Unauthorized Insurers and Trust Fund Compliance
The unauthorized-insurer rule
Michigan prohibits transactions with unauthorized insurers except as Chapter 19 permits. Surplus lines is the main exception, and it applies only when the insurer is eligible and the placement complies with search, notice, and tax rules. An unauthorized insurer is not supervised by DIFS in the same way as an admitted carrier, and its policies are not backed by the Michigan property and casualty guaranty association.
Trust fund requirements
Alien insurers seeking eligibility commonly must maintain a trust fund in the United States for the benefit of U.S. policyholders, often at a specified minimum level, and must demonstrate compliance to the Commissioner. The trust fund is a financial responsibility mechanism; it is not a guaranty fund and does not make the insurer admitted. If the trust fund falls below the required level, eligibility can be jeopardized.
Worked example
A foreign insurer applies for Michigan eligibility. It is authorized in its domicile and maintains a U.S. trust fund above the required minimum. DIFS places it on the eligible list. A Michigan agent may use it for a properly documented surplus lines placement. If the trust fund later drops below the minimum, the insurer may be removed; policies already issued are still not covered by the Michigan guaranty association.
Traps that cost marks
Do not tell an insured that a surplus lines policy is protected by the Michigan guaranty fund. Do not confuse a trust fund with guaranty association coverage or with admitted status. Do not place coverage with an unauthorized insurer that is not on the eligible list, even if it has a trust fund. Do not ignore a later eligibility suspension.