Florida Surplus Market Looking for Return to Status Quo

Chad Hemenway
TALLAHASSEE, Fla., Mar 30, 2009 (A. M. Best via COMTEX) --

The Florida Supreme Court said surplus lines carriers are subject to certain state statutes. The unwanted result? Surplus insurers could be subject to more regulation.

?It?s like we?ve been playing football all these years and now, all of a sudden, someone comes in and says, ?Oh yeah, we?re going to play baseball rules too,'? said Cecil Pearce, vice president of the American Insurance Association. ?This caught everyone by surprise.?

?The regulatory provisions on policies and rates ? that?s good for more traditional insurers,? said David Blades, senior financial analyst at A.M. Best Co. ?But when you?re writing the higher risk, the creative manner to underwrite, and freedom of rate and form are needed.?

The Supreme Court ruling last June in the case Essex Insurance Co. vs. Zota, basically upheld prior rulings that have stumped a surplus market, which has ?operated for 20 years, been through the hurricane seasons, and has had no insolvencies,? according to Pearce. First, the court found that delivery of a policy to an agent did not constitute delivery to the insured.

?Allowing this ruling to stand will create unnecessary confusion in the insurance law,? wrote the Florida Surplus Lines Office in a petition in support of Essex. ?A court is not permitted to rewrite the terms of an insurance contract.?

Should the rulings stand, industry observers worry surplus insurers could leave the market altogether in Florida, where the homeowners insurance market just lost one its largest writers, State Farm. The surplus market in Florida is the fourth-largest in the United States behind California, Texas and New York with about 700,000 policies.

?These are the companies writing the risk no one else will,? said Blades. ?If everything remains the same, I think they will definitely step away and take some time. Eventually someone is going to look at the market as a growth opportunity, but without the comfort to formulate a policy, it would be difficult.?

Pearce said departures in the surplus market would ?create holes that no one would fill in a significant market.? For instance, surplus carriers cover high-risk businesses and their employees as well as boats, homes, condominiums and mobile homes. About 40% of the business is personal lines and 60% is commercial.

?Florida needs this capital,? Pearce said.

The court decided that its perception of a failure of delivery meant that the insurer was barred from enforcing exclusions in the policy and that policies need regulatory approval just like traditional insurers, though surplus carriers have never been governed by the same laws as traditional insurers but by a special Surplus Lines Law.

?Right now, things are really grey,? said Pearce. ?There is no direction from the (Office of Insurance Regulation). It is difficult for these insurers to write policies when they aren?t sure if they will be subject to more class-action lawsuits if these court rulings stick.?

Blades, who recently spoke to many people within the industry, said there is a definite fear the rulings will certainly generate a ?feeding frenzy? of court cases.

Belinda Miller, deputy commissioner at the state insurance office, filed an affidavit in the Essex case in support of upholding the Surplus Lines Law. In her opinion, the Florida Supreme Court would not ?hold that surplus lines insurers are subject to form filing and prior approval? laws. Miller testified along the same lines last week before a Senate committee, said OIR spokesman Ed Domansky.

?The legislature as recently as the 2008 session recognized a general exemption of surplus lines insurers from the form filing and pre-approval applicable to admitted insurers,? Miller wrote the court. ?To my knowledge, no other state requires surplus lines insurers to file policy forms with the state insurance regulatory agency.?

The market is now counting on the legislature. Blades said the industry believes they have the support to get bills passed that would re-establish the rules governing surplus lines carriers so they can go back to business as usual.

"We don't want anything special," Pearce said. "Just take us back to the way things were. That worked fine for a lot of years. There's no reason to disrupt it."

(By Chad Hemenway, associate editor, BestWeek: Chad.Hemenway@ambest.com)

Copyright (C) 2009 by A. M. Best Company, Inc.