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The balance of this article attempts to highlight self procurement and
related arguments in light of the Cypress matter, along with related
theories of insurance regulation for issuance of coverage in Washington
State.
Mentioned above, self procurement of insurance is the notion that an
insured is entitled to find and buy insurance from any insurer, anywhere,
regardless whether the insurer holds a requisite license locally or the
coverage is otherwise purchased in compliance with local law such as
through a licensed surplus line broker.
[xiii]
The ability of an insured to self-procure insurance from any insurance
company anywhere is often codified in law in many states with a permitted
statutory method to self-report taxes due.
[xiv]
Washington State is not one of these states with self procurement statutory
authority. In fact, the State of Washington takes the position that if any
part of an insurable interest involves Washington State, then the entire
transaction and all parties are subject to state law and insurance
regulation.
[xv]
Many captive insurance companies and their service providers have made
arguments similar to the ones made in the Cypress Insurance Company
matters. As of the date of this publication, we are aware of no existing
judicial challenge to assert these arguments in a court of competent
jurisdiction or in an administrative hearing in Washington State.
Self Procurement Arguments Presented in Washington
Arguments have been presented that the Supreme Court’s 1962 opinion in Todd Shipyards upholding due process rights of an insured to buy
insurance from any insurer anywhere trumps state law.
[xvi]
Washington regulatory treatment instead has indicated that subsequent
judicial opinions have “eroded” Todd Shipyards, to the point that
this case does not preclude Washington State insurance law.
[xvii]
No court we are aware of in Washington State has yet ruled whether the
Insurance Commissioner is correct.
Some have argued that in addition to their Constitutional due process
rights outlined in Todd Shipyards, Congress meant to specifically
exempt captive insurance companies (such as Cypress Insurance) from “home
state” insurance regulation (Microsoft’s “home state” is Washington)
[xviii]
The thrust of this claim of “captive insurance” being exempt from state law
is because the Nonadmitted and Reinsurance Reform Act of 2010 (“NRRA”)
lists only “insurers” and “reinsurers”, and not specifically “captive
insurance” entities. The argument continues if Congress meant to include
“captive insurance” it could have and would have done so, and therefore
captive insurance is exempt.
[xix]
Central to this argument is an analysis of payment of surplus line taxes
under the NRRA and the claim that captive insurance is not within included
the terms, and by argument, it is silently excluded from regulatory
oversight.
[xx]
This argument that Congress intended “insurers” and “reinsurers” to not
include “captive insurers” has not been tested judicially in Washington to
our knowledge. Rather, the Insurance Commissioner argues that Washington
law specifically grants the state jurisdiction as the insurance code covers
any insurable interest touching the State of Washington.
[xxi]
Secondly, Washington State asserts if any part of the insurable interest is
in the state, the insurer must be licensed as an insurance company, or be
surplus line eligible as a nonadmitted insurer placed through a licensed
surplus line broker, or otherwise exempt (more on this below), and if
Washington is the “home state”, then all surplus line premium taxes are
solely due to Washington State.
[xxii]
It is worthwhile to compare the NRRA with Washington State law to look at
arguments of self procurement and whether there are conflicts. For example,
the NRRA defines self procurement (styled as “independently procured
insurance”), but then defers to individual states to determine the
jurisdictional authority.
[xxiii]
The NRRA specifically grants jurisdiction to the “home state” where
“placement of nonadmitted insurance shall be subject to the statutory and
regulatory requirements solely of the home state.”
[xxiv]
Stated above, Washington State takes a slightly broader definition of “home
state” and indicates if Washington is the home state, and if the insurable
interest in part or whole is in the state, the lack of any permissive
authority for the insured to self procure insurance from a company that
lacks a license or is surplus line eligible, through a licensed surplus
line broker, renders the transaction in violation of state law.
Exempt Commercial Purchaser in Washington: Only Some Surplus Line
Broker Requirements Removed
Under both Washington and federal law, there are some options for large
insureds that meet the definition of “exempt commercial purchaser”.
[xxv]
The NRRA allows for an exempt commercial purchaser meeting the definition
requirements as to size, amount of revenue, amount of insurance coverage
premium, net worth, and use of a qualified risk management individual to
independently procure insurance from a nonadmitted insurer.
[xxvi]
Washington State includes similar definitions as are found in the NRRA, but
then Washington law specifically limits and restricts the exempt commercial
purchaser to a reduction in the requirements of a licensed surplus line
broker making a surplus line placement, and not the ability to self procure
or place coverage with an insurer that is not surplus lines eligible.
[xxvii]
Washington State’s version of the exempt commercial purchaser reduction in
regulatory requirements includes primarily the removal of the diligent
effort requirement of the surplus line broker to ensure and certify that
the surplus line coverage was placed where there not any licensed insurers
willing to underwrite the risk and that surplus line coverage is not being
purchased for a lower premium amount limited to when the insured meets the
definitional requirements.
[xxviii]
All surplus line placements enjoy elimination of rate and form regulation
required of admitted insurers in Washington, regardless whether the insured
qualifies as an exempt commercial purchaser.
[xxix]
Other Methods to Consider When Insurance Coverage Involves Washington
State
Assuming the insured has insurable interests in Washington State, or the
“home state” is Washington, there are other statutes that may be of
interest to the reader to assist in lawful placement of insurance, even if
self procurement is not available. For example, if it is ocean marine or
foreign trade insurance, these are to a certain extent excluded from parts
of the insurance code.
[xxx]
And if the insurance transaction is “wholly outside” of Washington, meaning
there is no insurable interest in whole or part in Washington, and there is
not a “home state” of Washington under Washington law and an analysis under
the NRRA, then the transaction might be exempt from Washington regulatory
compliance altogether.
[xxxi]
There are also some exemptions for railroad and aircraft operations and
ownership.
[xxxii]
The Federal Liability Risk Retention Act for risk retention groups and risk
purchasing groups also could be a possibility for exploration. A properly
formed and registered liability risk retention group enjoys federal
preemption and a Washington state law corollary.
[xxxiii]
A liability risk purchasing group allows for reduction of certain rate and
form regulation if properly organized and approved.
[xxxiv]
And there are also specific statutes for local government, affordable
housing, and nonprofit risk pooling in Washington State.
[xxxv]
Health care sharing ministries are also afforded statutory protection.
[xxxvi]
And private air ambulances and rescue coverage when the insured is more
than one hundred miles from home are also recognized under Washington law.
[xxxvii]
Conclusion and Simple Decision Tree To Determine if Washington
Compliance Should Be Examined
Self procurement for Washington State risks is not a settled right of the
insured to buy insurance anywhere from any insurer. Judicial review of a
claim of right to self procure from Washington would be a case of first
impression for a court of competent jurisdiction in Washington State to
render an opinion on state law validity compared to Todd Shipyards and related federal caselaw precedent. Great care
and caution should be embraced by the practitioner trying to review whether
an insured would be compliant to self procure any part of a Washington
State insurable interest.
A simple decision tree for state law could be a good starting point. The
first question to ask is if the transaction is insurance.
[xxxviii]
If so, then ask whether any part of the insurable interest touches
Washington.
[xxxix]
If that is the case, then it is usually safe to assume Washington insurance
law will apply according to the regulator, unless clearly exempt.
[xl]