Although this bill will not affect how the individual reputable broker conducts their day to day business, it will have a tremendous positive impact on how we, as an industry, proceed into the future. This bill corrects one of the drawbacks which the SLA has had to contend with due to not being legislatively recognized: the threat of legal action by -unscrupulous brokers and unreliable non-admitted insurers.

Because of this threat, the SLA has been prevented from sharing information with the DOI. The result has been that the DOI has been deprived of a valuable resource in their mission to crack down on disreputable brokers and nonadmitted insurers in the California non-admitted market.

The highlights of AB 865 are as follows:

1. A surplus line advisory organization is authorized to perform the duties delegated by the Insurance Commissioner. The qualifications for the organization are detailed in the bill. The SLA meets all the criteria and will apply to be the surplus line advisory organization.
2. The Insurance commissioner shall remain fully responsible for supervising the implementation and administration of the surplus line law.
3. The surplus line advisory organization will submit a plan of operation to the Insurance commissioner for his approval. It will identify the duties that the organization proposes to perform and how the duties will be accomplished. In addition to the tasks currently performed by the SLA, the surplus line advisory organization is authorized to report any factual fraudulent or illegal activity or potential risk of harm to insurance consumers in the surplus line market.
4. Grants immunity to the surplus line advisory organization for actions taken or omitted in the performance of their delegated tasks.
5. Authorizes the assessment of a stamping fee. Any increase above 3/4 of one percent will have to be filed with the commissioner's office.

One provision which was added to this bill at the last minute was a "sunset clause." In essence, what this clause states is that unless SB 959 (White List Bill) passes next year, AB 865 will no longer be in effect. Based on our discussions with the author of SB 959, Senator Patrick Johnston, and the DOI, there is very good progress on this bill and the prognosis is that it will pass.

In substance, SB 959 is a codification of Regulation 2174 which created the mechanism to develop a list of acceptable non-admitted carriers for California insurance consumers. In addition to legislating 2174, the SLA is pushing for two additional provisions on which we believe we are close to agreement with the DOI: 1) an industrial insured exemption, and 2) a gap exemption.

The industrial insured exemption would exclude large sophisticated buyers of insurance from certain surplus line requirements in the code.

The gap exemption would allow, under certain circumstances, the surplus line broker to place some coverage with non-admitted insurers who are not on the 'white list" (placement with non-admitted insurers who have been removed from the white 1ist will not be allowed) The proposed conditions for placement with non-white listed non-admitted insurers is allowed if 1) multiple insurers are required to write 100% of the risk, 2) at least 80% of the risk is written by white listed insurers, and 3) the surplus line broker submits to the commissioner any and all documents and information used by the broker in verifying the integrity and financial stability of the non-white listed.

Although this bill was introduced during the 1993 legislative session, there was some technical language on which the author and the DOI still needed to agree when the deadline for passing legislation expired. As result this bill has been held over into the 1994 legislative session, when it again will be considered.

The SLA has been working closely with the author and the DOI in crafting the language for this bill. The SLA was originally supportive of SB 959 when it was first introduced at the beginning of this year. Now that this bill has been tied to AB 865, we are even more committed to its passage in 1994.

One other bill of note which will effect some surplus line brokers is AB 2055. This bill requires that from January I through December 31, 1994, persons subject to insurance taxes (including surplus line brokers) whose annual taxes exceed $50,000 must make payment by electronic funds transfer ("EFT"). On and after January 1, 1995, persons whose annual taxes exceed $20,000 must make payment by EFT. Unfortunately the language in this bill is not completely dear. The SLA is currently working with the DOI to help correct some of the drafting problems. We strongly encourage that any broker who may be affected by this bill contact their tax advisor for guidance. In the meantime, we will keep you apprised of any developments related to this bill.

With the end of the 1993 legislative session, the surplus line community can look back and mark this year as an important milestone in the evolution of the California surplus line market. Significant strides have been made in strengthening and improving the market, which should prove even more beneficial in the coming years.

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