Due Diligence:

"The full amount of insurance required must not be procurable, after a diligent effort has been made by the producing agent to do so, from among the insurers authorized to transact and actually writing that kind and class of insurance in this state, and the amount of insurance exported shall be only the excess over the amount so procurable from authorized insurers. Surplus lines agents must verify that a diligent effort has been made by requiring a properly documented statement of diligent effort from the retail or producing agent. However, to be in compliance with the diligent effort requirement, the surplus lines agent's reliance must be reasonable under the particular circumstances surrounding the export of that particular risk. Reasonableness shall be assessed by taking into account factors that include, but are not limited to, a regularly conducted program of verification of the information provided by the retail or producing agent."

As generally understood, the burden is on the retail agent to conduct and document a diligent search, and the surplus lines agent must then verify that the search has taken place. While seemingly straightforward, some retail agents have taken the position that the surplus lines agent should "help" the process along, a practice that some surplus lines agents have unfortunately agreed with. For one who may have adopted that practice, it might not be a problem today, but it may well be a significant issue during an audit. One could always argue that "helping" the process along was "reasonable," but I wouldn't advocate that approach unless the assertion could be substantiated easily.

Every agent and broker in the state understands that three admitted companies must reject an application for coverage before it can be insured in the surplus lines market. One wonders where the yardstick of three carriers came from though, since it is not specifically stated in the law. With some help from Matt Wester at the Florida Surplus Lines Surplus Office, we found that the three-company standard is located in the FSLSO Agents Procedure Manual, and it is based on an administrative rule that included the diligent effort form (DI4-1153). Since the form DI4-1153 (with spaces for three carriers) was adopted as part of an administrative rule (69P-5.003), the form is deemed necessary to ensure that the specific parties are in compliance with the legislative intent of the law.

As to the three carriers, FSLSO consistently receives calls from retail agents asking what to do since they don't have three qualifying carriers (a better option than those forms that are submitted with just one or two carrier names). On this point, Wester advised that "an agent must remember that if they do not have three companies that they are licensed and appointed with, they must check with their competitors first in order to properly execute the due diligence." I'm going to guess that quite a few retail agents and surplus lines agents don't know that's an option. It is a point that is worth keeping in mind for future reference.

Finally, surplus lines agents must have a "regularly conducted program of verification of the information provided by the retail or producing agent." That is fairly easy to accomplish for a surplus lines agent and should be given some attention if such a process is not currently in place.

Premiums and Coverage

The next applicable statutory requirement is as follows: "The premium rate at which the coverage is exported shall not be lower than that rate applicable, if any, in actual and current use by a majority of the authorized insurers for the same coverage on a similar risk."

This is another mouthful that hopefully does not require a lot of explanation. However, I would argue that on much of the business being written, especially in the current marketplace, it is difficult — if not impossible — to identify "that rate." One has to take great care to comply with the provision as currently written, so having documentation available to support one's actions is critical. When in doubt, ask for help; it could potentially save a great deal of time and energy later.

The law also requires the following: "The policy or contract form under which the insurance is exported shall not be more favorable to the insured as to the coverage or rate than under similar contracts on file and in actual current use in this state by the majority of authorized insurers actually writing similar coverage on similar risks."

This statute goes on to say that a special policy "filing" can be made by an unauthorized insurer subject to several provisions. That is a fairly unusual solution, but it is available.

This goes to the heart of an agent or broker's experience and knowledge. By the time a retail agent who loses a policy to a surplus lines carrier finds out what the wording is on the policy issued by the surplus lines carrier, the insured often would have probably already found coverage. At that point, there is just the practical matter of whether it is worth the time and effort to pursue the case.

This raises a number of questions. First of all, there is the issue of determining what the coverage is in use by the majority of authorized insurers, and the issue of any regulatory authority telling an insured/customer that they cannot purchase a competitively priced product because it is provided by a surplus lines insurer. Having said all of that, the producing agent or the surplus lines agent needs to have a good idea of what constitutes common policy language so that they can be aware if the wording or deductible is truly more favorable.

Beware of Citizens' Requirements

This last section is here to reflect the controversial decision by lawmakers — who followed Governor Charlie Crist's lead — that placed Citizens square in the middle of the coverage mix.

"For personal residential property risks, the retail or producing agent must advise the insured in writing that coverage may be available and may be less expensive from Citizens Property Insurance Corporation. The notice must include other information that states that assessments by Citizens Property Insurance Corporation are higher and the coverage provided by Citizens Property Insurance Corporation may be less than the property's existing coverage. If the notice is signed by the insured, it is presumed that the insured has been informed and knows that policies from Citizens Property Insurance Corporation may be less expensive, may provide less coverage, and will be accompanied by higher assessments."

I'd love to hear how this one has worked out in your office and what you're doing with it or because of it. In the meantime, make sure your office is consistent in the diligent search process, and if you do anything that is in a gray area, be certain to document your efforts and reasoning.

Tim Hoelle is president of Three Fifty Six Consulting, Inc. He may be reached at thoelle@threefiftysix.net.