Resources for Surplus Line Licensees

Other Information About the SLAI

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 and August.

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 Department. This 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 licensing information page.

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 following:

With some exceptions, the licensee is required to make sure that diligent effort has been made to place coverage with an admitted carrier. Insurance Department Regulation 2701.50 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 Procedures Manual.

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 Notice 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 SLAI. If it is an admitted placement, it should be processed according to the procedures of Lloyd's Illinois & Central Region office. 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. In July of 2020, Lloyd's announced that they are relinquishing their Illinois license as of July 1, 2021.

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 SLAI

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 the Surplus 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.