5.2 Hawaii Insurer Definitions: Domestic, Foreign & Alien; Stock, Mutual & Reciprocal; Certificate of Authority; Unauthorized Insurers

5.2 Hawaii Insurer Definitions: Domestic, Foreign & Alien; Stock, Mutual & Reciprocal; Certificate of Authority; Unauthorized Insurers

Outline item IV.B lists five definition topics that appear on both the producer and adjuster exams: authorized and unauthorized insurers (HRS §§ 431:8-102 to 204), domestic, foreign and alien insurers (§§ 431:3-101, 104, 105), stock, reciprocal and mutual insurers (§§ 431:3-106, 108, 110), the certificate of authority (§§ 431:3-201 to 206), and insurance itself (§§ 431:1-201 to 216). An adjuster's first coverage question — "Who issued this policy, and was it allowed to?" — depends on them.

Insurers by Place of Formation

The distinction matters for regulation: domestic insurers must be examined at least every five years (5.1), and foreign and alien insurers must appoint the commissioner to receive legal process (§ 431:2-205).

Insurers by Ownership Structure

• Stock insurer (§ 431:3-110) — an incorporated insurer with capital stock divided into shares and owned by stockholders, to whom earnings are distributed as dividends on their shares.
• Mutual insurer (§ 431:3-106) — an incorporated insurer without capital stock, whose governing body is elected by its policyholders. The policyholders own the insurer and are called members.
• Reciprocal insurer (§ 431:3-108) — an unincorporated aggregation of subscribers that exchange insurance among themselves through an attorney-in-fact common to all of them. A reciprocal may not write life or accident and health insurance (§ 431:3-204(2)).

Other insurer organizations include Lloyd's associations (individual underwriters accepting risk), risk retention groups, and captive insurers; Hawaii has an active captive program regulated by the Captive Insurance Branch.

The Certificate of Authority

No person may act as an insurer, and no insurer may transact insurance business in Hawaii, except as authorized by a certificate of authority granted by the commissioner, unless the code expressly provides otherwise (§ 431:3-201(a)). The certificate lists the insurer's name and the classes of insurance it may write (or, for a reciprocal, its attorney-in-fact) (§ 431:3-201(c)).

To qualify (§ 431:3-203), an insurer must:

• be a stock, mutual or reciprocal insurer of a type that could be formed as a domestic insurer (or one of the listed association types);
• hold the capital funds the code requires for its type, domicile and classes;
• write only insurance authorized by its charter that meets the code's standards; and
• comply fully with the code.

Foreign and alien insurers must also have transacted insurance continuously, actively and successfully for at least five years before qualifying, with an exception for reorganizations under substantially the same management (§ 431:3-203(b)). New insurers deposit minimum paid-up capital or surplus in a Hawaii federally insured financial institution — for example, $750,000 for property, $1,000,000 for vehicle or marine and transportation, and $1,500,000 for general casualty (§ 431:3-205, Schedule A).

What "Insurance" Means and Its Classes

Insurance is a contract by which one undertakes to indemnify another or pay a specified amount upon determinable contingencies (§ 431:1-201). The code then defines the classes an insurer can be authorized to write (§§ 431:1-204 to 1-211). The classes most relevant to adjusters are:

• Property insurance (§ 431:1-206) — insurance against loss of or damage to real or personal property of every kind, from any hazard, and against consequential loss from that damage.
• Marine and transportation insurance (§ 431:1-207) — vessels, cargo and goods in transit, marine builder's risks, personal property floaters, precious stones and jewelry whether or not in transit, bridges, tunnels and other instrumentalities of transportation, and marine protection and indemnity (see 2.6 and 7.1).
• Vehicle insurance (§ 431:1-208) and general casualty insurance (§ 431:1-209) — including liability, workers' compensation, burglary and theft, glass, boiler and machinery, elevator, sprinkler leakage, credit, livestock, collision, and malpractice.
• Surety insurance — bonds guaranteeing performance or honesty (3.7).

Authorized and Unauthorized Insurers

An authorized (admitted) insurer holds a Hawaii certificate of authority. An unauthorized (non-admitted) insurer does not. It is unlawful for an insurer to transact insurance in Hawaii without a certificate of authority, except for listed situations (§ 431:8-201), such as:

• lawful surplus lines insurance;
• reinsurance between insurers;
• policies lawfully written and delivered outside Hawaii covering subjects not located in Hawaii when issued;
• attorneys adjusting claims in the ordinary attorney-client relationship;
• certain group policies issued in other states;
• ocean marine insurance; and
• multistate property and casualty risks placed by a producer licensed in the insured's home state.

Why This Matters to an Adjuster

Two provisions apply directly to claims work:

1. Adjusting for an unauthorized insurer is transacting insurance. The investigation and adjustment of claims in Hawaii under contracts issued by an unauthorized insurer is deemed the transaction of insurance in Hawaii. Exceptions are surplus lines insurance issued under § 431:8-301 and isolated or nonrecurring transactions (§ 431:3-201(b)).
2. Aiding an unauthorized insurer is prohibited. No person may act as producer for, or otherwise represent or aid, an unauthorized insurer in soliciting, procuring or effectuating insurance, inspecting risks, fixing rates, investigating or adjusting claims or losses, or collecting premiums (§ 431:8-202).

A contract effectuated by an unauthorized insurer in violation of the article is voidable except at the instance of the insurer. The insured can enforce it, but the insurer cannot escape it (§ 431:8-203). If the unauthorized insurer fails to pay a claim, any person who helped procure the contract and knew or should have known the transaction was illegal is liable to the insured for the full amount of the claim (§ 431:8-204).

Surplus Lines Insurance

Surplus lines insurance is lawful coverage placed with an unauthorized insurer when admitted insurers will not write it. Under § 431:8-301, insurance may be procured from an unauthorized insurer only if:

1. it is procured through a surplus lines broker licensed in the insured's home state;
2. the full amount or kind of insurance cannot be obtained from authorized insurers, after a diligent search among authorized insurers actually writing that kind and class of insurance in Hawaii, each time the insurance is placed or renewed;
3. the surplus lines coverage is in addition to or in excess of what authorized insurers will provide; and
4. it is not procured at a rate lower than the lowest rate generally acceptable to authorized insurers for substantially the same protection.

The diligent search is not required for an exempt commercial purchaser that has been told the coverage may be available in the admitted market and has asked the broker in writing to use an unauthorized insurer (§ 431:8-301(b)).

Surplus lines policies are not covered by the Hawaii Insurance Guaranty Association if the insurer becomes insolvent, because HIGA protects only claims under policies of insurers licensed in Hawaii (5.6). After Hawaiʻi Island's lava flows, federal court decisions allowed homeowners to pursue claims against surplus lines brokers and underwriters who sold policies with lava exclusions without a diligent search that would have revealed HPIA coverage (see the case notes to § 431:8-301 and 7.2).