The information that follows is intended to guide association boards and managers as they decide what type of property insurance coverage is best for their association residents. There has been a recent, and potentially dangerous, trend for associations to select surplus lines, or unregulated, insurers to provide their coverage. Some insurance agents are illegally “poaching” polices from the admitted market into the surplus market.
Association Board members and property managers beware: placing your association policy in the surplus lines market is potentially very risky and may even involve violations of Florida’s insurance laws and can create liability exposure to association board members and/or managers.
There are two property insurance policies that cover condos:
The policy purchased by each owner (HO6) covers that owner’s unit “walls in”, and
coverage purchased by the association that primarily provides coverage for a condominium association’s building shell, which includes but is not necessarily limited to the building’s roofing systems, window and door openings and common elements throughout the association’s premises
Additional coverages include law and ordinance (coverage afforded for repairs to structures that are damaged and may need upgraded electrical; heating, ventilating, and air-conditioning (HVAC); and plumbing units based on city codes.), liability coverage, board of directors’ professional liability coverage and landscaping coverage. Florida law requires that producing agent may only write commercial residential insurance policies with Florida admitted insurance companies unless the insurance agent can document through a diligent effort that three admitted insurers authorized to transact and actually writing that kind and class of insurance in this state have declined to underwrite the risk. (To read 626.916, the Eligibility for Export Statute, in its entirety, click the following hyper-link: Florida’s Diligent Effort Statute.) The plain meaning and intent of this statute is that agents may not export policies into surplus markets unless there is no admitted market that will write the risk. This statute protects insurance consumers by keeping policies in the admitted or regulated market. At least 45 other states have the same or similar protections WHAT IS A SURPLUS LINES INSURER? According to a print piece produced in conjunction with the Florida Department of Financial Services (FDFS) and the Florida Surplus Lines Service Office (FSLSO), a surplus lines insurer is defined as:
An alternative type of insurance coverage for consumers who cannot get coverage in the standard or “admitted” market. Standard companies will not write policies for unusual, high-risk situations. This may include extremely old homes located in coastal areas, expensive boats and cars, day-care centers’ liability needs, or medical malpractice needs. The surplus lines market also provides coverage for very high risks, such as professional athletes who insure their bodies or consumers looking to insure the vacant home of a recently deceased relative until after probate or the legal processing of the will.
Surplus Lines insurers can tailor policies to meet specific hard to insure risk. Condo policies generally do not fall into this category;
Surplus Lines insurers have historically been very well capitalized and highly rated for financial strength, although admitted insurers are required to meet equal or higher financial standards;
Although Surplus Lines insurers usually have higher rates, due to their relaxed regulation requirement they may be able to provide a more competitive rate in the short-term
Surplus Lines insurers are not regulated by the Florida Office of Insurance Regulation (OIR) for their rates or policy coverages. They unilaterally can change rates and/or coverages at any time;
Surplus Lines insurers can cancel coverage midterm even during hurricane season potentially leaving an association without any coverage options for the remainder of the season;
Surplus Lines insurers do not participate with the Florida Insurance Guaranty Association that provides policyholders claim payment guarantees when a participating insurer becomes insolvent;
Association Board of Directors may be personally liable for negligence if a Surplus Lines carrier becomes insolvent or cancels their policy midterm during hurricane season affecting the association’s ability to obtain new insurance;
Surplus Lines carriers routinely stack coverage with multiple insurers, requiring associations to manage multiple claims processes and resolutions;
Some Surplus Lines insurers require claims disputes to be resolved through alternative dispute resolution formats out of state or even out of the country. Surplus Lines carriers typically invoke diversity of jurisdiction to move lawsuits out of state courts into federal courts.
Admitted insurers’ policy forms and rates are regulated by the Florida Office of Insurance Regulation.
Many admitted insurers have their corporate headquarters and claim operations within the state of Florida.
Admitted insurers are required to participate with the Florida Insurance Guaranty Association program to protect policyholders’ claims in the event the admitted insurer becomes insolvent.
Admitted insurers are required to participate with the Florida Hurricane Catastrophe Fund program which provides stability to the re-insurance marketplace and allows the admitted insurers to recoup hurricane losses.
Admitted insurers’ policyholders have access to claims help through the Florida Division of Consumer Services complaint portal and state sponsored mediation program.
Admitted insurers could be subject to OIR/DFS Emergency Orders regarding continuity of coverage after the loss; In 2004/2005 storms companies were required to continue to insure a risk until all damage repairs were made (barring unnecessary delays).
Admitted insurers must provide a 120 day notice of cancellation during hurricane season.
In the past the OIR/DFS also made a determination on the application of deductibles in multiple event scenarios within calendar year that inured to insured’s benefit. Not a guarantee but there is precedent if they elected to do so.
E&S would not be subject to OIR/DFS oversight regarding Emergency Orders.
Risk Factors – Considerations
$100,000 per unit FIGA limitation.
There may be a limited number of admitted insurers available to write the risk.
The risk may be located in an area (or areas) where admitted insurers have limited capacity to take on additional exposure.
Admitted insurers may only be willing to offer certain coverages.
Some admitted insurers may not be as well capitalized and highly rated for financial strength as their Surplus Lines counterpart.