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You are here: Home . rules . 2007 . 0622-059

SUBCHAPTER A. General Regulation of Surplus Lines Insurance 28 TAC §§15.3 - 15.5

1. INTRODUCTION. The Texas Department of Insurance proposes amendments to §§15.3 - 15.5, concerning proof of financial responsibility for resident surplus lines agents. The proposed amendments are necessary to implement SB 1564, 79th Legislature, Regular Session, effective January 1, 2006. SB 1564 repealed the Insurance Code §981.203(b)(3) and §981.206, which required applicants and surplus lines agents to provide proof of financial responsibility to the Department regarding transactions with insureds under surplus lines insurance policies.

Pursuant to this change in law, surplus lines agents are no longer required to provide proof of financial responsibility to the Department. Accordingly, the proposed amendments remove the requirements from §§15.3 - 15.5 that resident surplus lines agents provide proof of financial responsibility to the Department in the form of a $50,000 surety bond as a condition for licensure. These proposed amendments also update statutory citations in §§15.3 - 15.5 as a result of the enactment of the nonsubstantive revision of the Insurance Code by the 77th Legislature, Regular Session, HB 2811, which became effective on June 1, 2003. Additionally, the proposal revises the plural term "Chapters" in §15.5(a) to singular form for consistency with the updated reference to the Insurance Code §981.006.

The proposed amendments are necessary to implement SB 1564, the purpose of which includes furthering uniformity and reciprocity among the various states, as set forth in the bill analysis (Texas State Business & Commerce Committee, Bill Analysis (Enrolled), SB 1564, 79th Legislature, Regular Session (May 31, 2005)). The Gramm-Leach-Bliley Act (15 U.S.C.A. 93 §6751(c)(1) (1999)) contains a reciprocity condition applicable to the interstate licensing of insurance agents, providing for consistent licensing requirements for resident and nonresident producers. It further requires a reciprocal state to grant licensure to a nonresident producer who provides the following credentials: (i) a request for licensure; (ii) the application for licensure that the producer submitted to its home state; (iii) proof that the producer is licensed and in good standing in its home state; and (iv) the payment of any requisite fee to the appropriate authority.

Prior to the implementation of SB 1564, reciprocity under the Gramm-Leach-Bliley Act had the practical effect of imposing a financial responsibility requirement on resident surplus lines applicants but waiving this requirement for nonresident applicants. To remedy this disparity in licensing requirements, the 79th Legislature in SB 1564 repealed §981.203(b)(3) and §981.206 of the Insurance Code. Under §981.203(b)(3), surplus lines agents were required to provide proof of financial responsibility to the Department as a condition for licensure. Under §981.206, a surplus lines agent was required to provide an adequate proof of financial responsibility to the Department regarding transactions with insureds under surplus lines insurance policies. In accordance with the repeal of these two statutes, the proposed amendments delete the obsolete financial responsibility requirement for resident applicants under current §§15.3 - 15.5.

Though the notice requirements in §15.4(d) and §15.4(e)(1) are currently in the rule as part of the provisions on proof of agent's financial solvency, the Department has determined that it is necessary to retain these provisions. The Department has the responsibility to impose requirements necessary to make regulation and control of surplus lines insurance reasonably complete and effective. By retaining the notice provisions contained in §15.4(d) and §15.4(e)(1), the Department may more effectively monitor the surplus lines market to ensure compliance with licensing requirements, thereby protecting consumers who purchase surplus lines policies. The requirement that a surplus lines agency notify the Department of the name and surplus lines license number of each individual surplus lines agent within 30 days of commencement or cessation of employment is applicable to both resident and nonresident surplus lines agencies. However, to prevent a 30-day gap in required compliance with this requirement as a result of the proposal, §15.4(d), is also amended to delete the effective date provisions, which are no longer applicable. Because the Department is proposing to delete the obsolete financial requirement for resident applicants, it is necessary to amend the title of §15.4 to reflect that the section will continue to require the current notice provisions relating to commencement and cessation of the employment of individual surplus lines agents.

The proposed amendment to §15.3(d)(3) deletes the requirement that a surplus lines agent obtain a surety bond as a condition of licensure. The proposed amendment to §15.4 deletes subsections (a) - (c) and redesignates the notice provisions in existing §15.4(d) and (e) as §15.4(a) and (b). The proposed amendment to §15.5(a)(5) deletes the provision authorizing the Commissioner to sanction a surplus lines agent that fails to procure and maintain a surety bond and redesignates the remaining paragraphs as §15.5(a)(5) and (6).

2. FISCAL NOTE. Matt Ray, Deputy Commissioner, Life, Health and Licensing Division, has determined that for each year of the first five years the proposed amendments will be in effect, there will be no fiscal impact to state and local governments as a result of the enforcement or administration of the proposal. There will be no measurable effect on local employment or the local economy as a result of the proposal.

3. PUBLIC BENEFIT/COST NOTE. Mr. Ray also has determined that for each year of the first five years the proposed amendments are in effect, the public benefit anticipated as a result of the proposal will be consistency of the rule with the law, the purpose of which includes streamlining the licensing process, furthering uniformity and reciprocity among the various states in connection with the licensure of surplus lines agents, and saving state law regarding licensure of surplus lines agents from potential federal preemption. There will be no additional cost to persons required to comply with the proposal because the amendments remove an obsolete licensing requirement. In fact, agents may realize a savings in cost because they will no longer be required to obtain a surety bond as a condition precedent for being licensed and as a condition for continuing the licensure. Because there are no costs for compliance, the impact will not vary between the smallest and largest businesses. Also, because there are no costs for compliance, the proposed amendments will not have an adverse effect on small and micro businesses.

4. TAKINGS IMPACT ASSESSMENT. The Department has determined that no private real property interests are affected by this proposal and that this proposal does not restrict or limit an owner's right to property that would otherwise exist in the absence of government action and, therefore, does not constitute a taking or require a taking impact assessment under the Government Code §2007.043.

5. REQUEST FOR PUBLIC COMMENT. To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on August 6, 2007 to Gene C. Jarmon, 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 comment must be simultaneously submitted to Matt Ray, Deputy Commissioner, Life, Health and Licensing Division, Mail Code 107-1A, Texas Department of Insurance, P.O. Box 149104, Austin, Texas 78714-9104. Any request for a public hearing should be submitted separately to the Office of the Chief Clerk before the close of the public comment period. If a hearing is held, written and oral comments presented at the hearing will be considered.

6. STATUTORY AUTHORITY. The amendments are proposed pursuant to the Insurance Code §§981.001(b)(2), 981.009, 981.202, 981.203(b), 981.218, and 36.001. Section 981.001(b)(2) sets forth the purpose and scope of the regulation of surplus lines insurance generally, stating that it is necessary to provide for the regulation, taxation, supervision, and control of surplus lines transactions by imposing requirements necessary to make regulation and control of surplus lines insurance reasonably complete and effective. Section 981.009 authorizes the Commissioner to adopt rules to implement Chapter 981 or to satisfy requirements under federal law or regulations. Section 981.202 prohibits an agent licensed by this state from issuing or causing to be issued an insurance contract with an eligible surplus lines insurer unless the agent possesses a surplus lines license issued by the Department. Section 981.203(b) requires an agent to: (i) pay an application fee as determined by the Department; and (ii) submit a properly completed license application. Section 981.218 requires the Commissioner to monitor the activities of surplus lines agents as necessary to protect the public interest. Section 36.001 authorizes the Commissioner of Insurance to adopt any rules necessary and appropriate to implement the powers and duties of the Texas Department of Insurance under the Insurance Code and other laws of this state.

7. CROSS REFERENCE TO STATUTE. The following statutes are affected by this proposal:

Rule Statute

§§15.3 - 15.5 Insurance Code Chapter 981

8. TEXT.

§15.3. Licensing of Surplus Lines Agents.

(a) (No change.)

(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) - (3) (No change.)

(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 Chapter 4101[Article 21.07-4].

(c) (No change.)

(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; and

(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 Chapter 981[Article 1.14-2]. Nonresident applicants under this section shall also comply with the Insurance Code §4056.051[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 §4056.052[Article 21.11 §1(a)(2)(A)] shall meet all the licensing requirements of the Insurance Code Chapter 981[Article 1.14-2] to the extent that such Chapter 981[Article 1.14-2] requirements are not waived by the commissioner under §4056.055[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 §4003.001[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. Notice to Department for Commencement and Cessation of Employment of Individual Surplus Lines Agents[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.]

(a) Within[(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.

(b)[(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 Chapter [Chapters] 82 and §981.006[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) - (4) (No change.)

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

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

(6)[(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) - (c) (No change.)





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