1Amending the act of May 17, 1921 (P.L.682, No.284), entitled "An
2act relating to insurance; amending, revising, and
3consolidating the law providing for the incorporation of
4insurance companies, and the regulation, supervision, and
5protection of home and foreign insurance companies, Lloyds
6associations, reciprocal and inter-insurance exchanges, and
7fire insurance rating bureaus, and the regulation and
8supervision of insurance carried by such companies,
9associations, and exchanges, including insurance carried by
10the State Workmen's Insurance Fund; providing penalties; and
11repealing existing laws," providing for medical professional 
12liability reciprocal exchange-to-stock conversion.

13The General Assembly of the Commonwealth of Pennsylvania
14hereby enacts as follows:

15Section 1. The act of May 17, 1921 (P.L.682, No.284), known
16as The Insurance Company Law of 1921, is amended by adding an
17article to read:

18Article VIII-B.

19Medical Professional Liability Reciprocal

20Exchange-to-Stock Conversion

21Section 801-B. Definitions.

22The following words and phrases when used in this article
23shall have the meanings given to them in this section unless the

1context clearly indicates otherwise:

2"Attorney." The person that manages and acts as the
3attorney-in-fact for the reciprocal insurer.

4"Commissioner." The Insurance Commissioner of the
5Commonwealth.

6"Department." The Insurance Department of the Commonwealth.

7"Eligible subscriber." A subscriber of a reciprocal insurer
8whose policy is in force on at least one of the following dates:

9(1) the date the reciprocal insurer or its attorney
10adopts a plan of conversion; or

11(2) if a different date, on the record date for
12establishing subscribers eligible to vote on the plan of
13conversion.

14A person insured under a group policy that is otherwise an
15eligible subscriber also shall be an eligible subscriber. A
16person whose policy becomes effective after the adoption of the
17plan or the voting record date, if a later date, but before the
18plan's effective date is not an eligible subscriber but shall
19have the rights established under section 807-B.

20"Participating policy." A policy that grants a holder the
21right to receive dividends if, as and when declared by the
22reciprocal insurer.

23"Person." An individual, a corporation, a limited liability
24company, a partnership, an association, a joint stock company, a
25trust, an unincorporated organization, a similar entity or a
26combination of the foregoing acting in concert.

27"Plan of conversion" or "plan." A plan adopted under this
28article to convert the reciprocal insurer into a stock company
29by the subscribers' advisory committee or any equivalent
30governing body of the reciprocal insurer or, in the absence of a

1governing body, by the board of directors or governing body of
2the attorney for such reciprocal insurer.

3"Policy." An insurance policy issued by the reciprocal
4insurer.

5"Reciprocal insurer." A Pennsylvania domiciled reciprocal
6and inter-insurance exchange, as defined in Article X, that is
7authorized to write medical professional liability insurance and
8at least 50% of its direct written premium in the calendar year
9preceding adoption of the plan of conversion consisted of
10medical professional liability insurance.

11"Stock company." An insurance company that:

12(1) meets all of the requirements for admission to do
13business as a domestic Pennsylvania insurer;

14(2) is formed at the direction of the reciprocal insurer
15or the attorney; and

16(3) shall be the successor of the reciprocal insurer by
17the merger of the reciprocal insurer with and into the stock
18company or by any other means approved by the commissioner.

19Section 802-B. Adoption of plan of conversion.

20(a) Plan of conversion.--No plan of conversion may become
21effective unless the reciprocal insurer seeking to convert to a
22stock company shall have adopted, by the affirmative vote of not
23less than two-thirds of the subscribers' advisory committee or
24any equivalent governing body of the reciprocal insurer, or in
25the absence of a governing body, by the board of directors or
26governing body of the attorney for the reciprocal insurer, a
27plan of conversion consistent with the requirements of sections
28803-B and 804-B. At any time before approval of a plan by the
29commissioner, the reciprocal insurer, by the affirmative vote of
30not less than two-thirds of its subscribers' advisory committee

1or any equivalent governing body of the reciprocal insurer or,
2in the absence of a governing body, by the board of directors or
3governing body of the attorney for the reciprocal insurer, may
4amend or withdraw the plan.

5(b) Documents.--Before a reciprocal insurer's eligible
6subscribers may vote on approval of a plan, the reciprocal
7insurer or the attorney shall file all of the following
8documents with the commissioner within 90 days after adoption of
9the plan:

10(1) The plan of conversion, including the independent
11evaluation of pro forma market value required under section
12803-B(d).

13(2) The form of notice required under subsection (f).

14(3) The form of proxy to be solicited from eligible
15subscribers under subsection (g). 

16(4) The form of notice required under section 808-B to
17persons whose policies are issued after adoption of the plan,
18but before its effective date.

19(5) The proposed articles of incorporation and bylaws of
20the stock company.

21(6) The acquisition of control statement, as required
22under section 1402.

23(7) Such other information as the commissioner may
24request.

25Upon filing of the documents required under this subsection with
26the commissioner, the reciprocal insurer shall send to eligible
27subscribers a notice advising eligible subscribers of the
28adoption and filing of the plan, their ability to provide the
29commissioner and the reciprocal insurer with comments on the
30plan within 30 days of the date of the notice and the procedure

1for making comments.

2(c) Notice and approval of plan.--The commissioner shall
3immediately give written notice to the reciprocal insurer of any
4decision and, in the event of disapproval, a statement in detail
5of the reasons for the decision. The commissioner shall approve
6the plan if the commissioner finds each of the following:

7(1) The plan complies with this article.

8(2) The plan will not prejudice the interests of the
9subscribers.

10(3) The plan's method of allocating subscription rights
11is fair and equitable.

12(d) Experts.--The commissioner may retain, at the reciprocal
13insurer's expense, any qualified expert not otherwise a part of
14the commissioner's staff to assist in reviewing the plan and the
15independent evaluation of the pro forma market value required
16under section 803-B(d).

17(e) Hearing.--The commissioner may order a hearing on
18whether the terms of the plan comply with this article after
19giving written notice to the reciprocal insurer and other
20interested persons, all of whom have the right to appear at the
21hearing.

22(f) Notice of subscribers' meeting.--All eligible
23subscribers shall be sent notice of the subscribers' meeting to
24vote upon the plan. The notice shall briefly, but fairly
25describe the proposed conversion plan, shall inform the
26subscriber of his right to vote upon the plan and shall be sent
27to each subscriber's last known address, as shown on the
28reciprocal insurer's records, at least 30 days before the time
29fixed for the meeting. If the reciprocal insurer holds an annual
30meeting of subscribers and the meeting to vote upon the plan is

1held at such annual meeting, only a combined notice of meeting
2is required.

3(g) Voting.--The plan shall be voted upon by eligible
4subscribers and shall be adopted upon receiving the affirmative
5vote of at least two-thirds of the votes cast by eligible
6subscribers. Unless the governing documents of the reciprocal
7insurer establish a different date, the record date for
8determining subscribers eligible to vote on the plan shall be
9the date of adoption of the plan or such other date as shall be
10set forth in the plan which shall be no less than 30 nor more
11than 90 days before the date of the meeting. Eligible
12subscribers entitled to vote upon the proposed plan may vote in
13person or by proxy. Unless the governing documents of the
14reciprocal insurer provide otherwise, each eligible subscriber
15may cast one vote.

16(h) Adoption of plan.--A merger of the reciprocal insurer
17with and into the stock company shall be approved at the meeting
18of the subscribers called for the purpose of adopting the plan
19of conversion and shall require for adoption or ratification the
20affirmative vote of at least two-thirds of the votes cast by
21eligible subscribers.

22(i) Documents to be filed following approval.--Within 30
23days after the eligible subscribers have approved the plan, the
24stock company shall file all of the following documents with the
25commissioner:

26(1) The minutes of the meeting of the eligible
27subscribers at which the plan was approved.

28(2) The articles of incorporation and bylaws of the
29stock company.

30(3) Articles of merger for the merger of the reciprocal

1insurer with and into the stock company. The plan shall be
2consummated upon the filing such articles of merger.

3Section 803-B. Contents of plan of conversion.

4(a) Contents.--The following provisions shall be included in
5a plan of conversion:

6(1) The reasons for proposed conversion.

7(2) The effect of conversion on existing policies,
8including all of the following:

9(i) A provision that all policies in force on the
10effective date of conversion continue to remain in force
11under the terms of the policies, except that the
12following rights, to the extent they existed in the
13reciprocal insurer, shall be extinguished on the
14effective date of the conversion:

15(A) Any voting rights of the subscribers
16provided under the policies.

17(B) Except as provided under subparagraph (ii),
18any right to share in the surplus of the reciprocal
19insurer provided for under the policies.

20(C) Any assessment provisions provided for under
21the policies.

22(ii) Except as provided in subparagraph (iii), a
23provision that holders of participating policies in
24effect on the date of conversion continue to have a right
25to receive dividends as provided in the participating
26policies, if any.

27(iii) A provision that upon the renewal date of a
28participating policy, the stock company may issue the
29insured a nonparticipating policy as a substitute for the
30participating policy.

1(3) The grant of subscription rights to eligible
2subscribers, including all of the following:

3(i) A provision that each eligible subscriber is to
4receive, without payment, nontransferable subscription
5rights to purchase a portion of the capital stock of the
6stock company and that, in the aggregate, all eligible
7subscribers shall have the right, prior to the right of
8any other party, to purchase 100% of the capital stock of
9the stock company, exclusive of any shares of capital
10stock required to be sold or distributed to the holders
11of surplus notes or any shares of capital stock required
12to be sold or distributed to subscribers under the
13reciprocal insurer's constituent documents, if any.

14(ii) As an alternative to subscription rights in the
15stock company, the plan may provide that each eligible
16subscriber is to receive, without payment,
17nontransferable subscription rights to purchase a portion
18of the capital stock of one of the following:

19(A) the attorney or a holding company that will
20act as the holding company for the stock company and,
21in either case, will hold all the stock of the stock
22company; or

23(B) an insurance company or other corporation
24that will purchase all the stock of or otherwise
25acquire the stock company.

26(iii) A provision that the subscription rights shall
27be allocated in whole shares among the eligible
28subscribers using a fair and equitable formula. This
29formula may, but need not, take into account how the
30different classes of policies of the eligible subscribers

1contributed to the surplus of the reciprocal insurer or
2any other factors that may be fair or equitable.

3(b) Oversubscription.--The plan shall provide a fair and
4equitable means for allocating shares of capital stock in the
5event of an oversubscription to shares by eligible subscribers
6exercising subscription rights received under subsection (a)(3).

7(c) Shares not subscribed.--The plan shall provide that any
8shares of capital stock not subscribed to by eligible
9subscribers exercising subscription rights received under
10subsection (a)(3) shall be sold in a public offering through an
11underwriter or in any other transaction approved by the
12commissioner. If the number of shares of capital stock not
13subscribed by eligible subscribers is so small in number or
14other factors exist that do not warrant the time or expense of a
15public offering, the plan of conversion may provide for sale of
16the unsubscribed shares through a private placement or other
17alternative method approved by the commissioner that is fair and
18equitable to eligible subscribers.

19(d) Market value of capital stock.--The plan shall set the 
20total price of the capital stock equal to the estimated pro 
21forma market value of the stock company as successor to the 
22reciprocal insurer based upon an independent evaluation by a 
23qualified expert. This pro forma market value may be that value 
24that is estimated to be necessary to attract full subscription 
25for the shares, as indicated by the independent evaluation and 
26may be stated as a range of pro forma market value. If the
27attorney is a party to the conversion either as the entity that
28grants subscription rights to subscribers or it is
29simultaneously acquired by the stock company in connection with
30the conversion, the incremental value of the attorney shall be

1included in the estimate of pro forma market value of the stock
2company as successor to the reciprocal insurer. The qualified
3expert shall also consider the effect on the pro forma market
4value of a right, if any, of subscribers to a return of capital
5contained in the subscriber agreement or other operative
6document of the reciprocal insurer.

7(e) Purchase price of capital stock and minimum subscription
8amount.--The plan shall set the purchase price per share of
9capital stock equal to any reasonable amount. However, the
10minimum subscription amount required of any eligible subscriber
11cannot exceed $500 dollars, but the plan may provide that the
12minimum number of shares any person may purchase pursuant to the
13plan is 25 shares.

14(f) Limitation on amount of capital stock purchase.--The
15plan shall provide that a person or group of persons acting in
16concert shall not acquire, in the public offering or pursuant to
17the exercise of subscription rights, more than 5% of the capital
18stock of the stock company or the stock of another corporation
19that is participating in the conversion plan, as provided in
20subsection (a)(3)(i), except with the approval of the
21commissioner. This limitation does not apply to any entity that
22is to purchase 100% of the capital stock of the converted
23company as part of the plan of conversion approved by the
24commissioner.

25(g) Limitation on directors and officers.--The plan shall
26provide that no director or officer or person acting in concert
27with a director or officer of the reciprocal insurer or the
28attorney shall acquire any capital stock of the stock company or
29the stock of another corporation that is participating in the
30conversion plan, as provided in subsection (a)(3)(i), for three

1(3) years after the effective date of the plan, except through a
2broker-dealer, without the permission of the commissioner. This
3provision does not prohibit the directors and officers from
4making block purchases of 1% or more of the outstanding common
5stock:

6(1) other than through a broker-dealer if approved in
7writing by the department;

8(2) through the exercise of subscription rights received
9under the plan; or

10(3) from participation in a stock benefit plan approved
11by shareholders pursuant to section 809-B(b).

12(h) Sale of stock by directors and officers.--The plan shall
13provide that no director or officer may sell stock purchased
14pursuant to this section or section 804-B(a) within one year
15after the effective date of the conversion.

16(i) Holders of surplus notes.--The plan shall provide that
17the rights of a holder of a surplus note to participate in the
18conversion, if any, shall be governed by the terms of the
19surplus note and the rights, if any, of subscribers to a return
20of capital shall be governed by the subscriber agreement or
21other operative document of the reciprocal insurer.

22(j) Repurchase of capital stock.--The plan shall provide
23that, without the prior approval of the commissioner, no stock
24company, or any corporation participating in the conversion plan
25pursuant to subsection (a)(3)(i), may for a period of three
26years from the date of the completion of the conversion
27repurchase any of its capital stock from any person, except that
28this restriction shall not apply to either:

29(1) a repurchase on a pro rata basis pursuant to an
30offer made to all shareholders of the stock company or any

1corporation participating in the conversion plan pursuant to
2subsection (a)(3)(i); or

3(2) A purchase in the open market by a tax-qualified or
4nontax-qualified employee stock benefit plan in an amount
5reasonable and appropriate to fund the plan.

6Section 804-B. Optional provisions of plan of conversion.

7(a) Subscription rights.--The plan may provide that the
8directors and officers of the attorney and the reciprocal
9insurer shall receive, without payment, nontransferable
10subscription rights to purchase capital stock of the stock
11company or the stock of another corporation that is
12participating in the conversion plan, as provided in section
13803-B(a)(3)(ii). These subscription rights shall be allocated
14among the directors and officers by a fair and equitable formula
15and shall be subordinate to the subscription rights of eligible
16subscribers. Nothing contained in this article may require the
17subordination of subscription rights received by directors and
18officers in their capacity as eligible subscribers, if any.

19(b) Maximum share purchase by directors and officers.--The
20aggregate total number of shares that may be purchased by
21directors and officers of the attorney and the reciprocal
22insurer in their capacity under subsection (a) and in their
23capacity as eligible subscribers under section 803-B(a)(3) shall
24not exceed 35% of the total number of shares to be issued if
25total assets of the reciprocal insurer are less than $50,000,000
26or 25% of the total number of shares to be issued if total
27assets of the reciprocal insurer are more than $500,000,000. For
28reciprocal companies with total assets of or between $50,000,000
29and $500,000,000, the percentage of the total number of shares
30that may be purchased shall be interpolated.

1(c) Liquidation account.--The plan may provide for the
2creation of a liquidation account for the benefit of subscribers
3in the event of voluntary liquidation subsequent to conversion
4in an amount equal to the surplus of the reciprocal insurer,
5exclusive of the principal amount of any surplus note, on the
6last day of the quarter immediately preceding the date of
7adoption of the plan.

8Section 805-B. Alternative plan of conversion.

9A plan of conversion may be adopted that does not rely in
10whole or in part upon issuing nontransferable subscription
11rights to subscribers to purchase stock of the stock company if
12the commissioner finds that the plan does not prejudice the
13interests of the subscribers, is fair and equitable and is not
14inconsistent with the purpose and intent of this act. An
15alternative plan may:

16(1) Include the acquisition or merger of the stock
17company or any corporation participating in the conversion
18plan pursuant to section 803-B(a)(3)(ii) by or into a
19domestic or foreign stock company.

20(2) Provide for issuing stock, cash or other
21consideration to subscribers instead of subscription rights.

22(3) Set forth another plan containing any other
23provisions approved by the commissioner.

24Section 806-B. Effective date of plan.

25A plan is effective when all of the following have been
26completed:

27(1) The commissioner has approved the plan.

28(2) The eligible subscribers have approved the plan.

29(3) If the stock company becomes successor to the
30reciprocal insurer by merger, the eligible subscribers have

1approved the merger of the reciprocal insurer with and into
2the stock company and the articles of merger have been filed
3with the Secretary of State of the Commonwealth.

4Section 807-B. Rights of subscribers whose policies are
5issued after adoption of plan and before effective date.

6(a) Notice.--A subscriber shall be sent a written notice
7regarding the plan upon issuance of a policy if the subscriber's
8policy is issued after the later of:

9(1) the date the proposed plan has been adopted; or

10(2) if different, the record date for establishing
11subscribers eligible to vote on the plan.

12The notice shall be sent before the effective date of the plan.

13(b) Cancellation and refund.--A subscriber entitled to
14receive the notice provided for in subsection (a) shall be
15advised of the subscriber's right of cancellation and to a pro
16rata refund of unearned premiums.

17(c) Limitation on subscribers.--No subscriber who has made
18or filed a claim under the subscriber's insurance policy may
19receive a refund under subsection (b). No person who has
20exercised the rights provided under subsection (b) may make or
21file a claim under the subscribers insurance policy.

22Section 808-B. Corporate existence.

23On the effective date of the conversion, the corporate
24existence of the reciprocal insurer continues in the stock
25company. On the effective date of the conversion, all of the
26assets, rights, franchises and interests of the reciprocal
27insurer in and to every species of property, real, personal and
28mixed, and any accompanying things in action, are vested in the
29stock company, without any deed or other instrument of transfer
30and the stock company assumes all the obligations and

1liabilities of the reciprocal insurer.

2Section 809-B. Conflict of interest.

3(a) Compensation.--A director, officer, agent or employee of
4the attorney or reciprocal insurer shall not receive any fee,
5commission or other valuable consideration, other than his usual
6regular salary or compensation, for aiding, promoting or
7assisting in a conversion under this article except as provided
8for in the plan approved by the commissioner. This provision
9does not prohibit the payment of reasonable fees and
10compensation to attorneys, accountants and actuaries for
11services performed in the independent practice of their
12professions, even if the attorney, accountant or actuary is also
13a director or officer of the attorney or the reciprocal insurer.

14(b) Stock benefit plan.--For a period of two years after the
15effective date of the conversion, no stock company may implement
16any nontax-qualified stock benefit plan unless the plan is
17approved by a majority of votes eligible to be cast at a meeting
18of shareholders held not less than six months after the
19effective date of the conversion.

20(c) Costs and expenses.--The costs and expenses connected
21with a plan of conversion shall be paid for or reimbursed by the
22reciprocal insurer or the stock company. If the plan provides
23for participation by another corporation or stock company in the
24plan pursuant to section 803-B(a)(3)(ii), the corporation or
25stock company may pay for or reimburse all or a portion of the
26costs and expenses connected with the plan.

27Section 810-B. Failure to give notice.

28If the reciprocal insurer complies substantially and in good
29faith with the notice requirements of this article, the
30reciprocal insurer's failure to send a subscriber the required

1notice does not impair the validity of any action taken under
2this article.

3Section 811-B. Limitation on actions.

4An action challenging the validity of or arising out of acts
5taken or proposed to be taken under this article shall be
6commenced no later than 30 days after the later of the approval
7of the plan by the commissioner or the adoption of the plan by a
8vote of the eligible subscribers.

9Section 812-B. Reciprocal insurer insolvent or in hazardous
10financial condition.

11(a) Waiver of requirements.--If a reciprocal insurer seeking
12to convert is insolvent or is in hazardous financial condition
13according to information supplied in its most recent annual or
14quarterly statement filed with the department or as determined
15by a financial examination performed by the department pursuant
16to Article IX of the act of May 17, 1921 (P.L.789, No.285),
17known as The Insurance Department Act of 1921, the requirements
18of this article, including notice to and policyholder approval
19of the plan of conversion, may be waived at the discretion of
20the commissioner, if requested by the attorney or the reciprocal
21insurer. If a waiver under this section is ordered by the
22commissioner, the reciprocal insurer shall specify all of the
23following in its plan of conversion:

24(1) The method and basis for the issuance of the stock
25company's shares of its capital stock to an independent party
26in connection with an investment by the independent party in
27an amount sufficient to restore the stock company, as
28successor to the reciprocal insurer, to a sound financial
29condition.

30(2) That the conversion shall be accomplished without

1granting subscription rights or other consideration to the
2past, present or future subscribers.

3(b) Authority of commissioner.--Nothing contained in this
4section shall alter or limit the authority of the commissioner
5under any of the provisions of law, including, but not limited
6to, Article V of The Insurance Department Act of 1921.

7Section 813-B. Rules and regulations.

8The commissioner may promulgate rules and regulations to
9administer and enforce this article.

10Section 814-B. Laws applicable to stock company.

11(a) Control of stock company.--No reciprocal insurer may
12convert under this article if as a direct result of the
13conversion a person or the person's affiliates acquire control
14of the stock company, unless that person and the person's
15affiliates comply with the provisions of section 1402. For
16purposes of this subsection, "control" shall have the meaning
17given to such term in section 1401.

18(b) Stock insurance company rules.--Except as otherwise
19specified in this article, a stock company resulting from the
20conversion of a reciprocal insurer under this article shall have
21and may exercise all the rights and privileges and shall be
22subject to all of the requirements and regulations imposed upon
23stock insurance companies formed under this act and any other
24laws of this Commonwealth relating to the regulation and
25supervision of insurance companies, but it shall exercise no
26rights or privileges which other stock insurance companies may
27not exercise.

28Section 815-B. Licensing of stock company and commencement
29of business as an insurance company.

30The commissioner may waive the minimum surplus requirement of

1a stock company in connection with the initial licensing of a
2stock company that will be the successor to a reciprocal
3insurer. The stock company may not engage in the business of
4insurance as a stock company until the completion of the merger
5with the reciprocal insurer and compliance with all provisions
6of this article.

7Section 816-B. Amendment of policies.

8A reciprocal insurer, by endorsement or rider approved by the
9commissioner and sent to the policyholder, may simultaneously
10with or at any time after the adoption of a plan of conversion
11amend an outstanding insurance policy for the purpose of
12extinguishing a right of the holder of such policy to share in
13the surplus of the reciprocal insurer. This amendment shall be
14void if the plan of conversion is not submitted to the
15commissioner or, if submitted, is disapproved by the
16commissioner or, if approved by the commissioner, is not
17approved by the eligible subscribers on or before the first
18anniversary of its approval by the commissioner.

19Section 817-B. Prohibition on acquisitions of control.

20Except as otherwise specifically provided in section 803-B, 
21from the date a plan of conversion is adopted until the 
22effective date of the plan of conversion, no person may directly 
23or indirectly offer to acquire, make an announcement to acquire 
24or acquire in any manner, including making a filing with the 
25department for acquisition under a statute or regulation of this 
26Commonwealth, the beneficial ownership of 10% or more of a class 
27of a voting security of the attorney or the stock company that 
28will be the successor of the reciprocal insurer or of a person 
29which controls the voting securities of the attorney or the 
30stock company that will be the successor of the reciprocal
 

1insurer.

2Section 2. This act shall take effect in 60 days.