The broad exemption historically applied to surplus lines insurance under Florida law was recently called into question by the decision handed down by the Florida Supreme Court in Essex Insurance Company v. Mercedes Zota (Case No. SC06-2031). In Essex, the Court answered one of five questions certified to it by the United States Court of Appeals for the Eleventh Circuit: Whether the provisions embodied in Section 626.922, Florida Statutes (requiring surplus line insurers to issue and deliver insurance policies) or Section 627.421 (requiring licensed insurers to deliver insurance policies to insureds within a specified timeframe) require a surplus line insurer to deliver the policy directly to an insured and not just to the insured's agent. The Court answered in the negative, upholding the common law rule that delivery to the insured's agent was sufficient.

Though not necessary for the Court to reach its decision, the Court also addressed the scope of Florida's surplus lines exemption. Chapter 627 of the Florida Statutes contains Florida's rating law as well as content and filing requirements for policy forms and most other policyholder-related provisions historically applicable to licensed, admitted insurers.

In Essex, Florida's highest court held that the exclusionary provision of Section 627.021(2), Florida Statutes, was intended to exempt surplus lines insurance only from the rating law, and not from all of the other provisions of Chapter 627. Based upon its interpretation, the Court found that both Section 627.421 and Section 627.428 (allowing for the award of attorney's fees) were applicable to surplus lines insurance.

Decision Under Review

The Florida Office of Insurance Regulation (OIR) is currently reviewing the decision in Essex to determine what additional regulation, if any, the decision requires of surplus lines insurers. While Essex limited the breadth of the express statutory exemption, it's possible that the regulation of surplus lines insurers contained in Part VIII of Chapter 626, Florida Statutes, will ultimately be determined by the OIR to pre-empt at least the fundamental form regulation from which surplus lines insurers have traditionally been exempt. While reluctant to do so thus far, the OIR is being encouraged to issue a memorandum clarifying its interpretation of Essex and any additional regulations that may result. It also appears likely that the industry, the OIR, or both will seek to have the decision addressed in the 2009 regular legislative session.

At the current time, it does not appear that the OIR will accept surplus lines forms for approval even if they are filed. Consequently, it is probably not practicable for surplus lines insurers to attempt to comply with all of forms filing provisions of Chapter 627, Florida Statutes, pending further instructions from the regulator. However, surplus lines insurers should be aware of the potential application of Sections 627.421 and 627.428, Florida Statutes.

Furthermore, surplus lines insurers should be aware that Essex could well lead to the exposure of surplus lines insurers to additional provisions of Chapter 627, including non-renewal restrictions (in addition to those already applicable under Section 626.9201, Florida Statutes), claims settlement requirements, and other such provisions.

Recent Developments

On August 18, 2008, the Eleventh Circuit Court of Appeals rendered a decision in CNL Hotels v. Twin City Fire Insurance Company (WL 3823898). The Court applied Essex to reverse a summary judgment by determining that an endorsement under a surplus lines policy was not valid because it had not been filed and approved pursuant to the forms filing requirements of Chapter 627, Florida Statutes. In so doing, the Eleventh Circuit realized the worst-case scenario for application of Essex — that surplus lines insurance forms will now be treated just like admitted policy forms, and will be subjected to all of the same requirements.

The decision in CNL Hotels confirmed that it would not be possible to defer action to counter the Essex decision until the 2009 Florida legislative session beginning in March. Essex and CNL Hotels have attracted attention from the trial bar, resulting in further litigation on these issues. For that reason, several insurers, among them Lloyd's of London and AIG, filed amicus briefs in conjunction with a motion for reargument in the CNL Hotels case.

The OIR also filed an amicus brief, setting forth a more meaningful and official statement of its position with regard to surplus lines form regulation after Essex. Unfortunately, the Eleventh Circuit denied reargument, and the decision in CNL Hotels became law, further disrupting Florida's long-standing surplus lines regulatory regime.

Surplus lines insurers met in early October to discuss Essex, its progeny past and anticipated, and additional steps to be taken both in the courts, with the regulator, and in the 2009 session. At the request of the National Association of Professional Surplus Lines Offices, Ltd., Foley participated on the panel to address the issues and answer questions from the industry. While a consensus is building for legislative change, meetings to discuss the exact nature of that change and the ultimate strategy to address the issues are ongoing.

Special Reports /

Essex v. Zota: Florida Surplus Lines Exemption Under Attack

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