Locke Lord QuickStudy: Surplus Lines Task Force Discusses Modernizing the Nonadmitted Insurance Model Act ‎and the Standard Form of Trust Agreement

Locke Lord LLP
November 19, 2020

On November 18, 2020, the Surplus Lines Task Force held a virtual meeting in lieu of ‎its meeting at the 2020 NAIC Fall National Meeting. The Task Force discussed the ‎proposed modernization of the NAIC Nonadmitted Insurance Model Act (Model 870) ‎‎(the "Act") and the Standard Form of Trust Agreement.‎

Nonadmitted Insurance Model Act

The Task Force formed a drafting group to review the Act, which has been adopted by 31 states, and have it ‎conform to the changes provided for under the federal Nonadmitted and Reinsurance Reform Act of 2010 (the ‎‎"NRRA"). There was a discussion as to whether the Task Force should open up the Act to a more robust review, but ‎this was tempered by the fact that further analysis of other provisions of the Act could delay or even derail the ‎process.‎

The drafting group's recommendations included a number of surplus lines insurance issues, including ‎incorporating provisions related to affiliated/nonaffiliated groups to bring the Act in line with the ‎current law of states that have adopted the NRRA. With respect to group insurance policies, the ‎NRRA addresses policies covering affiliated groups, but not nonaffiliated groups, such as a risk ‎purchasing group or policies issued by a risk retention group. By way of background, the NRRA ‎expressly defines "home state" as the state where the insured maintains its principal place of ‎business, or where the majority of the taxable premium is located if 100% of the risk is outside of ‎the state where the principal place of business resides. The NRRA specifically addresses how to ‎determine the principal place of business of an affiliated group, by looking to the state of the largest ‎group member as determined by percentage of premium attributed to the members. However, the ‎NRRA does not address how to determine the home state of an unaffiliated group. This has led to ‎ambiguity on how to structure group insurance products in the surplus lines insurance market for ‎nonaffiliated groups, such as whether and where declinations are required or where premium taxes ‎need to be paid. The changes will look to incorporate the group requirements.‎

In addition, the drafting group recommended that the Act incorporate accident and health insurance ‎policies in light of the growing acceptance of the ability of surplus lines insurers to write such risks ‎and on the heels of the Task Force's adoption of the Guidelines on Nonadmitted Accident and Health ‎Coverages issued in 2019. The purpose of the Guidelines was to assist states in updating state laws ‎and to establish procedures to permit accident and health insurance coverage to be produced in the ‎surplus lines insurance market. The Guidelines highlighted that the types of accident and health ‎insurance coverage that some states are permitting in their nonadmitted market include short term ‎medical, international major medical, excess disability, high-risk disability and other similar insurance ‎coverages.‎

In addition, areas recommend for updating the Act included (1) adding the concept of domestic surplus lines ‎insurers (DSLIs), (2) revising the surplus lines insurance eligibility requirements to incorporate the minimum ‎standards provided for under the NRRA for both foreign and alien surplus lines insurers, (3) eliminating the ‎allocation of premium for tax sections as these was replaced with the "home state" system under the NRRA, (4) ‎including provisions related to self or independent procurement of insurance tax, where the insured goes out of its ‎home state to purchase insurance, and (5) adding the concept of exempt commercial insurance purchasers,‎ where a surplus lines insurance broker does not need to satisfy the diligent search requirements for ‎insureds that satisfy the definition of an exempt commercial insurance purchaser.‎

Following the discussion, the Task Force agreed to proceed with a formal review and to modernize ‎the Act. ‎

Standard Form of Trust Agreement

The Task Force also discussed a change to the standard form of Trust Agreement utilized by alien ‎insurers when they qualify for inclusion on the Quarterly Listing of Alien Insurers with the NAIC. A ‎trust fund is required and must be consistent with the NAIC's International Insurers Department ‎requirements for such a trust.‎

The NAIC Legal Division issued a memorandum recommending that the Task Force consider revisions to the Trust ‎Agreement to provide greater flexibility for the termination of the agreement in those cases where there are ‎practically no present or future liabilities to the trust. The Legal Division noted that revisions to be considered include ‎permitting termination upon: (1) a Statement of Actuarial Opinion or report of certified public accountant to the ‎effect that there are no reserves applicable to the Trust, (2) that the company has taken reasonable steps to insure ‎the payment of present or future claims; e.g., the entry into a 100 percent Quota Share Reinsurance Agreement, or ‎‎(3) discretion by the IID to provide recommendations to the Trustee on the termination of the Trust based upon ‎unique fact occurrences.‎

The Legal Division also recommended that the Task Force consider revisions to other sections within the Trust ‎Agreement, including (1) Article 1, Definitions, for updating and deleting, where necessary, (2) Article 2.8, Letters of ‎Credit, for review of the language surrounding the use of letters of credit, (3) Article 3.7, Trustee's Fees and ‎Expenses, regarding the amounts listed therein, and (4) the use of Certified Mail provided for throughout the ‎document.‎

The Task Force agreed to move forward with the specific review and draft amendments to the ‎standard form of Trust Agreement.‎

Locke Lord will continue to monitor these developments.