LL Surplus Lines Series (Entry 29): Illinois Looks to be Latest State to Streamline Diligent Search Requirements, and to Provide Clarity for Group Policies

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On February 26, 2021, a bill was introduced in the Illinois General Assembly that among other changes would eliminate the diligent effort requirement for commercial business sourced by a surplus lines producer through a retail insurance producer and would also reduce the requirement for master policies and program business.

With respect to commercial insurance transactions involving unaffiliated retail and wholesale producers, the proposed bill would permit a license surplus line producer to procure a policy from a surplus lines insurer without making the required diligent effort if the risk was referred to the producer by an unaffiliated licensed retail producer.  This would exempt such placements from the Illinois requirement that the surplus line producer or the referring retail producer submit the risk to three or more authorized insurers in Illinois (that are engaged in writing the same type of coverage), which is the typical requirement for conducting a diligent effort in most states.  The theory behind the exemption is that a retail producer is not likely to send a placement to a surplus lines producer, and share in the commissions, unless the retail producer was unable to find an admitted market for the risk.  This diligent search exemption would not apply to personal lines transactions.

Illinois also provides clarification for master policy insurance contracts, in that a licensed surplus line producer may make the required diligent effort to procure the insurance from a surplus lines insurer annually for the master policy rather than individually for each insured that is added during the policy period. This greatly reduces the administrative burden of obtaining declinations for each insured issued coverage under a master policy.  Similarly, for program business, the required diligent effort to procure the insurance from surplus lines insurers may be made annually for the program rather than individually for each contract.

Few states provide guidance on the diligent search efforts required with respect to nonaffiliated group policies and, as we have previously reported, guidance on how nonaffiliated group policies should be treated is not covered by the federal Nonadmitted and Reinsurance Reform Act of 2010 (the “NRRA”).  The NRRA specifically addresses how to determine the principal place of ‎business of an affiliated group for regulatory purposes, by looking to the state of the largest group member as determined ‎by percentage of premium attributed to the members.  However, the NRRA does not address ‎how to determine the “home state” of a nonaffiliated group. This has led to ambiguity on how to ‎structure group products in the surplus lines market for these nonaffiliated groups, such as where and how often does the diligent effort need to be conducted.  The proposed bill would clarify this for Illinois insureds.

The bill would also eliminate penalties, interest and late fees for those instances where a surplus lines producer made a good faith effort but picked the wrong “home state” to which to pay the surplus lines premium tax.  In such cases, if the Illinois Director of Insurance determined that the producer’s determination was not correct and the home state should have been Illinois, the producer may be required to pay applicable taxes and fees to Illinois, but would not be subject to any penalty, interest, or late fee.  What that means for taxes paid to the initial home state would likely be a separate matter between that state and the producer.

Locke Lord will continue to monitor the bill’s developments.  A copy of the proposed bill can be found here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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