LL Surplus Lines Series (Entry 34): Nonadmitted Model Act Moves Closer to Adoption; A Couple of Issues Remain Unresolved

On October, 17, 2022, the National Association of Insurance Commissioners (NAIC) Surplus Lines Task Force held an interim meeting to discuss, among other agenda items, the draft changes to the Nonadmitted Insurance Model Act (#870).  The Drafting Group presented the draft model to the Task Force on May 23 and the Task Force formally exposed the model for a 60-day public comment period that ended on July 21st. As a result of that exposure, 27 comments were received that covered a number of issues, including references to domestic surplus lines insurers (DSLIs), amending the arbitration provision requirements, and the topic which garnered the most discussion, the treatment unaffiliated groups.

With respect to the treatment of unaffiliated groups, the current draft, if adopted, includes two separate options that states could consider.  The first option provides that if a group policyholder pays 100% of the premium from its own funds, then the home state is determined under the methodology used to determine the home state for affiliated groups, i.e., the home state is the principal place of business (or principal residence if a natural person) of the group policyholder or if 100% of the risk is outside of that state, the state where the greatest amount of taxable premium is allocated.  If the group policyholder does not pay 100% of the premium from its own funds, then the home state is determined according the above for each member of the group. [emphasis added]  Under the alternative second option, the home state would be the home state of the group policyholder only, as determined by the application of same methodology, its principal place of business (or principal residence if a natural person) or the state where the most taxable premium is allocated.

There was discussion as to whether both options should be listed, or whether one is preferable over the other.  It is also possible no options will be included in the final version of the act.  The resulting language would assist brokers in determining the state or states where the premium taxes are required to be paid.

Other modifications discussed included making all references to DSLIs in the draft as optional since not all jurisdictions have adopted DSLI legislation at this point.  Currently, 21 jurisdictions permit the formation and authorization of DSLIs.  In a nod to the ability of surplus lines insurers to offer accident and health coverages, the task force deleted the limiting reference of “property and casualty” in the definition of Surplus Lines Insurance in the draft.

Finally, there was discussion over whether to amend the provision in the draft which requires that an arbitration (or other alternative dispute resolution mechanism) relative to property, risks or exposures located or to be performed in the state be conducted in that state.  The alternative is to let the parties negotiate the state where the arbitration is to be held.  No decision was made at the meeting.

The most recent draft, including any new revisions to the arbitration provision, will be put up for comment with a possible vote for full adoption at the NAIC Fall National Meeting in Tampa in December.

The current draft can be found here.

Locke Lord will continue to monitor for any developments.