Did you know that states have Property and Casualty guaranty fund associations and Life and Health guaranty fund associations? State guaranty fund associations are created to protect the insured in the event a licensed admitted carrier becomes insolvent.
In most states, if not all, licensed carriers must be members of these associations and contribute to these funds. Additionally, not every state guaranty fund is the same because state statutes differ in their regulations of these guaranty funds.
What is the purpose of the Guaranty Fund?
If a licensed carrier becomes insolvent and a claim is filed by an insured, the guaranty fund would step in and pay the claim. However, depending on the cost of the loss and the number of losses involved, there may be a limit on how much the guaranty fund association will payout.
What about the non-admitted market?
What about the non-admitted market? Except for New Jersey, states do not typically create a guaranty fund association for policies written in the Excess and Surplus Lines market. As a result, if a non-admitted becomes insolvent, there is no guaranty fund to protect the insured in the event of a loss.
Is this all beginning to make sense?
Since there is no guaranty fund protection for policies written through the non-admitted market, each policy and evidence of insurance requires a disclosure statement advising the insured that the insurance coverage is not covered under any guaranty fund association in the event a non-admitted carrier becomes insolvent.
Navigating Compliance and Guaranty Fund Disclosures
Keep in mind that each state has its own guaranty fund statement notice wording and requirements for disclosure, including font, size, type, and placement on the binder or policy. California and Virginia even have their own preprinted guaranty fund disclosure forms required to be placed on top of the binder and policy declaration page.
California has two separate disclosure forms: The D-1 must be signed by the insured when an application is accepted. When the policy is issued, the D-2 must be attached to the policy declaration page before being released to the insured. [CA INS Code Div. 1 Part 2 Chapter 6 .1764 and .1764.1].
Likewise, the Commonwealth of Virginia has its own guaranty fund disclosure notice, Form SLB-9, which is completed by the surplus line broker and attached to the policy declaration page. [VA Code 38.2 Chapter 48-38.2-4806].
The commonality among all 50 states and the District of Columbia is that the insured must be advised in writing that there is no guaranty fund protection in the event of a loss.
Additional Disclosure Requirements
It is also important to remember that a few states have additional disclosure requirements. Maryland, for example, has a disclosure notice for commercial lines insurance and another disclosure notice for personal lines insurance, and the disclosure notice for personal lines residential property or condominium insurance must be signed by the insured. [MD Code Reg. 31.03.06.09]. North Dakota requires the insured to sign and date a Consumer Notice that is "affixed" to the application for insurance acknowledging receipt of the notice by the insured. [ND 26.1-44-05]. Rhode Island requires the disclosure notice to be attached to every application for insurance and the policy declaration page. [RI 27-3-38]. For the State of Utah, if the non-admitted carrier is not on the Utah Department of Insurance approved list of authorized non-admitted carriers or is considered "financially unsound" or "substandard," the surplus line broker must give the insured written notice of the carrier's "deficiencies and limitations" and explain the reasons for placing insurance coverage with that non-admitted carrier. [UT 31-A-15-103.7 (b) (c)]. Finally, and not to be outdone, West Virginia has three disclosure notices:
Placement of Surplus Lines Coverage Notice affirming the insured was advised that the insurance coverage was placed through the non-admitted market. Additionally, this notice affirms the insured was advised that there is no guaranty fund protection in the event of a loss. [WV 114-2-4.2. a].
Notification printed on the policy indicating that the non-admitted carrier is not licensed to do business in West Virginia and is not subject to the West Virginia Insurance Guaranty Act. [WV 114-2-4.3]
Evidence of Insurance Notice to every insured applying for insurance with a non-admitted carrier. This notice is a separate document attached to the application for insurance and must be signed and dated by the insured. The surplus lines broker gives a copy of the signed notice to the insured when the policy is delivered to the insured. [WV 33-12C-12].
Domestic vs. Foreign Carriers
Anything else? Funny you should ask. There is one more point to make regarding the guaranty fund disclosure notices. If a state has passed Domestic Surplus Lines Insurer (DSLI) laws (and 21 states have), there may be a different guaranty fund notice for a domestic surplus line insurer and a foreign surplus line insurer. For example, Arizona, Illinois, New Jersey, North Carolina, Texas, and Wisconsin all require different guaranty fund disclosure notices depending on if the surplus line carrier is a domestic or foreign carrier.
Resources for Maintaining Compliance
If you, as the reader, have made it to this point in the article, you may be throwing your hands up in total disbelief and confusion. Welcome to the world of surplus lines, where there is an exception to nearly every "rule" and differing requirements for each state! Don't panic. While it can seem overwhelming trying to keep all the compliance regulations straight, it is important to remember that these state guaranty fund notifications inform and protect the insured. InsCipher's surplus lines management software, Connect™, consolidates the compliance requirements for all 50 states (plus Guam and Puerto Rico!) into a single database. Intuitive prompts guide you through the surplus lines filing process, and alert you to required documentation. Downloadable templates and state stamp wording are available with the click of a button, and taxes and fees are calculated instantly using the built-in tax calculator. InsCipher's software and services take the guesswork out of compliance, helping you quote and bind with confidence and file accurate surplus lines taxes on-time, every time.
Additionally, there are industry organizations to assist the surplus line broker in complying with all the various state regulations: state surplus lines associations, the Wholesale & Specialty Insurance Association, and the Securities and Insurance Licensing Association can all be an excellent resource when in doubt about compliance regulations.
Reach out, ask questions, and most of all, get involved.
InsCipher is an insurtech company providing software and services that are revolutionizing inefficient insurance processes. Save your agency time and money by automating surplus lines compliance, filing, and reporting. Want to learn more? Request a free demo today!