Other Information About the SLA
This section has been prepared by the Surplus Line Association of Illinois
to help give those who are not familiar with the surplus line industry an understanding
of its workings and its history. It is also provided to enhance the knowledge
of those presently involved with the surplus line industry and to supplement
their libraries and training aids.
Table of Contents
History of the Association
Prior to the existence of the Surplus Line Association, the Department of Insurance
of Illinois was directly involved with all the steps necessary to file surplus
line business. The Department provided the producers a list of surplus line
carriers they were permitted to use. Each producer or firm was required to file
a monthly risk affidavit with the Department of Insurance. This affidavit covered
the transactions of the previous month, listing the name and location of the
insured, amount of coverage, gross premium, name of the surplus line carrier
and type of coverage. In addition, each producer or firm was required to remit
the surplus line tax and the appropriate forms on a semi-annual basis in February
During the early 1980's, a prominent law firm approached the Department of Insurance to propose the development of a surplus line association or a stamping
office. The intent behind this proposal was to create a self-regulated, self-funded
body which would consolidate all the reporting to the Department of Insurance
on behalf of the brokerage community. While the regulatory responsibility would
remain with the state, the association would report the collected data to the
Department of Insurance on a monthly basis replacing all the monthly reports
previously provided by individual producers and firms to the
would free the Department from much time consuming administrative work and would
enable them to concentrate their resources on regulatory matters.
On December 27, 1984, the Director of Insurance appointed a five member Implementation
Task Force of prominent surplus line producers. The task force met for the first
time early in 1985 to discuss operating procedures, staff size, office space,
budget needs and other important issues.
At the same time, a draft bill was submitted to the Insurance Committee of
the Illinois Legislature by the Department of Insurance. The bill was then presented
formally to the House and Senate. A number of surplus line producers were asked
to testify before legislative committees during the deliberation process. The
culmination of all these activities was on February 27, 1985, when the bill
creating the new Surplus Line Association was signed into law.
A Board of Directors for the Surplus Line Association was elected by the Illinois
surplus line producers. On April 30, 1985, the first Board of Directors meeting
was held. The first act of the board was to review the recommendations of the
Implementation Task Force and approve the various steps needed to begin, which
included instituting procedures, establishing a Plan of Operations, adopting
a budget, determining staff needs and making other necessary operational decisions.
The Surplus Line Association then set up quarters at 230 West Monroe in Chicago
in late June, 1985, and began operations as planned on July 1, 1985. The
Association relocated to 100 S. Wacker Drive in July, 2000 and moved to its current location at 222 S. Riverside Plaza in July, 2015.
What Is Surplus Line Insurance?
For a comprehensive definition of surplus line insurance, click here.
Surplus line insurance is as old as insurance itself in the United States. In fact, it can be argued that the first chartered insurance company in the United States, The Philadelphia Contributorship, which was formed in 1752, was a surplus line insurance carrier.
In the 1700's, few states had any standards or regulations for insurance companies. No "modern" regulations existed until 1851 when New Hampshire enacted a statute which provided for the monitoring of insurance companies. From 1851 until 1870 other states enacted laws which regulated insurance companies.
In the mid 1800's, Lloyd's became a significant insurer in the United States. It was clear that this reputable and stable insurance operation had no intention to become licensed in any state, nor was it really compatible with state regulations. New York was the first state which legislatively recognized this conflict when it passed, in 1890, the first surplus line law. The underlying thinking behind this law was -- there was a need for this supplemental market: the law intended to control its activity rather than eliminate it.
All states have since developed their own surplus line regulations. In 1944 the Supreme Court of the U.S. overturned an 1869 decision, and for the first time the insurance industry was subject to federal regulations including anti-trust laws. In 1945 the right to regulate went back to the states when the McCarran-Ferguson Act was passed. New guidelines then had to be adopted by the states. It was at this time that domestic insurers entered the surplus line industry. They became a significant force and more recently have shown the greatest growth. In 1957 the National Association of Insurance Commissioners adopted guidelines for state regulations of surplus line carriers and now all 50 states have such laws.
Surplus line insurance carriers are simply the nonlicensed
insurance carriers that transact business within a
particular state. While they are regulated, they are not
controlled in the same way as the licensed companies, and
are essentially able to provide whatever policy form they
wish at whatever price they wish.
The thinking in 1890 was the need for a supplemental market would eventually disappear as licensed carriers responded by introducing similar products. In some circles this thinking continues to this day, but surplus line carriers still exist and play a significant role in providing this supplemental market. The supplemental market still reacts to the ability and willingness of the licensed insurance market to meet the needs of the insureds and the economy.
How to Obtain A Surplus Line License In Illinois
In order to qualify, an applicant must be an
Illinois licensed resident or nonresident producer.
For more information, see our
Duties of a Surplus Line Licensee
Once a person becomes a surplus line licensee, their principal responsibility
is to make sure all sections of the Illinois Insurance Code are met. These include
The licensee is required to make sure that
diligent effort has been made to place coverage with
an admitted carrier. Insurance Department
2801.50 defines "diligent
effort" as submitting the risk to three or more authorized companies engaged
in writing, in Illinois, the type of coverage sought. If no companies are writing
such coverage in Illinois, then it shall be submitted to companies that, in
the producer's professional judgment, are most likely to accept the risk. By
law, submission of a contract to the Surplus Line Association constitutes certification
that such diligent effort has been made.
If coverage is placed with a surplus line carrier, that carrier must have at
least $15,000,000 in policyholders' surplus and standards of solvency and management
which are adequate for the protection of policyholders. Surplus line licensees
must also comply with the cease orders that are published by the State of Illinois
in their periodic bulletins.
The licensee is responsible for surplus line taxes, stamping fees and fire
marshal taxes. These taxes and fees may be charged to, and collected from the
insured. The rates in effect as of the date of publication of this pamphlet
are: surplus line tax, 3.5%; stamping fee, 0.1%; and
fire marshal tax as described
in the published schedule. All taxes and fees must be rounded to the
nearest whole dollar.
The licensee must file the policies and endorsements with the Surplus Line
Association. These procedures are described on our
Filing Info page.
The Association provides completed tax forms to each surplus line licensee.
The licensee must pay the taxes to the State of Illinois and file the required
returns (even if no tax is due) by the indicated due dates. Stamping fees must
be paid to the Surplus Line Association in accordance with Association rules.
These procedures are also contained in the
Surplus Line Association
If a surplus line licensee fails to meet these standards, fines and penalties
may be assessed and the producer's surplus line license may be revoked.
When a retail producer and a wholesale producer team up to make a surplus line placement,
they must agree who has the responsibility to meet the standards listed above,
as both parties may possess surplus line licenses.
How the Association Works
All licensed surplus line producers in the State of Illinois are members
of the Surplus Line Association of Illinois. Surplus line producers are required
to submit the original insurance contract plus a complete copy to the Surplus
Line Association for stamping and recording. The Association reviews the documents
to determine that certain provisions are met, such as inclusion of the
to Policyholder Legend and the
Illinois Service of Suit clause.
The Association provides a report to each member at the end of each month detailing
the policies processed for that month. A copy of this information is also furnished
to the Department of Insurance along with other information such as
volume by insurer. Members are also sent the necessary completed tax forms at
the appropriate times throughout the year.
The Board of Directors of the Association is made up of nine members who are
surplus line licensees. Each member serves a three year term. The Board of Directors
is the policy making body of the Association and is guided by the Plan of Operation.
The Plan of Operation as well as the stamping fee charge must be approved by
the Director of Insurance. The Board of Directors maintains a close working
relationship with the Department of Insurance and, along with the staff, assists
the Department whenever requested. The staff of the Association carries out
the policies as dictated by the Board of Directors. The staff also maintains
contact with other surplus line associations throughout the country.
How the Association Relates to Lloyd's and Other Alien Insurers
The relationship between the State of Illinois and Lloyd's of London is unique
and deserves special attention.
In virtually every state of North America, Lloyd's of London functions
as a surplus line, alien insurer. In Illinois however, Lloyd's
can operate as a licensed, admitted insurer, or a surplus line
insurer. Therefore, for any placement made with Lloyd's, one must first make a
determination as to its status.
If it is a surplus line risk, it should be submitted to the
SLA. If it is an admitted placement, it should be processed according to the procedures of Lloyd's Illinois Inc. For further information about Lloyd's,
click here. The only other state where this occurs is Kentucky where Lloyd's also maintains
an admitted status.
Sometimes a placement will be made using a carrier not domiciled in the United
States and not with Lloyd's of London. The most common type of such placement
would be with "London companies." These carriers are viewed as "alien" carriers
and any placement made with them should be handled in the same way as a surplus
line placement with a U.S. surplus line carrier.
While most of these non-U.S. "alien" companies are no longer liable for Federal
Excise Tax, there are still some companies around the world who attract this
tax (normally 4%). This tax is usually allowed by the insurer to be deducted
from their gross premium. Whenever a placement is made using "alien" carriers,
it is therefore important to determine whether they are admitted (for example
with certain Lloyd's policies), if they are surplus line, and whether or not
they attract Federal Excise Tax.
Learn More about the SLA
We hope that this brief review has helped your understanding of Surplus Line
Insurance in Illinois. If you have any questions regarding this information or
relating to Surplus Line Insurance, please do not hesitate to contact
Line Association. There is a surplus line
insurer financial reference library maintained at the Association's
headquarters, and members are encouraged to take advantage of this resource.
The Association conducts instructional sessions on its operating procedures
for employees of both the new and existing members. As the world of insurance
in general, and surplus line insurance in particular, continues to undergo dramatic
changes, the Surplus Line Association of Illinois stands ready to help its members
effectively handle these new challenges.