BILL ANALYSIS                                                                                                                                                                                                    Ó






                             SENATE INSURANCE COMMITTEE
                           Senator Ronald Calderon, Chair


          SB 131 (Gaines)                    Hearing Date: May 11, 2011 

          As Amended: May 3, 2011
          Fiscal:             No
          Urgency:       No
          

           SUMMARY    Would clarify the allocation of Department of 
          Insurance reporting requirements under the surplus lines law 
          when multiple brokers are involved in a single surplus lines 
          transaction by permitting delegation of the responsibility by 
          mutual agreement among the brokers as a recognized option.    
          
           DIGEST
            
          Existing law

            1.  Requires insurers that "transact" insurance in California 
              be "admitted" to transact in the state.  "Admitted" is the 
              Insurance Code terminology for being licensed to transact 
              insurance in this state;

           2.  Provides that "transact" as it applies to insurance 
              includes solicitation, negotiations preliminary to the 
              execution of an insurance contract, execution of the 
              contract, and transaction of matters subsequent to the 
              execution of, and arising out of, the insurance contract;

           3.  Authorizes licensed "surplus lines brokers", when a risk 
              cannot be placed with an admitted insurer,  to place the 
              risk with an insurer that is not fully licensed in 
              California, subject to rules and financial requirements 
              designed to strengthen the public's confidence when dealing 
              with such entities;

           4.  Imposes various duties on surplus lines broker to ensure 
              compliance with the Surplus Lines law;

           5.  Among these duties is a requirement that on or before the 
              first day of March of each year, a surplus line broker must 
              file with the Insurance Commissioner a sworn statement of 
              all business transacted under his or her surplus line 




                                                SB 131 (Gaines), Page 2




              license during the prior calendar year.

           6.  Requires each surplus line broker to file with the 
              Insurance Commissioner a confidential written report 
              regarding the insurance placement within 60 days of placing 
              any insurance with a nonadmitted insurer. The report is 
              required to contain various matters, including the insured's 
              name and address, identity of the insurer/insurers, a 
              description of the subject and location of the risk, the 
              premium charged for the insurance, a copy of the 
              declarations page or of the surplus line broker's 
              certificate or binder evidencing the placement, and other 
              pertinent information that the commissioner may reasonably 
              require.

           7.  Provides that when multiple surplus line brokers are each 
              involved in placing a policy, only the one responsible for 
              negotiating, effecting the placement, remitting the premium 
              to the nonadmitted insurer or its representatives and filing 
              the confidential written report described above is 
              considered" transacting" under their surplus line broker's 
              license.
           
            
           
          This bill

           1.Permits, if multiple surplus lines brokers are involved in a 
            single transaction, that only one shall include the report 
            concerning the transaction in the required sworn statement of 
            business transacted which is filed with the Insurance 
            Commissioner.  

           2.Allows the surplus line brokers to delegate by agreement the 
            responsibility for filing the confidential written report on 
            the transaction which must be provided to the Insurance 
            Commissioner  if the agreement is:

               a.     Made by all surplus line brokers involved in the 
                 transaction;
               b.     Signed by all the surplus line brokers involved in 
                 the transaction; and 
               c.     Provides by its terms that the agreement shall be 
                 made available to the commissioner or his or her 
                 designee, upon request. 





                                                SB 131 (Gaines), Page 3





            
           COMMENTS

          1.  Purpose of the bill   According to the sponsors, SB 131's 
              purpose is clarify the reporting requirements under the 
              Surplus Lines law when multiple surplus lines brokers are 
              involved in a single insuring transaction. The bill will 
              permit the surplus line brokers involved in a placement to 
              designate among themselves, by a written agreement between 
              and signed by all the participating brokers, which broker is 
              responsible for the required filings.  This approach is said 
              to be a better fit for actual practice in the marketplace. 
              The bill requires that agreement must be made available to 
              the Insurance Commissioner upon request

           2.  Background and Discussion:  

              This bill is intended to clarify responsibilities of surplus 
              lines brokers under California law when a single transaction 
              involves participation by multiple surplus lines brokers. 
              The Department of Insurance has been extensively involved in 
              "vetting" this proposed bill to maintain suitable reporting 
              for compliance and regulatory purposes and to improve the 
              fit between statutory requirements and marketplace 
              practices.


           3.  Summary of Arguments in Support:  

              According to this bill's sponsor, American International 
              Group, (AIG) surplus line placements generally involve more 
              than one insurance producer.  In the typical placement, an 
              insured will interact with a broker, generally referred to 
              as a "retail agent", who does not hold a surplus line 
              broker's license and thus cannot place business with a 
              surplus line insurer.  When the retail agent is unable to 
              find coverage in California for the insured, he/she will 
              seek the services of a surplus line broker in order to find 
              a surplus line insurer willing to write coverage. 

              Multiple surplus line brokers are often involved in a 
              surplus line placement. Section 1774(b) provides that when 
              two or more surplus line brokers are involved in a 
              placement, only the broker who is responsible for 
              negotiating, effecting the placement, remitting the premium 




                                                SB 131 (Gaines), Page 4




              to the surplus line insurer, and filing the confidential 
              report with the Insurance Commissioner is the broker who is 
              considered to be transacting business under the surplus line 
              broker license.  As the broker transacting business, this 
              broker is responsible for remitting surplus line premium 
              taxes and making the various filings that are required by 
              the Insurance Code.  The required filings are submitted to 
              the Surplus Line Association of California. 

              By way of example, a surplus line placement could include 
              two surplus line brokers, Broker A and Broker B.  Broker A 
              is approached by a potential insured or a retail agent on 
              the insured's behalf after the insured or retail agent has 
              been unable to place insurance with an insurer that is 
              licensed to transact insurance in California and writes the 
              type of insurance required by the insured.   Broker A goes 
              to Broker B to obtain a surplus lines policy for the client 
              of Broker A.  In accordance with a written agreement that 
              Broker B has with a surplus line insurer, Broker B quotes 
              the risk and then binds coverage when the quote is accepted. 
              Broker B then invoices Broker A for collection of the policy 
              premium and the required surplus line premium taxes.

              The Surplus Lines Association interprets Section 1774(b) to 
              mean that in a placement involving more than one surplus 
              line broker, the broker who is closest to the surplus line 
              insurer is the broker transacting business and thus 
              responsible for the required filings.  This would be Broker 
              B in the example provided above.  In actual practice, 
              however,   the surplus line broker who is closest to the 
              insured is the broker who is negotiating and effecting a 
              surplus line placement.  This would be Broker A in our 
              example.

           4.  Summary of Arguments in Opposition:    

               a.     None
                

          5.  Amendments:   The California Department of Insurance is 
              requesting clarifying amendments as follows:

               a.     On page 2, line 17 and 18 strike out "under his or 
                 her surplus line broker's license." and insert:

                    , only the one who is responsible for filing the 




                                                SB 131 (Gaines), Page 5




                    confidential written report pursuant to subdivision 
                    (a) of Section 1763 shall be considered transacting 
                    business and

               b.     On page 2, line 28, strike out "all of"

               c.     On page 2, between lines 28 and 29 insert:

                    referenced in (1) and (2)

               a.     On page 2, line 30, after "brokers", insert:

                    referenced in (1) and (2)

        
          6.  Prior and Related Legislation:   

               a.     AB 315 (Solorio) is a pending measure to conform 
                 California's surplus lines law to the mandatory surplus 
                 line reforms of the Nonadmitted and Reinsurance Reform 
                 Act (NRRA) set forth in Title V of the Dodd Frank Wall 
                 Street Reform and Consumer Protection Act. It is 
                 anticipated that these two bills will be subject to 
                 technical conformity amendments as the bills move 
                 forward.


           
          LIST OF REGISTERED SUPPORT/OPPOSITION
          
          Support
           
          American International Group, (AIG) (Sponsor)
           
          Opposition
               
          None

          Consultant: Ken Cooley (916) 651-4110