Title of Regulation: 14VAC5-350. Rules Governing Surplus Lines Insurance (amending 14VAC5-350-30, 14VAC5-350-90, 14VAC5-350-100, 14VAC5-350-160, 14VAC5-350-165).

Statutory Authority: §§ 12.1-13 and 38.2-223 of the Code of Virginia.

Public Hearing Information: A public hearing will be held upon request.

Public Comment Deadline: February 1, 2010.

Agency Contact: Keith Kelley, Supervisor-Administrative Tax, Bureau of Insurance, State Corporation Commission, P.O. Box 1157, Richmond, VA 23218, telephone (804) 371-9333, FAX (804) 371-9821, or email keith.kelley@scc.virginia.gov.

Summary:

The proposed revisions update the rules, forms, and procedures used to administer Chapter 48 of Title 38.2 of the Code of Virginia, entitled Surplus Lines Insurance Law, and Chapter 6 of Title 38.2 of the Code of Virginia, entitled Insurance Information and Privacy Protection. The proposed revisions delete the definitions and sections of the regulations relating to commercial insureds and diligent effort. The proposed revisions are necessary due to the passage of Chapter 212 of the 2008 Acts of Assembly, which amended § 38.2-4806 of the Code of Virginia.

AT RICHMOND, DECEMBER 17, 2009

COMMONWEALTH OF VIRGINIA

At the relation of the

STATE CORPORATION COMMISSION

CASE NO. INS-2009-00225

Ex parte: In the matter of
Adopting Amendments to the Rules
Governing Surplus Lines Insurance

ORDER TO TAKE NOTICE

Section 12.1-13 of the Code of Virginia ("Code") provides that the State Corporation Commission ("Commission") shall have the power to promulgate rules and regulations in the enforcement and administration of all laws within its jurisdiction. Section § 38.2-223 of the Code provides that the Commission may issue any rules and regulations necessary or appropriate for the administration and enforcement of Title 38.2 of the Code. The rules and regulations issued by the Commission pursuant to § 38.2-223 of the Code are set forth in Title 14 of the Virginia Administrative Code.

The Bureau of Insurance ("Bureau") has submitted to the Commission proposed amendments to the regulations set forth in Chapter 350 of Title 14 of the Virginia Administrative Code entitled "Rules Governing Surplus Lines Insurance" which amend the regulations at 14 VAC 5-350-30, 14 VAC 5-350-90, 14 VAC 5-350-100, 14 VAC 5-350-160, and 14 VAC 5-350-165 ("Rules"). The Bureau has also recommended that Forms SLB 1, SLB 4, SLB 6, and SLB 10 be deleted and Forms 3001 and 4052 should be added.

The proposed amendments to the regulations are necessary due to the passage of House Bill 298 during the 2008 General Assembly Session, which amends § 38.2-4806 of the Code, effective July 1, 2008.

The Commission is of the opinion that the proposed amendments submitted by the Bureau should be considered for adoption with an effective date of February 19, 2010.

IT IS THEREFORE ORDERED THAT:

(1) The proposed amendments to the regulations entitled "Rules Governing Surplus Lines Insurance" which amend the regulations at 14 VAC 5-350-30, 14 VAC 5-350-90, 14 VAC 5-350-100, 14 VAC 5‑350-160, and 14 VAC 5-350-165 be attached and made a part hereof.

(2) All interested persons who desire to comment or request a hearing on the proposed amendments to the regulations shall file such comments or hearing request on or before February 1, 2010, in writing with Joel H. Peck, Clerk, State Corporation Commission, c/o Document Control Center, P.O. Box 2118, Richmond, Virginia 23218, and shall refer to Case No. INS-2009-00225. Interested persons desiring to submit comments electronically may do so by following the instructions available at the Commission's website: http://www.scc.virginia.gov/case.

(3) If no written request for a hearing on the proposed amendments to the regulations is filed on or before February 1, 2010, the Commission, upon consideration of any comments submitted in support of or in opposition to the proposed regulations, may adopt the regulations as submitted by the Bureau.

(4) The Commission's Division of Information Resources forthwith shall cause a copy of this Order, together with the proposed amended regulations, to be forwarded to the Virginia Registrar of Regulations for appropriate publication in the Virginia Register of Regulations and shall make available this Order and the attached proposed amended regulations on the Commission's website, http://www.scc.virginia.gov/case.

(5) AN ATTESTED COPY hereof, together with a copy of the proposed regulations, shall be sent by the Clerk of the Commission to the Bureau in care of Deputy Commissioner Brian P. Gaudiose, who forthwith shall give further notice of the proposed adoption of the amended regulations by mailing a copy of this Order, together with the proposed regulations, to all licensed surplus lines brokers.

(6) The Bureau shall file with the Clerk of the Commission an affidavit of compliance with the notice requirements of Ordering Paragraph (5) above.

14VAC5-350-30. Definitions.

As used in this chapter:

"Admitted insurer" means an insurer licensed by the commission to do an insurance business in this Commonwealth.

"Authorized to write the insurance coverage sought" means that the admitted insurer is licensed for that class of insurance in this Commonwealth and has complied with the applicable provisions of Title 38.2 of the Code of Virginia concerning the filing of rules, rates and policy forms providing the insurance coverage sought, unless such insurance coverage has been exempted from filing by commission order.

"Business entity" means a partnership, limited partnership, limited liability company, corporation, or other legal entity other than a sole proprietorship.

"Class of insurance" means the classes enumerated in §§ 38.2-109 through 38.2-121 and §§ 38.2-124 through 38.2-134 of the Code of Virginia.

"Commercial insured" means an insured (i) who procures the insurance of any risk or risks by use of the services of a full-time employee acting as an insurance manager or buyer, (ii) whose aggregate annual premiums for insurance on all risks total at least $75,000, or (iii) who has at least 25 full-time employees.

"Diligent effort" means:

1. For business that is originated by a surplus lines broker, a good faith search for insurance among admitted insurers resulting in declinations of coverage by three unaffiliated admitted insurers licensed and authorized in this Commonwealth to write the insurance coverage sought, whether or not the surplus lines broker is an agent of any of the declining insurers; and

2. For business that is referred from a licensed property and casualty insurance agent, declinations or rejections of coverage by three insurers licensed in this Commonwealth to write the class of insurance, whether or not the surplus lines broker is an agent of any of the declining insurers.

"Eligible surplus lines insurer" means a non-admitted insurer approved by the commission pursuant to subsection B of § 38.2-4811 of the Code of Virginia.

"Nonadmitted insurer" means an insurer not licensed to do an insurance business in this Commonwealth. "Nonadmitted insurer" includes insurance exchanges authorized under the laws of a state.

"Sell" means to exchange a contract of insurance by any means, for money or its equivalent, on behalf of an insurer.

"Solicit" or "negotiate" means the attempted selling or attempted placing of insurance or coverage, whether directly or indirectly, in this Commonwealth.

"Surplus lines broker" means an individual or business entity licensed pursuant to Article 5.1 (§ 38.2-1857.1 et seq.) of Chapter 18 of Title 38.2 of the Code of Virginia and thereby authorized to engage in the activities set forth in Chapter 48 (§ 38.2-4800 et seq.) of Title 38.2 of the Code of Virginia.

"Surplus lines insurance" means any insurance in this Commonwealth of risks resident, located or to be performed in this Commonwealth, permitted to be sold by or through a surplus lines broker from an eligible surplus lines insurer. Surplus lines insurance does not include reinsurance, insurance obtained directly from a nonadmitted insurer by the insured upon his own life or property, life insurance, credit life, industrial life, variable life, annuities, variable annuities, credit accident and sickness, credit insurance, title insurance, contracts of insurance on vessels or craft, their cargo, freight, marine builder's risk, maritime protection and indemnity, ship repairer's legal liability, tower's liability or other risks commonly insured under ocean marine insurance, and insurance of the rolling stock and operating properties of railroads used in interstate commerce or of any liability or other risks incidental to the ownership, maintenance or operation of such railroads.

"Unaffiliated" means admitted insurers who are not part of a group of insurers under common ownership or control.

14VAC5-350-90. Affidavit that insurance is unprocurable from licensed insurers.

A. Each surplus lines broker shall execute an affidavit on Form SLB-3 to accompany the quarterly report required by subsection D C of § 38.2-4806 of the Code of Virginia. Each surplus lines broker shall also execute an affidavit on Form SLB-4 to accompany the annual report required by subsection A of § 38.2-4807 of the Code of Virginia. The affidavit shall be a sworn statement, covering all of the policies reported by the broker on the accompanying quarterly or annual report, that such policies were procured by the broker in accordance with the applicable laws and rules governing surplus lines insurance in this Commonwealth.

B. The quarterly affidavit required under this section shall be filed with and received by the commission within the period specified in subsection A of § 38.2-4806 of the Code of Virginia. The annual affidavit shall be filed by March 1 of each year.

C. If the insurance transaction involves insurance primarily for personal, family, or household needs rather than business or professional needs, the surplus lines broker must comply with the provisions of Chapter 6 (§ 38.2-600 et seq.) of Title 38.2 of the Code of Virginia by giving the prospective insured the required adverse underwriting decision notice as required by § 38.2-610 of the Code of Virginia. A copy of the executed adverse underwriting decision notice must be attached to the quarterly affidavit which covers the policy to which it applies.

14VAC5-350-100. Commercial insured waiver of diligent effort. (Repealed.)

A commercial insured as defined in this chapter may waive the requirement of a diligent effort being made by the surplus lines broker among companies licensed and authorized to write the class of insurance sought. The licensed surplus lines broker shall have the commercial insured sign the waiver notice required under subsection C of § 38.2-4806 of the Code of Virginia as prescribed in Form SLB-10. The signed waiver required under this section shall be attached to the quarterly affidavit forwarded to the commission as prescribed in 14VAC5-350-90. A copy of each signed waiver shall be retained by the surplus lines broker for the time period specified in 14VAC5-350-165.

14VAC5-350-160. Surplus lines broker to file annual report and remit outstanding premium tax and full amount of assessment due.

On or before the first day of March of each year every licensed surplus lines broker shall file with the commission a report as required by § 38.2-4807 of the Code of Virginia on Forms SLB-4, SLB-6 (Parts 1-3), and Form SLB-8 for the business conducted during the previous calendar year. The report prescribed in this section shall be verified and notarized. In lieu of filing Form SLB-6 (Parts 1-3), a broker may file legible photocopies of the previously filed quarterly reports on Form SLB-5 (Parts 1-3) for the calendar year.

At the filing of the report, every licensed surplus lines broker shall remit to the commission any outstanding gross premium tax and the full assessment due as calculated on Form SLB-8. Such remittance shall be made payable to the Treasurer of Virginia. If a payment is made in an amount later found to be in error and an additional amount is due, the commission shall notify the surplus lines broker of the additional amount due, and the surplus lines broker shall pay such amount within 14 days of the date of the notice.

14VAC5-350-165. Records of surplus lines broker.

Each surplus lines broker shall retain in his office all of his records relative to insurance transactions, except that records of premium quotations that are not accepted by the insured or prospective insured need not be kept. In addition, for each policy sold by him, the surplus lines broker shall make and keep a record of the rejections or declinations of coverage, which include the name of the declining admitted insurer, the representative of the admitted insurer responsible for rejecting or declining the coverage sought, and the date the coverage was rejected or declined by the admitted insurer. The records of each insurance transaction shall be made available for inspection and subject to examination without notice by the commission during normal business hours. Such records shall be retained for a period of not less than five years following termination of the policy.

FORMS (14VAC5-350)

Form SLB-1 3001, Individual Application for Individual Insurance License for a Surplus Lines Broker, Part 1 (rev. 1/01) 3/08).

Form SLB-1 4052, Application for Business Entity Application for Insurance License for a Surplus Lines Broker, Part 2 (rev. 1/01) 3/08).

Form SLB-2, Bond for Surplus Lines Insurance Broker (rev. 1/01) 1/04).

Form SLB-3, Quarterly Combined Affidavit by Surplus Lines Broker (rev. 10/02) 6/08).

Form SLB-4, Annual Combined Affidavit by Surplus Lines Broker (rev. 10/02).

Form SLB-5, Surplus Lines Quarterly Report (rev. 9/99).

Form SLB-6, Surplus Lines Annual Report (rev. 9/99).

Form SLB-7, Quarterly Gross Premiums Tax Report (rev. 9/99).

Form SLB-8, Annual Gross Premiums Tax Report (rev. 9/99) 5/06).

Form SLB-9, Notice to Insured (eff. 9/96).

Form SLB-10, Commercial Insured Waiver (eff. 9/96).