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