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You are here: Home . rules . 2007 . 0814-059

SUBCHAPTER A. GENERAL REGULATION OF SURPLUS LINES INSURANCE

28 TAC §§15.3 - 15.5

1. INTRODUCTION. The Commissioner of Insurance adopts amendments to §§15.3 - 15.5, concerning proof of financial responsibility for resident surplus lines agents. Sections 15.3 - 15.5 are adopted without changes to the proposed text published in the July 6, 2007 issue of the Texas Register (32 Tex Reg 4174).

2. REASONED JUSTIFICATION. The adopted 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 SB 1564 repealed the Insurance Code §981.203(b)(3) and §981.206, which required applicants and surplus lines agents to provide proof of financial responsibility to the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.

The Department proposed the amendments to §§ 15.3 - 15.5 on June 22, 2007. The proposal was published for public comment on July 6, 2007. No hearing was held on the proposal and no comments were received. The Department is adopting the amendments without changes to the amendments as proposed.

Pursuant to the change in law made by SB 1564, surplus lines agents are no longer required to provide proof of financial responsibility to the Department. Accordingly, the adopted 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 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 plural term "Chapters" in §15.5(a) is changed to singular form for consistency with the updated reference to the Insurance Code §981.006.

The adopted 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, the reciprocity requirements 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 adopted 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 responsibility, the Department has determined that it is necessary to retain these provisions. The Department has the statutory responsibility to impose requirements necessary to make regulation and control of surplus lines insurance reasonably complete and effective. By retaining the notice provisions, the Department is able to continue to 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. Section 15.4(d) is also amended to delete the effective date provision, which was part of the original rule when it was first adopted in 2000 and is no longer applicable. Because the Department is adopting amendments 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 impose the current notice requirements relating to commencement and cessation of the employment of individual surplus lines agents.

3. HOW THE SECTIONS WILL FUNCTION. The adopted amendment to §15.3(d)(3) deletes the requirement that a surplus lines agent obtain a surety bond as a condition of licensure. The adopted 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 adopted 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).

4. SUMMARY OF COMMENTS AND AGENCY RESPONSE. The Department did not receive any comments on the proposed amendments.

5. STATUTORY AUTHORITY. The amendments are adopted 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.

6. TEXT.

§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 Chapter 4101.

(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; 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).

(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. Nonresident applicants under this section shall also comply with the Insurance Code §4056.051.

(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 shall meet all the licensing requirements of the Insurance Code Chapter 981 to the extent that such Chapter 981 requirements are not waived by the commissioner under §4056.055.

(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. 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.

(a) 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) Within 30 days after an individual surplus lines agent ceases to be employed by a licensed surplus lines agency for any reason, the licensed surplus lines agency, whether resident or nonresident, shall notify the department that the individual is no longer employed by that agency .

§15.5. Sanctions.

(a) The commissioner may impose any sanction or remedy set forth in the Insurance Code Chapter 82 and §981.006, 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 otherwise maintain the qualifications for a surplus lines license; or

(6) 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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