Enclosed is a copy of Bulletin #92-11 issued by the California Department of Insurance
providing information and guidelines concerning Regulation 2174.1, AB 2608 and SB 1145.
For additional information, we refer you to the Association Bulletins concerning these
changes.
James S. Pugh
Assistant Manager
JSP/imb
Enclosure(s)
STATE OF CALIFORNIA
Department of Insurance
45 Fremont Street
San Francisco, CA 94105
December 18, 1992
Bulletin No. 92-11
TO: Surplus Line Brokers, Insurance Producers and Other Interested Persons
SUBJECT: Surplus Line Insurance
The purpose of this notice is to advise surplus line brokers and other insurance producers
of significant legislative and regulatory changes affecting the transaction of surplus
line insurance in California.
REGULATION 2174.1
Effective November 25, 1992 the Office of Administrative Law adopted Sections 2174.1
through 2174.14 of Title 10, California Code of Regulations. These regulations establish
minimum standards respecting the financial stability, reputation and integrity of
nonadmitted insurers proposed for use by surplus line brokers in California. Included
among the minimum standards are the following:
* $15 Million in Capital and Surplus
* $5.4 Million U.S. Trust Account for Alien Insurers
* 3 Years of seasoning
* A license to sell insurance in the country/state of domicile or other jurisdiction that
issued the license.
* Satisfactory record concerning market conduct, regulatory actions and code violations.
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The regulation requires surplus line brokers to demonstrate compliance with these minimum
standards before placing insurance with a nonadmitted insurer. Specifically, before
placing business with a nonadmitted insurer, surplus line brokers must submit specified
documents to the California Department of Insurance (CDI), along with a filing fee of
$1,500. Upon submission of the required documents and fee, the submitting broker may then
make placements with that insurer. Documents to be submitted to the CDI include:
1. A copy of an annual statement not more than 12 months old.
2. A copy of an audited financial report showing the insurer's condition as of a date not
more than 12 months prior to submission.
3. A certified copy of the trust agreement for alien insurers including a verified copy of
the most recent quarterly statement or list of assets in the trust.
4. A certified copy of the insurer's license including a certificate of good standing,
certificate of compliance or other equivalent certificate.
5. Identification of the insurers agent in California for service of process.
6. The complete street address, mailing address, and telephone number of the insurer's
principal place of business.
7. A certified or verified explanation, report or other statement from the insurance
regulatory office of the insurer's domiciliary jurisdiction concerning the insurers record
regarding market conduct and consumer complaints.
8 A verified statement from the insurer or surplus line broker regarding any currently
known regulatory actions pending against the insurer.
List of Filings
The CDI will publish a List of Filings showing the names of those nonadmitted Insurers for
whom the CDI has received substantially complete filings under this new regulation. Any
other surplus line broker who wants to make placements with an insurer whose name appears
on the List of Filings must submit a Department Form A (6/92) to the CDI along with a $35
filing fee. Upon submission of this form and filing fee, the submitting broker may then
make placements with that insurer.
An insurers name will remain on the List of Filings for a period not to exceed 1 year
unless the required documents are updated and resubmitted to the Department within twelve
months from the initial submission. In other words, the documents submitted pursuant to
the regulation must be filed and updated annually.
Page 3
The CDI will maintain an updated List of Filings showing those nonadmitted insurers for
whom the Department has received substantially complete filings. This list will be
available for review at the Department's public counters in Los Angeles, San Francisco,
Sacramento and San Diego. Additionally, the CDI will provide an updated List of Filings to
The Surplus Lines Association of California on an ongoing basis.
Transition Period for On-going Insurers
The regulation provides a transition period for surplus line brokers who make placements
with an insurer which has been used for surplus line placements prior to the effective
date of this regulation. The transition provision allows those brokers to submit the
required documents for those companies to the CDI not later than 180 calendar days after
the effective date of this regulation. Thus, the documents required for on-going insurers
must be submitted to the Department no later than May 24, 1993.
AB2608
Assembly Bill 2608, Chapter 1205, amends Section 1763 of the California Insurance Code
effective January 1, 1993. As amended, Section 1763 of the Insurance Code permits surplus
line brokers to solicit and place insurance with nonadmitted insurers only if the
insurance cannot be obtained from insurers that are licensed and actually writing that
particular type of insurance in this state. The law requires each surplus line broker to
be responsible to ensure that a diligent search is made among insurers that are admitted
to transact and are actually writing the particular type of insurance in this state before
procuring the insurance from a nonadmitted insurer.
Report of Placement - Department Form SL-1 (1 2/92)
The law requires each surplus line broker to file with the Commissioner or his or her
designee a written report regarding each surplus line placement. The report of placement
must be filed with the Commissioner or his designee within 60 days of any placement made
with a nonadmitted insurer on or after January 1, 1993. The attached Department form, SL-1
(1 2/92), entitled "Report of Placement" has been developed for this purpose.
The Commissioner has designated The Surplus Line Association of California as his designee
for purposes of receiving this report.
The Report of Placement must be accompanied by a copy of the Declaration page of the
policy or a copy of the Surplus Line Broker's certificate or binder evidencing the
placement of insurance.
Page 4
Diligent Search Report
In addition, CDI Form SL-2 (12/92) entitled, 'Diligent Search Report" must also be
attached to each Report of Placement filed with The Surplus Line Association of
California. The SL-2 must set forth the diligent efforts to place coverage with admitted
insurers and the results of those efforts. The form must be signed by a person licensed
under the Insurance Code who made the diligent search or supervised an unlicensed person
or persons who actually conducted the search. A copy of CDI form SL-2 (12/92) is attached
to this Bulletin.
Lower Rate Filings
Section 1763 of the Insurance Code continues to prohibit the placement of insurance with a
nonadmitted insurer for the purpose of procuring a rate lower than the lowest rate that
will be accepted by any admitted insurer. It shall be conclusively presumed that insurance
is placed in violation of this section if the insurance is actually placed with a
nonadmitted insurer at a lower rate of premium or lower premium than the lowest premium
that could be obtained from an admitted insurer unless, at the time the insurance
attaches, the surplus line broker files with the Commissioner a statement describing the
insurance, specifying the rate and nearest rates procurable from admitted insurers. The
statement must explain the reasons that the insurance must be placed with a nonadmitted
insurer even though it is available from an admitted insurer. This statement must be filed
with the Insurance Commissioner at the following address:
State of California
Department of Insurance
45 Fremont Street
San Francisco, CA 94105
Attention: Surplus Line Enforcement Unit
The Insurance Commissioner has five days from receipt of the statement within which to
notify the licensee that the placement is in violation of Section 1763 and to order the
broker to effect termination of that insurance. Failure to effect that termination is
grounds for disciplinary action against the licensee.
Page 5
SB1145
Senate Bill Number 1145, Chapter 397, amends Section 1764.1 of the California Insurance
Code effective January 1, 1993. As amended, 1764.1 requires every policy issued by a
nonadmitted insurer to contain a required disclosure statement in bold face, 16-point type
on the front page of the policy. A copy of the required disclosure statement is attached.
Additionally, Section 1764.1 requires every surplus line broker to be responsible to
ensure that at the time of accepting an application for any insurance policy to be issued
by a nonadmitted insurer that the signature of the applicant is obtained on a
free-standing disclosure statement. The disclosure statement shall be in bold face 16
point type and contain the same mandatory disclosure language as is required on the front
page of the policy issued by the nonadmitted insurer. The free-standing disclosure
statement must be signed by the applicant and is not subject to any limited power of
attorney agreement between the applicant and an agent or broker or surplus line broker.
Industrial Insured
Section 1764.1 provides limited exemptions from these disclosure requirements for
industrial insureds and for transactions involving commercial insurance coverages.
Specifically, if the applicant qualifies as a industrial insured, then the applicant's
signature is not required on the free-standing disclosure statement. However, the
mandatory disclosure statement is still required to be contained on the policy,
confirmation of insurance or certificate of placement, whichever is first provided to the
insured.
An industrial insured is identified as an insured which employs at least 25 employees on
the average during the prior twelve months and which has aggregate annual premiums for all
insurance other than workers compensation and health coverage totaling not less than
$25,000; or which obtains the insurance through the services of a full-time employee
acting as insurance manager or a continuously retained insurance consultant. Please note
that a continuously retained insurance consultant does not include any agent or broker
through whom the insurance is placed, any sub-agent or sub-producer involved in the
transaction, or any agent or broker which employs or contracts with an agent, broker,
sub-agent or sub-producer involved in the transaction.
Commercial Coverages
With respect to commercial insurance coverage for an insured other than an industrial
insured, the law permits the applicant's signature on the disclosure form to be
transmitted by the applicant to the agent or broker via facsimile or comparable electronic
transmittal if the insurance transaction is not conducted in an in-person, face-to-face
meeting. Additionally, if the applicant requires that insurance coverage be bound
immediately because the applicant is required to
Page 6
because the applicant is required to have coverage in place within two business days and
the applicant cannot meet in person with the agent or broker to sign the disclosure form,
then the agent or broker may obtain the signature of the applicant within five days of
binding coverage. However, the applicant may cancel the insurance within five days of
receiving the disclosure form from the agent or broker. The cancellation shall be on a
pro-rata basis and the applicant shall be entitled to the recession or return of any
broker fees charged for the placement.
CONCLUSION
These regulatory and legislative changes are intended to safeguard the public's interest
when purchasing insurance from nonadmitted insurers. The CDI will aggressively enforce the
provisions of these new laws and regulation to ensure compliance and adequate consumer
protection.
Therefore, it is imperative that each licensee, who is or intends to become involved in
surplus line transactions, carefully review the provisions of these new laws and
regulation and take steps to achieve voluntary compliance. Any questions concerning this
bulletin should be addressed to the following:
State of California
Department of Insurance
45 Fremont Street
San Francisco, CA 94105
Attention: Surplus Line Enforcement Unit
JOHN GARAMENDI
Insurance Commissioner
NOTE: The forms attached to this Bulletin may be photocopied for your use.
CONFIDENTIAL
REPORT OF SURPLUS LINE PLACEMENT
PLEASE REFER TO THE INSTRUCTIONS ON THE BACK OF THIS FORM. THIS FORM MUST BE ACCOMPANIED
BY A DILIGENT SEARCH REPORT AND A COPY OF THE DECLARATIONS PAGE OR CERTIFICATE OR BINDER.
(CALIFORNIA INSURANCE CODE § 1763(A).)
1. __________________________________ hereby submits that he/she is:
(A) A duly licensed surplus line broker, license number ____________.
or (B) that he/she is a transactor on the surplus line license of
___________________
(Name of Organization)
license number ______________.
and (C) that he/she or said organizational licensee was engaged by the insured, or the
insured's
broker, named herein to obtain insurance against certain risk as described in this report.
2. (A) Name of Insured
___________________________________________________________.
(B) Address of Insured
________________________________________________________
(Street and Number)
____________________________________________________
(City) (State) (Zip Code)
(C) Description of the Risk __________________________________________________________
_____________________________________________________________________________
(D) Location of the Risk__________________________________________________________
(Street and Number)
_____________________________________________________________________________
(City) (State) (Zip Code)
(E) Name of Nonadmitted Insurer(s) With Whom the Risk Was Placed (Include an attachment if
additional space is needed)
Name Premium Charged Type of Insurance Placed*
_______________ ___________________ ___________________
_______________ ___________________ ___________________
_______________ ___________________ ___________________
*Enter appropriate code number for type of insurance placed. See Codes attached.
_________________________________________ _____________
SIGNATURE OF PERSON NAMED ON LINE 1 DATE
SL-1(12/92)
Page 2
INSTRUCTIONS
Line 2(E): This section must be completed in its entirety. Do not simply refer to attached
declaration pages or certificate.
WHAT MUST ACCOMPANY THE REPORT: This report must be accompanied by a copy of the
declarations page or certificate or binder, and a diligent search report Form SL.-2. Note:
The surplus line broker submitting this form is responsible to ensure that a diligent
search is made among admitted insurers and that the risk meets the conditions for surplus
line exportation.
(California. Insurance Code § 1763(a).)
WHEN TO FILE: This report must be filed by the surplus line broker within 60 days of
placing the insurance with a nonadmitted insurer. (California Insurance Code (1763(a).)
WHERE TO FILE: This report must be submitted to The Surplus Line Association of California
as designee for the California Insurance Commissioner.
LOWER RATE FILINGS: This report may not be used to file a risk placed with a nonadmitted
insurer when such insurance is procured at a lower rate of premium or lower premium than
the lowest rate or premium available from an admitted insurer. Please contact the
Department of Insurance or The Surplus Line Association of California for information
regarding the procedures applicable to such "lower rate" filings.
SL-1(12/92)
CODE TYPE OF INSURANCE
050 Auto Liability-Private
051 Auto Liability-Commercial
100 Auto Physical Damage-Private
101 Auto Physical Damage-Commercial
150 Crime
151 Crime-Kidnap & Ransom
200 Combined Auto Liability & P.D. - Private
201 Combined Auto Liab. & P.D. - Commercial
300 Excess Liability (Incl. Umb.)
350 Fidelity, Surety & Bonds - Bonds
351 Fidelity, Surety & Bonds - Fidelity
400 Fire - Sgl. Farm Dwelling, Duplex
401 Fire - Commercial
402 Fire - Homeowners
403 Fire - Homeowners Multiple Peril
404 Fire - Farm owners Multiple Peril
450 Inland Marine
500 General Liability
501 Gen. Liability - Pollution Legal Liability
502 General Liability - Product Tampering ...
510 Aviation
550 Errors & Omissions - AR others
551 Errors & Omissions - Dir. & Off.
600 Malpractice - AU Other
606 Malpractice - Hospitals
650 Miscellaneous
651 Miscellaneous - Glass
652 Miscellaneous - Boiler & Machinery
653 Miscellaneous - Nuclear Risks
655 Miscellaneous - Political Risks
700 Accident
701 Accident - Disability Income
702 Accident - Group Health Insurance
703 Accident - Individual Health Insurance
800 Garage Liability (May Include GKLL)
980 Excess Workers Compensation
990 Commercial Property - all Risk
994 Commercial Property - Sp. M. Peril
996 Commercial Property - DIC
997 Commercial Property - Earthquake
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INSTRUCTIONS
Line 1(A) and 1(B): If you are licensed and authorized to act in two or more capacities
(e.g. as a broker and a surplus line broker), then please circle the one that describes
the capacity in which you are acting in this transaction.
Line 7(A): Please provide a complete response. Note: the Insurance Commissioner or his
designee may require the surplus line broker to conduct a further or additional search
among admitted insurers for similar placements in the future. (California Insurance Code
Section 1763(b)) An incomplete response on line 7(A) may unnecessarily result in a request
for a further search to be conducted.
IMPORTANT: Persons who are licensed only as an agent may only submit a risk to admitted
insurers that have appointed them as their agent. Agents are not authorized to offer a
risk to admitted insurers for which they are not appointed agents. A search which is
limited to only those companies that have appointed the agent may not necessarily
constitute a diligent search of the admitted market.
WHAT TO FILE: This report must be filed as an attachment to the Report of Placement. (CDI
Form SL-1).
WHERE TO FILE: The SL-1 and this report are to be filed by the surplus line broker with
The Surplus Line Association of California within 60 days of placement of coverage with
nonadmitted insurer(s).
MULTIPLE LICENSEES CONDUCTING SEARCH: If two or more licensees conduct a diligent search
of admitted insurers, then each licensee must complete a diligent search report (CDI Form
SL-2). All such reports should be attached to the SL-1.
SL-2 (12/92)
DILIGENT SEARCH REPORT
Please Refer to the Instructions on Page 4 of This Form.
1. ______________________________________ hereby submits that he/she is:
(A) Duly licensed and authorized to act as (agent, broker, surplus line broker), license
(Circle One)
number _____________________;
or (B) that he/she is an endorsee on the organizational license of ____________________
(Name of Organization)
and is duly licensed and authorized to act as (agent, broker, surplus line broker),
license number
____________________ (Circle One)
and (C) that he/she or said organizational licensee was engaged by the insured, or the
insured's broker, named herein to obtain insurance against certain risk as described in
this report.
2. (A) Name of Insured
___________________________________________________________.
(B) Address of Insured
________________________________________________________
(Street and Number)
____________________________________________________
(City) (State) (Zip Code)
(C) Description of the Risk ____________________________________________________
_____________________________________________________________________________
(D) Location of the Risk_______________________________________________________
(Street and Number)
_____________________________________________________________________________
(City) (State) (Zip Code)
3. Type of Insurance coverage ___________________________________ (See Codes Attached)
(Enter Appropriate Code Number)
4. If Private Passenger Automobile liability Insurance is identified on line 3, does the
insured qualify as a 'Good Driver' under Section 1861.025 of the California Insurance
Code? Check one.
(Yes) (No) (Not Applicable)
5. If Health Insurance is identified on line 3, does the insured qualify as a "Small
Employer" under Section 10700(x) of the California Insurance Code? Check one.
(Yes) (No) (Not Applicable)
SL-2 (12/92)
Page 2
6. (A) Was this insurance placed pursuant to Section 125 et. seq. of the California
Insurance Code governing transactions with risk purchasing groups authorized by the
FederalLiability Risk Retention Act of 1986 - ____ ____
(Yes) (No)
(B) If the answer to 6(A) is yes, give the name and address of the purchasing group of
which the insured is a member ____________________________________________
_____________________________________________________________________
7. (A) Describe the diligent efforts made to place this coverage with admitted insurers
(include an attachment if additional space is needed)
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
(B) Did you determine that fewer than 3 admitted insurers actually write this particular
type of insurance?
____ ____
(Yes) (No)
(C) If yes, please describe how you made this determination.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
SL-2 (12/92)
Page 3
8. (A) Was the risk described on line 2 submitted by you or by someone under your
supervision to at least three (3) insurers that are admitted in California and actually
writing that particular type of insurance?
____ ____
(Yes) (No)
(B) If yes, complete the following:
ADMITTED COMPANIES DECLINING THE RISK
Name of Company
Name of Company
Representative*
and Telephone
Number
Declination Code**
Mo. and Year of
Decliniation
*Identify whether the representative is an employee or agent.
** Codes:
1 - Company's capacity reached
2 - underwriting reason
3 - refused to state
4 - other
The undersigned licensee hereby certifies that this report is true and correct and that
this risk is not being placed with a nonadmitted insurer for the sole purpose of securing
a rate or premium lower than the lowest rate or premium available from an admitted
insurer.
___________________________________________________ _______
Signature of Licensee Who Performed or Supervised the Search Date
SL-2 (12/92)
CODE TYPE OF INSURANCE
050 Auto Liability-Private
051 Auto Liability-Commercial
100 Auto Physical Damage-Private
101 Auto Physical Damage-Commercial
150 Crime
151 Crime-Kidnap & Ransom
200 Combined Auto Liability & P.D. - Private
201 Combined Auto Liab. & P.D. - Commercial
300 Excess Liability (Incl. Umb.)
350 Fidelity, Surety & Bonds - Bonds
351 Fidelity, Surety & Bonds - Fidelity
400 Fire - Sgl. Fam. Dwelling, Duplex
401 Fire - Commercial
402 Fire - Homeowners
403 Fire - Homeowners Multiple Peril
404 Fire - Farm owners Multiple Peril
450 Inland Marine
500 General Liability
501 Gen. Liability - Pollution Legal Liability
502 General Liability - Product Tampering
510 Aviation
550 Errors & Omissions - All others
551 Errors & Omissions - Dir. & Off.
600 Malpractice - AR Other
606 Malpractice - Hospitals
650 Miscellaneous
651 Miscellaneous - Glass
652 Miscellaneous - Boiler & Machinery
653 Miscellaneous - Nuclear Risks
655 Miscellaneous - Political Risks
700 Accident
701 Accident - Disability Income
702 Accident - Group Health Insurance
703 Accident - Individual Health Insurance
800 Garage Liability (May Include GKLL)
980 Excess Workers Compensation
990 Commercial Property - all Risk
994 Commercial Property - Sp. M. Peril
996 Commercial Property - DIC
997 Commercial Property - Earthquake
EXHIBIT A
NOTICE:
1. THE INSURANCE POLICY THAT YOU ARE APPLYING TO PURCHASE IS BEING ISSUED BY AN INSURANCE
COMPANY THAT IS NOT LICENSED BY THE STATE OF CALIFORNIA. THESE COMPANIES ARE CALLED
"NONADMITTED" OR "SURPLUS -LINES' INSURERS.
2. THE INSURANCE COMPANY IS NOT SUBJECT TO THE FINANCIAL SOLVENCY REGULATION AND
ENFORCEMENT WHICH APPLIES TO CALIFORNIA LICENSED COMPANIES.
3. THE INSURANCE COMPANY DOES NOT PARTICIPATE IN ANY OF THE INSURANCE GUARANTEE FUNDS
CREATED BY CALIFORNIA LAW. THEREFORE, THESE FUNDS WILL NOT PAY YOUR CLAIMS OR PROTECT YOUR
ASSETS IF THE INSURANCE COMPANY BECOMES INSOLVENT AND IS UNABLE TO MAKE PAYMENTS AS
PROMISED.
4. FOR ADDITIONAL INFORMATION ABOUT THE INSURANCE COMPANY YOU SHOULD ASK QUESTIONS OF YOUR
INSURANCE AGENT, BROKER, OR "SURPLUS LINES" BROKER OR YOU MAY CONTACT THE
CALIFORNIA DEPARTMENT OF INSURANCE.
___________________
DATE
___________________
INSURED
SLA FORM D-1 9/92
EXHIBIT B
NOTICE:
1. THE INSURANCE POLICY THAT YOU HAVE PURCHASED IS BEING ISSUED BY AN INSURANCE COMPANY
THAT IS NOT LICENSED BY THE STATE OF CALIFORNIA. THESE COMPANIES ARE CALLED
"NONADMITTED" OR "SURPLUS LINES" INSURERS.
2. THE INSURANCE COMPANY IS NOT SUBJECT TO THE FINANCIAL SOLVENCY REGULATION AND
ENFORCEMENT WHICH APPLIES TO CALIFORNIA LICENSED COMPANIES.
3. THE INSURANCE COMPANY DOES NOT PARTICIPATE IN ANY OF THE INSURANCE GUARANTEE FUNDS
CREATED BY CALIFORNIA LAW. THEREFORE, THESE FUNDS WILL NOT PAY YOUR CLAIMS OR PROTECT YOUR
ASSETS IF THE INSURANCE COMPANY BECOMES INSOLVENT AND IS UNABLE TO MAKE PAYMENTS AS
PROMISED.
4. FOR ADDITIONAL INFORMATION ABOUT THE INSURANCE COMPANY YOU SHOULD ASK QUESTIONS OF YOUR
INSURANCE AGENT, BROKER, OR "SURPLUS LINES"" BROKER OR YOU MAY CONTACT THE
CALIFORNIA DEPARTMENT OF INSURANCE.
SLA Form D-2 9/92