Eligibility Requirements for Florida Surplus Lines Insurance Carriers
Surplus lines insurance is intended to provide coverage that cannot be easily procured in the conventional insurance marketplace. Traditional insurance companies must file their premium rates and policy forms with state regulatory agencies. The rates and forms must be approved prior to any insurance policies being offered for sale to consumers within the state. Generally speaking, surplus lines insurance is that which is not readily available through traditional means. These are generally unusual risks that require specialized insurance policies or risks that have very poor loss experience and are unattractive to conventional insurers. Surplus insurers have written hurricane coverage in Florida and compete for these risks, although generally there has been a decline in such policies since the active hurricane season of 2005. In 2005, the Florida Surplus Lines Service Office (“FSLSO”), processed about 112,000 policies written in the homeowners market compared with about 53,000 policies in 2009.
In Florida, the FSLSO reported that when comparing the first six months of 2010 to the same time period in 2009, Florida actually saw a 2.5 percent increase in surplus lines insurance premiums. Florida Statute §626.918 (within the Surplus Lines Statute) imposes certain eligibility requirements for an insurer in Florida.
These requirements include the following. The insurer must be an authorized insurer in the state or country of its domicile as to the kind or kinds of insurance proposed to be placed and must have been such an insurer for three years or more. However, the three year requirement may be waived if the insurer provides a product or service not readily available to the Florida consumers or has operated successfully for a period of at least one year and has capital and surplus of $25 million or more. The insurer must furnish the FSLSO office with a copy of its current annual financial statement. The insurer must have and maintain surplus as to policyholders of not less than $15 million, and a foreign insurer must also have and maintain in the United States a trust fund for the protection of all its policyholders in the United States, in an amount not less than $5.4 million.
Additionally, the insurer must be of good reputation of service to its policyholders and payment of losses and claims. The insurer must be eligible to transact insurance in this state, under Florida Statute § 624.404(3).
After the Florida Legislature excepted surplus insurers from Chapter 627 of the Florida Insurance Statutes, there were some protections afforded to policyholders within the Surplus Lines Statute similar those provided in Chapter 627. Yet, there are still some provisions in Chapter 627 with no counter-parts within the Florida Surplus Lines Statute. In the upcoming weeks, we will address some of these similarities and differences between Chapter 627 and the Surplus Lines Statute.
I look forward to this series on the E&S market. You spoke of differences with Chapter 627 rates and forms. Don't forget the differences from the "admitted" market as provided in Chapter 631 Florida Statutes as well.
As I pointed out in my Surplus Lines presentation at the First Party Claims Conference in Providence, RI on October 19th this year, Surplus Lines carriers play a very important role in our state insurance markets. How important is perhaps best illustrated by the vote in both houses of the Florida legislature in 2009 to restore surplus lines exemption threatened by two court cases in 2008.
The first case was a decision by the Florida Supreme Court and the other was a Federal appeals court case. Not one vote was cast against this legislation which clearly shows this insurance scheme was viewed as a vital concern to our protection of property and well being. In addition the Insurance Journal reported that in 2008 surplus lines generated $4 billion dollars in preminums in Florida with taxes of $200 million paid into the state's coffers. But having said that, there are a lot of not so subtle differences in their practice and procedures verus those of "admitted carriers" when it comes time to pay claims. This is particularly pronounced in the residential or personal lines arena given the difference that currently exists between admitted carriers obligations and those of surplus lines insurers. Surplus lines adjusters are clearly following their forms (contract language) and not the requirements of carriers who fall under Chapter 627.
As an example, they are paying the ACV of all losses which contrast with admitted carriers who now have to pay the RCV of a loss both for contents and personal property. Given that they are not regulated as to price and coverage form approval, it is perhaps not surprising that they are becoming a dominant player in Florida. It has also been reported this may well be a national trend as there is some movement to have a national surplus lines agent licensing law. I think we will see more of the old mainstream insurance companies buying surplus lines business similar to what Nationwide did when they purchased Scottsdale a few years back. No rate filings or form filing approval at the state level can be a big advantage in the market place. There have been concerns raised about surplus lines insurers financial footprint and their distinctive differences verus admitted carriers.
As an example, the St Pete Times ran an editorial piece dated August 17,2009. In that editorial piece the Times stated that "Florida insurance numbers deceive." The editorial folks took exception to the $4.9 billion in new insurance capital reported to be in the Florida market as heralded by Governor Crist and Insurance Commissioner McCarty. The Times claims that 87.8% of this new capital was from unregulated carriers. The Times goes on to say that "surplus lines carriers are not subject to state regulation in areas such as price, coverage, or customer service."
In my view all professionals involved in loss adjusting, underwriting, and risk management would be well advised to learn as much as possible about the surplus lines unique insurance business model.
I need business liability insurance for a food truck business. Should I be concerned if the underwriter is a surplus line insurer?