Surplus Lines Insurers Should Be Exempt From Oversight Fees

The New Jersey Insurance Commissioner's decision to treat surplus lines insurers as admitted carriers and charge them departmental assessment fees is discriminatory and overreaches state law, says the National Association of Independent Insurers (NAII) and the National Association of Professional Surplus Lines Offices (NAPSLO).

Because surplus lines carriers are insurers of last resort and are not admitted in the state, they are exempt from any fees charged to admitted carriers under New Jersey law, NAII and NAPSLO said in an amicus curiae brief filed Monday (March 16) in support of the appellants.

The case was brought by four non-admitted New Jersey surplus lines insurers which seek relief from insurance department assessments for fiscal years 1996 and 1997. The appellant companies-Evanston Insurance Co., Essex Insurance Co., Lincoln Insurance Co., and Carlisle Insurance Co.-challenge the Commissioner's extension of N.J.S.A. 17 to apply to surplus lines companies. The legislation enables the Department to charge authorized and admitted insurers a percentage of written premiums as a fee for the financial oversight provided them by the insurance department. The appellant companies claim that because they are not admitted to do business in New Jersey, and are not subject to departmental oversight, the law does not apply to them. The companies also maintain that they had already paid separately for any departmental services that they had received from the department.

The case dates back to 1995, when the New Jersey legislature enacted the Act, which authorizes the Commissioner to distribute the cost of the state's insurance industry financial oversight among all insurers engaged in business in the state of New Jersey.

Subsequently, the Commissioner issued a bulletin to "all insurers, health maintenance organizations and certain other regulated entities authorized to transact business in New Jersey" stating that the department's direct and indirect operating costs topped $11 million. The bulletin further stated that carriers which paid the apportioned assessment "are exempt from most other Department service and filing fees."

When the legislation was later amended to include the assessment of eligible surplus lines insurers, the appellants objected by letter on the basis that as non-admitted, eligible surplus lines insurers, they were not "doing business" in the state, and therefore not subject to the assessment. The appellants subsequently presented formal objections, asserting that the assessment was unconstitutional because it created an improper tax; violated their due process rights; violated their rights to equal protection under the law; and hampered interstate commerce.

In October 1997, the Commissioner denied the companies' objections, and the appellants subsequently filed an appeal.

In its amicus curiae brief, NAII maintains that one of the main issues is the clear definition of a surplus lines insurer as a carrier which is not "engaged in business" in the state. As insurers of last resort, surplus lines carriers are neither authorized nor admitted to sell insurance in the state, and cannot even advertise or solicit business there.

The other major element in the case, according to the NAII brief, is the questionable decision of the Commissioner to expand the Act to include surplus lines carriers. As head of an administrative agency, the Commissioner by law must act within the bounds of the authority delegated to her and not overreach it. New Jersey tort law clearly states that "when interpretation of a taxing provision is in doubt...the court should construe the statute in favor of the taxpayer."

The NAII is a national trade association representing more than 500 property and casualty insurance companies.