LL Surplus Lines Series (Entry 18): Surplus Lines Compliance – Does it Apply or Not?

The American Property Casualty Insurance Association (APCIA) published a bulletin on November 8 regarding the California Department of Insurance (“CID”) issued legal opinion, which concluded that the cancellation and non-renewal provisions under California Insurance Code (“CIC”) sections 677 and 678 apply to insurance policies written on risks located or resident in California by non-admitted (surplus line) insurers that insure any of the contingencies specific in CIC section 675 (the “Opinion”).[1]   The Opinion, a copy of which can be found here, concludes that unless otherwise specifically excepted, the cancellation and non-renewal requirements apply to such polices.

The Opinion highlights an ongoing issue for non-admitted insurers, i.e., which of the insurance statutes that apply to admitted companies also apply to non-admitted insurers?  In order to arrive at its conclusion, the CDI undertook a full legal analysis of the issue.

As noted in the Opinion, statutes may expressly apply to only non-admitted insurers, to both admitted and non-admitted insurers, or only to admitted companies.  For statutes that do not expressly apply to either or both admitted and non-admitted insurers, such as the California cancellation and non-renewal requirements applicable to coverages specific in CIC section 675, the Opinion looked to the overall scope of the statute, the legislative history and intent, and public policy – the insurance commissioner’s duty to protect the rights of all insurance policyholders.

The Opinion stated that based on the legislative history, the legislative purpose of the cancellation and non-renewal laws is to protect California consumers with respect to providing “advance notice of expiration, termination, cancellation and non-renewal of a policy of insurance leaving enough time to renew coverage or acquire other coverage.”  It noted that if the legislature had intended the statute to not apply to non-admitted insurers, it would have done so, as it did with Section 765.5 with regard to commercial insurance.  Section 675.5 specifically excepts surplus lines insurance from the application of the cancellation and non-renewal laws for commercial insurance policies.  The Opinion concluded that the statutes in question “do not distinguish between admitted insurers and non-admitted insurers” and apply generally to certain polices of insurance covered under CIC section 675 and based on the legislative history and the public policy intent to protect California insurance consumers, the requirements were deemed to apply to both types of insurers.

It is not always clear from the statutory language whether cancellation and non-renewal requirements that apply to admitted insurers apply to non-admitted insurers.  As a general rule, each state has its own cancellation and nonrenewal requirements applicable to insurance companies licensed in the state.  Some states have statutes that specifically address cancellation and nonrenewal requirements applicable to surplus lines insurers separate and apart from the standards for admitted insurers.  For example, Florida is a state that as enacted cancellation and nonrenewal legislation directly under its surplus lines laws (see Fla. Stat. § 626.9201).  However, even if there are no specific state insurance statutes that expressly apply, this does not mean that there are no cancellation and nonrenewal requirements applicable to surplus lines insurers.  Some states will directly apply their admitted cancellation and nonrenewal requirements to surplus lines insurers, while other jurisdictions will explicitly not apply such requirements to surplus lines carriers.  As California illustrates, this can even vary by the type of insurance (cancellation and non-renewal requirements apply to personal line coverages under Section 675 but do not apply to commercial line coverages under Section 675.5).  Other states do not directly identify whether requirements ‎applicable to admitted insurers apply to surplus lines ‎insurers, but rather adhere to “desk-drawer” rules to ‎determine applicability.

As the opinion shows, trying to determine whether a statute applies or does not apply to surplus lines insurers can often require a full legal analysis and is one that surplus lines insurers must undertake or seek guidance.

[1] Insurance Code 675 applies to policies of insurance, other than automobile insurance and workers’ compensation insurance, on risks located or resident in this state which are issued and take effect or which are renewed after the effective date of this chapter and insuring any of the following contingencies:  (1) Loss of or damage to real property which is used predominantly for residential purposes and which consists of not more than four dwelling units. (2) Loss of or damage to personal property in which natural persons resident in specifically described real property of the kind described in paragraph (1) have an insurable interest, except personal property used in the conduct of a commercial or industrial enterprise. (3) Legal liability of a natural person or persons for loss of, damage to, or injury to, persons or property, but not including policies primarily insuring risks arising from the conduct of a commercial or industrial enterprise.

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