Surplus Lines and Unauthorized Insurance

Here’s a distinction that trips people up because the words are similar. Wisconsin uses the term “unauthorized insurer” to mean an insurer that doesn’t hold a Wisconsin certificate of authority. It uses “unauthorized insurance” to mean insurance placed with an unauthorized insurer ILLEGALLY. The two are NOT the same. Three ways an unauthorized insurer can come into the Wisconsin picture:

• Through a properly licensed surplus lines transaction (legal).
• Through direct placement negotiated primarily outside Wisconsin (legal, under restrictive conditions).
• Through unauthorized insurance — placement that’s neither a proper surplus lines transaction nor a proper direct placement (illegal).

Surplus Lines Insurance

Surplus lines insurance is insurance placed with unauthorized (not licensed in Wisconsin) insurers by an intermediary specifically licensed to transact surplus lines business in Wisconsin. The surplus lines license is in addition to the property & casualty license, and the annual fee is $100. A non-domestic insurer (one domiciled in another state) is not permitted to advertise or solicit business in Wisconsin without a certificate of authority. However, the Commissioner has prescribed rules for HOW intermediaries may advertise the availability of their services in procuring contracts with unauthorized insurers. Such advertisements may not refer to any particular unauthorized insurer. What the unauthorized insurer CAN do (through a properly licensed surplus lines intermediary):

• Inspect risks to be insured.
• Collect premiums.
• Adjust losses.
• Do all other acts reasonably incidental to a legally issued contract.

Required Disclosure

The unauthorized insurer and the intermediary are obligated to promptly furnish the policyholder with a proposal form that includes a statement that the insurer has not obtained a certificate of authority to do business in Wisconsin and is not state-regulated except for s. 618.41. The exact form is set forth in s. Ins 6.17.

Premium Tax

The policyholder must pay the 3% premium tax required under s. 618.43. The agent is required to keep all taxes collected in a separate bank account, NOT commingled with other funds.

Proper Exchange with Surplus Lines

Nothing prohibits a proper exchange of business under s. Ins 6.66 between licensed intermediaries. A regular licensed intermediary may procure surplus lines policies through a licensed surplus lines intermediary, and the surplus lines intermediary may share commissions with the regular agent as specified in s. Ins 6.66. Note: 2017 Wisconsin Act 16 authorizes domestic insurance corporations to provide surplus lines insurance in Wisconsin, subject to certain requirements.

Direct Placement

Direct placement is accomplished when there’s no Wisconsin intermediary or broker involved, AND negotiations occur primarily outside Wisconsin. The law provides that negotiations occur within Wisconsin if a letter regarding the insurance is sent to or from an address in Wisconsin — so the geographic test is real, not just nominal. Every policyholder who procures or renews insurance from an insurer not authorized to do business in Wisconsin (other than under surplus lines law and the renewal of guaranteed renewable insurance lawfully issued outside Wisconsin) must report within sixty days after the procurement or renewal to the Commissioner on the required form (s. Ins 6.19). The policyholder also must pay the tax under s. 618.43. A Wisconsin intermediary or broker need not be greatly concerned with directly placed insurance, except to recognize that the law permits Wisconsin residents to purchase insurance from any insurer — regardless of reliability or authority — as long as the transaction takes place primarily outside Wisconsin.

Unauthorized Insurance (Illegal)

Unauthorized insurance is insurance placed with an unauthorized insurer illegally — meaning NOT as a proper surplus lines transaction and NOT as a proper direct placement. A person may not perform insurance business in Wisconsin if the person knows or should know that the result is, or might be, the illegal placement of insurance with an unauthorized insurer, or the subsequent servicing of an insurance policy illegally placed with an unauthorized insurer. Anyone who violates this rule is personally liable to any claimant under the policy for any damage caused by the violation. That damage may include damage resulting from the necessity of replacing the insurance with an authorized insurer, or the failure of the unauthorized insurer to honor the contract.

Bottom line: If an unauthorized insurer fails to pay claims, the customer can come after the agent personally — for damages, for replacement costs, for everything. That’s a career-ending result. The lesson: don’t place business with insurers whose authority you can’t verify.

Risk Purchasing and Risk Retention Groups

A risk purchasing group is a group of members engaged in similar businesses or activities that expose them to similar risks, who form a group and purchase liability insurance for the group. An agent may not solicit, negotiate, or obtain liability insurance for a risk purchasing group from an unauthorized insurer UNLESS the agent holds an active surplus lines license in Wisconsin. A risk retention group is an insurance company comprised of members engaged in similar businesses or activities exposed to similar risks, which provides liability insurance to its members. An agent may not place insurance with or solicit insurance from an unauthorized risk retention group if:

• The group is financially unsound, engages in unfair business practices, or is otherwise substandard.
• The agent fails to give the applicant written notice of the insurer’s deficiencies.
• The agent knows of, or fails to investigate adequately, the insurer’s financial condition and general reputation. Before taking an application for liability insurance under a policy issued by an unauthorized risk retention group, the agent must inform the applicant:
• Of the insurer’s deficiencies.
• That the insurer is NOT regulated by the state.
• That the risk is NOT protected by the Insurance Security Fund.
• Of any other information required by the Commissioner by rule. Risk retention groups exist to allow groups in similar risk categories to band together and self-insure. They’re legitimate. But because they’re not state-regulated in the same way as licensed insurers, the disclosure to applicants is critical.