Insurance regulation is important. Unlike other commercial products, insurance is a product that serves the public trust. Without regulation, history has proven that insurers cannot control themselves. They go broke just when we need them the most and their claims practices, if unchecked, can be atrocious.

States with a strong admitted marketplace should be encouraged. States without a strong admitted marketplace run the risk of outrageous rates, bankrupt insurers and the lack of an insurance market which meets the needs specific to that state. Florida, with its peculiar geographic risk to hurricanes, especially needs a strong admitted market.

Over the past five years, a disturbing pattern of unregulated insurance companies, commonly referred to as excess and surplus lines carriers, are attempting to become “mainstream.” They sell to customers who can easily have their insurance needs met by regulated (often called “admitted”) insurance companies.

These regulated admitted insurance companies are overseen by the insurance commissioner, have bricks and mortar in Florida, have claims offices that are reachable daily, and are taken to task when they do something wrong. The battle between the unregulated companies with no consumer protections and regulated or admitted companies with all consumer protections continues with this year’s legislation.

HB 387 and SB 538 weaken laws that oversee the insurance agents that sell unregulated, surplus lines products. In particular, these bills remove the sworn affidavit surplus lines insurance agents must sign indicating that the insurance agent is not moving a customer from a regulated market with enhanced consumer protections to an unregulated surplus lines company that has practically no oversight.

There is a reason why this affidavit is important. A surplus lines agent swears in an affidavit that they did not take any business out of the admitted carrier market (the consumer protected market) and transfer the business to an unregulated market. These surplus lines agents get to charge a policy fee on top of their commission and it is currently capped at $35. The surplus lines industry wants this fee to be unlimited.

Surplus lines carriers also write very poor and anti-consumer policy forms. I wrote about this in a post. Did you know that one of the most prolific surplus lines carriers is now writing a policy that makes any dispute go to arbitration, in New York, applying New York law and requiring a panel of insurance claims executives to rule on the arbitration? Game, set, match!

The surplus lines carrier wins as soon as you buy their cheap insurance policy. Since they are not regulated like Florida’s admitted insurance market, they can cheat you badly and charge less in rates. Why do our politicians try to help these insurance carriers?

HB 301 allows unregulated surplus lines companies to sell property insurance policies of $700,000 or greater (current law says $1 million) when regulated insurance companies write this type of coverage. State Farm’s lobbyist, Mark Delligal, of the powerful corporate law firm Holland & Knight is pushing this anti-consumer legislation because State Farm wants to open a surplus lines company.

Many may have forgotten that Florida leaders were furious that Sate Farm sought concessions for years and was the admitted market leader getting these concessions, then did a 180 and left Florida:

In early 2009, the State Farm Florida subsidiary, the state’s largest insurer, threatened to withdraw from writing property insurance business in Florida after state regulators refused to approve a 47% property rate increase….Several other home insurers have pulled out of Florida as well; many homeowners are now using the Citizens Property Insurance Corporation run by the state government. State Farm has since decided to remain in Florida, although with a reduced amount of property policies.1

The problem for State Farm is that its agents can only sell to itself as its one admitted carrier and they are losing to those that are truly independent agents that can sell to many admitted carriers. So, Delegal, State Farm and others similarly situated are trying to argue for “free market competition” to gain support for a law that helps those insurers who abandoned the Florida admitted marketplace after the big disasters but still want laws that support them doing so. Not all current legislators are aware of this history—it has been a long time since the 2004 and 2005 hurricanes causing this crisis.

Some of the current insurance legislation should be entitled “The State Farm Agent’s Relief Legislation Bill.” It helps those insurers with captive agents that are truly not independent, so they can compete with companies that did not leave Florida and are unlike State Farm. Those other companies, including the small takeout companies, help support our admitted property insurance market. In the long run, this is very bad legislation because it harms admitted carriers.

Here is a limited history on some of these issues:

2015: A surplus lines agent was fined for violating multiple times the diligent effort law. This “independent” agent sat on the Florida Association of Independent Agent’s board.

2016: As a result of the above DFS action, FAIA pushed for the passage of an amendment in HB 651 to add “Commercial residential (condos and apartments)” to be exempted from diligent effort meaning surplus lines would be able to offer at the time of sale a policy offering a lower rate on the spot. The admitted market properly defeated this anti-consumer insurance because of public policy.

2017: The FAIA had new legislation and said this:

Finally, an FAIA supported bill to remove the diligent effort for commercial residential insurance didn’t get very far in the 2017 Legislature. Our lobbyists were prepared for this outcome and while a consistent approach for all commercial lines is preferable, we are satisfied with the recent changes and clarity DFS has provided for agents to lawfully export commercial residential risks. It’s really rather simple…an agent can export these risks if they can identify a difference in coverage not offered by the admitted market. DFS has also indicated it has no plans to become the arbiter in determining differences in coverage. To learn more, read the February edition of DFS Insights.” This DFS position has resulted, according to FSLSO, that over 50% of the commercial residential market is in surplus lines …

Why would it be good that 50% of a market is in surplus lines or are we now in an alternative reality marketplace with surplus lines carriers running the Florida insurance market? Surplus lines markets should be markets of last resort after the admitted carriers truly cannot accept the risk. We are wrong to encourage this type of behavior cited above.

2018: The admitted commercial residential insurers continue to lose market share because of DFS decision to not pursue diligent effort practices and efforts by surplus lines carriers and their lobbyists.

2019: HB 387 and SB 538 have provisions to eliminate the affidavit where a surplus lines agent swears that they didn’t take any business that should have remained in the admitted market.”

One Florida state senator argued in the Florida Senate and Banking Committee this week that this is all about a “free market.” I and many others say this is all about surplus lines carriers getting breaks in the law that are not deserved and harm policyholders in the long term.

All of us should support Florida policyholders first and Florida politicians should pledge to do so as well.

All of us should say “no” to carriers leaving Florida when storms show up and then want their cake and eat it too.

We should all be loyal to Florida policyholders and not to short-term profit-seeking surplus lines carriers not willing to become admitted and not accepting Florida laws that apply to admitted insurers.

I am not an insurance premium rate wonk. I know insurance claims and insurance claims ethics like others know the back of their hand. But, when it is obvious that those that should be speaking out on something they are supposed to be an expert upon and yet, they do not—something is amiss.

Florida CFO Jimmy Patronis is from Panama City, Florida, but he needs to decide if he is standing up for his people there and throughout Florida versus supporting Lloyds of London. Are our Florida leaders backing insurers not admitted in this state or are they for insurers that will stand with Floridians through thick and thin?

Thought For The Day

Where you see wrong or inequality or injustice, speak out, because this is your country. This is your democracy. Make it. Protect it. Pass it on.
—Thurgood Marshall

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1 https://en.m.wikipedia.org/wiki/State_Farm

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Photo of Chip Merlin Chip Merlin

Since 1983, Chip Merlin has served as a plaintiff’s attorney with a focus on commercial & residential property insurance claim disputes and bad faith insurance litigation. Chip is a noted national authority on insurance bad faith, lecturing to national trade groups and publishing a number of papers and articles on the subject for organizations such as The American Association for Justice, The Florida Justice Association, The Windstorm Insurance Network, and Trial Magazine.

As founder and president of Merlin Law Group, Chip has dedicated his practice to the representation and advocacy of insurance policyholders in disputes with insurance companies nationwide.

Chip served as Chair for the Bad Faith Insurance Litigation Group and Secretary for the Fire and Property Insurance Litigation Group for the American Association for Justice (formerly known as the Association of Trial Lawyers of America). He was also Vice-Chair for the Subcommittee on Property Insurance Law for the American Bar Association.