Non-Resident Licensing Requirements

The issue of non-resident testing for a Washington Surplus Line Broker's license has been an issue for a number of years. Washington along with Florida are the only states that require non-resident testing for surplus line broker's license. This licensing approach creates issues with Gramm-Leach-Bliley and NAIC Model laws in areas of reciprocity.

For a number of years Oregon has placed restrictions on Washington surplus line brokers trying to obtain a non-resident license. Here is an email from the Oregon licensing division that was received by one of our brokers:

"Surplus Lines applicants must be licensed for property and casualty and take a surplus lines exam. Oregon is accepting producer applications for surplus lines licensing from all states, except Washington. We apologize for any inconvenience to Washington producers, but must note that Washington is the only state in the country that imposes a second examination requirement on surplus lines producers who are licensed as resident producers in Oregon and already have passed an examination in Oregon. We are attempting to work out a solution to this situation that is mutually beneficial to Oregon and Washington."

It is our understanding that other states are considering this type of action. As you will see from an excerpt of a letter received from Linda Hall, Director of Alaska's Department of Commerce, Alaska is putting pressure on Washington to revise the testing approach.

Excerpt:

Although we have had numerous informal conversations over the past several years, I am writing today to request that the Office of Insurance Commissioner in Washington make changes in the licensing of non-resident surplus lines brokers. Today Alaska freely licenses non-resident surplus lines brokers as long as the broker is licensed in the resident state. Washington, however, does not similarly reciprocate. Washington continues to require in-state testing, a bond, fingerprinting and ten years experience for non-resident applicants.

I would urge you to meet the federal provisions of Gramm-Leach-Bliley that require reciprocity and allow a non-resident producer seeking licensure in your state to obtain a license without imposing additional requirements.

The position taken by the Office of the Insurance Commissioner on this matter has created an inequity for Alaska licensees seeking to obtain a non-resident surplus lines broker license in Washington. Washington surplus lines brokers are granted non-resident licenses in Alaska but Alaska surplus lines brokers are severely hampered. I will expect some action on this matter by July 1, 2008 or I will find it necessary to restrict any new surplus lines brokers licenses for Washington resident licensees.

The Association feels it is important to maintain non-resident testing. Washington has a unique set of regulations that need specific review. The test ensures that individuals know and understand these regulations along with demonstrating they have a certain level of proficiency in surplus lines. Most states have minimal testing requirements.

The surplus line broker doing business in Washington has enjoyed a long history of meeting unique market needs with a high degree of professionalism and ethical behavior. By removing the testing requirement for a certain producer segment, the skill and practice of surplus line brokering will certainly deteriorate. Ultimately it comes down to the consumer and with relaxed standards the quality is expected to decline.

The commissioner's office is looking closely at this matter and is indicating a desire to drop the non-resident testing requirement. The issue is a difficult one. Drop the testing and quality may drop, however, maintaining the status quo creates other business and political issues. One thing is certain, there is more and more pressure to follow other states reciprocity in licensing.

What are your thoughts?

Technical corrections proposed legislation

Please find copies of our recent emails sent to the OIC regarding the technical bill and the issue of RCW 48.15 vs. RCW 48.17.

Please review and provide your feedback.

Thank you,

Al Dorow, Manager

Surplus Line Association of Washington

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EMAIL TO JOHN HAMJE (OFFICE OF THE INSURANCE COMMISSIONER)

johnha@oic.wa.gov

Dear John:

Thank you for taking the time to meet with us and discuss the technical corrections proposed legislation. To restate some of our thinking:

1. The chapter on surplus line brokers, in particular RCW 48.15.080 should reference that business may only be accepted from licensed producers. Closely related is the position of the association that all surplus line brokers must be licensed as producers as well as being licensed as surplus line brokers. See WAC 284-15-010(2)(a). While we recognize that this may not be true of a very small number of individuals, we believe they are either no longer practicing brokerage and/or can be grandfathered. We emphasize that the surplus line brokerage function is that of a surplus line intermediary representing (see RCW 48.15.020(2)(a)) the surplus line carrier and is thus essentially a wholesaler function. (When surplus line brokers deal directly with insureds they are acting under their producer license and are responsible to comply with requirements of that license. This viewpoint and position is key to the specific points that follow.

2. It has never been our or our client’s understanding that all references to brokers in 48.17 automatically include surplus line brokers. We do not believe this is a supportable interpretation of the law. See attachment. It now appears that the difference between the Association’s view and that of the OIC is currently a relatively moot point because 48.17 going forward will be applicable to “producers” which expressly does not include surplus line brokers. Accordingly, it will be necessary to assess which provisions of 48.17 should be applicable to surplus line brokers.

3. We agree that the following RCW Ch. 48.17 provisions logically should apply to surplus line brokers.

.180 Assumed names
.450 Place of business
.460 Display license
.475 Reply to OIC inquiries (also partially redundant)
.480 Account for funds
.600 Account for funds
.XXX Report out of state regulatory actions
Service on SLB via commissioner

Our client also agrees that references to surplus line brokers in the proposed “Technical Correction” statute are appropriate in the following Insurance Code chapters.

48.31 Insolvency jurisdiction, funds
48.43 Comparison immunity
48.50 Immunity for release of info to OIC

However, we believe the above applicability provisions can and should conveniently and efficiently be done by stating the applicability of these sections in Chapter 48.15 which should continue as the statement of legal obligations of surplus line brokers. As we mentioned, we believe this promotes the clarity in the code and allows a surplus line broker to focus on this chapter to understand that licensee’s responsibilities.

4. We believe that the following references govern the retail activities i.e., those in which the intermediary “deals directly” with the insured and thus should be applicable to surplus line brokers only under their producer’s license (which as we have noted all surplus line brokers must have – at least on a going forward basis).

48.05 - RBC reference in marketing
48.30 - Specific Retail Practices – e.g., inducements
48.56 - Premium Finance
48.62 - Government Self Ins.
48.92 - RPG marketing

It is our Association’s emphasis that these govern the dealings with insureds and therefore governs the activities of producers with whom the surplus line broker deals. To the extent that the surplus line broker is also acting as a producer, these provisions will apply to that person or entity under their producer’s license. As mentioned, if it is desired to have an explicit reference prohibiting a surplus line broker from assisting a producer in violating producer regulations, we are not opposed in principle to having such a reference. We believe that this is already the law explicitly as to surplus line brokers in RCW 48.17.530(1)(b) which allows license revocation for “surplus line brokers” specifically if they “knowingly participate” in violation of the code.

5. As discussed, we have no difficulty with the provisions proposed for 48.17.150 as to continuing education (so long as it is understood that it is not the intention to increase the number of hours by reason of holding both a producer and surplus line license). We also do not oppose in concept the disclosure regulations under 48.17.270 with the proviso (which we understand the OIC agrees with) that the surplus line broker also acting as a producer would be required to make full disclosure to clients if a fee is charged, including disclosure of surplus line commissions, while a surplus line broker only acting as such through another licensed producer would not be required to disclose surplus line brokerage commissions, even where fees are charged, if the surplus line broker does not “deal directly” with the consumer. However, we would emphasize that these provisions should be included in 48.15, not in RCW 48.17 for reasons of clarity and good code organization and to avoid any inference that RCW Ch. 48.17 automatically applies to RCW Ch. 48.15 licensees. See attachment.

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The Surplus Line Association of Washington does not feel 48.17 is the appropriate section of the code to regulate Surplus Lines Brokers. We feel it is appropriate to use 48.15 for Surplus Lines Regulations. This approach is in keeping with our view of the past structure and keeps regulations in a defined area.

Here is our position as presented by email to the OIC:

RCW CH. 48.17 “BROKERS” DOES NOT INCLUDE

RCW CH. 48.15 “SURPLUS LINE BROKERS”

The stated position of the OIC that the use of the word “broker” in RCW Chapter 48.15 subjects the licensee’s under RCW 48.15 to all provisions of RCW Chapter 48.17 is not well taken for at least the following reasons:

1. 
   
   There is no published case law authority for such position and to our knowledge the OIC has not published any such position prior to consideration of the “Technical Corrections” legislation. In short, there is no authority for such proposition.



2. Various provisions of the code are clearly inconsistent with any such intent on the part of code drafters. For example:
   

• If RCW Chapter 48.17 were automatically applicable to all surplus line brokers simply by use of the word “broker” there would be no need for any explicit inclusion of RCW Chapter 48.15 licensees in any provisions of RCW Chapter 48.17. Accordingly, the provisions of RCW Chapter 48.15.140 (1)(c) would have been unnecessary. That portion of RCW Chapter 48.15 provides that the commissioner may revoke surplus line licenses “for any of the causes for which a broker’s license may be revoked under Chapter 48.17. RCW.” It is contrary to sound interpretation practices to interpret any provision of the code as being unnecessary or redundant. Any claimed “automatic” application of RCW 48.17 to surplus line brokers would make this provision redundant. RCW 48.15.140(1)(c) directly undermines the OIC position.



• Additionally and importantly, the only portion of 48.17 that is invoked by 48.15.140(1)(c) is the portion of 48.17 that refers to “causes for which a broker’s license may be revoked.” This is simply and only a reference to RCW 48.17.530 on “refusal, suspension, revocation of licenses”. 48.17.530 explicitly states that the Commissioner may . . . revoke . . . any license which is issued or may be issued under this Chapter or any surplus line broker’s license for any cause specified in any other provision of this code or for any of the following causes: . . . .” Thus RCW Chapter 48.17.530 by explicitly including surplus line brokers in this section makes clear that without such explicit inclusion the revocation provisions, they would not apply to surplus line brokers. It can not plausibly be argued that RCW 48.17 automatically includes all surplus lines brokers. There would be no reason to reference surplus line brokers in RCW 48.17.530 or RCW 48.15.140 if their inclusion was automatic under RCW Chapter 48.17.



• Most fundamentally, the definition of a “broker” in RCW 48.17.020 is inconsistent with the OIC position. A broker is defined as a person who “on behalf of the insured” solicits, negotiates or procures insurance. Under RCW 48.15 the prohibition on acting as a surplus line broker without a surplus line broker license states that “a person may not, in this state, represent an unauthorized insurer, except as provided in this chapter. “It is clear by comparing these two provision that a “broker” as used in RCW Chapter 48.17 means someone who represents the insured whereas a surplus line broker means someone who “represents an unauthorized insurer”. While an individual licensee may hold (and often does hold) both licenses, in representing an insured the licensee is acting as a licensee under RCW 48.17 whereas in “representing” a surplus line insurer the licensee is acting under RCW 48.15. The code is clear that the fundamental functions of a RCW 48.17 broker and a RCW 48.15 surplus line broker are very different and explicitly so in the provisions of the code.

The Association concludes that any attempt to equate an RCW 48.17 “broker” who represents the insured with an RCW 48.15 surplus line broker who represents the surplus line insurer would in no way be construed as simply a “Technical Correction”. Any such attempt to equate the two would be a significant attempt to substantively change the law.

The distinction between agents and brokers (“producers” under the proposed statute) and a surplus line broker (which the proposed statute explicitly excludes from the “producer” category) has been and we hope will remain clear in the future.