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, 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.
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) 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 Minimum 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
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 NRRA, state eligibility standards varied widely from state to state.
Following the enactment of 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 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 IID List is available for reference and download on the NAIC website at http://www.naic.org/prod_serv_alpha_listing.htm#quarterly_alien.
Many U.S. jurisdictions are now tending to recognize that the IID List 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 level of filing information varies 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.
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. 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.
There are 23 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.
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 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 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 are eligible for a “fast-track” confirmation process in the Senate Banking Committee’s Executive Calendar. The three remaining board members to be nominated will be Insurance Commissioners, or possibly former Commissioners. Once approved, these 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. President Trump has yet to nominate any board members, and it is uncertain at this point how he will act with regard to the implementation of this legislation.