1In the spring of 2010, I provided an overview of the NAIC's Review of Limited Lines Producer Licenses.2 This article is intended to provide an update to the NAIC's review of Limited Lines producer licenses, as well as an overview of actions that have been taken by the industry, as a result of, or substitute to, the NAIC's approach.
By way of background, limited lines producer licenses run the gamut among the various states as to the type of insurance products covered and the applicable regulatory requirements. Issues with uniformity and reciprocity continue to be a source of utter confusion to regulators and trade alike, as well as an impediment to the development and distribution of new products not otherwise available or conducive to major line products.
In 2009, upon recognition by the National Association of Insurance Commissioners of the issues, the Producer Licensing Task Force ("PLTF") and the Producer Licensing Working Group ("PLWG") were charged with review of limited lines producer licenses.
Overview of Limited Lines Producer Licensing
A Limited Lines producer license is a license authorizing the sale, solicitation or negotiation of a line of insurance other than a major line of insurance (e.g. Life, Accident and Health or Sickness, Property, Casualty, Variable Life and Variable Annuity Products and Personal Lines). At the point when the NAIC commenced the review, the NAIC's Compendium of State Laws on Insurance Topics3 revealed there were approximately fifty- five (55) different types of limited lines licenses available in the various states. The type of limited lines producer licenses, include what are referred to as the five (5) "core" limited lines: car rental, credit, crop insurance, surety, and travel. In addition to the "core" limited lines, some states authorize limited lines licenses for such things as pet, self-storage, communications equipment, pre-paid legal, and motor club among others. A number of states also include a catch-all provision for classification as limited lines as the Commissioner directs.
As previously noted, even within the core limited lines licenses, the regulatory requirements for issuance of a limited line license also vary widely among the states.4These varying requirements are in addition to the issues with having each officer/director of the business entity submit fingerprints5 and biographical affidavits, as well as obtain insurer appointments and/or test requirements of the individuals noted above in their resident state,6 as well as in a few non-resident states.7
Regulatory Response To Achieve Reciprocity/Uniformity
With the passage of the federal Gramm-Leach-Bliley Act ("GLBA") in 1999, the NAIC has been working to avoid certain preemption of state producer licensing laws by compliance with the provisions of Section 321.8 To avoid federal preemption, the NAIC elected the reciprocity route rather than the uniformity route and crafted a model law to assist with meeting the reciprocity requirement. The Producer Licensing Model Act (Model # 218 or PLMA)9 was adopted by the NAIC in 2000 and was intended to serve as the primary vehicle for states to achieve reciprocity, as well as assist in the next step to reach uniformity.
Although the PLMA established uniform definitions for the six major lines of insurance: (1) Life, (2) Accident and Health, (3) Property, (4) Casualty, (5) Variable Life and Variable Annuity, and (6) Personal Lines, the PLMA only specifically addressed one limited line - credit insurance.10 The PLMA did provide certain definitions relating to limited lines, including the definition for:
"Limited lines insurance"11 means those lines of insurance defined in [insert reference to state specific limited line statute] or any other line of insurance that the insurance commissioner deems necessary to recognize for the purposes of complying with Section 8E; and
"Limited lines producer"12 means a person authorized by the insurance commissioner to sell, solicit or negotiate limited lines insurance.
Subsequent to the adoption of the PLMA, in 2002 the NAIC adopted the Uniform Resident Licensing Standards which focused on the certain broad areas not addressed in the PLMA: (1) licensing qualifications, (2) pre- licensing education, (3) licensing testing, (4) integrity/background check standards, (5) license application process, (6) appointment process, (7) continuing education requirements, and (8) limited lines.13
The NAIC's Producer Licensing (D) Working Group (PLWG) is charged with ongoing monitoring of state implementation of the Uniform Resident Licensing Standards ("URLS"). In June 2002, the Uniform Producer Licensing Initiatives Working Group, acting under the direction of the NARAB Working Group, adopted limited lines definitions which are commonly referred to as "core" limited lines â car rental, credit, crop insurance, surety and travel.14
Recognition of the Issue
In 2009, the PLWG was charged with:
Review limited line licensing issues with particular focus on the following: (1) the establishment of a limited line that encompasses several insurance products where the business of insurance is ancillary to the business of the person offering the product, (2) the licensing requirements of individuals selling limited line insurance products, and (3) the fingerprinting of individuals selling limited line insurance products.
Throughout 2009, thoughtful information was presented to the PLWG in an effort to outline necessary changes to the PLMA, as well as provisions of the URLS, which were necessary to address the limited lines issues. Interested parties presented additional concerns regarding the practical aspects of licensing, including particular reference to limited lines issues and best practices, in connection with comments to the revisions to the NAIC State Licensing Handbook and the Uniform Applications. Issues were noted as to reflect how the URLS and the PLMA were unintentionally undermining the goal of reciprocity and increasing the compliance burdens without improving consumer protection. The NAIC's proposed approach to provide a limit of fewer than nine (9) limited lines by any state would do little to address uniformity issues.
Industry, particularly the travel industry, proposed modifications to the PLMA and revisions to the URLS to substantively change the system. The deliberations confirmed that consumer complaints attributable to limited lines products are nominal. Licensing the counter person at a car rental company, the counter person at a self-storage facility, or the travel agent at a travel agency does little to provide consumer protection when the substantive issues of regulatory consumer protection lie with the insurer or the MGA/MGU who developed and distributed the limited lines product. Such method of distribution and product development is demonstratively much like the service agreement and/or extended warranty, which according to the Service Contracts Model Act,15 do not require licensing at the counter or retail level, not to mention those products which contain accidental damage and theft coverage in addition to product defect.
As part of the PLWG effort in 2009, an ancillary16 definition of insurance was developed and then tabled due to resistance of some PLWG members to establish change in the current process. Issues were presented which included whether to include "core" limited lines in the definition of "ancillary" limited lines. Some regulators expressed concern with a new ancillary line definition because of the belief that implementation would require legislative action. Some regulators also objected to any changes that would not require those who sold these products to be specifically licensed. As a result, the "ancillary" definition was tabled.
Following the tabling of the "ancillary" definition, the PLWG proceeded to review changes to the core limited lines. The 2010 review by the PLWG included a revision of the Uniform Licensing Standards. Revisions were made to standards 16 (Lines of Authority), 33 (Definition of Core Limited Lines), 34 (Travel), and 37 (Standards for Non-Core Limited Lines). Importantly, standard 34 adopted the Limited Lines Travel Insurance Standard. This standard introduced a definition of travel insurance that was not limited to a specific trip or travel in connection with a common carrier.17 It also introduced the concept of the "travel retailer," a business entity that offers and disseminates travel insurance on behalf and under the direction of the "limited lines travel insurance producer."18
Under these revisions, a travel retailer may offer and disseminate travel insurance under the license held by the limited lines travel insurance producer if certain conditions are met. The producer must hold a business entity license, pay all applicable fees, and must be clearly identified as the licensed producer on marketing materials and fulfillment packages distributed by travel retailers. The producer must also keep a register of all travel retailers offering travel insurance on its behalf containing various information and compliance certifications. At least one employee of the licensed producer must be a licensed individual producer and be designated as a Designated Responsible Producer ("DRP") responsible for the business entity's compliance with state insurance laws, rules, and regulations. The DRP, president, secretary, treasurer, and any other person who directs and controls the licensed producer's insurance operations must comply with the fingerprinting requirements applicable to insurance producers in the resident state of the business entity. Each employee of the travel retailer must receive training before offering and disseminating travel insurance. If these requirements are met, individual employees are not required to obtain a license.
In addition to the adoption of a Limited Lines Travel Insurance Standard, the PLWG adopted standards for non-core limited lines in Standard 37 of the Uniform Licensing Standards. Under this standard, states will consider insurance offered incidental to the product being sold to be a limited line insurance product. These products should be offered in accordance with licensing requirements substantially similar to those required of limited lines travel insurance producers. Employees of licensed limited lines producers would not be required to be licensed if they receive training and do not receive a commission or compensation dependent on the placement of the insurance product.
In 2011, The PLWG again revised the Uniform Licensing Standards. Standard 16 was revised to state that all non-core limited lines, such as portable electronics insurance, legal expense insurance or pet insurance should be offered in accordance with standard 37. A Crop Limited Lines Standard was adopted requiring both individuals and business entities to be licensed. Appointments or affiliations will be required for crop if the state requires them for other lines of insurance. Surety was removed as a core limited line and is now considered casualty coverage. The 2011 revisions also encouraged states to eliminate testing requirements for limited lines, excluding crop or surety if classified as a limited line. In addition, the PLWG recommended definitions for limited lines pet insurance producer, pet insurance, and legal expense insurance.
After the adoption of the travel insurance standards, the push began to have the standards adopted by the states. The National Conference of Insurance Legislators ("NCOIL") considered a proposed Limited Lines Travel Insurance Model Act in 2012.19The proposal essentially adopted the Limited Lines Travel Insurance Standard, although it added a definition of "offer and disseminate"20 and offered a substantially similar definition of "travel retailer." The proposal also allowed travel retailers to receive a commission if the licensing standards are met. A substitute amendment to the NCOIL Model Act was also proposed. Among the proposals in the amendment were requirements for certain written disclosures,21 enhanced training requirements, specific disclosure language regarding the scope of coverage, and signage requirements. The amendment was criticized as being too California-specific rather than generally applicable, making unnecessary changes, and being potentially confusing to consumers. Among states that have adopted or proposed legislation based on the Model Act, only the amendment's disclosure requirements have been widely adopted.22
Thanks to the work of legislators such as Representative Robert Damron and Representative Steve Riggs,23 both of Kentucky, many states have adopted or proposed legislation, rules, or regulations that address travel insurance licensing.24 Unfortunately, many states have not adopted or considered adopting the new standards, and there is continued variation among the states that have adopted some form of regulation.25 For example, several states, such as Colorado, continue to define travel insurance differently, often limiting it to coverage for a specific trip and sold in connection with a common carrier. Still other states allow employees to avoid licensing requirements, but only for certain businesses, such as vehicle rental agencies.26 Several states with new policies effective in 2013 cover employees but do not cover authorized representatives.27Others have interpreted the new regulations differently than the NAIC intended.28
While travel insurance has received more attention than other limited lines in recent years, it is not the only area seeing activity. In addition to the changes and proposals mentioned above, portable electronics as a limited line has grown in popularity in recent years. In 2011, the NAIC considered a proposed standard for limited lines portable electronics insurance, although this proposal was not adopted. The proposal defined "portable electronics,"29 "portable electronics vendor,"30 and "portable electronics insurance,"31 among others. Under the proposal, employees and authorized representatives of vendors would be exempt from individual licensing if the vendor held a valid license. Material policy terms must be disclosed, and employees must receive training. Employees may receive incidental compensation. Vendors may also bill and collect for the insurance product and are not required to segregate funds under certain conditions. Regarding applications, the proposed standard did not require DRPs, if required by the state, to be employees, although an employee or officer responsible for compliance must be designated if less than fifty percent of the vendor's revenue is from the sale of portable electronics insurance. If more than fifty percent of revenue is from such sales, the application must disclose information for all owners with ten percent interest or voting interest, partners, officers and directors, or members or managers of a limited liability company. The application must also disclose the location of the applicant's home office.
Despite the failure of the standard at the NAIC, many states have adopted portable electronics insurance limited lines that largely track the proposal.32 While almost every state has applicable legislation that is substantially similar to the proposal, there are still differences from state to state.33 While most states allow licensing under a general limited lines license or a limited lines license specific to portable electronics, Virginia requires the vendor to have a limited lines property and casualty insurance license. As of July 1, 2014, Idaho and Nevada will no longer issue portable electronics limited lines licenses to non- residents if the non-resident's home state does not have such a line. Instead, both states will require a property and casualty license, two separate lines under the laws of both states. Despite these differences, all states with legislation allow employees to escape individual licensing requirements.
Next Steps
While much progress has been made regarding the standardization of limited lines licensing, particularly for travel and portable electronics, much still needs to be done. As groups such as the U.S. Travel Insurance Association continue to lobby for changes in legislation, rules, and regulations and their interpretation, the law will likely continue to change. As stated in my original overview in 2010, we will have to wait and see whether the necessary changes can be made to obtain true reciprocity among states and achieve uniformity that provides functional and appropriate regulation for limited lines products.
1. Greg Mitchell is a member in the Lexington, Kentucky office of Frost Brown Todd LLC.
2. See FORC Journal Vol. 21 Edition 1 - Spring 2010.
3. See the NAIC's Compendium of State Laws on Insurance Topics, Lists of Producer Licensing: Limited Line, I-PL-10-1.
4. See FORC Journal Vol. 21 Edition 1 - Spring 2010.
5. Alaska, Arizona, Connecticut, Florida, Georgia, Idaho, Louisiana,Montana, New Jersey, Nevada, Ohio, Oregon, Pennsylvania, Tennessee, Texas,Utah, and Washington require fingerprints for resident limited lines producer applicants.
6. Some states continue to require pre-license testing for limited lines producer applicants (e.g. Kentucky) while others require an approved course of instruction to be provided by the insurer.
7. California, Florida, Washington continue to require fingerprints from non-resident limited lines producers. California and Washington have recently advised that fingerprints for non-resident limited lines producers will no longer be required if the resident state requires fingerprints at licensure.
8. For those who do not follow these issues, Section 321 required a majority of states, not later than three years after the effective date, to enact: (1) uniform laws and regulations governing the licensure of individuals and entities authorized to sell and solicit the purchase of insurance within the state; or (2) reciprocity laws and regulations governing the licensure of non-resident individuals and entities authorized to sell and solicit insurance within those states.
9. NAIC Model # 218.
10. PLMA Section 2G.
11. PLMA Section 2I.
12. PLMA Section 2J.
13. The Limited Lines Subgroup was charged with developing standard definitions for the eight most common limited lines licenses. These limited lines licenses were identified at a meeting of the Uniform Producer Licensing Initiatives Working Group in August, 2001 and included Credit,Car Rental, Crop/Hail, Industrial Fire, Motor Club, PreNeed Life, Travel and Surety.
14. Originally motor club, industrial fire and funeral expense insurance was also included in the limited lines definitions proposed by the Subgroup but removed prior to adoption for various reasons, including the limited number of states having such lines in effect at the time of consideration.See March 18, 2002 Report of the Limited Lines Subgroup and Uniform Producer Licensing Initiatives Subgroup Report of June 8, 9, 10, 2002.
15. NAIC Model # 685.
16. Limited Lines Ancillary Insurance: Specific types of insurance offered, solicited, or sold to the consumer under an individual policy or enrolled in a group or master policy as an add on in connection with and incidental to non insurance goods or services, including coverage for (i)pet, (ii) self-service storage, (iii) mobile communication; (iv) travel,(v) car rental, or any other similar coverages as designated by the insurance commissioner.
17. "Travel Insurance" means Insurance coverage for personal risks incident to planned travel, including but not limited to:a. Interruption or cancellation of trip or event;b. Loss of baggage or personal effects;c. Damages to accommodations or rental vehicles;d. Sickness, accident, disability or death occurring during travel.Travel insurance does not include major medical plans, which provide comprehensive medical protection for travelers with trips lasting 6 months or longer, including for example, those working overseas as an ex-patriot or military personnel being deployed.
18. "Limited Lines Travel Insurance Producer" means an insurer designee, such as a managing general underwriter, managing general agent,or limited lines producer of Travel Insurance.
19. The original proposal was introduced by Representative Robert Damron of Kentucky.
20. "Offer and disseminate" means providing general information, including a description of the coverage and price, as well as processing the application, collecting premiums, and performing other non-licensable activities permitted by the state.
21. The disclosures included summarized material terms and conditions,the process for filing a claim, the process for cancelling coverage, the identity and contact information of the insurer, and the name and contact information of the limited lines travel insurance producer.
22. Alabama, Alaska, Arkansas, California, Georgia, Missouri, Montana,New Mexico, North Carolina, Rhode Island, Texas, and Virginia have adopted the same or similar disclosure requirements. Arizona and Illinois have proposed legislation pending which, if passed, would also adopt disclosure requirements. However, California has adopted policies most similar to the substitute amendment, including specific disclosure language.
23. Representatives Damron and Riggs are current members of the NCOIL Executive Committee, with Representative Riggs serving as Treasurer. Both have been instrumental in the introduction, formation, and passage of new insurance legislation, rules, and regulations.
24. Alabama, Alaska, Arizona, Arkansas, California, Florida, Georgia,Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, Montana, New Mexico, North Carolina, Oklahoma, Rhode Island, Texas, Virginia,Washington, and Wyoming have all either adopted or proposed travel insurance legislation, rules, or regulations.
25. Special thanks is given to Jack Zemp, vice president and deputy general counsel of Allianz Global Assistance and chairman of the U.S.Travel Insurance Association's law and regulations committee, for his contributions and insights regarding recent changes to the regulation of the travel insurance industry.
26. E.g. South Carolina, Idaho. As of May 1, 2013, Idaho's Department of Insurance was in the process of drafting regulations or bulletins regarding travel insurance.
27. As of this writing, eighteen states have new legislation, rules, or regulations for 2013. Of those states, seven do not cover authorized representatives under the limited lines travel insurance producer license,while it is unclear whether authorized representatives are covered under Alaska's new legislation.
28. Washington has adopted regulations similar to the NAIC's model,but continues to require that travel agencies be licensed, not just the producers of the insurance product.
29. "Portable electronics" means electronic devices that are portable in nature, their accessories and services related to the use of the devise.
30. "Portable electronics vendor" means a person in the business of engaging in portable electronic transactions directly or indirectly.
31. "Portable electronics insurance" means insurance providing coverage for the repair or replacement of portable electronics against any one or more of the following causes of loss: loss, theft, inoperability due to mechanical failure, malfunction, damage or other similar causes of loss.
32. Every state and the District of Columbia has adopted or proposed legislation regarding portable electronics insurance. As of this writing,only Connecticut, Iowa, Massachusetts, North Dakota, and Wyoming had not adopted legislation.
33. The majority of states adopted the same or substantially the same definition of portable electronics, although some created a detailed list of covered devices. Most states require vendors to disclose the insurance coverage may be duplicative. Some states require funds be held in segregated accounts. The number of days notice required to terminate or alter a policy, while not specified in the proposal, varies by state. Not all states require a DRP or disclosure of ownership interests if portable electronics insurance accounts for more than fifty percent of revenue,while Maryland requires such disclosure for only twenty-five percent. Many states also require maintenance of a register similar to the register required for limited lines travel insurance.