Insurance, Administration

Rule R590-171

Surplus Lines Procedures Rule

Notice of Proposed Rule

DAR File No.: 32865
Filed: 07/30/2009

RULE ANALYSIS

Purpose of the rule or reason for the change:

This rule is being changed to update code references, to change terminology, clarify language, to add two new sections as a part of the clarification and standardization process, and to change a filing requirement.

Summary of the rule or change:

The passage of H.B. 374 in 2003 resulted in the replacement of the terms "agent" and "broker" for "producer" in the Insurance code and rules. The bill also created a new Chapter 23a from part of Chapter 23 in Title 31A, which requires the updating of code references in the rule. The rest of the changes are nonsubstantive and for clarification only. (DAR NOTE: H.B. 374 (2003) is found at Chapter 298, Laws of Utah 2003, and was effective 05/05/2003.)

State statutory or constitutional authorization for this rule:

• Section 31A-2-201
• Section 31A-15-111
• Section 31A-15-103

Anticipated cost or savings to:

the state budget:

These changes will have no effect on the work load or income of the department or state budget. No filings will be required of insurance companies. The changes are mainly to conform the rule to the code and clarify the wording in the rule.

local governments:

The changes to the rule will have no impact on local governments since the rule deals solely with the relationship between the department and their licensees.

small businesses:

Since changes to the rule have been made to update code references where only the numbering of the references have been changed, to make changes in terminology, and to make wording changes for clarification purposes, the changes will have no fiscal impact on small businesses.

persons other than business:

Since changes to the rule have been made to update code references where only the numbering of the references have been changed, to make changes in terminology, and to make wording changes for clarification purposes, the changes will have no fiscal impact on businesses or individuals that could be affected by this rule.

Compliance costs for affected persons:

Since changes to the rule have been made to update code references where only the numbering of the references have been changed, to make changes in terminology, and to make wording changes for clarification purposes, the changes will have no fiscal impact on affected persons.

Comments by the department head on the fiscal impact the rule may have on businesses:

This rule will have no fiscal impact on the public or businesses in Utah.

D. Kent Michie, Commissioner

The full text of this rule may be inspected, during regular business hours, at the Division of Administrative Rules, or at:

Insurance
Administration
450 N MAIN ST
SALT LAKE CITY, UT 84114-1201

Direct questions regarding this rule to:

• Jilene Whitby at the above address, by phone at 801-538-3803, by FAX at 801-538-3829, or by Internet E-mail at jwhitby@utah.gov

Interested persons may present their views on this rule by submitting written comments to the address above no later than 5:00 p.m. on:

09/14/2009

This rule may become effective on:

09/21/2009

Authorized by:

Jilene Whitby, Information Specialist

R590. Insurance, Administration.

R590-171. Surplus Lines Procedures Rule.

R590-171-2. Purpose and Scope.

A. The purpose of this rule is:

(1) to recognize The Surplus Line Association of Utah as the advisory organization of surplus lines [brokers] producers;

(2) to authorize The Surplus Line Association to conduct the examination of surplus lines transactions;

(3) to authorize The Surplus Line Association to collect a stamping fee;

(4) to require that each person licensed as a surplus lines [broker] producer in Utah be a member of the advisory organization;

(5) to regulate access to the surplus lines market, with exceptions made for substantial insureds who are presumed to be sophisticated insurance buyers who the commissioner finds can adequately protect their own interests because of their financial resources, business experience and insurance knowledge; and

(6) to prescribe procedures for the placement of insurance with surplus lines insurers.

B. This rule applies, pursuant to Section 31A-15-103, to the placement of insurance with surplus lines insurers on risks located in Utah.

 

R590-171-3. Definitions.

For the purpose of this rule the commissioner adopts the definitions as set forth in Section 31A-1-301 and in addition the following:

A. "Export list" means a list published by the commissioner of coverages and classes of insurance for which the commissioner has determined no general market exists with admitted insurers.

B. "Producer" means an insurance agent, broker or surplus lines broker as defined in Section [31A-23-102] 31A-1-301-88.

C. "Surplus lines [broker] producer" means a [person licensed under Subsection 31A-23-204(5)] licensee as defined in Section 31A-23a-106(2)(a)(ix) to place insurance with surplus lines insurers in accordance with Section 31A-15-103 and this rule.

D. "Surplus lines insurer" means a nonadmitted insurer [with which a surplus lines] that may place business, pursuant to Title 31A, Chapter 15, Part 1 and this rule, with a surplus lines [broker may place business pursuant to Title 31A, Chapter 15, Part 1 and this rule] producer.

E. "Surplus lines transaction" means the solicitation, negotiation, procurement or effectuation with a surplus lines insurer of an insurance contract or certificate of insurance. It also means any renewal, cancellation, endorsement, audit, or other adjustment to the insurance contract.

 

R590-171-4. Surplus Line Association of Utah.

A. Surplus Line Association of Utah is recognized as the advisory organization of surplus lines [brokers] producers authorized by Section 31A-15-111.

B. Each person licensed as a surplus lines [broker] producer in Utah must be a member of the Surplus Line Association of Utah.

C. The Surplus Line Association of Utah is authorized:

(1) to facilitate and encourage compliance by its members with the laws of Utah and the rules of the commissioner relative to surplus lines insurance and to act in other matters as specified by Section 31A-15-111;

(2) to conduct the examination of surplus lines transactions required under Subsection 31A-15-103(11);

(3) to make a determination that a surplus lines transaction is in compliance with Subsection 31A-15-103(11) and with Sections R590-171-6 and 7 of this rule; and

(4) to collect the stamping fee prescribed by Subsection 31A-15-103(11)(d).

 

R590-171-6. Conditions for Placing Insurance with Surplus Lines Insurers.

Placement of insurance with surplus lines insurers pursuant to Section 31A-15-103 may only be done in accordance with either Section A, B or C below.

A. Insurance coverages and classes included on the export list may be placed with surplus lines insurers.

B. Insurance coverages and classes not included on the export list may be placed with surplus lines insurers only under the following conditions:

(1) A good faith effort must be made to place the insurance with admitted insurers the producer has reason to believe will consider writing the type of coverage or class of insurance involved. If that effort shows that the insurance cannot be obtained because of underwriting reasons or the insured requires specific terms and conditions of coverage which are unavailable through admitted insurers, the insurance may be placed with surplus lines insurers. Placement with the surplus lines insurer solely to obtain a better price does not constitute good faith unless the producer demonstrates that the price quoted by the admitted market is excessive as defined in Subsection 31A-19a-201(2).

(2) The inability to place the insurance through an admitted insurer with whom the producer has an established relationship is not an exception to the obligation to place the insurance with an admitted insurer.

(3) The producer must document his efforts to place the insurance with admitted insurers. The documentation must include the record of the efforts to place the insurance and a written explanation confirming the effort as being in good faith. The good faith effort documentation shall be maintained in the surplus lines [broker's] producer's and the originating producer's[producing agent's] files for at least three years from the inception date of coverage or renewal.

C. Substantial insureds may purchase insurance from surplus lines insurers pursuant to Section 31A-15-103 if each of the following conditions is met:

(1) the insured procures the insurance for its risk exposures by use of an employee of the insured whose full time responsibilities and duties consist of purchasing insurance and risk management;

(2) the insurance procured for property and casualty coverages, excluding workers' compensation insurance, exceeds an annual aggregate premium of $500,000; and

(3) the insured's risk manager and an officer of the company sign an affidavit confirming items (1) and (2). This affidavit shall be retained by the surplus lines [broker] producer and one copy shall be attached to the submission documentation required under R590-171-8.

D. All information relating to the placement of insurance pursuant to Section 31A-15-103 shall be made available to the commissioner upon his request.

 

R590-171-7. Conditions for Marketing Insurance with Surplus Lines Insurers.

A. Producers may not solicit business on behalf of a surplus lines insurer. However:

(1) Producers may advertise the availability of insurance products for the insurance coverages and classes included on the export list to potential insureds and other producers.

(2) Surplus lines [brokers] producers may advertise their services and product lines to other producers.

(3) Such advertisements shall identify the fact that the insurance will be placed with a surplus lines insurer. The advertisements must not identify the insurer by name nor act as a solicitation on behalf of any surplus lines insurer. The advertisements shall not identify specific rates or specific policy provisions.

B. Once negotiations over the available terms and conditions for specific coverages begin, at least the following facts must be disclosed in writing to the potential insured:

(1) that the insurance will be placed through a surplus lines insurer and the name of the insurer;

(2) that the producer is not [an agent] a producer of the potential insurer because surplus lines insurers are not permitted to appoint [agents] producers;

(3) that the surplus lines market is a specialty market that has limited regulatory oversight by the commissioner, and specifically, there is no regulation of policy coverage forms or rates; and

(4) that no protection is afforded under any Utah guaranty fund mechanism.

C. Subject to the general provisions of Section [31A-23-404] 31A-23a-501, a surplus lines [broker] producer may originate surplus lines insurance or accept applications for surplus lines insurance from any other producer duly licensed as to the kinds of insurance involved. The surplus lines [broker] producer may compensate the originating producer involved in the transaction[producer].

D. Only that portion of a risk that is unacceptable to the admitted market may be placed with a surplus lines insurer. If it is not possible to obtain the full amount of insurance required by segmenting the risk, or if the only portion that the admitted market will write is incidental to the principal elements of coverage, it is permissible to place the full amount with a surplus lines insurer. An explanation must be provided in the submission documentation outlined in R590-171-8.

 

R590-171-8. Reporting and Examination.

A. No later than 60 days after the effective date of a policy or a certificate of insurance that has been placed with a surplus lines insurer, the surplus lines [broker] producer must file a complete copy of the policy or certificate and justification for placement with a surplus lines insurer with the Surplus Line Association for examination pursuant to Subsection 31A-15-103(11)(a).

B. Justification for placement with a surplus lines insurer shall:

(1) for insurance exposures placed pursuant to R590-171-6.A, consist of identification of the specific coverage or class on the export list; or

(2) for insurance exposures placed pursuant to R590-171-6.B, consist of a copy of the record of the effort to place with admitted insurers required by R590-171-6.B(3); or

(3) for insurance placed pursuant to R590-171-6.C, consist of a copy of an affidavit signed by the insured; and

(4) if applicable, consist of the explanation required by R590-171-7.D; and

(5) consist of any other information or documentation pertinent to the surplus lines placement.

C. The Surplus Line Association shall provide submission forms to be used for complying with R590-171-8.B.

D. If the contract or certificate is not available within 60 days, a binder with sufficient detail to determine the subject of the insurance, coverages, insured, insurer, premium amount and the justification required by R590-171-8B must be filed with the Surplus Lines Association of Utah[pending receipt of the actual policy or certificate of insurance].

E. If the examination performed by the Surplus Line Association determines that the placement of a policy or certificate of insurance with a surplus lines insurer is not in compliance with Section 31A-15-103(11)(a) or this rule, the Surplus Line Association shall take such corrective action as the Association Board of Directors considers appropriate, subject to the review of the commissioner. The Association shall advise the commissioner of all cases of noncompliance.

 

R590-171-9. Rule Distribution.

The Surplus Line Association of Utah shall distribute a copy of this rule to every surplus lines [broker] producer and instruct all surplus lines [brokers] producers as to its scope and operation.

 

R590-171-10. Penalties.

A person found to be in violation of this rule shall be subject to penalties as provided under 31A-2-308.

 

R590-171-11. Enforcement Date.

The commissioner will begin enforcing the revised provisions of this rule upon the effective date of this rule.

 

R590-171-[10]12. Severability.

If a provision of this rule or its application to any person or situation[circumstance] is [for any reason]held to be invalid, that invalidity shall not affect any other provision or application of this rule which can be given effect without the invalid provision or application, and to this end the provisions of this rule are declared to be severable[the remainder of the rule and the application of such provisions is not effected].

 

KEY: insurance

Date of Enactment or Last Substantive Amendment: [ September 1, 1995] 2009

Notice of Continuation: June 14, 2005

Autorizing, and Implemented or Interpreted Law: 31A-2-201; 31A-15-103; 31A-15-111