Florida Surplus Lines Law Update

By Jennifer C. Erdelyi, Associate
Colodny Fass

 

Colodny Fass has been monitoring important federal and state litigation that has modified the interpretation of surplus lines regulation in Florida. 

Two recent cases, Essex v. Zota, currently pending in the U.S. District Court for the Southern District of Florida, and CNL Hotels & Resorts, Inc. v. Twin City Fire Insurance Co., in the U.S. District Court for the Middle District of Florida, have changed the landscape of Florida surplus lines regulation, and have spurred proposed legislation in the current Florida Legislative Session.

A ruling in Zota, by the Supreme Court of Florida responding to certified questions posed to the Court by the U.S. Court of Appeals for the Eleventh Circuit, and a decision by the Eleventh Circuit in CNL Hotels, have resulted, in essence, in requiring that surplus lines policy forms must now be filed, reviewed, and approved by the Florida Office of Insurance Regulation (“OIR”), pursuant to the provisions of Part II of Chapter 627, Florida Statutes, which has never before been a requirement.  From a regulatory standpoint, the OIR is not currently requiring surplus lines insurers to submit form filings.  In fact, the OIR has provided amicus briefs and affidavits in pending cases, stating that the form filings required of admitted insurers have never been required of surplus lines carriers. 

During this current Florida legislative session, Senator Mike Bennett introduced SB 1894, a bill that is considered the “legislative fix” to these judicial decisions.  As originally introduced, the bill specified the non-application of Chapter 627, Florida Statutes to surplus lines insurers, and provided for retroactive application of the bill’s provisions.  An amendment that was unfriendly to the insurance industry, was proposed by Senator Jeremy Ring and was passed by the Senate Committee on Banking and Insurance.  If it had moved forward, this Amendment would have subjected surplus lines insurers to numerous additional statutory provisions, required additional consumer protection disclosures, and removed the retroactive application of the bill’s provisions. 

On April 1st, the Senate Judiciary Committee passed a Committee Substitute sponsored by Senator Mike Fasano that reinstates the original bill language regarding the non-application of Chapter 627 to surplus lines insurers, and specifies the retroactive application of that portion of the bill.  This substitute bill did not contain the Amendment previously proposed by Senator Ring.  However, this bill does retain the former Amendment’s consumer protection disclosure requirements, and provides for an award of attorney’s fees upon a judgment in favor of an insured, among other provisions.  This Committee Substitute for SB 1894 was approved yesterday, April 20th, by the Senate Committee on Finance and Tax, by a vote of 3 to 2.  Two amendments, considered to be friendly to the Trial Bar, were filed by Senator Ring, but were withdrawn.  An additional amendment by Senator Charlie Justice was also withdrawn.  A technical amendment offered by Senator Bennett was adopted as well.  This bill has also been referred to the Senate General Government Appropriations Committee and the Senate Policy and Steering Committee on Ways and Means.

A companion bill in the House was sponsored by Representative Pat Patterson, Chair of the House Insurance, Business & Financial Affairs Policy Committee.  House Bill 853 contains language, similar to Senator Bennett’s original SB 1894, providing that Chapter 627 does not apply to surplus lines insurers unless specifically stated, and providing for retroactive application.  This bill passed the Insurance, Business & Financial Affairs Policy Committee with no Amendments, on March 17th.  HB 853 was considered by the House General Government Policy Council yesterday.  Representative Patterson offered a “strike everything” amendment that would require surplus lines insurers to make various disclosures regarding surplus lines policies issued, in addition to maintaining the provision specifying that Chapter 627 does not apply to surplus lines insurers.  Representative Patterson’s amendment was adopted by a vote of 13 to 2.  Two amendments considered to be friendly to the Trial Bar were offered by Representative Rick Kriseman, and were defeated after extensive debate.  The first of these amendments would have subjected surplus lines insurers to a variety of requirements contained in Chapter 627, and the other amendment would have removed the bill’s existing retroactive provision.  This bill now proceeds to the House Floor for consideration.

These bills are subject to considerable lobbying efforts by the trial lawyers, the insurance industry, and business associations.  The Florida Legislature’s Regular Session runs through May 1st, so it is difficult to predict what may transpire with regard to the bills, particularly in light of the strong lobbying activity occurring at the House and Senate leadership level. 

While these bills wind their way through the legislature, there has been additional recent activity in the Essex v. Zota litigation, at the trial court level.  An Order was issued in Zota, No. 04-60619-CIV, 2009 WL 959917 (S.D. Fla. April 9, 2009), granting in part Plaintiff’s Motion for Summary Judgment and granting in part Defendants’ Motion for Summary Judgment, as discussed and summarized below. 

In deciding this Zota Order, the Court considered the currently proposed Florida state legislation mentioned above, that would explicitly exclude surplus lines carriers from the requirements of Chapter 627, Florida Statutes.  The submitted Affidavits of Steven Parton, General Counsel for the Florida Office of Insurance Regulation (“OIR”), and Gary Pullen, Executive Director of the Surplus Lines Service Office (“SLSO”) were also addressed by the Court.  Messrs. Parton and Pullen asserted that the filing requirements of S. 627.410, (at issue here), have never been imposed upon surplus lines insurers, and that the OIR does not intend to require compliance, even after the earlier decision by the Supreme Court of Florida in this case. 

While recognizing the current legislative intent to exclude surplus lines, the Court commented that the proposed legislation does not impact this matter that is currently before the court.  Further, the argument that there was no prior legislative intent for S. 627.410 to apply to surplus lines insurers was rejected by the Eleventh Circuit in CNL Hotels, 291 F. App’x 220 (11th Cir. 2008).  The Court also rejected the argument that S. 626.923, which requires surplus lines insurers to submit copies of policy forms when requested by the OIR or SLSO, provides an exception to the filing requirements of S. 627.410.  Instead, the Court found that surplus lines insurers are subject to both of these sections’ provisions.  Accordingly, the Court held that S. 627.410 was applicable here, and that Essex did not comply with its filing requirements. 

The Court then turned to the determination of the consequences of Essex’s noncompliance, in the absence of an express penalty in the statute.  The Court cited CNL Hotels as another case holding that S. 627.410 applies to surplus lines insurers.  In its decision, the Eleventh Circuit remanded the case to the district court to determine whether the endorsement at issue was void because it was not filed with the OIR.  Subsequent to the Eleventh Circuit’s remand, the parties in CNL Hotels reached an agreement to settle the matter, and the case was dismissed on October 23, 2008.  In its remand decision, the Eleventh Circuit had cited American Mutual Fire Insurance Co. v. Illingworth, 213 So. 2d 747 (Fla. 2d DCA 1968), a case that held because an endorsement form was not approved by the Insurance Commissioner, the endorsement must be rendered void. 

However, in deciding this Zota Order, the Court found that the Florida Supreme Court holding in AIU Insurance Co. v. Block Marina Investment, Inc., 544 So. 2d 998 (Fla. 1989), was more applicable.  While Block Marina did not involve surplus lines insurers, its result is “that a technical statutory requirement should not be utilized to create coverage where coverage would not normally be found pursuant to the policy.”  In this Zota decision, the Court agreed with Essex that Block Marina‘s premise applies, as the voiding of the endorsement at issue would broaden the terms of the insurance contract as originally bargained for.

The District Court ruled in this Zota Order that rescission of the entire policy is “a harsh remedy utilized only when there has been fraud, accident, or mistake,” and therefore not the proper solution here.  Ultimately, the Court determined that voiding only the endorsement at issue would “raise grave constitutional concerns,” and therefore held that both the policy and endorsement provisions are valid, despite the noncompliance by Essex of the filing requirements required by S. 627.410.  The Court went on to hold that factual issues needed to be decided regarding the applicability of the endorsement to the particular loss in this case, and set a trial date of May 25, 2009.

 

Colodny Fass is actively monitoring both this litigation and the proposed legislation affecting the regulation in Florida of surplus lines insurers, and will continue to update clients on their progression.  Please do not hesitate to contact our office should you require further assistance.

 

This information is intended to provide a general overview of the issues contained herein and is not intended nor should it be construed to provide specific legal or regulatory guidance or advice.  If you have any questions or issues of a specific nature you should consult with appropriate legal or regulatory counsel to review the specific circumstances involved.

 

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