View this article online: https://www.insurancejournal.com/magazines/mag-features/2009/02/22/157732.htm
Have you ever seen anything like this in Florida?
Never. I haven’t seen anything like this anywhere in the country.
If it were a horror flick it might be titled, Surplus Fear Strikes Florida.
The opening scene shows roving bands of mobile park residents, condo dwellers, contractors, manufacturers, short order cooks, retailers, doctors, nurses and boat owners in communities across Florida naked and in a panic.
There is a riot and then a deadly explosion at the Citizens Property Insurance building after desperate homeowners are turned away because the building can’t hold any more.
In Tallahassee, the governor is furloughing thousands of employees because the state has lost millions in premium tax revenue.
Then the action shifts to London, where dark-suited men sit in silence on the trading floor at Lloyd’s.
This isn’t a new scary movie and there has not been any explosion at Citizens. People aren’t really running around naked in Florida — except perhaps at Haulover Beach in Miami.
But a scary scenario of what Florida would be like without its surplus lines insurance industry is keeping insurance executives, agents and even regulators awake at night. It’s the courts versus carriers, versus regulators, and versus tradition and, as usual, agents and brokers are caught in the middle.
One of the agents in the middle is Steven Finver, president of the surplus lines agency Continental Agency of Florida in Boca Raton. He is among those trying to change the current script in his role as president of the Florida Surplus Lines Association, a group of more than 70 surplus lines agencies.
“It’s a serious situation for everyone included. Surplus lines agents; retail agents, who rely on surplus lines policies; the consumer relies on the policies to protect themselves; and the state for the funds it brings in. It should never have gotten to this point,” Finver told Insurance Journal.
Big Stakes
The stakes are big. Florida ranks as the fourth largest state in terms of surplus lines business, behind only California, Texas and New York. In 2008, it generated more than $4 billion in surplus lines premium, according to the Florida Surplus Lines Service Office. It handles more than 700,000 excess and surplus lines policies a year — about 40 percent of them personal lines contracts for homes, condos, mobile homes and boats. The rest cover commercial entities, big and small, that could not obtain insurance they need in the standard marketplace. That’s a lot of insurance coverage and a lot of businesses and homeowners.
In addition, this industry generates premium taxes of $200 million a year for the state.
The surplus lines business has traditionally operated relatively free from the regulation of rates, forms and practices compared with standard insurers. That’s what helps make surplus lines unique — it has freedom and flexibility to design solutions and price them that the standard market doesn’t have. Surplus lines insurers and agents are not totally exempt from regulation but they are relatively free to do their thing to meet the needs of new, emerging, unusual and high risks that might otherwise go bare.
The state’s surplus lines industry is now scared because of two recent court decisions, referred to as the Essex and CNL Hotels decisions, which combined have cast doubt on surplus insurers continuing to enjoy relative freedom from regulation. If the court decisions stand, the insurers could be required to get state approval for their policies, something that would so drastically alter the nature of their business that carriers could decide to leave the state rather than comply.
The Essex Insurance Co. v. Mercedes Zota opinion handed down in June involved whether delivery of a surplus lines policy to the customer’s retail agent constituted delivery to the customer. The opinion actually found that delivery was achieved but it delved further to discuss Chapter 627, Part II of the Florida Insurance Code that sets forth requirements for policy delivery, policy forms, the payment of attorneys fees and other matters. Essex argued that another statute, Chapter 626 governing surplus lines, exempted it and all surplus lines insurers from the provisions in Part II. But the Florida Supreme Court upset this traditional reading of the law when it found that surplus lines insurers were not exempt from provisions of Part II but only from those in Part I, which concerns rates and rating organizations.
Florida Surplus Lines Business- Billions/Policy Count
| 2008 | 2007 | 2006 | |
|---|---|---|---|
| Total Premium | $4.09 | $4.73 | $4.72 |
| # Policies | 719,206 | 745,207 | 788,829 |
Source: Florida Surplus Lines Service Office
The court came to its opinion despite the fact that Chapter 626 specifically exempts surplus lines from Part II and despite the fact that the Office of Insurance Regulation has never interpreted the law to require surplus carriers to get its approval or even file their forms with the state.
The Essex opinion by the state’s highest court raised doubts about what the state law really is.
Then in August, the U.S. Court of Appeals for the 11th Circuit dropped the second bombshell with CNL Hotels & Resorts Inc. v. Twin City Fire Insurance Co. This case involved whether Twin City was right to deny a $5.5 million claim in legal fees under a policy endorsement exempting certain loss payments. The case raised again the applicability to surplus lines insurers of the Part II provision requiring filing of forms with the state.
As in Essex, the insurer for CNL Hotels argued that it was exempt from Part II. But the federal court, relying upon Essex, found that the exemption for surplus lines insurers did not extend to Part II. This in turn meant that the surplus lines policy endorsement Twin City used to deny the claim for legal fees was unenforceable because it had not been filed with and approved by the state.
The federal court denied requests for a rehearing from the insurer and the OIR and ignored an amicus brief from OIR stating that Florida law does not require OIR to approve surplus lines forms.
The two cases have sewn great confusion about what the law requires. It is now unclear where the surplus lines industry’s exemption from regulation begins and ends.
To compound the frustration for the industry, surplus lines carriers could not comply with the court opinions even if they tried. The OIR has no process for handling surplus filings.
“You cannot send them in by mail; they don’t accept form filings by mail. And there is no way to send them electronically because you cannot get an electronic filing number since you are a surplus line company. There is really no way to file your forms. So it has become a real issue because of that,” said Finver.
Carriers have concerns about whether existing policies will be enforced by courts and about what the state law requires going forward. No insurance executive wants to wake up some morning facing liability for an exposure clearly excluded in a policy but ruled unenforceable because the exclusion was never approved by state regulators.
Are surplus carriers really nervous enough to leave? “There has been talk. There have been a couple of carriers in a couple different classes, like an umbrella class, they stopped writing. There are some syndicates that don’t want to write any new contracts yet until they know what is going to happen,” Finver said.
“Then in London, there are some carriers who are saying, if this does not get fixed by March, they will pull out of the state of Florida. All you need is one or two to do that and you will see many do that. Once someone takes the bull by the horns and makes a decision — which is a pretty heavy decision to do that — you could see a mass exodus, which would be very, very bad for the consumer of the state of Florida, because surplus lines is where a lot of their policies are written, and very bad for the state of Florida from a revenue standpoint because surplus lines policies put in $190 million in taxes into the general fund of the state.”
OIR has indicated it may issue an order to provide some clarity for surplus lines carriers but eight months after Essex, that still hasn’t happened. According to spokesperson Ed Domansky, “OIR is considering a possible order, but there is no timetable yet.”
The industry is turning to Tallahassee for a solution. The Florida Legislature reconvenes in March. FSLA’s attorney and lobbyist, Doug Mang, along with a group of interested parties, has drafted a bill (HB 853) that could fix the problems created by the courts. Rep. Pat Patterson introduced the measure in the House on Feb. 12. It specifies which provisions of Chapter 627 do not apply to surplus lines and provides for a retroactive effective date to Oct. 1, 1988. Patterson, a Republican, is chair of the Insurance, Business and Financial Affairs Policy Committee.
FSLA President Finver is optimistic the Legislature will act: “We do feel very confident as a group that this will get fixed, not without opposition, I’m sure, by the trial bar. But we feel we will be able to prevail on this. We are still waiting for an order or a rule to come out in the department saying that forms will have to be filed, but the concern is that the companies are getting nervous.”
Of course, this is the Florida Legislature — where nothing is guaranteed when it comes to insurance. Then Gov. Charlie Crist, no friend of the industry, must sign it. The last thing the industry wants to see is a sequel to the other Florida insurance blockbuster that is still playing out across the state, The State Farm Farewell.