The Cayman SPC and the Missing NAIC Listing
Rivertown Manufacturing seeks $5 million environmental impairment liability for a closed plating facility. Its admitted property carrier excludes pollution. The producer obtains a quote from Northstar Assurance SPC, a Cayman Islands segregated portfolio company. Northstar is not authorized in Michigan, is not listed on the NAIC Quarterly Listing of Alien Insurers, and has $12 million in capital and surplus. It has a $7 million trust fund at a U.S. bank for U.S. policyholders and has appointed the Michigan commissioner as agent for service of process. The producer confirms the policy form is broad and the premium is $85,000. Rivertown's CFO says, 'We'll sign any waiver you need; just get us the coverage.' The producer wonders whether the trust fund and consent to service cure the missing listing.
1. Is Northstar an eligible unauthorized insurer for a Michigan surplus lines placement? Explain the significance of the NAIC listing, trust fund, and consent to service.
Read the worked answer
No. Michigan allows surplus lines placement only with an eligible unauthorized insurer. For an alien insurer, eligibility generally requires that the insurer be listed on the NAIC Quarterly Listing of Alien Insurers, in addition to meeting capital and surplus, trust fund, and service-of-process requirements. Northstar is not on the NAIC list. That is a threshold failure. The $7 million trust fund and the appointment of the Michigan commissioner are necessary protections, but they do not substitute for the listing. The listing is how Michigan and the NAIC monitor alien insurers that are not admitted in any U.S. state. Capital and surplus of $12 million may or may not meet Michigan's minimum, but the producer does not need to reach that issue because the missing listing is independently disqualifying. The producer should also confirm the insurer is not unauthorized for a line Michigan prohibits. Conclusion: Northstar is not eligible; the producer cannot lawfully place this risk with it.
2. The CFO offers to sign any waiver. Can the insured's waiver make the placement lawful? What should the producer do?
Read the worked answer
No. Surplus lines eligibility is a regulatory requirement, not a consumer-protection right that the insured can waive. A signed waiver cannot convert an ineligible insurer into an eligible one, and it cannot cure the producer's violation. Placing with Northstar could subject the producer to license discipline, fines, and civil liability, and the insured may later find that the policy is difficult to enforce or that no guaranty fund responds. The producer should decline to place with Northstar, explain why in writing, and look for an eligible surplus lines insurer or an admitted market. If no eligible market exists, the producer should document that and let the insured decide whether to go bare or restructure the risk. The producer should not accept a waiver that purports to authorize an illegal placement. A better document is a written explanation to the CFO that the insurer is not eligible and that the producer cannot place coverage with it.
3. If Northstar were on the NAIC list, what else should the producer verify before placing?
Read the worked answer
Even with the NAIC listing, the producer should verify: (1) the insurer meets Michigan's capital and surplus requirements; (2) the trust fund is maintained in the required amount and form for U.S. policyholders; (3) the consent to service of process is properly filed and current; (4) the insurer is authorized in its domiciliary jurisdiction and not in rehabilitation or liquidation; (5) the specific environmental impairment liability coverage is permitted surplus lines in Michigan and is not a line that must be written by an admitted insurer; (6) the policy form, exclusions, and claims-made terms are clear; (7) the insurer's rating or financial strength is acceptable; and (8) the required surplus lines notice and tax reporting will be handled. The producer should keep documentation of each check. If any item cannot be verified, the producer should not place the risk. The trust fund is not a substitute for eligibility; it is one component of it.