to the owners of policies reinsured under the reinsurance agreement on account of cancellation of the policies; and

(B) the assuming insurer's share under the specific reinsurance agreement of surrenders and benefits or losses paid by the ceding insurer, but not yet recovered from the assuming insurer, under the terms and provisions of the policies reinsured under the reinsurance agreement;

(ii) to pay the assuming insurer amounts held in the trust account in excess of the amount necessary to secure the credit or reduction from liability for reinsurance taken by the ceding insurer; or

(iii) to withdraw amounts equal to the assuming insurer's share of liabilities, to the extent that the liabilities have not yet been funded by the assuming insurer, and deposit those amounts in a separate account, in the name of the ceding insurer in any qualified United States financial institution separate from its general assets, in trust for the uses and purposes specified in Subsections (1)(l)(i) and (1)(l)(ii) as may remain executory after withdrawal and for any period after the termination date where:

(A) the ceding insurer received notification of termination of the trust; and

(B) the assuming insurer's entire obligations under the specific reinsurance agreement remain unliquidated and undischarged 10 days before the termination date; and

(m) either the reinsurance agreement or the trust agreement shall provide that assets deposited in the trust account:

(i) be valued according to their current fair market value; and

(ii) consist only of:

(A) cash in United States dollars;

(B) certificates of deposit issued by a United States bank and payable in United States dollars;

(C) investments permitted by Title 31A, Insurance Code; or

(D) a combination of Subsections (1)(m)(A) through (1)(m)(C), provided:

(I) investments in or issued by an entity controlling, controlled by, or under common control with either the grantor or the beneficiary of the trust may not exceed 5% of total investments; and

(II) investments are of a type of investment specified in the trust agreement; and

(iii) include provisions required by Subsection (1)(m) if the reinsurance agreement covers life, annuity, or accident and health risks.

(2) Permitted conditions.

(a) The trust agreement may provide that:

(i) the trustee may resign on delivery of a written notice of resignation, effective not less than 90 days after the beneficiary and grantor receive the notice; and

(ii) the trustee may be removed by the grantor on delivery to the trustee and the beneficiary of a written notice of removal, effective not less than 90 days after the trustee and the beneficiary receive the notice, if:

(A) no such resignation or removal is effective until a successor trustee is duly appointed and approved by the beneficiary; and

(B) the grantor and all assets in the trust are duly transferred to the new trustee.

(b) The grantor has the full and unqualified right to:

(i) vote any shares of stock in the trust account; and

(ii) receive, from time to time, payments of any dividends or interest upon any shares of stock or obligations included in the trust account, if any interest or dividends are:

(A) forwarded promptly upon receipt to the grantor; or

(B) deposited in a separate account established in the grantor's name.

(c) The trustee has authority to invest, and accept substitutions of, any funds in the account if no investment or substitution is made without prior approval of the beneficiary, unless the trust agreement:

(i) specifies categories of investments acceptable to the beneficiary; and

(ii) authorizes the trustee to invest funds and to accept substitutions that the trustee determines are:

(A) at least equal in current fair market value to the assets withdrawn; and

(B) consistent with the restrictions in Subsection (3)(a)(ii).

(d) The trust agreement may provide that:

(i) the beneficiary may at any time designate a party to which all or part of the trust assets are to be transferred, conditioned upon the trustee receiving, prior to or simultaneously, other specified assets; and

(ii) upon termination of the trust account, all assets not previously withdrawn by the beneficiary shall, with written approval by the beneficiary, be delivered to the grantor.

(3) A reinsurance agreement may:

(a) require the assuming insurer to:

(i) enter into a trust agreement;

(ii) establish a trust account for the benefit of the ceding insurer; and

(iii) specify what the agreement is to cover;

(b) require the assuming insurer, before depositing assets with the trustee, to:

(i) execute assignments or endorsements in blank; or

(ii) transfer legal title to the trustee of all shares, obligations, or other assets requiring assignment, so the ceding insurer or the trustee, upon direction of the ceding insurer, may, when necessary, negotiate the assets without consent or signature from the assuming insurer or another entity;

(c) require that all settlements of account between the ceding insurer and the assuming insurer are in cash or its equivalent;

(d) state that the assuming insurer and the ceding insurer agree that the assets in the trust account may be withdrawn by the ceding insurer at any time, notwithstanding any other provisions in the reinsurance agreement, which assets are used for the following purposes:

(i) to be utilized and applied by the ceding insurer or its successors in interest by operation of law, including any liquidator, rehabilitator, or receiver, without diminution because of insolvency on the part of the ceding insurer or the assuming insurer to pay or reimburse the ceding insurer for:

(A) the assuming insurer's share under the specific reinsurance agreement of premiums returned, but not yet recovered from the assuming insurer, to the owner of a policy reinsured under the reinsurance agreement due to cancellation of the policy;

(B) the assuming insurer's share of surrenders and benefits or losses paid by the ceding insurer pursuant to the provisions of the policy reinsured under the reinsurance agreement; and

(C) any other amount necessary to secure the credit or reduction from liability for reinsurance taken by the ceding insurer; and

(ii) to pay the assuming insurer amounts held in the trust account in excess of the amount necessary to secure the credit or reduction from liability for reinsurance taken by the ceding insurer;

(e) give the assuming insurer the right to seek approval from the ceding insurer, which may not be unreasonably or arbitrarily withheld, to withdraw from the trust account all or any part of the trust assets and transfer those assets to the assuming insurer, provided:

(i) the assuming insurer replaces, at the time of withdrawal, the withdrawn assets with other qualified assets having a current fair market value equal to the market value of the assets withdrawn to always maintain the deposit in the required amount; or

(ii) after withdrawal and transfer, the current fair market value of the trust account is no less than 102% of the required amount;

(f) provide for the return of:

(i) an amount withdrawn in excess of the actual amount under Subsection (3)(d); and

(ii) interest payments at a rate not to exceed the prime rate of interest on such amount; and

(g) permit the award by an arbitration panel or court of competent jurisdiction of:

(i) interest at a rate different from that provided in Subsection (3)(f);

(ii) court or arbitration costs;

(iii) attorney's fees; and

(iv) other reasonable expenses.

(4) A trust agreement may be used to reduce a liability for reinsurance ceded to an unauthorized assuming insurer in a financial statement required to be filed with the department in compliance with the provisions of this rule when:

(a) established on or before the date of filing of the financial statement of the ceding insurer;

(b) the reduction for the existence of an acceptable trust account is not more than the current fair market value of acceptable assets available to be withdrawn from the trust account at the time the trust is established; and

(c) the reduction is not greater than the specific obligations under the reinsurance agreement that the trust account was established to secure.

(5) Failure of a trust agreement to specifically identify the beneficiary may not be construed to affect an action or right that the commissioner may take or possess pursuant to the provisions of the laws of this state.

Utah Admin. Code R590-173-12

Amended by Utah State Bulletin Number 2017-3, effective 1/10/2017

Adopted by Utah State Bulletin Number 2022-12, effective 6/7/2022