Legislative Report
Surplus Lines State Issues
By Steve Stephan, JD, CPCU, ASLI
Director of Government Relations
A number of issues involving surplus lines are under discussion at the state level and also by the National Association of Insurance Commissioners.
NAIC
Commissioner James Donelon (La.), Chairman of the NAIC Surplus Lines Task Force, called for a teleconference of the Task Force in November to discuss the formation of a working group of regulators to study the feasibility of establishing a national clearinghouse for the allocation of multi-state surplus lines premium taxes. During the call, the feasibility of the clearinghouse was called into question (at least without legislation to create a uniform tax allocation system). As a result the agenda of the working group
was enlarged to include studying an interstate compact and other ideas for solving the multi-state surplus lines tax problems. The working group will be led by Cindy Donovan of Indiana, although there was some discussion about appointing a co-chair.
NAPSLO met with Ms. Donovan on Dec. 6th at the NAIC meetings in Grapevine, Tex. One of her initial thoughts was to investigate uniform electronic tax reporting, using uniform data elements in a uniform reporting form, based on a modification of preexisting reporting software (Sircon) for those states where it would be feasible to do so. The working group had its initial call Jan. 28.
NAPSLO spoke at the NAIC’s NARAB working group meeting Dec. 7 regarding the practice of requiring a non-resident P&C license as a precondition for the issuance of a non-resident surplus lines producer’s license. This practice could be construed to violate Graham-Leach-Bliley requirements for non-resident reciprocal licensing. NAPSLO submitted additional comments and the discussion with the NARAB working group is ongoing.
NAPSLO also spoke at the NAIC’s Producer Licensing Working Group Dec. 6 regarding the application of the multi-state risk exemption in the producer licensing model act. The exemption provides that a single license from the insured’s home state is all that is required to write a multi-state risk. The working group had previously indicated the exemption applied to surplus lines producers as well as producers on the admitted side. The working group recently changed their position so the exemption applies “at a minimum to admitted business” thus leaving the states the
option of requiring a surplus lines broker’s license from every state where any portion of the risk resides. NAPSLO objected that there appeared to be no legitimate policy reason for requiring multiple licenses to write a single policy with multi-state exposures on the surplus lines side, but a single license is all that is required on the admitted side. The surplus lines brokers do collect a multi-state tax, but there are many other more important duties performed by all producers, such as advising the client, binding the risk, collecting the premium, issuing policies etc. To single out
the surplus lines broker for more onerous regulatory treatment based upon a fear that the surplus lines tax (which is typically 3-5%) will be mishandled, is unjustified.
NCSL
NAPSLO spoke at the National Conference of State Legislators on Dec. 12, 2009 regarding the need for a legislative fix for the surplus lines multi-state tax problem. The NCSL previously appointed a working group to study the issue. The legislators present seemed receptive to the idea that a fix was needed, but they could also see potential problems with trying to implement a 50-state solution.
STATES TAXING GROSS SURPLUS LINES PREMIUM
NAPSLO has prepared a paper identifying the states that continue to have statutes on the books taxing the gross premium as opposed to an allocated share. The working groups at the NAIC and the National Conference of State Legislators are interested in this information because they are attempting to formulate a solution to the multi-state tax problems. Many of the states identified, in practice, tax only an allocated share of the premium. The states have been surveyed a couple of times in recent years and with a couple of exceptions, verbally
indicated they tax only an allocated share. NAPSLO believes the states should adopt allocation statutes so the laws on the books are consistent with the practice applied by the state tax collectors. Unfortunately, since many states may be facing budget shortfalls, this spring may not be the best time to be discussing revenue issues. If we identify states where it is feasible to seek such a reform in this environment of declining state revenues, we will do so.
SURPLUS LINES LAW GROUP
The surplus lines law group will meet March 26-27 in San Francisco. The law group is an informal meeting of surplus lines attorneys, compliance professionals and stamping office representatives who meet to discuss changes in the surplus lines laws and other pending surplus lines legal issues. For more information contact Steve Stephan at steve@napslo.org
NAPSLO Mid-Year Educational Workshop
A "Politics/Legislation" panel is slated for Friday, February 27 at the Mid-Year Workshop and will include a video interview from Rep. Dennis Moore, (D-Kan.), a presentation from NAPSLO lobbyist Maria Berthoud regarding plans for the upcoming congressional session and a presentation from Steve Stephan, NAPSLO Director of Government Relations, regarding state issues. A short review of the NAPSLO PAC activities by NAPSLO Executive Director Richard Bouhan is also expected.
ALASKA
NAPSLO objected to the following regulation adopted by the Alaska Insurance Department:
“An eligible surplus lines insurer shall include in each policy, binder and cover note an Alaska surplus lines policyholder notice regarding non-renewal and premium increase, in a format approved by the director.”
NAPSLO is opposed to the department of insurance approving any form issued by a surplus lines company because it violates one of the guiding principles of surplus lines insurance – freedom from form regulation. The Department politely responded and indicated this was the mechanism for requiring companies to either use the published wording approved by the department or file their own version.
CALIFORNIA
The fire surcharge assessment language that will be released shortly as part of Governor Schwarzenegger’s 2009-10 budget proposals regarding the Emergency Response Initiative is available to download. Similar to last year’s initiative, the administration will be looking for this proposal to be enacted this fiscal year.
Specifically, it is up to Surplus Line Brokers, not the non-admitted carrier, to collect the surcharge on non-admitted placements. For non-admitted policies, the surcharge is applicable to “the property portion of any homeowner’s policy, all risk insurance policy, or named peril insurance policy that specifically includes fire insurance.” On multi-state risks, the surcharge is to be pro-rated based on the percentage of the property risk located in California. Funds are to
be paid by the surplus lines broker to the surplus lines association (SLA) and by the SLA to the state. Risks with combined property & casualty coverage are to attribute 50% to the property coverage.
FLORIDA
An informal industry “working group” continues to work toward a legislative solution for the problems caused by the Essex v. Zota case. The Zota case ruled that a section of Chapter 627 of the Florida Insurance Code applied to surplus lines policies, notwithstanding the fact that Chapter 627 contained a provision that specifically stated “this chapter does not apply to surplus lines insurance.” Despite this plain language, the Florida Supreme Court concluded the language was a
“scrivener’s error” (legal clerical error). There is some disagreement over the interpretation of the Zota case, but some believe it could be read to mean that all of Chapter 627 applies to surplus lines insurance.
The Florida Office of Insurance Regulation (OIR) is expected to issue an order in the near future to partially clarify their interpretation of Zota Case. Specifically, the order is expected to state that surplus lines insurers are not required to file policy forms with the OIR. The order would only be a partial solution to the “Zota problem” and legislation would still be necessary to resolve which sections of Chapter 627 apply to surplus lines insurance.
The Florida Legislature convened a special session early in 2009 to address budget shortfalls, but many on the working group believe this was the wrong time to propose insurance legislation. By the time the regular session of the legislature convenes in March, the working group would like to have legislation drafted and ground work laid for introduction of the bill. Given the volatile legislative environment in Florida, few are willing to comment on the chance of success of any proposed
legislation. However, a bill that would nullify the Florida Supreme Court Decision was recently introduced in the Florida House of Representatives.
The latest exchange between the OIR and the working group involved the OIR seeking to add language to the draft bill allowing the OIR to be reimbursed by surplus lines companies for examination and investigation expenses. The working group is formulating a response to the Department’s request.
KENTUCKY
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. A copy of the notice is attached.
LOUISIANA
In December the Louisiana Department of Insurance issued a notice of intent to adopt Regulation 93 - Named Storm and Hurricane Deductibles, which states that it "applies to approved unauthorized insurers, i.e. surplus lines." It does not apply to commercial property or properties with three or more units. If an insurer deviates from the requirements concerning deductibles for named storms, it must file a plan with the state to write new business in the state.
In late 2008 the Louisiana Insurance Department made a data call to some surplus lines insurers issuing homeowner’s policies in New Orleans. In connection with an audit of the DOI by the Louisiana Legislative Auditor, (LLA) the DOI objected that information in its possession was protected from disclosure by third party confidentiality agreements. The LLA has renewed its request for information and the DOI has begun notifying parties that confidential information
provided to the DOI may be released to the LLA without further notice. Attached is the text of a letter from the DOI to a surplus lines insurer on this matter.
MINNESOTA
The new Minnesota Surplus Lines Stamping Office opened effective January 1. If you are writing surplus lines business in Minnesota, please check the website www.mnsla.com for more information. Please note that all surplus lines policies effective Jan. 1, 2009 and after must be electronically submitted to the Minnesota stamping office prior to delivery to
the insured.
NEW YORK
NAPSLO objected to NY circular letter 26 which was circulated to the industry before it was issued. The circular letter pertains to a law that took effect on January 17, 2009 (180 days after it was signed by the Governor on July 21, 2008). The law applies to all liability policies (including renewals) issued or delivered in New York on or after the effective date of January 17, 2009, including, by its terms,
policies issued in the excess line market. The circular letter was to remind liability insurers of the necessity of promptly revising their property/casualty insurance policy forms to comply with the bill’s significant amendments.
Specifically, Insurance Law 3420 establishes minimum policy provisions and other requirements with respect to liability policies “issued or delivered” in New York.
According to the circular letter, the claim may not be denied if: 1) it had not been reasonably possible to give notice within the prescribed time, and notice is given as soon as reasonably possible, even if the insurer has been prejudiced; or 2) the insurer has not been prejudiced, even if the claim was not made as soon as reasonably possible.
NAPSLO objected that the law violates the freedom from form regulation necessary to insure distressed risks. If the risk is so distressed that it was declined by the admitted market, making the tail even longer is not in the best interest of the insured. NAPSLO suggested that excess lines be removed from the scope of the circular letter.
TEXAS
NAPSLO is following the developments surrounding SB 148, which is a bill that attempts to require surplus lines insurers to invest in low-income communities. The bill contains some drafting errors and other problems. NAPSLO is considering objecting to the bill, but we have also been advised that it is
unlikely to advance.
Surplus lines companies continue to protest the Texas Windstorm Assessment because it applies to surplus lines companies that are affiliated with admitted companies. It does not apply to a stand-alone surplus lines company. The obvious unfairness of the rule has generated complaints since it was adopted several years ago, however the state has yet to take action.
