APPENDIX D
SURPLUS LINES LEGISLATIVE UPDATE 2009
STATE LEGISLATION
ARKANSAS
Senate Bill 806 requires each approved surplus line insurer in Arkansas, upon written request, to mail or deliver the policyholder’s claim information to the policyholder or his or her surplus lines broker within 30 days from the date of receipt of the request from the policyholder. If the claims loss information is provided to the surplus lines broker, the surplus lines broker must provide claim loss information to the policyholder within 7 days from the date of receipt of the claim loss information from the surplus lines insurer. If the surplus lines broker generates the claim loss information for the surplus lines insurer, the claim loss information must be provided to the policyholder within 30 days from the date of receipt of the request from the policyholder.
This legislation also makes clear that surplus lines carriers are not required to file policy forms. Arkansas is one of the few states to enact such legislation. Most states do not explicitly exempt surplus lines insurers from filing forms and rates because the surplus lines codes were originally intended to contain all the laws applicable to surplus lines insurance and the surplus lines codes do not require forms or rates to be filed.
This bill was signed by the Governor and enacted on March 31, 2009.
CONNECTICUT
Connecticut ADC 38a-740-6 amended the Connecticut insurance regulations to permit electronic filing of surplus lines insurers’ annual statements.
FLORIDA
House Bill 853/SB 1894 clarifies the surplus lines industry’s status regarding forms and policy regulation that was challenged by the Florida Supreme Court’s ruling in 2008 in the Essex v. Zota opinion.
The bill restores the industry’s exemption from regulation of surplus lines forms and policies that was put into question by the Court ruling which said that surplus lines was only exempt from the rating section of Chapter 627 of Florida’s insurance statute (Insurance Rates and Contracts) but was subject to the Chapter’s other provisions.
The legislation also amends Florida statute 626.913 to add a new subsection (4) which notes that the surplus lines law is exempted from the provisions of Chapter 627 of the Florida statutes, except where specifically stated. This amendment is retroactive to the regulation of surplus lines insurers from October 1, 1988, except with respect to lawsuits filed on or before May 15, 2009.
Other requirements imposed upon Florida’s surplus lines insurers which are similar to provisions governing admitted insurers in Chapter 627 of the Florida statutes include:
- Florida eligible surplus lines insurers must now include on the face of each surplus lines policy the following statement in at least 14-point boldface type: SURPLUS LINES INSURERS’ POLICY RATES AND FORMS ARE NOT APPROVED BY ANY FLORIDA REGULATORY AGENCY. This requirement will become effective October 1, 2009.
- Additionally, for all personal lines residential property policies containing a separate hurricane or wind deductible, the following statement must also be included on the face of the policy in 14-point boldface type: POLICIES CONTAINING A COINSURANCE PROVISION APPLICABLE TO HURRICANE OR WIND LOSSES MUST INCLUDE The following statement on the face of the policy in 14-point font: THIS POLICY CONTAINS A CO-PAY PROVISION THAT MAY RESULT IN HIGH OUT-OF-POCKET EXPENSES TO YOU. This requirement will become effective October 1, 2009.
- The methods of payment of premium and claims on surplus lines policies issued on or after October 1, 2009 includes coins, currency, checks, money orders, debit card, credit card, automatic electronic funds transfer or payroll deduction. This requirement will become effective October 1, 2009.
- The bill establishes a 60-day timeframe for disclosure of certain information requested by the insured from eligible surplus lines insurers to claimants regarding liability claims. This requirement will become effective October 1, 2009.
- Lastly, payment of reasonable attorneys fees upon a judgment in favor of the insured. This becomes effective June 11, 2009.
This bill was signed by the Governor and became law on June 11, 2009.
HAWAII
Hawaii SB 892 prohibits a surplus lines broker from writing life insurance, accident and health insurance and annuity products. The bill passed and was signed by the Governor in 2009.
IOWA
On 1-28-2009, Iowa adopted ADC 191-21.1-9 implementing electronic filing for surplus lines brokers and eliminating the “zero” reports whereby a surplus lines broker was required to notify the department that no business was written during the reporting period.
KENTUCKY
Kentucky has taken initial steps to implement a system to allocate surplus lines taxes among political subdivisions of the state where portions of surplus lines exposures reside. A hearing was held Jan. 29, 2009 regarding the risk location verification criteria and the process for vendors, and surplus lines brokers to apply for verification of a risk location system. The system is intended to assist brokers with allocating the surplus lines taxes to the numerous political subdivisions in the state.
A hearing was held Aug. 24 at the Kentucky Insurance Department regarding the reporting procedure to be used by surplus lines brokers. The department will generate a report for each licensed broker. The brokers will be required to retrieve their report, review and sign the report, and submit it to the department along with the tax. Electronic filing of affidavits will become necessary.
The regulations to implement this complex tax allocation system have become final and will require implementation in 2010. Brokers transacting business with exposures in Kentucky should review the requirements as soon as possible.
LOUISIANA
Senate Bill 290 exempts surplus lines insurers from the provision regarding co-insurance clauses. The old law prohibited fire, lightning and windstorm insurance covering property from containing any clause or provisions requiring the insured to maintain a larger amount of insurance than that covered by the policy. It also prohibited the insured from liability as a co-insurer unless such clause has been approved by the fire insurance division. The new law prohibits fire and extended coverage insurance issued by an authorized insurer covering property from containing any clause or provisions requiring the insured to maintain a larger amount of insurance than that covered by the policy and prohibits the insured from liability as a co-insurer unless such clause has been approved by the Commissioner of Insurance. This bill was signed by the Governor and became law on July 1, 2009.
MARYLAND
The Maryland Attorney General’s office has recently advised the Maryland Insurance Department that the Maryland unfair claims practices act applies to surplus lines carriers. This represents a change of position, but the state has declined to make public the attorney general’s opinion so it is not yet clear what caused the change of position. It is still unclear what the Maryland Insurance Department intends to do now that it has obtained this opinion from the Attorney General.
MINNESOTA
The new Minnesota Surplus Lines Stamping Office opened effective January 1, 2009. Minnesota in 2009 passed House Bill 1853. It makes changes that primarily impact the stamping office and clarifies that Surplus Lines brokers must register with the Minnesota Surplus Lines Association.
MISSOURI
House Bill 577 (HB 577) modernizes the surplus lines industry in Missouri and makes certain provisions of the surplus lines broker license consistent with those of major lines insurance producers (agents).
Section 384.043, RSMO, was updated to make surplus lines licenses effective for a term of two years. Previously, all surplus lines licensees renewed this type of license every year with an application fee of $50. This legislation states that surplus lines licensees shall now renew the license every two years at a cost of $100. This will be effective for all new surplus lines licenses and all existing surplus lines licenses expiring August 28, 2009 and later. Licensees who file new applications for surplus lines licenses through the National Insurance Producer Registry (NIPR) will receive a one-year license unless filing after August 27, 2009. After that date, a two-year license will be granted. Licensees with an expiration date after August 27, 2009 should file a paper renewal application if submitting before August 27, 2009 with a $100 fee in order to receive a two year license. For those who file a renewal application through NIPR please wait until after August 27, 2009 in order to be granted a two year license.
This bill was signed by the Governor and enacted on July 13, 2009.
MONTANA
Effective July 1, 2009, the Montana Commissioner of Securities and Insurance announced it will review and process surplus lines insurance submissions, determine applicable stamping fees owed, and send surplus lines agent’s tax and fee statements. All of these functions were previously performed by the Montana Surplus Lines Agents Association (MSLAA).
NEW JERSEY
Senate Bill 4108 increases the surplus lines tax in New Jersey from 3% to 5% effective July 1, 2009. Amendments to New Jersey Insurance Laws (N.J.S.A. 17:22-6.59 and 17:22-6.64) were also enacted on June 29, 2009 to reflect these changes. In addition, N.J.S.A. 17:22-6.59 was amended to provide that, where applicable, 3% of the premium receipts tax covering fire insurance shall be paid to the Treasurer of the New Jersey State Fireman’s Association and the remaining 2% of the premium tax receipts tax shall be forwarded to the Commissioner of Banking and Insurance.
The statutory changes outlined above necessitate changes to the surplus lines premium receipts tax and instructions related thereto for submission of quarterly surplus lines premium taxes by New Jersey producers, and for out-of-state placements, which utilize the forms for direct placements set forth on the New Jersey Department of Banking and Insurance (the Department) website. The Department is developing proposed amendments to N.J.A.C 11:19-3 to reflect the current statutory requirements.
The Piermount Iron Works v. Travelers case reversed a lower court decision and held that the cancellation and non-renewal laws were not applicable to a surplus lines insurer.
New Jersey amended its export list on October 5, 2009 adding “special risk disability and personal accident coverage” and “livestock gross margin policies” to the list.
NEW YORK
The New York Insurance Department also promulgated the 11th Amendment to Regulation 41 in order to expand the export list effective for placements made on or after September 2, 2009. The “export list” sets forth types of insurance coverages that the New York Superintendent of Insurance has determined are generally not available from licensed insurers, and therefore, three declinations from admitted insurers are not necessary. It should be noted that risks on the “export list” only exempt the broker from the declination process requirement and not from any other affidavit and documentation filing requirements. The following coverages have been added to the “export list”: commercial excess and umbrella liability (over $10,000,000), commercial property (excess of $50,000,000), contract frustration, employed lawyers liability, construction contractor’s liability coverage, owner’s contractor’s protective, prize indemnification, special events and vacant commercial property.
NORTH DAKOTA
House Bill 1141 changes the fee for an initial application for a surplus lines license or a consultant license to $100, and the fee for the annual renewal of s surplus lines license or a consultant license to $25 effective July 1, 2009. This bill was signed by the Governor and enacted on March 19, 2009.
OKLAHOMA
Oklahoma Senate Bill 700 allows for compulsory auto liability insurance for commercial auto to be issued by surplus lines insurers. This bill was signed by the Governor and enacted on May 12, 2009.
OREGON
Oregon SB 127 allows surplus lines insurers to provide auto coverage under the financial responsibility provisions. The bill was signed by the Governor and enacted in 2009.
RHODE ISLAND
Rhode Island Regulation 11 implements R.I. Gen. Laws § 27-3-38 which eliminates the filing of a surplus lines affidavit by broker forms with the Rhode Island Insurance Department (“R.I. DOI”). The affidavit must still be completed, and is subject to audit by the R.I. DOI, but filing with the R.I. DOI is no longer required. In lieu of the filing of affidavits, the new law adds a requirement that all surplus lines licensees (brokers) file a yearly report with the R.I. DOI showing the business procured under the surplus lines license for the proceeding calendar year. Insurance Regulation 11 addresses the 2008 statutory amendments to R.I. Gen. Laws § 27-3-38 and also includes a form under Exhibit C that should be used to fulfill the new reporting requirement. Surplus lines brokers should use this form as a guide and add information such as the company name and contact information where appropriate. The first surplus lines broker annual report filing is due April 1, 2010. There is no annual filing for 2009. Surplus lines brokers who do not write any Rhode Island business in a calendar year are required to either complete the form included in Insurance Regulation 11, Exhibit C indicating that they are reporting zero premium or file a letter to that effect on letterhead.
TEXAS
House Bill 4339 relates to the establishment and operation of an unauthorized insurance guaranty fund. Typically, state guaranty funds are created to help pay the claims of financially impaired insurance companies. State laws specify the lines of insurance covered by these funds and the dollar limits payable. Coverage is usually for individual policyholders and their beneficiaries and not for values held in unallocated group contracts. Texas’ current guaranty association consists of licensed insurers and only covers claims of its member companies. The new unauthorized insurance guaranty fund will provide the receiver with funding to pay claims of unauthorized insurers. Funds will be derived from fines and penalties imposed on unlicensed insurance entities and licensed entities that are doing insurance business in Texas without authorization. This bill was signed by the Governor and became law on June 19, 2009.
VERMONT
Vermont S 42 imposes an assessment on surplus lines insurers for expenses allowed under the insurance code. The bill was signed by the Governor and became law in 2009.
FEDERAL LEGISLATION
Nonadmitted and Reinsurance Reform Act
The Nonadmitted and Reinsurance Reform Act (NRRA) of 2009, HR 2571 and S 1363, was introduced in both the U.S. House and Senate again in 2009. The Senate version was introduced by Senators Evan Bayh, D-Ind. and Sen. Mel Martinez, R-Fla., and cosponsored by Senators Bill Nelson, D-Fla., and Mike Crapo, R-Idaho on June 26, 2009. In May, Representatives Dennis Moore, D-Kan., and Scott Garrett, R-N.J., introduced the same legislation (HR 2571) in the House of Representatives. It passed the U.S. House unanimously Sept. 9, 2009.
The NRRA would establish national standards on how states may regulate and tax surplus lines insurers and also sets national standards concerning the regulation of reinsurance.
In particular, the NRRA would give regulators in an insured’s home state authority over most aspects of surplus lines insurance, including the right to collect and allocate premium tax with respect to policies with multi-state perils, and regulators in a reinsurer’s state of domicile would be given the sole responsibility for regulating the reinsurer's financial solvency. Surplus lines brokers would only be required to be licensed in an insured’s home state. The NRRA would also prohibit a state from denying credit for reinsurance if the domiciliary state of the insurer purchasing reinsurance recognizes credit for reinsurance. Both reinsurance provisions require the domiciliary state to be NAIC-accredited or have financial solvency requirements substantially similar to NAIC accreditation requirements.
The bill has been included in a package of financial reform measures proposed by Senator Dodd, Chairman of the Senate Banking, Housing and Urban Affairs Committee. It was also included as an amendment to the financial reform package (HR 4173) that passed the House in late December, 2009. The bill has passed the House unanimously three times and many in the industry are hopeful the legislation will bring reform to the dysfunctional mult-state surplus lines tax system that has plagued the industry for so long. The NRRA is included in a bill that is in excess of 1100 pages and, among other things, puts new controls on large and systemically significant institutions and creates a consumer protection agency. Some portions of HR 4173 and similar legislation in the Senate are likely to draw stiff opposition so it is too early to guess what direction the financial reform bills may ultimately take in 2010.