5.2 Exceptions to the Diligent-Effort Rule: Exempt Commercial Purchasers, Industrial Insureds, Flood, TWIA, and Listed Commercial Lines

5.2 Exceptions to the Diligent-Effort Rule: Exempt Commercial Purchasers, Industrial Insureds, Flood, TWIA, and Listed Commercial Lines

Some states let brokers skip the admitted-market search for classes on a regulator-published "export list." Texas does not publish an export list. Every Texas exception is written into TIC § 981.004, and each has specific conditions. Memorize them as a set of five.

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1. Exempt Commercial Purchasers (TIC § 981.004(c))

The exempt commercial purchaser concept comes from the federal Nonadmitted and Reinsurance Reform Act and was added to Texas law in 2013.

Who Is an ECP (TIC § 981.0031)

At the time of placement, the purchaser of commercial insurance must:

1. Employ or retain a qualified risk manager to negotiate coverage;
2. Have paid more than $100,000 in aggregate nationwide commercial property and casualty premiums in the immediately preceding 12 months; and
3. Meet at least one of these:
   • Net worth of more than $20 million;
   • Annual revenue of more than $50 million;
   • More than 500 full-time or full-time-equivalent employees per individual insured, or membership in an affiliated group with more than 1,000 employees in aggregate;
   • A nonprofit organization or public entity with annual budgeted expenditures of at least $30 million; or
   • A municipality with a population of more than 50,000.

The net worth, revenue, and nonprofit-budget amounts are adjusted by commissioner order for inflation (CPI-U) effective January 1, 2015, and every fifth January 1 after that (§ 981.0031(b)). The figures above are the statutory base amounts.

Qualified Risk Manager (TIC § 981.0032)

A qualified risk manager is an employee of, or third-party consultant retained by, the commercial policyholder who provides skilled services in loss prevention, loss reduction, or risk and insurance coverage analysis and the purchase of insurance, and who meets one of four tests:

The Procedure

The exception applies only if:

1. The agent discloses to the ECP that (A) comparable insurance may be available from the admitted market, which is subject to more regulatory oversight than the surplus lines market, and (B) a policy purchased in the admitted market may provide greater protection than the surplus lines policy; and
2. After receiving that notice, the ECP requests in writing that the agent procure the insurance from an eligible surplus lines insurer.

Documentation (28 TAC § 15.111): The file must contain a copy of the written request and a signed statement from the insured identifying which provisions of § 981.0031(a)(3) and § 981.0032(3) apply to it (TIC § 981.215(a)(12)(A)).

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2. Industrial Insureds (TIC § 981.004(d))

Added by H.B. 1559 (2017) for policies delivered, issued, or renewed on or after January 1, 2018, this exception reaches mid-size commercial buyers.

Who Is an Industrial Insured (TIC § 981.0033)

At the time of placement, the purchaser of commercial insurance must:

1. Employ or retain a qualified risk manager; and
2. Either have paid more than $25,000 in aggregate nationwide commercial P&C premiums in the preceding 12 months or employ at least 25 full-time employees.

The Conditions

1. The same two-part disclosure required for ECPs;
2. The surplus lines company offering the coverage has an A.M. Best financial strength rating of A- or better; and
3. After the notice, the industrial insured requests in writing that the agent procure the insurance from an eligible surplus lines insurer.

Documentation (28 TAC § 15.112): evidence of compliance with the rating and written-request conditions, plus a signed statement from the insured identifying which provisions of § 981.0032(3) and § 981.0033(2) apply.

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3. Surplus Lines Flood Coverage (TIC § 981.004(e))

The diligent-effort rule and the excess-only rule do not apply to flood coverage under a policy issued by an eligible surplus lines insurer with an A.M. Best rating of A- or better. A Texas surplus lines agent may place private flood coverage without first shopping the admitted market or the NFIP, as long as the insurer has that rating.

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4. The TWIA Rule (TIC § 981.004(f))

Notwithstanding the diligent-effort rule, the availability of windstorm and hail insurance from the Texas Windstorm Insurance Association does not preclude an eligible surplus lines insurer from providing windstorm and hail coverage, and it does not limit the amount the surplus lines insurer may provide.

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5. Listed Commercial Lines (TIC § 981.004(g), S.B. 1367, 2021)

For policies delivered, issued, or renewed on or after September 1, 2021, the diligent-effort and excess-only rules do not apply to the commercial lines listed in TIC §§ 2251.0031(a) and 2301.0031(a), or exempted under subsection (c) of those sections. The Stamping Office summarizes the list as:

The catch: The exception does not apply to a line for which the commissioner has temporarily reinstated rate and form filing requirements under § 2251.0031(d) or § 2301.0031(d).

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6. What an Exception Does Not Waive

An exception waives only the admitted-market search and the excess-only limit. The placement must still:

• Be made through a licensed Texas surplus lines agent with an eligible surplus lines insurer;
• Carry the § 981.101(b) notice and other required contents;
• Be filed with SLTX within 60 days, with the stamping fee paid;
• Be taxed at 4.85%; and
• Be supported by the required documentation in the contract file (ECP and industrial-insured evidence under § 981.215(a)(12) and 28 TAC §§ 15.110-.112).