Certificate Of Authority

A producer licensed in Ohio places business with three carriers: one chartered in Ohio, one chartered in Texas, and one chartered in Ireland. From the standpoint of that Ohio producer, how are the three insurers classified?

1. A.Domestic, domestic, foreign.Only the Ohio-chartered carrier is domestic in Ohio. Calling the Texas carrier domestic ignores that domicile is measured against the state in question.
2. B.Foreign, domestic, alien.This misplaces the first two. The Ohio-chartered insurer is domestic in Ohio and the Texas-chartered insurer is foreign there.
3. C.Domestic, alien, foreign.Alien means chartered in another COUNTRY. Texas is another state, which makes that carrier foreign, and Ireland is another country, which makes that carrier alien.
4. D.Domestic, foreign, alien.Correct. Chartered in the state is domestic, chartered in another state is foreign, and chartered in another country is alien.

Why: Insurers are classified by DOMICILE relative to the state in question. A DOMESTIC insurer is incorporated or chartered in that state. A FOREIGN insurer is chartered in another state of the United States. An ALIEN insurer is chartered in another country. The labels shift with the vantage point: the Texas carrier is domestic in Texas and foreign in Ohio.

A prospect asks producer Anwen to explain the difference between the high financial strength rating an insurer displays from an independent rating organization and the CERTIFICATE OF AUTHORITY the same insurer holds from the state. What is the accurate distinction?

1. A.The rating is a state guarantee of solvency; the certificate of authority is a private industry credentialThis reverses both. States do not guarantee solvency and certificates of authority are governmental.
2. B.They are two names for the same document, one used by insurers and one by regulatorsThey are entirely different instruments issued by different bodies for different purposes.
3. C.Both are issued by the state insurance department, but the rating is renewed annually and the certificate is permanentRatings come from private organizations, not the department, and certificates of authority are subject to ongoing supervision.
4. D.The rating is a private organization opinion of financial strength; the certificate of authority is a state license to transact specified lines in that stateCorrect. One is a private opinion, the other a governmental licensing document, and neither guarantees the policy.

Why: A financial strength rating is the OPINION of a private rating organization about an insurer ability to meet its obligations. It is not a government approval, it carries no guarantee, and it can be revised at any time. A certificate of authority is a state issued LICENSE permitting the insurer to transact the lines of business named in it within that state. Holding one means the insurer satisfied the department requirements for admission and remains subject to its solvency oversight and examinations, but it is not an endorsement of financial strength and certainly not a guarantee of any policy. Confusing the two, or implying that state licensure guarantees a policy, is a misrepresentation.

After notice and a hearing, an insurance commissioner determines that Wrenlight Life has been engaging in a prohibited practice. She wants the practice stopped immediately while the question of penalties is still being decided. Which instrument does she use, and what happens if the company ignores it?

1. A.A certificate of authority, which is revoked automatically on any violation.A certificate of authority is the licence permitting an insurer to transact business in the state. Nothing about it is automatic, and revoking it is a far heavier step than ordering one practice to stop.
2. B.A subpoena, which compels the company to stop the conduct.A subpoena compels the production of testimony, records or documents during an investigation. It gathers evidence; it does not prohibit conduct.
3. C.A CEASE AND DESIST order directing the company to stop the specified conduct, with further penalties and licence action available if it is violated.Correct. The order operates immediately on the named conduct, and disobeying it is a separate violation exposing the company to additional fines and to action against its certificate of authority.
4. D.A market conduct examination, which itself bars the conduct while it is under way.An examination is a fact-finding review of a company's claims, underwriting, advertising and complaint practices. It produces a report and may lead to enforcement, but it prohibits nothing by itself.

Why: A CEASE AND DESIST order is the commissioner's direct remedy: it commands a named person or company to stop a specified practice, and it operates immediately, independently of any monetary penalty later imposed. Violating such an order is a separate offence, exposing the violator to additional fines, to suspension or revocation of the certificate of authority or licence, and in most states to enforcement in court.

Two of producer Ingvild clients hold life policies from carriers that have just been placed in liquidation. Client One bought from an insurer holding a certificate of authority in the state. Client Two bought through the SURPLUS LINES market from a nonadmitted carrier, after no admitted insurer would accept the risk. Which client can look to the state life and health guaranty association?

1. A.Client Two only, because surplus lines buyers need the protection moreNeed does not create coverage. Surplus lines policyholders are expressly outside guaranty association protection.
2. B.Client One only, because guaranty association protection extends to policyholders of admitted insurers and not to surplus lines placementsCorrect. The association is funded by and protects the policyholders of licensed insurers; surplus lines carriers are outside it.
3. C.Neither, because guaranty associations cover only property and casualty insuranceEvery state maintains a life and health guaranty association alongside its property and casualty association.
4. D.Both, because the guaranty association protects every resident policyholder regardless of the insurer statusProtection follows the insurer admitted status, not the policyholder residence alone.

Why: Guaranty association protection is one of the benefits of dealing with an ADMITTED insurer. The association is funded by assessments on the licensed insurers doing business in the state, and its protection extends to policyholders of those licensed insurers when one becomes insolvent, subject to statutory coverage limits set by each state. A nonadmitted surplus lines carrier pays no assessments and its policyholders receive no guaranty association protection, which is exactly why surplus lines placements carry a required disclosure warning the buyer of that fact. So only Client One is covered.