Property and Casualty Insurance · Texas statutes and rules pertinent to property and casualty insurance · 8 min read
Surplus lines, rate and form approval and homeowners cancellation rules
- Identify the rules governing surplus lines insurance eligibility, home state determinations, insurer financial requirements, and agent licensing standards under Texas law.
- Distinguish between exempt commercial purchasers, industrial insureds, and special coverage carve-outs regarding the diligent effort requirement.
- Explain Texas statutory requirements for policy cancellations, nonrenewals, conditional renewals, and form change notices for homeowners and other property lines under Texas Insurance Code Subchapter C.
Surplus Lines Insurance Fundamentals and Home State Rules
Surplus lines insurance transactions entered into by Texas residents through surplus lines agents are matters of public interest due to difficulty obtaining coverage from authorized insurers (Tex. Ins. Code §981.001(a)). Texas Insurance Code Chapter 981 applies to surplus lines insurance if the home state of the insured is Texas (Tex. Ins. Code §981.003). When you work with surplus lines placements, you must first confirm the insured entity's home state to determine whether Texas regulation applies.
An individual insured's home state is the state where the individual maintains their principal residence (Tex. Ins. Code §981.002(5)(A)). A principal residence is defined as the state where an individual resides for the greatest number of days during a calendar year (28 TAC §15.3(2)). A non-individual insured's home state is the state where the insured maintains its principal place of business (Tex. Ins. Code §981.002(5)(B)). A principal place of business is generally the main headquarters from which officers direct, control, and coordinate activities (28 TAC §15.3(1)). If 100 percent of the insured risk is located outside the principal residence or principal place of business, the home state is the state to which the greatest percentage of taxable premium is allocated (Tex. Ins. Code §981.002(5)(C)).
For an affiliated group, the home state is that of the member with the largest percentage of premium attributed under the contract (Tex. Ins. Code §981.002(5)(D)). For determining whether an entity is an insured's affiliate when establishing the insured's home state, control includes holding the power to vote at least 25 percent of any class of the other entity's voting securities or controlling the election of a majority of its directors or trustees (Tex. Ins. Code §981.002(3)). For example, if Carlos owns a Texas-based parent company that exercises 30 percent voting control over an affiliate operating across three other states, the affiliate relationship exists under Texas law, and the home state is determined by whichever group member holds the largest percentage of premium.
A managing underwriter exercises underwriting authority pursuant to a written agreement with an eligible surplus lines insurer and derives its business from a surplus lines agent (Tex. Ins. Code §981.002(6)). The stamping office refers specifically to the Surplus Lines Stamping Office of Texas (Tex. Ins. Code §981.002(7)).
Common mistakes
- Assuming that homeowners policies have the same unrestricted 90-day cancellation window as other non-auto property policies, when homeowners policies are actually subject to a 60-day window with strict condition restrictions (Tex. Ins. Code §551.104(g)).
- Believing that an insurer who fails to give the required 60-day nonrenewal notice must keep the policy in force even when the customer has already purchased a replacement policy with another company (Tex. Ins. Code §551.105).
- Confusing the qualification thresholds of an exempt commercial purchaser ($100,000 premium) with those of an industrial insured ($25,000 premium or 25 full-time employees) (Tex. Ins. Code §§981.0031(a), 981.0033).
- Assuming the Texas Windstorm Insurance Association (TWIA) availability blocks a consumer from obtaining surplus lines wind and hail coverage (Tex. Ins. Code §981.004(f)).
Key points
- Surplus lines transactions are subject to Texas Insurance Code Chapter 981 whenever Texas is the insured's home state (Tex. Ins. Code §981.003).
- Eligible surplus lines insurers must maintain at least $15 million in capital and surplus, unless they are alien insurers listed with the NAIC International Insurers Department (Tex. Ins. Code §981.057).
- The diligent-effort requirement, but not the excess-coverage limit, is waived for qualifying exempt commercial purchasers and industrial insureds who receive the required disclosures and then request placement in writing; the industrial-insured exception also requires an A. M. Best financial strength rating of A- or better. Both requirements are waived for qualifying flood coverage from an eligible surplus lines insurer with that rating (Tex. Ins. Code §981.004(c), (e)).
- Cancellations under §551.104(b), (c), or (d) do not take effect until the 10th day after the insurer mails notice to the insured (Tex. Ins. Code §551.104(e)).
- Homeowners policies in effect under 60 days can only be cancelled for specified reasons, including an undisclosed hazard not tied to a prior claim or an inspection report not accepted before policy inception; inspection reports are deemed accepted unless rejected before the 11th day after receipt (Tex. Ins. Code §551.104(g), (h)).
- For policies subject to Subchapter C, the insurer generally must mail written nonrenewal notice at least 60 days before expiration or renew at the insured’s request, subject to §551.105’s replacement-policy provision; material changes to a homeowners policy form on renewal require the notices to insureds and agents specified in §551.1055 at least 30 days before their respective statutory dates (Tex. Ins. Code §§551.102, 551.105, 551.1055(b), (d)).
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