Florida insurance agents should have an easier time placing commercial policies with surplus lines carriers under a new law that allows them to offer the coverage without first scouring the admitted market for the coverage.
For years, Florida required retail agents to fill out a due diligence form showing that three state-authorized carriers that were currently writing business had rejected an application for coverage before the application could be exported to the surplus market, which is less regulated. Agents who failed to conduct the search faced fines and other sanctions.
Agents in both the admitted and surplus lines market said the law did not reflect market practices and could unfairly penalize agents.
“The reason we needed this is about 98 percent of the market doesn’t operate as the statute was intended,” said Jeff Grady, president of the Florida Association of Insurance Agents. “Agents were complaining they were trying to follow a law that in most cases wasn’t possible.”
The new law applies only to commercial lines policies that are no longer regulated by the Office of Insurance Regulation. As of July 1¸the law covers commercial excess, surety and fidelity, boiler and machinery, errors and omissions, directors and officers, intellectual property, advertising and Internet liability insurance, and property risks rated under certain rating plans.
Starting October 1, general liability, nonresidential property, nonresidential multi-peril, excess property, and burglary and theft insurance will be added to the list.
Driving the law changes were several factors including the fact that agents who had appointments with state-authorized insurers already knew whether they would accept the policy. Agents said it was an imposition on those insurers to just keep sending applications just so that an underwriter could mark “no” and provide a signature.
Another issue was the competition between agents who have appointments with admitted insurers and those who don’t. According to FAIA’s Grady, while agents with appointments had to spend time and effort shopping the policy with their commercial insurers, agents without appointments were able to immediately offer surplus lines coverage. And as a lure, they emphasized price without necessary spelling out the risks up front. As a result, some agents had resorted to filling out the due diligence form themselves despite the fact they could face sanctions. Given the volume of business, the odds of regulators catching the agent made it worth the risk.
While the new law may make life easier for agents, they say it will also benefit insurance buyers by letting them know upfront the risks and benefits of surplus lines policies as opposed to those in the state-regulated admitted market. In the past, many buyers were not aware of the risk associated with the surplus lines market, such as the fact it is not covered by the Florida Insurance Guaranty Association, which covers policies stemming from bankrupt insurers.
One of the requirements of the new law calls for policyholders to sign a disclosure document stating that coverage may be available in the state-regulated market at a lesser costs and that surplus lines carriers are not covered by FIGA. A buyer’s signature on that disclosure form removes potential liability for agents.
“It changes the conversation an agent has with a client,” said Grady. “Instead of being only about price, it makes clear on the front end the pros and cons of both types of policies.”
Working alongside the FAIA, the Florida Surplus Lines Association backed the new law, which preserves the requirement that surplus lines policies must be placed through a Florida-licensed surplus lines agent with the commission being shared with the retail agent.
Dan O’Leary, chairman of Shelly, Middlebrooks, and O’Leary, who supports the new law, said the due diligence requirement made it problematic for retail agents to place policies with a surplus lines carrier without violating the law. He said the disclosure statement will maintain the integrity of a policyholder’s records without increasing a surplus lines broker’s workload.
O’Leary said the new law should benefit policyholders who will be better informed about what they are buying. “I believe it is beneficial to clients that they have the freedom to look at all the choices and determine best where to go,” he said.