Senate bill 1717, signed into law by Democratic Gov. James E. McGreevey on July 1, authorizes the transfer of more than $40 million from the Surplus Lines Insurance Guaranty Fund to the state's general fund.

The measure moved through the legislature during a frantic 11-hour marathon session during which lawmakers and the governor hammered out a balanced budget, which by law was due July 1.

Since taking office in January, Gov. McGreevey has been hard-pressed to close a projected state budget gap of about $2.8 billion for fiscal year 2002 and of $5 billion to $6 billion for fiscal year 2003.

S1717 and its Assembly counterpart A2514 were introduced in the legislature by Sen. Wayne R. Bryant, D-Camden, and Assemblyman Donald Tucker, D-Newark, on June 27, said Mike Koziol, senior director and counsel for the Des Plaines, Ill.-based NAII. By June 30 a combined version of the measure had passed both houses of the legislature.

"There was no chance for us to get some comments in and some public policy debate," Mr. Koziol said.

But "the bottom line is that there are insureds who did pay this money in with the expectation that it was for claim payment," he stressed.

The monies in the fund came from one-time membership fees for new members and through a direct policyholder surcharge, which ended about four years ago, he added.

The NAII opposes these types of pre-assessment funds precisely "because they are frequently used as a deep pocket for budget shortfalls," Mr. Koziol said.

Additionally, Mr. Koziol noted that S1717 narrows the future scope of the fund's coverage. While originally, the fund covered all surplus lines, it will now apply only to medical malpractice liability and owner-occupied dwellings of less than four units. But the law does not limit assessments for the fund to only those covered lines of business, Mr. Koziol said.

"It is entirely possible that insureds of lines other than these two may have to fund future insolvencies because there is now $40 million less in the fund," Mr. Koziol explained.

Surplus lines insurers also provide a funding backstop, and now they themselves "face additional exposure to fund claims because the $40 million is no longer available to pay claims in the event of an insolvency," he added.

Mr. Koziol said there is an open question as to whether New Jersey law permits such a move by the state. "Generally, they probably do have the authority to do a taking like this," he admitted. But the question is "whose monies were they," he continued.

"It is NAII's position that this type of taking of any kind of [insurance] fund is inappropriate because it was not the purpose for which the monies were given into the fund," Mr. Koziol stated.

He suggested that policyholders who paid into the fund may still have policies with surplus lines carriers that might be insolvent, such as Reliance of Illinois, a major surplus lines writer with exposure in New Jersey.

Mr. Koziol said that the next step is to see what happens when the Fund's board meets July 18 to consider whether to take any legal action to protect the funds. "I believe the board has 60 days from the passage of the law to either pay the money or take some action in that regard," he said.

If the Fund board decides to resist handing over the funds, NAII would consider lending its support to any action taken by the board, Mr. Koziol stated.

New Jersey is the only state with a surplus lines guaranty fund, Mr. Koziol said. However, New York is one other state that has a similar pre-assessment fund.

In fact, New York twice raided its pre-assessment guaranty fund, causing the NAII to sue for the inappropriate taking of the monies, Mr. Koziol said. He said the NAII succeeded in the last such lawsuit, requiring that New York pay the monies back into the fund.

Officials with the office of Gov. McGreevey and the State Department of Banking and Insurance could not respond immediately to the NAII remarks.