The Gig Economy’s Auto Insurance Market and Surplus Lines
Automobile insurance looks very different today than it did a generation ago. The means by which people (and goods) travel via motor vehicles continue to expand and evolve, as do businesses and their automobile insurance needs, especially in the gig economy and now with the current COVID-19 pandemic disruptions. No longer do individuals exclusively rely on traditional car rental companies for their temporary travel needs, as fleet-based services have grown exponentially, allowing for utilization of app-based technology to identify local vehicles for immediate use.
In addition, peer-to-peer services have carved out an impressive piece of the automobile rental and delivery marketplace, allowing individuals to share their vehicles and receive remuneration. And, of course, anyone who hasn’t been living under a rock for the last decade has seen the emergence of transportation network companies (TNCs), such as Uber and Lyft, which have substantially displaced traditional taxicab services in many localities. Even when taking a gander at automobile insurance needs of traditional, personal owners of motor vehicles, there is a growing trend toward “dynamic based” insurance pricing, where we can enjoy savings on our premiums by hitting certain driving metrics, such as avoiding traffic accidents and hard-breaking patterns.
The surplus lines insurance market and evolving motor vehicle trends would appear, at first blush, to be a match made in heaven. Surplus lines insurance companies that are eligible to write insurance on a non-admitted, surplus lines basis are not subject to the insurance premium rate, policy form filing and approval standards of the states and, as such, enjoy substantial freedom to develop specialty insurance products to serve emerging marketplaces. But the laws governing automobile insurance, in many states, were developed decades before anyone could have foreseen today’s diversity of motor vehicle products, and as a result, surplus lines insurers face substantial insurance regulatory hurdles to penetrate the automobile insurance marketplace.
The ‘Financial Responsibility’ Surplus Lines Barrier
In order to get behind the wheel, we need some sort of protection in case something goes wrong. This is typically referred to as the “financial responsibility” requirement found in state motor vehicle codes. While some states actually allow a driver of a vehicle to satisfy this requirement through the posting of a bond or deposit of money or securities, financial responsibility is of course most often satisfied through the purchase of a motor vehicle liability insurance policy containing the minimum terms and limits as required under applicable state law.
How the term “motor vehicle liability insurance policy” (or similar term under state law) is actually defined can blow up a well-intended surplus lines insurance program. For example, in New York, under N.Y. Veh. & Traf § 345, the term is defined as “an owner’s or an operator’s policy of liability insurance … [containing the terms required for] proof of financial responsibility, and issued … by an insurance carrier duly authorized to transact business in this state to or for the benefit of the person named therein as insured.” (Emphasis added).
The term “authorized” is generally interpreted under state law to refer to licensed, or admitted, insurance companies in the state, as opposed to surplus lines insurers that are generally characterized as unauthorized but nevertheless eligible to write certain lines of insurance on a surplus lines basis. Consequently, the majority of states contain in their motor vehicle statutes the implicit requirement that motor vehicle liability insurance policies be obtained from licensed insurance carriers rather than by unauthorized carriers doing business in the surplus lines market and over which insurance regulators in foreign states have limited jurisdiction.
State Insurance Codes and Departmental Opinions Provide a Surplus Lines Path
The fundamental tension that exists in determining whether surplus lines insurers can compete in the automobile space is created by the dichotomy between statutes promulgated under state automobile codes and insurance codes. In particular, in the vast majority of cases, it is the applicable state’s motor and traffic laws, rather than its insurance code, that requires automobile insurance be purchased by an authorized insurer. As a result, some states have promulgated statutes in their insurance codes or have otherwise rendered creative interpretive opinions to provide surplus lines insurers pathways for their insurance policies to satisfy motor vehicle financial responsibility requirements.
For example, Georgia’s insurance code provides that “[n]othing contained in this Code section shall be deemed to prohibit a nonadmitted insurer … to provide the minimum liability coverage for its insurance motorists who are involved in motor vehicle accidents in this state and, to the extent that such coverage is provided, such policies or contracts shall be deemed to provide the minimum liability coverage required by this chapter.” Ga. Code Ann. § 33-4-3(a)(3). However, Georgia’s motor vehicle and traffic laws run counter to the state’s insurance code and generally require automobile financial responsibility requirements be satisfied only through an authorized insurer, see Ga. Code Ann. § 40-9-37.
Oregon is a state, by contrast, that provides greater flexibility for surplus lines insurers under the Oregon Vehicle Code, thus avoiding legislative conflict. Under Or. Rev. Stat. § 806,280, “[t]he Department of Transportation may not accept a certificate of insurance for purpose of future responsibility filings from an insurer that is not authorized to do business in Oregon unless the insurer is an eligible surplus lines insurer ….” (Emphasis added).
At least one state, Arizona, has previously attempted to reconcile conflicting statutes through interpretive guidance. In particular, Arizona Attorney General Opinion No. 74-2-L (R-2) (December 19, 1974, the “Arizona Opinion”) held that surplus lines insurers can satisfy automobile financial responsibility requirements because Arizona’s insurance laws expressly recognize that “[i]nsurance contracts procured as surplus lines coverage are fully valid and enforceable as to all parties and shall be recognized in all matters in the same manner as like contracts issued by authorized insurers” (see Ariz. Rev. Stat. Ann. § 20-410). The Arizona Opinion thus concluded that Ariz. Rev. Stat. Ann. § 20-410 “impliedly amended” the state automobile financial responsibility laws that required the issuance of an automobile certificate of insurance by an authorized insurer.
The logic of the Arizona Opinion could provide a backdoor avenue for surplus lines insurers in other U.S. jurisdictions as many states have enacted statutes similar to Ariz. Rev. Stat. Ann. § 20-410 recognizing surplus lines coverage to the same extent as insurance policies issued by authorized insurers. Nevertheless, both formal and informal guidance provided by a number of states indicate that many U.S. jurisdictions do not follow the logic of the Arizona Opinion.
‘The surplus lines insurance market and evolving motor vehicle trends would appear, at first blush, to be a match made in heaven.’
For example, Nevada generally declines to follow the guidance of its neighbor and instead has said this year that surplus lines insurers are prohibited from offering first-dollar automobile liability insurance, although such unauthorized carriers can offer excess liability coverage if the financial responsibility layer is satisfied through the admitted market.
Further complicating the matter is that, even if a state insurance department blesses the satisfaction of automobile financial responsibility requirements by a surplus lines insurer, it is often not the insurance department that has the authority to provide such blessing. Rather, it is often the applicable secretary of state or department of transportation that has the final say in the matter, which can further frustrate efforts to obtain consistent positions across the United States.
Does a Surplus Lines Insurer Have Greater Flexibility for Commercial Automobile Insurance Coverage?
Some states do expressly recognize the ability for surplus lines insurers to satisfy commercial automobile financial responsibility requirements.
For example, in Oklahoma, under Article 6 of Chapter 7 of the Oklahoma Highway Safety Code, the term “Owner’s policy” is defined as a motor vehicle liability insurance policy which, among other things, “shall be issued by an authorized insurer … or in the case of a commercial automobile insurance policy may be issued by an unauthorized insurer ….” (Emphasis added).
Similarly, in 2015, the National Conference of Insurance Legislators (NCOIL) promulgated its model act to address the regulation of insurance requirements for TNCs, and in recent years, many states have followed suit by enacting legislation applicable to the financial responsibility requirements of drivers and owners of vehicles operated in connection with a TNC. In most cases, these statutes expressly allow for a driver to satisfy his or her auto financial responsibility requirements through the surplus lines market during the time when the driver is picking up or dropping off a customer. However, state TNC statutes do vary as to whether drivers that utilize application-based platforms to deliver goods or services (such as food) can satisfy their financial responsibility requirements through the surplus lines market.
Nevertheless, other than the TNC statutes that have been promulgated in a handful of jurisdictions, most states do not differentiate between automobile financial responsibility requirements of individuals driving a motor vehicle in a personal versus a commercial capacity. In such cases, prohibitions on satisfaction of financial responsibility requirements by surplus lines insurers would ordinarily apply to the commercial automobile insurance market as well. Even in states where flexibility exists for commercial auto insurance products, it is not always clear when an automobile insurance product is commercial in nature.
For example, an insurance policy provided to a driver of a fleet-owned vehicle may be considered a hybrid auto insurance policy providing both personal use insurance coverage for the driver as well as commercial insurance coverage for the commercial fleet company.
With respect to peer-to-peer car sharing programs, while NCOIL adopted its Peer-to-Peer Car Sharing Program Model Act in February 2020, such act only expressly requires that insurance be in place satisfying the state’s minimum levels of financial responsibility and that the insurance may be procured by the shared vehicle owner, driver or peer-to-peer car sharing program. However, the act does not expressly indicate that surplus lines insurers can provide such insurance coverage.
‘While surplus lines insurers face considerable regulatory hurdles to permissibly satisfy motor vehicle financial responsibility requirements, they have ample opportunities to penetrate the market in other ways.’
Practically speaking, states may be willing in the future to allow more forms of commercial automobile insurance coverage to be satisfied through the surplus lines markets.
As an initial matter, the explosion of TNC legislation in recent years nearly uniformly invites surplus lines involvement, which may hint at a trend to separate commercial automobile insurance from the prohibition against surplus lines satisfaction of financial responsibility requirements in general.
Absent an exemption under applicable law (such as inclusion on a state surplus lines export list), insurance may only be placed with surplus lines insurers when a “diligent search” of the admitted market has been conducted by the surplus lines broker in advance, and many states contain residual market mechanisms which may be more inclined to cover personal lines insurance risks rather than commercial programs.
What About Other Kinds of Motor Vehicle Insurance Coverage?
While surplus lines insurers face considerable regulatory hurdles to permissibly satisfy motor vehicle financial responsibility requirements, they have ample opportunities to penetrate the market in other ways. For example, many states recognize the ability for a surplus lines insurer to write liability insurance coverage in excess of the financial responsibility layer. In New York, the Excess Lines Association of New York has stated that automobile liability insurance “[c]an be written on an excess [surplus lines] basis but the primary coverage must be written by an admitted insurer or by a qualified self-insured retention.” (September, 2017, the “ELANY Compliance Advisor”).
Other kinds of motor vehicle insurance coverages, such as property insurance, hired and non-owned auto (HNOA), uninsured/underinsured motorist coverage and personal injury protection (PIP) are also more generally permissibly available through the surplus lines market. For example, the ELANY Compliance Advisor notes that “[a]lso, garage liability, named non-owner, [and] physical damage . . . can be written on an excess [surplus] line basis.” However, some states regulate these other forms of automobile insurance coverage under the same statutes and regulations that require the issuance of a motor vehicle insurance policy by an authorized insurer, and as such, it is important to investigate each state’s regulatory regime before concluding that a surplus lines insurer can permissibly expand its motor vehicle insurance offerings.
It should also be noted that separate state and federal financial responsibility requirements apply to “motor carriers” that transport property (or in some instances, hazardous materials). As an initial matter, the Federal Motor Carrier Safety Administration requires that motor carriers maintain minimum levels of liability insurance, but allows such insurance to be procured from a surplus lines insurer that is licensed in at least one state. On the local level, a number of states maintain separate motor carrier financial responsibility laws, and there is unfortunately little consistency between the states as to whether surplus lines insurers can play a role in satisfaction thereof, thus requiring a state-by-state analysis for exporting insurance needs to the non-admitted market.
Roads? Where We’re Going, We May Not Need Roads, But We Need the Surplus Lines Market
We may not yet have flying cars (one of only a few ways the Back to the Future franchise missed the mark), but that doesn’t mean technology hasn’t completely transformed the way we get around. The automobile industry looks completely different than it did a mere decade ago, and the demand for creative, innovative and tailored insurance products is soaring.
Yet, the door remains shut in many states for surplus lines insurers to serve the motor vehicle insurance market, and for now, only licensed insurers hold the coveted key. With the expansion of TNC legislation allowing for surplus lines insurers to play in the financial responsibility motor vehicle space, it is time for legislatures to take a new, fresh look at their motor vehicle financial responsibility laws and regulations to help surplus lines insurers provide the insurance backstop that companies, motor vehicle owners and automobile drivers need for their cars to hit the road.
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