Administrative Rules of the State of Montana

BEFORE THE STATE AUDITOR AND COMMISSIONER OF INSURANCE

OF THE STATE OF MONTANA

In the matter of the amendment of ARM 6.6.2801, 6.6.2803, 6.6.2804, 6.6.2808, and 6.6.2809, the repeal of ARM 6.6.2802, 6.6.2805, 6.6.2806, and 6.6.2807, and the adoption of NEW RULE I (ARM 6.6.2810) pertaining to Surplus Lines Insurance Transactions

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NOTICE OF AMENDMENT, REPEAL, AND ADOPTION

TO: All Concerned Persons

1. On July 30, 2009, the State Auditor and Commissioner of Insurance published MAR Notice No. 6-185 regarding the public hearing on the proposed amendment, repeal, and adoption of the above-stated rules at page 1191 of the 2009 Montana Administrative Register, issue number 14.

2. On August 21, 2009, the State Auditor and Commissioner of Insurance held a public hearing to consider the proposed amendment, repeal, and adoption of the above-stated rules.

3. The State Auditor and Commissioner of Insurance has amended ARM 6.6.2801, 6.6.2804, 6.6.2808, and 6.6.2809 exactly as proposed, and has amended 6.6.2803 as proposed, but with the following changes, stricken matter interlined, new matter underlined:

6.6.2803 FILING OF SUBMISSIONS, EXAMINATION OF SUBMISSIONS AND RECORDS RETAINED (1) through (4) remain as proposed.

(5) For electronically filed submissions, the producing insurance producer shall keep a true and correct copy of the notarized affidavit section of the paper submission form ~~affidavit with~~ showing the original signatures of the producing insurance producer and the notary regarding the diligent search and the information provided to the insured under 33-2-310, MCA. The producing insurance producer shall provide a true and correct copy of the notarized affidavit section of the submission form ~~affidavit~~ to the surplus lines insurance producer. These records shall be retained by the producing insurance producer and the surplus lines insurance producer for five years after the issuance of the surplus lines insurance policy to which they relate, and shall be subject to inspection by the department in accord with 33-2-310, MCA.

(6) Surplus lines insurance producers shall retain records of, and supporting documentation for, all inspection fees charged to insureds under ~~33-2-206~~ 33-2-306, MCA, and any assessment, membership, or similar fee or charge to insureds to obtain surplus lines insurance if such assessment, membership, or similar fee or charge was payable separately by the insured in consideration of the policy.

(7) Producing insurance producers and surplus lines insurance producers may create and retain electronic records to meet the records retention requirements in (5) and (6), provided that the electronic records are:

(a) archival in nature, such as a scanned copy, so as to preclude the alteration of the record after it is initially stored in the electronic medium; and

(b) capable of duplication to a paper copy that is as legible as the original.

AUTH: 33-1-313, 33-2-316, MCA

IMP: 33-2-301, 33-2-302, 33-2-303, 33-2-305, 33-2-306, 33-2-307, 33-2-308, 33-2-310, 33-2-311, 33-2-312, 33-2-313, 33-2-316, 33-2-321, 33-2-326, MCA

4. The State Auditor and Commissioner of Insurance has repealed ARM 6.6.2802, 6.6.2805, 6.6.2806, and 6.6.2807 and adopted New Rule I (ARM 6.6.2810) exactly as proposed.

5. Comments were heard at the hearing, and several other written comments were received and appear with the State Auditor and Commissioner of Insurance's responses. Some commenters submitted written comments and also made oral comments at the hearing. Comments were received from: Bob Biskupiak, representing the Montana Surplus Lines Agents' Association; Jeff Watt, a nonresident surplus lines insurance producer; Earnest J. "Bud" Baldwin, a resident surplus lines insurance producer; Gerald L. Silver, representing the Surplus Lines Association of Arizona; Penelope S. Hopper, representing AON Risk Services and AON Client Services, Inc.; Scott M. Anderson, a nonresident surplus lines insurance producer; Bernd G. Heinze, representing the American Association of Managing General Agents; Steven P. Stephan, representing the National Association of Professional Surplus Lines Offices, Ltd.; Scott Tuxbury, a resident surplus lines insurance producer; Roger Smith, representing Marsh USA, Inc.; and Paul Spector, representing the American Association of Managing General Agents.

When the State Auditor and Commissioner of Insurance, hereinafter the commissioner, received several similar comments on the proposed rule changes, it will be noted in the comment summary. The commissioner did not summarize or respond to comments that did not pertain to the proposed rule changes.

ARM 6.6.2801 and 6.6.2802

Resumption by commissioner and commissioner's authority

Comment NO. 1: Several comments were received opposing the repeal of the ARM 6.6.2802 which delegated authority to the surplus lines advisory organization, hereinafter called the association, to operate a surplus lines stamping office. The commenters stated that the association stamping office provided services to member surplus lines insurance producers and acted as a "buffer" between surplus lines producers and the department regarding compliance and administration because some producers were reluctant to ask questions of the department. Some commenters stated that the association stamping office acted as an "enabler" or a "help desk" for producers providing information, guidance, and education on issues unique to surplus lines and encouraging licensee compliance in all surplus lines placements while maintaining records for the commissioner. Two commenters stated that the review of surplus lines documents by the association stamping office provided consumer protections including verification that all necessary consumer disclosures are made, that only licensees are placing surplus lines risks, that only those lines of business eligible for export are being placed, and that all documentation is completed correctly. Some commenters stated that elimination of the association stamping office will result in additional costs to the department while decreasing the oversight of and service to producers.

Response NO. 1: The repeal of authority to operate the stamping office does not dissolve the association. The association may still provide services to its members including information, education, and guidance regarding surplus lines.

With regard to oversight and encouraging producer compliance, the department found in previous performance audits of the association stamping office's accepted submissions that a significant number of the audited submissions were not compliant. Areas of noncompliance included incomplete submissions, such as failure to conduct a diligent search and failure to provide or to stamp the declarations pages. Also, many of the submissions that the association stamping office recognized as noncompliant and returned for correction had several areas of noncompliance and some had to be returned to the producer multiple times for correction.

Accordingly, the department disagrees that oversight of and compliance by producers will decrease. Since resuming the stamping office functions on July 1, 2009, the department has received nearly 50 pieces of written correspondence from producers and nearly 75 phone calls from producers with compliance questions. The department believes that oversight of and compliance by producers will increase due to its resumption of the stamping office functions.

With regard to issue of added costs for the department due to its resumption of the stamping office functions, the department disagrees. See Response No. 14 regarding the stamping fee collection by the department.

Comment NO.2: Two commentators stated that the intent of the Montana Surplus Lines Insurance Law was that the surplus lines stamping office be run as a self-regulatory organization. The commenters further stated that the commissioner does not have legal authority to repeal the rule delegating authority to the association to operate the stamping office and resume the stamping office functions.

Response NO. 2: The Commissioner is responsible for administering and enforcing the Montana Insurance Code, 33-1-101, et. seq., MCA, and has the powers and authority expressly conferred or reasonably implied from the laws of the state under 33-1-311(2), MCA. Surplus lines insurance transactions are regulated by the commissioner under the Montana Insurance Code.

In the Surplus Lines Insurance Law, the plain language in 33-2-321, MCA, contemplates that either the Commissioner or an association will engage in the stamping office functions. Further, 33-2-321(5), MCA, provides that the stamping fee will be collected by the person, either the commissioner or the association, performing the stamping office functions and used for those expenses.

In 33-2-316, MCA, the commissioner has rulemaking authority. Previously, the commissioner adopted rules delegating the commissioner's authority to the association to operate a stamping office, including reviewing and processing surplus lines submissions to ensure compliance with Montana law.

Accordingly, the commissioner is responsible for administering and enforcing the Montana Insurance Code including the Surplus Lines Insurance Law. The commissioner has authority to delegate by rule the stamping office functions to the association or to repeal that delegation based upon reasonable necessity.

Comment NO. 3: One commenter stated that the commissioner and department had not shown a reasonable relationship between the exercise of its police power and the protection of the public welfare, health and safety citing Springfield Fire and Marine Ins. Co. v. Holmes, 32 F. Supp. 964 (D. Mont. 1940). The commenter stated that the commissioner and department had not considered any less restrictive methods to adequately comply with the "state's delegation of authority" to the association stamping office and its years of successful operation. The commenter stated that the commissioner's resumption was not grounded in reasonable necessity and was arbitrary and capricious rulemaking that had unconstitutionally taken the assets and duties of an independent non-profit association established for the benefit of administering surplus lines insurance transactions for the benefit of the citizens and businesses, and for the security of the insurance marketplace.

Response NO. 3: The commissioner has found that it is reasonably necessary to resume direct review and processing of surplus lines submissions. Previous performance audits of the association have repeatedly found that a significant number of the audited submissions were not compliant with Montana law, but the association failed to identify the areas of noncompliance, such as failure to conduct a diligent search, and erroneously accepted the submissions. After being advised of these failings, the association did not make the necessary corrections and continued to accept submissions with the same areas of noncompliance. Further, the most recent performance audit found that less than half of the accepted submissions audited were compliant with Montana law.

The commissioner gave notice to the association in April, 2009, that she planned to repeal the delegation of authority to the association stamping office. The commissioner proposed a transition period from July 1, 2009, through March 31, 2010, in which the association stamping office would continue to operate, but would work with the commissioner to facilitate the department's resumption of the stamping office functions. The association stamping office and its contractor proposed charging an amount in excess of the previous annual contract for the nine month transition period. The commissioner and department did not accept and the association stopped operating the stamping office as of 5:00 p.m. on June 30, 2009. Accordingly, the association has acknowledged the commissioner's authority to resume direct review and processing of surplus lines submissions.

The commenters reliance on Springfield Fire and Marine Ins. Co. v. Holmes , 32 F. Supp. 964 (D. Mont. 1940), is misplaced. The judgment in Springfield Fire was reversed by Osborn v. Ozlin, 310 U.S. 53 (1940). Holmes, 311 U.S. 606 (1940), rehearing denied at 311 U.S. 726 (1940).

The department disagrees that the association has been subjected to an unconstitutional "taking" of private property. The association does not have a cognizable property interest in the subject of the alleged taking. The commissioner is responsible for administering and enforcing the Montana Insurance Code, 33-1-101, et. seq., MCA, including the Surplus Lines Insurance Law, 33-2-301, et seq., MCA. See Response No. 2 regarding the responsibility and authority of the commissioner.

Assuming arguendo that the association had a cognizable property interest, the department disagrees that repealing the rule delegating the commissioner's authority to the association to operate a surplus lines stamping office constitutes a regulatory taking. See Kafka v. Mont. Dept. of Fish, Wildlife and Parks, 2008 MT 460, 348 Mont. 80, 201 P.3d 8 (2008); Buhmann v. State, 2008 MT 465, 348 Mont. 205, 201 P.3d 70 (2008). Insurance is a heavily regulated industry. Another heavily regulated industry in Montana, game farms, had to adapt to significant changes in government regulation – including the prohibition of "fee-shooting" – without the change rising to the level of an unconstitutional "taking" of private property. The Court noted that persons operating in highly regulated fields "should expect that the government can effectively regulate them out of business." Buhmann, 2008 MT at ¶ 84, 348 Mont. at 234, 201 P.3d at 91. Further, the U.S. Supreme Court recently declined to review the decision. Wallace v. Montana, Docket No. 08-1395, U.S. LEXIS 7453, cert. denied October 13, 2009.

The commissioner has responsibility for administering and enforcing the Montana Insurance Code, 33-1-101, et. seq., MCA, including the Surplus Lines Insurance Law, 33-2-301, et seq., MCA. The commissioner is further obligated to carry out that responsibility in the most cost effective and comprehensive manner to protect consumers which made it reasonably necessary to resume direct review and processing of surplus lines submissions.

Comment NO. 4: Two commenters stated that they believed there was no investigation or finding by the commissioner that the association stamping office was not operating pursuant to Montana law and that the association stamping office had not been afforded a hearing to contest any such finding. One commenter stated that the commissioner and department had not followed subsection (3) of 33-2-321, MCA, because the association stamping office had not been given the opportunity to request a hearing regarding any finding that it was not operating as set forth in the law. Another commenter stated that the public hearing on August 21, 2009, was "merely window dressing."

Response NO. 4: The department disagrees with the commenters' assertion that the commissioner lacks authority to repeal the rule delegating authority to the association to operate a surplus lines stamping office. See Response No. 3.

The department also disagrees that 33-2-321(3), MCA, establishes a procedure to be followed by the commissioner and department prior to resuming direct review and processing of surplus lines submissions. Further, the commissioner has already issued an examination report to the association with an opportunity for a hearing as set out in 33-2-321(3), MCA, and the association failed to request a hearing.

As explained in Response No. 3, the commissioner and department conducted performance audits of the submissions accepted by the association stamping office and have repeatedly found that a significant number of the audited submissions were not compliant with Montana law. See Response No. 3.

Comment no. 5: One commenter stated that there was no evidence that the association stamping office had done anything other than an exemplary job, citing "anecdotal evidence" from producers, insurers, and other association stamping offices and a significant increase in the number of submissions and premiums written in the first six months of 2009 compared to the first six months of 2008. The commenter stated that based on the data developed by the association stamping office, there had been an increase of 44% from $24 million to $34.6 million in premiums written in the first six months of 2009 over the same period in 2008. The commenter also indicated the premiums written for years 2005, 2006, 2007, and 2008 and the first six months of 2009 totaled $280.5 million.

Response no. 5: The department's performance audits of the association stamping office revealed significant areas of noncompliance in accepted submissions. See Response No. 3.

The data developed by the association stamping office in the "broker reports" regarding premiums written and taxes and stamping fees owed, and provided to the department, do not support the comment regarding the total premiums written or the increase in premiums written in the first six months of 2009 over 2008. The "broker report" data provided by the association stamping office to the department indicates that the premiums written for years 2005, 2006, 2007, and 2008 and the first six months of 2009 totaled $270.8 million, which is $9.7 million less than the total stated by the commenter. The "broker report" information also indicates that the increase in premiums written for first six months of 2009 over the same period in 2008 was $600,000.00, which is roughly an increase of 2%. Accordingly, the department disagrees with the comment.

The commissioner and department's primary concerns are that risks are appropriately placed in the surplus lines market, correct and timely filed submissions, and collection and remission of the correct fees and premium taxes. The prior performance audits of the association stamping office indicate problems in these areas.

Comment no. 6: One commenter stated that resumption by the commissioner and department will not benefit the public and private sector with surplus lines transaction processing, licensing or compliance. The commenter further stated that direct review and processing of surplus lines submissions by the department would create a nonuniform and inconsistent foundation and refrain creativity, investment, and security provided by the surplus lines market.

Response no. 6: The department disagrees. As explained in Response No. 3, the commissioner and department conducted performance audits of the submissions accepted by the association stamping office and have repeatedly found that a significant number of the audited submissions were not compliant with Montana law. See Response No. 3.

Creativity in the market cannot be achieved or condoned through noncompliance with the law. The commissioner and department intend to consistently and uniformly enforce the law.

Comment NO.7: Several commenters stated that there was no reason to think that enactment of federal legislation regulating multi-state surplus lines transactions would lead to a decrease in submissions in Montana and resulting in a decrease in taxes and fees collected.

One commenter stated that, under proposed federal legislation, the home state of the policyholder may actually receive an increase in its share of surplus lines taxes rather than receiving the proportional percentage of premium commensurate with the percentage of operations of the policyholder's risks in that state.

Another commenter stated that the proposed federal legislation and interstate compact working in tandem would streamline multi-state surplus lines transactions by increasing transparency for multi-state surplus lines transactions and standardizing the allocation formula for taxes. The commenter further stated that it is intuitive that tax revenues would increase after enactment of proposed federal legislation and interstate compacts because, under the current the tax system, states do not know what surplus lines transactions have occurred or what portion of the tax is properly allocated to each state. The commenter also stated that under the "Todd Shipyards case," the U. S. Supreme Court found that no state taxes were due on transactions in any state except the state with the transaction – meaning that if the only connection between the state and the insurance transaction at issue is the physical location of the property covered by the insurance, the state may not impose a tax.

Response NO. 7: The possible passage of the Nonadmitted and Reinsurance Reform Act of 2009, H.R. 2571, 111th Congress, 1st Sess. (2009), (NRRA) and the proposed Surplus Lines Insurance Multi-state Compliance Compact (SLIMPACT) was a consideration, but not the primary consideration for the rule changes. Other than their intuition, the commenters do not provide support that submissions and/or premium tax revenue would increase in Montana upon passage of the NRRA and the proposed SLIMPACT. Accordingly, the department's intuition that submissions and revenues would decrease could just as easily turn out to be correct.

In SLIMPACT, the premium tax data allocation formula for multi-state risks for the purpose of calculating the premium taxes due in each state would be developed by the commission, comprised of compacting states. It is unknown how the commission will allocate multi-state surplus lines premium taxes or whether it may establish a minimum percentage of total risk (i.e., 5%) that must be met before any premium taxes will be due to a compacting state. From the data in SLIMPACT, it appears that Montana's share is 0.21% of the total surplus lines premiums written in the United States. If the commission established minimums that must be met before any premium taxes would be due for a multi-state surplus lines policy, it is possible that some number of the current submissions in Montana would not meet the minimums which would decrease the premium taxes collected.

In the section of SLIMPACT regarding financing, it appears that the Compact Clearinghouse would collect stamping fees on every multi-state transaction to cover the operating costs of the commission and the Compact Clearinghouse. Additionally, SLIMPACT provides that its rules regarding surplus lines would have the force and effect of law and be binding in all compacting states. Accordingly, it appears that the stamping fee collected by state regulators or outside stamping offices for multi-state risks would instead be collected by the Compact Clearinghouse to fund their operations.

In compacting states, the Compact Clearinghouse appears to supplant the functions of local stamping offices and state regulators in that all multi-state submissions would be made through the Compact Clearinghouse which would review and process the submissions, determine the applicable premium taxes and the "stamping fee" to fund the operations of the Compact Clearinghouse, and provide reports regarding the premium taxes due to the compacting states and surplus lines producers. Accordingly, the passage of NRRA and SLIMPACT would appear to usurp the functions and the funding of local stamping offices regardless of whether an insurance department or non-profit association of agents was operating the local stamping office.

ARM 6.6.2803 – Electronic filing and records retention

Comment NO. 8: The department received several comments generally supporting the development of an electronic filing system for surplus lines submissions. One commenter stated that the department had not yet implemented an electronic filing system and had not done a study of the anticipated savings or efficiencies. One commenter stated that an electronic filing system could easily be implemented by the association stamping office without additional state government bureaucracy, expenditure of state funds, or elimination of private sector jobs at the association stamping office. Another commenter stated that the association had tried to implement an electronic filing system but was prevented by the department. Several commenters criticized the continued affidavit and notary requirement for surplus lines submissions in the department's proposed electronic filing system as being antiquated and diminishing the efficiency and effectiveness that could be achieved with an automated electronic filing system.

Response NO. 8: Although the department has not formally estimated a specific amount of savings to result from efficiencies gained through implementation of electronic filing, the department anticipates that about half the staff-time will be required to review and process electronic filings thereby resulting in a cost savings. To reflect the anticipated savings, the department proposed a 50% decrease in the stamping fee for electronically filed submissions. If the savings is less than or greater than expected, the department will amend the rule to make the stamping fee commensurate with the costs of reviewing and processing surplus lines submissions.

The department disagrees that it prevented the association stamping office from implementing an electronic filing system. The department further disagrees that the association stamping office could have easily implemented an electronic filing system based on the estimated start-up costs of $40,000.00 to $200,000.00 provided by the association stamping office. The department has other electronic filing systems in place, such as insurance producer licensing and continuing education reporting, and has greater capacity to implement an electronic filing system for surplus lines submissions for less cost.

Under 33-2-310, MCA, the producing producer must execute an affidavit. As explained in Response No. 9, an affidavit must be notarized and the department cannot change the statute or ignore it when developing and implementing an electronic filing system for surplus lines submissions.

Comment NO. 9: Several commenters opposed retaining paper copies of submission forms for electronically filed submissions as being unnecessary, time consuming, and costly because there would be an electronic record of the submission. One commenter stated that requiring hard copy records was a "band-aid" approach and that the department should address the real issue of the notary requirement to make the electronic filing process effective and efficient for all parties. One commenter stated that the notary requirement was burdensome and should be eliminated as it has been eliminated in many other states. One commenter stated that the notary requirement should be eliminated for electronically filed submissions which could then be electronically stored.

Response NO. 9: The producing insurance producer is required to execute an affidavit under 33-2-310, MCA, regarding the diligent search and specific disclosures made to the insured. Under Montana law, an affidavit is a written statement, under oath, sworn to or affirmed by the person making it before some person who has authority to administer an oath or affirmation. The maker must have personal knowledge of the information contained in the statement and must swear to its validity. McDermott v. Carie, LLC dba Horse Prairie Ranch, 329 Mont. 295, 307 (2005); Mountain States Resources, Inc. v. Ehlert, 195 Mont. 496, 503, 636 P.2d 868, 872 (1981); MCA 26-1-1001. Accordingly, the affidavit section of the submission form must be completed and signed before a notary.

The department's proposed electronic filing system for surplus lines submissions cannot change the statutory requirement that the producing insurance producer execute an affidavit before a notary. Additionally, the department's proposed electronic filing system does not accommodate an electronic notary. Therefore, the affidavit portion of the submission form must still be completed manually for paper submissions and for electronic submissions.

The department revised the proposed rule to allow for the creation and retention of electronic records. The electronic record format must be archival in nature, such as a scanned copy, so as to preclude the alteration of the record after it is stored in the electronic medium. Additionally, the electronic record must be capable of duplication to a paper copy that is as legible as the original. See also 33-2-313(1)(b), MCA, providing that the commissioner suspend or revoke a surplus lines producer license for failure to keep records.

ARM 6.6.2803 and 6.6.2804 – allowable fees

Comment NO. 10: The department received several comments that maintaining records of inspection fees took additional time and made unnecessary work for surplus lines producers. Several commenters stated that the inspection fee is estimated when the premium is quoted and the actual cost of the inspection is not known until the policy has been issued and the property inspected. Therefore, the records retained by the surplus lines producer would pertain to the estimated inspection fee.

Response NO.10: Presumably the inspection of the risk to be insured is usually conducted before the surplus lines policy is issued in that the inspection would be useful in obtaining information about the risk to assist the insurer in determining whether to offer the requested coverage and on what policy terms and at what premium charge.

If the inspection fee is estimated when the policy is issued, the estimated fee can be used in completing the submission form. After the inspection is completed and the actual inspection costs can be documented and known, the surplus lines producer would file an endorsement cover sheet form to correct the inspection fee and the tax calculation since the inspection fee is included as premium for the tax calculation. For example, if $2,000.00 is the estimated inspection fee when the policy is issued, but the documented inspection costs only total $1,000.00, then the surplus lines producer would file an endorsement cover sheet form to correct the inspection fee and the tax and then would refund the excess inspection fee and tax previously collected to the insured. [Note: There would be no change to the stamping fee because the stamping fee is not used in the tax calculation. The stamping fee is calculated on the base premium which does not include the inspection fee.] The surplus lines producer would maintain records of the inspection and costs associated with the inspection.

Comment NO. 11: Several commenters stated that if policy fees cannot be charged, insurers and managing general agencies would likely establish higher minimum premium policies or decline a particular submission due to the cost of processing the business which hurts consumers by limiting access. Two commenters speculated that a surplus lines wholesaler closed a local office primarily because it could not charge policy fees. Once commenter stated that policy fees can be charged for insurance from admitted insurers and should be allowed for surplus lines insurance.

Response NO. 11: Section 33-2-306(3), MCA, provides that a "surplus lines insurance producer" who places or renews surplus lines insurance "may collect an inspection fee for the actual costs of inspecting the risk to be covered." Since 1991, an inspection fee is the only fee that may be charged and collected (retained) by the surplus lines producer. In 1991, the Legislature amended 33-2-306(3), MCA, repealing surplus lines producers ability to charge a placement fee or policy fee. After the repeal of placement or policy fees, surplus lines producers may only charge and retain an inspection fee for the actual costs of inspecting the risk to be covered. This was a legislative action that cannot be changed by administrative rule.

Section 33-15-102(2), MCA, defines premium as "the consideration for insurance, by whatever name called. Any assessment or membership, policy, survey, inspection, service, or similar fee or charge in consideration for an insurance contract is deemed part of the premium." Under Title 33, chapter 16, MCA, admitted property and casualty insurers are required to file their rates and rating plans with the department. Any policy fee to be charged by an admitted insurer is "deemed part of the premium" under 33-15-102(2), MCA, and is included in the rates or rating plans filed with the department under Title 33, chapter 16, MCA, and in the calculation of premium taxes. Additionally, 33-18-212, MCA, prohibits the collection of any sum or charge for insurance, by any person, that is not provided to the insurer and that is not specified in the policy as premium in accordance with the applicable rates filed with the department.

In sum, surplus lines producers may charge and retain inspection fees for the actual cost of inspecting the risk to be covered under 33-2-306(3), MCA. Surplus lines producers are prohibited from charging and retaining any other fees under 33-18-212 and 33-2-306, MCA. Admitted insurers may charge and retain fees, which must be filed with the department with the rates and rating plans, which will be deemed premium under 33-15-102(2), MCA, and on which the insurers will pay premium taxes.

Comment NO. 12: One commenter stated that "assessment" and "membership" fee were new language in proposed ARM 6.6.2804(7). The commenter asked why assessment or membership fees could be charged but policy fees could not and what prevented an entity from charging a policy fee but simply calling it an assessment or membership fee.

Response NO.12: Surplus lines insurers were previously allowed to charge assessment or membership fees under the former (2), now (4), of ARM 6.6.2804. That section still provides that any assessment or membership fee charged would be considered to be premium in calculating the premium tax. New (7), formerly (3), uses the same language as former (2), now (4), to explain that the stamping fee is calculated on the base premium which does not include any assessment, membership, inspection, or similar fee payable separately by the insured in consideration of the policy.

Examples of assessment, membership or similar fees that may be charged by surplus lines insurers include a syndicate charging an assessment or membership fee that could either be separately stated on the declarations pages or included in the premium. Additionally, a surplus lines insurer may use a catastrophe modeling firm in underwriting a risk and may charge a fee for the computer modeling for the catastrophe, such as an earthquake, that could either be separately stated on the declarations pages or included in the premium.

Regardless of what a particular fee is called, whether the fee is allowable will be determined by who is charging and receiving the fee. Surplus lines insurance producers may only charge and receive an inspection fee for the actual cost of the inspection under 33-2-306(2), MCA. Surplus lines insurers may charge and receive fees, which may be listed separately on the declarations pages, such as assessment or membership or modeling fees, in consideration of the policy.

The permissible fees are not changing. The calculation method for the premium tax and the stamping fee are not changing. The stamping fee is calculated on the base premium which is the premium listed on the declarations pages and does not include any other charges listed separately on the declarations pages, such as an assessment, membership, computer modeling, or inspection fee, which are payable by the insured. The premium tax is calculated on all amounts or charges, except the stamping fee, payable by the insured. Section 33-15-102(2), MCA, defines premium as "the consideration for insurance, by whatever name called. Any assessment or membership, policy, survey, inspection, service, or similar fee or charge in consideration for an insurance contract is deemed part of the premium."

ARM 6.6.2804 and New Rule - annual statements

and annual payment of stamping fees

Comment no.13: Several commenters stated that the association used to provide monthly statements to surplus lines insurance producers which made it easier for the producers to reconcile their records. Several commenters suggested that the department issue monthly or quarterly statements in addition to the annual statements or accommodate requests by producers throughout the year for statements. One commenter stated that if the department only issued an annual statement, it appeared that the department was providing less service than the association did and shifting costs to the producers.

Response no. 13: Surplus lines insurance producers have always been responsible for maintaining records of their surplus lines transactions and reconciliation of the premium taxes and stamping fees regarding the same. The department disagrees that producers are additionally burdened when it compiles and issues annual statements to producers for premium taxes and stamping fees owed. Additionally, the department anticipates that the implementation of an electronic filing system will allow surplus lines producers to check the status of their submissions and obtain a running summary of the taxes and fees owed at any time.

ARM 6.6.2804 – Stamping fee

Comment no. 14: Several commenters stated that it appears that the department will be providing fewer services than the association stamping office, specifically the change from monthly to annual statements, and shifting costs to the surplus lines producers. The commenters asked why the stamping fee was not being reduced for all submissions, instead of just electronically filed submissions, or why the stamping fee was not being eliminated. One commenter stated that the stamping fee appeared to only benefit the department and asked how the continuation of the stamping fee would benefit consumers.

Response no. 14: Under 33-2-321(5), MCA, there is a stamping fee on surplus lines insurance submissions, of not more than 1% of the premium, which is earmarked to pay the expenses associated with regulating surplus lines transactions. The stamping fee is established by administrative rule.

After the department resumed direct review and processing of the surplus lines submissions, the department could collect the stamping fee. The department anticipates establishing and collecting a stamping fee that is commensurate with its expenses. The department reduced the stamping fee for electronically filed submissions in anticipation that its expenses to review and process these submissions would be lower than for paper submissions.

The department disagrees that it will be providing fewer services. As explained in Response No. 13, the change to an annual statement does not additionally burden surplus lines producers since they have always been responsible for maintaining records of their surplus lines transactions. Further, the implementation of an electronic filing system should allow surplus lines producers to view the status of their submissions and obtain a running summary of the taxes and fees owed at any time.

Montana consumers benefit from the stamping fee in the same way as they previously have. The stamping fee is basically a fee for service in that only those consumers who obtain surplus lines insurance policies pay a stamping fee for the review and processing of the submissions. Further, enforcement of Montana law regarding surplus lines transactions protects and benefits consumers.

ARM 6.6.2809 – Approved risk list

Comment no. 15: Several commentators asked whether the association or any individual producers who served on the committee to develop the approved risk list (ARL) would be reimbursed for the travel and other expenses. One commenter stated that in the past the ARL committee meeting was held in conjunction with the association board meeting so board members serving on the ARL committee were reimbursed by the association.

Response no. 15: The department lacks authority to reimburse travel expenses or other expenses for ARL committee members. The department anticipates using teleconference meetings initiated by the department or continuing to schedule ARL meetings in conjunction with the association board meetings to minimize the expense for ARL committee members.

/s/ Christina L. Goe /s/ Robert W. Moon

Christina L. Goe Robert W. Moon

Rule Reviewer Deputy State Auditor

Certified to the Secretary of State October 19, 2009.