Michigan Surplus Lines cheat sheet

The Michigan Insurance Code is Chapter 500 of the Michigan Compiled Laws; the Office of Financial and Insurance Regulation (now housed in the Department of Insurance and Financial Services, DIFS) administers it.

Surplus lines authority derives from Chapter 19 of the Insurance Code (MCL 500.1901 et seq.); Chapter 7 governs producer licensing and Chapter 12 governs unauthorized insurers.

The commissioner may examine surplus lines licensees and require production of records; examination costs are borne by the licensee under the Insurance Code's examination provisions.

Placement through an unauthorized insurer is lawful only for coverages that are exempt from the certificate of authority requirement or that qualify as surplus lines under Chapter 19.

The commissioner may issue cease-and-desist orders and seek injunctive relief against unlicensed insurers and producers transacting insurance in Michigan.

A person transacting insurance without a license is subject to civil penalties and, where applicable, criminal sanctions under the Insurance Code.

Rules and bulletins issued by DIFS carry the force of regulation; producers must monitor bulletins affecting surplus lines filings, fees, and tax reporting.

Michigan is a state-based filing jurisdiction: surplus lines tax and stamping office obligations are satisfied through the Michigan surplus lines stamping office rather than a national clearinghouse.

Surplus lines insurance is insurance procured from an eligible unauthorized insurer when the full amount of coverage cannot be obtained from authorized insurers.

An eligible surplus lines insurer must be authorized to write the type of insurance in its domicile, maintain capital and surplus of at least $15 million (or the minimum required by its domicile, whichever is greater), and be listed on the NAIC Quarterly Listing of Alien Insurers if it is an alien insurer.

A 'nonadmitted' insurer is one not holding a Michigan certificate of authority; 'eligible' surplus lines insurers are a subset of nonadmitted insurers that meet statutory standards.

Michigan maintains a list of eligible surplus lines insurers; a producer may not place business with an insurer not on the list unless a specific statutory exception applies.

Exempt commercial purchaser status can broaden placement options but does not eliminate the diligent search obligation unless a specific exemption applies.

Surplus lines insurers are not members of the Michigan Property and Casualty Guaranty Association; coverage is not protected by guaranty fund protection.

Placement with a nonadmitted insurer is prohibited for life insurance, annuities, and certain statutorily excluded coverages.

An eligible insurer must remain in good standing; removal from the eligible list terminates the producer's ability to place new business with that insurer.

Diligent search means a documented effort to place the full coverage with authorized insurers before resorting to surplus lines.

The producer must solicit declinations from authorized insurers that actually write the class of business in Michigan; a declination from an insurer that does not write the class is insufficient.

Documentation typically includes insurer name, date of declination, coverage limits requested, and reason for declination (e.g., capacity, appetite, loss history).

The number of declinations required is commonly three, but fewer may be acceptable if the producer documents that fewer authorized insurers write the class.

Declinations must be retained for at least five years and produced on demand during an examination or market conduct review.

A diligent search is not required where the insured is an exempt commercial purchaser and the statutory exemption applies, but the file should still reflect the basis for the exemption.

The producer's search must cover the full amount of coverage requested; partial placement with authorized insurers is permitted only if the surplus lines portion is documented.

A declination obtained after binding is not a valid diligent search; the search must precede placement.

Only a licensed surplus lines producer may procure surplus lines insurance; the producing agent must place through a surplus lines licensee unless the agent holds the surplus lines license.

The surplus lines licensee is responsible for confirming the insurer's eligibility, verifying the diligent search, and submitting the policy for stamping.

The policy must be delivered to the insured within a reasonable time after binding, and the surplus lines licensee must maintain a complete file.

Coverage may be bound orally or in writing, but the written policy or certificate must follow promptly and must disclose the surplus lines status.

The producer may not place business with an unauthorized insurer that is not an eligible surplus lines insurer, even if the insured requests it.

Placement must comply with Michigan's countersignature and licensing rules; a nonresident surplus lines producer must be licensed in Michigan or qualify for reciprocity.

The surplus lines licensee must verify that the insurer's policy forms and rates are not subject to prior approval as admitted rates are.

Records of each placement, including the policy, endorsements, and declinations, must be retained for at least five years.

An unauthorized insurer may not transact insurance in Michigan except as permitted for surplus lines or exempt coverages.

A surplus lines trust fund may be required of alien insurers or insurers not otherwise meeting financial standards; the fund protects Michigan policyholders.

The trust fund must be maintained in an amount set by statute or regulation and must be held by a qualified trustee.

The commissioner may require the trust fund to be maintained in a form acceptable to DIFS, such as cash or approved securities.

Failure to maintain the required trust fund can result in removal from the eligible insurer list and cessation of new placements.

The trust fund is not a substitute for guaranty fund protection; it is a separate security mechanism for surplus lines obligations.

Surplus lines licensees must confirm the insurer's compliance with trust fund requirements before placing business.

The commissioner may examine trust fund records and require periodic reporting of fund balances.

Each surplus lines policy must bear a conspicuous notice stating that the insurer is not licensed in Michigan and is not subject to the state's guaranty fund protection.

The notice must be in a form approved by the commissioner and must appear on the face of the policy or in a prominent endorsement.

The producer must disclose the surplus lines status and the lack of guaranty fund protection to the insured before binding.

The policy must identify the surplus lines licensee and the producing agent, if any, and state the premium and taxes separately.

Documentation must include the diligent search record, the insurer's eligibility confirmation, and the policyholder's acknowledgment where required.

The insured must receive a copy of the policy and any endorsements promptly after issuance.

The surplus lines licensee must retain copies of all notices and disclosures for at least five years.

Failure to provide required notices can result in regulatory action, including fines and license suspension.

Michigan imposes a surplus lines premium tax on the gross premium written by eligible surplus lines insurers; the rate is set by statute and is in lieu of other premium taxes.

The surplus lines licensee is responsible for collecting and remitting the tax to the Michigan Department of Treasury through the stamping office.

Stamping fees are separate from premium tax and are set by the stamping office; they cover administrative costs of processing surplus lines filings.

The tax and fee must be reported on the form and at the interval prescribed by the stamping office, typically quarterly.

Late payment of premium tax may incur interest and penalties; the licensee remains liable for the tax even if the insured fails to pay.

Records of premium tax and stamping fee calculations must be retained for at least five years.

The tax base is the gross premium, including policy fees and endorsements, unless a specific exclusion applies.

Failure to remit tax can result in license suspension, revocation, or civil penalties.

A surplus lines producer license is required in addition to a property and casualty producer license; the license must be renewed on the statutory cycle.

Commissions on surplus lines business must be disclosed and must not exceed the amount filed with the insurer or approved by the commissioner.

The producer may not share commissions with an unlicensed person or entity.

A producer must act in the insured's best interest and may not place business with an insurer in which the producer has an undisclosed financial interest.

Continuing education requirements apply to surplus lines licensees and must be completed before renewal.

The producer must maintain a separate record of surplus lines transactions, including commissions, for examination.

Unfair trade practices, including misrepresentation of coverage and coercion, are prohibited and subject to regulatory action.

The producer must promptly report changes in licensing status and any administrative action taken by another state.

Surplus lines coverage is used when admitted markets decline or cannot provide the full limit, often for high-value property, excess liability, and specialty risks.

Surplus lines policies are not subject to admitted rate and form filing requirements, giving insurers flexibility to tailor coverage.

Coverage may be written on a nonadmitted basis only if the risk is not readily insurable in the admitted market.

Common surplus lines coverages include excess and umbrella liability, commercial property, professional liability, and specialty casualty.

The surplus lines policy must clearly state the coverage grant, exclusions, limits, and conditions; ambiguity is construed against the insurer.

The insured should be advised that surplus lines insurers are not subject to the same financial reporting and guaranty fund protections as admitted insurers.

Claims handling for surplus lines insurers is subject to Michigan's unfair claims practices rules, but guaranty fund protection is absent.

The producer should review the insurer's financial strength and claims-paying ability before placement.