Cancellation and nonrenewal requirements applicable to insurance policies exist in every state in the nation. These laws and regulations are founded on the principle that insurance customers should be protected against losing insurance coverage without proper notice and without good reason. As such, many states require that mid-term cancellation of an insurance policy only be effectuated for specific statutorily-defined reasons, and that sufficient advance notice must be given to the insured prior to the cancellation or nonrenewal of an insurance policy.
However, whether or not each state’s cancellation and nonrenewal requirements apply to the surplus lines market differs substantially between U.S. jurisdictions and, in some instances, applicability is not always clear. Because surplus lines policies are often required to have disclosures indicating that the surplus lines insurer may not be subject to all of the laws and regulations of the insured’s home state, a number of jurisdictions have taken the position that the insured has effectively been put on notice that its surplus lines carrier, as part of the service of providing unavailable (and often complex and specialty) insurance coverage, will not necessarily need to abide by the cancellation and nonrenewal laws. Yet, other states see this issue differently and strive to regulate the surplus lines market nearly to the same extent that the admitted market is regulated.
To our knowledge, only Florida and Maine have statutes set forth in their respective surplus lines laws expressly addressing cancellation and nonrenewal standards applicable to surplus lines insurers. This does not mean, however, that the surplus lines market need not worry about the other states. For example, Indiana explicitly carves out from its cancellation and nonrenewal requirements automobile insurance and medical malpractice policies, but does specifically include “all lines of commercial property and casualty insurance.” Ind. Code § 27-1-31-1. Therefore, as surplus lines insurance is not excluded from the cancellation and nonrenewal requirements, and such requirements expressly apply to all property and casualty lines, Indiana likely does apply its termination and nonrenewal requirements to surplus lines insurers.
By contrast, Illinois specifically sets forth every provision of the Illinois Insurance Code applicable to surplus lines insurers under 215 ILCS 5/445(12). The notice of cancellation and nonrenewal requirements are found under 215 ILCS 5/143 et seq., which are not provisions listed as applicable to surplus lines carriers under 215 ILCS 5/445(12). Therefore, the interplay between various laws leads to the conclusion that Illinois does not apply its cancellation and nonrenewal requirements to surplus lines insurers. Some states do not expressly identify applicability of cancellation and nonrenewal standards to surplus lines insurers in their statutes but rather through published guidance; for example, in Vermont, Bulletin 176 (June 3, 2013) “remind[s] surplus lines insurers and surplus lines brokers that Vermont law governing the cancellation, nonrenewal and renewal of insurance policies does apply to any surplus lines contract where the State of Vermont is the home state of the insured.”
To make matters more confusing, some states do not directly identify whether requirements applicable to admitted insurers apply to surplus lines insurers, but rather adhere to “desk-drawer” rules to determine applicability. In particular, some states take an internal position that cancellation and nonrenewal laws applicable to admitted insurers do (or do not) apply to surplus lines insurers, even if no statute or regulation is specifically on point. In such instances, the best practice is to utilize legal counsel to consult contacts at the respective insurance departments.
While cancellation and nonrenewal statutes and regulations have existed for decades, make no mistake, this is an ever-evolving issue. The emergence of “InsurTech” and delivery of electronic policies that may be turned “on” and “off” raise continued regulatory concerns as to whether appropriate notice has been given for cancellation or nonrenewal of an insurance policy. And states, to this day, continue to weigh in on the issue. Just this month, the Louisiana Department of Insurance issued Advisory Letter 2019-01 (April 9, 2019) “advis[ing] all surplus lines insurers of the notice requirement for non-renewal or cancellation of [certain personal lines] surplus lines property and casualty insurance policies.” The advisory letter may be found here. Prior to the issuance of the advisory letter, it was not entirely clear from statutory construction in Louisiana that surplus lines insurers were required to adhere to personal lines cancellation and nonrenewal requirements.
Perhaps the largest lesson to be learned here is that applicability of various insurance laws, regulations and standards to surplus lines insurers is ever-changing and not always apparent. And, cancellation and nonrenewal requirements are but one set of insurance laws out of literally thousands that may, or may not, be applicable to the surplus lines market depending on the laws of a particular state.