Surplus Lines Courting Trouble

Copyright 2009 The National Underwriter Company Florida Underwriters

February 2009


1245 words

Surplus Lines Courting Trouble

By Fred E. Karlinsky and Richard J. Fidei; Fred E. Karlinsky is a shareholder in the law firm of Colodny, Fass, Talenfeld, Karlinsky, Abate. Richard J. Fidei is a partner in the firm. Karlinksy may be reached in the Ft. Lauderdale office at 954-332-1749 or by e-mail at [email protected]. Fidei may be reached in the Ft. Lauderdale office at 954-332-1758 or by e-mail at [email protected]. The firm also has offices in Tallahassee. The firm specializes in insurance, legislative, regulatory and transactional law, commercial and civil litigation, governmental consulting and administrative law. Its litigation practice group handles commercial, civil rights, employment discrimination and child advocacy matters in both trial and appellate levels. More information is available at

Issues Abound Related to Judges' Decisions

Significant issues have arisen in Florida's surplus lines industry that have their genesis in two recent decisions by the Florida Supreme Court and the U.S. Court of Appeals for the 11<th> Circuit. Based upon these decisions, it appears an argument could be made that surplus lines insurers have to file their policy forms with the Florida Office of Insurance Regulation (OIR) and comply with other standards under Florida law that heretofore were not considered to be applicable to surplus lines insurers.

In the Essex Insurance Company v. Meriades Zota decision, the Florida Supreme Court addressed the issue of whether certain statutory provisions found in Chapter 627, Part II of the Florida Insurance Code applied to surplus lines insurers. These provisions related to the delivery of insurance policies and the award of attorney's fees to plaintiffs under certain circumstances. Relying upon prior case law and its interpretation of legislative intent, the Supreme Court in Essex ultimately indicated that the provisions relating to the delivery of insurance policies and the awarding of attorney's fees set forth within Chapter 627, Part II of the Florida Insurance Code applied not only to admitted insurance companies, but also to surplus lines insurance carriers. The Supreme Court made this determination in spite of a statute that exempts surplus lines insurance from compliance with certain provisions in the Insurance Code, including those set forth in Part II of Chapter 627.

In addition to the specific provisions, which were at issue in the Essex decision, Part II of Chapter 627 relates to a variety of standards pertaining to insurance contracts and the filing and approval of policy forms.

In this context, the U.S. Court of Appeals for the 11<th> Circuit addressed in CNL Hotels & Resorts, Inc. v. Twin City Fire Insurance Company the issue of whether a surplus lines insurance company could enforce certain exemptions within a policy endorsement in order to deny a claim for legal fees previously paid to class-action counsel in a prior matter. The surplus lines insurer argued that it was exempt from the standard Florida insurance policy approval process. Traditionally, in Florida as well as nationwide, surplus lines insurers have not been required to have their policy forms filed and approved by the applicable regulatory authority. The Court, relying upon the Florida Supreme Court's decision in Essex, indicated that there was no exemption applicable to surplus lines insurers and that the lower court needed to consider whether the policy endorsement sought to be enforced by the surplus lines insurer had been filed and approved by the OIR. If not, the court determined that the endorsement sought to be enforced by the insurer would be void and unenforceable.

In connection with a Petition for Rehearing filed by the surplus lines insurer after this decision was issued, the OIR filed an amicus curiae brief supporting the position that surplus lines policy forms do not need to be filed with and approved by the OIR. In response to the Petition for Rehearing and the OIR's amicus curiae brief, the Court denied the Petition, thereby reinforcing its initial decision on this issue. More Court Cases

These decisions have created significant confusion within the surplus lines marketplace and have resulted in regulatory, legislative, and litigation activity.

With regard to litigation, several cases have been filed based on the Essex and CNL Hotels decisions. At the time of this writing, the authors are not aware of any final decisions that have been issued by the courts pertaining to the arguments raised in those cases that the subject policy forms are void and unenforceable because they were not approved by OIR.

However, based upon the decisions of the Florida Supreme Court in Essex and the U.S. Court of Appeals in CNL Hotels, it is not inconceivable that the courts could hold that exclusions or other beneficial language in policy forms not approved by OIR may not be enforced by the surplus lines insurer unless they have been filed with and approved by the OIR.

From a regulatory perspective, the OIR did state its position both informally around the time of the original CNL Hotels decision and later in the amicus curiae brief it filed with the court in the CNL Hotels case in connection with the Petition for Rehearing. Furthermore, the OIR has submitted affidavits in connection with certain litigation stating its position that it does not interpret Florida law as requiring surplus lines insurers to file their policy forms for OIR approval.

This position appears to be based on the fact that, from a traditional point of view, surplus lines insurers have not been subject to the same regulation as admitted insurers, not only in Florida but throughout the country. Furthermore, the nature of surplus lines insurance, which involves unique risks, unusual coverages and insurance that may not be otherwise available within the admitted market, does not make it conducive to standardized review of policy forms.

In view of the uncertainty that currently exists with regard to these court decisions, the OIR has considered the possibility of issuing formal direction or other guidance pertaining to the filing of surplus lines policy forms. However, as of the date of this writing, OIR has not issued any directive or guidance in this regard. Legislative Solutions

Finally, efforts are underway within the industry to address this issue from a legislative perspective. Many interested industry participants have proposed possible legislative solutions in an effort to address the issues raised in the Essex and CNL Hotels decisions. The OIR has been involved in this process.

Different legislative solutions have been proposed and are being considered, with an overall approach of defining the scope of the exemption from compliance with Florida's Insurance Code that should apply to surplus lines insurers, including, importantly, an exemption from having to file and obtain approval of their policy forms.

Florida convened a special legislative session to address budget issues in January. This special session did not address the surplus lines issue. It is expected that this issue will be raised with the Legislature during its regular legislative session, which is to commence on March 2.

The decisions, which have been issued by the Florida Supreme Court and U.S. Court of Appeals, have raised significant concerns within the industry that could implicate the viability of the surplus lines insurance market in Florida. Industry stakeholders would need to seriously consider whether to continue to do business in Florida on a surplus lines basis if they are required to comply with all of the laws applicable under the Florida Insurance Code, including those laws requiring approval of their policy forms. Any resultant losses in market capacity within the surplus lines industry could have a severe impact upon Florida's insurance market, particularly its property insurance market.

As a result, the ramifications and possible solutions to address the issues raised by these decisions have been subject to much consideration by industry stakeholders. While there are many concerns to address, all should agree that a quick and definitive solution to the issues raised would be most appropriate.

Photo 1, Fred Karlinsky; Photo 2, Richard Fidei

January 30, 2009


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