On November 20, 2010, the United States District Court for the Eastern District of Wisconsin issued a decision that sent shock waves through the surplus lines community. In Edward E. Gillen Co. v. Insurance Co. of the State of Pennsylvania, No. 10-C-564, 2010 WL 431 4266 (E.D. Wis. Nov. 2, 2010), the Court ruled Wisconsin law requires surplus lines insurers to file and obtain approval from the Wisconsin Office of the Commissioner of Insurance (OCI) for all Wisconsin policies. As a general rule, surplus lines insurers doing business in Wisconsin historically have not filed their policy forms with OCI and so the surplus lines industry has been following this case very closely.
The plaintiff-insured in Gillen filed a suit for coverage under a surplus lines liability insurance policy. The defendant-surplus lines insurer sought to enforce an agreement to arbitrate in the policy and asked the Court to dismiss the lawsuit in favor of an arbitration proceeding. The Court found that the agreement to arbitrate was not enforceable because the policy had not been filed with, and approved by, OCI.
In asking the Court to enjoin the arbitration proceeding, the plaintiff-insured in Gillen relied on Wis. Stat. § 631.85, which provides that agreements to arbitrate in insurance policies are “subject to the provisions of s. 631.20.” Section 631.20, in turn, requires insurers to obtain approval of their policy forms from OCI. Because the defendant-surplus lines insurer had not obtained policy form approval from OCI, the plaintiff-insured claimed that the agreement to arbitrate was not enforceable.
In response, the defendant-surplus lines insurer argued that Wis. Stat. § 618.41 excused surplus lines insurers from Wisconsin's form filing requirements. Section 618.41(11) provides:
(11)Form Regulation. The commissioner may by rule subject policies written under [Wisconsin's surplus lines statute] to as much of the regulation provided by Chapters 600 to 646 and 655 for comparable policies written by authorized insurers as the commissioner finds to be necessary to protect the interests of insureds and the public in this state.
Because OCI had not issued a regulation requiring surplus lines insurers to obtain approval of their policy forms, the defendant-surplus lines insurer asserted that the requirements of sections 631.85 and 631.20 did not apply to it.
The Court rejected the defendant-surplus lines insurer's argument. In so ruling, the Court relied heavily on the stated applicability of Chapter 631, where Wisconsin's form filing and approval requirements are found. The applicability statute in Chapter 631 provides:
631.01 Application of statutes. (1)General. This chapter and Chapter 632 apply to all insurance policies and group certificates delivered or issued for delivery in this state, on property ordinarily located in this state, on persons residing in this state when the policy or group certificate is issued, or on business operations in this state, except:
- As provided in ss. 600.01 and 618.42
- On business operations in this state if the contract is negotiated outside this state and if the operations in this state are incidental or subordinate to operations outside this state, unless the contract is for a policy of insurance to cover a warranty, as defined in s. 100.205(1)(g), in which case the provisions set forth in sub. (4m) apply
- As otherwise provided in the statutes
In its final analysis, the Court found that there was no provision in Chapter 631 that excused surplus lines insurers from Wisconsin's form filing and approval requirements. The Court stated, “[the defendant-surplus lines insurer's argument] directly conflicts with § 631.01(1), which provides that ch. 631 applies to all insurance policies delivered or issued for delivery in this State.” (Emphasis supplied by the Court in its decision.) Accordingly, the Court denied the defendant-surplus lines insurer's motion to dismiss and, instead, enjoined the insurer from proceeding with its demand for arbitration.
The case is currently on appeal to the Seventh Court of Appeals. As of the writing of this article, briefing has been stayed pending mediation. Regardless of the outcome of the mediation, a legislative solution appears to be one viable method to resolve the concern that the Gillen decision has cast across the surplus lines community.