optional standard lines of property insurance listed under paragraphs (b) and (c) of this section as may be designated separately for each State.

(b) The lines of mandatory coverage

are:

(1) Fire and extended coverage;

(2) Vandalism and malicious mischief;

(3) other allied lines of fire insurance; (4) Burglary and theft; and

(5) Those portions of multiple peril policies covering similar perils to those provided in subparagraphs (1), (2), (3), and (4) of this paragraph.

(c) The lines of optional coverage are: (1) Inland marine;

(2) Glass;

(3) Boiler and machinery;

(4) Ocean marine; and

(5) Aircraft physical damage.

[36 F.R. 24754, Dec. 22, 1971, as amended at 37 F.R. 8380, Apr. 26, 1972]

§ 1906.26 Premiums.

(a) The aggregate basic premium due the reinsurer for the reinsurance coverage provided under the contract shall be computed by applying the percentage rate determined by the reinsurer in accordance with the requirements of the Act and specified in the contract to an aggregate premium base consisting of the sum of the products of a reinsured company's direct premiums earned in each State in each reinsured line for the calendar year in which the annual contract period commences, multiplied by the specified percentage of such earned premiums, as defined in § 1906.21 (f) and (m).

(b) The contract may also provide for an additional premium which shall be due the reinsurer in such amounts and under such conditions as are specified in the contract: Provided, That an additional premium payment or payments shall only be required if the total amount of all excess aggregate losses paid by the reinsurer under all contracts for the contract period exceeds the total amount of all aggregate basic premiums paid or payable to the reinsurer under all contracts for that period.

(c) An advance premium, which shall be an estimated premium only, shall be computed by each reinsured company on the basis of its direct premiums earned in the calendar year preceding the calendar year in which the annual contract period commences, in the man

ner required for the computation of the aggregate basic premium. If any line of insurance is added during the term of the contract for which a reinsured company had no premium writings in the calendar year preceding the calendar year in which the annual contract period commences, the premium base for the advance premium shall be estimated by State for the period from the date of attachment of coverage to the expiration date of the contract. In no event shall the advance premium be less than $25 for each State in which reinsurance is provided under the contract. The advance premium shall be paid to the reinsurer without demand within 30 days from the effective date of coverage. The actual amount of the aggregate basic premium shall subsequently be computed and adjusted in accordance with the provisions of this section and § 1906.31.

(d) If the contract requires payment of an additional premium, the reinsurer shall have the option of requiring payment of the additional premium as an additional advance premium on an estimated basis: Provided, That an estimated additional premium payment or payments may only be required if the total amount of all excess aggregate losses paid by the reinsurer under all contracts for the contract period exceeds the total amount of all advance premiums collected by the reinsurer under all contracts for that period. If payment of an additional premium on an estimated basis is required under the contract, the actual amount of the additional premium shall subsequently be computed and adjusted in accordance with the provisions of this section and § 1906.31.

(e) With the exception of the advance premium which is due without demand of the reinsurer within 30 days from the effective date of coverage, premium amounts shall be due 30 days after the demand of the reinsurer. Interest shall accrue at six per centum (6%) per annum on any portion of any premium amount which is not received on or before 30 days from its due date.

(f) The aggregate basic premium, together with any additional premium which may be due the reinsurer in accordance with the preceding paragraphs, shall constitute the minimum reinsurance premium payable for coverage under the contract; and such reinsurance premium shall be deemed fully earned

If any company (or companies) reinsured by the reinsurer under a Standard Reinsurance Contract incurs aggregate losses in reinsured lines in any State during the period of the contract, which in total exceed its net retention for all such lines and as a result lodges claims against the reinsurer, then each reinsured company, on demand of the reinsurer, shall pay to the reinsurer an assessment sufficient to meet the company's equitable share of all such excess aggregate losses incurred in the State, but only to the extent that such losses exceed the unused net amount of all reinsurance premiums paid or payable by all reinsured companies into the National Insurance Development Fund for the period from August 1, 1968, through April 30 of the calendar year during which the annual contract period expires (including interest earned thereon), for reinsurance in such State. Such share shall be in the proportion that—

(a) The amount, if any, by which the company's net retention in lines reinsured under the contract in such State exceeds the company's aggregate losses in such lines, bears to

(b) The aggregate amount of unabsorbed net retention for all the lines of insurance of all companies reinsured under the contract in such State,

but such share shall not exceed the amount of the company's unabsorbed net retention under paragraph (a) of this section. An assessment will be required only after the termination of coverage provided by the contract.

[36 FR 24754, Dec. 22, 1971, as amended at 37 FR. 8380, Apr. 26, 1972]

(b) When the company incurs aggregate losses which exceed its net retention in any State, the company may make claim upon the reinsurer for the payment of excess aggregate losses in that State by filing a certification of loss and thereafter such supporting documentation of such losses as may be required by the reinsurer, and following the receipt of such certifications and documentation the reinsurer shall, as promptly as possible, in such installments and on such conditions as may be determined by the reinsurer to be appropriate (including advance payments made on the basis of preliminary certifications of loss filed in advance of the final determination of the ultimate amount of losses paid), pay to the company the amount of such excess aggregate losses subject to adjustments on account of underpayments or overpayments.

(c) If the ultimate amount of losses to be paid by the company has not been finally determined when the certification of loss is filed, the company shall, in due course, file one or more supplementary certifications of loss and thereafter the reinsurer or the company, as the case may be, shall pay the balance due.

(d) Claims paid pursuant to computations of net retentions based upon the direct premiums earned for the calendar year preceding the calendar year in which the annual contract period commences shall be recomputed and adjusted at the termination of the coverage provided by the contract on the basis of direct premiums earned in reinsured lines for the calendar year in which the annual contract period commences.

[36 FR 24754, Dec. 22, 1971, as amended at 37 FR. 8380, Apr. 26, 1972]

§ 1906.29 Inception and expiration dates.

(a) Provided a company has requested coverage by States and lines of coverage in the manner specified in the notice of offer published pursuant to § 1906.40, on or before April 30 of any year, the contract shall be in effect from 12:01 a.m., e.s.t., on May 1 of that year, and shall expire at 12 p.m. (midnight), e.s.t., on the following April 30, unless sooner terminated.

(b) If a company applies for coverage on or after May 1 of any year, the contract shall be effective from 12:01 a.m., e.s.t., on the day after such application is dispatched, as determined by the date

of postmark or telegram, provided the company requests coverage by State and line and otherwise complies with the eligibility requirements of the contract.

(c) The contract applies only to losses occurring during the term of the contract as follows:

(1) If at the inception of the contract any riot or civil disorder is in progress, no coverage shall be provided for losses resulting therefrom unless the contract is a continuation of coverage from the previous year's contract.

(2) If the contract terminates while a riot or civil disorder is in progress, no coverage shall be provided for any losses resulting therefrom which occur after the date and time of termination of the contract.

[36 FR 24754, Dec. 22, 1971, as amended at 87 F.R. 8380, Apr. 26, 1972] § 1906.30

Cancellations.

(a) Reinsurance under the contract may be canceled by the company in its entirety or with respect to any State upon written notice by the company to the reinsurer stating that it desires to cancel the reinsurance coverage specified and that it will pay any premium due the reinsurer in accordance with the provisions of the contract, subject to any adjustments which may be required under

1906.31: Provided, however, That no coverage shall attach under the contract if the company has willfully concealed or misrepresented any material fact with respect thereto.

(b) Reinsurance under the contract may be canceled by the reinsurer in its entirety or with respect to any State upon 30 days written notice to the company of such cancellation, stating the reasons for cancellation, which shall be limited to one or more of the following grounds: Fraud or misrepresentation subsequent to the inception of the contract, nonpayment of premium or any other amount due the reinsurer, and the grounds set forth in paragraph (b) of § 1906.36.

(c) Whenever the reinsurer determines, in his discretion, that any cancellation of reinsurance is involuntary and without fault on the part of the company, the premium due the reinsurer for the coverage afforded under the contract shall be prorated in the ratio of

(1) The number of days for which coverage was provided prior to the cancellation of such coverage plus 30, to

(2) The total number of days of coverage provided under the contract from the inception of such coverage up to and including April 30 of the calendar year in which the annual contract period expires.

(d) In the event of any cancellation of reinsurance coverage under this § 1906.30, the net retention and assessment of such company shall be computed, without proration, on the basis of the direct premiums earned for the calendar year during which the annual contract period commenced. Refunds of premiums, if any, due a company upon cancellation may, at the discretion of the reinsurer, be deferred until after final adjustments have been made in accordance with the provisions of § 1906.31.

[36 P.R. 24754, Dec. 22, 1971, as amended at 37 F.R. 8381, Apr. 26, 1972] § 1906.31

Adjustments.

(a) Each reinsured company shall report to the reinsurer within 60 days after request its direct premiums earned for the calendar year in which the annual contract period commenced in all reinsured lines in all States for which reinsurance was provided under the contract, for the purpose of computing and adjusting the reinsurance premium due to the reinsurer with respect to the coverage provided. The direct premiums earned to be reported for any line of insurance added during the contract term for any State in which a company had no premuim writings in such line in the calendar year in which the annual contract period commenced shall be the direct premiums earned for the first 4 months of the calendar year in which the annual contract period expires, as estimated by the company, subject to audit by the reinsurer.

(b) In no event shall the adjusted amount of direct premiums earned by the company result in a basic premium to the reinsurer in an amount less than $25 for each State during the contract year, which shall constitute the minimum adjusted reinsurance premium for any State under the contract.

(c) On or before July 31 of the calendar year in which the annual contract period expires, or such later date as may be permitted at the option of the reinsurer, each reinsured company shall report to the reinsurer its aggregate losses.

(d) Any overpayment or underpayment between the reinsurer and the com

(a) In the event of insolvency of the company the reinsurance under the contract shall be payable by the reinsurer to the company or to its liquidator, receiver, or statutory successor on the basis of the liability of the company under all policies, contracts, or participation shares reinsured without diminution because of the insolvency of the company.

(b) It is further agreed that the liquidator, or receiver, or statutory successor of the company shall give written notice to the reinsurer of the pendency of any claim against the company on the policies, contracts, or participation shares reinsured within a reasonable time after such claim is filed in the insolvency proceeding, and that during the pendency of such claim the reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which may be deemed available to the company or its liquidator, receiver, or statutory successor. The expense thus incurred by the reinsurer shall be chargeable, subject to court approval, against the company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the company solely as a result of the defense undertaken by the reinsurer. § 1906.33 Errors and omissions.

Inadvertent delays, errors, or omissions made in connection with any transaction under the contract shall not relieve either party from any liability which would have attached had such delay, error, or omission not occurred, provided always that such delay, error, or omission is rectified as soon as possible after discovery.

§ 1906.35 Participation in statewide plans.

(a) No reinsurance shall be offered or effective under the contract in any State unless there is in effect in such State, on the date coverage commences, a continuing statewide plan to make essential property insurance more widely available, and the company is fully participating in such plan on a risk-bearing basis and is certified by the State insurance authority as meeting the requirements of this 1906.35. Except with respect to its runoff business after ceasing to do business within a State, the company shall not be eligible for reinsurance under the contract in any State in which it is not engaged in the direct writing of property insurance at the time coverage is requested, or in which it is writing business on a nonadmitted basis, unless it reports such nonadmitted business to the State insurance authority and participates in the statewide plan of such State on the basis of such reported business. The company shall file and maintain with the State insurance authority in each State in which it is participating in the statewide plan a statement pledging its full participation and cooperation in carrying out the plan and shall file a copy of each such statement with the reinsurer. The company shall not direct any agent, broker, or other producer not to solicit business through such plans and shall not penalize in any way any agent, broker, or other producer for submitting applications for insurance under such plans. The company shall also establish and carry out an education and public information program to encourage agents, brokers, and other producers to utilize the programs and facilities available under such statewide plans.

(b) In the event that the company after the inception of the contract voluntarily withdraws from any State plan, pool, or other facility required by the provisions of this section, such withdrawal shall be deemed to constitute cancellation by the company with respect to that State as of the effective date of the withdrawal.

§ 1906.36 Limitations on reinsurance.

(a) Reinsurance hereunder shall not be applicable to insurance policies subsequently written in a State by the company after the close of the second full regular session of the appropriate State

legislative body following August 1, 1968, if the State has not enacted legislation to reimburse the reinsurer, as necessary, for the portion of the aggregate losses specified in section 1223(a)(1) of the National Housing Act (12 U.S.C. 1749 bbb-9(a)), paid by the reinsurer under the contract.

(b) The reinsurer shall cancel coverage, in accordance with the provisions of the contract, with respect to any State in which

(1) The reinsurer has found (after consultation with the State insurance authority) that (i) it is necessary to have a suitable program adopted, in addition to required statewide plans, to make essential property insurance available without regard to environmental hazards and that such a program has not been adopted, or (ii) the company is not fully participating in the statewide plan; and, where it exists, in a State pool or other facility; and, where it exists, in any other program found necessary to make essential property insurance more readily available in the State; or

(2) Following a merger, acquisition, consolidation, or reorganization involving the company and one or more insurers with or without such reinsurance, the surviving insurer does not meet all criteria of eligibility for reinsurance and within 10 days pay any reinsurance premiums due; or

(3) The reinsurer has found (after consultation with the State insurance authority) that a statewide plan is not complying with the reinsurer's statutory or regulatory criteria or has become inoperative.

(c) Notwithstanding the foregoing provisions, reinsurance may at the election of the company be continued, up to and including April 30 of the calendar year in which the contract term expires, for the term of such policies and contracts reinsured prior to the date of termination of reinsurance under this § 1906.36, provided the company pays the reinsurance premiums in such amounts as may be required. For the purposes of this § 1906.36, the renewal, extension, modification, or other change in a policy or contract for which any additional premium is charged, shall be deemed to be a policy or contract written on the date such change was made.

(d) Reinsurance under the contract shall be subject to all of the provisions

(a) If any misunderstanding or dispute arises between the company and the reinsurer with reference to the amount of premium due, the amount of loss, or to any other factual issue under any provision of the contract, other than as to legal liability or interpretation of law, such misunderstanding or dispute may be submitted to arbitration for a determination which shall be binding only upon approval by the reinsurer. The company and the reinsurer may agree on and appoint an arbitrator who shall investigate the subject of the misunderstanding or dispute and make his determination. If the company and the reinsurer cannot agree on the appointment of an arbitrator, than two arbitrators shall be appointed, one to be chosen by the company and one by the reinsurer.

(b) The two arbitrators so chosen, if they are unable to reach an agreement, shall select a third arbitrator who shall act as umpire, and such umpire's determination shall become final only upon approval by the reinsurer. The company and the reinsurer shall bear equally all expenses of the arbitration.

(c) Findings, proposed awards, and determinations resulting from arbitration proceedings carried out under this § 1906.37, shall, upon objection by the reinsurer or the company, be inadmissible as evidence in any subsequent proceedings in any court of competent jurisdiction.

§ 1906.38 Access to books and records.

The reinsurer and the Comptroller General of the United States, or their duly authorized representatives, shall have access for the purpose of investigation, audit, and examination to any books documents, papers, and records of the company that are pertinent to the business reinsured under the contract. Such audits shall be conducted to the maximum extent feasible in cooperation with the State insurance authorities and