Procuring Surplus Line Policies
In this chapter...
Introduction
As a surplus line licensee, you are required to read and understand the Illinois
surplus line law and associated regulations.
Staff acting on behalf of the licensee should be
similarly familiar with these laws and
regulations. Make sure you know and
understand the rules regarding procurement of
surplus line policies before you begin
the process. Do it right the first time!
The Illinois
Surplus Line Law requires a surplus line producer to first make a
diligent effort to procure a policy from an authorized
("licensed") insurer before placing a risk with a surplus
line insurer.
Regulation 2701.50 states that "diligent effort"
is deemed to be exercised if the producer submits the risk to three or
more authorized companies that are engaged in writing, in Illinois, the
type of coverage sought, or if no companies are actually engaged in
writing such coverage, the risk shall be submitted to companies which,
in the Surplus Line producer's or the insurance producer's professional
judgment, are the most likely to accept the risk.
Since there is no export list in Illinois,
you must have three declinations for every
risk you place in the surplus line market
unless it is exempt under the
exempt commercial purchaser provision [215 ILCS
5/445 (1.5)(e)].
There is no specific form upon which you must record your declinations for Illinois
risks and you do not need to file your declinations with the SLAI. You are required to
keep a record of your declinations
as described in
Regulation 2701.60.
In accordance with the federal
NRRA, Illinois law
recognizes that certain insureds can qualify as an exempt commercial
purchaser ("ECP"). Provided certain notification procedures are followed,
the law permits surplus line placements for ECPs without first making
the required diligent effort to procure the insurance from
authorized insurers. In order to qualify:
-
the insured must meet the
definition of exempt commercial purchaser
in the surplus line law; and
-
the producer must disclose
to the ECP that the requested
insurance may or may not be available from authorized
insurers that may provide greater protection with more
regulatory oversight; and
-
the ECP
has subsequently in writing requested the producer to procure
such insurance from an unauthorized insurer.
While it is not specifically expressed in the law, the producer is advised to
keep with their records of the surplus line contract for a period of 7 years:
(1) a record of how the ECP determination was made; (2) a copy of the notice;
and (3) the ECP's written request to procure surplus line insurance.
Illinois does not have a list of "approved" or "eligible" surplus line
insurers. The federal NRRA law and
applicable Illinois statutes set
forth the insurer eligibility requirements for surplus line risks.
Licensed surplus line producers may procure surplus line insurance from
insurers domiciled in the U.S. if the insurer:
-
is licensed to write the subject insurance
in their domiciliary jurisdiction; and
-
has at least $15 million in policyholder
surplus; and
-
has standards of solvency
and management that are adequate for the protection of
policyholders; and
-
when an unauthorized insurer
does not meet the above standards a licensed surplus
line producer may, if necessary, use that
insurer only if prior written warning is given to the
insured that is substantially similar to the sample
warning in Regulation
2701.Illustration A.
Licensed surplus line producers may procure surplus line insurance from
insurers domiciled outside the U.S. if the insurer meets the requirements set forth above for
insurers domiciled in the U.S., or if the insurer is listed on the
Quarterly Listing of Alien Insurers
maintained by the International Insurers Department (IID) of the
National Association of Insurance
Commissioners (NAIC).
The Director can issue an order declaring certain surplus line insurers
ineligible in Illinois.
Illinois allows insurers domiciled in the State to
elect a domestic surplus line insurer status. Under
Section 445a of the
Insurance Code, these insurers
choose to write Illinois risks on a surplus
line basis only (and typically write surplus line
policies for risks in other states, as well). As a
producer, you deal with Illinois domestic surplus
line insurers in much the same way as you would any
other surplus line insurer. They do, however, have a different
Notice to Policyholder that
needs to be shown on the dec page and their
policies do not require a service of
suit clause. A current list of Illinois domestic
surplus line insurers is available on
Bulletin 16a.
Licensed surplus line producers may place surplus line insurance on risks of the kinds specified in
Classes 2 and 3 of Section 4 of the Insurance Code.
Producers may not procure surplus line insurance:
-
on a risk where there is
an Illinois law requiring that insurance to be
placed with an authorized insurer;
-
for any primary
workers' comp risk; or
-
for any personal lines risk
where the coverage is available in a residual
market (like the
Fair Plan, or
Auto Plan).
Licensees may, however, procure insurance on an
excess or umbrella basis for these risks where
it is written over one or more authorized
insurer policies.
If a personal lines risk, as defined in
subsection (a), (b), or (c) of Section 143.13 of
the Insurance Code, is declined by three
licensed companies but is eligible for residual
market (FAIR
Plan,
Auto Plan) coverage, it must be placed with the
residual market unless the insured is seeking
coverage or limits that the residual market does
not offer.
Each Illinois surplus line producer must
maintain:
-
a separate account of the
business transacted under his or her license which shall
be open at all times to the Director or his
representative.
-
separate records of the business
transacted under his or her license, including
complete copies of surplus line insurance
contracts maintained on paper or by electronic
means. These records shall be open at all
times for inspection by the Director and by the
Surplus Line Association of Illinois.
-
a record of declinations
for each surplus line policy written their license. The content of these
required records is described in
Regulation 2701.60.
Illinois has no specific required form upon which the
declinations must be recorded and the declinations do
not need to be filed with the Surplus Line Association.
These records must be maintained on paper or by electronic means for a
period of 7 years from the policy effective date.
Service of Suit
Paragraph 10 of
the Surplus Line Law requires that each surplus
line policy designate the Director as attorney of
the insurer for service of process in any action,
suit or proceeding arising out of the policy.
For sample service of suit wording,
click here. The service
of suit requirement does not apply to insurers that have domestic
surplus line insurer (DSLI) status. For a list of DSLI insurers,
click here.
Policyholder Notices
Paragraph 10.5 of the Surplus Line Law requires that
surplus line insurance policies (not endorsements) have stamped or
imprinted on the first page, in not less than 12-pt.
bold face type, a notice to the policyholder as
follows:
For policies
issued by an unauthorized insurer (other than an
Illinois
domestic surplus line insurer):
Notice to Policyholder: This contract is issued, pursuant to
Section 445 of the Illinois Insurance Code, by a company not
authorized and licensed to transact business in Illinois and
as such is not covered by the Illinois Insurance Guaranty
Fund.
For policies
issued by an Illinois
domestic surplus line insurer:
Notice to Policyholder: This contract is issued by a domestic
surplus line insurer, as defined in Section 445a of the Illinois
Insurance code, pursuant to Section 445, and as such is not
covered by the Illinois Insurance Guaranty Fund.
SLAI Filing & Recording
Paragraph 6 of the Surplus Line Law states that it is unlawful to deliver a surplus line policy to the insured unless it has been filed with and recorded by the Surplus Line Association of Illinois. When filing on our Electronic Filing System (EFS), you receive a confirmation number which you place on the dec page of the policy or, alternatively, you can print the confirmation page and attach it to the policy.
Taxes and Fees on Dec Page
You are permitted by law to pass the surplus line tax, fire marshal tax and stamping fee on to the insured. If you pass these taxes and fees on to your insureds, they should be shown as separate items on the declarations page of the insurance contract. Remember, taxes and stamping fees are charged against premium only and are always rounded separately to the nearest whole dollar. For more information about the taxes and stamping fees, click here.
EFS Confirmation Page Satisfies All These Requirements
By attaching the EFS confirmation page to the policy, you can satisfy all four of the above requirements. The EFS confirmation page has service of suit wording, the proper policyholder notice (based on the insurer selected), the SLAI Confirmation Number, and lists the taxes and stamping fees.
Paragraph 11 of the Surplus Line Law exempts certain
transactions from the surplus line law. Exempt
transactions are:
-
Insurance of property and operations of railroads engaged in interstate or foreign commerce;
-
Insurance of property and operations of aircraft engaged in interstate or foreign commerce;
-
Any risk insured under an ocean marine or wet marine form of policy.
Since they are exempt, you do not need to submit these transactions to the SLAI or charge surplus line tax, fire marshal tax or stamping fee.
There is no exemption in the Illinois Surplus Line Law for Nonprofits & Governmental Entities.
The Illinois Department of Insurance has notified us of their view that surplus line insurance sold to federally chartered credit unions is exempt from the Illinois surplus line law, and filing and tax required thereunder, by virtue of 12 USC ยง1768.
Illinois does not have an export list. For every risk you place in the surplus line market, you must have 3 declinations from licensed insurers. The only exemption from this requirement is the exempt commercial purchaser (ECP) exemption.
The surplus line tax, fire marshal tax and stamping fee are levied upon the licensed surplus line producer, not the insured. There is no provision in the law that exempts the licensee from these taxes and fees when the insured is a nonprofit, governmental entity or political subdivision. The licensee is permitted by law to pass these costs on to the insured.
Paragraph 6 of the Surplus Line Law states that it is unlawful to deliver a surplus line policy to the insured unless it has been filed with and recorded by the Surplus Line Association of Illinois. When filing on our Electronic Filing System (EFS), you receive a confirmation number which you place on the dec page of the policy or, alternatively, you can print the confirmation page and attach it to the policy.
For some important information about Lloyd's special status in Illinois and procedures regarding Lloyd's policies that cover insureds whose home state is Illinois, see the Lloyd's section of the Filing Surplus Line Policies section of the Procedures Manual.
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