Surplus Lines Policies – Are You Doing Your Due Diligence?

I received an e-mail recently from a client complaining about the forms he was being asked to complete by brokers through whom he had placed surplus lines policies.  Those forms asked him to name the admitted insurance companies from whom he had tried to obtain the insurance coverage sought before obtaining the surplus lines policy in question.   He did not think there was any legal requirement that an agent complete such a form and wanted to know what I thought.

Due Diligence Requirement

After reviewing the applicable statute, O.C.G.A. Section 33-5-21, and doing some research, I agreed with my client that there was no such requirement that I could find.  However, that statute does require that, before a surplus lines policy can be obtained, “the insured or the insured’s agent has made an effort to procure the desired insurance coverage or benefits from authorized insurers, but such effort has been unsuccessful in obtaining insurance coverage or benefits which are satisfactory to the insured” (with an exception that is not relevant for most agents).   The statute says nothing about what type of “effort” must be made by an agent, and I could find no regulations issued by the Insurance Commissioner’s Office that addressed this subject.  Another section of the statute refers to “a due diligence search to determine whether the full amount or type of insurance can be obtained from authorized insurers,” but what constitutes such a search is not stated.

Best Practice

Although the statute and regulations do not require an agent to document what they did to find coverage “satisfactory to the insured” from an admitted insurer before obtaining a surplus lines policy, it would be a good idea for an agent to do so for two reasons.  First, doing so would provide protection against a potential E&O claim by the insured about the coverage that was obtained.  The insured’s satisfaction is the determining factor under the statute.  What better way to show that an insured was not satisfied with the coverages available from admitted insurers than to document the fact that what was available from them was presented to the insured and rejected by it in favor of surplus lines coverage.   Second, and perhaps more importantly, agents are required by the above statute to make at least some “effort” to obtain coverage from admitted insurers before they can legally offer a surplus lines policy to the insured.  Failure to satisfy this requirement can lead to disciplinary action by the Insurance Commissioner’s Office.

Responding to Broker’s Request for Information

Something else that can lead to such action would be putting inaccurate information on the forms requested by the surplus lines brokers.   Another statute, O.C.G.A. Section 33-5-29, requires such brokers to submit an affidavit to the Insurance Commissioner on a quarterly basis “setting forth the facts referred to in Code Section 33-5-21” and providing specified information about each surplus lines policy sold during the quarter.  As noted above, one of those “facts” is that “the insured or the insured’s agent has made an effort to procure the desired insurance coverage or benefits from authorized insurers.”  I think this explains why surplus lines brokers are asking agents to tell them what was done to satisfy this requirement for the issuance of a surplus lines policy.  If an agent provides false information to such a broker who then submits an affidavit to the Insurance Commissioner’s Office relying on that information, it is pretty clear who the Insurance Commissioner will consider to be the party worthy of disciplinary action.

The requirement imposed on agents by O.C.G.A. Section 33-5-21 may be an often overlooked one, but it is a requirement that can get an agent in trouble with the Insurance Commissioner’s Office if it is not satisfied.  The failure to satisfy that requirement could also lead to the invalidation of a surplus lines policy that was improperly obtained, which would not make for a happy insured.

 

 

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