We believe you may be required to accept a private flood insurance policy with a Section 445 disclaimer if it meets the definition of “private flood insurance.” However, we recommend confirming that the insurer is approved to engage in the business of insurance in Illinois and that the policy meets the other requirements for mandatory acceptance outlined in the flood insurance regulations before concluding that you must accept this policy.

The flood insurance regulations require a bank to accept a flood insurance policy that meets the “private flood insurance” definition, which among other things, requires that a private flood insurance policy be issued by an insurance company that is “licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located.” Despite this insurer’s lack of Illinois authorization, we believe it is possible that this insurer qualifies as a non-domestic surplus line insurer that is “otherwise approved” to engage in the business of insurance in Illinois.

Non-domestic surplus line insurers are treated as “unauthorized issuers” and must print the “Notice to Policyholder” language described in your question on the policy to alert the policyholder that the company is “not authorized and licensed to transact business in Illinois” and that the policy is “not covered by the Illinois Insurance Guaranty Fund.” The “unauthorized issuer” label means that the insurance company lacks a certificate of authority in Illinois — but it does not mean that the company is ineligible to issue policies in Illinois. Rather, Section 445 of the Illinois Insurance Code expressly allows surplus line insurance to be obtained from an Illinois-licensed “surplus line producer,” which may procure policies from non-domestic surplus line insurers if certain conditions are met. Consequently, a flood insurance policy issued by this company may meet the definition of private flood insurance — requiring you to accept it — if the insurer has been approved to engage in the business of insurance by the Illinois Department of Insurance and the policy meets the FDIC’s other enumerated requirements for private flood insurance (included in the resources below).

The newly released 2022 Interagency Q&As Regarding Flood Insurance suggest that lenders “refer to the website of the State insurance regulator where the collateral property is located to determine whether a particular insurer is licensed, admitted, or otherwise permitted to issue an insurance policy in a particular State.” If the lender cannot determine this information from the website, it can contact the state insurance regulator directly. Information on surplus line insurer eligibility also may be available in the Consumer Insurance Search tool available on the National Association of Insurance Commissioners (NAIC) website, and lenders may consult commercial service providers regarding the eligibility of surplus line insurers in particular states if they have a reasonable basis to believe that the service providers have reliable information. Additionally, if an unauthorized insurer is domiciled outside of the United States, you may review the NAIC’s Quarterly Listing of Alien Insurers.

As such, we recommend checking the Illinois Department of Insurance’s “Company Profile Search” and the Surplus Line Association of Illinois’s “List of Ineligible Surplus Line Insurers in Illinois” to confirm that this insurer has been approved in Illinois. You also may wish to review the other sources referenced in the Interagency Q&As, as applicable, which are linked in the resources below.

Further, even though the policy contains compliance aid language providing your bank a safe harbor to conclude that the policy meets the definition of private flood insurance without further review, the flood insurance regulations expressly state that you may choose not to rely on the compliance aid and conduct your own due diligence to ensure the policy meets the definition of private flood insurance.

For purposes of safety and soundness, we note that although surplus line insurers are not covered by the Illinois Insurance Guaranty Fund, the Illinois Insurance Code provides that “licensed surplus line producers may procure surplus line insurance from an unauthorized insurer domiciled in any state only if the insurer . . . has standards of solvency and management that are adequate for the protection of policyholders.” There is an exception that allows a surplus line producer to procure insurance from an insurer that does not meet these standards — but only if the surplus line producer gives the insured prior written warning of this fact.

For resources related to our guidance, please see:

• FDIC Flood Insurance Rules, 12 CFR 339.3(c)(1) (“An FDIC-supervised institution must accept private flood insurance, as defined in § 339.2, in satisfaction of the flood insurance purchase requirement in paragraph (a) of this section if the policy meets the requirements for coverage in paragraph (a) of this section.”)

• FDIC Flood Insurance Rules, 12 CFR 339.2 (“Private flood insurance means an insurance policy that:

(1) Is issued by an insurance company that is:

      (i) Licensed, admitted, or otherwise approved to engage in the business of
      insurance by the insurance regulator of the State or jurisdiction in which the
      property to be insured is located; or

      (ii) Recognized, or not disapproved, as a surplus lines insurer by the
      insurance regulator of the State or jurisdiction in which the property
      to be insured is located in the case of a policy of difference in
      conditions, multiple peril, all risk, or other blanket coverage insuring
      nonresidential commercial property;

(2) Provides flood insurance coverage that is at least as broad as the coverage provided under an SFIP for the same type of property, including when considering deductibles, exclusions, and conditions offered by the insurer. To be at least as broad as the coverage provided under an SFIP, the policy must, at a minimum:

      (i) Define the term ‘flood’ to include the events defined as a ‘flood’ in an SFIP;

      (ii) Contain the coverage specified in an SFIP, including that relating to
      building property coverage; personal property coverage, if purchased
      by the insured mortgagor(s); other coverages; and increased cost of
      compliance coverage;

      (iii) Contain deductibles no higher than the specified maximum, and include
      similar non-applicability provisions, as under an SFIP, for any total policy
      coverage amount up to the maximum available under the NFIP at the time
      the policy is provided to the lender;

      (iv) Provide coverage for direct physical loss caused by a flood and may only
      exclude other causes of loss that are excluded in an SFIP. Any exclusions
      other than those in an SFIP may pertain only to coverage that is in addition
      to the amount and type of coverage that could be provided by an SFIP or
      have the effect of providing broader coverage to the policyholder; and

      (v) Not contain conditions that narrow the coverage provided in an SFIP;

(3) Includes all of the following:

      (i) A requirement for the insurer to give written notice 45 days before
      cancellation or non-renewal of flood insurance coverage to:

            (A) The insured; and

            (B) The FDIC-supervised institution that made the designated loan
            secured by the property covered by the flood insurance, or the
            servicer acting on its behalf;

      (ii) Information about the availability of flood insurance coverage under the
      NFIP;

      (iii) A mortgage interest clause similar to the clause contained in an SFIP; and

      (iv) A provision requiring an insured to file suit not later than one year after the
      date of a written denial of all or part of a claim under the policy; and

(4) Contains cancellation provisions that are as restrictive as the provisions contained in an SFIP.”)

• Illinois Insurance Code, 215 ILCS 5/445(1) (“‘Surplus line insurance’ means insurance on a risk:

(A) of the kinds specified in Classes 2 and 3 of Section 4 of this Code; and

(B) that is procured from an unauthorized insurer after the insurance producer representing the insured or the surplus line producer is unable, after diligent effort, to procure the insurance from authorized insurers; and

(C) where Illinois is the home state of the insured, for policies effective, renewed or extended on July 21, 2011 or later and for multiyear policies upon the policy anniversary that falls on or after July 21, 2011; and

(D) that is located in Illinois, for policies effective prior to July 21, 2011.”)

• Illinois Insurance Code, 215 ILCS 5/445(1) (“‘Unauthorized insurer’ means an insurer that does not hold a valid certificate of authority issued by the Director but, for the purposes of this Section, shall also include a domestic surplus line insurer as defined in Section 445a.”)

• Illinois Insurance Code, 215 ILCS 5/445(10.5) (“[Surplus line] insurance contracts delivered under this Section from unauthorized insurers, other than domestic surplus line insurers as defined in Section 445a, shall have stamped or imprinted on the first page thereof in not less than 12-pt. bold face type the following legend: ‘Notice to Policyholder: This contract is issued, pursuant to Section 445 of the Illinois Insurance Code, by a company not authorized and licensed to transact business in Illinois and as such is not covered by the Illinois Insurance Guaranty Fund.’ . . .”)

• Illinois Insurance Code, 215 ILCS 5/445(1.5)(b) (“Licensed surplus line producers may procure surplus line insurance from an unauthorized insurer domiciled in any state only if the insurer:

(i) is permitted in its domiciliary jurisdiction to write the type of insurance involved; and

(ii) has, based upon information available to the surplus line producer, a policyholders surplus of not less than $15,000,000 determined in accordance with the laws of its domiciliary jurisdiction; and

(iii) has standards of solvency and management that are adequate for the protection of policyholders.

     Where an unauthorized insurer does not meet the standards set forth in (ii) and (iii) above,
     a surplus line producer may, if necessary, procure insurance from that insurer only if prior
     written warning of such fact or condition is given to the insured by the insurance producer
     or surplus line producer.”)

• Illinois Administrative Code, Surplus Line Business Requirements, 50 Ill. Adm. Code 2701.10 (“Policies or contracts of insurance may not be placed with insurers not authorized to do business in Illinois other than through surplus line producers licensed pursuant to Section 445 of the Illinois Insurance Code (the Code).”)

• Interagency Q&As Regarding Flood Insurance, Private Flood Compliance 9 (May 11, 2022) (“How can a lender determine: (i) whether an insurer is licensed or admitted in a particular State, (ii) or whether a surplus lines or nonadmitted alien insurer is permitted to issue an insurance policy in a particular State? A lender may refer to the website of the State insurance regulator where the collateral property is located to determine whether a particular insurer is licensed, admitted, or otherwise permitted to issue an insurance policy in a particular State. If the lender cannot determine this information from the website, the lender could contact the State insurance regulator directly. Further, information with respect to surplus lines insurer eligibility also may be available in the Consumer Insurance Search (CIS) tool available on the National Association of Insurance Commissioners (NAIC) website. Lenders may consult commercial service providers regarding the eligibility of surplus lines insurers in particular States provided the lenders have a reasonable basis to believe that these service providers have reliable information. With regard to nonadmitted alien insurers in particular, lenders could review the NAIC’s Quarterly Listing of Alien Insurers.”)

• Illinois Insurance Code, 215 ILCS 5/445(1.5)(c) (“Alien insurer eligibility. Licensed surplus line producers may procure surplus line insurance from an unauthorized insurer not domiciled in any state only if the insurer meets the standards for unauthorized insurers domiciled in any state in paragraph (b) of this subsection (1.5) or is listed on the Quarterly Listing of Alien Insurers maintained by the International Insurers Department of the NAIC at the time of procurement. The Director shall make the Quarterly Listing of Alien Insurers available to surplus line producers without charge.”)

• Illinois Department of Insurance, Company Profile Search

• Surplus Line Association of Illinois, List of Ineligible Surplus Line Insurers in Illinois

• Illinois Department of Insurance, Contact Us

• NAIC, Consumer Insurance Search Results

• NAIC, Quarterly Listing of Alien Insurers (January 2022)

• FDIC Flood Insurance Rules, 12 CFR 339.3(c)(2) (“An FDIC-supervised institution may determine that a policy meets the definition of private flood insurance in § 339.2, without further review of the policy, if the following statement is included within the policy or as an endorsement to the policy: ‘This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.’”)

• FDIC Flood Insurance Rules, FDIC FIL-8-2019 (February 13, 2019) (“The final rule includes a streamlined compliance aid provision to assist institutions in evaluating whether a flood insurance policy meets the definition of private flood insurance. This provision allows an institution to conclude that a private flood insurance policy meets the definition of private flood insurance, without further review of the policy, if the following statement is included within the policy or as an endorsement to the policy by the insurer: ‘This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.’ An institution may also choose not to rely on an assurance statement and conduct its own due diligence to ensure the private policy meets the definition of private flood insurance.”)

• Illinois Administrative Code, Surplus Line Business Requirements, 50 Ill. Adm. Code 2701.30(c) (“In determining whether the standards of solvency and management of an unauthorized insurer at the time of procurement meet requirements necessary for the protection of policyholders, the surplus line producer shall consider the financial condition of the insurer, the ready acceptance of the insurer in responsible commercial markets, the general reputation of the insurer, and the insurer's past and current performance of its obligations.”)