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Subchapter A. General Regulation Of Surplus Lines Insurance 28 TAC §§15.2 - 15.5

The Commissioner of Insurance adopts amendments to §§15.2 -15.5 concerning the regulation of surplus lines agents. The amended sections are adopted without changes to the proposed text published in the August 16, 2002 issue of the Texas Register (27 TexReg 7363) and will not be republished.

The adopted amendments are necessary so that agents and new applicants can determine when an individual is required to have a surplus lines license. The adopted amendments also clarify how a surplus lines agent can meet the agent's financial responsibility requirement; clarify statutory changes affecting resident and nonresident license applicants; and clarify conduct that may be sanctioned as a result of any violation of the Insurance Code or this subchapter, the available sanctions, and sanctioning procedures.

The adopted amendment to §15.2(11) adds the definition of "client." Adopted §15.3(a) lists insurance activities that are to be performed by a licensed surplus lines agent under Insurance Code Article 1.14-2. Adopted §15.3(b) lists activities that may be performed by unlicensed individuals. Adopted §15.3(c) clarifies that agency profits may be distributed to unlicensed employees, shareholders, and partners. Adopted §15.3(d) clarifies licensing submission requirements. Adopted §15.3(e) clarifies licensing requirements for Texas residents and nonresident applicants who do not hold a surplus lines license and/or are residents of a non-reciprocal state. Adopted §15.3(f) clarifies licensing requirements for nonresident applicants holding surplus lines licenses in reciprocal states. Adopted §15.3(g) clarifies license expiration and renewal procedures. Adopted amendments to §15.4(a) restate the commissioner's authority to waive the bond requirement as necessary to promote licensing reciprocity and uniformity under federal law. Adopted §15.4(b) and (c) provide the requirements for individuals and entities to meet the financial responsibility requirement. Adopted §15.4(d) and (e) clarify reporting responsibilities for both surplus lines agencies and agents when individual surplus lines agents become employed, or cease to be employed, by a surplus lines agency. Adopted amendments to §15.5 clarify activities for which surplus lines agents may be sanctioned, the available sanctions, and the procedures for sanctioning agents.

No comments were received.

The sections are adopted under Insurance Code Articles 1.14-2; 21.01; 21.01-2; 21.11 and §36.001. Insurance Code Article 1.14-2 §§2, 3A, and 4(b) and (c) authorize the commissioner to adopt rules necessary to implement Article 1.14-2, set financial responsibility requirements for surplus lines agents, determine license applications, and make Insurance Code Chapter 21, Subchapter A applicable to surplus lines agents. Article 21.01 §§3(1) and 4 also make Insurance Code Chapter 21, Subchapter A applicable to surplus lines agents and authorize the commissioner to adopt rules necessary to implement the subchapter. Article 21.01-2 §§1A - 4A and 6A establish license expirations and provide for license renewals, prohibited activities, license revocation, agent discipline, and judicial review of department actions. Article 21.11 §1(a)(2)(A) and (c) provide for licensing procedures which may be used by certain nonresident agents and authorize the commissioner to waive licensing requirements to promote licensing reciprocity between the states. Article 21.11 §1(e) provides for criminal history background checks of unlicensed nonresident agent applicants. Section 36.001 provides that the Commissioner of Insurance may adopt rules to execute the duties and functions of the Texas Department of Insurance only as authorized by statute.

§15.2. Definitions. The following words and terms, when used in this subchapter, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Admitted or authorized insurer -- An insurer that is doing the business of insurance in this state as defined in the Texas Insurance Code, and is licensed under the provisions of the Texas Insurance Code.

(2) Eligible surplus lines insurer -- An unlicensed insurer allowed by the commissioner to do business in Texas as a surplus lines insurer.

(3) Licensee -- A person holding a surplus lines agent's license.

(4) Person -- An individual or entity as defined by the Texas Insurance Code Article 21.21, §2(a).

(5) Properly allocated and apportioned -- The division or distribution of premium based upon the location of the various exposures afforded coverage under the insurance contract. This distribution of premium must be in accordance with the methods prescribed by the Comptroller of Public Accounts of Texas (the comptroller).

(6) Stamping Office -- The Surplus Lines Stamping Office of Texas created under the Texas Insurance Code, and operating under the plan of operation specified by §15.101 of this title (relating to the Plan of Operation of the Surplus Lines Stamping Office of Texas).

(7) Surplus lines agent or agency -- An agent or agency holding a surplus lines license issued by this department pursuant to the Texas Insurance Code Article 1.14-2.

(8) Surplus lines agent of record -- The Texas licensed surplus lines agent placing a policy with an eligible surplus lines insurer or the Texas licensed surplus lines agent transacting business directly with an unlicensed out-of-state agent to obtain coverage with an eligible surplus lines insurer. The agent or agents in these situations are the agent of record for their portion of the premium for the policy placement.

(9) Taxable surplus lines premium -- For surplus lines taxation purposes, except for exempt or federally pre-empted premiums, surplus lines premium is taxable as provided in Texas Insurance Code Article 1.14-2, §12.

(10) Unauthorized insurer -- An insurer that is conducting the business of insurance as defined in the Texas Insurance Code and is not licensed or an eligible surplus lines insurer under the Texas Insurance Code.

(11) Client -- Any person to whom a surplus lines agent sells or attempts to sell a surplus lines insurance policy or from whom an application for surplus lines insurance is accepted or to whom advice and counsel on a surplus lines insurance policy is given for the purpose of selling a surplus lines insurance policy.

§15.3. Licensing of Surplus Lines Agents.

(a) Persons performing any of the following surplus lines insurance activities are required to have a surplus lines license:

(1) supervising unlicensed staff engaged in activities described in subsection (b) of this section, except that supervision of staff may be conducted through the supervision of the staff´s unlicensed supervisors;

(2) negotiating, soliciting, effecting, procuring, or binding surplus lines insurance contracts for clients or offering advice, counsel, opinions, or explanations of surplus lines insurance products to agents or clients beyond the scope of underwriting policies or contracts, except for a general lines property and casualty agent making a referral of surplus lines business to a surplus lines agent or agency that then completes the surplus lines transaction; or

(3) receiving any direct commission or variance in compensation based on the volume of surplus lines premiums taken and received from, or as a result of, another person selling, soliciting, binding, effecting, or procuring surplus lines insurance policies, contracts, or coverages, except for a general lines property and casualty agent making a referral of surplus lines business to a surplus lines agent or agency that then completes the surplus lines transaction.

(b) The following activities in a surplus lines agency do not require a surplus lines license if the employee does not receive any direct commission from selling, soliciting, binding, effecting, or procuring insurance policies, contracts or coverages, and/or the employee's compensation is not varied by the volume of premiums taken and received:

(1) full-time clerical and administrative services, including, but not limited to, the incidental taking of information from clients, receipt of premiums in the office of a licensed agent, or transmitting to clients, as directed by a licensed surplus lines agent, prepared marketing materials or other prepared information and materials, including without limitation, invoices and evidences of coverage;

(2) contacting clients to obtain or confirm information necessary to process an application for surplus lines insurance so long as the contact does not involve any activities for which a license would be required under subsection (a)(2) of this section;

(3) performing the task of underwriting any insurance policy, contract, or coverage, including without limitation, pricing of the policy or contract; or

(4) contacting clients, insureds, agents, other persons, or insurers to gather and transmit information regarding claims and losses under the policy to the extent that the contact does not require a licensed adjuster as set forth under Insurance Code Article 21.07-4.

(c) This section shall not be construed to prohibit distribution of agency profits to unlicensed persons, including shareholders, partners, and employees.

(d) Before any surplus lines agent's license shall be issued, the following must be submitted by an applicant seeking a surplus lines license:

(1) an appropriate, fully completed written application;

(2) the fee specified by §§19.801 and 19.802 of this title (relating to General Provisions Regarding Licensing Fees and License Renewal and Amounts of Fees);

(3) a surety bond as required under §15.4 of this title (relating to Proof of Agent's Financial Solvency), unless the commissioner waives, in part or in whole, the bond as necessary to comply with federal law.

(e) Texas resident applicants and nonresident applicants who do not hold a surplus lines license in their state of residence or whose state of residence does not license Texas residents on a reciprocal basis as determined by the department, shall meet all licensing requirements as set forth in the Insurance Code Article 1.14-2. Nonresident applicants under this section shall also comply with the Insurance Code Article 21.11 §1(e).

(f) Nonresident applicants holding a surplus lines license in good standing in the agent's state of residence and meeting the requirements of the Insurance Code Article 21.11 §1(a)(2)(A) shall meet all the licensing requirements of the Insurance Code Article 1.14-2 to the extent that such Article 1.14-2 requirements are not waived by the commissioner under Article 21.11 §1(c).

(g) Each surplus lines license issued to an agent shall be valid for a term expiring two years after the date of issuance or as otherwise established by the commissioner under the Insurance Code Article 21.01-2 §1A(a). The license may be renewed by submitting a renewal application and a non-refundable license fee as specified by §§19.801 and 19.802 of this title.

§15.4. Proof of Agent's Financial Solvency.

(a) As set forth in this section and unless waived by the commissioner, each licensed surplus lines agent as a condition precedent for being licensed and as a condition for continuing the license in force shall offer proof of financial solvency and demonstrate financial responsibility by filing with the department a surety bond in the amount of not less than $50,000 on a form specified by the department. The surety on the bond may be an eligible surplus lines insurer that is acceptable to the commissioner. The surety bond shall remain a condition for the surplus lines agent's license. The surety bond must provide that the surety will give no less than 30 days written notice of bond termination to the licensee and the department. A binding commitment on the part of the surety to issue a bond pursuant to this section within a period of not more than 30 days shall be sufficient in connection with any application for a license. The commissioner may waive the requirement, in part or in whole, as necessary to comply with federal law to promote licensing uniformity and reciprocity among the states.

(b) Individuals licensed as surplus lines agents may demonstrate proof of financial responsibility by either:

(1) obtaining a separate bond; or

(2) relying on the bond of the surplus lines agency that employs the agent.

(c) Entities licensed as surplus lines agencies must obtain a separate bond and may not rely on the bond of any other individual or agency to demonstrate proof of financial responsibility.

(d) Without regard to whether or not the financial responsibility bond has been waived, within 30 days after the effective date of this section, and thereafter within 30 days of employment, each licensed surplus lines agency, both resident and nonresident, shall notify the department of the name and Texas surplus lines agent license number of each individual agent employed by the agency.

(e) Within 30 days after an individual surplus lines agent ceases to be employed by a licensed surplus lines agency for any reason:

(1) the licensed surplus lines agency, whether resident or nonresident, shall notify the department that the individual is no longer employed by that agency; and

(2) the individual agent shall demonstrate proof of financial responsibility to the department as specified in subsection (b) of this section.

§15.5. Sanctions.

(a) The commissioner may impose any sanction or remedy set forth in the Insurance Code Chapters 82 and 21, Article 1.14-2 §§17 and 17A, or any other applicable laws or statutes, if the commissioner determines, after notice and an opportunity for hearing, that the applicant or license holder individually or through any officer, director, or shareholder:

(1) has committed any action which would form the basis for sanctioning a general property and casualty agent or a managing general agent, as applicable to the surplus lines agent's other license(s), under the Insurance Code;

(2) failed to allow the department and the comptroller to examine the surplus lines agent's accounts and records or failed to maintain surplus lines insurance business accounts and records as required by the Insurance Code and this subchapter;

(3) failed to make and file all reports when due as required by the Insurance Code and this subchapter;

(4) failed to properly collect and pay required taxes and stamping fees on surplus lines gross premium or failed to submit tax reports as required by law or regulation;

(5) failed to procure and maintain a surety bond, if applicable, in accordance with this subchapter;

(6) Failed to otherwise maintain the qualifications for a surplus lines license; or

(7) is in violation of, or has failed to comply with the Insurance Code, this subchapter, or any other applicable laws or regulations of this state.

(b) The agent's surplus lines license shall be cancelled in the event the agent fails to maintain or renew the agent's license as a general property and casualty agent or managing general agent, as appropriate to the license status of the agent.

(c) No surplus lines agent whose license has been revoked shall be licensed until all fines, penalties and delinquent taxes owed by the agent have been paid. The suspension of a surplus lines agent's license shall continue in effect until all fines, penalties, restitution, delinquent taxes, and delinquent stamping office fees owed by the agent have been paid.



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