Principles of Insurance (Part 2)

Page 5 of 8

How insurers are domiciled

As we just did with the state insurance program samples in the previous lesson, let's use one state, California, as an example to give you an idea of how insurance companies are "domiciled" or allowed to practice in a given jurisdiction.

You could categorize insurer domicile issues in a number of different ways. For the sake of this lesson, let's organize this subject as follows:

Admitted

California Insurance Guarantee Fund

Non-admitted

Foreign

Alien

Admitted
An admitted carrier (in a state, such as California) must file the rates they use by class and any changes to those rates. All premiums and losses are reported to the Department of Insurance (DOI) categorized under the five-digit coding by risk type.

Admitted carriers are subject to strict regulation in the states in which they operate as to rates and forms they are allowed to use.

There are some advantages to writing insurance with an admitted carrier that include:

Perceived stability to the insurance consumer

Name recognition

Level of standardization of forms

Eligibility for California Insurance Guarantee Association (CIGA) benefits

California Insurance Guarantee Fund
The purpose of the California Insurance Guarantee Association is to provide insolvency insurance for each participating insurer as defined in Section ll9.5 of the Insurance Code Article 14.2.

All insurers, including reciprocal insurers, admitted to transact insurance in the state of California are part of the association.

The state will cover certain claims to try to ensure that a participating insurance company will not go out of business (or become insolvent) due to those claims. "Covered claims" under the California Insurance Guarantee Fund mean the obligations of an insolvent insurer, including the obligation for unearned premiums that are:

Imposed by law and within the coverage of an insurance policy of the insolvent insurer

Unpaid by the insolvent insurer

Presented as a claim in this state or to the association on or before the last date fixed for the filing of claims

This could present a problem for tail-type claim submissions. In insurance jargon, a "tail" extends liability coverage for incidents that occurred while a claims-made policy was in effect, though these incidents were not filed as a claim until after the policy was canceled. It is up to the insured to accept tail coverage or not when the original policy comes to a close.

Covered claims also include the obligations assigned to an assuming insurer from a ceding insurer where the assuming insurer subsequently becomes an insolent insurer if, at the time of the insolvency of the assuming insurer, the ceding insurer is no long admitted to transact insurance in the state.

Covered claims do not include that portion of any claim that is in excess of five hundred thousand dollars ($500,000), other than a claim for workers' compensation benefits.

Additionally, covered claims:

Do not include any amount awarded as punitive or exemplary damages

Do not include loss adjustment expenses, including adjustment fees and expenses, attorney fees and expenses, court costs, interest and bond premiums incurred prior to the appointment of a liquidator.

Basically, covered claims are only for insured damages, not for defense fees, etc.

Non-admitted
A non-admitted carrier, also known as a surplus line carrier, is not authorized to conduct business in a state (California, in this example) unless through a broker.

The idea behind non-admitted coverage is that the company is dealing with a unique risk not statistically identifiable or measurable. Status as a non-admitted insurance company allows more flexibility for the insurer to provide certain types of coverage.

A non-admitted insurance company is not eligible for California Insurance Guarantee Association benefits.

Diligent Search Report
When an insured accepts an insurance policy through a non-admitted insurer, they must sign and return the disclaimer notice required by the state called a Diligent Search Report that reads:

"The insurance policy that you are applying to purchase is being issued by an insurer that is not licensed by the state of California. These companies are called 'Non-Admitted' or 'Surplus Line' insurers.

"The insurer is not subject to the financial solvency regulation and enforcement which applies to California licensed insurers. The insurer does not participate in any of the insurance guarantee funds created by California law. Therefore these funds will not pay your claims or protect your assets if the insurer becomes insolvent and is unable to make payments as promised.

"California maintains a list of eligible surplus line insurers approved by the insurance commissioner. Ask your agent or broker if the insurer is on that list.
"For additional information about the insurer you should ask questions of your insurance agent, broker, or 'surplus line' broker or contact the California Department of Insurance at the following toll-free telephone number: 1-800-927-4357."

Domestic v. foreign v. alien
A "domestic" insurance company is one that is incorporated in its own home state (in this example, California). A "foreign" insurance company is one that is incorporated outside the home state. An "alien" carrier is one incorporated outside of the United States.

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Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course.