Coastal Apartment Placement and the Four Declinations
A Lafayette surplus lines broker is placing property coverage for a 24-unit apartment complex in Terrebonne Parish. The building and business personal property have a combined replacement cost of $5.2 million. The client wants full wind and hail coverage. The broker contacts four authorized insurers. Two decline because of coastal exposure. A third declines because the roof is 19 years old. A fourth will write $2 million of building coverage but excludes wind and hail; it will write wind only with a 10% deductible and a $1 million wind limit. The broker documents these responses and places the full $5.2 million with Gulf Coast Specialty Insurance Company, an eligible surplus lines insurer on the Department's current list, at a gross premium of $21,400. The broker adds a $150 policy fee and tells the insured the insurer is not admitted. The insured signs the disclosure form. The broker remits $1,037.90 in Louisiana surplus lines premium tax.
1. Did the broker satisfy Louisiana's diligent effort requirement? Analyze each of the four authorized-market responses and state what the file must show.
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The standard is a documented search of the authorized market for the coverage the insured actually requested, not a bare count of declinations. The two coastal declinations and the roof-age declination are meaningful because those insurers write commercial property and declined the risk for underwriting reasons. The fourth response is not comparable to the requested coverage: it excludes wind and hail and offers only a $1 million wind sublimit with a 10% deductible. An insured buying full $5.2 million wind coverage cannot be said to have that coverage available from an authorized insurer merely because a restricted wind offer exists. The broker should document each insurer contacted, date, coverage terms quoted, reason for declination, and why the admitted offer was rejected as materially narrower. A file that says only declined without the quoted terms is vulnerable on audit. The placement with an insurer on the current eligible list is consistent with the surplus lines law, but the diligent-effort file still must support the conclusion that the full coverage was not procurable from authorized insurers.
2. What disclosures and delivery obligations apply, and what happens if Gulf Coast Specialty later becomes insolvent?
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Before or at placement, the broker must give the insured a clear written disclosure that the insurer is not admitted in Louisiana, is not subject to the Department's rate and form regulation in the same way as an authorized insurer, and is not covered by the Louisiana Insurance Guaranty Association. The insured's signed acknowledgment should be retained. The broker must deliver the policy or a certificate evidencing the coverage and must maintain records of the placement. If Gulf Coast Specialty becomes insolvent, LIGA will not respond because LIGA does not cover surplus lines insurers; the insured bears the credit risk of the eligible surplus lines insurer. That is why the broker's file should show the insurer's eligibility at placement and why the disclosure is not a technicality. A certificate is not a substitute for the policy, and the broker should confirm that the policy, endorsements, and disclosure are delivered and retained.
3. Verify the Louisiana surplus lines premium tax. Does the $150 policy fee change the result?
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The tax is 4.85% of gross premium: $21,400 x 0.0485 = $1,037.90, so the remittance shown is correct for premium only. A bona fide policy fee retained by the broker and separately disclosed is generally not premium subject to the surplus lines premium tax. If the fee is instead part of the premium charged for the policy, the taxable base is $21,550 and the tax is $21,550 x 0.0485 = $1,045.18, an additional $7.28. The broker should keep the premium invoice, the fee disclosure, the tax calculation, and the annual statement reconciliation. The key audit point is characterization: the broker cannot call something a fee to avoid tax if it is actually consideration for the insurance contract.