Florida Surplus Lines Insurance Industry Seeks Regulatory Certainty

Mar 11, 2009

Insurance Journal--March 11, 2009

Surplus lines insurance industry leaders in Florida hope legislation working its way through the state Legislature will clarify how the industry will be regulated.

The industry has had concerns about its future since court decisions last year suggested that the industry, which runs relatively free of regulation of its forms and rates, should face closer scrutiny.

If the situation is not clarified, some fear the state could lose some of its surplus lines insurers.

The stakes are big. Florida ranks as the fourth largest state in terms of surplus lines business, behind only California, Texas and New York. In 2008, it generated more than $4 billion in surplus lines premium, according to the Florida Surplus Lines Service Office.

This industry handles more than 700,000 excess and surplus lines policies a year-about 40 percent of them personal lines contracts for homes, condos, mobile homes and boats. The rest cover commercial entities, big and small, that could not obtain insurance they need in the standard markets.

The industry also pays premium taxes of $200 million a year to the state.

One of the people following the situation closely is Steven Finver, president of the surplus lines agency Continental Agency of Florida in Boca Raton. He is also president of the Florida Surplus Lines Association, a group of more than 70 excess and surplus lines agencies.

“It’s a serious situation for everyone included. Surplus lines agents; retail agents, who rely on surplus lines policies; the consumer relies on the policies to protect themselves; and the state for the funds it brings in. It should never have gotten to this point,” Finver told Insurance Journal.

Turn to Tallahassee

The state Office of Insurance Regulation has indicated it may issue an order to provide some clarity for surplus lines carriers but nine months after Essex, that still hasn’t happened.

According to spokesperson Ed Domansky, “OIR is considering a possible order, but there is no time table yet.”

So the industry has turned to lawmakers for a solution. Two bills-SB1894 in the Senate and HB 853 in the House– would fix the problems created by the courts. They specify which provisions of state regulatory law do not apply to surplus lines and provide for a retroactive effective date to Oct. 1, 1988. The bills are in currently in committees.

Finver is optimistic the Legislature will act.

“We do feel very confident as a group that this will get fixed, not without opposition, I’m sure, by the trial bar. But we feel we will be able to prevail on this. We are still waiting for an order or a rule to come out in the department saying that forms will have to be filed, but the concern is that the companies are getting nervous,” he said.

The Surplus Lines Difference

While not totally exempt from state regulation, the surplus lines industry traditionally has not faced all of the same scrutiny of rates, forms and practices that standard insurers do. This difference is, in part, what makes surplus lines unique. Surplus lines insurers and agents are freer to try to meet the needs of new, emerging, unusual and high risks that would otherwise go without protection.

But the future of this unique regulatory status has been clouded by two court decisions, referred to as the Essex and CNL Hotels decisions. If the court decisions stand, surplus lines insurers could be required to get state approval for their policies, something that would so drastically alter the nature of their business that some in the industry fear carriers could decide to leave the state rather than comply.

Essex Decision

The Essex Insurance Co. v. Mercedes Zota opinion handed down in June involved whether delivery of a surplus lines policy to the customer’s retail agent constituted delivery to the customer. The opinion actually found that delivery was achieved but it delved further to discuss Chapter 627, Part II of the Florida Insurance Code that sets forth requirements for policy delivery, policy forms, the payment of attorneys fees and other matters.

Essex argued that another statute, Chapter 626 governing surplus lines, exempted it and all surplus lines insurers from the provisions in Part II. But the Floirida Supreme Court upset tradition when it found that surplus lines insurers were not exempt from provisions of Part II but only from those in Part I, which concern rates and rating organizations.

The court came to this opinion despite the fact that Chapter 626 specifically exempts surplus lines from Part II and despite the fact that the Office of Insurance Regulation has never interpreted the law to require surplus carriers to get its approval or even file their forms with the state. But the Essex opinion by the state’s highest court raised doubts about what the law really is.

“The Essex decision mistakenly placed surplus lines carriers under the regulatory authority of the Office of Insurance Regulation,” said William Stander, assistant vice president and regional manager for Property Casualty Insurers Association of America. “We fear that this will disrupt the already fragile Florida property insurance market.”

CNL Hotels Decision

Then in August, the U.S. Court of Appeals for the 11th Circuit dropped the second bombshell with CNL Hotels & Resorts, Inc. v. Twin City Fire Insurance Company. This case involved whether Twin City was right to deny a $5.5 million claim in legal fees under a policy endorsement exempting certain loss payments. The case raised again the applicability to surplus lines insurers of the Part II provision requiring filing of forms with the state.

As in Essex, the insurer for CNL Hotels argued that it was exempt from Part II. But the federal court, relying upon Essex, found that the exemption for surplus lines insurers did not extend to Part II. This in turn meant that the surplus lines policy endorsement Twin City used to deny the claim for legal fees was unenforceable because it had not been filed with and approved by the state.

The federal court denied requests for a rehearing from the insurer and the OIR and ignored an amicus brief from OIR stating that Florida law does not require OIR to approve surplus lines forms.

Cloudy Future

The two cases have sewn confusion about what the law requires. It is now unclear where the surplus lines industry’s exemption from regulation begins and ends.

According to Finver, carriers have concerns about whether courts will enforce existing policies and about what the state law requires going forward. No insurance executive wants to wake up some morning facing liability for an exposure clearly excluded in a policy but ruled unenforceable because the exclusion was never approved by state regulators.

Are surplus carriers really nervous enough to leave?

“There has been talk. There have been a couple of carriers in a couple different classes, like an umbrella class, they stopped writing. There are some syndicates that don’t want to write any new contracts yet until they know what is going to happen,” Finver said.

“Then in London, there are some carriers who are saying, if this does not get fixed by March, they will pull out of the state of Florida. All you need is one or two to do that and you will see many do that. Once someone takes the bull by the horns and makes a decision — which is a pretty heavy decision to do that — you could see a mass exodus, which would be very, very bad for the consumer of the state of Florida, because surplus lines is where a lot of their policies are written, and very bad for the state of Florida from a revenue standpoint because surplus lines policies put in $190 million in taxes into the general fund of the state,” Finver said.