Assumption reinsurance agreements typically (1) transfer the obligations or risks of existing contracts of insurance from one ceding insurer to an assuming insurer and (2) intend to effect a novation of the transferred contracts so that the assuming insurer becomes directly liable to the policyholders of the contracts.
In order to effect an assumption reinsurance agreement, the assuming and ceding insurers must obtain both regulatory approval and policyholders’ consent. In addition to domiciliary state approvals, the insurers may need to obtain approval in non-domiciliary states where affected policyholders reside. Furthermore, although the insurers’ intent to effect a novation is often reflected in the language of an assumption reinsurance agreement, most state laws require policyholders’ consent in order to effect transfer under a voluntary assumption reinsurance agreement.1
State laws vary on what form of consent the policyholder must give in order to effect the novation. Most states permit implied consent, where a policyholder’s inaction or indirect action (i.e., acceptance of benefits or payment of premium) constitutes consent to effect novation. However, the required elapsed time for inaction may vary from a few months to a few years. Sufficient indirect acts may also vary significantly by state.
The National Association of Insurance Commissioners (NAIC) Assumption Reinsurance Model Act provides that the ceding insurer must send an initial notice of transfer to affected policyholders, and, if a policyholder does not respond within 24 months, a final notice must be sent. If the policyholder does not respond to the final notice within one month, consent is deemed to have been given and novation of the contract will be effected. Moreover, if the policyholder makes a premium payment to the assuming carrier within the 24-month notice period without reserving his or her rights to reject the transfer, such payment is deemed to be consent. However, the premium notice must provide a method for the policyholder to make a payment while reserving the right to reject the transfer.
According to the NAIC Model Act, consent relieves the ceding insurer of all obligations or risks transferred under the assumption reinsurance agreement, and the assuming insurer becomes directly and solely liable to the policyholder for those obligations or risks.
Most states do not have express statutory provisions on the form of consent required for novation, and transactions in those states are governed by common law standards for novation. A minority of states have adopted the NAIC Model Act or some variation thereof. Even fewer states have enacted statutes that require affirmative consent in writing from the policyholder before novation may occur.
Given the broad spectrum of requisites to effect novation under an assumption reinsurance agreement, it is imperative that in any multi-state assumption transaction, each state’s laws must be closely examined to ensure complete and unequivocal transfer of liabilities under an assumption reinsurance agreement.
Cindy Chang is an Associate in the firm’s Insurance and Reinsurance Practice. Her practice includes an array of insurance and reinsurance dispute, regulatory, and corporate matters. Ms. Chang received her bachelor’s degree from Washington University and her law degree from Washington University School of Law.
1 Some states do not require policyholder consent when the assumption agreement is entered pursuant to rehabilitation or receivership statutes.