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. 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, in most states, 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. A few states have eliminated the need for the performance of a diligence search of licensed insurers altogether. 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.
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 List”) 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) $250,000,000; or
(b) 30% of U.S. gross liabilities up to $200,000,000, plus 25% of U.S. gross liabilities greater than $200,000,000 and up to $5,000,000, plus 20% of U.S. gross liabilities greater than $5,000,000 and up to $1,000,000,000, plus 15% of U.S. gross liabilities in excess of $1,000,000,000 of the Company’s United States gross surplus lines liabilities (i.e., gross reserve for unpaid losses for case and IBNR + gross reserve for unpaid loss adjustment expenses), excluding liabilities arising from aviation, ocean marine, and transportation insurance (NAIC Nonadmitted Insurance Model Act (#870), Section 3 – Definitions, Wet Marine and Transportation Insurance, provides an illustrative example), and direct procurement. The Trust Fund Minimum Amount may in no event be less than $6,500,000.
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
The laws of most U.S. jurisdictions require that a surplus lines insurer be deemed “eligible” by meeting certain financial criteria or by having been designated as “eligible” on a state-maintained list. Prior to the NRRA, state eligibility standards varied widely from state to state.
Following the enactment of the NRRA on July 21, 2011, a surplus lines transaction is subject only to the eligibility requirements of the insured’s home state. To the extent the home state has established its own statutory or regulatory insurer eligibility requirements; they must be consistent with the NRRA.
Under the NRRA, the states are prohibited from imposing eligibility requirements on foreign (U.S.) surplus lines insurers except for (i) standards that conform with the NAIC’s Non-Admitted Insurance Model Act (“the Model Act”) or (ii) “nationwide uniform requirements, forms and procedures” enacted pursuant to a compact or other agreement among the states.
The Model Act requires a foreign surplus lines insurer to:
(i) be authorized in its domiciliary state to write the type of insurance that it writes as surplus lines coverage; and
(ii) have capital and surplus, or its equivalent under the laws of its domiciliary jurisdiction, equaling the greater of (1) the minimum capital and surplus requirements under the law of the home state of the insured, or (2) $15 million.
Under the Model Act, the insured’s home state commissioner may reduce or waive the capital and surplus requirements down to a minimum of $4.5 million) after the commissioner makes a finding of eligibility based on several factors.
In addition to eligibility requirements for U.S. domiciled insurers, the NRRA requires the states to permit the placement of surplus lines coverage with nonadmitted insurers domiciled outside the United States (alien insurers) that are listed on the IID List. Thus, all states must permit NAIC-listed alien insurers to place surplus lines coverage. A state may allow placement of coverage with alien insurers not on the IID list (and have a separate set of requirements for those non-listed insurers), but the states cannot refuse to allow placement with NAIC-listed alien insurers.
The NAIC’s Quarterly Listing of Alien Insurers is available for reference and download on the NAIC’s website at https://www.naic.org/prod_serv_alpha_listing.htm#quarterly_alien.
Many U.S. jurisdictions are now tending to recognize that the NAIC’s Quarterly Listing of Alien Insurers is effectively the approved list of eligible nonadmitted insurers based outside the U.S. Nevertheless, a number of state regulators are continuing to request financial and/or premium information, and in some cases a fee, in order to include that company on their states’ eligibility list. While the filing obligations and associated fees vary by state, we expect these data requests will diminish in time as state insurance departments begin to rely more on the information now available for reference and download from the NAIC’s website for surplus lines eligibility purposes. Nevertheless, we note that while some states that still maintain such eligibility lists expressly indicate their voluntary nature (such as California and New York), a number of other states continue to require that surplus lines insurers obtain listing thereon, and will sometimes impose seasoning requirements before granting admission.
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 43 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. However, recent case law suggests that states that have not adopted the tax provisions of NRRA may not, in all cases, tax premium attributable to risks located outside of the insured’s home state. 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.
Because most states do not have robust statutory frameworks regulating the direct placement of insurance policies other than with respect to the taxation of directly procured polices (in part because states would normally expect insurance transactions to be conducted through licensed or surplus lines-eligible insurance carriers), it can at times be difficult to ascertain what activities would violate the foundational tenets of self-procurement. For example, some states expressly prohibit the utilization of a U.S. broker, whereas other states are silent on the matter. Moreover, case law decisions in a number of states (including New York) stand for the proposition that the insured must physically leave its home state and procure the insurance policy in a jurisdiction where the insurance carrier is appropriately authorized.
There are 20 U.S. jurisdictions which currently exempt nonadmitted insurers from surplus lines regulation insurance procured by industrial insureds, and an additional 12 states where an “industrial insured” exemption is recognized with respect to captive insurers or workers’ compensation insurance 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.
Under most of the industrial insured exemptions adopted by various states, any company that qualifies thereunder 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 license is not required in the transaction.
At least one state, Maryland, does not recognize its industrial insured exemption as allowing for procurement of insurance through an unauthorized insurer without leaving the state or following surplus lines procedural requirements. Under applicable case law in Maryland, the industrial insured exemption only alleviates the burden of the unauthorized insurer from submitting to the service of process procedures in the insured’s home state and does not otherwise allow for such insurer to conduct insurance business in the state unless licensed as an admitted insurer or eligible to write insurance coverage on a surplus lines basis.
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 and Florida. 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.
COMMERCIAL PURCHASER EXEMPTION
The NRRA also establishes a single “exempt commercial purchaser” definition and exemption standard that is applicable in every state. However, this is not a full exemption but only waives the diligent search requirement. This means a broker may go directly to the surplus lines market to place a policy for an exempt commercial purchaser if (i) the broker has disclosed to the exempt commercial purchaser that coverage may be available from the admitted market, which may provide greater protection with more regulatory oversight; and (ii) the exempt commercial purchaser has requested in writing that the broker procure/place such coverage with a surplus lines insurer.
Most states which had industrial insured exemptions prior to the enactment of the NRRA are continuing to recognize these exemptions (see Appendix C). Thus, in those states where the industrial insured exemption is retained, there could be two classes of exemptions: 1) For entities meeting the NRRA exempt commercial purchaser requirements; and 2) An additional class for entities that meet the state’s industrial insured exemption. Prior to utilizing these exemptions, brokers would be well advised to consult the law of the home state of the insured as well as the NRRA definition to ensure that the exemption is used correctly.
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, insurers must follow the individual criteria for writing surplus lines business as set forth in the state’s surplus lines laws.
The NRRA prohibits any state except the home state of the insured from requiring that a surplus lines broker be licensed in order to sell, solicit, or negotiate surplus lines insurance with respect to the insured. Accordingly, a broker is only required to maintain one surplus lines producer license to place a surplus lines policy, i.e., a license (resident or non-resident) in the insured’s home state. For a wholesale transaction, the wholesale broker on each such account must have the appropriate license in the “home state of the insured” for each state where placements are made.
On January 12, 2015, legislation was enacted that established a permanent National Association of Registered Agents and Brokers (“NARAB II”). NARAB will create a national clearinghouse as a one-stop licensing system for agents and brokers operating outside of their home state. Agents and brokers will apply for membership in the Association, agreeing to strict standards and ethical requirements. NARAB will be governed by a board of state insurance commissioners and industry representatives with a goal of applying licensing, continuing education and nonresident insurance producer standards on a multi-state basis while preserving the laws of individual states.
10 of the 13 inaugural members of the NARAB board were nominated by President Obama before he left office. The nominees were eligible for a “fast-track” confirmation process in the Senate Banking Committee’s Executive Calendar but were not acted on. Once thirteen nominees are approved, ten nominees would constitute a quorum, thereby enabling NARAB to start fulfilling its mission. NARAB will be based in Washington DC as a nonprofit corporation and regulatory agency with authority to issue multistate licenses to agents and brokers. After becoming licensed in one’s home state, agents and brokers can obtain a nationwide license by becoming “members” of NARAB. It is uncertain at this point how President Biden will act with regard to the implementation of this legislation.
Domestic Surplus Lines Insurance Companies (DSLIs)
While a surplus lines carrier is generally not able to write surplus lines insurance in its state of domicile, many states are changing their laws to allow surplus lines carriers to issue policies in their state of domicile as Domestic Surplus Lines Insurers (DSLI), for which a carrier would be approved or admitted in that state as a DSLI.
A total of 21 states now allow DSLI companies including: Arizona, Arkansas, Connecticut, Delaware, Georgia, Illinois, Iowa, Louisiana, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Texas, Vermont, Virginia and Wisconsin. While there exists variances in the states’ legislative language, the qualifying criteria for a DSLI generally includes that (1) the insurer possess policyholder surplus of at least $15 million; (2) the insurer is an eligible surplus lines insurer in at least one jurisdiction other than its state of domicile; (3) the insurer’s board of directors has passed a resolution seeking to be a domestic surplus lines insurer in the domicile state; and (4) the insurance commissioner has approved the insurance company and issued a certificate of authority or other written approval of same. Since 2011, the number of domestic surplus lines insurers has grown from 15 to over 100, with the majority domiciled in Illinois and Delaware. While most of the aforementioned states have enacted similar domestic surplus lines statutes, some of them do have critical differences, such as whether the principal offices of the DSLI are required to be located in the state.