Surplus lines insurance companies are a different breed of insurance cat. They are not admitted carriers in the state in which they do business. Thus, most states have consumer protection laws specifically regarding how surplus lines insurance carriers can do business.

Surplus lines carriers are very important to the insurance marketplace. They will often insure the risks many admitted carriers find too risky or novel. For example, when a property owner buys surplus flood insurance or a complex Difference in Conditions policy, it is often sold through the surplus lines market.

Generally, surplus lines carriers are free from the rate approval process admitted carriers have to go through. In many states, they do not have to file policy forms for regulatory approval and are not subject to financial audits for solvency. In short, surplus lines carriers are free from many laws and regulations that admitted carriers have to follow.

Invariably, questions arise regarding how much freedom surplus lines carriers should have from the insurance laws where they underwrite risks. Typically, the surplus lines carrier, following a loss, does not want to comply with claim regulations because doing so would provide coverage or more benefits to the policyholder. The attorneys for the surplus lines carriers argue that their clients do not have to follow claims laws because the legislatures have exempted them from such state rules and regulations.

More than one judge has heard me say in response:

"Your honor, if it does not have to follow this state’s law, what law does it have to follow? The law of Mars?"

Donna DeVaney beat a surplus lines carrier on this very issue. She represented a client with sinkhole loss. Scottsdale Insurance Company, a surplus lines carrier, hired Rimkus Engineering to conduct a test. Rimkus confirmed the loss was caused by a sinkhole. Scottsdale then denied the claim, saying that sinkhole loss was not covered under the policy. (How much do you want to bet that Rimkus would have found a different cause of loss if Scottsdale admitted sinkhole loss was covered?)

Donna filed a Motion for Partial Summary Judgment and a Memorandum on this issue. Interestingly, she did some investigation and showed the trial Court that Scottsdale had paid at least two other policyholders for sinkhole loss with the same policy. The Court, citing the recent Florida Supreme Court case of Essex v. Zota, 985 So. 2d 1036 (Fla. 2008) issued an Order ruling in our client’s favor

Surplus lines insurance policies can be complex because it is never clear which laws apply, and do not apply, to their contracts. Policyholders and adjusters have to be vigilant to understand the legal framework of these contracts to make certain all benefits are claimed and received.

  • The more cases I read, the more convinced I become of the importance of retaining an attorney experienced in insurance claims litigation – better yet, experienced and successful.

    The case you cited, Chip, is a different but compelling example of the difference that can make.

  • Nowdoucit,

    Experience certainly helps do a better job for the client. But, it is no guarantee.

    When I was a younger attorney, I hated to admit that experiences as a lawyer, and in life, made a difference in the quality of my representation. Now that I am older, there are so many reasons why I know that I am a much better attorney than 25 years ago. Much of it has to do with learning subtle aspects of human communication and interaction.

    Still, I sometimes have the opportunity to get brought into a case with less experienced attorneys that look at matters with a fresh viewpoint. There are many very bright and hardworking attorneys, with little prior insurance experience, that do a very fine job helping policyholders. I try to learn from them as well, and take from them the best of their ideas.

    The attorney in the above cited case, Donna Devaney, represented insurance companies at one of the largest lawfirms in Florida. After becoming a partner and finding that status was not all it seemed when she was younger, she switched over to the policyholder side with us.

    Donna has always been successful. Fortunately for her, she is now able to use her considerable talents to help people.

    One of the reasons I left the representation of insurance companies in 1985 is because I did not want to go see my Maker and explain that I used my talents to help save Travelers $25 million dollars. This is not to say that I do not respect my adversaries. The vast majority of insurance counsel are very honorable, good people, and play an important role in society. However, we all have a choice to make at the endeavors we try to be successful.

  • Mark Phillips

    Having represented and settled many Surplus lines losses, I would like to note that a constant “adjuster’s epiphany” which I experienced with these files was that of inadequate and faulty underwriting and policy schedule data. Numerous times, the file schedule did not match up to the real life property and exposure designations. It was almost as if the policy issuance and/or renewal was a “drive by” event…..completed by a Martian.

    What I am addressing here in the broad expectations of acquiring commercial or residential insurance is the ever-present evidence of poorly designed policies which I believe ultimately display the characteristics of the agent / broker. This naturally compromises customer service to the insured in the event of a catastrophic loss, particularly with ever fluctuating property valuations, potentially threatening policy performance in light of coinsurance penalties applied in the adjusted settlement. More times than not, this is due to faulty performance of the agent, who many times has no competence in establishing sophisticated property values and keeping them current. Naturally, this opens liability issues due to their errors and omissions, and rightly so.

    The insured, who many times has had to purchase coverage with “no options left in the market” pressures, is ultimately relying on the professional expertise of the field agent who is submitting and authorizing the insured’s application for coverage to the Surplus lines carrier.

    Since the carriers have no conforming mandatory State regulations or policy form mandates to adhere to, they also can play fast and loose with settlement performance. I handled numerous loss adjustments for a South Florida MGA broker who had arranged his own “excess surplus lines” authority overseas. Due to this flexible “hand-shake” authority and with his own customized and approved manuscripted policy designs, he was actually controlling the underwriting data and policy issuance. He was bold and daring enough to “check off” certain boxes misrepresenting building characteristics and histories inaccurately on applications, so that, at time of loss investigation he could promptly deny coverage when it was noted in the adjusting routine that certain building events and maintenances had not occured as were required to be validated in order to acquire the policy coverage and issuance. He could thus accurately void the contract on grounds of misrepresentation, and have the underwriting questionaire in the file to back up the denial. His incentive was of course to sustain his flexible contract arrangement and limit his loss ratios, thus enriching his commission contingencies. Worth noting is that many of the insureds represented a class of Hispanic consumers who had no ability to know what was authentically being stated on their final application and were thus caught by surprise when struggling to communicate in English, back to me the adjuster, that they had not confirmed certain property realities that had been “checked off” on their application.

    Another compromised policyholder left at the curb.

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