Commissioner of Insurance Kent Sullivan left the office on Sept. 30 with a host of accolades for modernizing the Texas Department of Insurance and making it more accessible and more understandable to Texas policyholders and complainants. His recent actions in regard to a unit of the department under his supervision, however, earn him a less favorable review. Sullivan departs having ordered a Plan of Operation on the Surplus Lines Stamping Office of Texas that sidestepped the lawful procedure for amending it, included elements that went beyond his authority under the Texas Open Meetings Act, and set up loads of discretionary supervision by TDI of stamping office personnel and procedures.

In June 2018, the SLTX board of director’s general counsel informed board members that the pending rewrite of the surplus lines regulation, which was adopted by the end of that year, would remove the Plan of Operation from Chapter 15 of the Texas Administrative Code, thus giving the board more flexibility to make changes to the Plan of Operation, making the plan more analogous to an association’s bylaws. “Now 30 years later, we have come to the point to where the Plan of Operation now is not going to be an official formal rule,” Alex Gonzales told the board.

It appeared to the board in 2018 that the change represented a shift from cumbersome to straightforward. The Plan of Operation would cease being a formally adopted rule, which involves statutorily burdensome administrative procedures, including potential legislative committee hearings and months of delay before final adoption. Instead, the Plan of Operation would be an internally developed one that would easily meet the regulator’s muster. The actual result of leaving the protections of the Administrative Procedure Act was not foreseen. No one understood that this action would eliminate due process review.

On July 3, 2020, then-Commissioner Sullivan ordered a new Plan of Operation for the Surplus Lines Stamping Office of Texas, a plan that asserts a more entangled supervisory role of TDI over the board and staff of the stamping office and occasionally exceeds statutory boundaries. By issuing the plan as an order, the commissioner was able to skirt the demands of rule making, including oversight by the legislature. The term order is not defined in the Insurance Code, or the Government Code, for that matter.

How this plan came about was the subject of a public information request made by the Reporter on June 23. Response by TDI to the request was made in two installments, first on July 21 then finally on September 30. The second response was delayed in part by coronavirus but more so by the department seeking an opinion from Texas Attorney General Ken Paxton on whether the documents requested constituted information that could be withheld from public view.

The Reporter’s June 23 public information request stated: “I would like print screens of all the metadata/properties associated with the original draft, subsequent drafts and final draft of TDI’s proposed plan of operation for the Surplus Lines Stamping Office of Texas. It is expected that these screens will reveal the original author of the document, all editors of the document, the date the document was created, along with dates of modification, along with successive sizes of the document and editing times.”

Initially, TDI released metadata associated with documents created on June 3 and June 4; however, following instruction from the attorney general’s office, TDI released a document created on April 30, which was identified as the document the department shared with the executive director and a board member of the stamping office. All three documents released were limited to the properties of PDF files created from underlying word processing files; hence, they bore only the date and size of the completed draft, not when the word processing file was created.

The public information request was made by the Reporter to determine if the prescribed process for amending the Plan of Operation, which was in effect at the time, was followed. The amendment process, which remains essentially the same under the July 3 ordered Plan of Operation, requires a two-thirds affirmative vote of the SLTX board, then written approval of the commissioner of insurance.

The amendment brought by the SLTX board of directors took the form of a redraft of the Plan of Operation, as the existing Plan of Operation was severed from the Texas Administrative Code in December 2018. The surplus lines regulation (TAC Title 28, Chapter 15) adopted at that time included some elements that were removed from the prior regulation’s section that contained the stamping office’s Plan of Operation. Until a rewrite of the plan could occur, the new Chapter 15 regulation recognized the existing Plan of Operation, except for parts it superseded.

It took about 10 months for the SLTX board to tackle the task of updating the Plan of Operation. With more urgent business of the board settled by October 2019, then-Board Chairman Lorrie Cheshier, Worldwide Facilities, MHI-MGA Division, formed a Plan of Operations Working Group, naming nine members to the group, including three industry board members; two other surplus lines industry representatives; two representatives of surplus lines insureds, one of whom was a board member, and a representative each from TDI and the Texas Comptroller of Public Accounts. 

While Rosemarie Marshall, AmWINS Access Insurance Services, was originally named chairwoman of the working group, the role was passed to fellow board member and committee member, Teri Brinson, LP Risk, when Marshall became chairman of SLTX in March 2020.

Brinson reviewed the SLTX draft of the new Plan of Operations during the May 21 board meeting. Brinson referred to the draft as Version 6, one that had undergone some late changes because the working group received a proposed draft of the plan from TDI marked “Privileged and Confidential.” Brinson explained to the board that some of the new language of Version 6 was lifted from the TDI draft, but that the SLTX draft did not bring in elements of the TDI draft that the working group disagreed with. The board’s vote to approve the new SLTX Plan of Operation as drafted by the working group was unanimous.

The TDI draft that the working group used to make changes to the SLTX draft is the one that TDI transferred to a PDF file on April 30, about three weeks prior to the board meeting. The metadata of this PDF file was ultimately released to the Reporter by advice of the attorney general.

That TDI even had a draft of the plan on April 30 is somewhat in conflict with the original Plan of Operation which called for amendments to the plan to originate with the SLTX board by a two-thirds vote. Earlier versions of TDI’s proposed plan exist, as TDI included such documents under an Exhibit B label in its opinion request to the attorney general. The attorney general found Exhibit B documents to be protected from public view under the attorney-client privilege. The attorney general wrote that these communications were “between department attorneys and employees that were made for the purpose of providing legal services to the department. .(T)he communications were intended to be confidential and have remained confidential.”

The very existence of these drafts indicates that work on a TDI-version of a Plan of Operation for the stamping office began earlier than April 30, possibly as early as the formation of the SLTX working group back in October 2019 or the adoption of the rewrite of the surplus lines regulations in December 2018. By April 30, TDI apparently had its own version of the stamping office’s Plan of Operation lying in wait to become the substitute amendment to whatever the board would send.

The TDI representative to the SLTX working group declined to attend the group’s meetings, citing what she believed to be a conflict, as she would be charged by her role at TDI to review the Plan of Operation that the stamping office would submit. Hence, TDI and SLTX did not share a deliberative process role in crafting the Plan of Operation. Still, she regularly attended board meetings of SLTX, not once publicly informing the board that TDI was already working on its own version of a Plan of Operation for the Stamping Office.

In the long run, the SLTX board was forced to live under a Plan of Operation that bore little to no input from the board whose recommended amendments to the TDI draft were largely ignored. Any dissatisfaction with the plan remains unspoken by all SLTX board members, whether they work for regulated entities or not. The stamping office board and staff set out to come into full compliance with the Plan of Operation TDI ordered on July 3.

Going forward, under the July 3 Plan of Operation, the stamping office must labor under several restrictions set by the commissioner of insurance, the supervisory authority on all Plan of Operations matters. Keep in mind that a regulator cannot include in regulation or rule that which goes beyond the law; this plan was promulgated not by rule but by commissioner’s order. Among its restrictions:

  • A near doubling of the meeting notice requirements that are set by the Texas Open Meetings Act. While state law requires seven days’ notice, the Plan of Operation requires 10 days; the open meeting law counts all calendar days; TDI’s plus three days must be only business days. In contrast, the Texas Windstorm Insurance Association, another insurance related quasi-government entity, must provide 11 days’ notice of a meeting. However, this requirement on TWIA was passed by the legislature as an exception to the open meetings law. (Insurance Code Sec. 2210.105(1)) The Plan of Operation requirement by order exceeds statutory requirements, something that cannot be done by rule or regulation.
  • Further, all meeting materials must be sent to TDI with the meeting notice. In July, this requirement set up the potentially conflicting situation of TDI receiving a host of documents that the board was to review at its next meeting to determine if the documents should be sent in current form or revised form to TDI under the new Plan of Operation.
  • Representatives of TDI cannot be excluded from attending a closed session of a board meeting, adding another nonstatutory expansion of the open meetings law. In contrast, TWIA also bears this intrusion; however, this authority is set by law, not commissioner’s fiat. (Insurance Code Sec. 2210.105(2-g)).
  • TDI can rewrite all stamping office policies and many policies applying to the board: board training; conflict of interest; competitive bidding procedures; investment and cash management policy; all committee charters, and the antitrust policy.
  • The commissioner can reject the board’s selection of an executive director and the proposed terms of employment. The commissioner can also, at his sole discretion, terminate the executive director.
  • Directors can be removed from their service on the board at the discretion of the commissioner.

The difference between a rule and an order is a rule must align with law; creating a rule involves a due process procedure; rules can be judicially contested. In contrast, an order, well, at least this order means “I’m your regulator; I can do what I want.”