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NAIC Working Groups, State Legislatures Busy With Surplus Lines Issues
Producer Licensing Working Group
Multi-State Tax Working Group
NARAB Working Group
Surplus Lines Task Force
Broker Fee Research
STATE ISSUES
The Alabama Senate was discussing a bill (SB 264) that would apply the Policyholder Bill of Rights to surplus lines insurance. NAPSLO sent a lengthy letter explaining how many of the concepts in the bill did not apply to surplus lines insurance and the bill was indefinitely postponed.
Alaska On March 19 the DOI issued order number 10-02 regarding reciprocity of surplus lines brokers. The DOI waived the requirement for an underlying P&C license if the surplus lines broker is not performing the diligent search.
Arkansas Arkansas Rule 24 became final. The rule was intended to clarify the duties of a surplus lines wholesaler and retailer. Rule 24 explicitly allows a wholesaler to rely upon the diligent search conducted by a retailer. This is a clarification that NAPSLO has been seeking in those states where the language is unclear.
California The Fire Surcharge Bill is by its terms applicable to surplus lines. Insureds would pay a surcharge on commercial property, residential property and multi-peril property insurance. The current version of the bill (SB 1258) is before the senate appropriations committee. There is no indication as to whether this bill will make it out of the committee. As in previous years, it is unclear whether it would require a 2/3 vote to pass because it is a tax.
AB 1837 would authorize a non-admitted insurer that is affiliated with a California domestic insurer to receive administrative services rendered in California by its domestic affiliate so long as the non-admitted insurer provides the insurance commissioner with a description of the administrative services to be rendered. There is a potential issue in that the recent litigation involving an attempt to collect a tax from surplus lines companies specifically mentioned the fact that surplus lines companies have no physical presence in the state.
A large wholesale broker inquired about the applicability of the California requirement that insurers offer earthquake coverage to homeowners. We are told that surplus lines brokers comply with the requirement notwithstanding the fact that it does not, by its terms, specifically apply to surplus lines insurers. Although this is not a good precedent for surplus lines brokers, it is unknown whether there would be any interest in seeking a legislative change because the law causes no significant problems today.
AB 1708 is pending and would increase the capital and surplus requirements for surplus lines insurers to $45 million.
A non-resident broker had a question about the applicability of CIC Sections 1734 and 1734.5, which require fiduciary funds on California business in a California bank account. The California Surplus Lines Association inquired as to the CDI's interpretation of the requirement (California business is not defined). In an apparent break from prior policy, the CDI responded that the requirement applies to non-residents. The SLA has sought clarification regarding whether the location of the transaction or of the risk is used to determine what constitutes "California business," but has not yet received it. Application of this requirement (which applies not only to surplus lines, but to all fire and casualty broker-agents) to all non-resident licensees on a situs-of-the risk basis would be problematic. If CDI adopts such interpretation, a legislative fix (which should get broad support) may be needed.
The Lexington vs. Silvers and Gold case is on appeal. Briefs were due May 11 and NAPSLO participated in an Amicus brief along with the AAMGA. The deadline did not apply to an Amicus brief.
Colorado HB 10-1394 has passed and alters existing case law for commercial policies issued to construction professionals. Specifically the case of General Security Indemnity Company of Arizona v. Mountain States Mutual Casualty, 205 P. 3d 528 (COLO. APP. 2009) did not, according to the legislature, properly consider a construction professionals reasonable expectation that an insurer would defend the construction professional against a claim. The law provides that in interpreting a liability policy issued to a construction professional a court shall presume the work of a construction professional that results in property damage is an accident unless the property damage is intended and expected by the insured.
District of Columbia The District of Columbia issued a bulletin on April 21, 2010 that streamlined the reporting of surplus lines tax by eliminating the zero reports, instituting semi-annual reporting for taxes and affidavit reporting within 30 days after the month in which the transaction occurred (it had been 10 days). The reforms were adopted, at least in part, in response to a letter from NAPSLO and SILA.
Connecticut Connecticut issued a bulletin on May 24, 2010 to surplus lines brokers reminding them that when an insured has been offered a renewal from their existing admitted insurers, or any other admitted insurer or any residual market mechanism, it would "be a violation of Connecticut statutes for the risk to be placed in the surplus lines market."
Florida Florida Governor Charlie Crist has signed SB 2176, which deregulates certain commercial lines of insurance. The law becomes effective Jan. 1, 2011 and specifically exempts the following commercial lines from rate filings: · Excess or umbrella · Surety and fidelity · Boiler and machinery and leakage and fire extinguishing equipment · Commercial motor vehicle insurance, minimum of 20 vehicles · Errors and omissions · Directors and officers, employment practices, and management liability · Intellectual property and patent infringement liability · Advertising injury and Internet liability insurance · Property risks rated under a highly protected risks rating plan · Unique or unusual risks or portions of risks which are not rated according to manuals, rating plans, or rate schedules, including "a" rates
Kentucky The Kentucky House has been discussing HB 278, which describes the location of the premium tax billing information. For new policies the information must be on the policy, the declarations sheet or the initial billing instruments; for renewals the information must be on either the renewals certificate or the billing instrument.
Illinois The Illinois Commissioner of Insurance has endorsed an interstate compact for the allocation of surplus lines tax.
Indiana The Indiana insurance department website was changed to reflect the policy of no longer requiring a monthly report from surplus lines brokers if no business was written in Indiana. The site could be clearer that a semi-annual report is still required, even if no business was written in the state.
Louisiana HB 285 has been proposed to exempt surplus lines from form and rate filing. Forms and rates are not presently filed in Louisiana, but the case law is so negative with respect to surplus lines that many believe the statutory exemption for forms and rates is needed.
HB 446 repeals the law enacted last session requiring certificates of insurance to be approved by the department.
Massachusetts The DOI has been engaged in discussions with a number of local brokers regarding the need to obtain a declination from the residual market mechanism for coastal homeowners prior to accessing the surplus lines markets. Current practices do not require a declination from the residual market and the law does not appear to require this on its face. Nevertheless a local agent has been trying to persuade the new Commissioner that the residual market is an "admitted carrier" and therefore must decline the risk before it is placed in the surplus lines markets. NAPSLO has discussed this with the local brokers and has offered to submit letters and attend meetings with the DOI if necessary. At this point, it appears that the DOI has little interest in changing the existing practices, but it is possible the affidavit language could be reexamined.
The Act to Increase Insurance Capacity in the Commonwealth (SB 2345) would allow alien surplus lines insurers to write insurance in Massachusetts. The bill passed the Senate and is pending.
Minnesota HB 2972 would change the definition of gross premium for surplus lines tax and clarify some of the broker fee provisions. NAPSLO was involved in the coalition discussing this issue with the Revenue Department. Many on the coalition were concerned about the possibility that the proposed definition (all charges, commission and fees received by the licensee) is so broad it would encompass fees unrelated to a surplus lines placement. An industry group proposed adding the words "directly related to a surplus lines placement" to the definition. The Revenue Department has agreed that the fees needed to be "related" to the surplus lines placement to be taxable.
Nevada Bulletin 2010 - 006 was issued to clarify that each Nevada licensed surplus lines broker must file a tax report, regardless of whether the individual licensee is affiliated with a firm or whether any business was actually transacted by the individual licensee or firm. If an individual only wrote policies under the firm's number, the individual reports $0 on their tax statement.
New Jersey New Jersey A 2670, SB 2010 - the Reinsurance and Surplus Lines stimulus and enhancement act is a bill to allow a domestic surplus lines insurer to write surplus lines business in New Jersey. Illinois and Oklahoma have adopted similar laws. NAPSLO has submitted comments seeking to clarify which guaranty fund would apply, which premium tax would apply and to make the language as clear as possible.
A 2589 is a bill that would reduce the surplus lines tax to 3% from 5%. Last session the surplus line tax was increased from 3% to 5%.
New York NY HB 11244 would amend section 2118 of the insurance law to recognize that where a quote for coverage from an authorized insurer exceeds by 25 percent or more, a quote for comparable coverage from the excess line market, the licensed insurer quote may be regarded as a declination from the authorized insurer.
Section 1 also relieves an excess line broker's diligent effort obligation to obtain three declinations of coverage from authorized insurers where the insured is sophisticated and meets the definition of an "exempt commercial purchaser."
Ohio Ohio House bill, HB 300, would eliminate the requirement that a non-resident surplus lines broker must have a non-resident P&C license, unless the surplus lines broker is going to perform a diligent search. This a position supported by NAPSLO.
Puerto Rico NAPSLO has requested that Puerto Rico create an English version of their affidavit form.
Rhode Island Under 6-65-7.1 Rhode Island now requires insurers to notify the contractor's registration and licensing board if a policy is cancelled. It does not specifically mention surplus lines insurers, and is not even in the insurance code. Nevertheless, at least one surplus lines insurer has expressed the concern that it would be applied to surplus lines insurance.
South Dakota Regulators with the South Dakota Insurance Department volunteered to lead a team of regulators in studying an interstate compact for the allocation of surplus lines taxes. NAPSLO was heavily involved in creating the draft compact known as "SLIMPACT." I traveled to South Dakota to meet with the state regulators about the history and drafting of SLIMPACT.
SB 32 passed and allows the insurance department to adopt a reporting form for surplus lines tax.
Texas The Texas Comptroller has audited some surplus lines underwriting managers and is contending that the surplus lines tax should have been remitted by the underwriting manager (who also holds a surplus lines license) instead of the other surplus lines broker. The Comptroller interprets the regulations defining "agent of record" to require the agent closest to the insurer to remit the tax. In this case, the tax was already remitted by another surplus lines broker who made the submission to an underwriting manager, so it is not clear how this matter will be resolved. The matter is still under discussion and a notice should be released by the Surplus Lines Stamping Office of Texas when the matter is resolved.
There is also a rumor that the Texas DOI is considering some large fines against surplus lines brokers who have failed to make the filings on time.
Vermont Vermont S 278 has passed. It repeals the requirement that a surplus lines broker have one year's experience as a qualification for licensing.
West Virginia HB 4038 passed. It allows the local governments to put a lien for debris removal on fire insurance proceeds and specifically mentions surplus lines insurance. NAPSLO objected to the bill as, in effect, requiring debris removal coverage, even if the form didn't cover debris removal. The bill requires companies to notify local governments of a total loss to real property. The law now creates a scheme for the liens to be created and expire if not perfected within 30 days.
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