A discussion of the history of insurance in the U.S. always seems to start with the beginnings of Lloyd's of London. Although Lloyd's is a major factor in the development of surplus lines in our country, for this article we shall dispense with that history and deal with ours here in the Sunshine State. However, to understand surplus lines in Florida, we must first understand the development of surplus lines in the U.S.
Insurance in the U.S. began in 1752 with the formation of the Philadelphia Contributorship, which was created to insure houses from the peril of fire. There were no insurance departments and no licensing. It was not until 1851 that New Hampshire created the first full-time Board of Insurance Commissioners. In 1871, what became the National Association of Insurance Commissioners (NAIC) was formed, initially with 17 members. Surplus lines, however, began to develop earlier than that.
In 1835, the great New York fire wiped out some $28 million in insurance capital; ten years later another fire caused approximately $4 million more to disappear. The Chicago fire of 1871 caused 60 insurance companies to go under with a loss of $40 million. In 1872, the Boston fire took out another 32 companies and cost $38 million.
Up until that time, companies could not do business unless they were chartered in that state. However, these disasters caused a shortage of capacity and there was need to write with other companies even if they were not licensed. There were few laws that prohibited this or, for that matter, allowed it to happen. However, there was a need. In 1875, legislation was passed in New York that allowed citizens to obtain insurance on their own to protect their property, but prohibited anyone from acting for another in procuring insurance in an unlicensed carrier. Other states also passed laws prohibiting non-admitted placements.
As in all things, demand created supply, and in 1884 the state of New York created a non-admitted insurance statute that required any foreign insurance company to appoint the New York Superintendent of Insurance for service of process if it wished to do business in the state. In 1890, this same state passed the first comprehensive non-admitted insurance act, which among other things created a special license for brokers to transact non-admitted business. This act also provided that brokers had to sign an affidavit showing that they were unable to obtain coverage from licensed companies in the state. In 1894, it was amended to permit Lloyd's to write fire insurance business. Thus, surplus lines as we know it today was born.
The 1940s and 1950s
From then until after World War II, surplus lines operated with little real regulation and even less enforcement. To a great degree, the laws that did exist were meant to prohibit non-admitted writings rather than to regulate it. After the war it grew, but still there were very few comprehensive surplus lines laws. In 1949, Florida permitted "Supervisory" General Agents to place business with a non-admitted insurer under very limited circumstances. Chief amongst these was that the risk must have been turned down by all admitted markets available to the agent, whether he was licensed with them or not, and that the insurance commissioner may prohibit placement with carriers he deemed unacceptable.
In 1957, the NAIC developed a set of guiding principles for surplus lines that were intended to regulate the practice rather than outlaw it. Following this, in 1959, Florida, under the leadership of Gov. LeRoy Collins and Insurance Commissioner J. Edwin Larson, enacted the most comprehensive surplus lines law in the country, and for the first time created a Surplus Lines Section within the Department of Insurance. Frederick D. Crum served as the first Administrator of Surplus Lines, followed by Charles Gray, John R. Walker, George G. Love, and Carolyn Daniels. The Surplus Lines Division ended in 1998 with the formation of the Florida Surplus Lines Service Office.
The 1960s and Beyond
In 1960, one year after the enactment of Florida's surplus lines law, the Florida Surplus Lines Association was born, founded by a group of 37 individuals. In its original form, the group met once a year for a luncheon, which for many years was held in conjunction with the FAIA convention at the Fontainebleau Hotel on Miami Beach. The very first meeting of the association was held on Dec. 5, 1960, at the Hotel Roosevelt in Jacksonville, where Hugh Donovan of Jacksonville was elected its first president. Most of the founding members were not wholesalers, but retail agents. Prior to this time, most of the wholesalers in Florida were Managing General Agents and almost all were writing the bulk of their business with the admitted market. Some of those Florida MGAs were Southern Underwriters, Frank R. MacNeil & Son, Gabor & Co., Irvin B. Green and Associates, Home Underwriters, Charles A Lenz & Associates, and Shelly Middlebrooks & O'Leary. However, most of these had little, if any, surplus lines writings. Some agencies, like Gabor & Co., Inc., out of Miami did, for they had been writing some specialized lines with Lloyd's since 1950.
In 1960, there were 15 non-marine, non-admitted insurers authorized to accept surplus lines business. Only three of these were American companies: Employers Surplus Lines Insurance Co., Interstate Fire and Casualty Co., and the Lexington Insurance Co.
The Lexington of 1960 was not the Lexington we know today, an AIG company. Then, Lexington was broker-owned. In 1965, it sold all of its business to a new company owned by National Union Fire, which took on the name Lexington. The original Lexington changed its name to the First State Insurance Co. and later became the surplus lines arm of the Hartford Insurance Co.
During the 1960s, many things began to change. Wholesalers emerged and surplus lines became the purview of the wholesaler. New names came on the Florida scene -- Coverall Underwriters, Southeastern Surplus Lines, Hull & Co., and others opened. More U.S. domiciled surplus lines carriers were formed. Some were subsidiaries of admitted carriers, many were broker-controlled, and some new independent carriers were created. Carriers like Western World, Jefferson, Canadian Universal, Ambassador, and many others were formed during this time, dedicated to writing through wholesale brokers.
It is difficult to find early figures of surplus lines writings, but in 1976 the total surplus lines writings in Florida were $57,224,154. In 2009, it had reached $4,000,000,000.
In 1965, Cameron Brown, one of the true American surplus lines pioneers, wrote, "To many persons within and outside of the insurance industry the most confusing and mysterious subject in insurance is the non-admitted market."
Here we are 45 years later and that statement is just as true as it was when it was written. I suspect that it may still be true 45 years from now.
Ron Gabor is president of Gabor Insurance Services, Inc., a wholesale surplus lines agency, and chairman of American Professional Liability Underwriters, Inc., a wholesale professional liability specialty agency, both headquartered in Miami. He may be reached at 786-924-7070. Company information is available at www.gaborinsurance.com.
The FSLA Mission
The Florida Surplus Lines Association is an association with a current regular membership of Excess and Surplus Lines Agency member firms and associate members (made up of Excess and Surplus Lines Insurance Companies, Re-insurers, Lloyd's Brokers, Premium Finance Companies, Surveyors and Claim Adjustment Companies). The purpose of the FSLA is outlined in Article I of our By-Laws.
Our primary concern is keeping up with proposed legislation that may affect the Surplus Lines industry in Florida. Over the years when the Florida Department of Financial Services or the Legislature has proposed a bill or legislation that would adversely affect our business, we have been 98 percent effective in defeating or changing the proposed changes to surplus lines. We have also been very effective in proposing legislation that is beneficial to our industry.
We have a Political Action Committee fund called SURPAC that we use to support candidates for the Florida Senate and House of Representatives who look with favor on our industry. While we encourage our members to participate in our PAC fund, it is voluntary.
Each year, usually in the middle of the summer season, we have an annual convention which is well attended. Our convention moves around to different first-class resorts in Florida. We have excellent programs and speakers during our business sessions. The majority of our company members attend our annual convention. This gives our agency members an opportunity to visit with their company representatives and socialize with them.
The Florida Surplus Lines Association is recognized as one of the most active and in the top three Surplus Lines Associations in the country.
P.O. Box 331444, Atlantic Beach, FL 32233-1444
Phone: 904-631-1322
Email: Roger Gobler, executive director, rtgobler@myfsla.com
