6.2 Statutory Definitions: Surplus Lines Insurance, the Business of Insurance, Authorized vs. Unauthorized Insurers, MGAs, Purchasing Groups, and Risk Retention Groups

6.2 Statutory Definitions: Surplus Lines Insurance, the Business of Insurance, Authorized vs. Unauthorized Insurers, MGAs, Purchasing Groups, and Risk Retention Groups

The "Definitions" part of the Texas statutes block lists six terms: surplus lines insurance, managing general agent, insurance transaction, authorized/unauthorized and admitted/non-admitted, purchasing groups, and risk retention. Exam questions often turn on the precise definition, so learn the statutory wording.

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1. Chapter 981 Definitions (TIC § 981.002)

Chapter 981 applies to surplus lines insurance when Texas is the insured's home state (TIC § 981.003). The exempt commercial purchaser, qualified risk manager, and industrial insured definitions (§§ 981.0031-.0033) are covered in Section 5.2.

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2. The Business of Insurance ("Insurance Transaction")

TIC § 101.051 lists the acts in Texas that constitute the business of insurance, including:

• Making or proposing to make an insurance contract as an insurer;
• Taking or receiving an insurance application;
• Receiving or collecting any consideration for insurance: premium, commission, membership fee, assessment, or dues;
• Issuing or delivering an insurance contract to a Texas resident or to a person authorized to do business in Texas; and
• Directly or indirectly acting for or assisting an insurer in soliciting, negotiating, procuring, or effectuating insurance, disseminating coverage or rate information, forwarding applications, delivering policies, inspecting risks, setting rates, investigating or adjusting claims, or handling post-sale transactions.

An act in Texas by an unlicensed or unauthorized person that affects a person in another state is still the business of insurance in Texas (§ 101.051(c)).

Which Surplus Lines Activities Require a Surplus Lines License? (28 TAC § 15.101)

Agency profits may still be distributed to unlicensed shareholders, partners, and employees (§ 15.101(c)).

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3. Authorized vs. Unauthorized; Admitted vs. Non-Admitted

• An authorized (admitted) insurer holds a certificate of authority, which authorizes it to engage in the business of insurance and states the specific kinds of insurance it may write (TIC § 801.052).
• An unauthorized (non-admitted) insurer has no Texas certificate of authority. A person, including an insurer, may not directly or indirectly do any act of insurance business except as authorized by statute (TIC § 101.102).

Statutory Exceptions (TIC § 101.053(b))

The unauthorized-insurance prohibition does not apply to, among others:

1. Lawful surplus lines insurance under Chapter 981;
2. Lawful reinsurance between insurers;
3. A policy lawfully solicited, written, and delivered outside Texas covering only non-Texas subjects when issued;
4. Independently procured insurance, meaning coverage the insured negotiates directly with an unauthorized insurer entirely outside Texas that is reported and taxed under Chapter 226;
5. Certain group life, health, and annuity coverage; and
6. A nonadmitted captive insurer insuring only its parent's and affiliates' risks or their directors and officers.

Consequences of Unauthorized Insurance

• Anyone who helped procure an unauthorized contract is liable to the insured for unpaid claims (TIC § 101.201). The liability does not apply to licensed surplus lines agents placing with eligible insurers or to properly reported independently procured coverage.
• A person investigating or adjusting a Texas loss must immediately report to TDI any policy issued by an unauthorized insurer. Surplus lines and independently procured coverage are excepted (TIC § 101.301).

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4. Managing General Agent

A managing general agent has supervisory responsibility for an insurer's local agency and field operations in Texas, or is authorized by the insurer to accept or process policies produced and sold by other agents (TIC § 4053.001). A surplus lines agent is not an MGA unless it accepts 50% or more of its business, or $500,000 or more of premium, whichever is less, from other agents' production (TIC § 4053.002). Section 3.2 covers MGA contract, reporting, and escrow duties.

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5. Purchasing Groups

Purchasing groups exist under the federal Liability Risk Retention Act of 1986 and TIC Chapter 2201.

• Definition (TIC § 2201.251; 28 TAC § 15.115(a)): A group that (1) has as one of its purposes the purchase of liability insurance on a group basis; (2) is composed of members whose businesses or activities are similar or related with respect to their liability exposure; (3) buys liability insurance only for its members and only for that similar or related exposure; and (4) may be domiciled in any state.
• Location: The state with the highest aggregate premiums in force when the group policy is written or renewed (TIC § 2201.252).
• Notice and registration: Before doing business in Texas, a purchasing group must notify the commissioner, with a filing fee of up to $100 (TIC § 2201.255), and register with and designate the commissioner as its agent for service of process (TIC § 2201.256).
• Surplus lines placements: A purchasing group located in Texas may buy from an insurer without a Texas certificate of authority, or from a risk retention group not chartered in a state, only through a licensed agent acting under Chapter 981 (TIC § 2201.253).
• Surplus lines agent duties (28 TAC § 15.115):
  • File the Chapter 981 filings and pay stamping fees directly to the Stamping Office;
  • Stamp or write "Purchasing Group" conspicuously on every policy, contract, or evidence of coverage issued to the group or its members; and
  • Not sell to a purchasing group that is not registered with TDI. Registration can be verified on TDI's website.

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6. Risk Retention Groups

• Definition (TIC § 2201.051): A corporation or other limited liability association organized primarily to assume and spread all or part of the liability exposure of its members. The name must include "risk retention group" (§ 2201.052).
• Charter: An RRG chartered in Texas must be chartered and authorized as an insurer under the applicable Texas company chapters (TIC § 2201.101).
• Non-Texas RRGs: Before offering insurance in Texas, an RRG chartered elsewhere must file its charter and membership information and its plan of operation, and designate the commissioner as its agent for service of process (TIC §§ 2201.152, 804.104). It must then provide annual financial statements certified by an independent public accountant with a loss-reserve opinion, plus examination reports (TIC § 2201.153).
• Agent verification: Before placing business with an RRG, an agent must obtain a certified copy of the RRG's certificate of authority from its domiciliary regulator (TIC § 2201.203).