KY Assoc Health Plan v. Nichols

Opinion

5(&200(1'(' )25 )8//7(;7 38%/,&$7,21 3XUVXDQW WR 6L[WK &LUFXLW 5XOH 

(/(&7521,& &,7$7,21  )(' $SS 3 WK &LU )LOH 1DPH DS

81,7('67$7(6&28572)$33($/6 )257+(6,;7+&,5&8,7 BBBBBBBBBBBBBBBBB

.(178&.< $662&,$7,21 2) ; +($/7+ 3/$16 ,1&  $'9$17$*( &$5( ,1&   1R $(71$ +($/7+ 3/$16 2)  2+,2 ,1& &+2,&(&$5( !  +($/7+ 3/$16 ,1& )+3 2)  2+,2 ,1& +03. ,1&  +3/$1 ,1& +80$1$  +($/7+ 3/$1 ,1&  3ODLQWLIIV$SSHOODQWV    Y   *(25*( 1,&+2/6 ,,,LQKLV  RIILFLDOFDSDFLW\DV  &RPPLVVLRQHURIWKH   .HQWXFN\'HSDUWPHQWRI  ,QVXUDQFH  'HIHQGDQW$SSHOOHH   1 $SSHDOIURPWKH8QLWHG6WDWHV'LVWULFW&RXUW IRUWKH(DVWHUQ'LVWULFWRI.HQWXFN\DW)UDQNIRUW 1RVnsRVHSK0+RRG'LVWULFWsXGJH $UJXHG6HSWHPEHU

  .<$VVjQRI+HDOWK3ODQV 1R ,QFHWDOY1LFKROV

'HFLGHGDQG)LOHG6HSWHPEHU %HIRUH.(11('<DQG1255,6&LUFXLWsXGJHV +2/6&+8+ 'LVWULFWsXGJH BBBBBBBBBBBBBBBBB &2816(/ $5*8('5REHUW1(FFOHV2j0(/9(1< 0<(56 :DVKLQJWRQ '& IRU $SSHOODQWV  6KDXQ 7 2UPH .(178&.<'(3$570(172),1685$1&()UDQNIRUW .HQWXFN\ IRU $SSHOOHH  21 %5,()  .DUHQ 0 :DKOH 2j0(/9(1< 0<(56:DVKLQJWRQ'&%DUEDUD5HLG +DUWXQJ *5((1(%$80 '2//  0&'21$/' /RXLVYLOOH.HQWXFN\IRU$SSHOODQWV6KDXQ72UPH$QQD 5*ZLQQ.(178&.<'(3$570(172),1685$1&( )UDQNIRUW.HQWXFN\IRU$SSHOOHH +2/6&+8+'sGHOLYHUHGWKHRSLQLRQRIWKHFRXUWLQ ZKLFK 1255,6 s MRLQHG  .(11('< s SS  GHOLYHUHGDVHSDUDWHGLVVHQWLQJRSLQLRQZLWKUHVSHFWWR3DUW,,, RIWKHPDMRULW\RSLQLRQ BBBBBBBBBBBBBBBBB 23,1,21 BBBBBBBBBBBBBBBBB +2/6&+8+'LVWULFWsXGJH3ODLQWLIIVDUHVHYHQKHDOWK PDLQWHQDQFHRUJDQL]DWLRQV+02VOLFHQVHGXQGHUWKHODZV RI.HQWXFN\DQGWKH.HQWXFN\$VVRFLDWLRQRI+HDOWK3ODQV ,QF D QRQSURILW DVVRFLDWLRQ RUJDQL]HG WR SURPRWH WKH EXVLQHVVLQWHUHVWRILWV+02PHPEHUVKHUHLQDIWHUUHIHUUHGWR DV mSODLQWLIIVl  3ODLQWLIIV ILOHG WKLV DFWLRQ DJDLQVW *HRUJH 1LFKROV ,,, mGHIHQGDQWl LQ KLV RIILFLDO FDSDFLW\ DV

+RQRUDEOH sRKQ ' +ROVFKXK 8QLWHG 6WDWHV 'LVWULFW sXGJH IRU WKH 6RXWKHUQ 'LVWULFW RI 2KLR VLWWLQJ E\ GHVLJQDWLRQ 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV

&RPPLVVLRQHU RI WKH .HQWXFN\ 'HSDUWPHQW RI ,QVXUDQFH 3ODLQWLIIVDUJXHGWKDW.HQWXFN\5HYLVHG6WDWXWHV$QQRWDWHG ††$DQG$o%DQNV%DOGZLQ  VKRXOG EH IRXQG SUHHPSWHG E\ WKH (PSOR\HH 5HWLUHPHQW ,QFRPH 6HFXULW\ $FW RI  m(5,6$l DQG VRXJKWLQMXQFWLYHUHOLHIIURPWKHLUHQIRUFHPHQW%RWKSDUWLHV PRYHG IRU VXPPDU\ MXGJPHQW  7KH GLVWULFW FRXUW GHQLHG SODLQWLIIVj UHTXHVW IRU VXPPDU\ MXGJPHQW DQG JUDQWHG GHIHQGDQWjVFURVVPRWLRQIRUVXPPDU\MXGJPHQWFRQFOXGLQJ WKDW††$DQG$ZHUHVDYHGIURP SUHHPSWLRQ E\ (5,6$ EHFDXVH WKH\ mUHJXODWHG LQVXUDQFHl XQGHU (5,6$jV VDYLQJV FODXVH  3ODLQWLIIV DVVHUW WKDW WKH GLVWULFWFRXUWHUUHGLQWKLVFRQFOXVLRQ ,7KH6WDWH6WDWXWHV ,Q  WKH .HQWXFN\ *HQHUDO $VVHPEO\ HQDFWHG WKH .HQWXFN\ +HDOWK &DUH 5HIRUP $FW WKH m$FWl  7KH $FW FRQWDLQHGDQm$Q\:LOOLQJ3URYLGHUlSURYLVLRQWKDWVWDWHG m+HDOWKFDUHEHQHILWSODQVVKDOOQRWGLVFULPLQDWHDJDLQVWDQ\ SURYLGHUZKRLVORFDWHGZLWKLQWKHJHRJUDSKLFFRYHUDJHDUHD RIWKHKHDOWKEHQHILWSODQDQGLVZLOOLQJWRPHHWWKHWHUPVDQG FRQGLWLRQVIRUSDUWLFLSDWLRQHVWDEOLVKHGE\WKHKHDOWKEHQHILW SODQl  .\ 5HY 6WDW $QQ † $ %DQNV %DOGZLQ7KH$FWGHILQHGDKHDOWKEHQHILWSODQDV >$Q\@KRVSLWDORUPHGLFDOH[SHQVHSROLF\RUFHUWLILFDWH QRQSURILWKRVSLWDOPHGLFDOVXUJLFDODQGKHDOWKVHUYLFH FRUSRUDWLRQFRQWUDFWRUFHUWLILFDWHDVHOILQVXUHGSODQRU D SODQ SURYLGHG E\ D PXOWLSOH HPSOR\HU ZHOIDUH DUUDQJHPHQWWRWKHH[WHQWSHUPLWWHGE\(5,6$KHDOWK PDLQWHQDQFH RUJDQL]DWLRQ FRQWUDFW DQG VWDQGDUG DQG VXSSOHPHQWDOKHDOWKEHQHILWSODQDVHVWDEOLVKHGLQ.56 $  † $ D %DQNV %DOGZLQ  ,QWKH.HQWXFN\*HQHUDO$VVHPEO\DGGHG††$ DQGWRWKHFRGH7KHDGGLWLRQVVSHFLILFDOO\UHJXODWH  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

KRZmKHDOWKEHQHILWSODQVlFDQLQWHUDFWZLWKFKLURSUDFWRUV .HQWXFN\SURYLVLRQVLPSHUPLVVLEOHmFRQQHFWLRQZLWKl(5,6$ 1RWRQO\GRHVWKHVWDWXWHFRQWDLQDQmDQ\ZLOOLQJSURYLGHUl SODQV ZRXOG FRQWLQXH DV (5,6$ SODQV ZRXOG VWLOO EH SURYLVLRQDGGUHVVHGSDUWLFXODUO\WRFKLURSUDFWRUVEXWLWDOVR HIIHFWLYHO\SURKLELWHGIURPRIIHULQJOLPLWHGSURYLGHUSDQHOV LPSRVHV YDULRXV DGGLWLRQDO UHTXLUHPHQWV RQ KHDOWK EHQHILW DV QRQH ZRXOG EH DYDLODEOH WR WKHP  7KH RQO\ ZD\ WKDW SODQVWKDWLQFOXGHFKLURSUDFWLFEHQHILWV6HH†$ †† $ DQG $ FRXOG EH VDYHG ZRXOG EH WR DGG ODQJXDJH HIIHFWLYHO\ DOORZLQJ KHDOWK FDUH HQWLWLHVWRRIIHUOLPLWHGSURYLGHUQHWZRUNVWR(5,6$FRYHUHG  SODQV%HFDXVHERWK.HQWXFN\DQGIHGHUDOFDVHODZSURKLELW 6HFWLRQ $ VWDWHV WKDW mKHDOWK EHQHILW SODQl KDV WKH VDPH PHDQLQJ DV LQ † $ ZKLFK SURYLGHV LQ SHUWLQHQW SDUW XV IURP DGGLQJ ODQJXDJH WR D VWDWH VWDWXWH WR UHPRYH LWV +HDOWK EHQHILW SODQ PHDQV DQ\ KRVSLWDO RU PHGLFDO FRQIOLFW ZLWK IHGHUDO ODZ VHH HJ 0XVVHOPDQ Y H[SHQVH SROLF\ RU FHUWLILFDWH QRQSURILW KRVSLWDO &RPPRQZHDOWK6:G.\(XEDQNV PHGLFDOVXUJLFDO DQG KHDOWK VHUYLFH FRUSRUDWLRQ FRQWUDFW RU Y:LONLQVRQ)GWK&LU,FRQFOXGH FHUWLILFDWH SURYLGHU VSRQVRUHG LQWHJUDWHG KHDOWK GHOLYHU\ WKDW††$DQG$DUHSUHHPSWHG QHWZRUN D VHOILQVXUHG SODQ RU D SODQ SURYLGHG E\ D PXOWLSOH LQWKHLUHQWLUHW\6HH3UXGHQWLDO,QV&R)GDW HPSOR\HU ZHOIDUH DUUDQJHPHQW WR WKH H[WHQW SHUPLWWHG E\ (5,6$ KHDOWK PDLQWHQDQFH RUJDQL]DWLRQ FRQWUDFW RU DQ\ KHDOWK FRQFOXGLQJWKDWWKH$:3VWDWXWHDWLVVXHZDVSUHHPSWHGLQ EHQHILW SODQ WKDW DIIHFWV WKH ULJKWV RI D .HQWXFN\ LQVXUHG DQG LWV HQWLUHW\ 7H[DV 3KDUPDF\ $VVjQ  )G DW  EHDUV D UHDVRQDEOH UHODWLRQ WR .HQWXFN\ ZKHWKHU GHOLYHUHG RU GUDZLQJWKHVDPHFRQFOXVLRQ LVVXHG IRU GHOLYHU\ LQ .HQWXFN\     † $ %DQNV %DOGZLQ  )LQDOO\ , DGGUHVV ZKHWKHU WKH SUHHPSWHG SURYLVLRQV SURYLVLRQ  RI † $ DQG SURYLVLRQ  RI  7KH mDQ\ ZLOOLQJ SURYLGHUl SURYLVLRQ RI † $ VWDWHV † $ PD\ EH VHYHUHG IURP WKHLU UHVSHFWLYH $ KHDOWK EHQHILW SODQ WKDW LQFOXGHV FKLURSUDFWLF EHQHILWV VKDOO VWDWXWRU\ VHFWLRQV RU ZKHWKHU WKH VHFWLRQV PXVW DOVR EH  3HUPLW DQ\ OLFHQVHG FKLURSUDFWRU ZKR DJUHHV WR DELGH E\ WKH SUHHPSWHG  .HQWXFN\jV VHYHUDELOLW\ VWDWXWH LQGLFDWHV WKDW WHUPV FRQGLWLRQV UHLPEXUVHPHQW UDWHV DQG VWDQGDUGV RI TXDOLW\ RI WKH KHDOWK EHQHILW SODQ WR VHUYH DV D SDUWLFLSDWLQJ XQFRQVWLWXWLRQDO SURYLVLRQV PD\ SUHVXPSWLYHO\ EH VHYHUHG SULPDU\ FKLURSUDFWLF SURYLGHU WR DQ\ SHUVRQ FRYHUHG E\ WKH XQOHVVVHYHULQJWKHRIIHQGLQJSURYLVLRQVPDNHVLWLPSRVVLEOH SODQ WRH[HFXWHWKHUHPDLQLQJSURYLVLRQVRIDVWDWXWHLQWKHPDQQHU WKHOHJLVODWXUHLQWHQGHG,WLVFOHDUWKDW††$DQG  6SHFLILFDOO\ KHDOWK EHQHILW SODQV DUH UHTXLUHG WR LQFOXGH DOO SULPDU\ $ FDQ EH H[HFXWHG LQ DFFRUGDQFH ZLWK WKH FKLURSUDFWLF SURYLGHUV ZKR DUH VHOHFWHG E\ D SHUVRQ FRYHUHG E\ WKH SODQ OHJLVODWXUHjVRULJLQDOLQWHQWLRQZLWKRXWSURYLVLRQDQG DOORZ SDUWLFLSDQWV GLUHFW DFFHVV WR FKLURSUDFWRUV RI WKHLU FKRLFH ZLWKRXW UHVSHFWLYHO\$FFRUGLQJO\ZKLOH,FRQFOXGHWKDW††$ UHIHUUDO IURP D JDWHNHHSHU DSSRLQW D FKLURSUDFWRU DV D JDWHNHHSHU IRU WKH SURYLVLRQ RI FKLURSUDFWLF VHUYLFHV ZKHQ WKH SODQ XVHV JDWHNHHSHUV UHIUDLQ  DQG $ VKRXOG EH SUHHPSWHG LQ WKHLU IURPGLVFULPLQDWLQJLQUHLPEXUVHPHQWUDWHVEHWZHHQFKLURSUDFWRUVUHIUDLQ HQWLUHW\WKHVWDWXWRU\VHFWLRQVWKH\UHVLGHLQVKRXOGUHPDLQ IURP SURPRWLQJ RU UHFRPPHQGLQJ DQ\ FKLURSUDFWRU WR D FRYHUHG SHUVRQ XQDIIHFWHG DVVXUH DGHTXDWH QXPEHUV RI SURYLGHUV DUH LQFOXGHG LQ WKH SODQ DQG PDNH OLVWLQJV RI SDUWLFLSDWLQJ FKLURSUDFWRUV DYDLODEOH WR FRYHUHG SHUVRQV RQ D UHJXODU EDVLV † $ o 7KH GLVWULFW FRXUW DSSDUHQWO\ OLPLWHG LWV DQDO\VLV WR .HQWXFN\jV m$Q\ :LOOLQJ 3URYLGHUl SURYLVLRQV WKH JHQHUDO SURYLVLRQ EHLQJ ORFDWHG DW † $ DQG WKH VSHFLILF FKLURSUDFWLF SURYLVLRQ EHLQJ ORFDWHG DW † $ 7KH GLVWULFW FRXUW QRWHG WKDW WKH FKLURSUDFWLF VWDWXWH LPSRVHG DGGLWLRQDO UHTXLUHPHQWV EH\RQG WKRVH LPSRVHG E\ WKH JHQHUDO  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

6HHDOVR $ODVND $LUOLQHV,QFY%URFN86 ,Q$SULORISODLQWLIIVILOHGVXLWLQWKH(DVWHUQ'LVWULFW 6&W/(GG5HJDQY RI .HQWXFN\ UHTXHVWLQJ WKDW † $ DQG 7LPH,QFVXSUDDW6&W †$IRUFRQYHQLHQFHZHZLOOFROOHFWLYHO\UHIHUWR † $ DQG † $ DV .HQWXFN\jV 0LOOH/DFV%DQGRI&KLSSHZD,QGLDQV6&WDW m$:3lODZVEHGHFODUHGDPRQJRWKHUWKLQJVSUHHPSWHGE\ 7KHUHIRUH DV HYLGHQFH RI WKH OHJLVODWXUHjV LQWHQW , ORRN WR †DRI(5,6$86&†D3ODLQWLIIVPRYHGIRU .HQWXFN\jVVHYHUDELOLW\VWDWXWHZKLFKVWDWHV SDUWLDO VXPPDU\ MXGJPHQW RQ WKH LVVXH DQG &RPPLVVLRQHU 1LFKROVFURVVPRYHGIRUSDUWLDOVXPPDU\MXGJPHQWDVZHOO ,WVKDOOEHFRQVLGHUHGWKDWLWLVWKHLQWHQWRIWKHJHQHUDO 7KHGLVWULFWFRXUWGHWHUPLQHGWKDWZKLOHWKH.HQWXFN\$:3 DVVHPEO\LQHQDFWLQJDQ\VWDWXWHWKDWLIDQ\SDUWRIWKH ODZV ZHUH UHODWHG WR HPSOR\HH EHQHILW SODQV XQGHU (5,6$ VWDWXWHEHKHOGXQFRQVWLWXWLRQDOWKHUHPDLQLQJSDUWVVKDOO † D WKH\ UHJXODWHG WKH EXVLQHVV RI LQVXUDQFH DQG UHPDLQLQIRUFHXQOHVVWKHVWDWXWHSURYLGHVRWKHUZLVHRU WKHUHIRUHIHOOXQGHUWKHVDYLQJFODXVHRI†E86& XQOHVV WKH UHPDLQLQJ SDUWV DUH VR HVVHQWLDOO\ DQG † E  $  7KH FRXUW WKXV JUDQWHG SDUWLDO VXPPDU\ LQVHSDUDEO\ FRQQHFWHG ZLWK DQG GHSHQGHQW XSRQ WKH MXGJPHQWLQIDYRURI&RPPLVVLRQHU1LFKROVDQGGHWHUPLQHG XQFRQVWLWXWLRQDOSDUWWKDWLWLVDSSDUHQWWKDWWKHJHQHUDO LWVRUGHUWREHILQDODQGDSSHDODEOH7KLVDSSHDOIROORZHG DVVHPEO\ ZRXOG QRW KDYH HQDFWHG WKH UHPDLQLQJ SDUWV ZLWKRXWWKHXQFRQVWLWXWLRQDOSDUWRUXQOHVVWKHUHPDLQLQJ 6HFWLRQV $  DQG $ D ZHUH SDUWV VWDQGLQJ DORQH DUH LQFRPSOHWH DQG LQFDSDEOH RI UHSHDOHGE\WKH.HQWXFN\OHJLVODWXUHHIIHFWLYHsXO\ EHLQJ H[HFXWHG LQ DFFRUGDQFH ZLWK WKH LQWHQW RI WKH 7KH SDUWLHV DFNQRZOHGJH WKDW WKLV DSSHDO LV QRW PRRW JHQHUDODVVHPEO\ KRZHYHUDVWKHOHJLVODWXUHWKURXJK+RXVH%LOO1R.\  UHSODFHG WKH UHSHDOHG SURYLVLRQV ZLWK WKH VDPH .\5HY6WDW$QQ†7KHVWDWXWHLQGLFDWHVWKDWLI UHTXLUHPHQWV EXW VXEVWLWXWHG WKH WHUP mKHDOWK LQVXUHUl IRU DQ\SDUWRID.HQWXFN\VWDWXWHLVIRXQGXQFRQVWLWXWLRQDOLWLV mKHDOWK EHQHILW SODQl LQ LWV DQ\ ZLOOLQJ SURYLGHU SURYLVLRQ WKHOHJLVODWXUHjVLQWHQWWKDWWKHUHPDLQLQJSURYLVLRQVEHVDYHG QRZ ORFDWHG DW .HQWXFN\ 5HYLVHG 6WDWXWHV $QQRWDWHG +RZHYHU LQ GUDIWLQJ WKH VWDWXWH WKH OHJLVODWXUH DOVR †$%DQNV%DOGZLQ7KH%LOOjVGHILQLWLRQ UHFRJQL]HG WKDW VLWXDWLRQV ZLOO H[LVW ZKHUH VHYHULQJ WKH RI mLQVXUHUl ZDV FRGLILHG DW .HQWXFN\ 5HYLVHG 6WDWXWHV RIIHQGLQJ SDUWV FDQQRW EH FRQVLGHUHG DV LW ZRXOG PDNH LW $QQRWDWHG†$%DQNV%DOGZLQZKLFK LPSRVVLEOHWRFDUU\RXWWKHRULJLQDOOHJLVODWLYHLQWHQW GHILQHVmLQVXUHUlDV , EHJLQ P\ VHYHUDELOLW\ LQTXLU\ E\ DGGUHVVLQJ ZKHWKHU >$@Q\ LQVXUDQFH FRPSDQ\ KHDOWK PDLQWHQDQFH SRUWLRQV RI  .\ 5HY 6WDW $QQ †† $ DQG RUJDQL]DWLRQVHOILQVXUHURUPXOWLSOHHPSOR\HUZHOIDUH $ PD\ EH VHYHUHG LQ VXFK D ZD\ WKDW WKH DUUDQJHPHQWQRWH[HPSWIURPVWDWHUHJXODWLRQE\(5,6$ SURYLVLRQVZRXOGQRWEHSUHHPSWHGLQWKHLUHQWLUHW\%HFDXVH ,EHOLHYHWKDW††$DQG$FRQWDLQ DQLPSHUPLVVLEOHFRQQHFWLRQZLWK(5,6$FRYHUHGSODQVWKHUH LVQRZD\WRVDYHWKHSURYLVLRQVWKHPVHOYHVIURPSUHHPSWLRQ mDQ\ ZLOOLQJ SURYLGHUl VWDWXWH EXW EHFDXVH ERWK VWDWXWHV mVLPLODUO\ GHILQH E\VHYHULQJSDUWLFXODUSDUWVZKLOHOHDYLQJWKHUHVWLQWDFW(YHQ µKHDOWK EHQHILW SODQjl WKH FRXUW UHIHUUHG WR WKRVH VWDWXWHV FROOHFWLYHO\ s$ LILWZHUHSRVVLEOHWRGRVRPHUHO\UHPRYLQJDQ\SURKLELWHG DW  %HFDXVH WKH FRXUW QHYHU H[SOLFLWO\ DGGUHVVHG SURYLVLRQV  DQG o RI † $ WKH FKLURSUDFWLF VWDWXWH ZH ZLOO UHPDQG WKH mUHIHUHQFHV WRl (5,6$ SODQV ZRXOG QRW VXIILFH  7KH LVVXH RI WKHLU SUHHPSWLRQ IRU FRQVLGHUDWLRQ LQ WKH ILUVW LQVWDQFH E\ WKH GLVWULFW FRXUW  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

SURYLGHUVSRQVRUHGLQWHJUDWHGKHDOWKGHOLYHU\QHWZRUN ,,6HYHUDELOLW\ VHOILQVXUHGHPSOR\HURUJDQL]HGDVVRFLDWLRQRUQRQSURILW KRVSLWDO PHGLFDOVXUJLFDO GHQWDO RU KHDOWK VHUYLFH %HFDXVH,EHOLHYHWKDW.HQWXFN\jV$:3 SURYLVLRQV.\ FRUSRUDWLRQ DXWKRUL]HG WR WUDQVDFW KHDOWK LQVXUDQFH 5HY 6WDW $QQ † $ DQG $ EXVLQHVVLQ.HQWXFN\ %DQNV%DOGZLQDUHSUHHPSWHGE\86&†D DQG QRW VDYHG E\ WKH VDYLQJV FODXVH RI  86& 7KHSDUWLHVKDYLQJDJUHHGWKDWWKLVDSSHDOLVQRWUHQGHUHG † E  $ , ZULWH VHSDUDWHO\ WR DGGUHVV ZKHWKHU WKH PRRWE\WKHQHZODQJXDJHXVHGLQWKHSUHVHQWVWDWXWHVWKH ODZVVKRXOGEHLQYDOLGDWHGLQWKHLUHQWLUHW\RUZKHWKHUWKH FRXUWZLOOFRQVLGHUWKH$:3ODZVLQWKHLUSUHVHQWIRUPLQWKH RIIHQGLQJSURYLVLRQVRIWKHVWDWXWHVPD\EHVHYHUHGLQZKROH FRXUWjVDQDO\VLVRIWKHLUYDOLGLW\UDWKHUWKDQDGMXGLFDWLQJWKH RUSDUW:KLOHQHYHUH[SOLFLWO\VWDWLQJVRDVGLVFXVVHGDERYH YDOLGLW\RIUHSHDOHGVWDWXWHV WKHPDMRULW\DSSHDUVWRDJUHHWKDW.HQWXFN\jV$:3ODZVDUH SUHHPSWHGDWOHDVWLQWKHLUDSSOLFDWLRQWR+02VDQG+6&V 7KH FKLURSUDFWLF SURYLVLRQV FRQWDLQHG LQ † $ ZKRDUHSHUIRUPLQJDGPLQLVWUDWLYHRUUHODWHGGXWLHVIRUVHOI DQG†$ZHUHOHIWLQWDFWE\+RXVH%LOO1RDQG LQVXUHGHPSOR\HHEHQHILWSODQV+RZHYHUGHVSLWHLPSOLFLWO\ FRQWLQXHWRUHPDLQXQFKDQJHG GUDZLQJWKLVFRQFOXVLRQWKHPDMRULW\VWLOOFRQFOXGHVWKDWWKH $:3ODZLVVDYHGE\WKHLQVXUDQFHVDYLQJVFODXVH,QGRLQJ 7KHLVVXHRIWKHSRWHQWLDOSUHHPSWLRQRI††$ VR WKH PDMRULW\ IDLOV WR PHQWLRQ OHW DORQH GLVFXVV KRZ LW DQG$E\(5,6$LVWKHUHIRUHSURSHUO\EHIRUH VHYHUV.HQWXFN\jV$:3SURYLVLRQLQVXFKDPDQQHUWKDWLWQR WKLV FRXUW  :H UHYLHZ D GLVWULFW FRXUWjV GHFLVLRQ WR JUDQW ORQJHUDSSOLHVWRWKLUGSDUW\SODQDGPLQLVWUDWRUVSHUIRUPLQJ VXPPDU\MXGJPHQWGHQRYRDSSO\LQJWKHVDPHWHVWDVWKDW DGPLQLVWUDWLYH IXQFWLRQV IRU VHOILQVXUHG SODQV WKHUHE\ HPSOR\HGE\WKHGLVWULFWFRXUW:DWKHQY*HQHUDO(OHF&R DOORZLQJLWWRFRQFOXGHWKDWWKHSURYLVLRQLVVDYHGLQDOORWKHU )GWK&LU6XPPDU\MXGJPHQWLV DSSOLFDWLRQV SURSHULIWKHUHLVQRJHQXLQHLVVXHRIPDWHULDOIDFWDQGWKH PRYLQJSDUW\LVHQWLWOHGWRDMXGJPHQWDVDPDWWHURIODZ6HH 7KH6XSUHPH&RXUWKDVRIWHQVWDWHGWKDWWKHLQTXLU\LQWR 6FKDFKQHUY%OXH&URVV %OXH6KLHOGRI2KLR)G ZKHWKHUDVWDWXWHLVVHYHUDEOHLVHVVHQWLDOO\DQLQTXLU\LQWR WK&LU OHJLVODWLYHLQWHQW6HHHJ0LQQHVRWDY0LOOH/DFV%DQGRI &KLSSHZD ,QGLDQV  6 &W   / (G G  ,,3UHHPSWLRQ =REHOY:LOOLDPV866&W /(GG5HJDQY7LPH,QF86 :HDUHUHTXLUHGE\WKLVDSSHDOWRGHILQHWKHERXQGDULHVRI 6&W/ (GG SUHHPSWLRQ XQGHU (5,6$ †  D DQG E  86& SOXUDOLW\RSLQLRQ,QGLVFHUQLQJWKHOHJLVODWXUHjVLQWHQWWKH &RXUWKDVGLUHFWHGWKDW 8QOHVVLWLVHYLGHQWWKDWWKHOHJLVODWXUHZRXOGQRWKDYH HQDFWHG WKRVH SURYLVLRQV ZKLFK DUH ZLWKLQ LWV SRZHU  7KH DSSHDO WDNHQ IURP &RPPXQLW\ +HDOWK 3DUWQHUV Y LQGHSHQGHQWO\RIWKDWZKLFKLVQRWWKHLQYDOLGSDUWPD\ &RPPRQZHDOWK RI .HQWXFN\  ) 6XSS G  :' .\  UDLVHG WKH TXHVWLRQ RI ZKHWKHU † $ UHSODFHG E\ † $ EH GURSSHG LI ZKDW LV OHIW LV IXOO\ RSHUDWLYH DV D ODZ ZDV SUHHPSWHG XQGHU (5,6$ DQG ZDV DUJXHG WKH VDPH GD\ DV WKLV FDVH &KDPSOLQ5HILQLQJ&RY&RUSRUDWLRQ&RPP QRI2NOD $V D UHVXOW WKLV RSLQLRQ ZLOO QHFHVVDULO\ GLFWDWH WKH RXWFRPH RI WKDW FDVH 866&W/(G DV ZHOO  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

ZDVQRWDYDLODEOHEHIRUHWKHODZ5DWKHU.HQWXFN\jV$:3 †DDQGE6HFWLRQDWKHSUHHPSWLRQSURYLVLRQ ODZV PHUHO\ IRUFH LQVXUHUV WR SRWHQWLDOO\ PDNH DGGLWLRQDO UHDGV FRQWUDFWXDODUUDQJHPHQWVZLWKSURYLGHUVWKH\PLJKWRWKHUZLVH H[FOXGH7KHPHGLFDOFRQGLWLRQVFRYHUHGUHPDLQXQDIIHFWHG ([FHSWDVSURYLGHGLQVXEVHFWLRQERIWKLVVHFWLRQWKH DQG WKH LQVXUHGV DUH VWLOO OLPLWHG WR WKH SODQjV QHWZRUN RI SURYLVLRQVRIWKLVVXEFKDSWHUDQGVXEFKDSWHU,,,RIWKLV SURYLGHUV7KHUHIRUH,PXVWFRQFOXGHWKDW.HQWXFN\jV$:3 FKDSWHUVKDOOVXSHUVHGHDQ\DQGDOO6WDWHODZVLQVRIDUDV ODZLVQRWLQWHJUDOWRWKHLQVXUHGLQVXUHUUHODWLRQVKLS WKH\PD\QRZRUKHUHDIWHUUHODWHWRDQ\HPSOR\HHEHQHILW SODQ GHVFULEHG LQ VHFWLRQ D RI WKLV WLWOH DQG QRW )LQDOO\ , FRQVLGHU ZKHWKHU WKH .HQWXFN\ $:3 ODZV DUH H[HPSW XQGHU VHFWLRQ E RI WKLV WLWOH HPSKDVLV OLPLWHGWRHQWLWLHVZLWKLQWKHLQVXUDQFHLQGXVWU\$VGLVFXVVHG DGGHG XQGHUWKHFRPPRQVHQVHWHVW,GRQRWEHOLHYHWKLVWREHWKH FDVH7KHODZQRWRQO\UHJXODWHVHQWLWLHVWKDWIDOORXWVLGHWKH 6HFWLRQE  $WKHmVDYLQJVlSURYLVLRQUHDGV WUDGLWLRQDO GHILQLWLRQ RI LQVXUHU LW DOVR H[WHQGV WR LQFOXGH HQWLWLHVLQQRZD\LQYROYHGLQXQGHUZULWLQJULVNV,QIDFWD ([FHSWDVSURYLGHGLQVXESDUDJUDSK%QRWKLQJLQWKLV UHYLHZRIWKHVWDWXWHVKRZVWKDWZKLOHLWPD\DIIHFWWKHZD\ VXEFKDSWHUVKDOOEHFRQVWUXHGWRH[HPSWRUUHOLHYHDQ\ WKDW VRPH LQVXUDQFH FRPSDQLHV UXQ WKHLU EXVLQHVV LW KDV SHUVRQ IURP DQ\ ODZ RI DQ\ 6WDWH ZKLFK UHJXODWHV QRWKLQJWRGRZLWKWKHXQGHUZULWLQJRIULVNWKHWUDGLWLRQDO LQVXUDQFHEDQNLQJRUVHFXULWLHV HDUPDUNRILQVXUDQFH6HH5R\DO'UXJ86DW 6&WDW$FFRUGLQJO\,EHOLHYHWKDW.HQWXFN\jV 6HFWLRQE  %WKHmGHHPHUlSURYLVLRQUHDGV $:3ODZVIDLOWKHWKLUGSURQJRIWKH0F&DUUDQ)HUJXVRQWHVW DVZHOO 1HLWKHU DQ HPSOR\HH EHQHILW SODQ GHVFULEHG LQ VHFWLRQ DRIWKLVWLWOHZKLFKLVQRWH[HPSWXQGHUVHFWLRQ ,QVXP,DPIRUFHGWRFRQFOXGHWKDW††$ E RI WKLV WLWOH RWKHU WKDQ D SODQ HVWDEOLVKHG DQG$.HQWXFN\jV$:3ODZVDUHQRWVDYHG SULPDULO\IRUWKHSXUSRVHRISURYLGLQJGHDWKEHQHILWV IURP SUHHPSWLRQ DV ODZV WKDW UHJXODWH WKH EXVLQHVV RI QRU DQ\ WUXVW HVWDEOLVKHG XQGHU VXFK D SODQ VKDOO EH LQVXUDQFHEHFDXVHXQGHU(5,6$†EWKH\IDLOWRPHHW GHHPHG WR EH DQ LQVXUDQFH FRPSDQ\ RU RWKHU LQVXUHU QRWRQO\WKHFRPPRQVHQVHWHVWEXWDOVRDOORIWKH0F&DUUDQ EDQN WUXVW FRPSDQ\ RU LQYHVWPHQW FRPSDQ\ RU WR EH )HUJXVRQ IDFWRUV  :KLOH IHGHUDOLVP FRQFHUQV SURKLELW HQJDJHG LQ WKH EXVLQHVV RI LQVXUDQFH RU EDQNLQJ IRU IHGHUDO FRXUWV IURP OLJKWO\ SUHHPSWLQJ DFWV RI D VWDWH SXUSRVHVRIDQ\ODZRIDQ\6WDWHSXUSRUWLQJWRUHJXODWH OHJLVODWXUH,DJUHHZLWKWKH(LJKWK&LUFXLWjVREVHUYDWLRQLQ LQVXUDQFH FRPSDQLHV LQVXUDQFH FRQWUDFWV EDQNV WUXVW 3UXGHQWLDO,QV&RWKDWmLWLVIRU&RQJUHVVQRWWKHFRXUWVWR FRPSDQLHVRULQYHVWPHQWFRPSDQLHV UHDVVHVV(5,6$LQOLJKWRIPRGHUQLQVXUDQFHSUDFWLFHVDQGWKH QDWLRQDOGHEDWHRYHUKHDOWKFDUHl3UXGHQWLDO,QV&R 7KHIHGHUDOFRXUWVKDYHDGGUHVVHGWKHVFRSHRI(5,6$jV )GDW SUHHPSWLRQRI6WDWHODZRQQXPHURXVRFFDVLRQVKRZHYHUWKH ZRUGLQJ RI WKH $FW FRPELQHG ZLWK WKH REYLRXV IHGHUDOLVP FRQFHUQV LQYROYHG KDYH PDGH LW GLIILFXOW WR GLVFHUQ FOHDU ERXQGDULHV0DQ\FRXUWVLQFOXGLQJWKH6XSUHPH&RXUWKDYH  $V ZH LQGLFDWHG DERYH WKH SDUWLHV KDYH DJUHHG WKDW RXU KROGLQJ FRPPHQWHGRQWKHYH[LQJO\EURDGDQGDPELJXRXVQDWXUHRI ZLWK UHJDUG WR † $ ZLOO VHUYH WR GHWHUPLQH ZKHWKHU † $ LV SUHHPSWHG DV ZHOO  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

WKHSURYLVLRQV'HVSLWHVXFKLQWHUSUHWDWLRQDOGLIILFXOWLHVZH $:3 ODZ QRW WR EH LQWHJUDO WR WKH LQVXUHULQVXUHG PXVW GHWHUPLQH ZKHWKHU .HQWXFN\ 5HYLVHG 6WDWXWHV UHODWLRQVKLSDVLWGHILQHGRQO\WKHWHUPVEHWZHHQWKHLQVXUHU $QQRWDWHG †† $ DQG $ %DQNV DQG SURYLGHUV DQG GLVWLQJXLVKLQJ *UHJRLUH EHFDXVH %DOGZLQmUHODWHWRlHPSOR\HHEHQHILWSODQVFRYHUHGE\ :DVKLQJWRQjV DQ\ FDWHJRU\ RI SURYLGHU ODZ GLG DIIHFW WKH (5,6$,IVRWKHQWKHSURYLVLRQVDUHSUHHPSWHGXQOHVVWKH\ LQVXUHULQVXUHG UHODWLRQVKLS E\ H[SDQGLQJ WKH NLQGV RI IDOO XQGHU (5,6$jV VDYLQJ FODXVH DV ODZV UHJXODWLQJ WUHDWPHQW WKH SROLF\ PXVW FRYHU &I 3LORW /LIH &R Y LQVXUDQFH 'HGHDX[  86  o  6 &W   QRWLQJWKDW0LVVLVVLSSLjVODZRIEDGIDLWKLQFRQWUDVW (5,6$ LV D FRPSUHKHQVLYH DFW GHVLJQHG WR UHJXODWH WRWKHPDQGDWHGEHQHILWVODZLQ0HWURSROLWDQ/LIHGLGQRW HPSOR\HHZHOIDUHDQGSHQVLRQEHQHILWSODQVLQFOXGLQJWKRVH GHILQHWKHWHUPVEHWZHHQWKHLQVXUHUDQGLQVXUHGDQGWKXV WKDWSURYLGHmµPHGLFDOVXUJLFDORUKRVSLWDOFDUHRUEHQHILWVj RQO\DIIHFWHGWKHLQVXUHULQVXUHGUHODWLRQVKLSLQDQDWWHQXDWHG IRU SODQ SDUWLFLSDQWV RU WKHLU EHQHILFLDULHV µWKURXJK WKH ZD\7KH&RXUWjVGLVFXVVLRQRI&DOLIRUQLDjVQRWLFHSUHMXGLFH SXUFKDVHRILQVXUDQFHRURWKHUZLVHjl1HZ&DOLIRUQLDjVQRWLFHSUHMXGLFHUXOH@VHUYHVDVDQLQWHJUDO SURYLVLRQ SDUWRIWKHSROLF\UHODWLRQVKLSEHWZHHQWKHLQVXUHUDQG LQVXUHG0HWURSROLWDQ/LIH86DW6&W 7KH6XSUHPH&RXUWKDVVSHFLILFDOO\IRXQGWKDWLQSDVVLQJ   &DOLIRUQLDjV UXOH FKDQJHV WKH EDUJDLQ EHWZHHQ †DLWZDV&RQJUHVVjLQWHQW LQVXUHU DQG LQVXUHG LW HIIHFWLYHO\ FUHDWHV D PDQGDWRU\ FRQWUDFWWHUPWKDWUHTXLUHVWKHLQVXUHUWRSURYHSUHMXGLFH EHIRUHHQIRUFLQJDWLPHOLQHVVRIFODLPSURYLVLRQ

 ,G,QVKDUSFRQWUDVW.HQWXFN\jV$:3SURYLVLRQVOHDYHWKH 6HH HJ &DOLIRUQLD 'LY RI /DERU 6WDQGDUGV (QIRUFHPHQW Y FRQWUDFW WHUPV EHWZHHQ WKH LQVXUHU DQG LQVXUHG XQDOWHUHG 'LOOLQJKDP &RQVWU 1$ ,QF  86  o  6 &W  7KH UHODWLRQVKLSV GLUHFWO\ DIIHFWHG E\ WKH ODZ DUH WKRVH   / (G G    6FDOLD s FRQFXUULQJ QRWLQJ WKDW H[LVWLQJ EHWZHHQ LQVXUHUV DQG WKLUG SDUWLHV LH PHGLFDO WKH &RXUW KDG WDNHQ  SUHYLRXV FDVHV UHJDUGLQJ (5,6$ SUHHPSWLRQ DQG VXJJHVWLQJ WKDW QHLWKHU WKH &RXUWjV SULRU GHFLVLRQV QRU LWV SUHVHQW RQH SURYLGHUV$VGLVFXVVHGDERYHWKHPHGLFDOULVNVFRYHUHGE\ 1HZ

5R\DO'UXJDQGLPSRUWHGLQWR(5,6$SUHHPSWLRQDQDO\VLVLQ WRHQVXUHWKDWSODQVDQGSODQVSRQVRUVZRXOGEHVXEMHFW 0HWURSROLWDQ /LIH ZLWKRXW DQ\ LQGLFDWLRQ WKDW LWV SDVW WR D XQLIRUP ERG\ RI EHQHILWV ODZ WKH JRDO ZDV WR SUHFHGHQW LQWHUSUHWLQJ ZKHWKHU D ODZ mUHJXODWHV LQVXUDQFHl PLQLPL]H WKH DGPLQLVWUDWLYH DQG ILQDQFLDO EXUGHQ RI XQGHU (5,6$jV VDYLQJV FODXVH ZDV FDOOHG LQWR GRXEW  6HH FRPSO\LQJZLWKFRQIOLFWLQJGLUHFWLYHVDPRQJ6WDWHVRU :DUG  6&W     8QWLO WKH &RXUW EHWZHHQ6WDWHVDQGWKH)HGHUDO*RYHUQPHQW>DQGWR LQGLFDWHVWKDWLWV5R\DO'UXJEXVLQHVVRILQVXUDQFHWHVWLVQR SUHYHQW@WKHSRWHQWLDOIRUFRQIOLFWLQVXEVWDQWLYHODZ ORQJHU DSSURSULDWH LQ WKH (5,6$ VDYLQJV FODXVH FRQWH[W UHTXLULQJWKHWDLORULQJRISODQVDQGHPSOR\HUFRQGXFWWR VRPHWKLQJWKDWLWKDV\HWWRGR,EHOLHYHZHPXVWFRQWLQXHWR WKHSHFXOLDULWLHVRIWKHODZRIHDFKMXULVGLFWLRQ DSSO\WKHWHVWDVGLFWDWHGE\WKH&RXUWjVSUHFHGHQW 7UDYHOHUV86DWo6&WDW/(G 0RYLQJWRWKHVHFRQG0F&DUUDQ)HUJXVRQIDFWRU,FRQVLGHU GDWDOWHUDWLRQLQRULJLQDOTXRWLQJ,QJHUVROO5DQG&R ZKHWKHU.HQWXFN\jV$:3ODZVDIIHFWDQLQWHJUDOSDUWRIWKH Y0F&OHQGRQ866&W/ SROLF\ UHODWLRQVKLS EHWZHHQ WKH LQVXUHU DQG LQVXUHG  7KH (G G      ,Q GLVFXVVLQJ WKH SUHHPSWLRQ PDMRULW\DVVHUWVWKDWWKHGLVWULFWFRXUWZDVFRUUHFWLQILQGLQJ SURYLVLRQWKH&RXUWKDVYDULRXVO\QRWHGLWVH[WUHPHEUHDGWK WKDW.HQWXFN\jV$:3ODZVGLFWDWHDVXEVWDQWLYHWHUPRIWKH WHUPLQJLWmFOHDUO\H[SDQVLYHlmEURDG>LQ@VFRSHlmEURDGO\ FRQWUDFW EHWZHHQ WKH LQVXUHU DQG LQVXUHG DQG DUH WKXV DQ ZRUGHGlmGHOLEHUDWHO\H[SDQVLYHlDQGmFRQVSLFXRXVIRULWV LQWHJUDO SDUW RI WKLV UHODWLRQVKLS  $V VXSSRUW IRU WKLV EUHDGWKl&DOLIRUQLD'LYRI/DERU6WDQGDUGV(QIRUFHPHQWY SURSRVLWLRQ WKH PDMRULW\ DJDLQ FLWHV 6WXDUW &LUFOH ZKLFK 'LOOLQJKDP&RQVWU1$,QF866&W FRQFOXGHG WKDW EHFDXVH 9LUJLQLDjV $:3 ODZ DIIHFWHG /(GGLQWHUQDOFLWDWLRQV WUHDWPHQWDQGFRVWWKURXJKWKHVDPHDWWHQXDWHGPDQQHULQ RPLWWHGUHYLHZLQJSDVW6XSUHPH&RXUWFDVHODZDGGUHVVLQJ ZKLFKWKHFRXUWFRQFOXGHGULVNZDVVSUHDGLWZDVLQWHJUDOWR WKHVFRSHRI(5,6$jVSUHHPSWLRQSURYLVLRQ7KHSUHHPSWLRQ WKHLQVXUHULQVXUHGUHODWLRQVKLS)GDW SURYLVLRQKRZHYHULVQRWZLWKRXWOLPLWV$VWKH&RXUWQRWHG LQ7UDYHOHUV†DSUHHPSWVDOOVWDWHODZVWKDWUHODWHWRDQ $JDLQ , ILQG 6WXDUW &LUFOH XQFRQYLQFLQJ  7KH HIIHFW RI HPSOR\HHEHQHILWSODQFRYHUHGE\(5,6$EXWm>L@IµUHODWHWRj .HQWXFN\jV $:3 ODZV FHQWHU RQ WKH LQVXUHUSURYLGHU ZHUH WDNHQ WR H[WHQG WR WKH IXUWKHVW VWUHWFK RI LWV UHODWLRQVKLS7KHWHUPVRIWKHLQVXUHULQVXUHGUHODWLRQVKLSDUH LQGHWHUPLQDQF\ WKHQ IRU DOO SUDFWLFDO SXUSRVHV SUHHPSWLRQ RQO\DIIHFWHGLQDYHU\LQGLUHFWPDQQHUPDNLQJLWGLIILFXOWWR ZRXOGQHYHUUXQLWVFRXUVHl86DW6&WDW VHH WKH $:3 ODZV DV LQWHJUDO WR WKDW UHODWLRQVKLS  6HH /(GGDW 3UXGHQWLDO,QV&R)GDWILQGLQJWKH$UNDQVDV 7KXVWRGHWHUPLQHZKHWKHUDODZmUHODWHVWRlDQHPSOR\HH EHQHILWSODQWKH&RXUWKDVIRUPXODWHGDWZRSDUWWHVWXQGHU ZKLFKDmODZµUHODWH>V@WRjDFRYHUHGHPSOR\HHEHQHILWSODQ  7KH GLVWULFW FRXUW LQ &RPPXQLW\ +HDOWK 3DUWQHUV Y &RPPRQZHDOWK IRUSXUSRVHVRI†DLILW>@KDVDFRQQHFWLRQZLWKRU>@ RI .HQWXFN\  )6XSSG  :' .\  REVHUYHG WKDW 8QLWHG UHIHUHQFHWRVXFKSODQl'LOOLQJKDP86DW6 6WDWHV Y )DEH  86   6 &W   / (GG   &W DW   / (G G DW  LQWHUQDO TXRWDWLRQV DQG PLJKW EH DUJXHG WR FKDQJH DQG EURDGHQ VDYLQJV FODXVH DQDO\VLV LQ WKH (5,6$ FRQWH[W +RZHYHU RWKHU IHGHUDO FRXUWV KDYH QRW UHDFKHG WKLV FLWDWLRQVRPLWWHGHPSKDVLVDGGHG7KHGLVWULFWFRXUWIRXQG FRQFOXVLRQ DQG WKH 6XSUHPH &RXUWV PRVW UHFHQW RSLQLRQ LQ :DUG JLYHV QR DQGSODLQWLIIVDUJXHWKDWWKH.HQWXFN\$:3SURYLVLRQVERWK LQGLFDWLRQ WKDW WKH &RXUWjV VDYLQJV FODXVH DQDO\VLV KDV FKDQJHG 6HH DOVR UHIHUWRDQGKDYHDFRQQHFWLRQZLWK(5,6$FRYHUHGHPSOR\HH 3UXGHQWLDO ,QV &R  )G DW  FRQFOXGLQJ WKDW )DEH KDG QR HIIHFW RQ VDYLQJV FODXVH DQDO\VLV  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

EHQHILWSODQV:HDQDO\]HHDFKSURQJRIWKHmUHODWLRQWRl SROLF\KROGHUDQGLQVXUHUWKDWDVSHFLILFPHGLFDOFRQWLQJHQF\ WHVWLQWXUQ ZLOORFFXU $5HIHUHQFH7R 7KH PDMRULW\ DWWHPSWV WR HVFDSH IURP 5R\DO 'UXJjV WHDFKLQJE\UHO\LQJRQGLFWDIURP$PHULFDQ'UXJ6WRUHV,QF 7KH6XSUHPH&RXUWKDVSURYLGHGJXLGDQFHLQVHYHUDOFDVHV Y+DUYDUG3LOJULP+HDOWK&DUH,QF)6XSS' DVWRZKHQDODZmUHIHUVWRl(5,6$,Q'LOOLQJKDPWKH&RXUW 0DVV  LQ ZKLFK WKH FRXUW TXHVWLRQHG mZKHWKHU WKH VXPPDUL]HGLWVDQDO\VLVVWDWLQJ KROGLQJ RI 5R\DO 'UXJ PD\ EH WUDQVODWHG LQWR WKH (5,6$ SUHHPSWLRQFRQWH[WDWDOOl,GDW7KH$PHULFDQ'UXJ >:@H KDYH KHOG SUHHPSWHG D ODZ WKDW mLPSRV>HG@ 6WRUH FRXUW ZDV UHIHUULQJ WR WKH IDFW WKDW 5R\DO 'UXJ UHTXLUHPHQWV E\ UHIHUHQFH WR >(5,6$@l'LVWULFW RI LQWHUSUHWHGWKHVFRSHRIWKHDQWLWUXVWH[HPSWLRQXQGHU†E &ROXPELD Y :DVKLQJWRQ %G RI 7UDGH  86  RIWKH0F&DUUDQ)HUJXVRQ$FWEXWGLGQRWDGGUHVV††DQG oDODZWKDWVSHFLILFDOO\H[HPSWHG(5,6$ DRIWKHDFWZKLFKSUHVHUYHGD6WDWHjVDELOLW\WRUHJXODWH SODQV IURP DQ RWKHUZLVH JHQHUDOO\ DSSOLFDEOH WKHmEXVLQHVVRILQVXUDQFHlIURP&RPPHUFH&ODXVHDWWDFN JDUQLVKPHQW SURYLVLRQ 0DFNH\ Y /DQLHU &ROOHFWLRQ 6HH5R\DO'UXJ86DWQ6&WDW $JHQF\ 6HUYLFH,QF86Q +RZHYHU WKH 6XSUHPH &RXUW KDV QRW LQGLFDWHG WKDW LW LV DQG D FRPPRQODZ FDXVH RI DFWLRQ SUHPLVHG RQ WKH WURXEOHG E\ WKLV GLVWLQFWLRQ  $V UHFHQWO\ DV ODVW WHUP WKH H[LVWHQFH RI DQ (5,6$ SODQ ,QJHUVROO5DQG &R Y &RXUWHPSOR\HGWKH0F&DUUDQ)HUJXVRQIDFWRUVLWFUHDWHGLQ 0F&OHQGRQ86:KHUHD6WDWHjV ODZDFWVLPPHGLDWHO\DQGH[FOXVLYHO\XSRQ(5,6$SODQV DVLQ0DFNH\RUZKHUHWKHH[LVWHQFHRI(5,6$SODQVLV HVVHQWLDO WR WKH ODZjV RSHUDWLRQ DV LQ *UHDWHU FRQWUDFW ZLWK D ODUJH UHWDLO GUXJ FKDLQ ZKHUHE\ LWV SROLF\KROGHUV

:DVKLQJWRQ %G RI 7UDGH DQG ,QJHUVROO5DQG WKDW FRXOG REWDLQ GUXJV XQGHU WKHLU SROLFLHV RQO\ IURP VWRUHV RSHUDWHG

mUHIHUHQFHlZLOOUHVXOWLQSUHHPSWLRQ E\ WKLV FKDLQ 7KH MXVWLILFDWLRQ IRU VXFK DQ DJUHHPHQW ZRXOG EH DGPLQLVWUDWLYH DQG EXONSXUFKDVH VDYLQJV UHVXOWLQJ IURP REWDLQLQJ DOO RI WKH FRPSDQ\jV GUXJ QHHGV IRUP D VLQJOH GHDOHU 86DWo6&WDWo/(GGDW (YHQ WKRXJK WKHVH FRVW VDYLQJV PLJKW XOWLPDWHO\ EH UHIOHFWHG LQ  ORZHU SUHPLXPV WR SROLF\KROGHUV ZRXOG VXFK D FRQWUDFW EH WKH mEXVLQHVV RI LQVXUDQFH"l 2U VXSSRVH WKDW WKH LQVXUDQFH FRPSDQ\ VKRXOG GHFLGH WR DFTXLUH WKH FKDLQ RI GUXJ VWRUHV LQ RUGHU WR ORZHU VWLOO IXUWKHU LWV FRVWV RI PHHWLQJ LWV REOLJDWLRQV WR  LWV SROLF\KROGHUV 6XFK DQ DFTXLVLWLRQ ZRXOG VXUHO\ QRW EH WKH 7KH :HVWHUQ 'LVWULFW RI .HQWXFN\ LQ &RPPXQLW\ +HDOWK 3DUWQHUV mEXVLQHVV RI LQVXUDQFHl ,QF Y .HQWXFN\  ) 6XSS G   :' .\  DOVR  86 DW   6 &W DW  ,I VXFK DJUHHPHQWV DUH QRW WKH IRXQG WKH $:3 SURYLVLRQV mUHODWHG WRl (5,6$ SODQV EXW RQO\ XQGHU WKH mEXVLQHVV RI LQVXUDQFHl WKHQ LW IROORZV WKDW D VWDWHjV DWWHPSWV WR UHJXODWH mFRQQHFWLRQ ZLWKl SURQJ RI WKH mUHODWLRQ WRl DQDO\VLV 7KDW FRXUW GLG QRW WKHVH DJUHHPHQWV ZRXOG QRW TXDOLI\ DV VXFK HLWKHU EHOLHYH WKDW WKH VWDWXWH UHIHUUHG WR (5,6$ SODQV LQ WKH PDQQHU WKDW 6XSUHPH &RXUW SUHFHGHQW UHTXLUHV IRU SUHHPSWLRQ XQGHU WKH mUHIHUHQFH  WRl SURQJ 6SHFLILFDOO\ WKH FRXUW EHOLHYHG WKDW XQGHU 'LOOLQJKDP  D ODZ 7KH PDMRULW\ DSSHDUV WR EH SHUVXDGHG E\ WKLV UHDVRQLQJ , GR QRW ZLOO RQO\ mUHIHU WRl DQ (5,6$ SODQ IRU SUHHPSWLRQ SXUSRVHV LI LW mDFWV GUDZ WKH VDPH FRQFOXVLRQ +RZHYHU HYHQ LI WKH PHDQLQJ RI mEXVLQHVV RI LPPHGLDWHO\ DQG H[FOXVLYHO\ XSRQ (5,6$ SODQVl RU mZKHUH WKH H[LVWHQFH LQVXUDQFHl ZDV EURDGHQHG EH\RQG WKH FRQWUDFWXDO UHODWLRQVKLS EHWZHHQ RI (5,6$ FRYHUHG SODQV LV HVVHQWLDO WR WKH ODZjV RSHUDWLRQl ,G DW WKH SROLF\KROGHU DQG LQVXUHU , GR QRW EHOLHYH WKDW .HQWXFN\jV $:3 ODZ o :H GLVDJUHH ZLWK WKH GLVWULFW FRXUWjV mUHIHUHQFH WRl DQDO\VLV IRU ZRXOG TXDOLI\ $V , KDYH H[SODLQHG HOVHZKHUH .HQWXFN\jV $:3 ODZV WKH UHDVRQV VHW IRUWK LQ WKLV RSLQLRQ KDYH DW PRVW D VSHFXODWLYH DQG WDQJHQWLDO HIIHFW RQ WKLV UHODWLRQVKLS  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

0F&DUUDQ)HUJXVRQ IDFWRUV  'LVFXVVLQJ ZKHWKHU WKH ODZ ,Q0DFNH\Y/DQLHU&ROOHFWLRQ$JHQF\ 6HUYLFH,QF WUDQVIHUUHGRUVSUHDGSROLF\KROGHUULVNWKHFRXUWFRQFOXGHG 86   6 &W   / (G G   WKH WKDWWKH9LUJLQLDVWDWXWHmDIIHFWVWKHW\SHDQGFRVWRIWUHDWPHQW &RXUWGLVFXVVHG*HRUJLD&RGH$QQRWDWHG† DYDLODEOH WR DQ LQVXUHGl  ,G  7KH FRXUW UHDFKHG WKLV ZKLFK VSHFLILFDOO\ H[HPSWHG (5,6$ SODQV IURP *HRUJLDjV FRQFOXVLRQ EHFDXVH LW EHOLHYHG WKDW ZLWKRXW WKH $:3 ODZ JHQHUDOJDUQLVKPHQWODZ7KH&RXUWQRWHGWKDWHYHQWKRXJK SROLF\KROGHUVPLJKWRQRFFDVLRQDWWHQGDGRFWRURXWVLGHRI *HRUJLDjVOHJLVODWXUHPD\KDYHHQDFWHG†WRKHOS WKHLU SODQ QHWZRUN GXH WR D SHUVRQDO SUHIHUHQFH IRU WKDW HIIHFWXDWH (5,6$jV XQGHUO\LQJ SXUSRVH LW ZRXOG VWLOO EH GRFWRUDQGLQGRLQJVRZRXOGEHIRUFHGWRVKRXOGHUDOORU SUHHPSWHG LI LW IHOO ZLWKLQ (5,6$jV SUHHPSWLRQ SURYLVLRQ SDUWRIWKHFRVW6HHLG )LQGLQJ WKDW †  ZDV LQGHHG SUHHPSWHG WKH &RXUW VWDWHG ,DPXQSHUVXDGHGE\WKHPDMRULW\jVDUJXPHQWWKDW6WXDUW &LUFOHjVDWWHQXDWHGULVNVSUHDGLQJUDWLRQDOHVKRXOGEHDSSOLHG >$@GKHULQJWRRXUSUHFHGHQWVLQWKLVDUHDZHKROG*D WR.HQWXFN\jV$:3ODZV$V,KDYHGLVFXVVHG.HQWXFN\jV &RGH $QQ †  ZKLFK VLQJOHV RXW (5,6$ $:3ODZVGRQRWUHTXLUHKHDOWKEHQHILWSODQVWRLQFOXGHD HPSOR\HH ZHOIDUH EHQHILW SODQV IRU GLIIHUHQW WUHDWPHQW VLQJOHDGGLWLRQDOSURYLGHUXQOHVVWKHTXDOLILHGSURYLGHUQRW XQGHUVWDWHJDUQLVKPHQWSURFHGXUHVLVSUHHPSWHGXQGHU WKHSROLF\KROGHUGHFLGHVWRMRLQWKHSODQ3ROLF\KROGHUVDUH †D7KHVWDWHVWDWXWHjVH[SUHVVUHIHUHQFHWR(5,6$ QRWQHFHVVDULO\DQ\EHWWHURIIWKDQWKH\ZHUHEHIRUHWKHODZ SODQV VXIILFHV WR EULQJ LW ZLWKLQ WKH IHGHUDO ODZjV ZDVSDVVHGRQO\EHQHILWWLQJIURPWKHODZLIWKHLUSURYLGHULV SUHHPSWLYHUHDFK ERWKZLOOLQJWRMRLQWKHLUSDUWLFXODUSURYLGHUQHWZRUNDQGDEOH WR PHHW LWV UHTXLUHPHQWV  7KH LQVXUDQFH SROLF\ DQG WKH 0DFNH\86DW6&WDW/(GG FRQWLQJHQFLHV LW XQGHUZULWHVLH WKH ULVN WKDW LQVXUHG ZLOO DW,QDIRRWQRWHWKH&RXUWLQGLFDWHGWKDWWKHmGLIIHUHQW QHHG PHGLFDO WUHDWPHQW IRU D FRQGLWLRQ FRYHUHG XQGHU WKH WUHDWPHQWlZDVLOOXVWUDWHGQRWMXVWE\WKHH[SUHVVUHIHUHQFHWR SROLF\ UHPDLQ WKH VDPH UHJDUGOHVV RI .HQWXFN\jV $:3 (5,6$ SODQV LQ WKH VWDWXWHjV ODQJXDJH EXW DOVR LQ WKH ODZ  7KHUH LV QR VKLIWLQJ RI WKH ULVN EHWZHHQ WKH GLVSDUDWH WUHDWPHQW DFFRUGHG WR QRQ(5,6$ SHQVLRQ DQG EHQHILWSODQVXQGHU*HRUJLDODZ6HHLGDWQ7KHHIIHFW ZDVWKDWRQO\(5,6$ZHOIDUHEHQHILWSODQVZHUHVLQJOHGRXW IRUSURWHFWLRQXQGHUWKHVWDWXWHDQLPSHUPLVVLEOHUHVXOW DSSOLHG WR mLQVXUHUVl GHILQHG ZLWKLQ WKH &KDSWHU WR PHDQ mDQ LQVXUDQFH FRPSDQ\l ZKLFK LV LWVHOI GHILQHG DV mDQ\ FRPSDQ\ HQJDJHG LQ WKH 7KH GLVWULFW FRXUW LQ WKH FDVH DW EDU UHOLHG RQ0DFNH\ LQ GHWHUPLQLQJZKHWKHU.HQWXFN\jV$:3VWDWXWHVUHIHUUHGWRDQ EXVLQHVV RI PDNLQJ FRQWUDFWV RI LQVXUDQFHl 9D &RGH $QQ †  7KXV 9LUJLQLDjV $:3 VWDWXWH ZDV PRUH QDUURZ LQ VFRSH WKDQ .HQWXFN\jV TXLWH VSHFLILFDOO\ OLPLWLQJ LWV DSSOLFDWLRQ WR WKH WHUP mLQVXUDQFH (5,6$ SODQ  7KH GLVWULFW FRXUW ILUVW REVHUYHG WKDW XQGHU FRPSDQLHVl GHILQHG E\ WKH VWDWXWH WR LQFOXGH RQO\ FRPSDQLHV DFWLYHO\ .HQWXFN\jV VWDWXWH mKHDOWK EHQHILW SODQVl ZHUH GHILQHG WR LVVXLQJ LQVXUDQFH FRQWUDFWV &RQVHTXHQWO\ 9LUJLQLDjV VWDWXWH ZRXOG LQFOXGH DPRQJ RWKHU WKLQJV mD VHOILQVXUHG SODQ RU SODQ FOHDUO\ QRW DSSO\ WR HQWLWLHV HQJDJHG LQ RQO\ DGPLQLVWUDWLYH IXQFWLRQV IRU SURYLGHGE\DPXOWLSOHHPSOR\HUZHOIDUHDUUDQJHPHQWWRWKH DQ HPSOR\HH EHQHILW SODQ H[WHQW SHUPLWWHG E\ (5,6$l  %DVHG RQ WKLV ODQJXDJH WKH  FRXUWFRQFOXGHGWKDWmLWLVFOHDUWKDWWKH$:3VWDWXWHVµUHIHU 7KH FRQFOXVLRQ WKDW .HQWXFN\jV $:3 ODZV DUH QRW WKH EXVLQHVV RI LQVXUDQFH LV VXSSRUWHG E\ WKH IROORZLQJ UKHWRULFDO TXHVWLRQ ZKLFK WKH WRj (5,6$ HPSOR\HH EHQHILW SODQVl  ,Q VXSSRUW WKH FRXUW 6XSUHPH &RXUW SRVHG LQ 5R\DO 'UXJ 7KH FRXUW DGGUHVVHG D VFHQDULR FLWHG'H %XRQR Y 1<6$,/$ 0HGLFDO  &OLQLFDO 6HUYLFHV ZKLFK HVVHQWLDOO\ LQYROYHG OLPLWHG SURYLGHU QHWZRUNV VWDWLQJ )XQG866&W/(G 6XSSRVH IRU H[DPSOH WKDW DQ LQVXUDQFH FRPSDQ\ HQWHUHG LQWR D  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

GZKLFKFLWHG0DFNH\IRUWKHSULQFLSOHWKDWD DUUDQJHPHQWV  +RZHYHU WKH PDMRULW\ FRQFOXGHV WKDW WKH SURYLVLRQWKDWH[SOLFLWO\UHIHUVWR(5,6$LQGHILQLQJWKHVFRSH SROLF\KROGHUV ZHUH FRQFHUQHG ZLWK UHVWULFWLRQV RQ WKHLU RIWKHVWDWHODZjVDSSOLFDWLRQLVSUHHPSWHG IUHHGRPRIFKRLFHLQVHHNLQJPHGLFDOWUHDWPHQW,JQRULQJIRU DPRPHQWWKHIDFWWKDW.HQWXFN\jV$:3ODZVGRQRWDOORZ 7KH GLVWULFW FRXUW QRWHG WKDW WKH :HVWHUQ 'LVWULFW RI SROLF\KROGHUVWKHIUHHGRPWRFKRRVHWKHLURZQGRFWRUDQG .HQWXFN\LQ&RPPXQLW\+HDOWK3DUWQHUV,QFY.HQWXFN\ WKXVRQO\DGGUHVVHVWKLVFRQFHUQLQDWEHVWDYHU\WDQJHQWLDO )6XSSG:'.\GLVDJUHHGZLWKLWVDQDO\VLV ZD\ DQ\ FRQFHUQV RYHU IUHHGRP RI FKRLFH DUH EHVLGH WKH RIWKHVDPHVWDWXWH7KH&RPPXQLW\+HDOWK3DUWQHUVFRXUW SRLQW7KHFULWLFDOLVVXHZLWKUHVSHFWWRWKHULVNVSUHDGLQJ UHO\LQJ RQ ODQJXDJH LQ 'LOOLQJKDP IRXQG WKDW .HQWXFN\jV SURQJ DV ZHOO DV ZKHWKHU WKH ODZ UHJXODWHV LQVXUDQFH DV D $:3VWDWXWHGLGQRWmUHIHUWRlDQ(5,6$SODQEHFDXVHWKH PDWWHURIFRPPRQVHQVHLVZKHWKHURUQRWWKHODZLVUHODWHG ODZGLGQRWDFWmLPPHGLDWHO\DQGH[FOXVLYHO\XSRQ(5,6$ WRWKHULVNVXQGHUZULWWHQE\WKHLQVXUHU$VWKH&RXUWQRWHG SODQVlDQGEHFDXVHWKHH[LVWHQFHRI(5,6$SODQVZDVQRW LQ5R\DO'UXJZKLOHGLVFXVVLQJWKHPHDQLQJRImEXVLQHVVRI HVVHQWLDOWRWKHODZjVRSHUDWLRQ,GDWo+RZHYHUWKH LQVXUDQFHl XQGHU WKH 0F&DUUDQ)HUJXVRQ $FW m,W LV GLVWULFW FRXUW LQ WKH SUHVHQW FDVH GLVDJUHHG ZLWK WKH LPSRUWDQWWKHUHIRUHWRREVHUYHDWWKHRXWVHWWKDWWKHVWDWXWRU\ &RPPXQLW\ +HDOWK 3DUWQHUV FRXUW ILQGLQJ WKDW m0DFNH\ ODQJXDJH LQ TXHVWLRQ KHUH GRHV QRW H[FHSW WKH EXVLQHVV RI PDNHV LW FOHDU WKDW ZKHQ D VWDWXWH µVLQJOHV RXW (5,6$ LQVXUDQFH FRPSDQLHV IURP WKH VFRSH RI WKH DQWLWUXVW ODZV HPSOR\HHEHQHILWSODQVIRUGLIIHUHQWWUHDWPHQWjWKHVWDWXWHjV 7KH H[HPSWLRQ LV IRU WKH µEXVLQHVV RI LQVXUDQFHj QRW WKH µH[SUHVVUHIHUHQFHWR(5,6$SODQVVXIILFHVWREULQJLWZLWKLQ µEXVLQHVV RI LQVXUHUVjl  ,G DW o  6 &W DW  WKHIHGHUDOODZjVSUHHPSWLYHUHDFKjls$DWQ %HFDXVH.HQWXFN\jV$:3ODZVVHHNWRPHUHO\UHJXODWHWKH mEXVLQHVVRILQVXUHUVlE\GLFWDWLQJKRZWKH\VWUXFWXUHWKHLU 2WKHUFRXUWVKDYHUHDFKHGVLPLODUFRQFOXVLRQV7KH(LJKWK SURYLGHUQHWZRUNVLUUHVSHFWLYHRIWKHULVNVWKH\XQGHUZULWH &LUFXLWLQ3UXGHQWLDO,QVXUDQFH&RRI$PHULFDY1DWLRQDO WKH\VKRXOGQRWTXDOLI\IRUVDYLQJVFODXVHSURWHFWLRQ 3DUN 0HGLFDO &HQWHU ,QF  )G  WK &LU  IRXQG WKDW DQ $UNDQVDV $:3 VWDWXWH FRQWDLQLQJ ODQJXDJH 7KHPDMRULW\SRLQWVWR6WXDUW&LUFOH+RVS&RUSY$HWQD FRPSDUDEOHWR.HQWXFN\jVSURYLVLRQVZDVSUHHPSWHGGXHWR +HDOWK0DQDJHPHQW)GWK&LUDVVXSSRUW LWVUHIHUHQFHWRHPSOR\HHEHQHILWSODQVFRYHUHGE\(5,6$ IRULWVFRQWHQWLRQWKDW.HQWXFN\jV$:3ODZVGRWUDQVIHUULVN 7KHFRXUWQRWHGWKDWWKHODZH[SUHVVO\VWDWHGLWVSURYLVLRQV 6WXDUW &LUFOH LQYROYHG D 9LUJLQLD VWDWXWH ZKLFK UHTXLUHG mVKDOOQRWDSSO\WRVHOIIXQGHGRURWKHUKHDOWKEHQHILWSODQV LQVXUHUV WR DFFHSW DQ\ ZLOOLQJ SURYLGHU LI WKH\ HVWDEOLVKHG WKDWDUHH[HPSWIURPVWDWHUHJXODWLRQE\YLUWXHRI>(5,6$@l SUHIHUUHGSURYLGHUQHWZRUNV7KHFRXUWFRQFOXGHGWKDWZKLOH ,GDW$FFRUGLQJO\WKHFRXUWGHWHUPLQHGWKDW† WKHVWDWXWHmUHODWHGWRl(5,6$SODQVLWZDVQRWSUHHPSWHG RIWKH$UNDQVDV3DWLHQW3URWHFWLRQ$FWm33$lUHIHUUHG EHFDXVH LW IHOO ZLWKLQ (5,6$jV VDYLQJV FODXVH DV D ODZ WR(5,6$SODQVDVLWmXQGHQLDEO\PDNHVDQH[SUHVVUHIHUHQFH UHJXODWLQJLQVXUDQFH,GDW$IWHUILQGLQJWKHFRPPRQ WR(5,6$DQGDWWHPSWVWRH[FOXGHIURPFRYHUDJHRIWKH33$ VHQVHWHVWVDWLVILHGLQSDUWEHFDXVHWKHODZZDVORFDWHGZLWKLQ DW OHDVW VRPH (5,6$ SODQV  7KXV LW µVLQJOHV RXW (5,6$ 9LUJLQLDjV LQVXUDQFH FRGH WKH FRXUW PRYHG RQ WR WKH HPSOR\HH EHQHILW SODQV IRU GLIIHUHQW WUHDWPHQW XQGHU VWDWH >ODZ@>DQGWKHUHIRUH@LVSUHHPSWHGXQGHU†>D@jl,G DWTXRWLQJ0DFNH\6HHDOVR&LJQD+HDOWK3ODQRI/D  $V LQGLFDWHG DERYH WKLV IDFW VKRXOG KDYH OLWWOH WR GR ZLWK ,QF Y /RXLVLDQD  )G  o WK &LU  GHWHUPLQLQJ ZKHWKHU D ODZ LV VSHFLILFDOO\ GLUHFWHG DW WKH LQVXUDQFH FRQFOXGLQJWKDW/RXLVLDQDjV$:3VWDWXWH† FRIWKH LQGXVWU\ DV DQ\ ODZ PD\ EH LQVHUWHG ZLWKLQ WKH LQVXUDQFH SURYLVLRQV RI D VWDWH FRGH )XUWKHU WKH 9LUJLQLD VWDWXWH DW LVVXH †  RQO\  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

,QGLVFXVVLQJWKHQDWXUHRILQVXUDQFHWKH5R\DO'UXJ&RXUW 6WDWHjV +HDOWK &DUH &RVW &RQWURO $FW ZKLFK DSSOLHG WR UHIHUUHGWR6(&Y9DULDEOH$QQXLW\/LIH,QV&R86 mJURXS SXUFKDVHUVl UHIHUUHG WR (5,6$ TXDOLILHG SODQV E\ 6&W/(GGTXRWLQJLWIRUWKH GHILQLQJmJURXSSXUFKDVHUVlWRLQFOXGHHQWLWLHVVXFKDVmµ7DIW SURSRVLWLRQ WKDW mWKH FRQFHSW RI LQVXUDQFH LQYROYHV VRPH +DUWOH\ WUXVWV RU HPSOR\HUV ZKR HVWDEOLVK RU SDUWLFLSDWH LQ LQYHVWPHQW ULVNWDNLQJ RQ WKH SDUW RI WKH FRPSDQ\l  7KH VHOIIXQGHGWUXVWVRUSURJUDPVjZKLFKµFRQWUDFW>ZLWKKHDOWK &RXUWQRWHGWKDWZKLOHSHWLWLRQHUVGLGQjWGLVSXWHWKLVIDFWWKH\ FDUHSURYLGHUV@IRUWKHEHQHILWRIWKHLUHPSOR\HHVjl PDLQWDLQHG WKDW WKH SKDUPDF\ DJUHHPHQWV GLG LQYROYH WKH XQGHUZULWLQJ RI ULVN  7R WKLV HQG WKH\ DUJXHG WKDW %OXH $OWKRXJK LQ WKH UHFHQW FDVH RI :DVKLQJWRQ 3K\VLFLDQV 6KLHOG DFFHSWHG D SUHPLXP DQG DVVXPHG WKH ULVN WKDW 6HUYLFH $VVRFLDWLRQ Y *UHJRLUH  )G  WK &LU SROLF\KROGHUVZRXOGQHHGSUHVFULSWLRQGUXJVE\DJUHHLQJWR FHUWGHQLHG866&W/ HQWHULQWRFRQWUDFWVZLWKH[LVWLQJSKDUPDFLHVWRSURYLGHVXFK (GGWKHFRXUWIRXQGWKDW:DVKLQJWRQjVmHYHU\ GUXJVIRUSURPLVHGUHLPEXUVHPHQWIURP%OXH6KLHOG7KH FDWHJRU\RISURYLGHUlVWDWXWHGLGQRWFRQWDLQDmUHIHUHQFHWRl &RXUWREVHUYHGWKDWmWKHIDOODF\RISHWLWLRQHUjVSRVLWLRQLVWKDW RUmFRQQHFWLRQZLWKlHPSOR\HHEHQHILWSODQVWKHVWDWXWHDW WKH\ FRQIXVH WKH REOLJDWLRQV RI %OXH 6KLHOG XQGHU LWV LVVXH LV GLVWLQJXLVKDEOH IURP .HQWXFN\jV $:3 ODZV  7KH LQVXUDQFH SROLFLHV ZKLFK LQVXUH DJDLQVW WKH ULVN WKDW WKH FRXUWQRWHGWKDWE\WKHVWDWXWHjVGHILQLWLRQmKHDOWKFDUULHUl SROLF\KROGHUV ZLOO EH XQDEOH WR SD\ IRU SUHVFULSWLRQ GUXJV RQO\ LQFOXGHG GLVDELOLW\ LQVXUHUV KHDOWK FDUH VHUYLFH GXULQJWKHSHULRGRIFRYHUDJHDQGWKHDJUHHPHQWVEHWZHHQ FRQWUDFWRUVRUKHDOWKPDLQWHQDQFHRUJDQL]DWLRQV6HHLGDW %OXH 6KLHOG DQG WKH SDUWLFLSDWLQJ SKDUPDFLHV ZKLFK VHUYH (PSOR\HUVSRQVRUHGVHOIIXQGHGSODQVZHUHH[FOXGHG RQO\WRPLQLPL]HWKHFRVWV%OXH6KLHOGLQFXUVLQIXOILOOLQJLWV QRWE\DSURYLVLRQRIWKHDFWEXWUDWKHUE\OLPLWLQJWKHDFWjV XQGHUZULWLQJ REOLJDWLRQVl  7KH FRXUW WKHQ QRWHG WKDW WKH DSSOLFDWLRQWRRQO\WKHPHQWLRQHGHQWLWLHV$VDUHVXOWWKHDFW EHQHILWSURPLVHGWRWKHSROLF\KROGHUVWKDWWKH\ZRXOGRQO\ FRQWDLQHG QR UHIHUHQFH ZKDWVRHYHU WR (5,6$FRYHUHG KDYHDWZRGROODUFRSD\PHQWIRUDQ\SUHVFULSWLRQVUHPDLQHG HPSOR\HHEHQHILWSODQV XQFKDQJHGE\WKHDUUDQJHPHQW :KLOHDPHUHUHIHUHQFHWRDQ(5,6$SODQZLWKRXWPRUH $V D UHVXOW WKH FRXUW FRQFOXGHG WKDW %OXH 6KLHOGjV PD\ QRW EH HQRXJK WR FDXVH SUHHPSWLRQ 6XSUHPH &RXUW DUUDQJHPHQWVOHIWSROLF\KROGHUVEDVLFDOO\XQFRQFHUQHGIURP SUHFHGHQW VKRZV WKDW LI VXFK D UHIHUHQFH LV FRPELQHG ZLWK DILQDQFLDOSHUVSHFWLYH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 XQFKDQJHG OHDYLQJ WKH SROLF\KROGHUV ZLWKRXW FRQFHUQ IRU %OXH 6KLHOGjV FRVW VDYLQJV DJUHHPHQWV ZLWK WKH ODUJHU :H FRQFOXGH WKDW .HQWXFN\jV $:3 VWDWXWHV mUHODWH WRl SKDUPDFLHV (5,6$ SODQV DQG DUH WKHUHIRUH SUHHPSWHG XQOHVV WKH\ DUH IRXQG WR EH VWDWXWHV WKDW UHJXODWH mLQVXUDQFHl XQGHU WKH $VWKHPDMRULW\QRWHVLQWKHFDVHDWEDUWKHSROLF\KROGHUV VDYLQJV FODXVH RI † E  $  7KLV FRQFOXVLRQ DOVR ZHUH DOVR XQFRQFHUQHG ZLWK WKH LQVXUHUjV FRPSHQVDWLRQ LQYROYHV FRQVLGHUDWLRQ RI WKH mGHHPHUl FODXVH † E  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

 %ZKLFKHQVXUHVWKDW(5,6$HPSOR\HHEHQHILWSODQVDUH GLIIHUHQW IURP DFWXDOO\ HQWHULQJ LQWR VXFK DJUHHPHQWV QRW GHHPHG WR EH HQJDJHG LQ WKH EXVLQHVV RI LQVXUDQFH LQ EHFDXVHDVWKH6XSUHPH&RXUWREVHUYHGmRQO\SKDUPDFLHV DSSO\LQJWKHVDYLQJVFODXVH8QGHUWKHGHHPHUFODXVHVWDWH WKDWFDQDIIRUGWRGLVWULEXWHSUHVFULSWLRQGUXJVIRUOHVVWKDQ LQVXUDQFHODZVWKDWDSSO\GLUHFWO\WR(5,6$VHOILQVXUHGSODQV WKLVPDUNXSFDQSURILWDEO\SDUWLFLSDWHLQWKHSODQl,GDW GRQRWIDOOZLWKLQWKHVDYLQJVFODXVHDQGWKXVDUHSUHHPSWHG 6&WDW$VDUHVXOWWKHLQVXUHUjVSURPLVHWR 0HWURSROLWDQ/LIH,QV&RY0DVVDFKXVHWWV86 HQWHULQWRDJUHHPHQWVZLWKDOOSKDUPDFLHVZDVHVVHQWLDOO\DQ  6 &W   / (G G   )0& &RUS Y HPSW\ RQH DV RQO\ ODUJHU KLJK YROXPH SKDUPDFLHV FRXOG +ROOLGD\  86   6 &W   / (G G  DIIRUGWRHQWHULQWRVXFKDQDJUHHPHQW6XFKDKROORZRIIHU  SURYLGHVQRUHDOEDVLVWRGLVWLQJXLVKWKHFDVHIURPWKHOLPLWHG SURYLGHUQHWZRUNVDWLVVXHLQWKHFDVHDWEDU 7KH.HQWXFN\OHJLVODWXUHDZDUHRILWVLQDELOLW\WRUHJXODWH VHOILQVXUHG(5,6$SODQVVRXJKWWRLQFOXGHVXFKSODQVoDV 6LPLODUO\.HQWXFN\jV$:3ODZVKDYHDOPRVWQRHIIHFWRQ ZHOODVPXOWLSOHHPSOR\HUZHOIDUHDUUDQJHPHQWV0(:$Vo WKHSROLF\KROGHUULVNWKDWLQVXUHUVPXVWXQGHUZULWH/LNH%OXH RQO\mWRWKHH[WHQWSHUPLWWHGE\(5,6$l7KHHIIHFWRIWKLV 6KLHOGjV XQFKDQJHG REOLJDWLRQ WR FRYHU D SROLF\KROGHUjV SURYLVLRQ LV WR H[FOXGH VHOILQVXUHG (5,6$ SODQV IURP SUHVFULSWLRQV DIWHU HQWHULQJ LQWR WKH SKDUPDF\ DJUHHPHQWV FRYHUDJHRIWKHVWDWXWHE\YLUWXHRIWKHGHHPHUFODXVHDQGWR .HQWXFN\LQVXUHUVPXVWFRYHUWKHVDPHPHGLFDOSURFHGXUHV LQFOXGH 0(:$V RQO\ WR WKH H[WHQW VWDWH UHJXODWLRQ LV DIWHU WKH $:3 ODZ DV WKH\ ZRXOG KDYH WR LI WKH $:3 SHUPLWWHG XQGHU  86& † %   ,Q &RPPXQLW\ SURYLVLRQKDGQRWEHHQHQDFWHG,WLVWUXHWKDWWKH$:3ODZV +HDOWK3DUWQHUVY&RPPRQZHDOWKRI.HQWXFN\)6XSS ZRXOGOLNHO\IRUFHLQVXUHUVWRSD\KLJKHUUDWHVKRZHYHUDVLQ G:'.\'LVWULFWsXGJH0F.LQOH\SRLQWHG 5R\DO 'UXJ WKLV ZRXOG RQO\ DIIHFW WKH SULFH WKDW LQVXUHUV WKLVRXWLQKLVRSLQLRQ PXVW SD\ IRU SURFHGXUHV FRYHUHG LQ WKH SROLFLHV WKH\ KDYH LVVXHG QRW WKH W\SH  RI SROLF\KROGHU ULVNV WKDW WKH\ 7KHIDFWWKDWWKH.HQWXFN\OHJLVODWXUHFKRVHWRDOORZ FRQWUDFWXDOO\PXVWFRYHU $FFRUG3UXGHQWLDO,QV&R IRUUHJXODWLRQRI0(:$VDQGVHOILQVXUHGSODQVmWRWKH )GDWILQGLQJWKDWWKH$UNDQVDV$:3VWDWXWHSODLQO\ H[WHQWSHUPLWWHGE\(5,6$lVXJJHVWVWKDWWKHOHJLVODWXUH GLGQRWVSUHDGULVNDQGQRWLQJWKDWDSSHOODQWVGLGQRWHYHQ ZDVZHOODZDUHRIWKHSUHHPSWLYHIRUFHRI(5,6$$V DWWHPSWWRDUJXHWRWKHFRQWUDU\ QRWHGE\'HIHQGDQWWKHSKUDVHDSSHDUVPHUHO\WRUHVWDWH WKHmGHHPHUFODXVHlE\H[HPSWLQJVHOILQVXUHG(5,6$ SODQVIURPWKHVFRSHRIWKH$:3VWDWXWH7KHmGHHPHU FODXVHlSUHYHQWVDVWDWHODZIURPmGHHPLQJlDQHPSOR\HH EHQHILWSODQWREHDQLQVXUDQFHFRPSDQ\IRUWKHSXUSRVH  8QGHU .HQWXFN\jV $:3 ODZ EHQHILW SODQV FDQ QR ORQJHU JXDUDQWHH RI DQ\ ODZ SXUSRUWLQJ WR UHJXODWH WKH EXVLQHVV RI D OLPLWHG SDQHO RI SURYLGHUV WR ZKLFK RWKHU GRFWRUV ZLOO QRW EH DGGHG WR LQVXUDQFH86&E  %7KHGHHPHUFODXVH KDQGOH WKH SODQjV SDWLHQWV 7R WKH H[WHQW WKDW FRQWUDFWV EHWZHHQ EHQHILW WKXV HIIHFWLYHO\ SUHYHQWV VWDWHV IURP VXEMHFWLQJ VHOI SODQV DQG SURYLGHUV FRQWDLQHG VXFK H[FOXVLYLW\ SURYLVLRQV XQGHU WKH LQVXUHGSODQVWRVWDWHLQVXUDQFHUHJXODWLRQ2QWKHRWKHU PDMRULW\jV KROGLQJ WKH\ ZLOO QR ORQJHU EH HQIRUFHDEOH :KLOH WKH OLNHO\ UHVXOW LV DQ LQFUHDVH LQ WKH SULFH WKDW LQVXUHUV PXVW SD\ WKLV LV QRW EHFDXVH RI DQ LQFUHDVH LQ ULVN EXW UDWKHU LW LV GXH WR D GHFUHDVH LQ WKH YROXPH GLVFRXQW DQ LQVXUHU FDQ FRPPDQG LI SROLF\KROGHUV DUH VSUHDG DFURVV D

 SRWHQWLDOO\ ODUJHU QHWZRUN RI SODQ GRFWRUV 6HH *URXS /LIH +HDOWK ,QV  86& † %  SHUPLWV VWDWH ODZV WKDW UHJXODWH LQVXUDQFH WR &R Y 5R\DO 'UXJ &R   86    6 &W   DSSO\ WR 0(:$V XQGHU WKH FLUFXPVWDQFHV VHW IRUWK LQ WKDW VHFWLRQ  / (G G    .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

SUHIHUUHGGRFWRUWKH\ZLOOVWLOOEHUHVWULFWHGWRWKHGRFWRUV KDQGLQVXUHGSODQVoSODQVWKDWSXUFKDVHLQVXUDQFHoDUH LQWKHLUEHQHILWSODQQHWZRUNUHJDUGOHVVRIWKHPHPEHUVKLSRU VXEMHFWWRVWDWHODZVUHJXODWLQJWKHLQVXUDQFHLQGXVWU\ QRQPHPEHUVKLSRIWKHLUSUHIHUUHGGRFWRU 6HH 0HWURSROLWDQ /LIH ,QV &R Y 0DVVDFKXVHWWV  866&W/(GG 7KH6XSUHPH&RXUWGLVFXVVHGWKHWUDQVIHURISROLF\KROGHU ULVNLQGHWDLOLQ*URXS/LIH +HDOWK,QVXUDQFH&RY5R\DO ,GDWQ 'UXJ&R866&W/(GG   7KH &RXUW ZDV FRQVLGHULQJ ZKHWKHU DJUHHPHQWV $VWKH6XSUHPH&RXUWQRWHGLQ8180/LIH,QVXUDQFH&R EHWZHHQ%OXH6KLHOGDQGSDUWLFLSDWLQJSKDUPDFLHVFRQFHUQLQJ Y:DUG86Q6&W/ WKH SULFH WKDW SROLF\KROGHUV ZRXOG SD\ IRU SUHVFULSWLRQV (GG FRQVWLWXWHGWKHEXVLQHVVRILQVXUDQFH8QGHUWKHDJUHHPHQWV WKH SDUWLFLSDWLQJ SKDUPDFLHV ZRXOG ILOO DQ\ %OXH 6KLHOG 6HOILQVXUHG (5,6$ SODQV  DUH JHQHUDOO\ VKHOWHUHG SROLF\KROGHUjVSUHVFULSWLRQIRUDWZRGROODUFKDUJH6HHLGDW IURPVWDWHLQVXUDQFHUHJXODWLRQ 6&WDW7KHSKDUPDF\ZDVWKHQHQWLWOHGWR UHLPEXUVHPHQWIURP%OXH6KLHOGIRUWKHFRVWRIDFTXLULQJWKH 7KH.HQWXFN\$FWSURYLGHVWKDWVKHOWHUE\LWVH[FOXVLRQRI GUXJVSUHVFULEHG6HHLG7KH&RXUWIRXQGWKDWXQGHUWKH (5,6$VHOILQVXUHGSODQVIURPLWVFRYHUDJHEXWLWVUHIHUHQFH DQWLWUXVWH[HPSWLRQSURYLVLRQRIWKH0F&DUUDQ)HUJXVRQ$FW WR(5,6$SODQVDQGLWVH[FOXVLRQRIVHOILQVXUHG(5,6$SODQV 86&†EWKHDUUDQJHPHQWGLGQRWFRQVWLWXWHWKH IURPLWVFRYHUDJHFOHDUO\EULQJWKHVWDWXWHZLWKLQWKHmUHIHUWRl mEXVLQHVVRILQVXUDQFHlEHFDXVH%OXH6KLHOGjVDJUHHPHQWZLWK SURQJRIWKHmUHODWHWRlDQDO\VLV WKHSKDUPDFLHVPHUHO\OLPLWHGWKHDPRXQWWKDWLWZRXOGKDYH WRSD\WRFRYHULWVSROLF\KROGHUULVNV6HHLGDW6 %&RQQHFWLRQ:LWK &W DW   :KLOH UHDOL]LQJ WKDW WKH SROLF\KROGHUV PLJKW :KLOHWKHIDFWWKDWWKH.HQWXFN\VWDWXWHVmUHIHUWRl(5,6$ XOWLPDWHO\EHQHILWLQWKHIRUPRIORZHUUDWHVFKDUJHGE\%OXH HPSOR\HHEHQHILWSODQVLVHQRXJKWRSRWHQWLDOO\SUHHPSWWKHP 6KLHOGWKH&RXUWFRQFOXGHGWKDWQRDGGLWLRQDOSROLF\KROGHU RQWKDWEDVLVDORQHWKHLUmFRQQHFWLRQZLWKlVXFKSODQVRIIHUV ULVNV ZHUH EHLQJ XQGHUZULWWHQ  ,QVWHDG WKH &RXUW VDZ WKH DQDOWHUQDWLYHEDVLVIRUVXFKSUHHPSWLRQ$QDO\VLVXQGHUWKH DJUHHPHQWVDVPHUHO\DUUDQJHPHQWVIRUWKHSXUFKDVHRIJRRGV mFRQQHFWLRQ ZLWKl SURQJ KDV FKDQJHG VRPHZKDW DIWHU WKH DQG VHUYLFHV E\ %OXH 6KLHOG DQG WKXV QRW WKH mEXVLQHVV RI 6XSUHPH&RXUWjVRSLQLRQLQ1HZX@QOLNHWKHKHDOWKSODQVWKDWDUHWKHVXEMHFWRI WKH .HQWXFN\ VWDWXWH WKH LQVXUHU LQ 5R\DO 'UXJ GLG QRW  UHVWULFWWKHQXPEHURISURYLGHUVLQTXHVWLRQl+RZHYHUWKH 'H %XRQR Y 1<6$,/$ 0HGLFDO &OLQLFDO 6HUYLFHV )XQG ,Q   LQVXUHULQ5R\DO'UXJPHUHO\RIIHUHGWRHQWHULQWRDJUHHPHQWV 86   6 &W   / (G G   WKH &RXUW H[SODLQHG ZLWKHDFKOLFHQVHGSKDUPDF\LQ7H[DV7KLVLVVLJQLILFDQWO\ LWV FKDQJH LQ IRFXV VWDWLQJ WKDW LWV HDUOLHU (5,6$ FDVHV KDG QRW UHTXLUHG D ILQH DQDO\VLV RI WKH VFRSH RI (5,6$jV mUHODWH WRl ODQJXDJH EHFDXVH WKH VWDWH ODZV DW LVVXH KDG D FOHDU mFRQQHFWLRQ ZLWK RU UHIHUHQFH WRl (5,6$

 EHQHILW SODQV 'H %XRQR   86 DW   6 &W DW   / (G ,I WKHLU GRFWRU PHW WKH SODQV TXDOLILFDWLRQV KDG ZDQWHG WR MRLQ WKH G DW  7KH &RXUW H[SODLQHG WKDW LQ 7UDYHOHUV  KRZHYHU LW ZDV SODQ EXW ZDV GHQLHG PHPEHUVKLS WKDW GRFWRU FRXOG QR ORQJHU EH NHSW RXW IRUFHG WR FRQIURQW GLUHFWO\ ZKHWKHU (5,6$jV mUHODWHV WRl ODQJXDJH DOWHUHG RI WKH QHWZRUN LI KH RU VKH VWLOO ZLVKHG WR MRLQ WKH QRUPDO VWDUWLQJ SUHVXPSWLRQ WKDW &RQJUHVV GRHV QRW LQWHQG WR VXSSODQW  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

7KH7UDYHOHUV&RXUWGLVFXVVHGZKHWKHU(5,6$jVSUHHPSWLRQ WHUPV RI WKH SROLF\KROGHUjV SROLFLHV  7KH RQO\ FRQWUDFWV SURYLVLRQDOWHUHGWKHVWDUWLQJSUHVXPSWLRQWKDW&RQJUHVVGRHV DIIHFWHGDUHWKRVHEHWZHHQWKHEHQHILWSODQDQGWKHSURYLGHUV QRWLQWHQGWRVXSSODQWVWDWHODZ6HHLGDWo6&W DOUHDG\LQWKHSODQQHWZRUN.HQWXFN\jV$:3ODZVGRQRW DW/(GGDW:KLOHREVHUYLQJWKDWWKLV UHTXLUH WKDW D VLQJOH GRFWRU EH DGGHG WR DQ\ EHQHILW SODQ SUHVXPSWLRQUHPDLQHGXQDOWHUHGWKH&RXUWUHFRJQL]HGWKDWLWV QHWZRUNEHQHILWSODQVPD\VWLOOPDLQWDLQSURYLGHUQHWZRUNV SULRUDWWHPSWVWRFRQVWUXHmUHODWHWRlGLGQRWSURYLGHPXFK ZKLFKUHTXLUHGRFWRUVWRPHHWFHUWDLQWHUPVEHIRUHMRLQLQJDQG KHOSGUDZLQJWKHOLQHDVWRZKDWVKRXOGEHSUHHPSWHG6HHLG WKHSODQVPD\VWLOOUHTXLUHWKDWSROLF\KROGHUVVHHSODQGRFWRUV DW6&WDW/(GGDW7KH&RXUW IRU WKHLU PHGLFDO FRVWV WR EH FRYHUHG  6HH *DU\ $ FRQFOXGHG WKDW LQ RUGHU WR GHWHUPLQH ZKHWKHU WKH QRUPDO )UDQFHVFRQL (ULVD 3UHHPSWLRQ RI m$Q\ :LOOLQJ 3URYLGHUl SUHVXPSWLRQ DJDLQVW SUHHPSWLRQ KDV EHHQ RYHUFRPH LQ D /DZVo$Q (VVHQWLDO 6WHS 7RZDUG 1DWLRQDO +HDOWK &DUH SDUWLFXODUFDVHLWmPXVWJREH\RQGWKHXQKHOSIXOWH[WDQGWKH 5HIRUP:DVK8/4REVHUYLQJWKDW IUXVWUDWLQJGLIILFXOW\RIGHILQLQJ>†DjV@NH\WHUPDQG ZLWKRUZLWKRXWWKHDQ\ZLOOLQJSURYLGHUODZWKHLQVXUHGjV ORRNLQVWHDGWRWKHREMHFWLYHVRIWKH(5,6$VWDWXWHDVDJXLGH DFFHVVWRFHUWDLQSURYLGHUVLVOLPLWHGE\WKHSROLF\ WRWKHVFRSHRIWKHVWDWHODZWKDW&RQJUHVVXQGHUVWRRGZRXOG VXUYLYHl,GDW6&WDW/(GGDW :KLOH GRFWRUV ZKR PHHW WKH SODQV TXDOLILFDWLRQV PD\ 7KH&RXUWIRXQGWKDWWKHmEDVLFWKUXVWlRIWKHFODXVHZDVmWR LQGHSHQGHQWO\GHFLGHWRMRLQWKHSODQDQGWKHSODQPXVWDFFHSW DYRLG D PXOWLSOLFLW\ RI UHJXODWLRQ LQ RUGHU WR SHUPLW WKH WKHPPDQ\GRFWRUVPD\QRWPHHWWKHSODQjVTXDOLILFDWLRQVRU QDWLRQDOO\XQLIRUPDGPLQLVWUDWLRQRIHPSOR\HHEHQHILWSODQVl PD\KDYHQRGHVLUHWRMRLQWKDWSDUWLFXODUSODQ)RUH[DPSOH DQGREVHUYHGWKDWXQGHULWVSDVWFDVHODZLWKDGIRXQG(5,6$ LQ DQ DUHD ZLWK PXOWLSOH EHQHILW SODQV D UHODWLYHO\ VPDOO WR SUHHPSW VWDWH ODZV WKDW PDQGDWHG HPSOR\HH EHQHILW SHUFHQWDJHRIDGGLWLRQDOTXDOLILHGGRFWRUVPD\GHFLGHWRMRLQ VWUXFWXUHVRUWKHLUDGPLQLVWUDWLRQ,GDWo6&WDW DQ\SDUWLFXODUSODQQHWZRUN,QVXFKDVFHQDULRPDQ\GRFWRUV /(GGDW7KHXVHRIWKLVDSSURDFKIRU PD\DOUHDG\EHPHPEHUVRIVHYHUDOSODQQHWZRUNVDQGPD\ mFRQQHFWLRQZLWKlDQDO\VLVZDVVXEVHTXHQWO\HQGRUVHGDQG KDYHQRGHVLUHWRHQUROOLQDGGLWLRQDOQHWZRUNV(YHQWKRVH XVHG E\ WKH &RXUW ERWK LQ 'LOOLQJKDP DQG 'H %XRQR DQG TXDOLILHGGRFWRUVZKRZHUHSUHYLRXVO\H[FOXGHGIURPDOOWKH UHFRJQL]HG E\ WKLV FLUFXLW LQ 'DYLHV Y &HQWHQQLDO /LIH SODQVLQVXFKDQDUHDZRXOGEHXQOLNHO\WRMRLQHYHU\SODQ ,QVXUDQFH&R)GWK&LU DIWHUWKH$:3ODZ7KHUHVXOWLVWKDWDOWKRXJK.HQWXFN\jV $:3 ODZV PDNH LW PDUJLQDOO\ PRUH OLNHO\ WKDW D 8VLQJWKH7UDYHOHUVmFRQQHFWLRQZLWKlDQDO\VLVWKHGLVWULFW SROLF\KROGHUjV EHQHILW SODQ QHWZRUN ZLOO FRQWDLQ WKHLU FRXUWLQWKHFDVHDWEDUGHWHUPLQHGWKDW.HQWXFN\jV$:3ODZV KDGDFRQQHFWLRQZLWK(5,6$SODQV7KHFRXUWIRXQGWKDW ZKLOH WKH ODZ GLG QRW RSHUDWH GLUHFWO\ RQ (5,6$ SODQV LW  7KH PDMRULW\ P\VWHULRXVO\ FRQFOXGHV WKDW WKH SURYLVLRQ FKDQJHV WKH

VWDWH ODZ 6HH LG SROLF\ EHWZHHQ WKH LQVXUHG DQG LQVXUHU mQRW LQ WHUPV RI FRYHUHG PHGLFDO FRQGLWLRQV EXW LQ WHUPV RI FRYHUHG WUHDWPHQW E\ KHDOWK FDUH SURYLGHUVl

 +RZHYHU ERWK WKH PHGLFDO ULVNV DQG FRUUHVSRQGLQJ WUHDWPHQW FRYHUHG E\ ,Q FKDQJLQJ LWV mUHODWH WRl DQDO\VLV LQ 7UDYHOHUV WKH &RXUW DSSHDUV WKH LQVXUHU UHPDLQ XQDOWHUHG E\ .HQWXFN\jV $:3 ODZ &RQVHTXHQWO\ , WR KDYH EHHQ DGGUHVVLQJ RQO\ WKH mFRQQHFWLRQ ZLWKl SURQJ DV LWV DVVXPH WKDW E\ WKLV VWDWHPHQW WKH PDMRULW\ UHDOO\ PHDQV WKDW E\ SRWHQWLDOO\ VWDWHPHQWV LQ ODWHU FDVHV LQGLFDWH WKH mUHIHUHQFH WRl SURQJ ZDV XQDIIHFWHG H[SDQGLQJ WKH QXPEHU RI SODQ GRFWRUV WKDW RQH FRXOG JR WR UHFHLYH 6HH 'H %XRQR  86 DW  Q  6 &W DW   / (G G DW WUHDWPHQW IRU D FRYHUHG FRQGLWLRQ WKH $:3 ODZ VRPHKRZ FKDQJHV WKH  'LOOLQJKDP  86 DW   6 &W DW   / (G G DW  FRQWUDFW EHWZHHQ WKH LQVXUHU DQG LQVXUHG  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

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 :'.\WKHFRXUWIRXQG.HQWXFN\jV $:3 SURYLVLRQ ORFDWHG WKHQ DW † $ WR EH ,GDW7KHFRXUWFRQFOXGHGKRZHYHUWKDWE\H[SDQGLQJ VLPLODULQHIIHFWWRWKHPDQGDWHGEHQHILWODZLQ0HWURSROLWDQ WKHNLQGVRIWUHDWPHQWWKDWDQLQVXUHUPXVWFRYHUWRLQFOXGH /LIH,QVXUDQFH&RY0DVVDFKXVHWWV866&W YDULRXVW\SHVRIDOWHUQDWLYHPHGLFLQHWKHULVNWKDWWKHLQVXUHG /(GG,Q0HWURSROLWDQWKH6XSUHPH PLJKWQHHGDOWHUQDWLYHPHGLFDOWUHDWPHQWZDVVKLIWHGWRWKH &RXUW KHOG WKDW WKH 0DVVDFKXVHWWV PDQGDWHG EHQHILW ODZ LQVXUDQFH FRPSDQ\  6HH *UHJRLUH  )G DW   ,Q mUHODWHGWRl(5,6$SODQVEHFDXVHWKHVWDWXWHERUHLQGLUHFWO\ UHDFKLQJ WKLV FRQFOXVLRQ WKH FRXUW GLVWLQJXLVKHG EXW VXEVWDQWLDOO\ RQ DOO LQVXUHG HPSOR\HH EHQHILW SODQV E\ :DVKLQJWRQj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jVDUHGLIIHUHQWLQSXUSRVH WUDGLWLRQDO(5,6$HQWLWLHVLHWKHSODQWKHHPSOR\HUDQGWKH DQG HIIHFW WKDQ HLWKHU WKH PDQGDWRU\ EHQHILW RU PDQGDWRU\ SODQILGXFLDULHVDQGEHQHILFLDULHV)6XSSGDW SURYLGHU VWDWXWHV UHVSHFWLYHO\ DW LVVXH LQ0HWURSROLWDQ /LIH DQG*UHJRLUH5DWKHUWKDQVKLIWLQJULVNIURPSROLF\KROGHUVWR $UHFHQWPHPRUDQGXPRSLQLRQ:DUGY$OWHUQDWLYH+HDOWK LQVXUHUV .HQWXFN\jV $:3 VWDWXWHV PHUHO\ SURKLELW EHQHILW 'HOLYHU\6\VWHPV,QF)6XSSG:'.\ SODQVIURPH[FOXGLQJTXDOLILHGSURYLGHUVZKRZDQWWRMRLQWKH KHOG WKDW † $ ZKLFK FRQWDLQV UHJXODWLRQV RI D SODQjV SURYLGHU QHWZRUN DQG DUH DEOH WR PHHW WKH SODQjV KHDOWKEHQHILWSODQjVXVHRIFKLURSUDFWLFVHUYLFHVLQFOXGLQJDQ UHTXLUHPHQWV7KHULVNDVVXPHGE\WKHEHQHILWSODQXQGHULWV $:3 SURYLVLRQ ZDV SUHHPSWHG E\ (5,6$ GXH WR LWV SROLF\WKDWWKHSROLF\KROGHUZLOOUHTXLUHPHGLFDOWUHDWPHQW FRQQHFWLRQ ZLWK HPSOR\HH EHQHILW SODQV  ,G DW   7KH UHPDLQVXQDOWHUHG7KHVWDWXWHjVSDVVDJHLQQRZD\DOWHUVWKH MXGJHIRXQGWKDW %\ VSHFLILFDOO\ SURKLELWLQJ KHDOWK RUJDQL]DWLRQV IURP RIIHULQJQHWZRUNVZLWKOLPLWHGFKLURSUDFWLFSURYLGHUVWKH VWDWXWH PDQGDWHV WKH SODQjV VWUXFWXUH  0RUHRYHU WKH VWDWXWH DOVR GLFWDWHV WKDW DOO FRYHUHG SDUWLFLSDQWV VKDOO  $V WR WKH LVVXH RI ZKHWKHU $:3 ODZV VSUHDG ULVN WKH *UHJRLUH KDYHDFFHVVWRWKHFKLURSUDFWRURIWKHLUFKRLFH7KLVWRR FRXUW VWDWHG WKDW LW H[SUHVVHG QR RSLQLRQ *UHJRLUH  )G DW   .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

GLFWDWHVDFHUWDLQVWUXFWXUHWRZKLFKDQHPSOR\HUjVKHDOWK FRQFOXVLRQEHFDXVHLWEHOLHYHGWKHODZVZHUHVLPLODUWRWKH FDUHSODQPXVWVXFFXPE$VVXFKWKLVFODLPDOVRIDOOV PDQGDWHG EHQHILW ODZV WKDW WKH 6XSUHPH &RXUW IRXQG WR ZLWKLQWKHUHDOPRI(5,6$SUHHPSWLRQ VSUHDGULVNLQ0HWURSROLWDQ/LIH,QV&RY0DVVDFKXVHWWV 86$FFRUGLQJWRWKHGLVWULFWFRXUWULVNZDV ,GDW VSUHDGEHFDXVH.HQWXFN\jV$:3ODZVPDGHLWPRUHOLNHO\ WKDW DQ LQVXUHU ZRXOG FRYHU D YLVLW WR D SURYLGHU WKDW WKH 6RPHDFDGHPLFOLWHUDWXUHKDVVXJJHVWHGWKDWWKH6XSUHPH SROLF\KROGHUPD\KDYHSDLGWRYLVLWRQKLVRUKHURZQGXHWR &RXUWjVSRVW7UDYHOHUVFDVHODZPD\UHSUHVHQWDmVHDFKDQJHl WKHSROLF\KROGHUjVSUHIHUHQFHIRUWKDWSDUWLFXODUSURYLGHU LQWKHmUHODWLRQWRlDQDO\VLVKRZHYHUQHLWKHUWKH&RXUWjVQRU WKHFLUFXLWVjRSLQLRQV\HWFRQILUPWKLVDVVHUWLRQ7KHWZR ,GLVDJUHHZLWKWKHGLVWULFWFRXUWjVDWWHQXDWHGULVNVSUHDGLQJ DSSHOODWHFRXUWVWKDWKDYHDGGUHVVHGWKHLVVXHVLQFH7UDYHOHUV DQDO\VLV DQG ILQG LWV DQDORJ\ WR 0HWURSROLWDQ /LIH WR EH ERWKIRXQGWKDWWKH$:3VWDWXWHVDWLVVXHZHUHmFRQQHFWHG PLVSODFHG0HWURSROLWDQ/LIHLQYROYHGD0DVVDFKXVHWWVODZ ZLWKl(5,6$FRYHUHGHPSOR\HHEHQHILWSODQV6HH&,*1$ ZKLFKUHTXLUHGLQVXUHUVWRSURYLGHFHUWDLQPLQLPXPPHQWDO +HDOWKSODQ RI/D,QFY/RXLVLDQD)Go KHDOWKEHQHILWVWR0DVVDFKXVHWWVUHVLGHQWV,GDW6 WK&LU7H[DV3KDUPDF\$VVjQY3UXGHQWLDO,QV&R &W:KLOHDSSO\LQJWKH0F&DUUDQ)HUJXVRQIDFWRUVWR RI$P)GWK&LU,QERWKRIWKHVH WKH0DVVDFKXVHWWVODZWKH6XSUHPH&RXUWFRQFOXGHGWKDWULVN FDVHV WKH FRXUWV UHFRJQL]HG WKDW XQGHU WKH UHDVRQLQJ RI ZDV EHLQJ VSUHDG EHFDXVH WKH VWDWXWH ZDV LQWHQGHG mWR 7UDYHOHUVVWDWHODZVWKDWPDQGDWHHPSOR\HHEHQHILWVWUXFWXUHV HIIHFWXDWH WKH OHJLVODWLYH MXGJPHQW WKDW WKH ULVN RI PHQWDO DUHSUHHPSWHG)LQGLQJWKH$:3VWDWXWHVDWLVVXHGLGH[DFWO\ KHDOWKFDUHVKRXOGEHVKDUHGl,GDW6&W WKDW ERWK FRXUWV FRQFOXGHG WKDW WKH\ ZHUH WUXPSHG E\ (5,6$jV SUHHPSWLRQ SURYLVLRQ  &I 6WXDUW &LUFOH +RVS 0DQGDWHGEHQHILWODZVOLNHWKHRQHDWLVVXHLQ0HWURSROLWDQ &RUSY$HWQD+HDOWK0DQDJHPHQW)GWK /LIHUHTXLUHDQLQVXUHUWRWUHDWLQGLYLGXDOVZLWKKHDOWKFDUH &LU  ILQGLQJ LQ D FDVH SULRU WR 7UDYHOHUV WKDW FRQGLWLRQVWKDWPD\QRWKDYHEHHQFRYHUHGEHIRUHWKHODZ 9LUJLQLDjV$:3VWDWXWHUHODWHGWR(5,6$FRYHUHGHPSOR\HH 7KHHIIHFWRIVXFKODZVLVWRVKLIWDVLJQLILFDQWGHJUHHRIULVN EHQHILW SODQV EHFDXVH LW HOLPLQDWHG DQ LQVXUHUjV DELOLW\ WR IURPLQGLYLGXDOVZKRRULJLQDOO\KDGQRVXFKFRYHUDJHXQGHU FKRRVHOLPLWHGSURYLGHUQHWZRUNV WKH LQVXUDQFH SROLF\ WR WKH LQVXUHU  $OWKRXJK D FORVHU TXHVWLRQWKHVDPHFDQOLNHO\EHVDLGIRUPDQGDWHGSURYLGHU :HDUHFRQYLQFHGWKDWHYHQDIWHUWKHFKDQJHRIHPSKDVLV ODZV8QGHUVXFKODZVDQLQVXUDQFHFRPSDQ\PXVWSURYLGH ZRUNHGE\7UDYHOHUVRQWKHmFRQQHFWLRQZLWKlSURQJRIWKH FRYHUDJHIRUWUHDWPHQWIURPDQ\FDWHJRU\RISURYLGHUZKLFK 6XSUHPH &RXUWjV mUHODWLRQ WRl SUHHPSWLRQ DQDO\VLV WKH W\SLFDOO\ EURDGHQV LQVXUDQFH FRYHUDJH WR LQFOXGH IRUPV RI GLVWULFWFRXUWLQWKLVFDVHZDVFRUUHFWLQILQGLQJWKDWIRUPHU DOWHUQDWLYH PHGLFLQH HJ FKLURSUDFWLF PDVVDJH WKHUDS\ † $ QRZ † $ DQG SUHVHQW DFXSXQFWXUHQRWSUHYLRXVO\FRYHUHGXQGHUWKHSROLF\7KH 1LQWK &LUFXLW FRQIURQWHG VXFK D ODZ LQ :DVKLQJWRQ 3K\VLFLDQV6HUY$VVjQY*UHJRLUH)G,Q  :KLOH sXVWLFH 6FDOLD KDV VXJJHVWHG WKDW WKH &RXUW VKRXOG UHDOO\ EH DSSO\LQJ ILHOG SUHHPSWLRQ UDWKHU WKDQ WKH H[SUHVV SUHHPSWLRQ WHVW LW KDV FUHDWHG IRU DQDO\]LQJ (5,6$jV SUHHPSWLRQ SURYLVLRQV 'LOOLQJKDP   86 DW   6 &W DW   / (G G DW   6FDOLD s  FRQFXUULQJ DEVHQW IXUWKHU GLUHFWLRQ IURP WKH ZKROH &RXUW RQ WKLV LVVXH 7KH LQVXUDQFH FRPSDQ\jV DELOLW\ WR XVH OLPLWHG SURYLGHG QHWZRUNV ZH PXVW FRQWLQXH WR DSSO\ WKH WUDGLWLRQDO DQDO\VLV UHPDLQV XQDIIHFWHG E\ VXFK D ODZ  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

UHVXOW,PXVWFRQFOXGHWKDW††$DQG$ †$ZHUHERWKmFRQQHFWHGZLWKl(5,6$FRYHUHG  GR QRW mVDWLVI\ WKH FRPPRQVHQVH YLHZ DV    SODQV  7KH\ QRW RQO\ DIIHFW WKH EHQHILWV DYDLODEOH E\ UHJXODWLRQ>V@WKDWKRQHLQRQWKHLQVXUDQFHLQGXVWU\lEXWUDWKHU LQFUHDVLQJ WKH SRWHQWLDO SURYLGHUV WKH\ GLUHFWO\ DIIHFW WKH WKHSURYLVLRQVmMXVWKDYHDQLPSDFWRQ>WKDW@LQGXVWU\l6HH DGPLQLVWUDWLRQRIWKHSODQV :DUG6&WDWTXRWLQJ3LORW/LIH86DW 6&WDW 7KH.HQWXFN\VWDWXWHVLQTXHVWLRQPHHWERWKSURQJVRIWKH mUHODWLRQWRlDQDO\VLVDQGWKXVDUHSUHHPSWHGXQOHVVIRXQGWR % EHVWDWXWHVWKDWUHJXODWHLQVXUDQFHXQGHUWKHVDYLQJVFODXVHRI †E $ 1H[W,mFRQVLGHU>WKH@WKUHHIDFWRUVHPSOR\HGWRGHWHUPLQH ZKHWKHUWKHUHJXODWLRQILWVZLWKLQWKHµEXVLQHVVRILQVXUDQFHj ,,,,QVXUDQFH6DYLQJV&ODXVH DVWKDWSKUDVHLVXVHGLQWKH0F&DUUDQ)HUJXVRQ$FWILUVW ZKHWKHUWKHSUDFWLFHKDVWKHHIIHFWRIWUDQVIHUULQJRUVSUHDGLQJ +DYLQJ FRQFOXGHG WKDW .HQWXFN\jV $:3 ODZV UHODWH WR D SROLF\KROGHUjV ULVN VHFRQG ZKHWKHU WKH SUDFWLFH LV DQ (5,6$FRYHUHGHPSOR\HHEHQHILWSODQVDQGDUHWKXVZLWKLQ LQWHJUDOSDUWRIWKHSROLF\UHODWLRQVKLSEHWZHHQWKHLQVXUHUDQG WKHVFRSHRI(5,6$jVSUHHPSWLRQSURYLVLRQWKH&RXUWPXVW WKH LQVXUHG DQG WKLUG ZKHWKHU WKH SUDFWLFH LV OLPLWHG WR WKHQGHWHUPLQHZKHWKHUWKHODZVIDOOZLWKLQ(5,6$jVVDYLQJV HQWLWLHV ZLWKLQ WKH LQVXUDQFH LQGXVWU\l :DUG  6&W DW FODXVH7KHVDYLQJVFODXVHVWDWHVWKDWm>H@[FHSWDVSURYLGHG  LQWHUQDO FLWDWLRQV DQG TXRWDWLRQV RPLWWHG  7KH LQ VXESDUDJUDSK % QRWKLQJ LQ WKLV VXEFKDSWHU VKDOO EH 0F&DUUDQ)HUJXVRQ IDFWRUV RQO\ VHUYH WR UHLQIRUFH P\ FRQVWUXHGWRH[HPSWRUUHOLHYHDQ\SHUVRQIURPDQ\ODZRI FRQFOXVLRQ WKDW .HQWXFN\jV $:3 ODZV DUH QRW VDYHG IURP DQ\6WDWHZKLFKUHJXODWHVLQVXUDQFHEDQNLQJRUVHFXULWLHVl SUHHPSWLRQ E\ (5,6$ † E  :KLOH QRQH RI WKH (5,6$ † E  $  86& † E  $  7KLV 0F&DUUDQ)HUJXVRQ IDFWRUV VKRXOG EH VHHQ DV GLVSRVLWLYH SURYLVLRQ SURYLGHV D EURDG DQG LPSRUWDQW H[FHSWLRQ WR WKH\SURYLGHKHOSIXOJXLGHSRVWVIRUVDYLQJVFODXVHDQDO\VLV (5,6$jVSUHHPSWLRQSURYLVLRQVDYLQJVWDWHODZVWKDWUHODWH OHQGLQJ GHSWK DQG JXLGDQFH WR WKH FRPPRQ VHQVH WHVW WR(5,6$SODQVIURPSUHHPSWLRQVRORQJDVWKH\mUHJXODWH SDUWLFXODUO\LQGLIILFXOWFDVHVVXFKDVWKHRQHZHDUHSUHVHQWHG LQVXUDQFHl  0XFK OLNH WKH SUHHPSWLRQ SURYLVLRQ LWVHOI ZLWK6HH:DUG6&WDW:LWKWKLVXQGHUVWDQGLQJ KRZHYHUWKHVFRSHRIWKHVDYLQJVFODXVHKDVSURYHGGLIILFXOW ,EHJLQE\FRQVLGHULQJZKHWKHU.HQWXFN\jV$:3ODZVKDYH WRGHWHUPLQHIURPLWVVSDUVHODQJXDJH WKHHIIHFWRIWUDQVIHUULQJRUVSUHDGLQJSROLF\KROGHUULVN $SSHOOHHVDUJXHDQGWKHPDMRULW\DJUHHVWKDWWKHGLVWULFW  FRXUW ZDV FRUUHFW LQ ILQGLQJ WKDW .HQWXFN\jV $:3 ODZV $00 0HWURSROLWDQ /LIH ,QV &R Y 0DVVDFKXVHWWV  86    6 &W    / (G G    LQ ZKLFK WKH VSUHDG SROLF\KROGHU ULVN  7KH GLVWULFW FRXUW UHDFKHG WKLV &RXUW VWDWHG >7@KH VSKHUH LQ ZKLFK † D RSHUDWHV ZDV H[SOLFLWO\ OLPLWHG E\ † E  7KH LQVXUDQFH VDYLQJV FODXVH SUHVHUYHV DQ\ VWDWH ODZ mZKLFK UHJXODWHV LQVXUDQFH EDQNLQJ RU VHFXULWLHVl UHDVRQ WKDW WKH $:3 ODZV ZRXOG QRW DSSO\ $ SODLQ UHDGLQJ RI WKH $:3 7KH WZR SUHHPSWLRQ VHFWLRQV ZKLOH FOHDU HQRXJK RQ WKHLU IDFHV SURYLVLRQ FRPSHOV WKLV FRQFOXVLRQ UHJDUGOHVV RI WKH ODZjV DSSOLFDELOLW\ WR SHUKDSV DUH QRW D PRGHO RI OHJLVODWLYH GUDIWLQJ IRU ZKLOH WKH WKH VHOILQVXUHG HQWLW\ WKH +02 RU +6& FRQWUDFWHG ZLWK &RQVHTXHQWO\ JHQHUDO SUHHPSWLRQ FODXVH EURDGO\ SUHHPSWV VWDWH ODZ WKH RQH FDQ RQO\ FRQFOXGH WKDW WKH $:3 SURYLVLRQV DUH SUHHPSWHG DV E\ WKHLU VDYLQJ FODXVH DSSHDUV EURDGO\ WR SUHVHUYH WKH 6WDWHVj ODZPDNLQJ WHUPV WKH\ DSSO\ GLUHFWO\ WR +02jV DQG +6&jV WKDW KDYH PHUHO\ DJUHHG SRZHU RYHU PXFK RI WKH VDPH UHJXODWLRQ :KLOH &RQJUHVV WR RSHUDWH DV DGPLQLVWUDWRUV RI VHOILQVXUHG HPSOR\HH EHQHILW SODQV RFFDVLRQDOO\ GHFLGHV WR UHWXUQ WR WKH 6WDWHV ZKDW LW KDV SUHYLRXVO\  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

7KH6XSUHPH&RXUWKDVHQGHDYRUHGWRSURYLGHJXLGDQFHRQ WRlHPSOR\HHEHQHILWSODQV+RZHYHUKDYLQJFRQFOXGHGWKDW ZKDW LW PHDQV WR mUHJXODWH LQVXUDQFHl ILUVW DGGUHVVLQJ WKH WKHHQWLUH$:3SURYLVLRQLVSUHHPSWHGWKHPDMRULW\IDLOVWR LVVXHLQ0HWURSROLWDQ/LIH,QVXUDQFH&RY0DVVDFKXVHWWV DSSO\VDYLQJVFODXVHDQDO\VLVWRWKHHQWLUH$:3SURYLVLRQ 866&W/(GGDQG $V,KDYHGLVFXVVHG.HQWXFN\jVODZE\LWVYHU\WHUPVGRHV PRVWUHFHQWO\GHVFULELQJWKHWHVWLQ8180/LIH,QVXUDQFHRI DWWHPSW WR UHJXODWH HQWLWLHV RXWVLGH WKH LQVXUDQFH LQGXVWU\ $PHULFDY:DUG866&W/(G WKURXJK LWV UHJXODWLRQ RI +02 DQG +6& DQG ,QVXUDQFH GVWDWLQJ &RPSDQ\FRQWUDFWVZKLFKZRXOGLQFOXGHFRQWUDFWVSXUHO\IRU SODQDGPLQLVWUDWLRQ7KHPDMRULW\DWWHPSWVWRLJQRUHWKLVIDFW 2XU SUHFHGHQW SURYLGHV D IUDPHZRUN IRU UHVROYLQJ E\VXPPDULO\FRQFOXGLQJWKDWWKHODZZRXOGQRWDSSO\WRSODQ ZKHWKHU D VWDWH ODZ mUHJXODWHV LQVXUDQFHl ZLWKLQ WKH DGPLQLVWUDWRUV  +RZHYHU LQ GRLQJ VR WKH PDMRULW\ LV PHDQLQJRIWKHVDYLQJFODXVH)LUVWZHDVNZKHWKHUIURP DSSDUHQWO\VD\LQJWKDWWKHODZLVFOHDUO\SUHHPSWHGDQGQRW D mFRPPRQ VHQVH YLHZ RI WKH PDWWHUl WKH FRQWHVWHG VDYHGLQVRIDUDVLWDSSOLHVWRSODQDGPLQLVWUDWRUVDQG WKHQ SUHVFULSWLRQUHJXODWHVLQVXUDQFH6HFRQGZHFRQVLGHU DUJXLQJWKDWGXHWRWKLVSUHHPSWLRQWKHVWDWXWHGRHVQRWDSSO\ WKUHH IDFWRUV HPSOR\HG WR GHWHUPLQH ZKHWKHU WKH WRHQWLWLHVRXWVLGHWKHLQVXUDQFHLQGXVWU\7KHPDMRULW\FLWHV UHJXODWLRQILWVZLWKLQWKHmEXVLQHVVRILQVXUDQFHlDVWKDW QR DXWKRULW\ IRU LWV DWWHPSW WR GLVVHFW .HQWXFN\jV $:3 SKUDVH LV XVHG LQ WKH 0F&DUUDQ)HUJXVRQ $FW mILUVW SURYLVLRQVGLVPLVVLQJVRPHRIWKHSURYLVLRQjVDSSOLFDWLRQVDV ZKHWKHU WKH SUDFWLFH KDV WKH HIIHFW RI WUDQVIHUULQJ RU SUHHPSWHGDQGWKHQDSSO\LQJVDYLQJFODXVHDQDO\VLVRQO\WR VSUHDGLQJ D SROLF\KROGHUjV ULVN VHFRQG ZKHWKHU WKH WKRVH DSSOLFDWLRQV LW ZLVKHV WR UHWDLQ  ,Q DSSO\LQJ WKH SUDFWLFH LV DQ LQWHJUDO SDUW RI WKH SROLF\ UHODWLRQVKLS FRPPRQ VHQVH WHVW ZH VKRXOG EH ORRNLQJ DW WKH ZKROH EHWZHHQWKHLQVXUHUDQGWKHLQVXUHGDQGWKLUGZKHWKHU SURYLVLRQQRWGHWHUPLQLQJZKHWKHUSRUWLRQVRIDSURYLVLRQDUH WKH SUDFWLFH LV OLPLWHG WR HQWLWLHV ZLWKLQ WKH LQVXUDQFH VDYHGLQVRPHEXWQRWDOOVFHQDULRV LQGXVWU\lLQWHUQDOFLWDWLRQVRPLWWHG ,QVXPXQOLNH:DUGZKHUHWKHQRWLFHSUHMXGLFHUXOHZDV :DUG86DW6&WDW/(GG E\ LWV YHU\ WHUPV mGLUHFWHG VSHFLILFDOO\ DW WKH LQVXUDQFH DW LQGXVWU\DQG>ZDV@DSSOLFDEOHRQO\WRLQVXUDQFHFRQWUDFWVl 6&WDW.HQWXFN\jV$:3ODZVFOHDUO\DSSO\WR 7KH&RXUWQRWHGWKDWWKHWKUHH0F&DUUDQ)HUJXVRQIDFWRUV HQWLWLHVDQGFRQWUDFWVRXWVLGHWKHLQVXUDQFHLQGXVWU\$VD DUHmµFRQVLGHUDWLRQV>WREH@ZHLJKHGjLQGHWHUPLQLQJZKHWKHU D VWDWH ODZ UHJXODWHV LQVXUDQFHl DQG WKDW m>Q@RQH RI WKHVH FULWHULDLVQHFHVVDULO\GHWHUPLQDWLYHLQLWVHOIl6HHLGDW   6 &W DW   / (G G DW   7KHUHIRUH LQ ,Q DQ DWWHPSW WR GLVPLVV WKH SUREOHP RI SDUWLDO SUHHPSWLRQ LQVRIDU DV DSSOLHG RQO\ WR SODQ DGPLQLVWUDWRUV WKH PDMRULW\ DSSHDUV WR GUDZ D GHWHUPLQLQJZKHWKHU.HQWXFN\jV$:3ODZVDUHVDYHGIURP GLVWLQFWLRQ EHWZHHQ .HQWXFN\jV $:3 VWDWXWH DQG WKH $:3 VWDWXWH DW LVVXH SUHHPSWLRQ E\ (5,6$ † E  $ RQH PXVW ILUVW DVN LQ 3UXGHQWLDO ,QV &R RQ WKH JURXQGV WKDW .HQWXFN\jV VWDWXWH GRHV QRW ZKHWKHUDVDPDWWHURIFRPPRQVHQVHWKH\UHJXODWHLQVXUDQFH VSHFLILFDOO\ VWDWH WKDW LW DSSOLHV WR mSODQ DGPLQLVWUDWRUVl +RZHYHU †† $ DQG $ DSSO\ WR m+HDOWK %HQHILW 3ODQVl GHILQHG WR LQFOXGH +02 DQG +6& FRQWUDFWV 6LPLODUO\ † $ DSSOLHV WR m+HDOWK ,QVXUHUVl GHILQHG WR LQFOXGH DOO ,QVXUDQFH &RPSDQLHV +02V DQG +6&V 7KHVH GHILQLWLRQV LQ QR ZD\ OLPLW WKH DSSOLFDELOLW\ RI .HQWXFN\jV $:3 SURYLVLRQV WR HQWLWLHV XQGHUZULWLQJ ULVN &RQVHTXHQWO\ WDNHQ DZD\ LW GRHV QRW QRUPDOO\ GR ERWK DW WKH VDPH WLPH LI D VHOILQVXUHU HQWHUHG LQWR D FRQWUDFW ZLWK DQ +02 +6& RU ,QVXUDQFH &RPSDQ\ VROHO\ IRU WKH SURYLVLRQ RI SODQ DGPLQLVWUDWLRQ WKHUH LV QR  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

%OXH6KLHOGZKLFKSURYLGHGSODQDGPLQLVWUDWLRQVHUYLFHVIRU DQGWKHQORRNWRWKH0F&DUUDQ)HUJXVRQIDFWRUVDVFKHFNLQJ DVHOILQVXUHGHPSOR\HHEHQHILWSODQZHUHQRWHQJDJHGLQWKH SRLQWVRUJXLGHSRVWVWRDLGWKHDQDO\VLV EXVLQHVVRILQVXUDQFHDQGWKHUHIRUHWKDWWKHVWDWHPDQGDWHG EHQHILW ODZV ZHUH SUHHPSWHG ZLWK UHVSHFW WR QRW RQO\ WKH ,Q:DUGWKH&RXUWZDVIDFHGZLWKWKHTXHVWLRQRIZKHWKHU XQGHUO\LQJVHOILQVXUHGSODQEXWDOVRWKHSODQDGPLQLVWUDWRUV &DOLIRUQLDjVQRWLFHSUHMXGLFHUXOHZDVSUHHPSWHGE\(5,6$ 7KHSDUWLHVKDGDJUHHGWKDW&DOLIRUQLDjVQRWLFHSUHMXGLFHUXOH /LJKWKRZHYHULVLQDSSRVLWHWRWKHSURSRVLWLRQWKHPDMRULW\ mUHODWHG WRl (5,6$ FRYHUHG SODQV XQGHU † D VR WKH XOWLPDWHO\VHHNVWRDGYDQFHWKDWLVLI.HQWXFN\jV$:3ODZ &RXUWKDGRQO\WRGHWHUPLQHZKHWKHUWKHUXOHZDVVDYHGE\ GRHV QRW DSSO\ WR VHOILQVXUHUV D IRUWLRUL LW DOVR GRHV QRW WKH LQVXUDQFH UHJXODWLRQ VDYLQJV FODXVH RI † E  $ DSSO\ WR HQWLWLHV DGPLQLVWHULQJ WKH VHOILQVXUHG SODQ  7KH 86DW6&WDW/(GGDW HPSOR\HHEHQHILWSODQDWLVVXHLQ/LJKWFRQWDLQHGDSURYLVLRQ 7KH &RXUW EHJDQ ZLWK WKH FRPPRQ VHQVH SURQJ RI LWV VWDWLQJWKDWmWKHFRQWUDFWVEHWZHHQ6RXWK&HQWUDO%HOODQGWKH LQVXUDQFHUHJXODWLRQVDYLQJVFODXVHWHVWREVHUYLQJWKDW SODQDGPLQLVWUDWRUQHFHVVDULO\ZLOOFRQIRUPWRDSSOLFDEOHVWDWH ODZVl  ,G DW   3ODLQWLIIV DUJXHG WKDW VLQFH WKH SODQ 7KH&DOLIRUQLDQRWLFHSUHMXGLFHUXOHFRQWUROVWKHWHUPVRI DGRSWHG VWDWH ODZ WKH SODQ DGPLQLVWUDWRU ZDV UHTXLUHG WR WKH LQVXUDQFH UHODWLRQVKLS E\ mUHTXLULQJ WKH LQVXUHU WR FRPSO\ZLWKWKDWODZ7KH)LIWK&LUFXLWEHJDQE\QRWLQJWKDW SURYH SUHMXGLFH EHIRUH HQIRUFLQJ SURRIRIFODLP LI(5,6$SUHHPSWHGVWDWHODZWKHUHZRXOGEHQRVWDWHODZIRU UHTXLUHPHQWVl&LVQHURV)GDW$VWKH1LQWK WKH DGPLQLVWUDWRU WR FRQIRUP WR  7KH FRXUW WKHQ WXUQHG WR &LUFXLWREVHUYHGWKHUXOHE\LWVYHU\WHUPVmLVGLUHFWHG 3ODLQWLIIVj DUJXPHQW WKDW WKH SUHHPSWLRQ SURYLVLRQ RI  VSHFLILFDOO\DWWKHLQVXUDQFHLQGXVWU\DQGLVDSSOLFDEOH 86& † D VKRXOG QRW EH UHDG WR DSSO\ WR SODQ RQO\WRLQVXUDQFHFRQWUDFWVl,ELGVHH%ULHIIRU8QLWHG DGPLQLVWUDWRUV3ODLQWLIIVDVVHUWHGWKDWEHFDXVHWKHLUDFWLRQ 6WDWHVDV$PLFXV&XULDHm>2@XUVXUYH\RI&DOLIRUQLD ZDV DJDLQVW D SODQ DGPLQLVWUDWRU LW GLG QRW UHODWH WR DQ ODZ UHYHDOV QR FDVHV ZKHUH WKH VWDWH FRXUWV DSSO\ WKH HPSOR\HHEHQHILWSODQDQGWKHUHIRUHZDVQRWSUHHPSWHG7KH QRWLFHSUHMXGLFHUXOHDVVXFKRXWVLGHWKHLQVXUDQFHDUHD FRXUW IRXQG QR PHULW LQ SODLQWLIIVj DUJXPHQW EHFDXVH 1RU LV WKLV VXUSULVLQJ JLYHQ WKDW WKH UXOH LV VWDWHG LQ m>D@EVHQW(5,6$WKHVWDWHFRPPRQODZRQZKLFK>SODLQWLIIV@ WHUPV RI SUHMXGLFH WR DQ µLQVXUHUj UHVXOWLQJ IURP UHO\ZRXOGSURYLGHFDXVHVRIDFWLRQIRUWKHLPSURSHUKDQGOLQJ XQWLPHOLQHVVRIQRWLFHl7KHUXOHWKXVDSSHDUVWRVDWLVI\ RI FODLPV XQGHU EHQHILW SODQVl JLYLQJ WKH ODZ D mGLUHFW WKHFRPPRQVHQVHYLHZDVDUHJXODWLRQWKDWKRPHVLQRQ FRQQHFWLRQlZLWKHPSOR\HHEHQHILWSODQV,GDW$VD WKHLQVXUDQFHLQGXVWU\DQGGRHVmQRWMXVWKDYHDQLPSDFW FRQVHTXHQFHWKHFRXUWIRXQG†SUHHPSWHGSODLQWLIIVj RQ>WKDW@LQGXVWU\l3LORW/LIH86DW6&W VWDWHFDXVHVRIDFWLRQZLWKUHVSHFWWRWKHDGPLQLVWUDWRURIWKHLU  VHOILQVXUHGSODQDVZHOO,G ,QWKHFDVHDWEDUWKHPDMRULW\VWDWHVWKDWEDVHGLQSDUWRQ UHOLDQFHRQ/LJKWLWGRHVQRWEHOLHYHWKDW.HQWXFN\jV$:3 ODZ FRXOG EH HQIRUFHG DJDLQVW SODQ DGPLQLVWUDWRUV RI VHOI  LQVXUHG SODQV  7KH PDMRULW\ DSSHDUV WR DUULYH DW WKLV 7KH UXOH VWDWHV mD GHIHQVH EDVHG RQ DQ LQVXUHGjV IDLOXUH WR JLYH WLPHO\ QRWLFH >RI D FODLP@ UHTXLUHV WKH LQVXUHU WR SURYH WKDW LW VXIIHUHG FRQFOXVLRQGXHWRLWVEHOLHIWKDWDVLQ/LJKW.HQWXFN\jV$:3 DFWXDO SUHMXGLFH 3UHMXGLFH LV QRW SUHVXPHG IURP GHOD\HG QRWLFH DORQH VWDWXWH ZRXOG EH SUHHPSWHG LQVRIDU DV LW DSSOLHV WR SODQ :DUG 7KH LQVXUHU PXVW VKRZ DFWXDO SUHMXGLFH QRW WKH PHUH SRVVLELOLW\ RI

DGPLQLVWUDWRUVJLYHQWKDW.HQWXFN\jV$:3VWDWXWHmUHODWHV SUHMXGLFHl   86 DW   6 &W DW   / (G G DW   .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

:DUG86DW6&WDW/(GG ZLWKLQ WKHLQVXUDQFHLQGXVWU\LQSDUWEHFDXVHLWDSSOLHGWR DW mKHDOWKFDUHILQDQFLHUVWKLUGSDUW\DGPLQLVWUDWRUVSURYLGHUV RURWKHULQWHUPHGLDULHVl7KHRQO\ULVNXQGHUZULWWHQLVWKDW :DUGPDNHVLWFOHDUWKDWWKHPRVWLPSRUWDQWDVSHFWRIWKH DFFHSWHG E\ WKH (5,6$ VHOILQVXUHG SODQ ZKLFK XQGHU WKH WHVWLVZKHWKHUIURPDFRPPRQVHQVHYLHZRIWKHPDWWHUWKH mGHHPHU FODXVHl RI (5,6$ †  E  %  86& FRQWHVWHGVWDWXWHUHJXODWHVLQVXUDQFH7KHWKUHH0F&DUUDQ †E  %FDQQRWEHWUHDWHGDVDQLQVXUDQFHFRPSDQ\ )HUJXVRQIDFWRUVDUHRIVHFRQGDU\LPSRUWDQFHVHUYLQJRQO\DV IRU WKH SXUSRVHV RI VWDWH UHJXODWLRQ  6HH )0& &RUS Y mFKHFNLQJ SRLQWVl RU mJXLGHSRVWVl DQG QRW DV HVVHQWLDO +ROOLGD\866&W/(GG HOHPHQWV  ,QGHHG LQ :DUG WKH &RXUW LJQRUHG WKH ILUVW 7H[DV3KDUPDF\$VVjQ)GDW7KH 0F&DUUDQ)HUJXVRQ IDFWRU DOWRJHWKHU LQ LWV DQDO\VLV RI WKH FRPPRQVHQVHFRQFOXVLRQWKDWFDQEHGUDZQIURPWKH$:3 FKDOOHQJHGVWDWXWHLQWKDWFDVH VWDWXWHjVFRYHUDJHRIHQWLWLHVFOHDUO\RSHUDWLQJRXWVLGHRIWKH EXVLQHVVRILQVXUDQFHLVWKDWWKHVWDWXWHLVFRQFHUQHGJHQHUDOO\ 7KH.HQWXFN\$FWPHHWVWKHFRPPRQVHQVHWHVWLQWKDWLW ZLWK UHJXODWLQJ SURYLGHU DFFHVV WR QHWZRUNV UDWKHU WKDQ FOHDUO\ GRHV UHJXODWH LQVXUDQFH  7KH IDFW WKDW LW LQFOXGHV VSHFLILFDOO\ UHJXODWLQJ WKH EXVLQHVV RI LQVXUDQFH  6HH ZLWKLQ LWV UHDFK +02V DV ZHOO DV WUDGLWLRQDO LQVXUDQFH 3UXGHQWLDO ,QV &R  )G DW  FRQFOXGLQJ WKDW  WKH FRPSDQLHV GRHV QRW WDNH LW RXW RI WKH UHDOP RI LQVXUDQFH $:3ODZDWLVVXHZDVmQRWDODZGLUHFWHGDWWKHLQVXUDQFH UHJXODWLRQ:HDJUHHZLWKWKHUHDVRQLQJRIWKH1LQWK&LUFXLW LQGXVWU\ DW DOO EXW D ODZ GLUHFWHG DW UHJXODWLRQ RI EURDGO\ LQ:DVKLQJWRQ3K\VLFLDQV6HUYLFH$VVRFLDWLRQY*UHJRLUH GHILQHGKHDOWKEHQHILWSODQVRQO\VRPHRIZKLFKIDOOZLWKLQ )GWK&LULQZKLFKWKH&RXUWVDLG WKHLQVXUDQFHLQGXVWU\l 7KH:DVKLQJWRQODZLVmVSHFLILFDOO\GLUHFWHGlWRZDUG 7KHPDMRULW\VHHNVWRUHIXWHWKLVFRQFOXVLRQE\DUJXLQJWKDW WKH LQVXUDQFH LQGXVWU\ 3LORW /LIH  86 DW   .HQWXFN\jV$:3ODZZRXOGQRWDSSO\WRHQWLWLHVSHUIRUPLQJ 6&WEHFDXVHLWRSHUDWHVGLUHFWO\RQ +02VDQG RQO\SODQDGPLQLVWUDWLRQIRUVHOILQVXUHUVDSSDUHQWO\RQWKH +&6&V HQWLWLHV WKDW DUH HQJDJHG LQ WKH EXVLQHVV RI JURXQGVWKDWWRWKHH[WHQWWKDW.HQWXFN\jV$:3ODZVHHNVWR KHDOWKLQVXUDQFHm7KHSULPDU\HOHPHQWVRIDQLQVXUDQFH GRVRWKH\ZRXOGEHSUHHPSWHGE\(5,6$,QVXSSRUWWKH FRQWUDFW DUH WKH VSUHDGLQJ DQG XQGHUZULWLQJ RI D PDMRULW\ FLWHV /LJKW Y %OXH &URVV DQG %OXH 6KLHOG RI SROLF\KROGHUjVULVNl*URXS/LIH +HDOWK,QV&RY $ODEDPD,QF)GWK&LUZKLFK 5R\DO'UXJ&R866&W/ KROGV WKDW VWDWH ODZV ZKLFK DSSO\ WR DGPLQLVWUDWRUV RI VHOI (GG   FLWLQJ  * &RXFK &\FORSHGLD RI LQVXUHGSODQVPD\EHSUHHPSWHGE\(5,6$DQGmLI(5,6$ ,QVXUDQFH/DZ†GHG m,WLVFKDUDFWHULVWLFRI SUHHPSWVVWDWHODZWKHUHLVQRDSSOLFDEOHVWDWHODZWRZKLFK LQVXUDQFHWKDWDQXPEHURIULVNVDUHDFFHSWHGVRPHRI WKHDGPLQLVWUDWRUPXVWFRQIRUPl2WKHUFRXUWVKDYHGUDZQD ZKLFK LQYROYH ORVVHV DQG WKDW VXFK ORVVHV DUH VSUHDG VLPLODUO\XQUHPDUNDEOHFRQFOXVLRQ6HH,QVXUDQFH%G8QGHU RYHU DOO WKH ULVNV VR DV WR HQDEOH WKH LQVXUHU WR DFFHSW 6RFLDO,QV3ODQRI%HWKOHKHP6WHHO&RUSY0XLU)G HDFKULVNDWDVOLJKWIUDFWLRQRIWKHSRVVLEOHOLDELOLW\XSRQ oG&LUFRQFOXGLQJWKDW%OXH&URVVDQG LWl7KHRQO\GLVWLQFWLRQEHWZHHQDQ+02RU+&6& DQG D WUDGLWLRQDO LQVXUHU LV WKDW WKH +02 SURYLGHV PHGLFDOVHUYLFHVGLUHFWO\ZKLOHDWUDGLWLRQDOLQVXUHUGRHV  7KH IDFW WKDW †† $ DQG $ KDSSHQ WR EH VR LQGLUHFWO\ E\ SD\LQJ IRU WKH VHUYLFH $QGHUVRQ Y FRGLILHG DPRQJVW .HQWXFN\jV LQVXUDQFH SURYLVLRQV GRHV QRW DOWHU WKLV +XPDQD,QF)GWK&LUEXWWKLV FRQFOXVLRQ DV LW LQ QR ZD\ DVVXUHV WKDW WKH ODZ LV VSHFLILFDOO\ GLUHFWHG WRZDUG WKH LQVXUDQFH LQGXVWU\  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

WKHUHYHU\WHUPVSURKLELWDOO+02jV+6&jVDQG,QVXUDQFH LVDGLVWLQFWLRQZLWKRXWDGLIIHUHQFH0HWURSROLWDQ/LIH &RPSDQLHVIURPmGLVFULPLQDW>LQJ@DJDLQVWDQ\SURYLGHUZKR 86DW6&WH[SODLQLQJWKDWQRWKLQJ LVORFDWHGZLWKLQWKHJHRJUDSKLFFRYHUDJHDUHDRIWKHKHDOWK LQ (5,6$ mSXUSRUWV WR GLVWLQJXLVK EHWZHHQ WUDGLWLRQDO EHQHILWSODQl6HH††$DQG$ DQG LQQRYDWLYH LQVXUDQFH ODZVl .ODPDWK/DNH 7KH $:3 ODZV ZRXOG FOHDUO\ DSSO\ WR +02V +6&V RU 3KDUPDFHXWLFDO $VVjQ Y .ODPDWK 0HG 6HUY %XUHDX ,QVXUDQFH&RPSDQLHVSURYLGLQJSODQDGPLQLVWUDWLRQVHUYLFHV  )G   WK &LU   ,Q WKH HQG DVWKHUHLVQRWKLQJLQWKHVWDWXWHWKDWZRXOGH[FOXGHWKHPLQ +02V IXQFWLRQ WKH VDPH ZD\ DV D WUDGLWLRQDO KHDOWK VXFKDVFHQDULR LQVXUHU7KHSROLF\KROGHUSD\VDIHHIRUDSURPLVH RI PHGLFDOVHUYLFHVLQWKHHYHQWWKDWKHVKRXOGQHHGWKHP $OWKRXJK +02V +6&V DQG ,QVXUDQFH &RPSDQLHV PD\ ,WIROORZVWKDW+02VDQG+&6&VDUHLQWKHEXVLQHVVRI DFFHSWULVNLQVRPHVLWXDWLRQVDVWKLUGSDUW\DGPLQLVWUDWRUV LQVXUDQFH WKH\ZRXOGPHUHO\EHFRQWUDFWLQJWRKDQGOHSDSHUZRUNDQG SODQ DGPLQLVWUDWLRQ IRU D VHOILQVXUHG (5,6$ SODQ  :KLOH ,GDW,Q$QGHUVRQY+XPDQD,QF)G KDQGOLQJVXFKDGPLQLVWUDWLYHGXWLHVKRZHYHUWKHVHHQWLWLHV WK&LUWKHFRXUWVDLGm%HFDXVH+02VVSUHDG ZRXOG EH IRUFHG E\ .HQWXFN\jV $:3 ODZV WR DFFHSW DQ\ ULVNoERWKDFURVVSDWLHQWVDQGRYHUWLPHIRUDQ\JLYHQSHUVRQ ZLOOLQJ SURYLGHU LQWR WKH SODQ HYHQ WKRXJK WKH\ ZHUH QRW oWKH\DUHLQVXUDQFHYHKLFOHVXQGHU,OOLQRLVODZl7KH\DUH XQGHUZULWLQJDQ\ULVN7KHODZLQWKLVLQVWDQFHLVQRWGLUHFWHG OLNHZLVHmLQVXUDQFHYHKLFOHVlXQGHU.HQWXFN\ODZ DWWKHEXVLQHVVRILQVXUDQFHDVQRLQVXUDQFHLVLQYROYHG6HH 3UXGHQWLDO ,QV &R  )G DW  REVHUYLQJ WKDW WKH ,WLVWUXHWKDWWKHVWDWXWHVZRXOGUHDFKFHUWDLQVHOILQVXUHG $UNDQVDV$:3VWDWXWHDWLVVXHGHILQHGKHDOWKEHQHILWSODQVVR KHDOWK FDUH EHQHILW SODQV WKDW DUH QRW XQGHU (5,6$jV EURDGO\DVWRLQFOXGHSODQDGPLQLVWUDWRUVDQGWKXVGLGQRWILW SURWHFWLYH mGHHPHUl FODXVH HJ VHOILQVXUHG JRYHUQPHQW ZLWKLQDFRPPRQVHQVHYLHZRIDODZGLUHFWHGVSHFLILFDOO\ SODQV DQG VHOILQVXUHG FKXUFK SODQV EHFDXVH WKH\ DUH WRZDUG WKH LQVXUDQFH LQGXVWU\ 7H[DV 3KDUPDF\ $VVjQ Y H[FOXGHGHQWLUHO\IURP(5,6$jVFRYHUDJHXQGHU86& 3UXGHQWLDO,QV&RRI$PHULFD)GWK †E:HGRQRWVHHWKLVIDFWKRZHYHUDVDQ\EDUULHUWR &LUQRWLQJWKDWDVHOILQVXUHGHPSOR\HUZRXOGQRWEH D ILQGLQJ WKDW D FRPPRQ VHQVH YLHZ LV WKDW WKH VWDWXWHV VXEMHFWWR7H[DVj$:3VWDWXWHmEXWLIWKHHPSOR\HUVLJQHGXS UHJXODWH LQVXUDQFH  :H NQRZ RI QR UHDVRQ ZK\ LW LV QRW ZLWKDQ+02RU332WKRVHRUJDQL]DWLRQVZRXOGEHVXEMHFW ZLWKLQWKHDXWKRULW\RIDVWDWHLQHQDFWLQJODZVGHDOLQJZLWK WRWKHVWDWXWHHYHQLIWKHUHLVQRLQVXUDQFHLQYROYHGl&LJQD LQVXUDQFHWRLQFOXGHZLWKLQVXFKODZVHQWLWLHVWKDWDFWDVVHOI +HDOWK 3ODQ RI /D ,QF  )G DW  FRQFOXGLQJ WKDW LQVXUHUVDVZHOODVHQWLWLHVZKRSXUFKDVHLQVXUDQFH$VWKH /RXLVLDQDjV$:3ODZZDVREYLRXVO\QRWOLPLWHGWRHQWLWLHV DXWKRURIDZHOONQRZQWUHDWLVHKDVVDLGm6HOILQVXUDQFHKDV RIWHQOHGFRXUWVDQGOHJLVODWXUHVWRVWUXJJOHZLWKWKHLQWULJXLQJ TXHVWLRQRIZKHWKHUDSDUW\ZKRKDVQRWSXUFKDVHGLQVXUDQFH HIIHFWLYHO\DFWLQJDVLWVRZQLQVXUHUVKRXOGEHWKHHTXLYDOHQW LQVXUDQFH EXVLQHVV LQ .HQWXFN\ .\ 5HY 6WDW $QQ † $ %DQNV%DOGZLQ  7KLV GHILQLWLRQ ODUJHO\ WUDFNV UHSHDOHG † $ DjV GHILQLWLRQ RI  m+HDOWK %HQHILW 3ODQl 'HVSLWH WKH PDMRULW\jV FODLP WKDW WKH VXEVWLWXWLRQ $V QRWHG HDUOLHU WKH 1LQWK &LUFXLW LQ *UHJRLUH IRXQG WKDW WKH RI WKH WHUP m+HDOWK ,QVXUHUl IRU m+HDOWK %HQHILW 3ODQl LQ WKH FXUUHQW :DVKLQJWRQ VWDWXWH GLG QRW FRPH ZLWKLQ WKH VFRSH RI (5,6$jV SUH VWDWXWH H[FOXGHV DGPLQLVWUDWRUV XQGHU FRQWUDFW ZLWK EHQHILWV SODQV IURP WKH HPSWLRQ FODXVH 1HYHUWKHOHVV WKH &RXUW IRXQG WKDW HYHQ LI LW GLG WKH VFRSH RI WKH VWDWXWHV WKH GHILQLWLRQ RI mLQVXUHUl FRQWLQXHV WR LQFOXGH SODQ VWDWXWH GHDOW ZLWK WKH UHJXODWLRQ RI LQVXUDQFH DQG ZRXOG WKHUHIRUH EH VDYHG DGPLQLVWUDWRUV IURP SUHHPSWLRQ  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

RI DQ LQVXUHUl   &28&+ 21 ,1685$1&( G †   ,W LV GXH WR PRRWQHVV DIWHU WKH $ODEDPD 6XSUHPH &RXUW SRLQWHGRXWWKDWWKLVGLIILFXOW\LQPRGHUQSUDFWLFHLVIUHTXHQWO\ GHWHUPLQHGLQDFHUWLILHGTXHVWLRQWKDWWKHODZDWLVVXHGLGQRW UHPRYHG E\ H[SUHVV VWDWXWRU\ SURYLVLRQV VSHFLI\LQJ WKDW D DSSO\ WR SODLQWLII 6WXDUW &LUFOH  )G DW o SDUWLFXODUUHTXLUHPHQWGRHVRUGRHVQRWDSSO\WRVHOILQVXUHG FRQFOXGLQJWKDWWKH$:3VWDWXWHDWLVVXHZKLFKRQO\DSSOLHG HQWLWLHV,G.HQWXFN\KDVGRQHWKLVE\H[SUHVVO\LQFOXGLQJ WRLQVXUDQFHFRPSDQLHVDFWLYHO\LVVXLQJLQVXUDQFHSROLFLHV VHOILQVXUHUVnWRWKHH[WHQWSHUPLWWHGE\(5,6$nZLWKLQ PHWWKHFRPPRQVHQVHWHVWDVDODZUHJXODWLQJLQVXUDQFH WKHFRYHUDJHRIWKHVWDWXWHVLQTXHVWLRQ 6LJQLILFDQWO\ WKH $:3 SURYLVLRQV DOVR DSSO\ WR WKLUG 7KHVWDWHjVUHJXODWLRQRIKHDOWKEHQHILWSODQVLVVHWIRUWKLQ SDUWLHVWKDWDVHOILQVXUHG(5,6$SODQKLUHVWRDGPLQLVWHULWV .HQWXFN\jV ,QVXUDQFH &RGH &KDSWHU  RI 7LWOH ;;9 SODQEHQHILWV$VXVHGLQ††$DQG$ GHDOLQJ ZLWK %XVLQHVV DQG )LQDQFLDO ,QVWLWXWLRQV 6XEWLWOH  mKHDOWK EHQHILW SODQl DOVR LQFOXGHV +RVSLWDO +HDOWK $ RI WKH ,QVXUDQFH &RGH GHDOV ZLWK KHDOWK LQVXUHUV DQG 6HUYLFH&RUSRUDWLRQDQG+02FRQWUDFWV6HFWLRQ$ KHDOWK EHQHILW SODQV  6HFWLRQ $ FRQWDLQV WKH XVHVWKHWHUPm+HDOWK,QVXUHUlLQVWHDGRIm+HDOWK%HQHILW GHILQLWLRQ RI ZRUGV XVHG LQ WKDW VXEWLWOH  3DUDJUDSK  3ODQl EXW VLPLODUO\  GHILQHV LW WR LQFOXGH DQ\ ,QVXUDQFH SURYLGHV &RPSDQ\+02RU+6&7KXV.HQWXFN\jV$:3ODZVE\ m,QVXUHUl PHDQV DQ\ LQVXUDQFH FRPSDQ\ KHDOWK PDLQWHQDQFH RUJDQL]DWLRQ VHOILQVXUHU RU PXOWLSOH  6HFWLRQ $ D GHILQHG m+HDOWK %HQHILW 3ODQl DV HPSOR\HU ZHOIDUH DUUDQJHPHQW QRW H[HPSW IURP VWDWH LQFOXGLQJ UHJXODWLRQ E\ (5,6$ SURYLGHUVSRQVRUHG LQWHJUDWHG $Q\ KRVSLWDO RU PHGLFDO H[SHQVH SROLF\ RU FHUWLILFDWH QRQSURILW KHDOWKGHOLYHU\QHWZRUNVHOILQVXUHGHPSOR\HURUJDQL]HG KRVSLWDO PHGLFDOVXUJLFDO DQG KHDOWK VHUYLFH FRUSRUDWLRQ DVVRFLDWLRQ RU QRQSURILW KRVSLWDO PHGLFDOVXUJLFDO FRQWUDFW RU FHUWLILFDWH D KHDOWK EHQHILW SODQ RIIHUHG E\ D

GHQWDO RU KHDOWK VHUYLFH FRUSRUDWLRQ DXWKRUL]HG WR SURYLGHUVSRQVRUHG LQWHJUDWHG KHDOWK GHOLYHU\ QHWZRUN D VHOI LQVXUHG SODQ RU D SODQ SURYLGHG E\ D PXOWLSOH HPSOR\HU ZHOIDUH WUDQVDFWKHDOWKLQVXUDQFHEXVLQHVVLQ.HQWXFN\ DUUDQJHPHQW WR WKH H[WHQW SHUPLWWHG E\ (5,6$ KHDOWK PDLQWHQDQFH RUJDQL]DWLRQ FRQWUDFW DQG VWDQGDUG DQG m+HDOWKEHQHILWSODQlLVDOVRGHILQHGWKHUHOHYDQWSRUWLRQRI VXSSOHPHQWDO KHDOWK EHQHILW SODQ DV HVWDEOLVKHG E\ .56 WKDWGHILQLWLRQWUDFNLQJWKHDERYHGHILQLWLRQRImLQVXUHUl $ .\ 5HY 6WDW $QQ † $ D 6HFWLRQ $ VXSSOLHV m+HDOWKEHQHILWSODQlPHDQVDQ\KRVSLWDORUPHGLFDO D QHDUO\ LGHQWLFDO GHILQLWLRQ RI m+HDOWK %HQHILW 3ODQl E\ UHIHUHQFH WR † $ IRU † $ H[SHQVHSROLF\RUFHUWLILFDWHQRQSURILWKRVSLWDOPHGLFDO VXUJLFDO DQG KHDOWK VHUYLFH FRUSRUDWLRQ FRQWUDFW RU  $V REVHUYHG LQ SDUW , RI WKH PDMRULW\ RSLQLRQ † $ FHUWLILFDWHSURYLGHUVSRQVRUHGLQWHJUDWHGKHDOWKGHOLYHU\ UHFRGLILHG † $ PHUHO\ VXEVWLWXWLQJ m+HDOWK ,QVXUHUl IRU QHWZRUN D VHOILQVXUHG SODQ RU D SODQ SURYLGHG E\ D m+HDOWK %HQHILW 3ODQl DQG OHDYLQJ WKH $:3 SURYLVLRQ RWKHUZLVH PXOWLSOH HPSOR\HU ZHOIDUH DUUDQJHPHQW WR WKH H[WHQW XQFKDQJHG 6HFWLRQ $ GHILQHV m,QVXUHUl DV XVHG LQ SHUPLWWHG E\ (5,6$ KHDOWK PDLQWHQDQFH RUJDQL]DWLRQ † $ DV FRQWUDFW >$@Q\ LQVXUDQFH FRPSDQ\ KHDOWK PDLQWHQDQFH RUJDQL]DWLRQ VHOILQVXUHU RU PXOWLSOH HPSOR\HU ZHOIDUH DUUDQJHPHQW QRW H[HPSW IURP VWDWH UHJXODWLRQ E\ (5,6$ SURYLGHU VSRQVRUHG .\5HY6WDW$QQ†$ LQWHJUDWHG KHDOWK GHOLYHU\ QHWZRUN VHOILQVXUHG HPSOR\HU RUJDQL]HG DVVRFLDWLRQ RU QRQSURILW KRVSLWDO PHGLFDOVXUJLFDO GHQWDO RU KHDOWK VHUYLFH FRUSRUDWLRQ DXWKRUL]HG WR WUDQVDFW KHDOWK  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

.HQWXFN\jV $:3 ODZV DSSO\ WR QRQ(5,6$ FRYHUHG VHOI 7KH $:3 SURYLVLRQ RI .HQWXFN\jV ,QVXUDQFH &RGH LQVXUHGSODQVE\GHILQLQJKHDOWKEHQHILWSODQVWRLQFOXGHmD VSHFLILFDOO\LVGLUHFWHGDWmLQVXUHUVlE\SURYLGLQJWKDW VHOILQVXUHG SODQ    WR WKH H[WHQW SHUPLWWHG E\ (5,6$l ††$ DDQG$7KLVGHILQLWLRQ $ KHDOWK LQVXUHU VKDOO QRW GLVFULPLQDWH DJDLQVW DQ\ LQFOXGHVVHOILQVXUHGSODQVQRWUHJXODWHGE\(5,6$VXFKDV SURYLGHUZKRLVORFDWHGZLWKLQWKHJHRJUDSKLFFRYHUDJH JRYHUQPHQWSODQVDQGFKXUFKSODQVZKLFK(5,6$H[FOXGHV DUHDRIWKHKHDOWKEHQHILWSODQDQGZKRLVZLOOLQJWRPHHW IURPLWVFRYHUDJH6HH86&†E7KHUHVXOWLV WKHWHUPVDQGFRQGLWLRQVIRUSDUWLFLSDWLRQHVWDEOLVKHGE\ WKDWWKHVHVHOILQVXUHGSODQVZKLFKDVDPDWWHURIFRPPRQ WKHKHDOWKLQVXUHULQFOXGLQJWKH.HQWXFN\6WDWH0HGLFDLG VHQVH RXJKW WR EH FRQVLGHUHG DV RSHUDWLQJ RXWVLGH WKH SURJUDPDQG0HGLFDLGSDUWQHUVKLSVHPSKDVLVDGGHG LQVXUDQFHLQGXVWU\DUHVXEMHFWWR.HQWXFN\jV$:3ODZV&I &LJQD+HDOWK3ODQRI/D,QFY/RXLVLDQD)G .\5HY6WDW$QQ†$ WK&LUFRQFOXGLQJWKDWWKHVWDWXWHZDVQRWVDYHGDV DQLQVXUDQFHUHJXODWLRQEHFDXVHLWZDVQRWOLPLWHGWRHQWLWLHV 7KH FKLURSUDFWLF $:3 SURYLVLRQ VSHFLILFDOO\ DGRSWV WKH LQWKHLQVXUDQFHLQGXVWU\DVLWDSSOLHGWRHQWLWLHVVXFKDVVHOI GHILQLWLRQRIDKHDOWKEHQHILWSODQDVVHWIRUWKLQ.HQWXFN\ IXQGHGRUJDQL]DWLRQV7DIW+DUWOH\7UXVWVRUHPSOR\HUVZKR 5HYLVHG 6WDWXWHV $QQRWDWHG † $ DQG GHILQHV HVWDEOLVKDQGSDUWLFLSDWHLQVHOIIXQGHGWUXVWVRUSURJUDPVDV mKHDOWKFDUHLQVXUHUlDVDQ\HQWLW\mDXWKRUL]HGE\WKHVWDWHRI ZHOODVYDULRXVLQWHUPHGLDULHV%OXH&URVV %OXH6KLHOGRI .HQWXFN\WRRIIHURUSURYLGHKHDOWKEHQHILWSODQVSROLFLHV $ODEDPDY1HLOVHQ)6XSSo1'$OD VXEVFULEHUFRQWUDFWVRUDQ\RWKHUFRQWUDFWVRIVLPLODUQDWXUH KROGLQJWKDW$ODEDPDjV$:3VWDWXWHVGLGQRWUHJXODWH ZKLFKLQGHPQLI\RUFRPSHQVDWHKHDOWKFDUHSURYLGHUVIRUWKH LQVXUDQFHDVDPDWWHURIFRPPRQVHQVHEHFDXVHWKH\DSSOLHG SURYLVLRQ RI KHDOWK FDUH VHUYLFHVl .\ 5HY 6WDW $QQ WRDOOHPSOR\HHEHQHILWSODQVLQFOXGLQJVHOIIXQGHGSODQVDQG †$ ZHUH WKXV QRW VSHFLILFDOO\ GLUHFWHG WRZDUG WKH LQVXUDQFH LQGXVWU\YDFDWHGLQSDUWRQDSSHDOE\%OXH&URVV %OXH 7KH .HQWXFN\ $:3 ODZV DUH WKXV VSHFLILFDOO\ GLUHFWHG 6KLHOGRI$ODEDPDY1HLOVHQ)GWK&LU WRZDUGmLQVXUHUVlDQGWKHLQVXUDQFHLQGXVWU\DQGDUHRQHVWKDW IURPDmFRPPRQVHQVHYLHZlUHJXODWHLQVXUDQFH 7KH IDFW WKDW WKH GHHPHU FODXVH SUHYHQWV (5,6$ VHOI PHGLFDO VHUYLFHV LQ H[FKDQJH IRU D IHH 6HH *URXS /LIH +HDOWK ,QV Y LQVXUHG SODQV IURP EHLQJ FRQVLGHUHG DV HQJDJLQJ LQ WKH 5R\DO 'UXJ   86    6 &W    / (G G  EXVLQHVVRILQVXUDQFHGRHVQRWPHDQWKDWVHOILQVXUHGSODQV  VWDWLQJ WKDW m>W@KH SULPDU\ HOHPHQWV RI DQ LQVXUDQFH FRQWUDFW DUH E\WKHLUQDWXUHGRQRWLQYROYHWKHEXVLQHVVRILQVXUDQFHDQG WKH VSUHDGLQJ DQG XQGHUZULWLQJ RI SROLF\KROGHU ULVNl $V VXFK WKH\ PD\ DUH EH\RQG WKH UHDFK RI VWDWH UHJXODWLRQV GHDOLQJ ZLWK EH VHHQ DV XQGHUZULWLQJ SROLF\KROGHU ULVN DQG WKHQ FRYHULQJ WKDW ULVN ZLWK LQVXUDQFH  7KH GLVWLQFWLRQ EHWZHHQ SODQV IXQGHG E\ WKH WKH SURYLVLRQ RI PHGLFDO VHUYLFHV UDWKHU WKDQ E\ SD\LQJ IRU WKRVH VHUYLFHV DV D WUDGLWLRQDO LQVXUHU ZRXOG *LYHQ WKH VRPHZKDW VXEWOH GLVWLQFWLRQ LQ SXUFKDVHRILQVXUDQFHDQGSODQVWKDWDUHIXQGHGE\HPSOR\HUV WKLV GLIIHUHQFH LW FRXOG EH DUJXHG WKDW VRPH +02jV DQG +6&jV DUH DV VHOILQVXUHG SODQV UHVXOWV IURP mD GLVWLQFWLRQ FUHDWHG E\ HQJDJHG LQ WKH EXVLQHVV RI LQVXUDQFH 6HH :DVKLQJWRQ 3K\VLFLDQV 6HUY &RQJUHVV LQ WKH µGHHPHU FODXVHj D GLVWLQFWLRQ &RQJUHVV LV $VVjQ Y *UHJRLUH  )G DW  DGRSWLQJ WKLV YLHZ EXW VHH 7H[DV DZDUHRIDQGRQHLWKDVFKRVHQQRWWRDOWHUl0HWURSROLWDQ 3KDUPDF\ $VVjQ  )G DW o FRQFOXGLQJ WKDW WKH 7H[DV VWDWXWH /LIH,QV&RY0DVVDFKXVHWWV86DW6&WDW ZDV QRW OLPLWHG WR HQWLWLHV ZLWKLQ WKH LQVXUDQFH LQGXVWU\ DV LW DSSOLHG WR HQWLWLHV VXFK DV +02jV DQG 332jV +RZHYHU DV .HQWXFN\jV $:3 ODZV /(GGDW,WLVQRWDGLVWLQFWLRQEDVHGXSRQ DOVR DSSO\ WR HQWLWLHV WKDW DUH FOHDUO\ RXWVLGH WKH EXVLQHVV RI LQVXUDQFH , D FRQFHSW WKDW HPSOR\HUV ZKR FKRRVH WR EH VHOILQVXUHUV EHOLHYH WKDW LW LV XQQHFHVVDU\ IRU XV WR GHFLGH WKLV LVVXH FDQQRW EH FRQVLGHUHG LQVXUHUV VXEMHFW WR VWDWH UHJXODWLRQV  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

GHDOLQJZLWKLQVXUDQFH7KHUHIRUHWKHIDFWWKDWWKH.HQWXFN\ WLPH DQDO\]LQJ WKH 0F&DUUDQ)HUJXVRQ IDFWRUV ZKLFK VWDWXWH UHDFKHV VHOILQVXUHUV ZKR DUH QRW SURWHFWHG E\ VLJQLILFDQWO\RYHUODSWKHFRPPRQVHQVHWHVWEHLQJGHVLJQHG (5,6$jV GHHPHU FODXVH GRHV QRW GHWUDFW IURP LWV ODUJHO\WRJXLGHDFRXUWjVFRPPRQVHQVHGHWHUPLQDWLRQ6HH FKDUDFWHUL]DWLRQDVDVWDWXWHUHJXODWLQJHQWLWLHVHQJDJHGLQWKH 8QXP/LIH,QVRI$PY:DUG6&W/ EXVLQHVVRIKHDOWKLQVXUDQFH (GG $VQRWHGHDUOLHUWKH.HQWXFN\VWDWXWHVH[FOXGHIURPWKHLU $V WKH 6XSUHPH &RXUW KDV JHQHUDOO\ VWDUWHG LWV VDYLQJV VFRSHVHOILQVXUHG(5,6$SODQV,IVXFKDSODQSURYLGHVIRU FODXVHDQDO\VLVZLWKWKHFRPPRQVHQVHWHVW,EHJLQWKHUHDV D OLPLWHG JURXS RI SURYLGHUV WKH $:3 ODZV ZRXOG QRW ZHOO6HHLGDW6HHDOVR'DYLHV)GWK FRPSHODFKDQJHLQWKDWSODQUHJDUGOHVVRIWKHQDWXUHRIWKH &LU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FRQFOXGLQJWKDWWR DGPLQLVWUDWRUEXWDVDQLQVXUHURILWVRZQSODQ,Q/LJKWY IDOO ZLWKLQ WKH VDYLQJV FODXVH D ODZ PXVW EH VSHFLILFDOO\ %OXH&URVVDQG%OXH6KLHOG)GWK&LU GLUHFWHGDWWKHLQVXUDQFHLQGXVWU\ZKLFKLQSDUWUHTXLUHVWKDW WKH FRXUW UHMHFWHG WKH DUJXPHQW WKDW D VWDWH ODZ FRXOG EH WKH ODZ GHILQH WKH WHUPV RI WKH UHODWLRQVKLS EHWZHHQ WKH HQIRUFHGDJDLQVWWKHDGPLQLVWUDWRURIDVHOILQVXUHG(5,6$ LQVXUHU DQG WKH LQVXUHG UDWKHU WKDQ WKH LQVXUHU DQG D WKLUG SODQ EHFDXVH WKH GHHPHU FODXVH † E  % ZKLFK SDUW\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 LV LQ QR ZD\ DIIHFWHG FRXOGQRWEHEURXJKWHYHQWKRXJKWKHSODQLWVHOISURYLGHGWKDW ,QVXUHGVDUHQRWIUHHWRDWWHQGWKHSURYLGHURIWKHLUFKRLFHDV WKHFRQWUDFWVEHWZHHQWKHHPSOR\HUDQGWKHSODQDGPLQLVWUDWRU WKH $:3 ODZV PHUHO\ UHTXLUH HPSOR\HH EHQHILW SODQV WR ZRXOG mFRQIRUP WR DSSOLFDEOH VWDWH ODZVl  7KH FRXUW DFFHSWSUHYLRXVO\H[FOXGHGGRFWRUVWKDWDUHTXDOLILHGZLOOLQJ REVHUYHG WKDW m,I (5,6$ SUHHPSWV VWDWH ODZ WKHUH LV QR WRMRLQWKHSODQDQGDJUHHWRDELGHE\LWVWHUPV DSSOLFDEOH VWDWH ODZ WR ZKLFK WKH DGPLQLVWUDWRU PXVW FRQIRUPl,GDW &RQWUDU\ WR WKH PDMRULW\jV DVVHUWLRQV , EHOLHYH LW LV DOVR DSSDUHQWWKDW.HQWXFN\jV$:3ODZVFOHDUO\WDUJHWPRUHWKDQ ,Q3UXGHQWLDO,QVXUDQFH&RPSDQ\RI$PHULFDY1DWLRQDO MXVW PHPEHUV RI WKH LQVXUDQFH LQGXVWU\  %\ WKHLU WHUPV 3DUN0HGLFDO&HQWHU,QF)GWK&LUWKH FRXUWIRXQGWKDWDQ$UNDQVDVVWDWXWHWKDWFRQWDLQHGDQ$:3 SURYLVLRQ GLG QRW PHHW WKH FRPPRQ VHQVH WHVW EHFDXVH LQ  ,Q DGGLWLRQ WR WUDGLWLRQDO LQVXUDQFH FRPSDQLHV .HQWXFN\jV $:3 SDUWLWVVFRSHLQFOXGHGmHPSOR\HUVDQGDGPLQLVWUDWRUVRIVHOI ODZV DSSO\ WR HQWLWLHV VXFK DV +02jV DQG +HDOWK 6HUYLFH &RUSRUDWLRQV LQVXUHG SODQVl DOWKRXJK WKH VWDWXWH H[FOXGHG (5,6$ VHOI 7KHVH HQWLWLHV PLJKW EH DUJXHG WR IDOO ZLWKLQ WKH LQVXUDQFH LQGXVWU\ LI WKH\ KDYH DJUHHG WR DFFHSW WKH ULVN WKDW WKH FRYHUHG LQGLYLGXDO ZLOO QHHG  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

BBBBBBBBBBBBBBBBB IXQGHGSODQV$VQRWHGDERYHKRZHYHUZHGRQRWEHOLHYH WKDW LQFOXVLRQ RI VHOILQVXUHUV QRW SURWHFWHG E\ WKH GHHPHU ',66(17 FODXVHDVZHOODVSXUFKDVHUVRILQVXUDQFHZLWKLQWKHVWDWXWHjV BBBBBBBBBBBBBBBBB UHDFK LQ LWVHOI UHPRYHV WKH VWDWXWH IURP EHLQJ YLHZHG D SHUPLVVLEOHUHJXODWLRQRILQVXUDQFHEDVHGXSRQmDFRPPRQ .(11('<&LUFXLWsXGJHGLVVHQWLQJ,ZULWHVHSDUDWHO\ XQGHUVWDQGLQJ RI LQVXUDQFH UHJXODWLRQl  $OVR XQOLNH WKH ZLWKUHVSHFWWR3DUW,,,RIWKHPDMRULW\jVRSLQLRQWRGLVVHQW $UNDQVDV VWDWXWH WKH .HQWXFN\ VWDWXWHV GR QRW LQFOXGH IURP WKH PDMRULW\jV FRQFOXVLRQ WKDW .\ 5HY 6WDW $QQ mDGPLQLVWUDWRUV RI VHOILQVXUHG SODQVl  7KH\ DUH GLUHFWHG ††$DQG$%DQNV%DOGZLQ WRZDUGVDQGOLPLWHGWRKHDOWKFDUHmLQVXUHUVl IDOOZLWKLQ(5,6$jVLQVXUDQFHVDYLQJVFODXVH,EHOLHYHWKDW .HQWXFN\jVDQ\ZLOOLQJSURYLGHUODZVKDYHOLWWOHWRGRZLWK LQVXUDQFH DQG DUH QRW VDYHG IURP SUHHPSWLRQ E\ (5,6$jV  ,QVXUDQFH6DYLQJV&ODXVHDVWKH\GRQRWUHJXODWHLQVXUDQFHDV 7KH GLVVHQW FRQWHQGV WKDW .HQWXFN\jV $:3 SURYLVLRQV DSSO\ WR

DPDWWHURIFRPPRQVHQVHDQGIDLODOOWKUHHRIWKH0F&DUUDQ WKLUG SDUWLHV WKDW D VHOILQVXUHG (5,6$ SODQ KLUHV WR DGPLQLVWHU LWV SODQ

)HUJXVRQIDFWRUV EHQHILWV 7KLV FRQWHQWLRQ KRZHYHU LV EDVHG XSRQ WKH GLVVHQWjV UHDGLQJ RI WKH UHSHDOHG .HQWXFN\ VWDWXWHV ZKLFK SURKLELWHG mKHDOWK FDUH EHQHILW SODQVl IURP GLVFULPLQDWLRQ DQG GHILQHG KHDOWK EHQHILW SODQV DV LQFOXGLQJ ,,QVXUDQFH6DYLQJV&ODXVH D KHDOWK VHUYLFH FRUSRUDWLRQ FRQWUDFW DQG D KHDOWK PDLQWHQDQFH RUJDQL]DWLRQ FRQWUDFW 7KH SUHVHQW .HQWXFN\ VWDWXWHV HOLPLQDWH DQ\

$ DPELJXLW\ DV WR ZKHWKHU DGPLQLVWUDWRUV XQGHU FRQWUDFWV ZLWK EHQHILW SODQV DUH LQFOXGHG ZLWKLQ WKH VFRSH RI WKH VWDWXWHV 7KH\ REYLRXVO\ DUH QRW 7KH

7KHGLVWULFWFRXUWLQWKHFDVHDWEDUGHYRWHGRQO\DVHQWHQFH FXUUHQW .HQWXFN\ VWDWXWH SURKLELWV RQO\ mD KHDOWK LQVXUHUl IURP

WR WKH FRPPRQ VHQVH WHVW PHUHO\ FRQFOXGLQJ WKDW mWKH GLVFULPLQDWLRQ .\ 5HY 6WDW $QQ † $ $V WKH GHIHQGDQW

FRPPRQVHQVH YLHZ LV WKDW WKH $:3 VWDWXWHV UHJXODWH WKH FRUUHFWO\ QRWHV mWKH QHZ VWDWXWH UHIHUV WR KHDOWK LQVXUHUV ZKLFK VKDOO QRW GLVFULPLQDWH DPRQJ SURYLGHUV UDWKHU WKDQ KHDOWK FDUH EHQHILW SODQV ZKLFK EXVLQHVVRILQVXUDQFHl ,QVWHDGWKHFRXUWVSHQWPRVWRILWV VWUHQJWKHQV $SSHOOHHjV DUJXPHQWV WKDW WKH $:3 ODZ UHJXODWHV LQVXUDQFHl %ULHI RI 'HIHQGDQW$SSHOOHH S  Q $Q HQWLW\ WKDW PHUHO\ DGPLQLVWHUV D SODQ IRU D KHDOWK LQVXUHU DQG GRHV QRW SDUWLFLSDWH LQ WKH XQGHUZULWLQJ RI WKH ULVN LV QRW DQ mLQVXUHUl DQG LV QRW ZLWKLQ WKH VFRSH RI .HQWXFN\jV  FXUUHQW VWDWXWHV ZKLFK DUH E\ WKHLU H[SUHVV WHUPV GLUHFWHG VROHO\ DW KHDOWK $V QRWHG LQ WKH PDMRULW\jV RSLQLRQ † $ ZDV WKH LQVXUHUV 7KLV LV DFNQRZOHGJHG E\ WKH GHIHQGDQW SURYLVLRQ WKDW ZDV DFWXDOO\ EHIRUH WKH GLVWULFW FRXUW +RZHYHU ERWK WKH SDUWLHV KDYH DJUHHG WKDW WKLV DSSHDO ZLOO JRYHUQ † $ DV ZHOO DV 7KH VWDWXWHV HVWDEOLVK WKDW KHDOWK LQVXUHUV ZKLFK DVVXPH LW LV HVVHQWLDOO\ D UHFRGLILFDWLRQ RI † $ $FFRUGLQJO\ XQOHVV ILQDQFLDO ULVN FDQQRW GLVFULPLQDWH DJDLQVW TXDOLILHG SURYLGHUV RWKHUZLVH QRWHG , ZRXOG DSSO\ P\ DQDO\VLV RI † $ WR 7KHUHIRUH DOWKRXJK WKH VWDWXWH WHQXRXVO\ DIIHFWV WKH UHODWLRQVKLS † $ DV ZHOO EHWZHHQ LQVXUHUV DQG SURYLGHUV LWV IRFXV LV RQ WKH FRQWUDFWXDO

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jQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

7H[DV 3KDUPDF\ $VVRFLDWLRQ Y 3UXGHQWLDO ,QVXUDQFH .HQWXFN\ $:3 ODZV LQ TXHVWLRQ UHJXODWH LQVXUDQFH :H &RPSDQ\RI$PHULFD)GWK&LUFRQWDLQV FRQFOXGH DV GLG WKH WZR .HQWXFN\ 'LVWULFW sXGJHV ZKR WKHVWDWHPHQWWKDWLIDVHOILQVXUHGHPSOR\HUQRWVXEMHFWWRWKH FDUHIXOO\FRQVLGHUHGWKLVTXHVWLRQWKDWWKH\GR DQ\ ZLOOLQJ SURYLGHU VWDWXWH mVLJQHG XS ZLWK DQ +02 RU 332WKRVHRUJDQL]DWLRQVZRXOGEHVXEMHFWWRWKHVWDWXWHHYHQ ,9&RQFOXVLRQ LIWKHUHLVQRLQVXUDQFHFRPSDQ\LQYROYHGl,GDW7KH FRXUWZDVSUHVXPDEO\UHIHUULQJWRWKH+02RU332DFWLQJDV :LWK UHVSHFW WR .HQWXFN\jV $:3 VWDWXWH .HQWXFN\ WKH DGPLQLVWUDWRU RI WKH HPSOR\HUjV VHOIIXQGHG SODQ  :H 5HYLVHG6WDWXWHV$QQRWDWHG†$%DQNV%DOGZLQ EHOLHYH KRZHYHU WKDW DV WKH FRXUW LQ /LJKW REVHUYHG LI DQG.HQWXFN\jVFKLURSUDFWLF$:3VWDWXWH.HQWXFN\ (5,6$ SUHHPSWV WKH VWDWH ODZ ZLWK UHVSHFW WR VHOIIXQGHG 5HYLVHG 6WDWXWHV $QQRWDWHG † $ %DQNV SODQVWKHUHLVQRVWDWHODZWRZKLFKWKHDGPLQLVWUDWRURIWKH %DOGZLQWKHMXGJPHQWRIWKHGLVWULFWFRXUWLVDIILUPHG VHOIIXQGHGSODQPXVWFRQIRUP)XUWKHUPRUHDVSUHYLRXVO\ %HFDXVH WKH GLVWULFW FRXUW RSLQLRQ GRHV QRW GLVFXVV WKH QRWHGWKH.HQWXFN\VWDWXWHLVGLUHFWHGWRZDUGDQGDSSOLHVWR DGGLWLRQDOUHTXLUHPHQWVLPSRVHGE\SURYLVLRQVDQG RQO\LQVXUHUVDQGQRWWRSODQDGPLQLVWUDWRUV6XSUDQRWH RI†$GHDOLQJZLWKFKLURSUDFWRUVDQGKHDOWK $SODQDGPLQLVWUDWRUWKDWGRHVQRWKLQJPRUHWKDQDGPLQLVWHU EHQHILWSODQVWKLVFDVHLVUHPDQGHGWRWKHGLVWULFWFRXUWIRU WKH SODQ RI D VHOILQVXUHG HPSOR\HU LV QRW HQJDJHG LQ mWKH FRQVLGHUDWLRQ LQ WKH ILUVW LQVWDQFH RI WKH LVVXH RI WKHLU XQGHUZULWLQJDQGVSUHDGLQJRIULVNl*URXS/LIH +HDOWK SUHHPSWLRQE\(5,6$ ,QV&RY5R\DO 'UXJ &R866&W /(GGDQGLQRXUYLHZ ZRXOGQRWEHFRQVLGHUHGDQmLQVXUHUlRIDKHDOWKEHQHILWSODQ DVWKDWWHUPLVXVHGLQ.HQWXFN\jV$:3ODZV

WKH SODQjV QRQGLVFULPLQDWRU\ UHTXLUHPHQW :LWK UHVSHFW WR VHOILQVXUHG (5,6$ EHQHILW SODQV WKH LQVXUHU RI VXFK SODQV LV EH\RQG WKH VFRSH RI WKH VWDWXWH E\ LWV H[SUHVV WHUPV DQG WKH DGPLQLVWUDWRUV RI VXFK SODQV ZKR DFW VROHO\ DV DGPLQLVWUDWRUV DQG QRW DV LQVXUHUV DUH OLNHZLVH EH\RQG WKH VFRSH  +DYLQJ FRQFOXGHG WKDW .HQWXFN\jV $:3 VWDWXWHV DUH YDOLG WKHUH RI WKH VWDWXWH EHFDXVH RI LWV DSSOLFDWLRQ RQO\ WR KHDOWK LQVXUHUV LV QR UHDVRQ IRU WKH PDMRULW\ RSLQLRQ WR GLVFXVV DQ\ TXHVWLRQ RI

 VHYHUDELOLW\ 7KH GLVVHQW KRZHYHU LQ GLVFXVVLQJ WKH TXHVWLRQ RI 7KH GLVVHQW EHOLHYHV WKDW WKH PDMRULW\ LV mDSSDUHQWO\ VD\LQJ WKDW WKH VHYHUDELOLW\ VWDWHV WKDW WKH PDMRULW\ mIDLOV WR PHQWLRQ OHW DORQH GLVFXVV ODZ LV FOHDUO\ SUHHPSWHG DQG QRW VDYHG LQVRIDU DV LW DSSOLHV WR SODQ KRZ LW VHYHUV .HQWXFN\jV $:3 SURYLVLRQ LQ VXFK D PDQQHU WKDW LW QR DGPLQLVWUDWRUV DQG WKHQ DUJXLQJ WKDW GXH WR WKLV SUHHPSWLRQ WKH VWDWXWH ORQJHU DSSOLHV WR WKLUG SDUW\ SODQ DGPLQLVWUDWRUV SHUIRUPLQJ DGPLQLVWUDWLYH GRHV QRW DSSO\ WR HQWLWLHV RXWVLGH WKH LQVXUDQFH LQGXVWU\l $FFRUGLQJ WR IXQFWLRQV IRU VHOILQVXUHG SODQV WKHUHE\ DOORZLQJ LW WR FRQFOXGH WKDW WKH WKH GLVVHQW WKLV LV DQ mDWWHPSW WR GLVVHFW .HQWXFN\jV $:3 SURYLVLRQV SURYLVLRQ LV VDYHG LQ DOO RWKHU DSSOLFDWLRQVl $V QRWHG HDUOLHU VXSUD QRWH GLVPLVVLQJ VRPH RI WKH SURYLVLRQjV DSSOLFDWLRQV DV SUHHPSWHG DQG WKHQ  WKLV LV D PLVUHDGLQJ RI WKH PDMRULW\ RSLQLRQ 7KH PDMRULW\ GRHV QRW DSSO\LQJ VDYLQJ FODXVH DQDO\VLV RQO\ WR WKRVH DSSOLFDWLRQV LW ZLVKHV WR KROG WKDW WKH $:3 VWDWXWHV DUH SUHHPSWHG DV DSSOLHG WR DGPLQLVWUDWRUV RI UHWDLQl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jV UHDVRQLQJ RI /LJKW EHFDXVH LI WKH ODZ LV SUHHPSWHG ZLWK UHVSHFW WR VHOI KHDOWK EHQHILW SODQ  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

LQVXUDQFHLQGXVWU\7RKROGRWKHUZLVHZRXOGUHTXLUHWKH ,Q 0HWURSROLWDQ /LIH  86 DW   6 &W DW &RXUWWRUHFRJQL]HIRUPRYHUVXEVWDQFHDQGWRUHIXVHWR /(GGDWWKH6XSUHPH&RXUWVDLG UHFRJQL]HWKHQDWXUDOHYROXWLRQRIWKHKHDOWKLQVXUDQFH LQGXVWU\&I6(&Y9DULDEOH$QQXLW\/LIH,QV&R &RQJUHVVZDVFRQFHUQHG>LQWKH0F&DUUDQ)HUJXVRQ$FW@ 866&W/(GG:H ZLWKWKHW\SHRIVWDWHUHJXODWLRQWKDWFHQWHUVDURXQGWKH UHDOL]H WKDW OLIH LQVXUDQFH LV DQ HYROYLQJ LQVWLWXWLRQ FRQWUDFWRILQVXUDQFH7KHUHODWLRQVKLSEHWZHHQLQVXUHU &RPPRQNQRZOHGJHWHOOVXVWKDWWKHIRUPVKDYHJUHDWO\ DQGLQVXUHGWKHW\SHRISROLF\ZKLFKFRXOGEHLVVXHGLWV FKDQJHG HYHQ LQ D JHQHUDWLRQ  $QG ZH ZRXOG QRW UHOLDELOLW\ LWV LQWHUSUHWDWLRQ DQG HQIRUFHPHQW o WKHVH XQGHUWDNHWRIUHH]HWKHFRQFHSWVRImLQVXUDQFHlLQWR ZHUHWKHFRUHRIWKHmEXVLQHVVRILQVXUDQFHl>7@KHIRFXV WKH PROG WKH\ ILWWHG ZKHQ WKHVH )HGHUDO $FWV ZHUH >RIWKHVWDWXWRU\WHUP@ZDVRQWKHUHODWLRQVKLSEHWZHHQ SDVVHG WKHLQVXUDQFHFRPSDQ\DQGWKHSROLF\KROGHU6WDWXWHV DLPHG DW SURWHFWLQJ RU UHJXODWLQJ WKLV UHODWLRQVKLS )6XSSGDW GLUHFWO\RULQGLUHFWO\DUHODZVUHJXODWLQJWKHmEXVLQHVVRI LQVXUDQFHl 6(& Y 1DWLRQDO 6HFXULWLHV ,QF  86 ,W PXVW EH UHLWHUDWHG DQG HPSKDVL]HG WKDW WKH WKUHH 6&W/(GG 0F&DUUDQ)HUJXVRQIDFWRUVDUHQRWUHTXLUHGWREHVDWLVILHG EHIRUH D VWDWH ODZ FDQ EH IRXQG WR EH D ODZ UHJXODWLQJ 7KH.HQWXFN\$:3ODZVGHDOGLUHFWO\ZLWKWKHUHODWLRQVKLS LQVXUDQFH  7KH\ DUH DV WKH 6XSUHPH &RXUW SRLQWHG RXW LQ EHWZHHQ LQVXUHUV DQG LQVXUHGV XQGHU KHDOWK EHQHILW SODQV :DUGQRWKLQJPRUHWKDQmFKHFNLQJSRLQWVlRUmJXLGHSRVWVl 7KH\ DIIHFW UHVWULFWLRQV E\ WKH LQVXUHUV RQ WKH QXPEHU RI 7KHEDVLFWHVWLVZKHWKHUIURPDFRPPRQVHQVHYLHZWKH KHDOWK FDUH SURYLGHUV DYDLODEOH WR WKH LQVXUHGV XQGHU VXFK SODQVWKH\LQFUHDVHEHQHILWVWRWKHLQVXUHGVE\JLYLQJWKHP JUHDWHU IUHHGRP WR FKRRVH KHDOWK FDUH SURYLGHUV XQGHU WKH  SODQV DQG WKH\ DUH DLPHG DW UHJXODWLQJ WKLV LQVXUDQFH ,Q $PHULFDQ 'UXJ 6WRUHV ,QF Y +DUYDUG 3LOJULP +HDOWK &DUH UHODWLRQVKLS  7KH\ DUH SDUW RI D FRPSUHKHQVLYH VXEWLWOH RI ,QF  ) 6XSS  ' 0DVV  D 0DVVDFKXVHWWV $:3 VWDWXWH XQOLNH WKH .HQWXFN\ $:3 ODZV GLG QRW H[FOXGH (5,6$ VHOILQVXUHG SODQV .HQWXFN\jV LQVXUDQFH FRGH UHJXODWLQJ KHDOWK EHQHILW SODQV IURP LWV FRYHUDJH %HFDXVH VXFK SODQV DUH QRW LQVXUHUV XQGHU WKH DQGWKH\DUHLQRXUYLHZFOHDUO\ODZVZKLFKLQDFRPPRQ mGHHPHUl FODXVH WKH DUJXPHQW ZDV PDGH WKDW WKH VWDWH VWDWXWH ZDV QRW VHQVHYLHZRIWKHPDWWHUmUHJXODWHLQVXUDQFHlDQGWKXVDUH GLUHFWHG VSHFLILFDOO\ WRZDUG WKH LQVXUDQFH LQGXVWU\ ,Q UHMHFWLQJ WKLV VDYHGIURPSUHHPSWLRQ DUJXPHQW WKH FRXUW QRWHG WKDW ZLWK UHIHUHQFH WR (5,6$ VHOILQVXUHG SODQV mDQ\ GHFLVLRQ KROGLQJ WKDW WKH $FW LV VDYHG IURP SUHHPSWLRQ E\ WKH LQVXUDQFH VDYLQJ FODXVH ZRXOG KDYH WR UHFRJQL]H WKDW WKH $FW FRXOG QRW DSSO\ WR WKH SURYLVLRQ RI VHUYLFHV WR VHOILQVXUHG SODQV %HFDXVH WKH $FW ZRXOG QRW DSSO\ WR WKHVH XQLQVXUHG UHODWLRQVKLSV LW LV XQQHFHVVDU\ WR FRQVLGHU ZKHWKHU WKH $FW ZRXOG ORVH LWV VWDWXV DV DQ LQVXUDQFH UHJXODWLRQ LQVXUHG SODQV mWKHUH LV QR DSSOLFDEOH VWDWH ODZ WR ZKLFK WKH DGPLQLVWUDWRU EHFDXVH LW SXUSRUWV WR FRYHU WKHVH UHODWLRQVKLSVl ,G DW  Q 7KH FRXUW PXVW FRQIRUPl 0RUH LPSRUWDQWO\ KRZHYHU LV WKH IDFW WKDW WKH SUHVHQW DOVR SRLQWHG RXW WKDW LQ 0HWURSROLWDQ /LIH ,QVXUDQFH &R Y 0DVVDFKXVHWWV .HQWXFN\ $:3 VWDWXWH .\ 5HY 6WDW $QQ † $ SURKLELWV  86   6 &W   / (G G   WKH IDFW WKDW WKH RQO\ KHDOWK LQVXUHUV IURP GLVFULPLQDWLRQ DQG ZRXOG KDYH QR DSSOLFDWLRQ VWDWH VWDWXWH mDSSOLHG E\ LWV WHUPV WR VHOILQVXUHG SODQV GLG QRW SUHYHQW WKH WR DQ HQWLW\ DFWLQJ PHUHO\ DV DQ DGPLQLVWUDWRU RI DQ LQVXUHUjV SODQ 6XSUHPH &RXUW IURP FRQFOXGLQJ WKDW WKH VWDWXWH ZDV OLPLWHG WR WKH $OWKRXJK WKH FKLURSUDFWLF VWDWXWH VWLOO UHIHUV WR D SURKLELWLRQ DJDLQVW LQVXUDQFH LQGXVWU\ ,QVWHDG WKH GHHPHU FODXVH VLPSO\ SUHYHQWHG mKHDOWK EHQHILW SODQVl GLVFULPLQDWLRQ .\ 5HY 6WDW $QQ † $ DSSOLFDWLRQ RI WKH VWDWXWH WR VHOILQVXUHG SODQVl ,G LQWHUQDO FLWDWLRQV  WKH PDMRULW\ EHOLHYHV WKDW SURSHUO\ FRQVWUXHG WKLV HQFRPSDVVHV RPLWWHG LQVXUHUV RI KHDOWK EHQHILW SODQV DQG QRW PHUH DGPLQLVWUDWRUV RI VXFK SODQV  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

&RQVLGHUDWLRQRIWKHWKUHH0F&DUUDQ)HUJXVRQIDFWRUVXVHG ,Q3ODLQWLIIVjYLHZWKHVHFRQGIDFWRULVQRWVDWLVILHGEHFDXVH LQ WKH VHFRQG VWHS RI WKH DQDO\VLV DV mFKHFNLQJ SRLQWVl RU WKH $:3 SURYLVLRQV OHDYH WKH FRQWUDFW WHUPV EHWZHHQ WKH mJXLGHSRVWVl GRHV QRW UHTXLUH D GLIIHUHQW UHVXOW  )LUVW LQVXUHUDQGWKHLQVXUHGXQDOWHUHGWKHPHGLFDOULVNVUHPDLQWKH DOWKRXJK FHUWDLQO\ D GHEDWDEOH LVVXH ZH DJUHH ZLWK WKH VDPHDQGHYHQLIDQLQVXUHGjVSURYLGHUGHFLGHVWRMRLQWKH UHDVRQLQJ RI WKH )RXUWK &LUFXLW LQ 6WXDUW &LUFOH +RVSLWDO LQVXUHGjVQHWZRUNWKHPHGLFDOFRYHUDJHUHPDLQVWKHVDPH &RUSY$HWQD+HDOWK0DQDJHPHQW)GWK&LU :KLOHLWLVDGPLWWHGO\WUXHWKDWWKH$:3ODZVGRQRWFKDQJH  WKDW WKH ILUVW IDFWRU o mWUDQVIHUULQJ RU VSUHDGLQJ WKH WKH VXEVWDQWLYH WHUPV RI WKH LQVXUDQFH FRYHUDJH LW LV QRW SROLF\KROGHUjVULVNloLVVDWLVILHG QHFHVVDU\WKDWWKHVWDWXWHVGRWKLVEHIRUHWKH\FDQEHIRXQGWR EHVWDWXWHVUHJXODWLQJLQVXUDQFH,G.HQWXFN\jV$:3ODZV 7KHUHDUHVHYHUDOFRPSRQHQWVWRWKHmSROLF\KROGHUjV GRKRZHYHUGLUHFWO\LPSDFWWKHLQVXUHULQVXUHGUHODWLRQVKLS ULVNl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jVVWDQGDUGVLWGHQLHV FRYHUHGWUHDWPHQWIURPDFORVHGSRRORISURYLGHUVWRDQRSHQ DQLQVXUHGWKHFKRLFHRIGRFWRURUKRVSLWDOWKDWPD\EHVW SRRORISURYLGHUV$VWKH)RXUWK&LUFXLWVDLGLQ6WXDUW&LUFOH VXLWWKHLQVXUHGjVQHHGVXQOHVVWKHLQVXUHGLVZLOOLQJDQG +RVSLWDO&RUS)GDWm:HUHSHDWWUHDWPHQWDQG DEOHWRSD\DOORUSDUWRIWKHFRVWRIWKHGRFWRURUKRVSLWDO FRVW DUH LPSRUWDQW FRPSRQHQWV RI KHDOWK LQVXUDQFH WKDWLVQRWSUHIHUUHGE\WKHLQVXUHU7KLVLVDUHVWULFWLRQ 5HJXODWLRQVJRYHUQLQJWKHVHFRPSRQHQWVVXFKDVWKH9LUJLQLD RI WKH LQVXUHGjV EHQHILWV  %\ LWV SURKLELWLRQ DJDLQVW VWDWXWHDUHLQWHJUDOSDUWVRIWKHUHODWLRQVKLSEHWZHHQLQVXUHU XQUHDVRQDEOHUHVWULFWLRQRISURYLGHUVWKH9LUJLQLDVWDWXWH DQGLQVXUHGl,QRXUYLHZWKHVHFRQG0F&DUUDQ)HUJXVRQ VSUHDGV WKH FRVW FRPSRQHQW RI WKH SROLF\KROGHUjV ULVN IDFWRULVFOHDUO\VDWLVILHG DPRQJ DOO WKH LQVXUHGV LQVWHDG RI UHTXLULQJ WKH SROLF\KROGHU WR VKRXOGHU DOO RU SDUW RI WKLV FRVW ZKHQ :H DOVR FRQFOXGH WKDW WKH WKLUG IDFWRU o WKH VWDWXWHjV VHHNLQJ FDUH RU WUHDWPHQW IURP DQ H[FOXGHG GRFWRU RU OLPLWDWLRQV WR HQWLWLHV ZLWKLQ WKH LQVXUDQFH LQGXVWU\ o LV KRVSLWDORIKLVRUKHUFKRLFH VDWLVILHG)RUUHDVRQVVWDWHGHDUOLHUZHEHOLHYHWKDWHQWLWLHV VXFKDV+02VDQGVHOILQVXUHUVDUHHQJDJHGLQWKHEXVLQHVV ,GDW RILQVXUDQFHDORQJZLWKWKHPRUHZLGHO\UHFRJQL]HGDQGPRUH WUDGLWLRQDOFRPPHUFLDOLQVXUDQFHFRPSDQLHVDQGWKDWHQWLWLHV 3ODLQWLIIVSRLQWRXWWKDWWKH.HQWXFN\VWDWXWHVLQTXHVWLRQGR DFWLQJ VROHO\ DV SODQ DGPLQLVWUDWRUV DQG QRW DV mKHDOWK QRWUHTXLUHKHDOWKEHQHILWSODQVWRFRQWUDFWZLWKDQ\DGGLWLRQDO LQVXUHUVlDUHQRWZLWKLQWKHVFRSHRIWKHVWDWXWH$V'LVWULFW SURYLGHUEXWRQO\ZLWKSURYLGHUVZKRDUHZLOOLQJWRPHHWWKH sXGJH0F.LQOH\SRLQWHGRXWLQ&RPPXQLW\+HDOWK3DUWQHUV QHWZRUNjVWHUPVDQGFRQGLWLRQV:KLOHWKLVLVXQTXHVWLRQDEO\ WUXHLWGRHVQRWLQRXUYLHZFKDQJHWKHIDFWWKDWWKHVWDWXWHV :KDWHYHUGLIIHUHQFHLQIRUPRUVWUXFWXUHWKDWH[LVWVDV RSHQDQRWKHUZLVHFORVHGGRRULQVRIDUDVWKHDYDLODELOLW\RI EHWZHHQ WUDGLWLRQDO LQVXUDQFH FRPSDQLHV DQG +02V KHDOWKFDUHSURYLGHUVLVFRQFHUQHG6RPHPD\FKRRVHWRJR 0(:$V DQG SURYLGHUVSRQVRUHG LQWHJUDWHG KHDOWK WKURXJKWKDWGRRUDQGMRLQWKHJURXSRISURYLGHUVZKLOHRWKHUV GHOLYHU\ QHWZRUNV LV LQVXIILFLHQW WR HVWDEOLVK WKDW PD\QRWEXWWKLVGRHVQRWPHDQWKDWUHPRYDORIDUHVWULFWLRQ .HQWXFN\jV$:3ODZLVQRWOLPLWHGWRHQWLWLHVZLWKLQWKH  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

WKHDQWLWUXVWODZH[HPSWLRQVHH86&†E 7KH RQDYDLODELOLW\RISURYLGHUVLVQRWDEHQHILWFRQIHUUHGRQWKH ILUVWFODXVHZKLFKFRPPLWVODZVmHQDFWHGE\DQ\6WDWHIRUWKH LQVXUHGV  ,W HIIHFWLYHO\ FKDQJHV WKH WHUPV RI WKH SROLF\ SXUSRVHRIUHJXODWLQJWKHEXVLQHVVRILQVXUDQFHlWRWKH6WDWHV DGPLWWHGO\QRWLQWHUPVRIFRYHUHGPHGLFDOFRQGLWLRQVEXWLQ LV DFFRUGLQJ WR WKH 6XSUHPH &RXUW mQRW VR QDUURZO\ WHUPVRIFRYHUHGWUHDWPHQWE\KHDOWKFDUHSURYLGHUV FLUFXPVFULEHGl,GDW6&WDW/(GG DW :KLOH 3ODLQWLIIV XQGHUVWDQGDEO\ UHO\ RQ *URXS /LIH +HDOWK,QV&RY5R\DO'UXJ&R866&W 7KH VHFRQG 0F&DUUDQ)HUJXVRQ IDFWRU LV LQ RXU YLHZ /(GG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oUHPRYDORIUHVWULFWLRQVRQWKHQXPEHURISURYLGHUV ZKHWKHU WKH VWDWXWH VDWLVILHG WKH ILUVW IDFWRU o WKH ULVN oZDVDOUHDG\SUHVHQWLQ5R\DO'UXJ7KH6XSUHPH&RXUW DOWHUDWLRQIDFWRUoEHFDXVHWKHRWKHUWZRIDFWRUVYHULILHGWKH H[SUHVVO\QRWHGZLWKUHIHUHQFHWRLWVGLVFXVVLRQRIFRQWUDFWV FRPPRQVHQVHYLHZRIWKHVWDWXWHDVRQHUHJXODWLQJLQVXUDQFH EHWZHHQWKHLQVXUHUDQGSURYLGHUVm>W@KLVLVQRWWRVD\WKDWWKH 7KH&RXUWVSHFLILFDOO\UHMHFWHGWKHDUJXPHQWWKDWWKHVWDWXWH FRQWUDFWV RIIHUHG E\ %OXH 6KLHOG WR LWV SROLF\KROGHUV DV ZDVQRWVXFKDODZEHFDXVHLWGLGQRWFKDQJHDQ\VXEVWDQWLYH GLVWLQJXLVKHGIURPLWVSURYLGHUDJUHHPHQWVZLWKSDUWLFLSDWLQJ WHUPVRIWKHLQVXUDQFHFRYHUDJH SKDUPDFLHVPD\QRWEHWKHµEXVLQHVVRILQVXUDQFHjZLWKLQWKH PHDQLQJRIWKH>0F&DUUDQ)HUJXVRQ@$FWl,GDWQ :HUHMHFW8180jVVXJJHVWLRQWKDWEHFDXVHWKHQRWLFH 6&WDW/(GGDW8QOLNH5R\DO'UXJ SUHMXGLFH UXOH UHJXODWHV RQO\ WKH DGPLQLVWUDWLRQ RI SROLF\KROGHUVLQ.HQWXFN\ZLOOEHQHILWXQGHUWKHLUSROLFLHVE\ LQVXUDQFHSROLFLHVQRWWKHLUVXEVWDQWLYHWHUPVLWFDQQRW EH DQ LQWHJUDO SDUW RI WKH SROLF\ UHODWLRQVKLS  6HH 0HWURSROLWDQ/LIH86DWQ6&W LQFOXGLQJODZVUHJXODWLQJFODLPVSUDFWLFHVDQGUHTXLULQJ JUDFH SHULRGV LQ FDWDORJXH RI VWDWH ODZV WKDW UHJXODWH LQVXUDQFH  7KH GLVVHQW FKDUDFWHUL]HV WKLV FRQFOXVLRQ DV mP\VWHULRXVl 7KHUH LV QR P\VWHU\ KRZHYHU LQ WKH XQGHQLDEOH IDFW WKDW WKHUH LV D GLIIHUHQFH 86DWQ6&WDW/(GGDW EHWZHHQ D FORVHG QHWZRUN RI SURYLGHUV FKRVHQ E\ WKH LQVXUHU DQG DQ RSHQ QHWZRUN RI SURYLGHUV FRQVLVWLQJ RI DOO SURYLGHUV o LQFOXGLQJ SURYLGHUV SUHIHUUHG E\ WKH LQVXUHG SDWLHQWV o ZKR DUH ZLOOLQJ WR DJUHH WR WKH VDPH WHUPV DV WKH RWKHU QHWZRUN SURYLGHUV ,W LV DQ H[WUHPHO\ VLJQLILFDQW GLIIHUHQFH DQG RQH ZKLFK QRW RQO\ FKDQJHV WKH FRQGLWLRQV RI WKH SODQ EXW

 E\ RSHQLQJ DQ RWKHUZLVH FORVHG GRRU H[SDQGV WKH SRWHQWLDO IRU LQFOXVLRQ 7KH &RXUW LQ 5R\DO 'UXJ VDLG m,W LV ZHOO VHWWOHG WKDW H[HPSWLRQV RI DGGLWLRQDO HTXDOO\ FRPSHWHQW PHGLFDO SURYLGHUV ,W LV LQ WKLV VHQVH WKDW IURP WKH DQWLWUXVW ODZV DUH WR EH QDUURZO\ FRQVWUXHGl  86 DW   WKH $:3 ODZV FKDQJH mWKH WHUPV RI FRYHUHG WUHDWPHQW E\ KHDOWK FDUH 6 &W DW   / (G G DW  SURYLGHUVl  .<$VVjQRI+HDOWK3ODQV 1R 1R .<$VVjQRI+HDOWK3ODQV  ,QFHWDOY1LFKROV ,QFHWDOY1LFKROV

DQHZFKDQJHLQFRYHUDJHLQVRIDUDVDYDLODELOLW\RISURYLGHUV 7KH)LIWK&LUFXLWKDVDOVRGLVWLQJXLVKHG5R\DO'UXJLQLWV LVFRQFHUQHG GLVFXVVLRQ RI D SULRU 7H[DV $:3 VWDWXWH SHUWDLQLQJ WR SKDUPDFLHV LQ 7H[DV 3KDUPDF\ $VVRFLDWLRQ Y 3UXGHQWLDO 7KH SROLF\KROGHUV LQ 5R\DO 'UXJ ZHUH mEDVLFDOO\ ,QVXUDQFH &R RI $PHULFD  )G  WK &LU  XQFRQFHUQHGZLWKDUUDQJHPHQWVPDGHEHWZHHQ%OXH6KLHOG DJUHHLQJZLWKWKHUHDVRQLQJRIWKH)RXUWK&LUFXLWLQ6WXDUW DQGSDUWLFLSDWLQJSKDUPDFLHVl,GDW6&WDW &LUFOH +RVSLWDO &RUS  m8QOLNH WKH WKLUGSDUW\ SKDUPDF\  / (G G DW   7KH\ SDLG D IL[HG SULFH  WR D DJUHHPHQWV LQ 5R\DO 'UXJ WKH SULRU 7H[DV VWDWXWH GLUHFWO\ SDUWLFLSDWLQJ SKDUPDF\ IRU HDFK SUHVFULSWLRQ DQG UHJXODWHG WKH WHUPV RI WKH LQVXUDQFH SROLF\ EHWZHHQ WKH FRQVHTXHQWO\WKH\ZHUHQRWFRQFHUQHGZLWK%OXH6KLHOGjVFRVW LQVXUHUDQGWKHLQVXUHGl,GDW IRU WKRVH SUHVFULSWLRQV  6LPLODUO\ WKH SROLF\KROGHUV LQ .HQWXFN\DUHEDVLFDOO\XQFRQFHUQHGZLWKDUUDQJHPHQWVPDGH )LQDOO\LWVKRXOGEHHPSKDVL]HGLQDSSO\LQJWKH0F&DUUDQ EHWZHHQWKHLQVXUHUVDQGSDUWLFLSDWLQJSURYLGHUVUHJDUGLQJWKH )HUJXVRQ IDFWRUV WKDW mWKH IRFXV RI 0F&DUUDQ)HUJXVRQ LV LQVXUHUVj FRVW IRU WKH PHGLFDO VHUYLFHV REWDLQHG E\ WKH XSRQWKHUHODWLRQVKLSEHWZHHQWKHLQVXUDQFHFRPSDQ\DQGLWV LQVXUHUV7KH.HQWXFN\VWDWXWHVGRQRWVHHNWRFKDQJHWKH SROLF\KROGHUVl DQG VWDWH VWDWXWHV DLPHG DW UHJXODWLQJ WKDW WHUPV DQG FRQGLWLRQV RI WKRVH FRVW DUUDQJHPHQWV  7KH\ UHODWLRQVKLSmGLUHFWO\RU LQGLUHFWO\DUHODZVUHJXODWLQJWKH PHUHO\UHTXLUHWKDWDQ\SURYLGHUZKRLVZLOOLQJWRPHHWWKH µEXVLQHVVRILQVXUDQFHjl8QLWHG6WDWHV'HSjWRIWKH7UHDVXU\ VDPHWHUPVDQGFRQGLWLRQVRIWKRVHDUUDQJHPHQWVVKRXOGEH Y)DEH866&W/(G DOORZHG WR MRLQ WKH OLVW RI SDUWLFLSDWLQJ SURYLGHUV  :KLOH G,Q)DEHWKH&RXUWKHOGWKDWm>W@KHUHFDQ .HQWXFN\SROLF\KROGHUVPD\EHEDVLFDOO\XQFRQFHUQHGZLWK EH QR GRXEW WKDW WKH DFWXDO SHUIRUPDQFH RI DQ LQVXUDQFH WKHLQVXUHUVjFRPSHQVDWLRQDUUDQJHPHQWVZLWKSDUWLFLSDWLQJ FRQWUDFW IDOOV ZLWKLQ WKH µEXVLQHVV RI LQVXUDQFHj DV ZH SURYLGHUVLWFDQQRWEHVDLGWKDWWKH\DUHXQFRQFHUQHGZLWKD XQGHUVWRRGWKDWSKUDVHLQ3LUHQRDQG5R\DO'UXJl,GDW OLPLWDWLRQRQWKHQXPEHURIVXFKSURYLGHUVDQGWKHUHVXOWLQJ 6&WDW/(GGDW)XUWKHUPRUHLQ UHVWULFWLRQRQ WKHLU IUHHGRP RI FKRLFH LQ VHHNLQJ PHGLFDO )DEHWKH&RXUWGLVWLQJXLVKHG5R\DO'UXJRQWKHJURXQGWKDW WUHDWPHQW LWZDVDQDQWLWUXVWODZFDVHDQGWKH&RXUWLQWKDWFDVHZDV FRQVWUXLQJWKHZRUGVmWKHEXVLQHVVRILQVXUDQFHlFRQWDLQHG LQWKHVHFRQGFODXVHRI†ERIWKH0F&DUUDQ)HUJXVRQ$FW  ,Q $PHULFDQ 'UXJ 6WRUHV ,QF Y +DUYDUG 3LOJULP +HDOWK &DUH ,QF  ) 6XSS  ' 0DVV  WKH FRXUW LQ FRQVLGHULQJ D 0DVVDFKXVHWWV $:3 VWDWXWH GLVWLQJXLVKHG 5R\DO 'UXJ RQ WKH JURXQG WKDW m>E@\ GLUHFWLQJ LQVXUHUV WR RSHQ WKHLU QHWZRUNV WKH $FW VKRXOG DIIHFW WKH RUJDQL]DWLRQV DQG SURYLGHUV SUHVHQW LQ HDFK PDUNHWl sDPHV : &KLOGV DYDLODELOLW\ RI EHQHILWV WR LQVXUHGV E\ LQFUHDVLQJ WKHLU DELOLW\ WR VHOHFW sU