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Surplus Confusion

Under new governor, Florida begins to ease market access, but there is still some distance to travel.

By  Kevin Amrhein

On the federal level, several states have helped confuse the implementation of surplus lines reform tax collections by promoting agreements like NIMA, the Nonadmitted Insurance Multistate Agreement, or SLIMPACT, the Surplus Lines Insurance Multistate Compliance Compact. The agreements leave brokers scratching their heads wondering to whom and to where they will pay future premium taxes.

Last year at the state level, however, Florida approved legislation exempting certain commercial lines from the state’s file and review requirements as of Oct. 1, 2010. In this year’s legislative session, lawmakers exempted more lines from rate regulation with the passage of H.B. 99.

Surplus lines carriers, wholesale brokers and their customers will also notice changes with the passage of H.B. 1087. The bill, signed by Gov. Rick Scott in June, includes a provision that simplifies the placement of non-admitted insurance by eliminating an arduous due diligence requirement. Instead of forcing brokers to scour the market and document rejections by three admitted carriers, the new law requires a simple disclosure form.

The form states that coverage may be available in the admitted market at a lesser cost and that E&S carriers are not covered by the Florida Insurance Guaranty Association. This disclosure, which must be signed by the insured, helps to limit potential liability for agents. The due diligence requirement still applies to residential coverage placed in the surplus lines market.

The new law continues to require the use of a Florida surplus lines broker who shares commissions with retailers to place non-admitted coverage.

The due diligence requirement was lifted for the following lines as of July 1: commercial excess; surety and fidelity; boiler and machinery; errors and omissions; directors and officers, employment practices and management liability; intellectual property; advertising and Internet liability; and properties under high-risk rating plans. On Oct. 1, the list expanded to the lines deregulated under H.B. 99: fiduciary liability; general liability; commercial property; commercial multi-peril; excess property; and burglary and theft.

“Prior to the recent law change, an agent with access to an admitted market that has experienced a downgraded rating [or] offers unfavorable pricing or coverage [was] obligated to offer that market to the insured vs. an excess and surplus lines offering,” says John Laurie, agency manager of BB&T Insurance Services in Bradenton, Fla. “In a way, that punishes that agent because a competing agent may not have that same market and have unimpeded access to an E&S market that is stronger financially, offers better coverage, etc.”

In addition to cleaning up the surplus lines premium tax payment mess, further reform at the state level could be on the agenda. Laurie believes further reform is a good thing. “I would like to see more deregulation. The current changes are not applicable to all lines, but what we have now is certainly better than it was.”

Getting the disclosure form signed is the responsibility of the retail agent. The form was designed with the intent of reducing the retailer’s liability due to an insured’s lack of understanding the differences in the E&S market. The onus used to be on the retail agent to explain differences in placing business in the E&S market to the customer. The new disclosure form helps alleviate some of that risk. Even though the law exempts commercial lines from rate approval, carriers must be able to justify the rates if questioned. The new law allows for rates to be challenged if they are considered excessive.

“Twenty years ago, non-admitted policies were largely manuscript policies for high-risk accounts. Now, many of these policies have become almost duplicates of admitted forms,” says Tom Terfinko, assistant director of Agent & Insurer Services for the Florida Surplus Lines Service Office.

There was a great deal of frustration dealing with solicitation practices under the old due-diligence effort. If caught, agents who didn’t comply faced sanctions, but some took the risk. “There were those who abused it, those who never complied. Others thought it was unfair or redundant,” Terfinko says. “With the change, the attempt is to free up the marketplace.”

Amrhein is wholesale editor.

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