DFS Publishes Interpretations of Surplus Lines Export Requirements
We often receive questions from insurers or agents relating to the requirements for exporting risks to the surplus lines market. These are fact-specific determinations that depend on the nature of the risks and the markets available to the agents. The Florida Department of Financial Services likewise reports receiving questions in this area and recently summarized some of its interpretations in its Insurance Insights newsletter. The Department’s guidance warrants review, and is set forth below in its entirety:
The Department has received numerous questions from agents seeking guidance on how to comply with the export eligibility requirements set forth in sections 626.916(1)(a) – (d), Florida Statutes, while simultaneously meeting the needs and demands of their clients. Because the Department recognizes the difficulty agents have in understanding the statutory provisions within the surplus lines law with regard to export eligibility, we are providing questions previously addressed by the department and our responses those to questions:
Agent A has a condominium association client with a commercial residential policy that Agent A has placed with an admitted insurer. Upon renewal, the client asks Agent A to move its commercial residential policy to a surplus lines insurer, but Agent A refuses and states that he cannot move the policy from an admitted insurer to a surplus lines insurer because he is not able to legally complete a diligent effort form. The client then contacts Agent B and asks Agent B to place its commercial residential policy (at renewal) with a surplus lines insurer. Agent B does not have access to an admitted insurer that is willing to write this risk, and despite Agent B’s knowledge that the risk is currently insured with an admitted insurer, Agent B does not have access to the admitted insurer that currently insures the risk. Thus, Agent B properly completes a diligent effort form (he gets declinations from 3 admitted insurers that he does have access to but who are not willing to write the risk) and then Agent B places this risk with a surplus lines insurer at renewal. Has Agent B followed the law by properly completing a diligent effort form, despite the fact that he has moved a commercial residential policy from the admitted market to the surplus lines market at renewal?
Agent B has followed the law by properly completing and documenting diligent effort, despite the fact that the policy was moved from the admitted market to the surplus lines market. The law does not compel an agent to seek quotes from companies they are not affiliated with. To meet the requirements of the law, the writing agent must seek the required coverage in the admitted market from insurers “actually writing that kind and class of insurance in this state,” and properly document those efforts in accordance with s.626.916, F. S. Failure by Agent B to make the required diligent effort or to properly document that effort could lead to administrative action being taken against the agent.
Agent A has a condominium association client with a commercial residential policy ($70 million total insured value) that Agent A has placed with an admitted insurer. The policy is coming up for renewal and the admitted insurer currently insuring the risk will renew the policy but will not offer full law and ordinance coverage, which for this risk, the agent and client both believe is a necessary coverage since the condominium association buildings were built in the 1970’s and do not comply with current building codes. Agent A cannot find stand-alone law and ordinance coverage for this risk either in the admitted market, or in the non-admitted market. Other than the current admitted insurer that will renew the risk without full law and ordinance coverage, Agent A does not have access to any other admitted insurers that are willing to write this risk at all given the age of the buildings. Agent A completes a diligent effort form listing the current insurer as declining to write the risk with full law and ordinance coverage, and listing two other admitted insurers that are not willing to write the risk due to the age of the buildings. Agent A then places the risk, with full law and ordinance coverage, with a surplus lines insurer. Has Agent A properly complied with the export law?
Agent A has properly complied with the export law. In this scenario, the full amount of required insurance was not procurable based on a diligent effort by the agent. Technically the agent went beyond the requirements of the law in obtaining 3 declinations as s.626.914, F. S. only requires 1 declination for risk where the residential structure has a dwelling replacement cost of $1 million or more. The agent also attempted to layer the risk as required by law and the diligent effort also established that layering was not an option. Since full law and ordinance coverage was established as a requirement by the client, the agent was obligated to attempt to procure that coverage. Given that the documented diligent effort did not result in identifying an admitted insurer willing to write the required coverage, the policy is eligible for export.
Agent A has a condominium association client with a commercial residential policy renewal coming up in about 30 days ($40 million total insured value) that Agent A has placed with an E & S insurer. The board is very savvy and has some members who are very familiar and comfortable with the E&S market. The board insists on coverage only from an AM Best “A” rated company with large financial size (policyholder surplus). It is nonnegotiable. They have no problem with E&S and want to stay with current carrier which is offering a renewal. There is no admitted AM Best A rated carrier that will write this risk.
Even though the board has no interest in admitted carriers that do not have an AM Best rating, the admitted carriers are quoting for Agent A and other agents. Hence Agent A is not able to complete a diligent effort search because he has an admitted market willing to write the required coverage. Agent A asks DFS if he should follow the customer’s instructions and renew the coverage in the E & S market? Or alternatively, does the DFS force the client to insure with a non AM Best rated company against their wishes.
In this scenario the insured has expressed a requirement as to the type of insurer they are willing to accept. The statute provides for export only to obtain the full amount of insurance required. The rating of the carrier is a preference of the insured, and is unrelated to the amount of insurance required. A consumer cannot be compelled to enter into or continue a contract with an insurer they do not wish to do business with. However, the agent is still bound by the requirements of the law. The law does not provide an exception for wishes of the consumer. Given the information provided, it would not appear this agent could legally export this policy.
Consumers have the option of independently procuring insurance directly from the surplus lines market. Those who wish to do so should be aware of the requirements set forth in s. 626.938, F. S., and can consult with the Independently Procured Coverage (IPC) Procedures Manual located at http://www.fslso.com/Comply/ProceduresManuals.
In addition to the questions and answers above, Department legal staff has directed our attention to a case which is illustrative of the Department’s interpretation of key provisions of the surplus lines law. Case No. 99-1914 (DOAH July 7, 2000; DOI Oct. 4, 2000), Dep’t of Ins. v. Bandel, addresses many concerns which might be raised by agents. https://finalorders.fldfs.com/ViewImage.aspx?disn=86436
Moving forward, the Department will aggregate questions relating to additional hypothetical scenarios and will periodically publish our responses here. We will not be providing pre-approval of specific transactions for agents.
To summarize the Department’s position regarding allegations of improper export, we will investigate complaints on a case-by-case basis and take regulatory action where the facts of the specific case warrant action. Discipline for a violation can range from a letter of guidance, to a monetary penalty, or even suspension or revocation of a license. Monetary penalties can be assessed commensurate with the amount of premium collected on a per count basis. If no violation is uncovered, the case will be closed without action and the investigation will remain a confidential record.