CID: Retail Agents Must Still Make Surplus Lines Diligent Effort
Recently enacted legislation had only a minor effect on Connecticut’s surplus lines diligent effort requirement, according to a recent Insurance Department announcement.
Connecticut law imposes requirements on a licensed surplus lines insurance broker and the insured before obtaining coverage from an “unauthorized” (unlicensed) insurer. They must “make a diligent effort … to procure, from any authorized insurer or insurers, the full amount of insurance required to protect the interest of such insured …” This is commonly referred to as the “diligent effort” requirement. Until recently, the only exceptions to that requirement were for:
- Coverages that the department has concluded are generally unavailable from licensed insurers. The list of these coverages is called the “exportable list.”
- Flood insurance.
- Coverage for “exempt commercial purchasers” (large organizations that retain risk managers.)
The department’s October 10 bulletin interpreted the changes made by a bill signed into law last June by Gov. Ned Lamont and effective October 1. That bill added a third exception: “… any policy of insurance where the broker seeks to procure or place such insurance through an unaffiliated wholesale surplus lines insurance broker.”
Insurance Commissioner Andrew Mais wrote in the bulletin that this new exception applies only in very narrow circumstances. He noted that the exception uses the word “broker,” and the state insurance statutes do not contain a definition of that word. “In the absence of a statutory definition,” he wrote, “the Insurance Department interprets the term ‘broker’ as used in Public Act 25-87 to mean ‘surplus lines broker.'” He continued:
“Notably, if the legislature had intended the exception from the diligent effort requirement established by Public Act 25-87 to apply to ‘producers’ (i.e., retail agents), … it is reasonable to expect that the term ‘producer’ would have been specified in the Act or that the diligent effort required pursuant to Conn. Gen. Stat. § 38a-741(b)(1) would have been repealed in its entirety.
Based on the foregoing, the Limited Exception only applies to placements in the surplus lines market where the surplus lines broker acts as the retail agent and accesses such market through an unaffiliated wholesale surplus lines broker.”
Therefore, the requirement that retail agents make a diligent effort even when obtaining coverage through an unaffiliated wholesaler has not changed.
Big I Connecticut is disappointed with this interpretation as we do not believe it reflects the legislation’s intent. We supported passing the bill last spring because we intended to reduce burdens on retail agents. This law serves little purpose and unnecessarily consumes limited resources. We will continue working toward legislative and regulatory solutions to reform it.
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