BEFORE THE COMMISSIONER OF SECURITIES AND INSURANCE

MONTANA STATE AUDITOR

 

In the matter of the amendment of ARM 6.6.2801, 6.6.2803, 6.6.2804, 6.6.2808, 6.6.2809, and 6.6.2810 regarding Surplus Lines Insurance Transactions

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NOTICE OF AMENDMENT

 

TO:  All Concerned Persons

 

            1.  On September 22, 2011, the Office of the Commissioner of Securities and Insurance, Montana State Auditor published MAR Notice No. 6-198 regarding the public hearing on the proposed amendment of the above-stated rules at page 1857 of the 2011 Montana Administrative Register, issue number 18.

 

2.  On October 13, 2011, the Office of the Commissioner of Securities and Insurance, Montana State Auditor held a public hearing to consider the proposed amendment of the above-stated rules.

 

3.  The commissioner has amended ARM 6.6.2801, 6.6.2804, 6.6.2808, 6.6.2809, and 6.6.2810 exactly as proposed.

 

            4.  The commissioner 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 (5) remain as proposed.

(6)  If coverage is procured through a surplus lines insurance producer, that surplus lines insurance producer shall stamp or notate the first page of each insurance contract, cover note, declarations page, or certificate of insurance procured and delivered as surplus lines insurance with the following completed statement:

 

NOTICE:  This coverage is issued by an unauthorized insurer that is an eligible surplus lines insurer.  If this insurer becomes insolvent, there is no coverage by the Montana Insurance Guaranty Association under the Montana Insurance Guaranty Association Act.

 

_________________________________________    ____________________

Printed Name of Surplus Lines Insurance Producer    Montana License Number

 

_________________________________________

Signature of Surplus Lines Insurance Producer

 

(7) through (8) remain as proposed.

 

            5.  Comments were heard at the hearing and written comments were received and appear with the responses from the Office of the Commissioner of Securities and Insurance, Montana State Auditor (CSI).  Comments were received from: Bob Biskupiak, representing the Independent Insurance Agents' Association of Montana and the Montana Surplus Lines Insurance Agents' Association; Roger McGlenn, representing ALPS, also known as the Attorney Liability Protection Society; Bruce Spencer, representing  the Property and Casualty Insurers Association of America; and Jacqueline Lenmark, representing the National Association of Professional Surplus Lines Offices, Ltd.

 

            The CSI did not summarize or respond to comments that did not pertain to the proposed rule amendments.

 

COMMENT I:  One commenter stated that ARM 6.6.2810 should be amended to include a new (7) stating that when Montana is the home state, the entire gross premium – regardless of whether a multistate risk is covered – will be taxed at the Montana tax rate.  The premium tax will be remitted to the state of Montana until such time as the commissioner is participating in an agreement with other states to allocate and distribute premium taxes attributable to multistate risks.  The commenter indicated that members of the represented organization had complained about states attempting to tax at other states' rates on multistate risks when the home state of the insured is not participating in a premium tax allocation and distribution agreement.  The commenter noted that, under 33-2-311, MCA, when Montana is the home state of the insured, the gross premium will be taxed at the Montana tax rate regardless of whether a multistate risk is involved.  The commenter also noted that, under 33-2-323, MCA, the tax process (at 33-2-311, MCA) only changes if Montana participates in an agreement with other states to collect, allocate, and distribute premium taxes on multistate risks.  The commenter also urged the CSI "to continue to tax at 100% of the premium where [Montana] is the home state until such time as it is participating in a tax sharing system with other states."

 

RESPONSE I:  As recognized by the commenter, the CSI has not imposed, nor attempted to impose, other states' premium tax rates on the portion of the risk located or to be performed in other states in regard to policies covering multistate risks when Montana is the home state of the insured.  As noted by the commenter, the Montana Insurance Code at 33-2-311, MCA, provides that when Montana is the home state of the insured, the entire premium (gross premium) will be taxed at the Montana tax rate in 33-2-705, MCA, regardless of whether the coverage includes risks or exposures partially located or to be performed in another state.  As further noted by the commenter, this tax process can only be changed under 33-2-232, MCA, if Montana participates in an agreement with other states to collect, allocate, and distribute premium taxes on multistate risks.  The premium tax rate imposed, and allocation and distribution of taxes, are addressed in the statutes and therefore the CSI declined to adopt a new (7) to ARM 6.6.2810.

 

COMMENT II:  Regarding the proposed amendments to ARM 6.6.2804, one commenter stated that although the proposed elimination of the stamping fee for electronically filed submissions and the reduction of the stamping fee from 1% to .25% for paper submissions was appreciated, the stamping fee should be eliminated for all submissions.

 

RESPONSE II:  Pursuant to 33-2-321(1), MCA, the commissioner may establish a stamping fee by rule commensurate with the expenses of regulating surplus lines insurance.  The proposed reduction in the stamping fee reflects the savings due to the widespread use of the electronic filing system for surplus lines insurance submissions.  The stamping fee cannot be eliminated because there are still expenses incurred by the CSI in regulating surplus lines insurance and the Legislature has not approved an alternative source of funding for these expenses.  The commissioner will adopt the amendment as proposed.

 

COMMENT III:  One commenter stated that the organization he represented had received feedback from a member regarding proposed new (6) in ARM 6.6.2803.  The proposed language providing that surplus lines insurance producers stamp or notate each contract, cover note, declarations page, or certificate of insurance procured with the notice to the insured, would result in excess work for surplus lines insurance producers with numerous transactions annually.

 

RESPONSE III:  The language in proposed new (6) in ARM 6.6.2803 is substantially similar to 33-2-303, MCA, prior to the enactment of SB 331 (2011).  No change is anticipated to the practice under former 33-2-303, MCA.  Surplus lines insurance producers will still stamp or notate the first page of each insurance contract, cover note, declarations page, or certificate of insurance procured and delivered as surplus lines insurance with the stated notice to the insured.  For clarification, the commissioner will adopt the amendment as proposed with additional language stating that "the first page of" each insurance contract, cover note, declarations page, or certificate of insurance procured and delivered as surplus lines insurance must be stamped or notated with the notice to the insured.

 

COMMENT IV:  One commenter stated that the organization he represented had received feedback from a member that under the proposed amendment to ARM 6.6.2804(4), the surplus lines insurance producer may end up "eating" or carrying the burden of the stamping fee.  The commenter also stated that it was the responsibility of the insurance producers involved in the transaction to explain to their customers that the stamping fee is nonrefundable from the CSI once the policy or monied endorsement becomes effective.  However, the customer may want a refund if the policy is cancelled midterm and some producers may refund the stamping fee out of the producers' own funds.

 

RESPONSE IV:  The CSI agrees with the commenter that insurance producers are responsible for advising their customers about the circumstances in which the stamping fee will be refunded by the CSI.  The proposed amendment to ARM 6.6.2804(4) actually expands the circumstances in which the stamping fee will be refunded by the CSI.  The existing rule allows the department to retain all stamping fees for the underlying surplus lines insurance policy and any monied endorsements as soon as any premium for the policy is earned.  Under the existing rule, if a monied endorsement is cancelled before becoming effective and before any premium for that endorsement is earned, the stamping fee could be retained by the CSI as long as the policy becomes effective.  The amendments provide that if the surplus lines insurance transaction generating the stamping fee, whether by the underlying policy or a monied endorsement, is cancelled before becoming effective and before the associated premium is earned, the associated stamping fee will be refunded by the CSI.  Additionally, with the elimination of the stamping fee for electronically filed submissions, surplus lines insurance producers could avoid imposition of the stamping fee entirely by filing electronically.  The commissioner will adopt the amendment as proposed.

 

COMMENT V:  One commenter stated that independently procured insurance is rare, but that he was in agreement with the proposed amendments to the rules.

 

RESPONSE V:  The commissioner appreciates the support for the proposed amendments.

 

COMMENT VI:  With regard to proposed new (6) in ARM 6.6.2803, one commenter stated that the notice to the insured may not be necessary because consumers buying surplus lines insurance policies are more knowledgeable than standard insurance consumers.  The commenter also stated if the policy is sent directly to the consumer by the surplus lines insurer, the surplus lines insurance producer would not have the opportunity to affix the notice to the insured.

 

RESPONSE VI:  The language in proposed new (6) in ARM 6.6.2803 is substantially similar to 33-2-303, MCA, prior to the enactment of SB 331 (2011).  No change is anticipated from the practice under former 33-2-303, MCA. Under that statute, surplus lines insurance producers stamped or notated the first page of each insurance contract, cover note, declarations page, or certificate of insurance procured and delivered as surplus lines insurance with the stated notice to the insured.  Furthermore, it is common industry practice for the surplus lines insurance producer to deliver the surplus lines insurance policy to either the producing insurance producer or to the insured.  In the event that the surplus lines insurance policy was delivered by the insurer directly to the insured, the stated notice would not be affixed by a surplus lines insurance producer.  The commissioner will adopt the amendment as proposed.

 

            /s/ Brett O'Neil                       /s/ Jesse Laslovich

            Brett O'Neil                            Jesse Laslovich

            Rule Reviewer                     Chief Legal Counsel

 

Certified to the Secretary of State November 28, 2011.