New arbitration rules for surplus lines insurance contracts in Texas

The Texas Legislature recently passed Senate Bill 455, which places new rules on provisions in certain surplus lines insurance contracts. S.B. 455 introduces new requirements for arbitration agreements contained within surplus lines insurance contracts that insure risks located entirely within the state of Texas. Arbitration provisions must now provide that the arbitration will occur within and be governed by the laws of the state of Texas. The requirement also provides that the insurance contract will be interpreted in accordance with Texas law. However, S.B. 455 provides a carve out. Contracts may mandate application of out of state law if the insurer provides written notice to the policyholder of the insurer’s request for a different venue as well as a premium credit for the costs incurred to the policyholder resulting from the venue change. S.B. 455 also carves out where an insurer and policyholder may agree by mutual consent memorialized via written form to a different arbitration venue and governance under another state’s laws, when the subject contract exceeds $2 million in insured value. 

Surplus lines insurance companies are those insurers not licensed through the Texas Department of Insurance under current law, but authorized to conduct business in Texas in order to fill a gap in the standard market. Many major insurance companies worldwide participate in the surplus lines market, which serves an important role in the insurance marketplace by insuring risks that pose underwriting challenges.  To facilitate their utility, the Texas Department of Insurance approves which surplus lines insurance companies may do business in the state by ensuring that the companies meet financial requirements, are licensed in their home state or country, and comply with nationwide uniform standards. However, certain representatives have cited growing concerns that choice of law and arbitration provisions in surplus lines contracts circumvented Texas policyholders’ protections by forcing them to participate in costly arbitration proceedings and being subject to the laws of another state. The Texas Legislature definitively confronted the issue with S.B. 455.

S.B. 455 will become effective on September 1, 2025 and applies to all contracts delivered, issued for delivery, or renewed after January 1, 2026. S.B. 455 does not have retroactive effect. Questions remain how courts will interpret the “premium credit” requirement. And while arbitration clauses remain enforceable, the new legislation expressly shows the Texas Legislature’s intent to keep surplus lines disputes originating within the state and subject to Texas law.  Kennedys is able to offer guidance to brokers, insurance agents or insurers navigating these new regulatory requirements. Please contact us with any questions.