Michigan Surplus Lines 1
This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. 2015 by American Education Systems, LC. All rights reserved. The text of this publication, or any part thereof, may not be reproduced in any manner whatsoever without written permission from the publisher. American Education Systems, LC 14 Belleview, Mt. Clemens, MI 48043 www.amedsys.com www.bestinsurancecontinuingeducation.com www.facebook.com/americaneducationsystemslc Toll free: 1-800-775-6339 2
About This Program This is a continuing education program designed to provide an overview of essential information pertaining to surplus lines insurance in Michigan. American Education Systems, LC is not engaged in rendering legal or other professional advice, and the reader should consult legal counsel as appropriate. The content of this publication may be affected by changes in law or industry practice; as a result, the information contained within may become outdated. This material should in no way be used as an original source of authority on legal matters. About The Exam Paper courses include a Test Packet, which contain instructions, a disinterested third-party affidavit (i.e. Monitor Form), an Agent/Producer Information Page, a scoring sheet (i.e. Answer Sheet), and the exam/test. Online courses integrate the contents of the Test Packet and deliver them to the student directly. IMPORTANT NOTE: To earn continuing education (CE) credit with a paper version of this course, you are required to follow one of two options: Option 1 Complete all the enclosed paperwork in the Test Packet and submit the contents to American Education Systems, LC at 14 Belleview, Mt. Clemens, MI 48043. We will grade the completed exam; upon passing (i.e. score 70% or better), we will update our records and submit the pertinent information to the State of Michigan s authorized representative so the earned credits can be posted to your official record. 1 Option 2 At no additional cost to you, we also provide you with the option of completing your exam online. This allows for a more rapid conveyance of the completed paperwork to our office and eliminates the uncertainties associated with physical mail delivery. Instructions for completing your test online are found at the conclusion of the text. About Contacting Our Office If you have any questions about your course, the process of meeting your CE requirements, or the contents of your course package, feel free to contact us. 2 Our office hours are Monday-Friday, 10 am to 4 pm, and we maintain a toll-free line at 1-800-775-6339. If you need help after hours, you may leave us a message on the office voice mail, and we will contact you at our first availability. You may also want to visit our homepage at www.amedsys.com and search the FAQs. www.amedsys.com www.bestinsurancecontinuingeducation.com 14 Belleview, Mt. Clemens, MI 48043 586.469.8800 Fax 586.469.8802 aes@amedsys.com 1 If you do not pass your exam on your first attempt, we will forward you a new exam; there is no maximum number of attempts, nor are there additional fees associated with exam retakes. 2 Please be advised we can only discuss course and exam process; we are not permitted to provide comment or direction regarding course content. 3
Contents Introduction 5 and Overview of Excess and Surplus Lines Development of the Excess & Surplus Lines 6 The Nonadmitted and Reinsurance Reform Act (NRRA) 7 The Michigan Surplus Line Law 10 Appendices 29 4
Introduction and Overview of Surplus Lines This course is designed as a continuing education course for the Michigan producer. The reader should know that Michigan currently does not have additional mandatory education requirement for the Surplus Lines qualification; credits earned from successful completion of this program will be allotted to the producer s core (i.e. General ) continuing education requirements. Surplus Lines is a class of insurance designed to meet insurance needs of insureds that fall outside the underwriting guidelines of the standard market and are often characterized as being large, unusual and difficult to place. Dramatic examples of surplus lines insurance include exotic coverages such as a celebrity s leg s or some priceless artwork. Most surplus lines business, however, covers more familiar risks such as special events, vacant buildings and environmental impairment. Also referred to as Excess & Surplus Lines, it is an insurance market that consists of property and casualty insurers that act as a fall-back to the standard market by providing coverage for risks that would otherwise go unprotected, either due to the characteristics of the risk or the amount of premium required to establish coverage. Some of the benefits realized by the Surplus Lines market are the following: Accepts unfamiliar business risks Accepts coverage when the standard market declines the risk Develops and provides a stable market with new products and services to secure special/individual and program risk exposures Develops premium for risks without much historical data Provides the consumer with a competitive choice as compared to involuntary, inflexible residual market Provides additional capacity Affords flexibility to tailor coverages to meet the needs of policyholders Quickly responds to needs of market 5
Development of the Surplus Lines Market The surplus lines market was created as a result of insurance industry regulation. In the 1880 s rate wars were rampant among young property insurers often resulting in inadequate rates and insurer insolvency. This led to the development of rating bureaus which could collect loss experience and promulgate uniform rates for all insurers. The result was rate and form standardization for licensed carriers. While rating bureaus were technically anticompetitive, the 1869 case of Paul vs. Virginia determined that insurance was not interstate commerce and, therefore, not subject to federal law. The legitimacy of these rating bureaus was reconfirmed in 1910 when the Merritt Committee, formed by the New York State Legislature, confirmed that due to the nature of the insurance industry, the rating bureaus were in the best interest of the public. The resulting forced uniformity stabilized the insurance industry but stifled innovation, flexibility in pricing and product design in the admitted market. Thus, the excess and surplus line carriers continued to operate. In 1895, the National Association of Insurance Commissioners (NAIC) raised concerned with unregulated carriers, recommending each state pass a law prohibiting domestic companies from doing business in states where they were not licensed. This meant that due to the rate filing requirements, many insurers were incapable of charging adequate rates for certain insureds and certain classes of business. These higher risk insureds and classes were declined and thus, unable to purchase insurance. A need emerged for non-regulated insurers who could charge adequate premiums for those unusual risks and exposures which needed the financial protection provided by insurance. As Lloyd s of London was not a domestic insurer, the new regulation did not apply to that market. In fact, the regulation, which would require rules and rates to be filed, became a disincentive for Lloyd s to apply for an insurance license in the United States. As a result, Lloyd s became a major unlicensed insurer despite the position of most insurance regulatory bodies of the time. The New York legislature had already recognized the need for the specialty market and in 1890 enacted the first surplus lines law legitimizing domestic as well as alien surplus lines insurers. These were similar to the laws in effect today in that the regulatory responsibility is placed on the broker rather than the insurance company. Unfortunately other states were slow to follow New York s lead. Most states preferred to believe that the licensed carriers could handle all insurance needs. One legislator even felt that if an insurance buyer could not find coverage in the standard market, the risk probably did not deserve insurance. In 1944 the US Supreme Court overturned Paul vs. Virginia in the case of US vs. South-Eastern Underwriters Association. The court concluded that insurance constituted interstate commerce, thus making the insurance industry subject to federal antitrust laws and removing it from state jurisdiction. State legislators and the insurance industry quickly acted together to draft the McCarran-Ferguson Act which Congress passed in 1945. The Act returned the authority to regulate insurance to the states, and provided the insurance industry broad exemptions from federal antitrust laws. 6
During the ensuing years, the surplus lines market was often considered to be the black sheep of the insurance industry. Most of the trade press misunderstood the work and efforts of legitimate carriers doing their part to supplement the admitted market. In 1959, Florida was the first state to create a surplus lines division within its insurance department. In the 1960 s there was an upsurge in surplus lines volume due, in part, to the frustration of standard carriers with rate and rule filings. As a result, these standard carriers formed new surplus lines subsidiaries to give themselves the flexibility they needed to write more business profitably. The Nonadmitted and Reinsurance Reform Act Legislative Background In 2010, sweeping financial services reform legislation, including significant changes to surplus lines regulation, was approved as part of the Dodd Frank Wall Street Reform and Consumer Protection Act. The surplus lines reforms, outlined in the Nonadmitted and Reinsurance Reform Act (NRRA), were incorporated in the Dodd-Frank bill and went into effect in July 2011. The NRRA was the result of reform efforts of industry groups and professional organizations. These efforts began as far back as 2003, when the National Association of Professional Surplus Lines Offices (NAPSLO) contacted the House Financial Services Committee regarding including surplus lines reforms in the state insurance regulatory legislation the committee was drafting. Proposals were offered in 2004 to use federal law to make the state surplus lines premium tax payment system more rational and efficient while simplifying the compliance process on multi-state surplus lines risks. These ideas on surplus lines regulatory reform were included in the State Modernization and Regulatory Transparency (SMART) Act, but the proposal did not advance at that time. The concepts, however, did not die and in 2006 the surplus lines provisions, along with the reinsurance sections of the SMART Act, were introduced together as The Nonadmitted and Reinsurance Reform Act (NRRA). In September the House passed the NRRA for the first time by a vote of 417 to 0, and eventually passed the NRRA four times. Following the 2008 economic crisis, the Senate version of the bill was introduced and the NRRA provisions were included in financial services reform legislation passed by the House in 2009 and the Senate in 2010 and were included in the conference committee approved bill in June 2010. The bill was signed into law in July 2010 and became effective on July 21, 2011. Summary and Goals of the NRRA Language from the Nonadmitted and Reinsurance Reform Act was included in the financial services reform legislation passed in June 2010. The new law is expected to significantly increase the level of efficiency in purchasing surplus lines insurance for all those involved in the surplus lines transaction--- from the insurance companies to the consumers. These bills would simplify the payment of surplus lines premium taxes, establish one state compliance on multi-state risks, streamline access to the surplus lines market for large commercial purchasers; and creates uniform surplus lines insurer eligibility standards. 7
Simplifying the Payment of Surplus Lines Premium Tax The NRRA will simplify the surplus lines broker s payment of surplus lines premium taxes on multistate risks by requiring that all premium tax due the states in a surplus lines transaction be paid to one state--- the insured s home state. The insureds home state is defined as the state of the principal place of business for a commercial insured or the state of residence for an individual insured. It is, then, up to the states to determine how and a on what basis the premium taxes paid on these transactions will be allocated and distributed to the states. This eliminates the necessity of surplus lines broker paying taxes to each of the individual states where there is an exposure in a multi-state surplus lines transaction. This will save time and costs for the surplus lines broker in these transactions and provide certainty on tax payments. It is the stated intent of Congress in the NRRA that there be established a nationwide or uniform system of reporting, payment, collection and allocation of surplus lines taxes among the states. The states may establish this uniform system by entering into an interstate compact or establishing other procedures for the allocation of the surplus lines premium tax. If the states fail to establish a nationwide/uniform procedure through an interstate compact or otherwise, the payment of the surplus lines tax becomes the exclusive province of the insured s home state. In either case, the NRRA would eliminate the uncertainty and confusion that has plagued the surplus lines broker for decades in determining how the premium is to be allocated for tax purposes, how and to what state the tax is to be reported, and when it is to be paid. Under the NRRA the states will either establish uniform and consistent allocation and payment rules for surplus lines premium taxes under a compact or other agreement or the tax laws of the home state of the insured will apply to the entire transaction. One way or the other, the NRRA will create uniformity and certainty in the allocation and payment of surplus lines premium tax. Establish One State Compliance on Multi-State Risks Since the enactment of Gramm-Leach-Bliley in 1999, non-resident surplus lines licenses have become available in virtually every state, causing confusion in the marketplace as to which state laws apply in a multi-state surplus lines transaction. For example, if a policy covers risks in five different states, what are the ramifications? Must the surplus lines licensee be licensed in each state? Conduct five separate diligent searches under each of the five state s laws? Validate that the surplus lines insurer is eligible in each state? Provide five different policyholder notices or legends? Make five different affidavit or regulatory filings? Determine the regulatory requirements and what states have jurisdiction if the coverage is a casualty or a liability policy that covers the operations in each of the five states? How is the surplus lines licensee to resolve questions regarding D & O policies or a products liability/completed operations policy? The NRRA eliminates this confusion and potential multiple compliance obligations on the surplus lines broker by directing that the placement of surplus lines insurance shall be subject to the statutory and regulatory requirements solely of the insured s home State. It further states that only the insured s home state may require a surplus lines broker to be licensed to conduct a surplus lines transaction with the insured and pre-empts any other state laws that might apply to the placement, transaction or policy. 8
With the number of surplus lines transactions that involve multi-state exposures growing as the surplus lines market share expands and the risks entering the marketplace becoming bigger and more complex, the NRRA will make the placement of these multi-state risks easier, less treacherous and less costly for the surplus lines broker. Streamline Access to the Surplus Lines Market for Large Commercial Purchasers The NRRA allows the surplus lines broker to place insurance on behalf of large, sophisticated commercial purchasers, as defined in the act, without having to satisfy a diligent search requirement. These commercial purchasers, known as exempt commercial purchasers must employ a qualified risk manager who has the education and training in insurance/risk management to properly represent the insured in this type of transaction and the insured (which can be a business entity or municipality) and in the previous year had in excess of $100,000 in property and casualty insurance premium on a nationwide basis. In addition to the above, the insured must meet at least one additional criterion relating to: net worth ($20,000,000), annual revenue ($50,000,000), employees (500 full time employees or be an affiliate of a group that employees at least 1,000 employees) o If the insured is a municipality, it must have a population in excess of 50,000. o If the insured is non-profit organization or public entity, it must have an annual budget of at least $30 million. While the number of entities qualifying for this exemption may be limited, the surplus lines broker working on behalf of such exempt commercial purchaser can procure the insurance, even for a multi - state risk, without the impediment of a diligent search. Create Uniform Surplus Lines Insurer Eligibility Standards Applicable for All States The NRRA creates national eligibility standards for surplus lines carriers by prohibiting states from imposing any eligibility requirements other than the criteria established in Sections 5A(2) and 5C (2) (a) of the NAIC Nonadmitted Insurance Model Act (Model Act) for surplus lines insurers domiciled in a United States jurisdiction. Under the NRRA states cannot prevent surplus lines brokers from placing business with alien Nonadmitted insurers listed on the NAIC s Quarterly Listing of Alien Nonadmitted Insurers. For surplus lines insurers domiciled in a U.S. Jurisdiction, the two sections of the NAIC model law would establish the greater of a state s minimum capitalization requirement for surplus lines insurer eligibility or $15 million as the capitalization standard for surplus line insurer eligibility. The Model Act permits an individual state insurance commissioner to allow a company, having a lesser amount of capitalization, to be eligible under a specific set of circumstances, but in no case may the insurer have less than $4.5 million in capitalization. The company must also be authorized by its state of domicile to write the type of insurance it seeks to write on a surplus lines basis in other jurisdictions. Alien insurers listed on the NAIC Quarterly Listing of surplus lines insurers would be, in effect, eligible in every state as a surplus lines insurer. During the more than 40 years that the NAIC Quarterly Listing 9
of Alien Insurers has been in existence, the list has had an impeccable record of containing only solid and solvent alien insurers. The NRRA seeks to eliminate the current confusion regarding surplus lines eligibility standards and create specific eligibility standards that will be used in every state. It would also provide certainty to surplus lines insurers as to their eligibility status at all times. The NRRA is expected to reduce, if not eliminate, the situation, often encountered by surplus lines brokers conducting multi-state transactions, where a company is eligible in one state but not in another. The Michigan Surplus Lines License In order for a Michigan insurance producer to have access to the unique or hard to place risks found in the surplus lines market, he/she must become properly licensed: only a person licensed for Surplus Lines may solicit insurance, or bind coverage, or in any other manner act as an agent or broker in the transaction of surplus lines insurance (Chapter 12 and Chapter 19 of the Michigan Insurance Code.) Surplus Lines producers are regulated under the Non-Admitted Reinsurance Reform Act (NRRA) as of July 21, 2011, as well as Chapter 19 of PA 218 of 1956, MCL 500.1900 et seq. Once licensed as a surplus lines producer, the licensee has authority to do any or all of the following: (a) Place insurance on risks in this state with eligible unauthorized insurers. (b) Act in the capacity of an agent or broker, as determined by the contractual relationship with the eligible unauthorized insurer or that insurer's legal representative. (c) Place insurance on risks in this state, with unauthorized insurers that are not eligible unauthorized insurers (in strict compliance with section 1950.) In order to be eligible for a resident Surplus Lines license, an individual must hold an active property and casualty producer license as a prerequisite to the Surplus Lines license. Licensing Regulation for Surplus Lines This section covers state regulations specific to surplus lines insurance producers and covered on the Surplus Lines Producer examination. Purpose (500.1902,.1903a) Sec. 1902 states that the purpose of the Surplus Lines Act (i.e., Chapter 19 of the Insurance Code) is to: (a) Protect persons seeking insurance in this state. (b) Permit stable and reputable insurers to write surplus lines insurance in this state. (c) Establish a system of regulation which will permit an orderly access to surplus lines insurance in this state. 10
Definitions (500.1201,.1903) Section 1201 provides definitions for the following terms: "Agent" means an insurance producer. "Business entity" means a corporation, association, partnership, limited liability company, limited liability partnership, or other legal entity. "Home state means the District of Columbia or any state or territory of the United States in which an insurance producer maintains his or her principal place of residence or principal place of business and is licensed to act as an insurance producer. "Insurance" means any of the lines of authority in chapter 6 (i.e. Life, Accident & Disability, Property, Casualty, Surety and Fidelity). "Insurance producer" means a person required to be licensed under the laws of this state to sell, solicit, or negotiate insurance. "License" means a document issued by this state's director authorizing a person to act as an insurance producer for the qualifications specified in the document. The license itself does not create any actual, apparent, or inherent authority in the holder to represent or commit an insurer. "Limited line credit insurance" includes credit life, credit disability, credit property, credit unemployment, involuntary unemployment, mortgage life, mortgage guaranty, mortgage disability, guaranteed automobile protection insurance, and any other form of insurance offered in connection with an extension of credit that is limited to partially or wholly extinguishing that credit obligation that the director determines should be designated a form of limited line credit insurance. "Limited line credit insurance producer" means a person who sells, solicits, or negotiates 1 or more forms of limited line credit insurance coverage to individuals through a master, corporate, group, or individual policy. "Limited lines insurance" means any of the following: marine insurance, credit insurance, surety and fidelity insurance, legal expense insurance, livestock insurance, malpractice insurance, plate glass insurance, [a]ny other miscellaneous insurance described in section 624(1)(i) (i.e. insurance against any other hazards of a casualty nature not prohibited by the laws of this state nor exclusively delegated to any other class or kind of insurer ). (j) "Limited lines producer" means a person authorized by the director to sell, solicit, or negotiate limited lines insurance. "Negotiate" means the act of conferring directly with or offering advice directly to a purchaser or prospective purchaser of a particular contract of insurance concerning any of the substantive benefits, terms, or conditions of the contract, provided that the person engaged in that act either sells insurance or obtains insurance from insurers for purchasers. "Sell" means to exchange a contract of insurance by any means, for money or its equivalent, on behalf of an insurance company. 11
"Solicit" means attempting to sell insurance or asking or urging a person to apply for a particular kind of insurance from a particular company. "Terminate" means the cancellation of the relationship between an insurance producer and the insurer or the termination of a producer's authority to transact insurance. Sec. 1903 provides the following terms and definitions Eligible unauthorized insurer means an insurer not authorized to transact insurance in this state but eligible to write insurance business under this chapter. Association means an association registered under section 1930. Licensee means a person licensed under this chapter. Surplus lines insurance means insurance in this state procured from or continued or renewed with an unauthorized insurer and includes all of the following, whether effected by mail or otherwise: (i) Insurance for which applications are solicited from persons resident or located in this state. (ii) Insurance for which contracts of insurance are issued or delivered to persons resident or located in this state. (iii) Insurance that is procured through negotiations or by an application occurring in whole or in part in this state or made within or from within this state. (iv) Insurance for which premiums, in whole or in part, are remitted directly or indirectly within or from within this state. Who may be Licensed (500.1211,.1905(1,2)) Sec. 1211 states that a natural person may solicit applications for insurance and collect premiums on behalf of a licensed insurance producer resident in this state if he or she is so authorized to act by a written contract with the insurance producer, and the contract specifies the extent of his or her authority to act, he or she is licensed to act as a solicitor in accordance with this chapter, and the insurance producer has notified the director of the contract. A natural person refers to a real person or individual, rather than a legal person (e.g. a corporation or partnership.) An agency wishing to be licensed for Surplus Lines authority must have a licensed Surplus Lines producer in good standing affiliated with their agency before an agency Surplus Lines license will be issued Current Licensing Requirements (500.1905) To be eligible for an individual Michigan Resident Surplus Lines license, one must hold an active property and casualty producer license as a prerequisite to the Surplus Lines license. One is then required to meet the following requirements: 12
File an application in the form and with the information as the director may reasonably require to determine the ability of the applicant to satisfactorily act in accordance with this chapter. Complete an examination testing the applicant's understanding of this chapter, the surplus lines insurance business, and other chapters of this act, if required by the director. The director may waive the examination requirements for a person who has been licensed as a surplus lines licensee within the preceding 12 months. Change of Name and Address (500.1206(5)) Licensees shall inform the director by any means acceptable to the director of a change of legal name or address within 30 days of the change. Disciplinary Actions (500.1239,.1244) Sec. 1239 covers the following disciplinary actions: probation, suspension, or revocation of insurance producer's license; refusal to reissue; causes; civil fine; notice of license denial; hearing; license of business entity; penalties and remedies. The director may place on probation, suspend, or revoke an insurance producer's license or may levy a civil fine under section 1244 or any combination of actions, and the director shall refuse to issue a license under section 1205 or 1206a, for any 1 or more of the following causes: (a) Providing incorrect, misleading, incomplete, or materially untrue information in the license application. (b) Violating any insurance laws or violating any regulation, subpoena, or order of the director or of another state's insurance director. (c) Obtaining or attempting to obtain a license through misrepresentation or fraud. (d) Improperly withholding, misappropriating, or converting any money or property received in the course of doing insurance business. (e) Intentionally misrepresenting the terms of an actual or proposed insurance contract or application for insurance. (f) Having been convicted of a felony. (g) Having admitted or been found to have committed any insurance unfair trade practice or fraud. (h) Using fraudulent, coercive, or dishonest practices or demonstrating incompetence, untrustworthiness, or financial irresponsibility in the conduct of business in this state or elsewhere. (i) Having an insurance producer license or its equivalent denied, suspended, or revoked in any other state, province, district, or territory. (j) Forging another's name to an application for insurance or to any document related to an insurance transaction. 13
(k) Improperly using notes or any other reference material to complete an examination for an insurance license. (l) Knowingly accepting insurance business from an individual who is not licensed. (m) Failing to comply with an administrative or court order imposing a child support obligation. (n) Failing to pay the single business tax or the Michigan business tax or comply with any administrative or court order directing payment of the single business tax or the Michigan business tax. Before the director denies an application for a license under section 1205 or 1206a, the director shall notify in writing the applicant or licensee of the denial and of the reason for the denial. Not later than 30 days after this written denial, the applicant or licensee may make written demand upon the director for a hearing before the director to determine the reasonableness of the director's action. A hearing under this subsection shall be held pursuant to the administrative procedures act of 1969, 1969 PA 306, MCL 24.201 to 24.328. (3) The license of a business entity may be suspended, revoked, or refused if the director finds, after hearing, that an individual licensee's violation was known or should have been known by 1 or more of the partners, officers, or managers acting on behalf of the partnership or corporation and the violation was neither reported to the director nor corrective action taken. (4) In addition to or in lieu of any applicable denial, suspension, or revocation of a license, a person may, after hearing, be subject to a civil fine under section 1244. (5) In addition to the penalties under this section, the director may enforce the provisions of and impose any penalty or remedy authorized by this act against any person who is under investigation for or charged with a violation of this act even if the person's license or registration has been surrendered or has lapsed by operation of law. Sec. 1244 covers actions following violations. These include the following: hearing; serving copy of findings and cease and desist order; additional orders; reopening, altering, modifying, or setting aside order; violation of cease and desist order; notice and hearing; civil fine; suspension or revocation of license; disposition of fine. If the director finds that a person has committed a relevant violation, a hearing will be conducted. Following the hearing, the director shall produce a written report of the findings and decision. The director will issue a copy of the findings and an order requiring the person to cease and desist from the violation. The director will cause to be served upon the person charged both the copy of findings and cease and desist order. In addition, the director may order any of the following: (a) Payment of a civil fine of not more than $500.00 for each violation. However, if the person knew or reasonably should have known that he or she was in violation of this chapter, the director may order the payment of a civil fine of not more than $2,500.00 for each violation. An order of the director under this subsection shall not require the payment of civil fines exceeding $25,000.00. A fine collected under this subdivision shall be turned over to the state treasurer and credited to the general fund of the state. (b) A refund of any overcharges. 14
(c) That restitution be made to the insured or other claimant to cover incurred losses, damages, or other harm attributable to the acts of the person found to be in violation of this chapter. (d) The suspension or revocation of the person's license. The director may by order, after notice and opportunity for hearing, reopen and alter, modify, or set aside, in whole or in part, an order issued under this section, if in the opinion of the director conditions of fact or of law have changed to require that action, or if the public interest requires that action. If a person knowingly violates a cease and desist order under this chapter and has been given notice and an opportunity for a hearing, the director may order a civil fine of not more than $10,000.00 for each violation, or a suspension or revocation of the person's license, or both. An order issued by the director pursuant to this subsection shall not require the payment of civil fines exceeding $50,000.00. A fine collected under this subsection shall be turned over to the state treasurer and credited to the general fund of the state. The director may apply to the circuit court of Ingham County for an order of the court to support its actions. Renewals (500.1204,.1206(2,3),.1905(3)(c)) Sec. 1204 covers the process of licensing, relevant fees and reapplication for licensure. As noted previously, a resident individual applying for an insurance producer license shall pass a written examination, and that an exam may require completion of a pre-licensing education course prior to testing. The Surplus Lines license falls outside of the mandatory pre-licensing education requirement. The examination is to be entry level and should test the knowledge of the individual concerning the qualifications for which application is made, the duties and responsibilities of an insurance producer, and the insurance laws and regulations of this state. Part 4 of this section spells out the director s power to make arrangements, including contracting with an outside testing service, for administering examinations under this section and collecting the nonrefundable [test administration] fee. 15
Along with stating that the insurance licensing exam will be administered with a fee (5), this section also stipulates that [a]n individual who fails to appear for the examination required under this section as scheduled or fails to pass the examination shall reapply for an examination and remit all required examination fees and forms to be rescheduled for another examination (6). Sec. 1204c. describes the mandatory continuing education requirements and process for meeting mandatory compliance. The Surplus Lines license qualification does not require its own continuing education, nor does it impose additional requirements on the producer; however, the producer does need to maintain a valid individual Resident Producer license with Property and Casualty qualifications in order to hold the Surplus Lines license. The mandatory continuing education requirement is 24 credits of approved course work, with a credit being the equivalent of 1 hour; within this context, 1 hour is determined to mean 50 minutes of classroom instruction or its equivalent in self-study format. Of the 24 credits, 3 must be categorized as Ethics by the DIFS. The due date for meeting the continuing education requirement varies with each producer, falling every two years on the first day of the producer s birth month. The provider of the continuing education course is responsible for filing the credits with the DIFS and its representative with 30 days of course completion, and issuing a Certificate of Completion to the producer. The director shall waive the continuing education requirements of this section for an insurance producer if the producer is unable to comply with the continuing education requirements of this section due to military service or if the director determines that enforcement of the requirements would cause a severe hardship. If an insurance producer has not met his or her continuing education requirements by the expiration date of his or her license, the insurance producer shall have a 90-day grace period in which to meet the continuing education requirements of this section. During the 90-day grace period, the insurance producer shall not solicit or sell new policies of insurance, bind coverage, or otherwise act as an insurance producer except that the insurance producer may continue to service policies previously sold and may receive commissions on policies previously sold. If the insurance producer has not met his or her continuing education requirements by the expiration of the 90-day grace period, the insurance producer's license shall be canceled. An insurance producer whose license has been canceled under this section may reapply for a license except that the program of study requirements under section 1204 shall not be waived meaning that any mandatory pre-licensing education requirement will (again) have to be met. It is also noted in this section (under part 14) that an insurance producer who has sold his or her insurance business and who has not met the continuing education requirements of this section shall not solicit or sell new policies of insurance, bind coverage, or otherwise act as an insurance producer except that the insurance producer may continue to service policies previously sold and may receive commissions on policies previously sold as well as receive partial commissions on policies of insurance sold by a purchasing insurance producer. An insurance producer who is in the process of selling his or her insurance business and who has not met the continuing education requirements of this section may not solicit or sell new policies of insurance, bind coverage, or otherwise act as an insurance producer except that the insurance producer may continue to service policies previously sold and may receive commissions on policies previously 16
sold as well as receive partial commissions on policies of insurance sold by a purchasing insurance producer, for a period not to exceed 12 months after the selling insurance producer's continuing education due date. Sec.1206 states that an insurance producer license (e.g. Property and Casualty license) is perpetual, and remains in effect unless revoked or suspended as long as education requirements for resident individual producers are met by the due date (part 2). Should a license lapse due to failure to maintain education requirements, a licensee may reinstate the same license without the necessity of passing a written examination if he or she does so not later than 12 months after the date of the lapse. Surplus Lines licenses expire annually on March 31. Renewal invoices are not be mailed to Surplus Lines licensees; it is the responsibility of each licensee to ensure that their license is renewed each year by March 31. The renewal fee is $100.00. DIFS has implemented an online renewal application process through the National Insurance Producer Registry (NIPR), at www.nipr.com. All surplus lines licensees are required to renew their license via www.nipr.com. Select from the Resident or Non-Resident Producer Renewal links to access the appropriate renewal application for Surplus Lines. NIPR charges a $5.00 service fee in addition to the renewal fee for utilizing their service. The online renewal system is available annually from February 1 through March 31. After completing the online application, a receipt can be printed to confirm the renewal fee was submitted. The licensee record will reflect an updated expiration date and a new license document will be generated. Market Conduct Regulation This section covers state regulations applicable to all insurance producers and covered on the Surplus Lines Producer examination. Prohibited Acts ((500.1207,.2003,.2059,.2062) Sec.1207 concerns the producer s role as fiduciary. Along with outlining requirements for accounting methods, examination of records, remuneration of person acting as agent and placing refused coverage, it also spell out the following specific prohibited acts: (3) an agent shall not reward or remunerate any person for procuring or inducing business in this state, furnishing leads or prospects, or acting in any other manner as an agent unless properly appointed as a solicitor or in the following instance as described in part 4: If an agent is unable to immediately provide, through his or her insurers that are authorized to underwrite the coverage, all or a part of the coverage requested on a risk, the agent may obtain the part of the coverage refused by his or her insurers through another licensed agent or through a risk sharing plan permitted by state law. An agent who attempts to place the refused part of the 17
coverage through another licensed agent shall advise the buyer in writing that they refused part of the coverage is not in effect until the buyer receives written evidence of insurance. (5) A person may not sell or attempt to sell insurance by means of intimidation or threats, whether express or implied. A person may not induce the purchase of insurance by a threat to refuse to sell goods, to refuse to lend money, or to refuse to provide services. (6) an insurer or an agent may not be a party to a contract under which the agent assumes any responsibility or obligation for payment, from his or her commission or any allocation of premium to him or her by the insurer, of any losses on insurance policies sold by the agent unless the claim adjusting is done by insurance company adjusters or licensed independent adjusters. Sec. 2003 states that unfair methods of competition and an unfair or deceptive acts or practices in the business of insurance are prohibited. Sec. 2059 prohibits using name of an insurer in conducting or advertising business not related to business of insurance. Unfair Insurance Trade Practices Misrepresentation (500.2005,.2005a,.2055,.2057,.2064,.2218 Misrepresentation is the intent to defraud. Misrepresentations may be written or oral. It is a misrepresentation and illegal to issue, publish, or circulate any illustration or sales material that is false, misleading, or deceptive as to policy benefits or terms, the payment of dividends, etc. False Information and Advertising (500.2001,.2002,.2005,.2005a,.2007,.2055,.2057,.2064) Advertisements cannot contain any false, deceptive or misleading statements relating to insurance, the business of insurance, or those conducting insurance business; such advertisements are considered false advertising, and publishing, broadcasting or circulating false advertisements is prohibited. Twisting (500.2005(f),.2064(2)) Twisting is the act of inducing an insured to lapse, surrender, or terminate a life insurance policy for the purpose of replacing it with a new policy. Twisting involves both using some illegal inducement or activity and the act of terminating an existing policy. Twisting may include use of an incomplete policy comparison, a rebate, a misrepresentation, or some other illegal act. False Financial Statements (500.1015,.2014,.2018,.2055,.2062,.2474,.2666) Financial statements intended to deceive public officials and/or the general public about the financial condition of an insurer are prohibited. Defamation (500.2007,.2009; 600.2911; 750.389; R500.662,.1377(14)) Defamation is the making of oral or written statements about another agent or insurer that are false, malicious and derogatory. 18
Boycott, Coercion, and Intimidation (500.1242,.2012) It is illegal to make actions that result in unreasonable restraint of trade or a monopoly. Unfair Discrimination (500.2019,.2020,.2027,.2082) Discrimination between individuals of the same class and life expectancy regarding rates, dividends, or other benefits is illegal. In addition, it is illegal to discriminate because of age, color, or creed with regard to premiums or types of coverage Rebating (500.2024,.2069,.2070) and Illegal Inducement (500.2024,.2066,.2069,.2070) Rebating is an illegal inducement to purchase insurance. Rebates can include payments from a portion of the agent s commission, gifts, shares of stock, or anything of value when the purpose is to convince a prospect to purchase insurance. Agents are also not permitted to offer a rebate of the premium payable on any policy as an inducement unless it is specified in the contract. Agents are allowed to give applicants token gifts, but these must be merchandise valued at $5.00 or less for life producers and $10.00 or less for property and casualty producers. Unlawful inducements to buy insurance are the following: o Any special favor or advantage in benefits or dividends o Any stocks, bonds, securities, or accrued dividends or profits o Anything of value not specified in the insurance contract. Commissions and Fees (500.1915,.1916 and Bulletin 2014-11-INS) A licensee may not charge, in addition to the premium charged by an unauthorized insurer, a fee to cover the costs incurred in the placement of the indemnity which exceeds $50.00, unless all of the following conditions are met: (a) The fee in excess of $50.00 is filed with the commissioner and not disapproved by the commissioner within 30 days of the date it is filed with the commissioner. (b) The fee exceeds $50.00 only to the extent that the actual additional costs incurred for services performed by persons or entities unrelated to the licensee exceed that amount. A fee charged pursuant to subsection (1) shall not be excessive or discriminatory. The licensee shall maintain complete documentation of all fees charged pursuant to subsection (1)(b). Those fees shall not be included as a part of the policy premium in the computation of premium taxes. The $50.00 fee prescribed in subsection (1) shall be adjusted June 1, 2008 and annually thereafter to reflect the percentage of change in the consumer price index. The maximum fee a surplus lines licensee may charge for costs, without application to the Director but subject to all requirements of Section 1915 quoted above, is $59.00 (for 2014). As used in this section, "consumer price index" means the consumer price index (i.e. CPI) for all urban consumers in the United States city average for all items, as most recently reported by the United States 19
department of labor, bureau of labor statistics, and as certified by the commissioner in an administrative bulletin. A licensee may be compensated by an unauthorized insurer and the licensee may compensate a licensed resident agent in this state for obtaining surplus lines insurance business. The licensed resident agent authorized by the licensee may collect a premium on behalf of a surplus lines licensee and, as between the insured and the licensee, the licensee shall be considered to have received the premium if the premium payment has been made to the agent. Producer Disclosure (500.1922) Each policy, cover note, or other instrument evidencing surplus lines insurance which is to be delivered to an insured or a representative of an insured shall have printed, typed, or stamped in red ink upon its face, in not less than 10-point type, the following notice: This insurance has been placed with an insurer that is not licensed by the state of Michigan. In case of insolvency, payment of claims may not be guaranteed. This notice shall not be covered over or concealed in any manner. Michigan Property and Casualty Guaranty Association (500.7901.7949) The Michigan Property and Casualty Guaranty Association (MPCGA) is an unincorporated association of all property and casualty insurers authorized to transact insurance in Michigan. MPCGA was created by an act of the Michigan Legislature, MCL 500.7901 et seq., in order to protect the public against financial losses to policyholders and claimants as a result of property and casualty insurance company insolvencies. When a member insurer becomes insolvent, MPCGA has a duty to pay certain obligations of the insolvent insurer that come within the Act s definition of covered claims. MPCGA does not handle claims arising out of life or disability insurance or annuity contracts. Surplus Lines Markets and Practices (500.1901-.1955) United States Nonadmitted Market The United States Nonadmitted Market consists of foreign nonadmitted insurers. Foreign nonadmitted insurers are companies not licensed (admitted) in Michigan, and unauthorized. However, they are domiciled in the United States and can be eligible to provide coverage. Alien Insurers Like foreign nonadmitted insurers, alien insurers are not licensed (admitted) in Michigan, and so are unauthorized insurers. They also are not domiciled in the United States. However, they can be eligible to provide coverage when listed on the NAIC s Quarterly Listing of Alien Insurers. A non-u.s. (alien) insurer wishing to accept surplus lines insurance typically starts the process with an application for inclusion on the Quarterly Listing of Alien Insurers published by the International Insurers Department ("IID List") of the National Association of Insurance Commissioners ("NAIC"). 20
This includes the establishment of a trust fund, for the benefit of its U.S. policyholders, which is revalued annually. The company must also provide copies of its articles of incorporation and by-laws, biographical affidavits of the insurer's officers and directors, a business plan describing the insurer's global business followed by a description of the proposed lines of U.S. business, and financial statements. This information must be updated annually. Lloyd s of London and the London Market The London Market is a result of Lloyd s of London, which has the following interconnected components: Lloyd s members, who provide the capital to support underwriting and include some of the world s major insurance groups and companies listed on the London Stock Exchange, as well as individuals and limited partnerships; Lloyd s brokers, who are brokers accredited to deal with Lloyd s of London underwriters; the Corporation of Lloyd s, which oversees and supports the market, and promotes Lloyd s around the world. Alternative Markets (Chapter 18) In addition to using an eligible foreign or alien nonadmitted insurer or a Lloyd s, surplus lines insurance may be placed with a risk retention or purchasing group. Risk Retention and Risk Purchasing Groups A risk retention group (RRG) is an insurance company organized by a group of businesses or institutions in the same line of business. RRG is one form or type of captive that is restricted to writing only liability coverage. A risk purchasing group refers to a number of parties with similar coverage needs who incorporate into a group for the purpose of acquiring liability insurance. Authorized by the Liability Risk Retention Act of 1986, a purchasing group needs to be domiciled in a specific state. In contrast to risk retention groups, purchasing groups are not risk-bearing entities. Independently Procured Insurance Surplus lines is actually one of two methods of accessing the non-admitted market. The second method is known as a direct placement or independently procured placement. This takes place when an insured elects to go out of the state and purchase the desired insurance from an unauthorized carrier either directly with the company or through a broker or agent not licensed by the jurisdiction in which the risk is located, such as a Lloyd's Broker. (Eligible) Surplus Lines Insurers (500.1920,.1950 and Bulletin 2014-04-INS) Eligibility Requirements and Withdrawal of Eligibility Sec. 1920 describes the eligibility process for surplus lines insurers and process of removing an insurer from the list of eligible insurers. 3 3 See appendix, NRRA 21