|
|
|
|
|
|
|
|
|
Bulletins & News The Story of Nonadmitted Insurance in Californiafor a copy of the brochure click here.
The Surplus Line Association of California Copyright © 2001 This brochure is advisory only and is not intended to be all-inclusive or original. It does not supersede the actual language of the California Insurance Laws or Regulations. The SLA makes no warranty or representation as to the accuracy or current effectiveness of the laws and regulations reprinted in this brochure. The Material in this booklet is protected by copyright and no portion hereof may be reproduced without permission. All rights reserved. THE NONADMITTED MARKETPLACE WHY DO WE NEED IT? The answer to this question lies in the need for an innovative and imaginative insurance marketplace for those insureds who require extremely large limits of protection, or require coverages that have exposures of such an unusual nature that the admitted companies are unable to respond to their insurance needs. The origins of the Excess & Surplus line market go back to the 1800's when a network developed whereby a broker, unable to find enough American insurers to provide full coverage for his client, could export the business to British insurers thereby covering the necessary limits or unique coverages required. Unlike the admitted market, the insurers in the nonadmitted market were not subject to the authority of the insurance regulators. They constituted a small percentage of the total insurance business done in the state and were usually located in a foreign country. As the nonadmitted market grew in size, it became obvious to the state regulatory authorities that they had inadequate controls over this market and additional regulations were needed. These new regulations controlled the nonadmitted marketplace by regulating the activities of the licensed surplus line brokers. HISTORY OF THE SURPLUS LINE LAWS In California, the regulatory law prior to 1937 provided an inadequate form of control over activities of Surplus Line Brokers by the California Department of Insurance ("CDI"). The Insurance Commissioner lacked authority and facilities for effectively policing the activities of licensed insurance brokers who handled nonadmitted insurance placements. Therefore, the Commissioner could not properly safeguard the interest of California insureds or admitted insurers nor assess and collect the full taxes provided by law on such activities. As a result, in 1937, the California Insurance Commissioner recommended the following: 1. A special committee be created to cooperate with the Insurance Department in the drafting of new laws which would provide the Commissioner a means of proper regulation and would permit nonadmitted insurers to provide coverages which the admitted market did not readily provide, and; 2. Surplus Line Brokers should form an Association, whose purpose is to inform members as to proper procedures and to cooperate with the Insurance Department in providing effective regulation. This joint effort resulted in the drafting of the California Surplus Line Law, now contained in Chapter 6, Sections 1760 through 1780 of the Insurance Code of California and passed by the Legislature in 1937. At the same time, The Surplus Line Association of California ("SLA" or the "Association") was formed. STAMPING OFFICE In 1938, the California Insurance Commissioner requested that the "Association" create a Stamping Office to administer the functions of the newly created SLA. Today the most important of these functions are the receipt, review, and processing of required policy filings. The SLA also performs financial security summary review and analysis to determine whether foreign and beginning in 1994 alien, nonadmitted insurers meet the criteria set forth by the CDI. The expense of operating the Stamping Office, and other operating expenditures of the Association, are defrayed by a mandatory stamping fee which is a percentage of the premium. The Stamping Office also serves as a surplus line advisory organization for the Insurance Commissioner with various statutory powers and duties. The Stamping Office acts as an advisory organization in notifying SLA members of incomplete or inaccurate information in transactions filed. The Stamping Office function is a clearinghouse through which admitted insurers or producers may call attention to transactions believed to be in violation of the law. THE RIGHT TO PURCHASE INSURANCE State regulation of insurance purchases by its citizens from insurers
not admitted in the State is an old problem. The California Surplus Line
Law is based on the theory that the right of the buyer to make a contract
outside of the State cannot be denied by the State. Therefore,
any person may negotiate and effect insurance to protect himself, herself,
or itself against loss, damage, or liability with any nonadmitted carrier.
(insurance Code Section 1 760) In cases of direct placements the insured
must pay the premium tax in accordance with the Revenue and Taxation Code. PRINCIPAL PROVISIONS OF THE SURPLUS LINE LAW 1. Insurance on a risk in California may be placed through a licensed Surplus Line Broker only in those instances where the insurance is not available from admitted insurers qualified to write such insurance. 2. State laws provide the broker with guidelines as to the types of risks that are eligible for surplus lines placements and the necessary procedures to be followed in accessing the nonadmitted insurer. 3. Restrictions are placed on the surplus line licensee as to which nonadmitted insurers it can use for the placement. 4. A clear disclosure to the buyer must be made, stating that the risk is being placed with a nonadmitted insurer and that guaranty fund protection is unavailable to the buyer. 5. The surplus lines transaction and supporting documentation must be reported to a "surplus lines stamping office" to verify that the placement was handled correctly by the broker. 6. Surplus line transactions are subject to a premium tax levied by the state, charged to the insured, and paid or. remitted to state authorities by the surplus line broker. 7. No such insurance may be placed with a nonadmitted insurer for the purpose of obtaining a lower premium than the lowest premium at which such insurance is available from an admitted insurer. 8. Surplus line brokers must provide a surety bond guaranteeing that they fully comply with the Surplus Line Laws. LESLI LIST The CDI established a List of Eligible Surplus Line Insurers, known as the "LESLI" list, which was first issued on July 7,1995. The CDI determines whether a particular insurance company meets the state's standards for eligibility, and if so, the company's name is placed on the list. Licensed surplus line brokers are prohibited from using nonadmitted insurers that are not on the list. Effective January 1, 1997, the CDI implemented Senate Bill 1906, requiring individual Lloyd's syndicates be identified rather than just showing "Underwriters at Lloyd's." Therefore, beginning January 1, 1997, a Surplus Line Broker may only place business with Lloyd's syndicates on the "LESLI" list. ONGOING FILING REQUIREMENTS FOR ELIGIBLE SURPLUS LINE INSURERS IN CALIFORNIA All filings on behalf of eligible surplus line insurers in California (or those insurers seeking to become eligible) must be made through a licensed California surplus line broker ("contact broker"). Refer to California Insurance Code ("CIC") Section 1765.1 and California Code of Regulations ("CCR"), Title 10, Section 2174 for the regulatory filing requirements for surplus line insurers. In addition, the CDI has provided a guide outlining the ongoing regulatory filing requirements for eligible surplus line insurers, as well as for those insurers who are seeking surplus line eligibility in California. This guide is attached to SLA Bulletin #852 (issued March 12, 1999). EXPORT LIST In recognition of the fact that certain types of insurance coverages,
or classes of risks, are almost always placed in the surplus line market,
an export list was created. The export list was created for coverages
or risks that can be "exported" to nonadmitted insurers without
fulfilling the diligent search requirements (Form SL 2). The export list
greatly facilitates surplus line placements that involve coverages traditionally
not provided by the admitted market. It is reviewed and updated at least
annually by the CDI to reflect changes in market conditions. As the various State Insurance Codes started to address the nonadmitted market in more depth, it soon became apparent to the Insurance Departments in many of these states that they were not able to handle the large volume of work generated by these new provisions. A solution to the problem was to enlist the help of the surplus line broker community. The regulators realized that these brokers could assist in handling some of the more routine matters of the trade and provide valuable background information on nonadmitted insurers. This constituted the genesis of The Surplus Line Association of California. SLA was the first association of its kind and soon became a model for
other Surplus Line Associations throughout the country. Effective March 30, 1994 the SLA was approved to the surplus line advisory organization to the CDI. THE SURPLUS LINE ASSOCIATION OF CALIFORNIA MISSION STATEMENT Our mission is to ensure that a responsive and lawful nonadmitted insurance market is maintained in California. Our measure of success in this respect is that the consumer is protected, the needs of the regulators are well served, and unlawful activities are curtailed. Through a professional and committed organization, utilizing state of the art technology and a challenging work environment, we respond to the needs of the California consumer, our membership, and appropriate public agencies. We provide education, processing, evaluation, and dissemination of Surplus Line data and information to help ensure the financial integrity and stability of the nonadmitted market. THE PURPOSES OF THE ASSOCIATION I. To monitor, facilitate and encourage compliance with the Surplus Line Law by its Members. 2. To promote fair dealing between Members and the public, to protect the rights of admitted insurers and to encourage legal use of the surplus line market by Members. 3. To assist the Commissioner in ensuring that those seeking coverage in the California excess and surplus line market have access to financially sound and reputable nonadmitted insurers. 4. To maintain a Stamping Office for the receipt, recording and review of documents Members are required to file. 5. To receive and disseminate to its Members information relative to surplus line insurance and to educate and assist its Members in the understanding and interpretation of California surplus lines laws and regulations. 6. To provide such other services to its Members as are incidental or related to the purposes of the Association. ASSOCIATION OFFICERS AND COMMITTEES The officers of the SLA consist of an elected Chair, Vice Chair and a Secretary Treasurer, and management has been vested in an elected Executive Committee. The SLA endeavors to maintain equitable distribution of Executive Committee membership based on size, location and type of the members' operations. Additional committees are appointed by the Executive Committee, which regularly receives information on their activities. Of greatest importance are the Stamping Office and Contact Committee, Legislative Committee, Education Committee and Automation Committee. THE SURPLUS LINE ASSOCIATION MANUAL California statutes and regulations applicable to surplus line brokers, as well as other useful reference materials on surplus line placement and filing procedures, surplus line taxes and other relevant topics, are published by the SLA in the form of a manual. Many of the statutes and regulations are subject to interpretation in view of changing conditions in the admitted market. These conditions are continuously reviewed both by the Stamping Office personnel and by the Association's committees. CONTACT WITH THE INSURANCE DEPARTMENT The Stamping Office maintains a close relationship with the CDI to assure a continuous exchange of necessary and vital information, essential to the surplus line business. Since the SLA, and particularly its Officers and Executive Committee, are concerned with the operations of the Stamping Office and the proper activities of the Surplus Line Brokers within the Surplus Line Law, close contact between the Officers and Executive Committee and the Insurance Commissioner is also maintained. RECORD KEEPING The Stamping Office records are maintained to keep track of the total surplus line insurance premium transactions of all members. These records often are of assistance to the CDI in connection with audits. Also, through a sophisticated computer system the Association compiles comprehensive statistical data concerning California Surplus Line exports. This affords a valuable means of measuring the extent to which nonadmitted insurers are participating in certain classes of business. Refer to our Web site for percentages of each major classification and nonadmitted premium totals (click here for more information on premium totals). FILING WITH THE STAMPING OFFICE As a matter of interest, the filings by the Surplus Line Broker with the Stamping Office are handled as follows: The Surplus Line Broker proposing to use a nonadmitted insurer is guided by the rules and regulations set forth in the California Surplus Line Law, contained in Chapter 6, Sections 1760 through 1780 of the CIC and Title 10, Sections 213 1 2174 of the CCR. The Surplus Line Broker, having concluded that the risk appears to be proper for placement, makes a filing with the Stamping Office. This filing must be made within 60 days of placing the insurance with a nonadmitted insurer. Unless the Stamping Office or the CDI notifies the member that the filing is incomplete, the placement then stands as being in compliance with the law for the term of that placement. STATE TAX AND STAMPING FEE A California state tax of 3% is imposed on the premium writings of a Surplus Line Broker. The stamping fee has been changed a number of times in the history of the Association; check our Web site for the current rate (click here for more information on taxes and fees). NONADMITTED FOREIGN INSURERS A nonadmitted foreign insurer is an insurance company, which is licensed in its state or country of domicile but not in California. The insurer must have and continually maintain a minimum of $15 million in capital and surplus consisting of assets acceptable under the California Insurance Code. It should be noted that letters of credit are not acceptable assets. ALIEN INSURERS An alien insurer is an insurance company licensed in a foreign country,
but not licensed in California. The insurer must have and continually
maintain a minimum of $15 million in capital and surplus consisting of
assets acceptable under the California Insurance Code. It should be noted
that letters of credit are not acceptable assets. In addition, to protect
U.S. policyholders, alien insurers must establish a U.S. trust account
consisting of cash and marketable securities of no less than $5.4 million
with a U.S. Federal Reserve System Bank member. Letters of credit may
be used to fund the trust account, provided they are issued by a qualified
U.S. financial institution. |
