Eligibility
ELIGIBILITY AND FILING REQUIREMENTS BY STATE
The following section sets forth a summary of the surplus lines eligibility and filing requirements of the various states for both foreign (U.S.) and alien surplus lines insurers. This information is based upon state surplus lines laws and regulations as well as responses to surveys that were sent to state insurance departments and surplus lines associations. Copies of applications and other pertinent forms may be obtained by contacting our firm or the state insurance departments directly.
It should be noted that most states treat reinsurance, independently procured/direct placement insurance, industrial insurance and insurance on subjects located out-of-state as outside the ambit of surplus lines regulation.
Surplus Lines Laws - Generally
Every U.S. jurisdiction has a surplus lines law, although the regulation of surplus lines business is primarily focused on surplus lines brokers. Despite the increasing interest in the solvency of non-admitted insurers, which has made the approval process somewhat more detailed, there is still almost no rate and form regulation of surplus lines insurers. Only one jurisdiction (New Jersey) requires surplus lines insurers to participate in a guaranty fund and then only in connection with the insolvency of other surplus lines insurers. By contrast, licensed insurers in the U.S. are broadly regulated as to solvency, rates and forms, market conduct, permissible investments, leverage (whether as to capital structure, premium to surplus ratio, or limit of risk to surplus) and affiliate relationships. Licensed insurers are also required to participate in a variety of government mandated insurance programs and pay assessments levied by state guaranty funds in the event of insurer insolvencies.
In theory, surplus lines insurers may not compete directly with licensed insurers for business and should write only business that licensed insurers will not write. Such “surplus” business must be “exported” by specially licensed surplus lines brokers who ensure that the required diligent search of licensed insurers has been accomplished and who also make appropriate tax and other filings. Certain jurisdictions maintain lists of coverages which are deemed to be generally unavailable from the admitted market (“export” lists), obviating even the need for the broker to first attempt to place these kinds of insurance with licensed carriers. In order for an unauthorized insurer to avail itself of the opportunity to write business under the surplus lines laws of the various jurisdictions, it must first become an eligible surplus lines insurer in those jurisdictions.
NAIC APPROVAL
A non-U.S. (alien) insurer wishing to accept surplus lines insurance typically starts the process with an application for inclusion on the Quarterly Listing of Alien Insurers published by the International Insurers Department ("IID") of the National Association of Insurance Commissioners ("NAIC"). This includes the establishment of a trust fund, for the benefit of its U.S. policyholders, which is revalued annually and currently calculated to be the lesser of:
(a) $100,000,000; or
(b) for business written on or after January 1, 1998, 30% of any amount up to the first $200,000,000 plus 25% of any amount up to the next $300,000,000 plus 20% of any amount up to the next $500,000,000 plus 15% of any amount in excess of $1,000,000,000 of either the Company's United States gross surplus lines liabilities or the Company's direct non-admitted United States liabilities excluding liabilities arising from aviation, wet marine and transportation insurance and direct placements. The Trust Fund Mimimum Amount may in no event be less than $5,400,000.
The application also requires that the company provide copies of its articles of incorporation and by-laws, biographical affidavits of the insurer's officers and directors, a business plan describing the insurer's global business followed by a description of the proposed lines of U.S. business, and financial statements. This information must be updated annually. A more detailed description of the application procedure and the standards for inclusion on the NAIC Quarterly List are contained in the IID Plan of Operation (see Appendix E).
ELIGIBILITY REQUIREMENTS OF INDIVIDUAL STATES
Most states have individual eligibility and filing requirements apart from, or in addition to, those required by the NAIC Listing. In several jurisdictions, there is an official list of insurers, the “white list,” which are approved for use by surplus lines brokers. This list is published periodically and circulated to brokers. Also, in most jurisdictions, surplus lines insurers are required to provide annual statements/reports and related financial information. Alien and foreign surplus lines insurers must maintain minimum capital and surplus of at least $15 million, although states often prefer higher amounts. As noted in the pages that follow, the level of detail varies by state, and may also include filing fees, biographical affidavits, articles of incorporation, details of reinsurance arrangements, a business plan, background investigations of officers and directors, and other data.
INDEPENDENTLY PROCURED/DIRECT PLACEMENT INSURANCE
Surplus lines is actually one of two methods of accessing the non-admitted market. The second method is known as a direct placement or independently procured placement. This takes place when an insured elects to go out of the state and purchase the desired insurance from an unauthorized carrier either directly with the company or through a broker or agent not licensed by the jurisdiction in which the risk is located, such as a Lloyd's Broker.
The right of a U.S. citizen to leave the state to obtain insurance on a risk located in the state with an unlicensed company without being regulated by the state was first enunciated by the United State Supreme Court in its landmark decision State Board of Insurance v. Todd Shipyards Corporation. In that case, the High Court also upheld the right of the buyer to be free of taxation on the transaction if the only contact with the state was the fact that the insured risk was located in the state.
In Todd Shipyards, the insurance buyer was located out of state and purchased property coverage out of state from an unauthorized insurer. The only connection or nexus with the state in the Todd Shipyards transaction was the location of the insured property. Under this set of facts, the High Court concluded that under the McCarran-Ferguson Act, the state was precluded from taxing or regulating the transaction.
While a number of subsequent decisions have distinguished Todd Shipyards, the current case law would still protect a direct placement transaction from state regulation provided the following circumstances apply:
- The insured does not access the non-admitted insurer through a resident agent or surplus lines broker.
- There is no activity by the non-admitted insurer in the state either in the making or in the performance of the contract.
- The transaction takes place "solely" (or, in New York, "principally") outside of the state where the insured is located.
Currently, only 39 U.S. jurisdictions have enacted self-procurement/direct placement statutes (see Appendix B). However, since these statutes govern actions by buyers that are "constitutionally guaranteed," they are intended more to tax rather than to regulate the transaction. These statutes do not prescribe rules or procedures which would grant jurisdiction over a non-admitted carrier in a self-procurement transaction, but simply impose a tax on the insured for the privilege of procuring insurance on its own behalf. Thus, subject to the judicial limitations mentioned above, state statutory authority is not required for a citizen to leave the state and purchase insurance from a non-authorized carrier.
INDUSTRIAL INSURANCE
There are 25 U.S. jurisdictions which currently exempt nonadmitted insurers from surplus lines regulation insurance procured by industrial insureds, and an additional 11 states where an "industrial insured" exemption is recognized with respect to captive insurers only (see Appendix C). State statutes define industrial insureds in various ways, but, in most states, the exemption applies to "sophisticated commercial buyers" having at least $25,000 in annual premium for non-mandatory coverages, full-time risk managers or outside insurance consultants advising them of procuring insurance, and a certain number of full-time employees (usually 25) or amount of gross sales.
Any company that qualifies under the industrial insured exemption can procure insurance from an unauthorized insurer without leaving the state or following surplus lines procedural requirements. Thus, declinations from the admitted market are not necessary. There is no escape from premium taxes, however, since most states still seek to tax that portion of the premium allocable to in-state risks. The burden of filing and paying the tax will typically fall on the insured, since a surplus lines licensee is not required in the transaction.
The industrial insured exemption has not been adopted (except for captive insurers only) in some of the largest surplus lines states such as New York, Florida and Texas. Moreover, the NAIC Non-Admitted Insurance Model Act makes no provision for industrial insurance other than to include a drafting note to the effect that individual states can consider exemptions for industrial insurance purchased by a sophisticated buyer.
OCEAN MARINE AND TRANSPORTATION INSURANCE
The surplus lines laws of 41 of the 53 U.S. jurisdictions (including District of Columbia, Puerto Rico and U.S. Virgin Islands) provide some type of ocean marine and transportation exemption. Most of these states provide a complete exemption for "ocean marine" although these exemptions do not always extend to aviation or transport risks generally. Those jurisdictions which do not have a full statutory exemption (or require such business to be written by an eligible surplus lines insurer) include Connecticut, District of Columbia, Florida, Kansas, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Oklahoma, Texas, and Wisconsin. In these states, insureds must follow the individual criteria for writing surplus lines business as set forth in the state's surplus lines laws.
NONRESIDENT RECIPROCAL E&S BROKER LICENSING
Historically, most states required that an agent or a broker be a resident of the state in order to obtain a surplus lines license. The passage in November 1999 of the Gramm-Leach-Bliley Act ("GLBA") relaxed this rigid environment by calling for the creation of uniform or reciprocal producer licensing laws among states for insurance agents and surplus lines brokers. In response to this mandate, the NAIC adopted a Producer Licensing Model Act that attempts to comply with GLBA and provide states with a model for meeting these reciprocity requirements. As of January 2010, all the states have adopted this model law or similar legislation, American Samoa is the lone U.S. jurisdictions not to have adopted some form of unrestricted reciprocal producer licensing legislation.
In general, a state is deemed to be reciprocal if it offers nonresident E&S broker licenses based upon the following four criteria to residents of states which have adopted the same four part criteria. The four requirements are that the nonresident present:
- a request for licensure;
- a certificate of good standing from the resident state insurance department;
- the license application from its home state; and
- payment of any requisite application fee.
A state will not be certified as a reciprocal state by the NAIC if it imposes requirements on a non-resident producer which have the effect of limiting or conditioning that producer's activities because of its residence or place of operations (excepting countersignature requirements). Among the limitations that have been found to be inconsistent with the reciprocity requirements of GLBA are fingerprint requirements and surplus lines bonds as either a pre-licensing or post-licensing requirement.