One substantial area of ambiguity that permeates the surplus lines industry throughout the United States relates to the applicability of state law to surplus lines insurance carriers and brokers. This week, the Excess Line Association of New York (“ELANY”) published its “Compliance Advisor” intending, in part, to shed light on applicability of various New York statutes and regulations to the excess (surplus) lines market. Indeed, the very first paragraph of the Compliance advisor notes that “there is a fairly popular belief within the industry that E&S insurers are subject to none of the laws, regulations or limitations which apply to licensed insurers” and that the Compliance Advisor seeks to correct this common misconception.
A few particular examples from the Compliance Advisor are as follows:
- New York, like most states, exempts surplus lines insurers from the rate and form filing requirements traditionally applicable to the licensed (admitted) market. This does not mean, however, that surplus lines policies are exempt from various substantive rate and policy form requirements or standards that are contained in other sections of the New York Insurance Code.
- Excess lines brokers must pay a 3.6% excess line premium tax. While many states do not expressly impose additional state-specific tax obligations on surplus lines insurers, the Compliance Advisor does notes that, as of 2016, surplus lines insurers are subject to franchise taxes in New York.
- Commercial lines insurance transactions written on a surplus lines basis are exempt from the applicable commercial lines cancellation and nonrenewal standards; however, personal lines insurance policies issued by a surplus lines carrier are not
- Surplus lines insurers are largely exempt from the defense-within-limits and claims-made standards other than in the context of surplus lines coverage issued to transportation network companies.
- Surplus lines carriers are not subject to the caps on short rate and minimum earned premium provisions applicable to licensed insurers.
- The surplus lines market must generally adhere to the standard fire policy provisions in New York.
The Compliance Advisor also discusses how the New York Department of Financial Services (“NYDFS”) generally views statutes and regulations applicable only to “authorized insurers” as not applying to the surplus lines market. By contrast, the NYDFS generally applies laws applicable to policies “issued or delivered” in New York to the surplus lines market. We note that many states differ from the NYDFS and take the alternate position that surplus lines carriers do not “issue or deliver” insurance policies into the state.
Finally, it is important to note that the Compliance Advisor is not meant to be an exhaustive list of all statutes and regulations applicable (or inapplicable) to the surplus lines market. Nearly every state law requires its own separate analysis and understanding; for example, New York’s substantial prohibitions on group property and casualty insurance policies apply to the surplus lines market as well. And, as should be obvious, the Compliance Advisor is only applicable to New York statutes and regulations, and each and every U.S. jurisdiction has its own view of the applicability of its respective insurance laws to the surplus lines industry.
A link to the Compliance Advisor can be found here.