Industry Issues | Surplus Lines Reform

South Carolina Senate Committee Considers Amendment to Med Mal JUA Legislation

Legislative Update II - South Carolina

On Wednesday, March 27th a Senate Banking & Insurance Subcommittee heard testimony regarding H. 3760, the Department of Insurance bill that proposes to merge the Patients Compensation Fund and the South Carolina Medical Malpractice Joint Underwriting Association, eliminate the operating deficits, and provide for a JUA functioning as a market of last resort.

Prior to last week's committee meeting, APCIA had delivered the attached letter to the Department of Insurance (and members of the committee) regarding the language providing that a surplus lines insurer offering medical professional liability coverage "is and must remain a member of the association as a condition of the authorization to transact the sale of insurance in this State".

Attached please find a revised draft substitute prepared by Committee Staff.

Regarding surplus lines insurance, the draft substitute would not require surplus lines insurers to be members of the JUA but would require surplus lines brokers to collect and remit a surcharge.

The draft substitute also includes language providing that in 2025 the JUA Board could require proof of admitted insurer declinations before providing a JUA quote to an applicant.

Committee staff will convene a stakeholders' meeting to discuss the draft substitute on Monday, April 1 at 2:00 PM.

The Subcommittee will again consider H. 3760 on Wednesday, April 3rd.

We expect the Subcommittee to take action on a substitute and the bill to proceed to full committee on Wednesday, April 10th.

Please email any comments or concerns to david.kodama@apci.org.


Surplus Lines State Legislative Update - South Carolina

Legislative Update - South Carolina

South Carolina HB 3760 has been introduced to address changes to the South Carolina Medical Malpractice Joint Underwriting Association, including amendment to the association membership and assessment provisions.

In particular, the provision extracted below would specifically require surplus lines insurers writing medical malpractice coverage to be members of the state medical malpractice underwriting association and would subject the insurers annually to assessments to cover the association operating costs. Further, the bill language contains a problematic reference to surplus lines insurers as "authorized to do business."

The APCIA intends to raise concern about this provision. Pursuant to SC surplus lines laws -https://www.scstatehouse.gov/code/t38c045.php - the surplus lines insurer is not authorized under any provision but is an unlicensed entity meeting certain conditions from whom a licensed surplus lines broker is permitted to procure surplus lines insurance. That broker is further authorized via license to place and transact the insurance in the state where SC is the home state of the insured, and is therefore further responsible for administering the duty of tax collection, remittance and reporting.

See SECTION 38-45-10 - "Surplus lines insurer" means an insurer not licensed to engage in the business of insurance in this State, but does not include a risk retention group, as that term is defined in Section 2(a)(4) of the Liability Risk Retention Act of 1986 (15 U.S.C. 3901(a)(4)).

"Surplus lines insurance" means any property and casualty insurance permitted to be placed directly or through a surplus lines broker, or an insurance producer as provided in subitem (b)(ii), with a surplus lines insurer eligible to accept the insurance as defined in Section 38-1-20(56).

See SECTION 38-1-20 - (56) "Surplus lines insurance" means insurance in this State of risks located or to be performed in this State, permitted to be placed through a licensed broker, or a licensed broker as provided in Section 38-45-10(8)(b)(ii), with a nonadmitted insurer eligible to accept the insurance, other than reinsurance, wet marine and transportation insurance, insurance independently procured, and life and health insurance and annuities. Excess and stop-loss insurance coverage upon group life, accident, and health insurance or upon a self-insured's life, accident, and health benefits program, disability insurance in excess of any benefit limit available from an admitted insurer, and international major medical insurance may be approved as surplus lines insurance.

The APCIA will seek to have "surplus lines insurer" deleted from the highlighted language. Surplus lines insurers should not be referred to as being "authorized to do business" in the state as there are no provisions that authorize the insurer beyond stipulating the conditions for eligibility for procurement of surplus lines insurance by the licensed broker authorized to transact that business in the state.

Section 38-79-120. (1) A joint underwriting association (association) is created, consisting of containing as members all insurers authorized to write and report net direct written premiums for medical malpractice insurance, medical professional liability insurance, hospital professional liability insurance, or any other type of professional liability insurance in this State covering the professional liability risks of licensed health providers. Membership also includes foreign and domestic risk retention groups and surplus lines insurers authorized to do business in accordance with the provisions of this title. Each insurer, risk retention group, or surplus lines insurer is and must remain a member of the association as a condition of the authorization to transact the sale of insurance in this State. If the net direct premiums written by all carriers are less than twenty-five million dollars in a given year, then in such year the membership of the association must be expanded to include all insurers authorized to write within this State, on a direct basis, bodily injury liability insurance, other than automobile bodily injury liability insurance, homeowners liability insurance, and farmowners liability insurance, including insurers covering such peril in multiple peril package policies.Every such insurer is and must remain a member of the association as a condition of its authority to continue to transact such kind of insurance in this State.In such years, the term 'net direct premiums' shall include the gross direct premiums written on bodily injury liability insurance other than automobile insurance, homeowners liability insurance, and farmowners liability insurance including the liability component of multiple peril package policies as computed by the director or his designee, less return premiums of the unused or unabsorbed portions of premium deposits.

Your review and feedback on this matter is greatly appreciated. Email any member comment, question or concern to david.kodama@apci.org.


South Carolina Enacts SB460 on Surplus Lines Eligiblity

South Carolina Senate Bill 460 was signed by the Governor on June 13, 2013 and becomes effective immediately. This legislation amends South Carolina law related to the duty of due care that a surplus lines insurance broker must exercise when placing business with nonadmitted insurers. Language is added to clarify the solvency requirement and to provide exemption to those brokers from the due diligence requirement when seeking to procure or place nonadmitted insurance for an exempt commercial purchaser in certain circumstances.


South Carolina Issues Bulletin Addressing Surplus Lines Blended Tax Rate

The purpose of South Carolina Department of Insurance Bulletin 2012-09 is to advise surplus lines brokers of the effective date for collection of the surplus lines blended tax rate on premiums for all policies of insurers not licensed in this State. Pursuant to South Carolina law under 2012 S.C. Act 283 related to the federal NRRA, the municipal business license tax no longer applies to brokers for non-admitted insurers. The surplus lines premium tax is now a blended rate of six percent (6%).


South Carolina Enacts NRRA-Surplus Lines SB 1419

On June 29, 2012, South Carolina Governor Nikki Haley signed Senate Bill 1419, an act to amend chapter 45, title 38, relating to insurance brokers and surplus lines insurance. It is stated that the act takes effect January 1, 2012.

SB 1419 defines terms in accordance with the NRRA of 2010; provides that the revenue collected from the broker's premium tax rate must be credited to a special earmarked fund; provides for the manner in which the fund may be used and disbursed; authorizes the director of the department of insurance to conduct examinations of broker records; allows the department of insurance to promulgate regulations necessary to implement the chapter; provides the manner in which the NRRA of 2010 may be implemented; and, amends section 38-7-160, relating to municipal license fees and taxes, so as to disallow a municipality from charging an additional license fee or tax based upon a percentage of premiums for purposes of surplus lines insurance.

New section 38 45 190. provides that for the purposes of carrying out the NRRA, the director may enter into an agreement with a single state to facilitate the collection, allocation, and disbursement of premium taxes attributable to the placement of surplus lines insurance, provide for uniform methods of allocation and reporting among surplus lines insurance risk classifications, and share information among states relating to surplus lines insurance premium taxes. Further, the director is authorized to participate in a clearing house established through a multistate agreement for the purpose of collecting and disbursing to reciprocal states any funds collected applicable to properties, risks, or exposures located or to be performed outside of this State. The General Assembly retains authority to approve, modify, or rescind any such agreement pursuant to this section.


South Carolina DOI Introduces SB1419, Surplus Lines Insurance

South Carolina State Senator David L. Thomas, Chairman of Senate Banking and Insurance Committee, introduced Senate Bill 1419 on April 10, 2012. This bill would amend chapter 45, title 38, code of laws of South Carolina relating to insurance brokers and surplus lines insurance, so as to define terms, to provide that the revenue collected from the broker's premium tax rate must be credited to a special earmarked fund, to provide the manner in which the fund may be used and disbursed, to authorize the director of the department of insurance to conduct examinations of broker records, to allow the department of insurance to promulgate regulations necessary to implement the chapter, to provide the manner in which the NRRA of 2010 may be implemented; and to amend section 38-7-160, relating to municipal license fees and taxes, so as to disallow a municipality from charging an additional license fee or tax based upon a percentage of premiums for purposes of surplus lines insurance.

Section 38-45-190 (A) provides that, For the purposes of carrying out the Nonadmitted and Reinsurance Reform Act of 2010, the director or his designee is authorized to enter into agreements with other states in order to facilitate the collection, allocation and disbursement of premium taxes attributable to the placement of surplus lines insurance, provide for uniform methods of allocation and reporting among surplus lines insurance risk classifications, and share information among states relating to surplus lines insurance premium taxes.

E-mail member comment and questions to David Kodama.

With the introduction of SC SB 1419, Michigan is now the lone state not to consider legislation to conform state law to the NRRA. Of the two other states yet to enact legislation, Colorado's bill is awaiting the governor's signature and Illinois' has passed the Senate and is pending in the House.


South Carolina DOI Updates Surplus Lines Broker, Insurer Premium Tax Procedures

The South Carolina DOI issued a January 4, 2012, memorandum to all eligible surplus lines brokers transacting business in South Carolina and all eligible surplus lines insurers. The stated purpose of the attached memorandum is to update surplus lines brokers and surplus lines insurers of the transition to an electronic premium tax process, as well as advise of enhancements and guidelines relating to the deployment of the Online Surplus Lines Brokers Premium Tax Application.

Issues addressed include the following: deployment; log in; 2011 tax payments; submissions; cancellations; endorsements; renewals; change of broker of record; quarterly tax payments and reconciliation; purchasing groups; bulk submission testing; independently procured business; independently procured tax payments; and payment methods.

Of particular note, page 6 of the memorandum specifically refers to Bulletin Number 2011-5 (attached), which indicates that the DOI “is requesting certain information from authorized insurers to audit the taxes due from brokers and any entity that may directly procure insurance through a surplus lines insurer.” Please be advised that according to the memorandum, DOI is not requesting such information for tax year 2012. That component of the Online Surplus Lines Brokers Premium Tax Application will be addressed in tax year 2013.


South Carolina Issues New Submission Guidelines for Surplus Lines Insurers

After multiple conference calls with PCI staff and letters of objection from the industry, the South Carolina Department of Insurance still issued the attached bulletin with new submission guidelines, albeit revised, for surplus lines insurers for the purpose of auditing the taxes due from brokers.

Bulletin 2011-5: New Online Surplus Lines Broker Premium Tax System Guidelines, includes (with added emphasis):

SECTION 4: SUBMISSION GUIDELINES FOR ELIGIBLE SURPLUS LINES INSURERS

The Department is requesting certain information from authorized insurers to audit the taxes due from brokers and any entity that may directly procure insurance through a surplus lines insurer. This information is not requested by the Department to calculate taxes due from brokers; however, S.C. Code Ann. Section 38-13-160 (2002) empowers the Director to conduct special inquiries or to require special reports from insurers authorized to transact business in South Carolina. An insurer is an "authorized insurer" if the insurer is either licensed or approved to transact business in South Carolina. Although surplus lines insurers are not licensed in South Carolina, they are deemed as "authorized insurers" because they are approved to transact business in South Carolina. Accordingly, all eligible surplus lines insurers must submit by May 7 of each year the following information for each broker that placed business with it in the preceding calendar year: Broker Name, SC License Number, Policy Number, Insured's Name, Premiums Written, and the Tax Year. This information will be used by the Department to audit and verify the premium taxes due and payable to the state and to ensure that premiums are properly allocated to other states.

In support of this new regulation, the Department's Legal Division takes the contrarian position that a surplus lines insurer is deemed to be an "authorized insurer" - an otherwise undefined term within the SC statutes. The Legal Division was unwilling to offer any further reasoning other than that is their "interpretation."

PCI continues to seek further opportunity to raise our objection to this interpretation and concerns regarding potential other implications. Members are welcome to submit their comments to David Kodama. Further discussion will be held on our upcoming committee call on Tuesday, September 27, 2011 at 10 a.m. CDT.


South Carolina Issues Surplus Lines Insurer Survey

A number of members brought the below South Carolina DOI notice to our attention. The Department is conducting a survey related to the implementation of the surplus lines provisions of the Nonadmitted and Reinsurance Reform Act of 2010. PCI staff has contacted the Department for more information.

  • Purpose: South Carolina is seeking information to guide them in determining whether the state participates in a tax-sharing compact for surplus lines, such as SLIMPACT, NIMA, or to defer the decision (wait-n-see), or just default to a 100% single home state tax rule (no allocation).
  • It was confirmed that the Department "requests" participation in this market survey - it is not a requirement .
  • It is acknowledged that "home state" policy detail is not generally captured by insurers, so expectation is for "ball park estimates."
  • Insurance companies, rather than brokers, are being surveyed because, 1) it is a smaller set to survey and 2) the Department has a particular interest in hearing from the companies on this matter (Question 6).
  • Deadline: The Department will accept survey responses until Friday, April 8.
  • Question 6: It is requested that participating companies provide any pertinent comments and input related to participation in a multistate compact or reciprocal agreement pursuant to the NRRA - this could include feedback on the ability and burden of requiring insurance companies to capture and report "home state" policy and/or aggregate premium detail.

South Carolina has yet to introduce legislation in response to the NRRA (effective July 21, 2011).


From: South Carolina Department of Insurance
Sent: Tuesday, March 29, 2011
Subject: Surplus Lines Survey

In anticipation of the implementation of the Nonadmitted and Reinsurance Reform Act of 2010, as included in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the South Carolina Department of Insurance is soliciting your input and feedback regarding surplus lines insurance. The data collected will be used to ascertain the financial impact of various implementation options.

We respectfully request that you provide a response to the questions below by close of business Monday, April 4, 2011. If you are not the appropriate person to respond to this inquiry, please forward this survey to the correct person. Your responses should be e-mailed to wkannaday@doi.sc.gov. If you have any questions regarding this inquiry, please contact Trey Kannaday at 803-737-6279.

Thank you for your prompt response!

Regarding your surplus lines business, please answer the following questions:

  1. What is the total amount of premiums written for calendar year 2010 on policies for which South Carolina is considered the home state as defined in the NRRA? If the exact amount is not available, please provide an approximation.

    Note:The definition of "home state" as provided in the NRRA is listed at the bottom of this survey for your convenience.
  2. What percentage of the total premiums provided in response to #1 above is attributable to policies that only cover risks in South Carolina (i.e., single-state risks)?
  3. What percentage of the total premiums provided in response to #1 above is attributable to policies that cover risks in multiple states (i.e., multi-state risks)?
  4. Regarding multi-state policies when South Carolina is considered the home state, please list the top 3 states (by premium volume) that also have risks covered under these policies.
  5. Regarding multi-state policies when South Carolina is NOT considered the Home State, please list the top 3 states (by premium volume) that would be considered the Home State and for which risks located in South Carolina are covered under these policies.
  6. Please provide any suggestions, comments, or recommendations regarding implementation of the Dodd-Frank Act.

Definition of "Home State"

(6) HOME STATE.—

(A) IN GENERAL.—Except as provided in subparagraph

(B), the term ''home State'' means, with respect to an

insured—

H. R. 4173—218

(i) the State in which an insured maintains its principal place of business or, in the case of an individual, the individual's principal residence; or

(ii) if 100 percent of the insured risk is located out of the State referred to in clause (i), the State to which the greatest percentage of the insured's taxable premium for that insurance contract is allocated.

(B) AFFILIATED GROUPS.—If more than 1 insured from an affiliated group are named insureds on a single nonadmitted insurance contract, the term ''home State'' means the home State, as determined pursuant to subparagraph

(A), of the member of the affiliated group that has the largest percentage of premium attributed to it under such insurance contract.