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Producer Frequently Asked Questions

 

Introduction

  1. There are many times when I have difficulty as the writing producer obtaining the minimum of three declining admitted carriers. Why must I perform this process?
  2. What are the requirements of the Law pertaining to the necessity of the 1609-PR producer affidavit and why were these requirements implemented?
  3. What about the fact that market conditions change and this can cause this process to be very difficult?
  4. I understand that there are some risks for which the diligent search is not required. What are the alternative filing types that can be used?
  5. What are the compliance requirements with regard to the 1609-PR producer affidavit?
  6. I notice in the Regulations to the Pennsylvania Surplus Lines Law that reference is made to “unique forms of coverage” being exempt from the diligent search process. What is meant by the term “unique”?
  7. I have been told that I should avoid being in a position where I need someone with a surplus lines license to make a courtesy filing on my behalf. Is this true and what do I do if this should happen?
  8. I notice that in reviewing the requirements of the producer, there are several places during the surplus lines transaction that requires that I inform my client that the carrier in which coverage has been placed is subject to limited jurisdiction by the Pennsylvania Insurance Department and should the carrier fail financially, there is no backup by the guaranty fund. Why is this necessary since it is part of the law and appears to be a very negative statement?
  9. In the interest of transparency and disclosure, could I as a licensed producer rely on the completed producer affidavit as, at least, a contributing factor to compliance addressing what has now become an important issue?

CONCLUSION

Please email or call Agency Services if your question was not answered.

 

INTRODUCTION

Surplus lines placements require two licensees, the insurance producer who, with the appropriate lines of authority, represents the insured and the surplus lines licensee who is empowered to negotiate appropriate coverage in the non-admitted or surplus lines marketplace. The required licensees can either be two separate parties or one party holding both required licenses.

A primary purpose of a surplus lines stamping office is to assist the Insurance Department to promote consumer protection by offering training and education to the surplus lines licensee. The licensee is responsible for proper compliance with the requirements of the Pennsylvania Surplus Lines Law and its supporting Regulations. Recently, questions with regard to the producer affidavit, the 1609-PR and other producer requirements have been increasing.

The purpose of this addition to our website is to focus on some of the more frequently asked questions of interest to all PA licensed producers, both resident and non-resident, alike. The inclusion of a large number of non-resident licensees has accelerated the level of inquiry. Since the September 07, 2002 amendments to our Pennsylvania Surplus Lines Law by Act 110 of 2002 “Act 110” that now permitted non-residents to be licensed as surplus lines licensees, the Pennsylvania stamping office now deals with inquiries from both producers and surplus lines licensees in 56 different jurisdictions.

Act 147 of 2002 converted all former “agents” and all former “brokers” to “insurance producers.” What were approximately 15,000 brokers became over 87,000 producers when the former agents were included. This change, along with Act 110, allowed a large volume of new licensees to access the surplus lines market and become responsible for completing and signing the producer affidavit for the first time.

Note: A producer who is actively participating in a surplus lines placement transaction is referred to as the “writing producer”.

Typical of some of the most frequently asked questions are the following.

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1. There are many times when I have difficulty as the writing producer obtaining the minimum of three declining admitted carriers. Why must I perform this process?

  • The easiest answer to this question is that the Pennsylvania Surplus Lines Law requires completion of the producer affidavit, including the diligent search. We understand that this can sometimes be a challenge depending on market conditions, characteristics of a given risk or a risk in a particular class of business. However, we also understand that this process is often not as bad an issue as it seems.
  • One should review and understand both the Pennsylvania Surplus Lines Law and its supporting Regulations. Specifically, Section 1609 of the Pennsylvania Surplus Lines Law and Section 124.5 of the Regulations speak to the diligent search requirements. Both the Law and the Regulations are available on this website.

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2. What are the requirements of the Law pertaining to the necessity of the 1609-PR producer affidavit and why were these requirements implemented?

  • For years, it has been recognized that all Surplus Lines Laws allow access to the surplus lines market, but no Surplus Lines Law encourages it. The creation of the surplus lines market, since its beginning, has never been for purposes of competing against the admitted market. This market is to be treated as a second level market for those risks that cannot be placed in the admitted market.
  • Since the original comprehensive Pennsylvania Surplus Lines Law was developed in the 1960’s the diligent search process has been the qualifying test utilized by most states. Pennsylvania Law requires a minimum of three declining admitted insurance carriers. The producer affidavit requires the five digit NAIC number of the carrier be indicated along with the name of the carrier (not the name of the group) and the name of the company representative who declined the risk. Some states require more items of information for each declining carrier and other states that require less, but the process is still similar.
  • The Pennsylvania Insurance Department, doing its job of looking out for the insured, must have the assurance that a given risk needs to be placed with an unlicensed insurance carrier that is subject to only limited jurisdiction by the Department. In addition, if said carrier fails, there is no coverage in the state’s guaranty fund. The diligent search process provides this assurance.
  • On a positive note, a properly completed producer affidavit forwarded within 30 days to the surplus lines licensee as required, provides that producer with clear evidence that the terms and conditions of the Pennsylvania Surplus Lines Law have been met, providing a measure of compliance, disclosure and transparency

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3. What about the fact that market conditions change and this can cause this process to be very difficult?

  • We’re aware of the fact that as the insurance marketplace ebbs and flows, the status of the standard market attitude changes from positive to negative depending on the form of coverage being sought. This is a condition of the insurance marketplace that consists of the soft market followed by the tight market and back again. This ever changing picture requires the writing producer to consistently re-market coverage for a client. During these insurance marketing cycles, certain markets respond in different ways. This means that today’s accepting carrier can become tomorrow’s declining carrier. The diligent search process should fit into this ongoing pattern, often, a step to front end underwriting. This IS the job of the writing producer, to find the best market and the best coverage for the insured in the market that prevails at that time.

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4. I understand that there are some risks for which the diligent search is not required. What are the alternative filing types that can be used?

  • There are a number of exemptions where the producer affidavit is not required, thereby removing the diligent search requirement. From the beginning, our original Pennsylvania Surplus Lines Law of March, 1966 did not require the producer affidavit for a placement that has been in the surplus lines market continuously for three consecutive years. Refer to Pennsylvania Surplus Lines Law Section 1609(b).
  • The Law as amended in April 1993, eliminated the producer affidavit requirement for the large insurance account, as defined in Section 1610(a). In addition, with the creation of risk purchasing groups, the producer affidavit requirement is not applicable to the filing of the Pennsylvania members of the Purchasing Group involving surplus lines carriers, Section 1610(b).
  • Finally, those risks pertaining to kinds and classes that appear on the Export List are free of all affidavit requirements as these items have been deemed by the Pennsylvania Insurance Department to be frequent visitors to the surplus lines market. Recording of the transaction may be done on form 1604-E.
  • In all of the situations outlined here, it is the duty of the surplus lines licensee only to make the appropriate surplus lines filings within 45 days of inception.

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5. What are the compliance requirements with regard to the 1609-PR producer affidavit?

  • Writing producers who have difficulty securing at least three declining admitted carriers may obtain declinations from other producers (acting on your behalf) provided you make certain that you indicate the name of the CARRIER(S) that declined the risk. Other producers can include the wholesaler with access to admitted carriers in addition to the usual non-admitted carriers. If an admitted carrier offers coverage that does not respond to the insured’s specifications and needs, that would count as a declination. It is the insured’s needs rather than what the carrier is prepared to offer that is important. Analysis and comparison of various proposals needs to be conducted. Section 124.5 of the Regulations also offers some suggestions. Although it is necessary that producers keep a written record of all admitted carrier declinations, those received orally are now acceptable. The declination record should include the name of the carrier’s representative with position or title, applicable carrier office or branch location address, the date of contact and a brief explanation about the declination.
  • In addition, when a writing producer submits underwriting information to a licensed carrier and does not obtain a response within five business days, this represents a declining carrier.
  • Declinations cannot be received from two admitted carriers within the same group. In addition, the declination cannot be an admitted carrier that is part of the same group as the surplus lines carrier writing the coverage. These restrictions do not apply if it can be established that they are writing independently of each other, using separate and independently arranged underwriting criteria and marketing plans and actually compete with each other.
  • Finally, the overall purpose of the producer affidavit is to provide documented evidence that an honest effort was made to place the insurance coverage in the licensed or admitted market. This document is not only on record with the Regulator, but is available to the public upon formal request. The surplus lines market is a specialty market requiring skill and experience beyond routine handling. In reality, the compliance and filing process of the producer affidavit has long been recognition of disclosure and transparency for the insurance buyer.

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6. I notice in the Regulations to the Pennsylvania Surplus Lines Law that reference is made to “unique forms of coverage” being exempt from the diligent search process. What is meant by the term “unique”?

  • The dictionary says unique means one and only, sole, without like or equal and very unusual. The Thesaurus provides similar examples in larger numbers, but, the meaning is the same and this should give you a basic idea of what the Regulations are addressing. This section of the Regulations simply recognizes the fact that from time to time a need arises for the creation of a one of a kind coverage for a special risk situation. Usually, this involves accounts of an industrial or commercial nature. Some refer to these types of forms as manuscript forms that speak to a special, unusual exposure.
  • The first thing to keep in mind is DO NOT CONFUSE UNIQUE WITH HARD TO PLACE. Many kinds of coverage and many classes of operations as well as individual placements can become hard to place from time to time. This can be the result of tight market conditions or an individual placement that has experienced problems. This is one of the reasons that the surplus lines market exists. Hard to place accounts that wind up in the surplus lines market are subject to normal filing requirements.
  • Many kinds of coverage viewed as routine today had their beginnings in the surplus lines marketplace. For example, the first Directors and Officers liability policy written in 1963 was no doubt considered a unique form of coverage. The same can be said for Products Recall (remember the Tylenol case?), Difference In Conditions, Environmental Impairment, SEC Liability and Employer Practices Liability, just to name a few. The first Umbrella policy was written in the London Market and yes, it was called a Bumbershoot policy. The point is these were new kinds of coverage that addressed new exposure developed at a given time mostly due to changes occurring as society progressed and were “unique” at that time, but not later.
  • If extenuating circumstances lead you to believe that you have a unique form of coverage, please contact PSLA.

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7. I have been told that I should avoid being in a position where I need someone with a surplus lines license to make a courtesy filing on my behalf. Is this true and what do I do if this should happen?

  • Yes, it’s true and don’t just avoid it, don’t let it happen at all. Any entity (individual or agency) that makes a placement for a Pennsylvania insured in the non-admitted or surplus lines market without a surplus lines license is in DIRECT VIOLATION OF THE LAW. The only way that a producer can access the surplus lines market is THROUGH either a resident or non-resident Pennsylvania surplus lines licensed wholesaler. As with all placement transactions, it makes good sense for a producer to make certain that the chosen surplus lines licensee have the proper credentials including the necessary licensing in the beginning rather than after the fact.
  • Further, if any surplus lines licensee does front the filing, this licensee is also in direct violation of the Law. The only entities that can make the necessary declarations are the entities that actually functioned as such.
  • This means that only the writing producer who represents the insured can and must complete the producer affidavit. Only the surplus lines licensee, who actually negotiated, quoted, bound coverage and remitted premium to the surplus lines carrier can and must complete the surplus lines affidavit. This may involve two separate entities or it may involve one entity with both licenses. The point is a separate entity that played NO ROLE in the transaction cannot be involved in the filing or the collection or remitting of surplus lines premium taxes. This includes agencies with multiple branch offices trying to do filings for each other. Remember, the declarations contained in the affidavits are made under the penalties of perjury.

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8. I notice that in reviewing the requirements of the producer, there are several places during the surplus lines transaction that requires that I inform my client that the carrier in which coverage has been placed is subject to limited jurisdiction by the Pennsylvania Insurance Department and should the carrier fail financially, there is no backup by the guaranty fund. Why is this necessary since it is part of the law and appears to be a very negative statement?

  • We refer to this as the disclosure statement to the insured and it is required that you, as the Insured’s representative, notify the Insured. This required disclosure statement does appear on several occasions during the transaction process of all surplus lines placements.
  • The first required appearance of the disclosure statement occurs during the time of ALL quotations or proposals of coverage to the Insured. The Pennsylvania Surplus Lines Law requires that the writing producer present the disclosure information as part of the quotation utilizing the same size print as the balance of the text of the quotation itself.
    1. The insurer with which the licensee places the insurance is not licensed by the Pennsylvania Insurance Department and is subject to its limited regulation and...
    2. In the event of insolvency of an eligible surplus lines insurer, losses will not be paid by the Pennsylvania Property and Casualty Insurance Guaranty Association.
  • The second place where the disclosure statement appears is on all producer affidavit forms (1609-PR) as well as on all surplus lines affidavit forms (1609-SLL, 1609-B, 1610-A, 1610-B). This is part of the declaration process that all licensees make in the completion and signing of the affidavit form itself. (see the specimen affidavits appearing on this web site)
  • The third place that the disclosure statement appears is in ALL placements after coverage has been bound with the eligible surplus lines carrier. It is required that every evidence of insurance ( policies, binders, cover notes, confirmations, etc.) negotiated, placed or procured pursuant to the provisions of the Pennsylvania Surplus Lines Law issued by a surplus lines licensee shall bear the name of the licensee and the following legend in ten point type: “The insurer which has issued this insurance is not licensed by the Pennsylvania Insurance Department and is subject to the limited regulation. This insurance is not covered by the Pennsylvania Property and Casualty Insurance Guaranty Association. Placed by (Insert your name, partnership or corporation, your street address (not P.O. Box), city, state and zip code.)”

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9. In the interest of transparency and disclosure, could I as a licensed producer rely on the completed producer affidavit as, at least, a contributing factor to compliance addressing what has now become an important issue?

  • As indicated earlier, well before recent times the requirements of the Pennsylvania Surplus Lines Law has made compliance mandatory on the part of the licensees who are parties to a non-admitted market placement. This is largely due to the fact that the regulatory requirements shift from the carrier to the licensees. Beginning with the original Pennsylvania Surplus Lines Law it is this difference in regulatory focus that has always distinguished the surplus lines market from the standard market.

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CONCLUSION

  • The fact is the surplus lines market does require special handling over and above that required in the admitted market, due to the additional regulatory requirements placed upon the surplus lines licensee and the producer, rather than on the carrier. (Remember, non-admitted carriers are subject to very limited jurisdiction). These regulatory requirements should not be viewed as restraint of trade, as some would maintain, but rather, a means of protecting the consumer, and you the producer being provided a means of compliance. This is what makes an established stamping office, staffed with knowledgeable and experienced personnel, a valuable added feature to all interested parties on the subject of surplus lines and its requirements. Remember, we cannot comply for you, but we are here to help you comply and understand why.
  • The concept of a stamping office supplementing the efforts of the Regulator and training the licensees is not new. The California stamping office (California Surplus Lines Association) has served its state continuously since 1939, recognizing that industry self-regulation is helpful to all involved parties. At this time, there are fifteen states with stamping offices. These fifteen stamping offices record and report on over 2/3 of the total surplus lines premium activity in the United States. (Pennsylvania began operations in January 1997).
  • Keep in mind that as with all Laws and supporting Regulations, the Pennsylvania Surplus Lines Law may not always cover every set of circumstances. Further, the surplus lines market, from its beginning, was never designed to be a cookie cutter market. Therefore, there always will be extenuating circumstances where judgment and experience must prevail. If you feel that the situation that you have needs special attention, always feel free to contact us by phone, fax or e-mail and we will respond accordingly.

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