COURT OF APPEALS CONCLUDES THAT SURPLUS LINES INSURERS ARE “INSURERS” FOR PURPOSES OF CHAPTER 4001 OF THE TEXAS INSURANCE CODE

The Fort Worth Court of Appeals recently concluded that surplus lines insurers are “insurers” for purposes of Chapter 4001 of the Texas Insurance Code which regulates licensure and activities of agents and other persons engaged in the business of insurance in Texas. In HOF Partners LLC v. Nautilus Ins. Co., No. 02-22-00175-CV, 2023 WL 3114309 (Tex. App-Fort Worth, April 27, 2023, mem. op.), HOF Partners LLC (“HOF”), through its retail agent Summit Insurance Group, LLC (“Summit”), obtained property and casualty insurance from Nautilus Insurance Company (“Nautilus”) for HOF’s commercial building. Under the parties' agency billing plan, Summit was responsible for collecting the premiums from HOF and transmitting them to Nautilus via its broker. However, although HOF timely made its premium payments to Summit, Summit failed to forward them to Nautilus, who then, unbeknownst to HOF, canceled the policy and, based upon this cancellation, subsequently refused to cover a loss claimed by HOF. Consequently, HOF filed suit. 

On appeal, the issue was whether the statutory-agency provision of Section 4001.052 of the Texas Insurance Code applies to surplus lines insurers such as Nautilus (which if answered in the affirmative could characterize HOF’s premium payments to Summit as payments to Nautilus and, thus, no proper cancellation of the policy). Section 4001.052 provides that a person who solicits an application for property or casualty insurance is considered the agent of the insurer issuing a policy on the application and not the agent of the insured in any controversy between the insurer and the insured.  Nautilus argued that Section 4001.052 did not apply to surplus lines carriers such as itself because “insurer” is defined as “an insurance company or insurance carrier regulated by the department”, and Nautilus, as a surplus lines insurer, was purportedly not regulated by the Texas Department of Insurance. 

The Court of Appeals concluded that surplus lines insurers are “regulated” by the Department of Insurance and, thus, surplus lines insurers are “insurers” for purposes of Chapter 4001 of the Texas Insurance Code. The Court reasoned that the common and ordinary meaning of “regulated” was to be subject to rules or restrictions.  “Accordingly, an entity that is subject to rules or restrictions promulgated or executed by a government agency is ‘regulated’ by that agency, and because surplus lines insurers are subject to certain rules and restrictions set forth in the Insurance Code and the Department is tasked with enforcing these rules and restrictions, surplus lines insurers are “regulated by the Department.”

Nautilus argued that even if Chapter 4001 applied to surplus lines insurers, Summit did not qualify as Nautilus’ agent because there was no evidence that Nautilus communicated with Summit or HOF regarding the policy. The Court remanded this issue to the trial court, concluding that the parties' agency billing plan was sufficient to create a genuine issue of material fact regarding whether Summit had actual or apparent authority to collect the premiums on Nautilus' behalf.