Regulating the Regulatory Scheme: (April-June 2010 Litigation Quarterly)

Florida’s Legislative Clarification of the Role of Surplus Lines Carriers

Surplus lines insurers, also known as “non-admitted” carriers, have long served Florida consumers by providing coverage for unique risks that Florida-licensed (“admitted”) insurers may shy away from.  In order to effectuate the placement of these risks, surplus lines carriers, who often are headquartered in other states, traditionally were exempt from much of the regulatory structure applicable to admitted insurers.  For many years, it was commonly understood that the practices of surplus lines carriers were governed by whereas licenses carriers were subject to the more detailed requirements of Florida Statutes, Chapter 627.  For example, under Chapter 627, property insurers licensed in Florida are required to provide coverage or sinkholes, a natural phenomenon not commonly found in other states; requiring surplus lines carriers to write this insurance may dissuade them from doing business in Florida.

However, the traditional view, and the stability of the surplus lines market, were challenged by a pair of 2008 decisions holding that certain portions of 627 did apply to surplus lines policies.  For example, in Essex Insurance v. Zota, 985 So.2d 1036 (Fla. 2008), the court held that surplus lines insurers must comply with all of the insurance code applicable to admitted carrier with the exception of Part I only.1 In   CNL Hotels & Resorts, Inc. v. Twin City Fire Insurance Company, 2008 WL 3823898 (11th Cir. 2008), the court held that the portion of Florida’s insurance code requiring filing and approval of insurance forms also applied to surplus lines insurance.  These cases opened the door to a slew of lawsuits for sinkhole losses against surplus lines insurers.  Plaintiffs also saw the valued policy law, requiring that an insurer tender the face value of the policy upon a showing of a total fire loss, the prompt payment requirements of Fla. Stat. § 627.70101(5)(a) and required availability of replacement cost and ordinance and law coverage as fair game for lawsuits, after the decisions in Essex Insurance and CNL Hotels.

The Florida Legislature responded to the concerns of businesses and surplus lines associations by enacting HB 853 and ultimately promulgating new statutes.  The ambiguities caused by the case law were removed when Fla. Stat. § 626.913 was enacted on June 11, 2009.  At paragraph 4, this new statute provides “except as may be specifically stated to apply to surplus lines insurers, the provisions of chapter 627 do not apply to surplus lines insurance authorized under §§ 626.913-626.937, the Surplus Lines Law.”  The new law also contained a retroactivity provision applying the new language from October 1, 1988 onward “except with respect to lawsuits that are filed on or before May 15, 2009.”  This change resulted in a race to the courthouse by surplus lines insureds to file lawsuits regarding sinkhole and other claims.

Other notable changes were also made to the law.  The law was changed to require additional language with respect to policies issued after October 1, 2009.  For example, Fla. Stat § 626.924 requires a notice that surplus lines policy rates and forms are not approved by any Florida regulatory agency, and § 626.9374 requires language regarding deductibles and co-pays for hurricane or wind losses.

In conclusion, although the Legislature made its intent clear, the above-noted changes in the law, including the new policy language requirements, will have to be fully tested and resolved by the courts before the contours of the duties of surplus lines carriers are fully defined.

1            Fla. Stat. § 627.021(2)(e), found in “Part I: Rates and Rating Organizations” of the insurance code provides that “this chapter does not apply to… surplus lines insurance placed under the provisions of ss. 626.913-0626.937.”  As such, surplus lines insurers were exempted from the requirement that their rates be filed with, and approved by, the Office of Insurance Regulation.

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