Surplus Line Filing Procedures, Rules & General Information

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 authorized (licensed) insurers 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.  A new diligent effort must be performed for each renewal and for any policy extension.

Diligent effort exemptions, and limited exemptions, are as follows:

• Exempt commercial purchaser transactions.  If the insured qualifies as an exempt commercial purchaser as defined in section 1 of the Illinois surplus line law [215 ILCS 5/445(1)], the transaction can be exempt from diligent effort requirements provided the licensed surplus line producer follows the procedures in section 1.5(e) [215 ILCS 5/445(1.5)(e)]. See Exempt Commercial Purchasers, below
• Commercial wholesale transactions.  Effective January 1, 2022, when a commercial risk is referred to an Illinois wholesale surplus line producer by an unaffiliated Illinois-licensed producer, the transaction is exempt from the diligent effort requirements. [215 ILCS 5/445(1.5)(f)]
• Master policy transactions.  Effective January 1, 2022, for master policies, only an annual diligent effort is required, rather than a diligent effort for each insured added during the policy period.  The diligent effort must be performed annually, even if the policy period is greater than 12 months.  The diligent effort must include all variable provisions of the master policy. [215 ILCS 5/445(1.5)(g)]
• Program business transactions.  Effective January 1, 2022, for program business, only an annual diligent effort is required for the program, rather than a diligent effort for each contract written under the program. The diligent effort must be performed annually, and must include all variable provisions of the program. [215 ILCS 5/445(1.5)(h)]

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 must subsequently in writing request the producer to procure the insurance from an unauthorized insurer.

Paragraph 7 of the surplus line law requires the surplus line producer to keep their surplus line records for a period of 7 years.  For exempt commercial purchasers, these records should include (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 (DSLI) 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 DSLIs 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 DSLIs 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 or 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 §1768.

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 unless it is exempt. Diligent effort, exemptions and limited exemptions are covered here.

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.