Surplus Lines Placement, Premium Trust Funds, and a Carrier Insolvency

Before binding:

1. Diligent effort / declination search. Surplus lines is a market of last resort. Rico must document a genuine, contemporaneous search of the authorized market - applications and declinations from authorized carriers for the same coverage, limits, and terms. Notes in the file are not a substitute for documented declinations.
2. Eligible insurer only. The carrier must appear on the DFS eligible surplus lines insurer list at the time of placement; Florida prohibits placing with a non-listed, unauthorized insurer.
3. Written disclosure and acknowledgment. The insured must be told in writing that the insurer is not authorized in Florida, is not subject to the same solvency regulation, and - critically - that the policy is not protected by the Florida Insurance Guaranty Association. The insured's written acknowledgment must be obtained and retained. (A qualifying exempt commercial purchaser may waive the diligent-effort search, but the disclosure obligation does not disappear.)
4. Licensing. The placement must run through a licensed surplus lines broker, with premium tax and policy filings handled through the surplus lines service office.

Now that the insurer is insolvent:

• FIGA does not respond. FIGA covers claims against authorized insurers that become insolvent. Surplus lines insureds have no guaranty fund. The $200,000 claim is simply an unsecured claim in the insolvency.
• Rico's exposure. Failure to deliver the required disclosure is a licensing violation and the core of an errors-and-omissions claim: the association can argue it would never have accepted an unauthorized insurer had it known there was no guaranty fund protection.
• The association's parallel remedy is a DFS complaint against Rico and the surplus lines broker, plus a possible claim that binding without the signed disclosure was itself improper.

Premiums are trust funds, not agency revenue.

• Under Florida law, funds an agent collects from or on behalf of an insured are held in a fiduciary capacity. They must be maintained in a separate fiduciary trust account, kept distinct from operating funds, and used for no purpose other than the transaction for which they were received.
• Commingling with the agency operating account is itself a violation; using the money to pay office rent is misappropriation of fiduciary funds.
• The 52-day delay in remitting is independently a violation - premium must be remitted promptly, in accordance with the insurer's or broker's agreement and the statutory duty, not whenever cash flow permits.
• Consequences: administrative fines, suspension or revocation of the license, restitution, and potential criminal exposure for theft. The agency's and the agent's own E&O and the surplus lines broker's records would be examined in any DFS market-conduct review.

What Rico should have done:

1. Open and use a dedicated premium trust account at a qualified institution.
2. Deposit the $18,000 there, not in operating funds.
3. Remit to the surplus lines broker within the agreed period, retaining only the disclosed commission.
4. Keep transaction records and the trust-account reconciliation available for the statutory retention period.

Separate the two problems - the prior carrier's notice does not create coverage now.

On the notice:

• Florida prescribes minimum written notice periods for nonrenewal that differ by line of business; residential and personal lines carry considerably longer notice periods than most commercial lines. The exact requirement depends on the policy type, so it must be verified against the current statute and rule rather than assumed.
• If the notice was short, the association's remedy runs against the prior carrier, not against the surplus lines insurer or against the loss. Typical remedies are a DFS complaint and a market-conduct inquiry, and possibly a short extension of the expiring policy - but not retroactive wind coverage for a storm that occurred six months into a different policy.
• The 45-day notice also does not excuse Rico's placement failures: the disclosure and trust-account violations stand on their own.

The residual-market step Rico skipped:

• For a residential condominium association, Florida's residual market insurer (Citizens Property Insurance Corporation) is a potential market for wind coverage that the admitted market will not write. Before going to surplus lines, an agent should determine whether the risk is eligible for Citizens and whether the account was properly submitted.
• Note the depopulation/take-out rules: Citizens policyholders generally must accept an offer from an authorized carrier if the offer is not more than the statutory percentage above the Citizens premium. That calculation is part of the agent's placement analysis and should be documented in the file.
• Documentation discipline is the defense: a file showing a documented declination search, Citizens eligibility screening, the signed surplus lines disclosure, and a clean trust-account trail turns a licensing complaint into a defensible business decision.