Court to Hear Suit Challenging State’s Raid on Miss. Surplus Lines Fund

September 4, 2007

The 5th U.S. Circuit Court of Appeals in Jackson, Miss. will hear arguments Oct. 1 about whether the Mississippi Legislature unconstitutionally raided an insurance fund in 2004 to balance the state budget.

The Mississippi Surplus Lines Association sued the state after the Legislature took $2 million from its surplus. Lawmakers raided several small, fee-funded agencies to pay for large budget items such as schools, roads and prisons.

The MSLA claimed it was a private entity and not subject to legislative appropriation or control by the state.

U.S. District Judge Tom S. Lee ruled for the state in 2006. The MSLA appealed to the 5th Circuit, which handles cases from Mississippi, Louisiana and Texas. A three-judge panel in Lubbock, Texas, will hear the appeal.

Surplus line associations represent insurance companies that specialize in high-risk coverage.

According to the court record, MSLA was created in 1997 by private individuals. From 1997 through 2005, MSLA collected about $5.2 million in examination fees while spending only $1.6 million, resulting in an excess of $3.6 million.

The MSLA argued it was not a state agency, citing a 2004 opinion from state Attorney General Jim Hood. The group also said its money was not subject to legislative action.

Under state law, the Mississippi Insurance Department regulates insurance companies and agents, including in-state and out-of-state companies, and eligible non-admitted insurers, also known as surplus lines insurers.

State law also says the Insurance Department can rely upon the advice and assistance of an association of surplus lines agents — in this case, the MSLA — in carrying out regulations. In return, the MSLA can collect an examination fee of 1 percent of premiums charged insurers in return for helping the Insurance Department.

Lee, in his ruling, said if the Insurance Department’s duties weren’t done by MSLA, the insurance commissioner himself would do them or hand them off to another group.

“Moreover, the examination fees, although paid to MSLA by private entities, are not mere membership dues, but rather are assessed by MSLA pursuant to authority granted by the commissioner, as provided by the Legislature, and are intended to be used by MSLA only for the operation of MSLA,” Lee said.

Lee said membership is voluntary to the extent that a surplus lines agent could choose not to write coverage in Mississippi; but if it makes a decision to write coverage in the state, its membership in MSLA is mandatory, according to court documents. If a member fails to pay the fee, he can be banned from writing insurance in Mississippi.

“Contrary to MSLA’s insinuation, these are not simply membership dues. To be sure, the fee must be paid in order for a surplus lines agent to remain a member; but there is nothing voluntary about this arrangement from the perspective of the State, MSLA or the individual ‘members.’

“The excess examination fees held by MSLA are not its private funds but rather are held on behalf of the state, and accordingly, may be claimed by the state without violence to any constitutionally protected interest of MSLA,” Lee said.


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