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Exhibit A:

NEIL Memorandum: Enforceability of


Waivers of Statutory Rights
MEMORANDUM

Enforceability of Waivers of Statutory Rights


December 2012

I. Introduction

Nuclear Electric Insurance Limited (NEIL) was organized by and for the benefit of the
United States energy companies to provide protection against the financial consequences of
accidents at nuclear power generating facilities, which may not otherwise be available, or
available on the terms and conditions provided by NEIL. The protection afforded under the
NEIL policies to the Member Insureds is essential to energy companies, their customers and their
stockholders.

The Member Insureds have recognized that it is important to the operation of NEIL and
essential for the fair and equal treatment of all Insureds that the terms and conditions set forth in
each policy issued by NEIL are construed and enforced in the same way as the terms and
conditions of every other policy issued by NEIL. To accomplish this needed uniformity, the
Member Insureds have agreed, both in the policies and in a separate Waiver of Rights Agreement
executed by all Member Insureds, that all disputes arising out of the NEIL policies shall be
settled through arbitration in New York City pursuant to the laws of the State of New York. The
parties have also agreed that the United States District Court for the Southern District of New
York will have exclusive jurisdiction over any dispute that is not amenable to arbitration.

The statutes and regulations of many jurisdictions contain provisions that may hinder the
enforceability of the certain provisions contained in the NEIL policies and/or the policies
themselves. Pursuant to the separate Waiver of Rights Agreement, the Insureds agreed to waive
any rights they may have under such statutory provisions. The Insureds also agreed that the
public policies supporting the adoption of such statutes are inapplicable to the purchase by the
Insureds of policies from NEIL and, in any event, are far outweighed by the interest of all
Insureds in the uniform interpretation of the policies and by the strong public policy
considerations of making this insurance available on the terms and conditions collectively
determined by the Insureds.

This memorandum analyzes the general rule concerning the enforceability of waivers of
statutory rights and provides a general overview and summary of the law concerning the
applicability of that general rule to waivers of statutory rights by the Insureds. The ultimate
determination as to the enforceability of a waiver by an individual Insured will be dependent
upon the individual state law applicable to such Insured. In general, however, it is clear that
strong arguments can be made supporting the enforceability of statutory waivers by the Insureds.

II. Waivers of Statutory Rights Are Enforceable If Public Policies Are Not Offended

In general, the parties to a contract may waive statutory rights as long as the waiver does
not frustrate public policy. In analyzing whether an individual can waive rights conferred under
a statute, many courts have focused on whether the states purpose in enacting the statute was to
protect the property rights of individual parties or to protect the general public. See Canal Elec.
Co. v. Westinghouse Elec. Corp., 548 N.E.2d 182, 187 (Mass. 1990). In this regard, the courts
have been more likely to enforce the waiver of rights intended for the benefit of the individual,
rather than the public at large. In Alabama Terminix Co. v. Howell, 158 So.2d 915 (Ala. 1963),
for example, the court held that the parties could waive a statute concerning the endorsement of
contracts, bonds and other writings for the payment of money because no considerations of
public policy or morals were involved in a statute and, under such conditions, a party may
waive a rule of law, or statute, or even a constitutional provision. Id. at 918. See also Lloyd
Noland Hosp. v. Durham, 906 So. 2d 157, (Ala. 2005). Similarly, in Holmes v. Graves, 318 P.2d
354, 356, (Ariz. 1957), the Arizona Supreme Court held that a party could waive its statutory
right to demand a written detailed accounting in an action for an account stated because the rule
was designed for the private benefit of the individual and therefore there is no public policy
forbidding its loss through the conduct of the party. Id. See also McFann v. Sky Warriors, Inc.,
603 S.E. 2d 7, (Ga. App. 2004).

III. The Member Insureds Waiver Of Rights Conferred By Anti-Arbitration


Provisions, Forum Selection Limitations And Choice of Law Restrictions Should Be
Enforceable

A. Anti-Arbitration Provisions, Forum Selection Limitations And Choice Of


Law Restrictions Generally Are Intended To Protect Consumers From
Having To Assert Rights In Distant Forums

Many unauthorized insurance provisions were enacted to protect consumers who


otherwise would be forced to litigate their claims against mail order life insurers in distant
forums. For example, Section 101.001, set forth Texas policy and purpose in part as follows:

(a) It is a state concern that many residents of this state hold insurance policies
issued by persons or insurers who are not authorized to do insurance business
in this state and who are not qualified as eligible surplus lines insurers under
Article 1.14-2. These residents face often insurmountable obstacles in
asserting legal rights under the policies in foreign forums under unfamiliar
laws and rules of practice.

(b) It is the policy of this state to protect residents against acts by a person or
insurer who is not authorized to do insurance business in this state by:

(1) maintaining fair and honest insurance markets;

(2) protecting the premium tax revenues of this state;

(3) protecting authorized persons and insurers, who are subject to strict
regulation, from unfair competition by unauthorized persons and
insurers; and

(4) protecting against evasion of the insurance regulatory laws of this state.

TEXAS INS. CODE. 101.001 (emphasis added). See also, Johnston v. Commercial Travelers Mut.
Accident Assoc. of Am., 131 S.E.2d 91, 94 (S.C. 1963) (S.C. Code Ann. 38-61-10, an
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unauthorized insurance provision prohibiting the enforcement of choice of law clauses, was
intended to deal with the problem of mail order insurance which created hardships for
policyholders who would otherwise have to enforce their rights in foreign jurisdictions); Joseph
E. Smith, Civil Procedure Forum Selection N.C. Gen. Stat. 22B-3 (1994), 22 N.C. L.
REV. 1608, 1611 (1994) (statutory restrictions of forum selection provisions were drafted to
protect consumers and others with little bargaining power).

B. The Public Policies Favoring The Protection of Consumers Which Underlie


The Anti-Arbitration Provisions, Forum Selection Limitations And Choice of
Law Restrictions Are Not Violated If These Provisions Are Waived By Large
Sophisticated Business Entities.

Strong arguments can be made that the public policy behind many of the provisions
hindering arbitration, the application of the parties choice of law and forum and the enforcement
of unauthorized insurance contracts are not violated if those provisions are waived by NEILs
Member Insureds. NEIL can argue that these statutes are intended to protect consumers, not
sophisticated corporations. Clearly, a large, wealthy and sophisticated energy company is not
presented with insuperable obstacles by agreeing to arbitrate a dispute in New York according
to New York law. Therefore, a waiver of these statutes arguably would not violate the public
policy behind the statute.

In this regard, courts have been more likely to support a statutory waiver in a contract
executed by a sophisticated party. In Canal Electric Co. v. Westinghouse Electric Corp., 548
N.E.2d 182 (Mass. 1990), the Supreme Judicial Court of Massachusetts noted that a
sophisticated business may be permitted to waive a right that a consumer ordinarily would not be
permitted to waive. Canal Electric involved a suit by several electric utilities against
Westinghouse over the sale of a set of rotating blades used in a steam turbine generator. The
contract governing the sale contained a provision limiting liability under the contract to the
purchase price of the turbine blades and excluding indirect or consequential damages. The
defendant argued that this liability limitation clause acted as a waiver of the remedies, such as
actual damages and attorneys fees, that plaintiffs may otherwise have been entitled to collect
under Massachusetts unfair trade practices act. The Massachusetts Supreme Judicial Court
agreed. The court noted that a waiver of this same statute by a consumer would be
unenforceable because it would violate the public policy underlying the statute. The waiver of
the statute by a sophisticated business plaintiff in a private purely commercial transaction,
however, would be enforceable because it did not do violence to the public policy underlying the
statute. Id. at 187-88.

Similarly, in Massachusetts Mutual Life Ins. Co. v. Avon Assoc., Inc., 373 N.Y.S.2d 464,
468 (Sup. Ct. 1975), a court upheld a waiver in a mortgage agreement by a mortgagee of his
rights to notice and a hearing prior to the appointment of a receiver because the mortgage was
executed by sophisticated business operators, the waiver was plainly stated in a custom tailored
agreement, the parties were of relatively equal bargaining power and both were represented by
eminent counsel. In Argonaut Ins. Co. v. Cooper, 261 N.W.2d 743, 745 (Minn. 1978), a court
enforced a waiver of a constitutionally granted homestead exemption by a sophisticated party.
Minnesotas state constitution and its implementing statutes exempt a debtors residence from
seizure and sale to satisfy a debt. In order to obtain security bonds for a construction contract,
the defendant agreed to indemnify the bonding company in the event of a default by the
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construction company run by the defendant. The indemnity agreement contained a clause
specifically waiving the defendants right to claim that his homestead was exempt from levy.
The court held that this waiver was enforceable in a commercial transaction between two
sophisticated business people. Moreover, the court found that the defendant was estopped from
asserting the homestead exemption because the bonding company clearly had relied on the
waiver in the indemnity agreement and on the financial statements supplied by the defendant
listing his home as an asset. Id. at 745.

Courts enforce choice of law clauses in agreements between sophisticated business


entities, even when the choice of law effectively waives the protections of state law. See
Tele-Save Merchandising Co. v. Consumers Distrib. Co., 814 F.2d 1120, 1123 (6th Cir. 1987).
In Tele-Save, the parties included a choice of law clause in a franchise agreement and decided
that New Jersey law would apply to the agreement between a Canadian distributor with an office
in New Jersey (defendant) and an Ohio Merchandiser (plaintiff). The court enforced the choice
of law provision and refused to apply an Ohio franchise statute, which contains an anti-waiver
provision that renders any waiver of the franchise statute void. OHIO REV. CODE ANN.
1334.15. The franchisee argued that the choice of law clause was unenforceable because it
violated the public policy expressed in the anti-waiver statute, which was designed to protect
individual franchisees from unreasonable or abusive treatment by powerful franchisors. The
court, however, found that the public policy involved was not violated because the agreement at
issue was freely negotiated and entered into knowingly by sophisticated corporations of
relatively equal bargaining power. Indeed, the court found that Ohios public policy favoring the
enforcement of choice of law provisions was more fundamental under the facts at issue. Tele-
save, 814 F.2d at 1121-24. 1 See also Wallace Hardware Co., Inc. v. Abrams, 223 F.3d 382 (6th
Cir. 2000) (finding that Kentuckys statutory restrictions on guaranties did not represent such a
fundamental state interest as to render guarantys choice of law provision unenforceable in
agreement between parties of equal bargaining power who were represented by counsel).

C. A States Regulatory Interest In A Dispute Between Private Parties Is Only


Indirect.

The decision by the United States District Court for the Southern District of New York in
NEIL v. Central Power & Light Co., 926 F. Supp. 428 (S.D.N.Y. 1996) (the SDNY Opinion) is
very supportive of NEILs waiver arguments. In granting NEILs motion to compel arbitration
and stay pending Texas state court proceedings, the District Court observed that CPLs dispute
with NEIL is essentially a contract dispute between two purely private parties, implicating
Texass interest as a regulator of the insurance business only indirectly. This decision will give
NEIL strong support in any future attempts to enforce a waiver in a judicial forum. NEIL can
argue that the waiver at issue does not violate any public policy because the waiver is contained
in a contract between two purely private parties and this contract involves a states insurance
regulatory interest only indirectly. The SDNY Opinion is doubly important because the NEIL
policies give the United States District Court for the Southern District of New York exclusive
jurisdiction over any controversy not subject to appraisal or arbitration. A previous decision by
the Southern District holding that a NEIL policy involves a private transaction only indirectly
implicating a states interest in regulating insurance business is likely to be very persuasive to
another judge in the Southern District if any future dispute arises.

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IV. The Limited Case Law Dealing With The Waiver Question In The Insurance
Context Is Inapplicable To NEILs Situation

There is no case law dealing with the specific question of whether a sophisticated insured
can by agreement waive statutory insurance provisions in a commercial insurance policy. The
few cases that have considered the waiver question in other contexts have viewed waivers
disfavorably, but these cases are arguably not applicable to NEIL. In Moore v. National
Distillers & Chemical Corp., 143 F.R.D. 526 (S.D.N.Y. 1992), affd sub nom.on different
grounds, 69 F.3d 1226 (2d Cir. 1996), for example, a court considered whether an insured had
waived its right to seek pre-answer security from an unauthorized insurer under N.Y. Ins. Law
1213(c) when it failed to assert the provision when the insurer filed its answer. Section 1213(c)
requires an unauthorized insurer to post security or obtain a certificate of authority before it can
file an answer in a lawsuit brought in New York by an insured. The court found that 1213 was
intended to protect the public and could not be waived. The court based its finding on the plain
language of the provision and the preamble of 1213 which stated that in enacting the law, New
York exercises its power to protect its residents. . . N.Y. INS. LAW 1213(a). See also Curiale
v. Phoenix Gen. Ins. Co. of Greece, No. 83 Civ. 4687, 1992 WL 320535 (S.D.N.Y. Oct. 23,
1992) (Plaintiff cannot not waive rights under 1213(c)). It was also significant, however, that
plaintiff was the Kentucky Insurance Commissioner as liquidator. The Commissioner argued,
inter alia, that he could not be held to waive the protections of 1213 because he was bringing
the action in his representative capacity on behalf of the public.

NEIL can make a strong argument that Moore would not be applicable to a waiver of
1213 by one of NEILs Member Insureds. First, Moore did not involve a prior agreement by a
sophisticated insured to waive the right to assert the statute. Second, the plaintiff in Moore was
the Kentucky Insurance Commissioner acting as liquidator on behalf of the public. Finally, the
express language of 1213 relied on by the court explicitly refers to the insuperable obstacles
faced by insureds forced to litigate claims in distant forums. Thus, the public policy embodied
by 1213 would not be violated if 1213 were waived by a large corporation.

In State ex rel v. Allen, 112 S.W.2d 843, 846 (Mo. 1938), the Supreme Court of Missouri
held that nonforfeiture of life insurance provisions in Missouris insurance code could not be
waived because the statutes established a rule of public policy which overrides the freedom of
contract of the parties, and makes waiver of statutory provisions ineffectual, although such
waiver is contained in the strongest terms in the policy. Id.; see also Fayman v. Franklin Life
Ins. Co., 386 S.W.2d 52, 58 (Mo. 1965) (Non-forfeiture provision in insurance code throws arm
of protection around policyholder that cannot be abrogated, waived or contracted away by the
policyholder.) These cases are also inapplicable to NEILs situation, however, as they involve
the forfeiture of the cash value of life insurance policies by unsophisticated consumers.

V. Anti-Arbitration Provisions Are Generally Preempted By Federal Law.

Even if the law of a specific state prohibits the waiver of anti-arbitration provisions, the
anti-arbitration provision at issue may be preempted by the Federal Arbitration Act (the FAA).
Under 2 of the FAA, a written provision in any maritime transaction or a contract evidencing
a transaction involving commerce to settle by arbitration a controversy thereafter arising out of
such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such
grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C. 2. Generally,
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federal statutes, such as the FAA, preempt state laws; however, the McCarran-Ferguson Act, 15
U.S.C. 1011 et seq., (the MFA) provides that federal statutes do not preempt state laws that
regulate the business of insurance. Notwithstanding this anti-preemption provision of the
MFA, the FAA preempts state anti-arbitration statutes, which do not regulate the business of
insurance. Hart v. Orion Ins. Co., 453 F.2d 1358 (10th Cir. 1971); Hamilton Life Ins. Co. v.
Republic National Life Ins. Co., 408 F.2d 606 (2d Cir. 1969).

Nevertheless, it should be noted that the United States Court of Appeals for the Tenth
Circuit held that 5-401 of the Kansas Arbitration Act regulates the business of insurance,
and, as a result, the MFA precludes application of the FAA in Kansas. Mutual Reinsurance
Bureau v. Great Plains Mut. Ins. Co., Inc., 969 F.2d 931 (10th Cir. 1992). The version of 5-
401 that the Tenth Circuit applied stated, in relevant part:

(a) A written agreement to submit any existing controversy to


arbitration is valid, enforceable and irrevocable except upon such
grounds as exist at law or in equity for the revocation of any
contract.

(b) Except as provided in subsection (c), a provision in a written


contract to submit to arbitration any controversy thereafter arising
between the parties is valid, enforceable and irrevocable except
upon such grounds as exist at law or in equity for the revocation of
any contract.

(c) The provisions of subsection (b) shall not apply to: (1) Contracts
of insurance, except for those contracts between insurance
companies, including reinsurance contracts; (2) contracts between
an employer and employees, or their respective representatives; or
(3) any provision of a contract providing for arbitration of a claim
in tort.

K.S.A. 504.01 (amended 1995). The court decided, without a thorough analysis of the issue,
that a reinsurance agreement is a contract of insurance and that 5-401 regulates the business of
insurance. The Tenth Circuit therefore held that the arbitration provision was not valid under the
plain language of 5-401. The Tenth Circuit distinguished the Hart and Hamilton Life Ins. Co.
decisions because, unlike the Kansas statute, the statutes at issue in those cases did not
specifically refer to contracts of insurance. Mutual Reinsurance Bureau, 969 F.2d at 934. 2
See also Cox v. Woodmen of the World Ins. Co., 347 S.C. 460, 556 S.E.2d 397 (S.C. App. 2001)
(following Mutual Reinsurance Bureau in interpreting South Carolina statute, that mirrors the
Kansas statute, to hold that the MFA precludes application of the FAA in South Carolina) and
Mid-Continent Cas. Co. v. General Reinsurance Corp., 2007 WL 539217 (N.D. OK 2007)
(following the reasoning of Mutual Reinsurance Bureau relative to Oklahomas anti-arbitration
statutue.)

A Federal district court sitting in Kansas has held, however, that where a policy is issued
in another state and such other states law would enforce an arbitration clause contained in the
policy, Kansas courts would not declare the arbitration agreement void and unenforceable under
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5-401. Federated Rural Electric Insurance Co. v. Nationwide Mutual Insurance Co., 874 F.
Supp. 1204 (D. Kan. 1995). See also Federated Rural Elec. Ins. Co. v. International Ins. Co.,
884 F. Supp. 439 (D. Kan. 1995) (Ohio law enforcing the arbitration clauses in insurance
policies, rather than Kansas law invalidating them in contract of insurance, applied, as lex loci
contractus, to arbitration clause in reinsurance treaty that was issued in Ohio). Thus, despite the
Mutual Reinsurance Bureau decision, NEIL should be able to avoid the application of Kansas
anti-arbitration provision since the NEIL policies are issued and delivered in Delaware.

VI. Conclusion

Based on the foregoing general discussion, it is clear that strong arguments exist
supporting the enforceability of the waiver by the Member Insureds of statutory rights which
could potentially impair the enforceability of the choice of law and arbitration provisions
contained in the NEIL policies or of the policies themselves.

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ENDNOTES
1
In a similar case, the Eighth Circuit enforced a choice of law provision in a franchise
agreement and applied Nebraska law, rather than Minnesota law, to the agreement. Modern
Computer Sys., Inc. v. Modern Banking Sys., Inc., 871 F.2d 734, 738-40 (8th Cir. 1988). This
choice of law effectively waived the protections of Minnesota law, including the non-waiver
provisions of the Minnesota Franchise Act, which was enacted to protect franchisees from
unreasonable or abusive treatment by powerful franchisors. MINN. STAT. 80C.01(4). The
court reasoned that the purpose of the Minnesota Franchise Act would not be frustrated by
refusing to apply Minnesota law because the parties were sophisticated companies who
negotiated a million dollar contract. Modern Computer Sys., 871 F.2d at 739. In reaction to this
decision, however, the Minnesota legislature amended the Franchise Act rendering non-waiver
provisions and choice of law provisions in franchise agreements void and unenforceable. MINN.
STAT. 80C.01(4).
2
Since this decision, the Kansas legislature has amended 5-401 so that the statute no
longer precludes arbitration provisions in reinsurance agreements. Presumably, the legislature
amended the statute to reflect the public policy that sophisticated business entities (e.g.,
reinsurers) may agree to arbitrate their disputes.

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Exhibit B:
NEIL Introduction to the State Law Surveys
December 2012

INTRODUCTION

The state law surveys produced in conjunction with this document have been prepared to provide
assistance to attorneys rendering legal opinions to NEIL in connection with the purchase or
renewal of NEIL insurance policies. A brief description of NEIL and its operations is set forth in
the NEIL Operating Procedures. Other materials that should be reviewed include: the policies
issued by NEIL (Insurance Agreements); NEILs Bye-Laws and Memorandum of Association
of NEIL; and the forms of the legal opinion to be given by NEILs Insureds, the Waiver of
Rights Agreement, the Power of Attorney, and the Companys Certificate.

The summaries were prepared for informational use only and not as legal advice, or as an
opinion of law. They are simply an indication of what general research suggests is the relevant
law. No party should rely on the information contained in the surveys in making decisions as to
legal issues.

The following issues are discussed in each state survey: (1) NEILs authorization status; (2) the
enforceability by NEIL of the Insurance Agreements issued to the Insureds; (3) the enforceability
of the arbitration provision in the Insurance Agreements; (4) the enforceability of the choice of
law provision in the Insurance Agreements; (5) the enforceability of the choice of forum
provision in the Insurance Agreements; (6) the enforceability of the cancellation provision in the
Insurance Agreements and (7) the waiver of statutory rights by the Insureds. Set forth below is a
general discussion of each of these issues. While New York law governs the NEIL Insurance
Agreements and the Waiver of Rights Agreement, the accompanying surveys and Insureds legal
opinions consider the laws where NEILs Insureds and their nuclear assets/risks are located.
This is simply to obtain the additional comfort of knowing that an Insured could not simply
circumvent the material provisions of its various agreements with NEIL by seeking the
applicability of a law other than New York for such agreements.

NEIL Authorization Status

NEIL is a Bermuda insurer headquartered in Delaware that is not licensed to transact insurance
business in any United States jurisdiction other than Delaware. NEIL provides coverage relating
to nuclear facilities in about thirty states, usually relying on statutory exemptions, such as the
industrial insured or independently procured exemptions, from licensing requirements or
from the definition of transacting an insurance business. With respect to states that do not
have such statutory exemptions, and those states for which NEIL may not qualify for the
independently procured exemption, NEIL and the Insureds involved in those states take the
position that, because of the way in which NEIL conducts its business, the state insurance
statutes cannot prohibit it from insuring risks within the state without violating the Due Process
Clause of the Fourteenth Amendment. In support of this position, NEIL and those Insureds have
relied upon the United States Supreme Courts decision in State Board of Insurance v. Todd
Shipyards Corporation, 370 U.S. 451 (1962).

Since the Supreme Court decided Todd Shipyards in 1962, there have been several developments
in this area. Outside the context of insurance, the Supreme Court has held that the Due Process
Clause does not prohibit enforcement of a states use tax against an out-of-state mail-order house
that did not have an outlet or representatives in the state. Quill Corp. v. North Dakota, 504 U.S.
298 (1992); Chase Manhattan Bank v. Gavin, 733 A.2d 782 (Conn.), cert. denied, 120 S. Ct.
401, 145 L.Ed.2d 312 (1999). Several cases have criticized Todd Shipyards. See, e.g., Lakehead
Pipe Line Co. v. American Home Assurance Co., 981 F. Supp. 1205 (D. Minn. 1997); Howell v.
Rosecliff Realty Co., Inc., 245 A.2d 318 (N.J. 1968) (discussed in the New Jersey survey);
Associated Electric & Gas Ins. Services, Ltd. v. Clark, 676 A.2d 1357 (R.I. 1996). However in
Dow Chemical Co. v. Rylander, 38 S.W.3d 741 (Tex. App. 2001), review denied, cert. denied at
534 U.S. 996, 122 S. CT 466 (Oct. 2001), the Texas Court of Appeals reaffirmed that Todd
Shipyards remains the controlling precedent in Texas.

Enforceability by NEIL of the Insurance Agreements

NEIL and its Insureds have agreed that the Insurance Agreements shall be construed and
enforced in accordance with and governed by the internal law of the State of New York, United
States of America. Furthermore, NEIL delivers and issues the Insurance Agreements in
Delaware, a jurisdiction in which NEIL is licensed to transact the business of insurance.
Accordingly, the laws of other jurisdictions should not apply when determining whether the
Insurance Agreements are enforceable by an unauthorized insurer.

Nevertheless, the surveys consider whether the contract is enforceable under the laws of the
jurisdiction for which the Insureds counsel is rendering the opinion and generally discuss the
statutes regarding the enforceability of contracts by unauthorized insurers. Some states provide
that policies issued by unauthorized insurers are valid, while a handful of states provide that such
policies are voidable at the instance of the insured. Most states provide that an unauthorized
insurer must satisfy pre-answer security provisions, which include either posting a bond or
obtaining an insurance license. NEIL, however, is exempt from the requirement of obtaining an
insurance license in many states pursuant to an industrial insured or independently procured
exemption.

Enforceability of Arbitration Provision

As stated above, since the Insurance Agreements are governed by the internal laws of the State
of New York, United States of America, and the Insurance Agreements are issued and delivered
in Delaware, the laws of a state other than New York should not be applied to the Insurance
Agreements. In considering whether the arbitration clause is enforceable under the laws of the
jurisdiction of the Insureds counsel rendering the opinion, the surveys generally discuss the
relevant law. In a number of states, the states arbitration act provides that agreements to
arbitrate that are set forth in insurance contracts are not enforceable. An arbitration provision in
a contract evidencing a transaction that involves interstate commerce, however, is governed by
the Federal Arbitration Act (FAA), 9 U.S.C. 1, et seq., 1 which preempts state arbitration law.

The McCarran-Ferguson Act, 15 U.S.C. 1011 et seq. (MFA) prohibits the application of
federal statutes such as the FAA that would invalidate, impair, or supersede a state law enacted

1
Section 2 of the Federal Arbitration Act provides that a written provision in any maritime transaction or a
contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out
of such contract or transaction shall be valid, irrevocable, and enforceable, save upon such grounds as exist at
law or in equity for the revocation of any contract. 9 U.S.C. 2.

2
for the purpose of regulating the business of insurance. 2 The MFA should not preempt the
application of the FAA in an insurance case involving dispute resolution because the business
of insurance does not include the resolution of disputed insurance claims. See Triton Lines, Inc.
v. Steamship Mut. Underwriting Assn (Bermuda) Ltd., 707 F. Supp. 277, 279 (S.D. Tex. 1989)
(alleged unauthorized insurer could compel arbitration of a disputed insurance claim under the
FAA, regardless of the purported prohibition against the enforcement by unauthorized insured of
insurance contracts). Furthermore, in order for the FAA to be able to invalidate, impair, or
supersede a state law, that state law must specifically and expressly prohibit arbitration of, or
require exclusive judicial resolution over, certain types of insurance. See Bernstein v. Centaur
Ins. Co., 606 F. Supp. 98, 101-02. (S.D.N.Y. 1984) (court stated that if state law specifically
prohibited arbitration in disputes involving the insurance business, arbitration could be
precluded in such a case).

In a number of states, the insurance code prohibits agreements to arbitrate disputes arising out of
an insurance contract. See Standard Security Life Ins. Co. of NY v. West, 267 F. 3d 821 (8th Cir.
2001) (Court ruled that the Missouri Arbitration Act, which specifically excluded insurance
agreements from the general rule that arbitration agreements in contracts are valid, enforceable
and irrevocable, was enacted to regulate the business of insurance and therefore the MFA pre-
empted application of the FAA), and Mutual Reinsurance Bureau v. Great Plains Mut. Ins. Co.,
969 F.2d 931 (10th Cir 2002) cert. denied 506 U.S. 1001 (2002) (Court ruled that Kansas
Arbitration Statute which specifically excluded insurance agreements from the general rule that
arbitration agreements in contracts are valid, enforceable and irrevocable, was enacted to
regulate the business of insurance and therefore the MFA pre-empted application of the FAA).
In some of these jurisdictions, the prohibition pertains to policies that are delivered or issued for
delivery in the state. In those jurisdictions that simply prohibit arbitration clauses in insurance
policies, if an argument is unsuccessful under the FAA, the fact that the Insurance Agreements
provide that the internal laws of the State of New York shall govern the contract would allow a
court to compel arbitration.

Where a party claims that an arbitration clause is unenforceable because the entire policy is
unenforceable, such general challenge to the contract must be heard by the arbitrator, not a court.
In re Arbitration between Nuclear Electric Ins. Ltd. and Central Power and Light, 926 F. Supp.
428 (S.D.N.Y. 1996).

Enforceability of Choice of Law Provision

Under New York law, parties to any agreement relating to any obligation arising out of a
transaction concerning in the aggregate not less than $250,000 may agree that the law of New
York will govern their rights and duties in whole or in part, whether or not such contract bears a
reasonable relation to New York. N.Y. GEN. OBLIG. 5-1401. Accordingly, the Insurance

2
The MFA provides, in pertinent part:

(b) No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for
the purpose of regulating the business of insurance unless such Act specifically relates to the business of
insurance. . . .
15 U.S.C. 1012(b) (emphasis added).

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Agreements, under their terms, shall be construed and enforced in accordance with, and
governed by the internal law of, the State of New York. In considering whether the New York
choice of law clause is enforceable under the laws of the jurisdiction of the Insureds counsel
rendering the opinion, the surveys generally discuss the relevant law. The statutes of a few states
provide that if the risk insured is located within the state, then that states law must apply.
Furthermore, a number of states prohibit an agreement that requires a policy to be construed
according to the laws of any other state or country. Such prohibitions, however, generally
pertain to policies delivered or issued for delivery in the state. NEIL delivers and issues the
Insurance Agreements in Delaware, a jurisdiction in which NEIL is licensed to transact the
business of insurance. Accordingly, the above-described anti-choice-of-law statutes should not
apply when determining whether the Insurance Agreements are to be construed and enforced in
accordance with, and governed by the internal law of, the State of New York.

Enforceability of Choice of Forum Provision

Under New York law, forum selection clauses are prima facie valid. Price v. Brown Group, Inc.,
206 A.D.2d 195, 198 (N.Y. App. Div. 1994) (citing British W. Indies Guar. Trust Co., Ltd. v.
Banque Internationale Luxembourg, 172 A.D.2d 234 (N.Y. 1991)). Furthermore, the New
York statutes provide that any person may maintain an action against a foreign corporation
where the action arises out of or relates to a contract for which a choice of New York law has
been made in whole or in part, which contains a provision whereby such foreign corporation
agrees to submit to the jurisdiction of New York courts and which is a contract, agreement or
undertaking, contingent or otherwise, in consideration of, or relating to any obligation arising out
of a transaction covering in the aggregate, not less than $1,000,000. N.Y. GEN. OBLIG. 5-1402.
See also Farrell v. Piedmont Aviation, Inc., 411 F.2d 812 (2d Cir. 1969); but c.f., Bank of
Tokyo-Mitsubishi, Ltd. v. Kvaerner, 671 N.Y.S.2d 905, 908 (1st Dept 1998).

The Insurance Agreements provide that to the extent any claim or controversy between the
Insureds and NEIL that arises thereunder is not subject to arbitration for any reason whatever, the
United States District Court for the Southern District of New York shall have exclusive
jurisdiction thereof 3; and such provision is enforceable under New York law. In considering
whether the New York choice of forum clause is enforceable under the laws of the jurisdiction of
the Insureds counsel rendering the opinion, the surveys generally discusses the relevant law.
Statutory provisions and judicial decisions in a few jurisdictions prohibit parties to an agreement
from selecting a forum that would deprive that states courts of jurisdiction. The statutory
prohibitions, however, relate to policies that are issued or issued for delivery in the
jurisdiction. Since the Insurance Agreements are only issued and issued for delivery in
Delaware, such statutory provisions should be inapplicable.

Cancellation of Insurance Agreements

The Insurance Agreements may be canceled as follows: (1) at any time by NEIL, upon approval
of its Board of Directors, upon sixty days written notice of cancellation mailed or delivered to
the Member Insured, with or without tender of the excess of paid premium above the pro rata
premium for the expired time, which excess, if not tendered, shall be refunded on demand; (2)

3
Alternatively, if Federal jurisdiction cannot be maintained for any reason, the State Supreme Court in New York
County would have jurisdiction.

4
automatically if (a) the Institute of Nuclear Power Operations (INPO) membership of either
the Insured or the persons responsible for operating the unit or units covered by the Policy is
suspended or canceled by INPO for any reason and (b) the Member Insured fails to notify the
Insurer within five business days after receipt of notice of such suspension or cancellation of
membership in INPO.

With respect to clause (1) above, NEIL may cancel an Insurance Agreement if the actions of an
Insured are an Event of Default under the Waiver Agreement. The following acts are Events
of Default: (1) the filing of an action against NEIL with respect to the Waiver Agreement or
Insurance Agreement in any court other than the U.S. District Court for the Southern District of
New York, except with respect to appeals of decisions by the U.S. District Court of the Southern
District of New York or enforcement of a judgment thereof; (2) the assertion or seeking a
determination in any court or before any arbitral panel that the provisions regarding arbitration
and choice of law contained in the Insurance Agreements are unenforceable; or (3) the assertion
or seeking a determination in any court or before any arbitral panel that the terms of the
Insurance Agreements are unenforceable by reason of NEIL being an unauthorized insurer.

NEIL is not subject to the notice provisions or reasons for cancellations set forth in other states
insurance codes because NEIL issues and delivers the Insurance Agreements in Delaware. In the
event a court found such provisions applicable, NEIL nevertheless should be able to cancel the
Insurance Agreements in those states with such statutory provisions because an Event of Default
by an insured should constitute both an increase of risks insured or a substantial breach of
contract by the Insured.

Waiver of Statutory Rights

The statutes and regulations of many jurisdictions contain provisions which may or may not
hinder the enforceability of the certain provisions contained in the NEIL policies and/or the
policies themselves. Pursuant to the separate Waiver of Rights Agreement, the Insureds agreed
to waive any rights they may have under such statutory provisions. The Insureds agreed that the
public policies supporting the adoption of such statutes are inapplicable to the purchase by the
Insureds of policies from NEIL and, in any event, are far outweighed by the strong public policy
considerations of making insurance available on the terms and conditions collectively
determined by the Insureds and by the interests of all Insureds in the uniform interpretation of the
policies.

5
Exhibit C:
NEIL Operating Procedures
NUCLEAR ELECTRIC INSURANCE LIMITED

OPERATING PROCEDURES FOR


UNITED STATES NUCLEAR INSURANCE
REVISED AS OF JANUARY 1, 2013

Background

Nuclear Electric Insurance Limited (NEIL or the Company) is incorporated under the laws of
Bermuda and is a registered insurer under the Bermuda Insurance Act of 1978 and the Captive
Insurance Companies Act of Delaware. NEIL moved its corporate offices from Bermuda to
Delaware in 1988.

The Company insures nuclear power plants located in the United States, providing primary property
insurance, excess property insurance and accidental outage insurance. In 1999, NEIL formed its
overseas subsidiary, Overseas NEIL Limited (ONEIL), which is generally responsible for all
business outside North America, on a Member and non-Member basis, other than select reinsurance
business conducted by NEIL. Separate Operating Procedures apply to ONEILs business. In mid-
2000, NEIL began offering limited capacity to its Members for their non-nuclear property and
accidental outage risks, within specific business and underwriting parameters. NEIL is handling
this business generally on a following lines reinsurance basis under separate Operating Procedures
adopted for that business.

NEIL was formed by a group of U.S. utilities desirous of acquiring nuclear insurance not available
in the marketplace, or not available on acceptable terms and conditions. As the nuclear power plant
industrys insurance needs have grown, NEIL has increased its limits and its products. NEILs
nuclear property and excess insurance expressly respond to the Nuclear Regulatory Commission
(NRC) Property Rule, which requires nuclear power plants to be insured for at least $1.06 billion.
NEIL presently insures all operating nuclear power plants in the United States. The NRC has
advised that it believes this Federal law preempts any conflicting state insurance law. Thus, any
state insurance law that would prevent NEIL from providing insurance to a utility seeking to
comply with the NRC Property Rule should be preempted by Federal law under this principle. The
existence of any actual pre-emption of state insurance laws otherwise applicable to the Company or
its Members would be a function of the particular circumstances involved.

NEIL is neither licensed, nor an authorized insurer, in any of the states within the U.S. in which the
nuclear risks are located because, among other reasons, it cannot satisfy the surplus requirement
under most state insurance laws. One provision generally applicable is that an insurer cannot have
more than 10% of its surplus exposed on any one risk. NEIL has no reasonable prospect of meeting
this 10% surplus requirement because of the limits necessary for the nuclear coverages needed by
its U.S.-based Members. As an unauthorized insurer, the Company writes insurance in states under
Federal or state exemptions from such licensing laws.

1
Insureds are specifically permitted to secure insurance coverage from unauthorized insurers, such as
NEIL, in many states in which risks are located under the industrial insured, independently
procured and nuclear insured exemptions. NEIL is also expressly permitted to conduct certain
activities ancillary to the transaction of insurance, namely loss control inspections and claims
matters, in a smaller number of the other states in which risks are located.

The Company developed Operating Procedures when it was located in Bermuda to ensure that it
was not engaged in the transaction of insurance business in any state in the United States. Those
Procedures were revised when NEIL relocated to Delaware to accommodate the different
circumstances while maintaining the essential purpose.

The growth of the Companys operations and changes regarding the insurance needs of our
Members prompt the Company to periodically review the Operating Procedures and make
appropriate revisions. When changes are made, the revised Operating Procedures are circulated to
the Insureds risk managers and counsel. The Operating Procedures are designed to maintain the
independently procured exemption utilized by some Insureds in certain states to purchase
insurance from NEIL and to otherwise assist NEIL in complying with state and federal law in
conducting its insurance operations.

These Operating Procedures apply to all U.S.-based NEIL Insureds under the Nuclear Insurance
Programs, except for those insureds who are excused from having to comply with certain provisions
of these Operating Procedures pursuant to the Application of Operating Procedures section
below, and to all insurance-related communications and transactions between NEIL and its
Insureds.

General Requirements

1. Nuclear Service Organization, Inc. ("NSO") will be licensed to do business in all the states
in which nuclear power plants insured by NEIL are located.

2. NEIL will not perform claims adjustment services, but will retain NSO to perform and
manage claims adjustment services for NEIL. (See Claims Procedures section below).

3. NSO will use a licensed adjuster in any state where such licensure is required.

4. NSOs Vice President of Loss Control, Vice President of Claims, loss control
representatives and staff, and Claims staff will be employees of NSO. NSOs Vice
Presidents will be members of NEILs Leadership Team and be designated as Vice
Presidents of NEIL. They will be responsible for liaison between NEIL and NSO. NSO
employees may not be employees of NEIL, and must represent themselves as employees of
NSO in all states and only use NSO letterhead. Any NEIL employee participating in the
claims process will present themselves to claimants as representatives of NEIL, not NSO.

4. NEIL will not evaluate any risk in any state. All such evaluations will be performed by
entities approved in writing by the Company and which are independent of the Insured.

2
NSO is an entity approved by the Company and, if NSO conducts the evaluations, NEIL
will pay NSO the fees and expenses involved.

5. Insurance prospects and Insureds will designate a representative located in Delaware (the
Insureds Delaware Representative) as their attorney-in-fact with respect to certain of their
activities with NEIL, as indicated below.

6. NEIL meetings may be held in any U.S. state. However, any NEIL meeting held in the
following states, in which NEILs Insureds are based or have their plants, shall not include
any activities which could be viewed as conducting the business of insurance: Alabama,
Arkansas, California, Florida, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan,
Minnesota, Mississippi, New Jersey, New York, Ohio, Texas, Washington and Wisconsin.
For example: NEIL should not solicit new insurance business or negotiate policy terms with
prospective insureds or existing Insureds.

7. Insureds relying on the independently procured, industrial insured, and nuclear


insured exemptions, where the payment of premium taxes is necessary for the exemption,
are required to send NEIL copies of prior state filings evidencing payment of premium taxes
(the Tax Filing States). These states currently are California, Connecticut, Georgia,
Maryland, Missouri, New Hampshire, Pennsylvania, Texas and Wisconsin. The request for
the state premium tax filings will be made as part of the biennial request for updated Legal
Opinions, with the tax filings being attachments to the Company Certificate executed by
each Insured.

The Application Procedure

Anything to do with new applications to join a NEIL program, including the delivery of the
application form, NEILs acceptance of the application form, and communications about decisions
concerning the application, will be performed in Delaware, either directly between NEIL and the
applicant, who must come to Delaware, or through the applicants Delaware Representative.

The Policy Renewal Procedure

Anything to do with the policy renewal procedure, including but not limited to the payment of the
policy premium, the execution of the policy and the delivery of the policy, will be performed in
Delaware, either directly between NEIL and the Insured, who must come to Delaware, or through
the Insureds Delaware Representative. Any communication concerning the netting of a Member
Insureds premium against that Member Insureds Policyholder Distributions (e.g., requests for
netting and/or notices concerning netting) should also be made through the Member Insureds
Delaware Representative.

3
The Insurance Policy
Policy Form

1. All policies issued by NEIL will contain a notice stating that NEIL is only licensed in
Bermuda and Delaware and that the Insureds will not be protected by the guaranty funds of
any U.S. jurisdiction.

2. All policies issued by NEIL on U.S. nuclear risks will contain a provision that states the
policy will become effective only upon the acceptance by the Insured (including its
Delaware Representative) of the delivery of the policy at the Insurers office in Delaware.
The policy will only become effective if this procedure is followed. NEIL will waive this
requirement for Insureds with a Qualified Exemption pursuant to the Application of
Operating Procedures section below. However, irrespective of the above, all Insureds will
be required to execute all nuclear policies.

3. All policies will contain a provision that requires the Insured to represent that it has paid or
will pay any applicable state premium tax. Insureds from the Tax Filing States will be
required to send NEIL copies of state filings evidencing payment of state premium taxes.

Policy Issuance and Delivery

1. NEIL will issue and deliver all policies, binders, etc. to the Insureds Delaware
Representative.

2. Once delivery is complete, NEIL may, if so requested by the Insureds Delaware


Representative, arrange for the mailing to be completed.

3. The Insureds Delaware Representative will set up two accounts under its direction for
NEIL Insureds at Wilmington Trust. The Insureds will wire transfer the payment of
premiums to the incoming account. The Insureds Delaware Representative will arrange
for the premiums to be paid to the NEIL bank account from such incoming account. The
Insureds Delaware Representative will wire transfer the payment of claims and return
premiums, such as shutdown credits, through the outgoing account, unless otherwise
instructed to make such payments to the Insureds by check. NEIL can waive the
requirement that payments be wired through the accounts set up by the Insureds Delaware
Representative for Insureds with a Qualifying Exemption, pursuant to the Application of
Operating Procedures section below.

Policy Negotiations

1. NEILs nuclear policy forms are standard forms and are not subject to individual
negotiation. Changes to the forms are recommended by the IAC and are submitted to the
Company's Board of Directors for approval. Requests for individual variances or
endorsements shall be in writing and delivered to the Insureds Delaware Representative.
NEIL will handle the mailing of, and send duplicates of, the original policy endorsements
directly to the Insureds, if requested by the Insureds Delaware Representative.

4
Claims Procedures

1. Insureds wishing to report claims or potential claims to NEIL will either come to Delaware
to deliver notice to NEIL or deliver such claims notification to the Insureds Delaware
Representative for delivery on behalf of the Insured to NEILs Vice President Member
Insurance.

2. Insureds will either come to Delaware to file a Proof of Loss with NEIL or send the Proof of
Loss to the Insureds Delaware Representative for delivery on behalf of the Insured to
NEILs Vice President Member Insurance.

3. NEIL will make claims payments, if any, to the Insureds Delaware Representative who will
then either wire transfer the payments from the outgoing account to the Insured or make the
claims payment via a check to the Insured.

4. NEIL will issue denial letters, if applicable, to the Insureds Delaware Representative.

5. Other claims communications between NEIL and Insureds will be made to the Insureds
Delaware Representative except where NSO has been asked to provide assistance to NEIL
with respect to a claim.

6. NSO will handle all claims for NEIL, including adjustments, negotiations, and settlements
of claims, as authorized by NEIL. If so authorized, NSO will be responsible for engaging
adjusters, appraisers, and other experts in connection with claims.

Distributions

NEIL will make distributions directly to Members. However, any communication concerning the
netting of a Member Insureds premium against that Member Insureds Policyholder Distributions
(e.g., requests for netting and/or notices concerning netting) should be made through the Member
Insureds Delaware Representative.

Incident Reports and Adverse Condition Reports

All Insureds will send incident reports and adverse condition reports to NSO since they are
necessary for NSO to provide its services to NEIL.

5
Application of Operating Procedures

Based on the availability of a Qualifying Exemption in the relevant state(s), an Insured


may be relieved from having to comply with certain parts of these Operating Procedures. The
Qualifying Exemptions for Insureds with nuclear policies are Nuclear Exemptions and Industrial
Insured Exemptions. To qualify, the Insureds Risk Management operations and the insured plant
must be located in a state with a Qualifying Exemption, but they do not need to be in the same state.
A current list of Insureds that NEIL has determined have a Qualifying Exemption is attached as
Exhibit A.

Insureds with a Qualifying Exemption may be excused from the requirement that certain
communications be delivered to NEIL and the Insured through the Insureds Delaware
Representative as set forth in the Application Procedures, the Policy Renewal Procedures, the
Insurance Policy Procedures, and the Claims Procedures.

Any Insured who does not appear on Exhibit A must adhere to all provisions of these
Operating Procedures. NEIL will periodically update the list of Insureds who are excused from
these Operating Procedures and distribute the updated list as necessary.

EXAMPLES:

Insureds with a Qualifying Exemption may elect to receive policy renewal and endorsement
information (legal and underwriting) directly from NEIL and will be permitted to send the
responding information back to NEIL directly.

Insureds with a Qualifying Exemption will be permitted to transmit premium payments


directly to NEIL and may elect to receive insurance-related payments, such as claims payments,
directly from NEIL.

An Insured with a Qualifying Exemption will be permitted to execute its Nuclear Polices
and other corresponding documents, such as the Waiver of Rights Agreement, within its state and
will no longer need to execute Power of Attorney forms for the Delaware Representative.

6
EXHIBIT A

MEMBERS EXCUSED FROM


NEILS U.S. NUCLEAR OPERATING PROCEDURES
AS OF JANUARY 1, 2013

MEMBER EXEMPTION(S) APPLICABLE STATE

Arizona Public Service Co. Industrial Insured AZ

Central Vermont Public Service Co. Industrial Insured VT

Duke Energy Carolinas Nuclear Exception NC


Carolina Power and Light Co. Industrial Insured SC

Exelon Generation Industrial Insured PA and IL


(Applies only to the non-New Jersey sites)

MEAG Power Nuclear Exception GA

Northeast Utilities Industrial Insured CT


Connecticut Light & Power
Western Massachusetts Electric Co.

PPL Susquehanna LLC Industrial Insured PA

Salt River Project Industrial Insured AZ

South Carolina Electric & Gas Industrial Insured SC

Southern Company
Alabama Power Industrial Insured AL
Georgia Power Nuclear Insured GA

Union Electric (AmerenUE) Industrial Insured MO