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SUBCHAPTER A. GENERAL REGULATION OF SURPLUS LINES INSURANCE 28 TAC §§15.2 - 15.5

The Texas Department of Insurance proposes amending §§15.2 -15.5 concerning the regulation of surplus lines agents. The proposed amendments address licensing, financial responsibility requirements, and sanctions. The proposed amendments clarify statutory requirements enacted in Senate Bill 414, 77th Legislature, by providing guidance as to the insurance activities that require licensure as a surplus lines agent, how agents are to meet financial responsibility requirements, and changes affecting resident and nonresident license applicants. The proposed amendments also 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 proposed amendments are necessary to maintain effective regulation of surplus lines agents by providing clearer guidance on both what constitutes an insurance activity that must be performed by a licensed agent and how agents are to meet their financial responsibility requirements. Prior law and practice allowed qualified individuals to be associated with a surplus lines agency, but did not specifically require that those persons obtain a license for acts they performed through the licensed agency. As of September 1, 2001, all persons performing the activities of a surplus lines agent are required to be licensed under Senate Bill 414. The proposed amendments are necessary so that agents and new applicants can determine when an individual is required to have a surplus lines license. The proposed amendments also clarify that surplus lines agents employed by a surplus lines agency can meet their financial responsibility requirements through that agency.

The proposed amendment to §15.2(11) adds the definition of "client." Proposed §15.3(a) lists insurance activities that are to be performed by a licensed surplus lines agent under Insurance Code Article 1.14-2. Proposed §15.3(b) lists activities that may be performed by unlicensed individuals. Proposed §15.3(c) clarifies that agency profits may be distributed to unlicensed employees, shareholders, and partners. Proposed §15.3(d) clarifies licensing submission requirements. Proposed §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. Proposed §15.3(f) clarifies licensing requirements for nonresident applicants holding surplus lines licenses in reciprocal states. Proposed §15.3(g) clarifies license expiration and renewal procedures. Proposed 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. Proposed §15.4(b) and (c) provide the requirements for individuals and entities to meet the financial responsibility requirement. Proposed §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. Proposed amendments to §15.5 clarify activities for which surplus lines agents may be sanctioned, the available sanctions, and the procedures for sanctioning agents.

Matt Ray, deputy commissioner, licensing division, has determined that for the first five years the proposed sections will be in effect, there will be no fiscal impact on state and local governments as a result of the enforcement or administration of these sections. There will be no measurable effect on local employment or the local economy as a result of the proposal.

Mr. Ray has determined that for each year of the first five years the proposed sections are in effect, the anticipated public benefit of administering and enforcing the sections is that surplus lines agents will be able to conduct their business in compliance with the Insurance Code and the public will be provided with surplus lines products through licensed agents.

The probable economic cost to comply with the proposed sections will result from the requirement that a surplus lines agency provide an initial list of employed agents to the department and notify the department whenever an agency subsequently employs or ceases to employ an agent. The cost of the preparation and mailing of the initial list of all employed agents within 30 days of the effective date of these sections is estimated to be in the range of $5 to $65, but should be no greater than $10 for most agencies. The cost of mailing each subsequent notice detailing employment changes is estimated to be no greater than $10 for all agencies. The costs are based on the department´s belief that a typed list can be prepared by a secretary at the rate of one name per minute with 10 minutes of preparation time for each set of 30 agents. The average wage of a secretary is shown as $11.25 per hour in the 2001 Occupational Employment Statistics wage survey published by the Texas Workforce Commission. Further, the estimate is based on 15 names being placed on a single sheet of paper at, including printing costs, $.15 per page and mailing costs of $1.50 per 5 pages. The existing subchapter requires the bond referenced in the amendments; thus, the bond is not a cost of this proposal.

Other costs to comply with the proposed sections result from the legislative enactment of Senate Bill 414 and not as a result of the adoption, enforcement, or administration of the proposed sections. In addition, the cost of labor per hour is not affected by the proposed sections; thus, there is no disproportionate economic impact on small or micro businesses. It is anticipated that the difference in the costs of compliance between a large and small business as a result of the proposed sections will result from the number of employed agents to be listed. It is neither legal nor feasible to waive the provisions of the proposal for small or micro businesses since all licensees are required by statute to offer proof of financial responsibility.

To be considered, written comments on the proposal must be submitted no later than 5 p.m. on September 16, 2002 to Lynda H. Nesenholtz, General Counsel and Chief Clerk, Mail Code 113-2A, Texas Department of Insurance, P. O. Box 149104, Austin, Texas 78714-9104. An additional copy of the comments must be simultaneously submitted to Matt Ray, Deputy Commissioner, Licensing Division, Mail Code 107-1A, Texas Department of Insurance, P.O. Box 149104, Austin, Texas 78714-9104. Any requests for a public hearing should be submitted separately to the Office of the Chief Clerk.

The sections are proposed 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.

The following statutes are affected by the proposal: Insurance Code Articles 1.14-2; 21.01; 21.01-2; and 21.11.

§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) - (10) (No change.)

( 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)[ (a)] Before any surplus lines agent's license shall be issued [ and before each renewal thereof], the following [ requirements] must be submitted [ completed] by an applicant seeking a surplus lines license:

(1) an [ An] appropriate , fully completed written application ; [ shall be filed by the applicant upon one of the following forms, which are available from the Texas Department of Insurance (the department):]

[ (A) Surplus Lines License Application for Individual; or]

[ (B) Corporate, Partnership or Limited Liability Company Application for Surplus Lines License.]

(2) the [ 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) ; [ shall be submitted, with the application, for each license by check or money order made payable to the department. The full license fee is required if the license is effective for any part of a calendar year and is non-refundable.]

(3) [ The appropriate application forms shall be submitted together with] a surety bond as required under §15.4 of this title (relating to Proof of Agent's Financial Solvency), [ executed in the amount of not less than $50,000 on a form specified by the department] unless the commissioner [ Commissioner of Insurance] waives, in part or in whole, the [ amount of the] bond [ required] 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)[ (b)] 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) [ unless the department's single license renewal procedures provide otherwise]. The license may be renewed by submitting a renewal application [ showing the existence of all original licensing requirements, evidence of financial solvency if applicable,] and a non-refundable license fee as specified by §§19.801 and 19.802 of this title [ to the department prior to the expiration date].

[ (c) If the applicant meets the requirements set forth in subsection (a) of this section and is otherwise qualified by law, then a license certificate will be issued to the applicant by the department.]

§15.4. Proof of Agent's Financial Solvency.

(a) As set forth in this section and unless waived by the commissioner, each [ Each] licensed surplus lines agent as a condition precedent for being licensed and as a condition for continuing the [ his/her] 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 [ Commissioner of Insurance]. 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 [ will be given] to the licensee and [ filed with] 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 [ Commissioner of Insurance] may waive the requirement [ amount], in part or in whole, [ of the bond required] 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 [ including revoking, suspending or refusing to grant or renew the license of a surplus lines agent, that may be imposed under the Texas Insurance Code on a general property and casualty agent or a managing general agent, as appropriate to the license status of the surplus lines agent. Disciplinary action may be initiated against a surplus lines agent upon the occurrence of any one or more of the following]:

(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 [ Texas] Insurance Code;

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

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

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

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

(6) failed [ the failure] to otherwise maintain the qualifications for a surplus lines license; or

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

(b) - (c) (No change.)



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