Procedural Updates

TO: All Property and Casualty Insurers and Eligible Surplus Lines Insurers

RE: Senate Bill 1775 – Relating to the regulation of certain providers of service contracts (Adds Article 9034, Chapter 20, Title 132. Revised Statutes)

Senate Bill 1775, “Service Contract Regulatory Act” (Act), enacted by the 76th Texas Legislature, establishes regulation of service contracts by the Texas Department of Licensing and Regulation (TDLR). The Act requires providers of service contracts, as defined therein, to register with the TDLR. To ensure faithful performance of its obligations under the service contract, providers are required to comply with one of three options to establish financial security. One option is to insure the provider’s service contracts under a reimbursement insurance policy issued by an insurer authorized to transact insurance in Texas or under a surplus lines insurance policy issued by an insurer eligible to place coverage in Texas as regulated under Article 1.14-2, Insurance Code.

Reimbursement insurance policies issued pursuant to this legislation must state that:

(1) the insurer that issued the reimbursement insurance policy shall reimburse or pay on behalf of the provider any covered amounts the provider is legally obligated to pay or shall provide the service that the provider is legally obligated to perform according to the provider’s contractual obligations under the insured service contract issued or sold by the provider; and

(2) if the covered service is not provided to a service contract holder within 60 days of proof of loss, payment shall be made directly from the reimbursement insurer to the service contract holder or the reimbursement insurer shall provide the required service.

Insurers may not cancel a reimbursement policy until the insurer delivers to the provider a written notice of cancellation pursuant to Articles 21.49-2A, Insurance Code. Cancellation of a reimbursement insurance policy does not reduce the insurer’s responsibility for service contracts issued by the provider and insured under the policy before the date of the cancellation.

While eligible surplus lines insurers are not required to file policy forms with the Texas Department of Insurance (TDI) for approval, they must comply with the requirements set forth in the Act and outlined in this bulletin for reimbursement policies covering service contracts entered into on or after January 1, 2000. All other insurers planning to write reimbursement insurance policies to cover service contracts entered into on or after January 1, 2000 must file their policy forms, rules and rates with TDI or amend existing filings to comply with these requirements. Programs accepted on an individual risk submission basis do not comply with this Act and must be filed with TDI as a new filing. Reimbursement policies and endorsements are subject to prior approval and the rates and rules for these forms are file and use. All filings must be submitted in accordance with the filing requirements contained in “Property and Casualty Filings Made Easy,” accessible on our website.

This notice provides a summary description of the insurance requirements of Senate Bill 1775 and is not intended to provide a detailed presentation of the law.

As reported in a previous bulletin, the Texas Surplus Lines Association has reached agreement with the Texas Department of Insurance to permit the Stamping Office to stop collecting and reporting premium by individual syndicates on Underwriters at Lloyd’s policies. This means you will no longer be required to redistribute individual syndicate percentages of participation on policies with multiple Lloyd’s contracts, or on policies where Lloyd’s is not the sole insurer.

Since, as a part of this agreement, the Stamping Office must continue to verify the eligibility of each syndicate as of the effective date or annual anniversary date of the policy, you must continue to provide the Stamping Office a listing of the syndicates and their percentage of participation on each policy. We shall continue to tag any Lloyd’s security reported without a breakdown of the participating syndicates and you will still be required to correct or replace any ineligible syndicate we identify.

This change applies to all Lloyd’s policies processed by the Stamping Office on or after May 15, 1997. Please refer any questions to SLTX.

The Stamping Office continues to receive agent filings indicating coverage on a single policy through both surplus lines insurers and admitted insurers. Please note that insurers authorized to write business on an admitted basis in Texas are precluded from writing surplus lines business as only unauthorized insurers may be eligible pursuant to Sec. 2(b) of Art. 1.14-2 of the Texas Insurance Code and 28 TAC 15.10.

Beyond the matter of not complying with Texas law, there are several practical problems with combining insurers on a single policy. The surplus lines premium tax cannot be applied to admitted insurers (tax rates and mode of remittance to the state differ,) nor can the surplus lines stamp regarding nonparticipation in the guaranty fund. In addition, admitted insurers are generally subject to rate and form regulation by the Texas Department of Insurance. The failure of an admitted insurer to comply with these rate and forth regulations may subject the insurer to disciplinary action including monetary forfeiture among other sanctions.

Please ensure that any coverage provided by admitted insurers is written under a policy separate from the policy written by surplus lines insurers. Again, this is required by law.