Quarterly Newsletter    April - June 2004 Issue



Diligent Effort
Governor Perry Calls Special Session
SLSOT Elects Officers During Annual Meeting
From the EFS Help Desk
2003 Summary Statistics for US Stamping Offices
SLSOT Employee News
Save-A-Tree
Helpful Hints
Comparison of SLSOT Premium Processed by Line of Business

Each surplus lines agent has a statutory duty to make a "diligent effort" to first place insurance coverage in the admitted market.

Under Section 981.004 of the Insurance Code, surplus lines insurance can only be procured from an eligible surplus lines insurer if "the full amount of required insurance cannot be obtained, after a diligent effort, from an insurer authorized to write and actually writing that kind and class of insurance in this state". However, there is no pat legal definition of what constitutes diligent effort in Texas. Each case is considered by Texas regulators or courts in accordance with its specific facts and circumstances. Texas law is thus more nebulous than that found in many other states, which commonly call for a declination from at least three licensed carriers before export. As with the other technical requirements of Texas' surplus lines law, such as the payment of taxes and display of the guaranty fund disclaimer, the diligent effort obligation is "highly regulatory and must be strictly complied with." (First Bank & Trust of Groves v Kraehnke 1987)

Diligent effort remains a concern of all surplus lines agents for the following reasons:

1. Many agencies do not themselves have admitted markets. Because a surplus lines transaction implies many negatives for retail agents, including commission sharing, some loss of control regarding the procurement, incomplete knowledge of coverages provided, etc., it is widely assumed the sheer fact the risk has been brought to the surplus lines agent is de facto proof of diligent effort. Nonetheless, since 1967 it is the surplus lines agent that has held this statutory responsibility. Some surplus lines agencies take the reasonable step of maintaining documentation from retail agents in their contract files identifying the reason for each risk's export. Of note, Texas Department of Insurance (TDI) regulations state "no surplus lines agent or agency shall shift, transfer, delegate, or assign his or her responsibility to a person or persons not licensed as a surplus lines agent". (28 TAC Sec. 15.6(d))

2. Texas case law is sparse regarding the interpretation of the diligent effort requirement, in major part because lawsuits alleging a failure to pursue a diligent effort to procure coverage in the admitted market also typically turn on the agent's failure to meet other statutory requirements that are easier to prove. The case often cited, First Bank & Trust of Groves v Kraehnke, was really an unauthorized insurance case, with the appeals court telling us that failure to make any diligent effort whatsoever is not legally sufficient, which we could probably have surmised on our own.

3. It is notably with program business that there is potential conflict with state diligent effort laws. Particularly in the case of personal lines, mass writing is susceptible to allegations of unfair competition with licensed carriers. While such accusations are largely anecdotal, they are easily made but less readily refuted. Ultimately, carelessness by a few agents in adhering to diligent effort requirements is a direct threat to the entire market's fundamental freedom from rate and form regulation.

4. Historically, substantive differences in policy coverage or limits between a licensed insurer and a surplus lines insurer have been deemed a legitimate cause for export. In conflict with this interpretation is a very old (1954) Attorney General's opinion, which states, "To construe (the surplus lines law) to mean that insurance may be taken out with a nonlicensed insurer merely because the insured cannot secure a certain type of policy from a licensed insurer, which it is prohibited from issuing under the Texas law, would defeat the purpose of (the surplus lines law) and other provisions of the Insurance Code."

5. Market conduct exams of surplus lines agencies in Texas are rare and typically prompted by specific complaints or significant market disruptions. However, in the event an agency faces an exam, TDI expects validation of diligent effort to be readily available. A word to the wise: document, document, document.

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