Fall/Winter 2008 FASI E-Newsletter
Date Published: 11-25-2008
Our Recent Federal Decision Requires Filing of Surplus Lines Insurance Forms in Florida
--by Richard J. Fidei, Esq., Partner, Colodny, Fass, Talenfeld, Karlinsky & Abate
Published in the Florida Association of Self Insurance Fall-Winter 2008 E-Newsletter
A fundamental concept of Florida insurance law appears to have been negated by the United States Court of Appeals for the Eleventh Circuit in a recent decision that appears to require surplus lines insurers to file policy forms for approval by the Florida Office of Insurance Regulation (OIR).
In its ruling on CNL Hotels & Resorts, Inc. v. Twin City Fire Insurance Company (hereinafter CNL Hotels), the Court relied upon a recent Florida Supreme Court decision in Essex Insurance Company v. Mercedes Zota (hereinafter Essex), to hold that the forms filing statute, (section 627.410(1), Florida Statutes), applies to surplus lines insurers. While the June, 2008 Essex decision was mostly favorable to the surplus lines industry, the Court decided that certain provisions of Florida law, previously understood to be applicable only to admitted insurers, also apply to surplus lines insurers.
The National Association of Professional Surplus Lines Offices subsequently expressed concern that, under this ruling, surplus lines insurers potentially could be subjected to all of Florida's rules relating to insurance contracts, including those involving notices of nonrenewal, imposition of attorneys fees and valued policy laws.
As reported on August 18, 2008, in National Underwriter On-Line Magazine, the OIR informally indicated that it interprets Florida law as providing that non-admitted or surplus lines insurers are not required to file policy forms, except in very limited situations. However, a decision recently issued by the United States Court of Appeals for the Eleventh Circuit in CNL Hotels held that the surplus lines policy forms in that case had to be approved by the OIR to be effective.
To fully understand the implications of the CNL Hotels decision, some background information on surplus lines insurance regulation is in order.
Traditionally, surplus lines insurance is not subject to some statutory standards that are generally applicable to all admitted insurance companies in Florida. For example, surplus lines insurance placed in Florida is exempt from certain statutory requirements that would otherwise apply to surplus lines insurance companies and to the insurance policies that they issue.
Therefore, determination of which specific statutory requirements apply or do not apply to surplus lines carriers is always a question. Section 627.021(2)(e), Fla. Stat., provides that this "Chapter does not apply" to surplus lines insurance.
A casual interpretation could lead to a conclusion that Chapter 627, which provides broad standards and regulation of insurance rates and contracts, does not apply to surplus lines insurance. However, the Florida Supreme Court recently held in Essex that this is not the case.
In Essex, the Florida Supreme Court was faced with the issue of whether certain statutory provisions found in Part II of Chapter 627 of the Florida Insurance Code applied to surplus lines insurers. Notably, certain sections of Florida statutes set forth parameters relating to the delivery of insurance policies, while another provides for the award of attorneys fees under certain circumstances.
In Essex, the plaintiff argued that these statutes applied to surplus lines carriers and the policies that they issue. In response, the surplus lines insurer contended that these statutes did not apply under the law, which exempts surplus lines insurance from the provisions in this Chapter.
Ultimately in Essex, the Court relied upon prior case law and its interpretation of legislative intent that the exemption provided by law for surplus lines insurers applied only to the statutory provisions set forth in Part I of Chapter 627, as opposed to the specific provisions set forth in Part II of Chapter 627, which the Plaintiff was seeking to enforce.
In doing so, the Court relied upon relevant prior legislative materials, as well as the structure and organization of Chapter 627, to reach the conclusion that it was the intention of Legislature for the term "Chapter" to only refer to, and include, Part I of Chapter 627. Thus, the Court interpreted the statutory provisions to exempt surplus lines insurers only from complying with the rating laws in Florida, as set forth in Part I of Chapter 627.
Notably, Chapter 627 of the Florida Insurance Code is separated into 21 parts. Each part covers a separate broad subject matter, which includes, but is not limited to: rates and rating organizations (Part I); the insurance contract (Part II); life insurance and annuity contracts (Part III); health insurance policies (Part VI); property insurance contracts (Part X); motor vehicle and casualty insurance contracts (Part XI); and various other broad subjects. Thus, based upon the decision in Essex, it could be argued that surplus lines insurers are only exempt from the provisions set forth in Part I. While there may be other statutory exemptions that would apply to surplus lines carriers within select provisions of Chapter 627, the Court in Essex held that Section 627.021(2)(e), Fla. Stat. could not be used as a basis for a blanket exemption.
As previously stated, the OIR subsequently provided informal direction that it interpreted Florida law so as to not require surplus lines insurers to file their forms with the OIR, except in very limited situations. Within this context, in CNL Hotels, the Eleventh Circuit addressed the issue of whether an endorsement to a surplus lines policy exempting from coverage certain "loss" payments could be enforced by a surplus lines insurer to deny a claim for $5.5 million in legal fees paid to class action counsel in a prior matter involving its insured. The Court revisited the issue of the applicability of the provisions codified in part II of Chapter 627 to surplus lines insurers, which included section 627.410, Fla. Stat. Under this section, insurers are required to file their basic insurance policies, annuity contract forms, and application forms with the OIR and obtain its approval. Pursuant to the plain language of the statute, this provision does not have an express exemption applicable to surplus lines insurers. However, OIR has not historically required surplus lines insurers to file their forms, either for informational purposes or for approval.
In CNL Hotels, the surplus lines insurer argued that it was exempt from the Florida insurance policy approval process as a surplus lines carrier. Notwithstanding, relying upon the decision in Essex, the Eleventh Circuit disagreed. The Eleventh Circuit held that since the form filing requirement is set forth in part II of Chapter 627, rather than in part I, the statutory exemption found in Section 627.021(2)(e), Fla. Stat., does not apply. As such, the court found under the facts of the case, that OIR approval of surplus lines policies was required and remanded the case to the lower court to make a determination as to whether the endorsement, which the surplus lines insurer was attempting to enforce, had been filed and approved by the OIR. If it had not been approved, the Court stated that the endorsement would be deemed void and unenforceable, which would result in the surplus lines insurer losing the benefit of the exemption from coverage otherwise afforded under the endorsem ent. Clearly, the Court in CNL Hotels did not adopt the OIR's position that forms filings are not required for surplus lines insurers; however, such a holding contravenes long standing practice within the industry -- both in Florida and across the United States. The Opinion's possible far reaching consequences and the implications with potential applicability of other statutory provisions to surplus lines carriers are dramatic and create a host of issues which need to be carefully considered by all surplus lines insurers in Florida and other jurisdictions.
A request for rehearing was filed by the surplus lines insurer with the court in the CNL Hotels case. In connection with that request, OIR filed a Brief of Amicus Curiae in support of the request by the surplus lines carrier for a hearing. In its brief, OIR argued that the Legislature never intended the surplus lines insurer policy form to conform to the same standards as admitted carriers. OIR concluded that surplus lines law does not require form review by OIR and requested that the court vacate its prior decision or certify the case to the Florida Supreme Court for them to decide. In response, the Court in CNL Hotels denied the insurer's request for rehearing.
To date, the OIR has not issued a formal order or other guidance concerning the obligation of surplus lines insurers to file their policy forms for OIR approval or the applicability of other statutory standards to surplus lines insurers. Moreover, the OIR has not issued any guidance as to other statutory standards which may be imposed upon surplus lines carriers based upon the Essex and CNL Hotels decisions. However, OIR General Counsel Steve Parton has indicated that the OIR is considering the issuance of an order to clarify its position on this subject.
Efforts are underway in Florida's Legislature to consider the impact of these decisions and possibly enact legislation to correct the statutory language which has led to them. Many will endorse appropriate legislative changes to address the issue of the applicability of certain provisions of Florida law to surplus lines insurers. However, the Legislature is not scheduled to convene until its next Regular Legislative Session (commencing in March 2009) unless a Special Session is held in December 2008 to address budget issues.
The dynamics of the Florida Supreme Court decisions must be seriously considered. For example, surplus lines insurers may face issues heretofore thought to not apply to them. As a result, all surplus lines carriers should immediately evaluate the implications of these decisions, consider possible alternatives related to the interpretations of the courts, and take appropriate action to assure that they remain in compliance with Florida law.
