Illinois amends surplus lines group coverage and industrial insured provisions

Group insurance

Illinois Senate Bill 3324 impacts group coverage written on a surplus lines basis in Illinois by creating a rule for determining the home state of such policies. This new law will apply to contracts of insurance effective 1 January 2015 or later. The law provides that where more than one insured from a group is a named insured on a surplus lines contract and the individual group members pay 100% of the premium, each group member’s coverage must be treated as a separate surplus lines contract and the home state of the individual member determined for compliance and tax purposes. Conversely, if the group pays some portion of the premiums (so that the group members are not paying 100%) and individual members are not listed as named insureds on the policy, then Illinois will be the home state for the group. Underwriters should carefully consider the impact of this bill on any group programmes involving individual named insureds on a single policy.

Industrial insured

The law also narrows the definition of an “industrial insured.” By way of background, contracts of insurance issued to “industrial insureds” are specifically exempted from the compliance requirements of the surplus lines law meaning that no diligent search is required. Under SB 3324, industrial insured has been redefined as an insured:

• that procures the insurance of casualty, fidelity, and surety risks or fire and marine risks as those classes are defined in Section 215 ILCS 5/4 of the Illinois Insurance Code;
• that procures the insurance by the services of a full-time employee who is a qualified risk manager or the services of a regularly retained consultant who is a qualified risk manager;
• that procures the insurance directly from a surplus lines insurer without the services of a broker; and
• that is an exempt commercial purchaser in the state of Illinois†.

Importantly, industrial insureds are now subject to the Illinois premium tax and transaction reporting requirements, whereas they were previously exempt. For industrial insured contracts effective 1 January 2015 or later, the insured must report the transaction to the Insurance Commissioner within 90 days of the effective date. Within 30 days of the effective date the insured must pay premium tax and the fire marshal tax to the Insurance Commissioner and a countersigning fee to the Surplus Lines Association of Illinois. 

Independent procurements

The law does not create any obligations in regards to independent procurements by insureds that do not meet the definition of “industrial insured.”  As a reminder, the law on independent procurements is complex and generally requires that the entire transaction take place outside of the state.  In view of the significant complexity of such placements, it is sensible to make any such arrangement with the benefit of specific legal advice.

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†Exempt commercial purchaser is defined as an entity which has nationwide commercial property and casualty insurance premiums in excess of $100,000 in the preceding 12 months and has either (a) net worth of more than $20m, (b) more than $50m of annual revenues, (c) more than 500 full time employees or is a member of an affiliated group employing more than 1,000 employees, (d) a nonprofit with at least a $30m annual budget, or (e) a municipality with a population in excess of 50,000 people.