When the Essex v. Zota decision was rendered in June 2008, the surplus lines industry was shaken to its very foundation by its implications. The Florida Supreme Court was only asked four specific questions: to include whether or not the surplus lines policy had to be delivered to the insured as opposed to the insured's retail agent, and whether or not the plaintiff can recover attorneys' fees in a case against the surplus lines carrier. The Court, however, elaborated on its view of the case and in a decision (which we believe to be incorrect), found that the exception that was put in by the Florida Surplus Lines Association in 1988 to exempt the surplus lines industry from the entire Chapter 627 relating to the admitted industry only applied to the filing of rates by the surplus lines industry, leaving the rest of the Chapter open for grabs by the trial lawyers.
And what a field day they had. Many cases were filed, both individually and as a class action, in order to seek compensation from the industry for statutory provisions that were never applied to the surplus lines industry, and never intended to apply to the surplus lines industry. Some of the cases endeavored to hold the industry liable for failure to file forms for approval with the Office of Insurance Regulation (OIR).
One such case argued that policy exclusions could not be applied because the forms had not been approved by the OIR. The OIR, however, never approved forms for the surplus lines industry, does not approve them today, and never intended to approve the forms for the industry. It so said in affidavits filed in court.
Other aspects of the law -- for example, sinkhole coverage -- applicable to admitted companies were sought to be applied to the surplus lines industry and the failure to apply those standards in coverages prospectively and retroactively was used to claim damages from the carriers for provisions that were never applicable in the past.
The industry was challenged as never before and literally was threatened to its very existence, resulting in at least some paralysis concerning its ability to go forward.
Back to the Future
Something had to be done. The subsequent passage of HB 853 essentially returned the law to the status that it enjoyed for over 30 years when the exemption to the statute was put in place. In particular, the statute provided that it would be retroactive to Oct. 1, 1988, the date upon which the exemption was first put into the law. It should be noted that while the exemption was first added to the law in 1988, the industry had always operated under the presumption that the Chapter applying to admitted companies did not apply to the surplus lines industry.
Not everyone, however, is happy with the concessions included in the new law. The retroactive application of the current law did exempt from its applications those lawsuits that had been filed on or before May 15, 2009. Many feared that leaving that door open would result in a flood of new cases being filed before the date by avaricious counsel seeking to beat the deadline. That fear was not realized, and to the knowledge of this writer only one case was filed that had not already existed -- not surprisingly by attorneys who participated in the negotiation of the legislation. So today there are approximately five cases pending in the courts in at various procedural levels. These cases will have to go forward on their own merits. Keep in mind that the Essex case did not say that all of the provisions of Chapter 627 are applicable to the surplus lines industry. It simply said that the exemption only applied to Part I of Chapter 627, which is the Rating Law, and requires the filing of rates for approval by the OIR for policies issued in Florida.
More New Rules
In addition, other exceptions for the surplus lines law now require, as of Oct. 1, 2009, that surplus lines policies covering risks located in or to be performed in Florida must provide that premiums for the surplus lines policies be in cash, checks, money orders or by using debit cards, credit cards, electronic funds transfer or payroll deduction plans. Such a provision does not present any complications and is honored today routinely. Claims have to be paid in cash or cash equivalents. Same result. Other sections imposed various disclosure requirements in the policy that are largely form over substance. For example, a surplus lines homeowners' policy must disclose on its face if it has a separate coinsurance, hurricane, or wind deductible provision.
Probably the largest exception in the bill was a provision that permitted attorneys' fees in the event that plaintiffs are successful in cases against their carriers. A survey of carriers during the legislative session, specifically the larger carriers involved in Florida, felt that in such a situation the attorneys' fees were paid anyway. Therefore, we believe that the bill, as passed, was critical to the life of the surplus lines industry and allowed it to go forward and place coverages without the fear of lawsuits predicated upon this errant decision.
Douglas A. Mang is president and shareholder of the Mang Law Firm, P.A. He represents the Florida Surplus Lines Association as legislative and regulatory counsel. He has been active in the insurance arena for over 25 years, has served as general counsel for the State Treasurer and Insurance Commissioner of Florida, served on NAPSLO's legislative committee, and is a director of the Federation of Regulatory Counsel, a nationwide organization of attorneys who specialize in insurance regulatory matters.
