Surplus Lines Insurance

There are many types of insurance products available today. Insurance offers policyholders protection from many risks inherent in our society. Some activities are so risky or new that most insurance companies won't cover them. However, there are other options for coverage — namely, the surplus lines market. Read on to learn more about surplus lines insurance.

What Is Surplus Lines Insurance?

Surplus lines insurance is a type of property and casualty insurance. Surplus lines insure risks conventional brokers in the insurance industry will not underwrite. Such coverage is generally unavailable under standard policies. The conventional insurance markets consider the unknown or high risks too costly to insure.

Surplus lines carriers provide insurance coverage. A well-known insurer providing surplus line coverage is Lloyds of London. It's a U.K.-based insurer issuing surplus lines policies to U.S. consumers.

Examples of Surplus Lines Coverage

The types of situations covered by surplus lines insurance include:

• A business with a high number of claims in its history
• A new venture business with no loss history (a loss history shows the history of claims made against an insurance policy)
• A business that is inherently risky or whose risks are difficult to assess, such as vacant properties, bars, and dance clubs
• Manufacturers of high-risk products like firearms and hazardous materials hauling
• Special events like concerts or hole-in-one contests

Surplus lines insurance is typically more expensive than regular insurance. There's a high level of potential risk involved.

Purchasing Surplus Lines Policies

Buyers can purchase surplus lines policies from a surplus lines broker. Surplus lines insurance is a specialized coverage written by unlicensed, nonadmitted insurance companies. Nonadmitted carriers do business through brokers in states where they do not have surplus lines licenses. They can be considered too risky or rare for conventional insurers.

Surplus lines carriers are not required to be licensed in the buyer's state or follow the same state regulations as admitted carriers. However, nonresident surplus lines carriers must be licensed in the state where they are based. A nonadmitted insurance carrier must comply with special licensing requirements.

Purchasing Surplus Lines Can Come With Additional Risks

Purchasing surplus lines can offer benefits that are unavailable through other insurance carriers. Surplus lines insurance covers many financial hazards that conventional insurers consider nonstandard risks. However, purchasing surplus lines insurance comes with additional risks to policyholders.

Surplus line carriers aren't subject to all regulations that apply to other insurance carriers. This allows them to take on more risk for a higher premium. Due to the decreased regulation, policyholders can be unprotected in certain situations.

There are no assurances of solvency with surplus lines insurance. With conventional insurance policies, state guaranty funds pay out claims if an insurer cannot. This can occur if an insurer files for bankruptcy or is otherwise insolvent.

State guaranty funds are funded by other insurers in case one of them goes bankrupt. If a surplus lines carrier fails, the state will not step in to make payments on claims. However, according to the National Association of Insurance Commissioners (NAIC), surplus lines insurers have a historically low insolvency rate.

Surplus Lines Insurance and the Law

The states regulate the insurance marketplace. States license insurance companies, brokers, and agents. Each state has a department of insurance that oversees the insurance industry within a state. The admitted market includes conventional insurance carriers. A surplus lines insurer is also known as a nonadmitted or unlicensed carrier.

Admitted carriers must follow specific state regulations in the jurisdictions where they sell insurance. These regulations can include:

• Limits on how much the insurer can charge
• Limits on risks the insurer can cover
• Content of policy forms
• Procedures for handling claims

Surplus lines carriers aren't subject to these regulations, which allows them to take on higher risks. However, this does not impact the validity of policies sold by licensed surplus lines brokers.

Surplus lines insurance is subject to laws and regulations. The nonadmitted designation for surplus lines carriers means they are subject to different rules from those that govern admitted or standard carriers.

Nonadmitted and Reinsurance Reform Act

In 2010, Congress enacted the Nonadmitted and Reinsurance Reform Act (NRRA) as part of the Dodd-Frank Wall Street and Consumer Protection Act. The goal of the NRRA was to streamline the surplus line market. The NRRA established federal standards for:

• Collecting surplus lines premium taxes
• Insurer eligibility
• Commercial purchase exemptions
• Limiting regulatory authority of surplus lines transactions to the insured's home state

A key provision of the NRRA defines an insured's home state if the insured does business in multiple states. Before the enactment of the NRRA, there were frequently conflicts over which state had jurisdiction over a broker. When this occurred, it was unclear which state was entitled to collect the surplus line tax. The NRRA resolved these disputes.

Diligent Search Requirements

Most states require an insurance broker to make a diligent effort to find coverage for a customer. Insurance agents must conduct a diligent search in the standard market. If nothing in the standard market is suitable, they can seek coverage from a surplus lines provider.

Typically, a broker may contact a surplus lines provider if a specified number of standard insurers deny coverage. State laws make exceptions for coverage unavailable in the standard market.

Speak With an Attorney About Surplus Lines Insurance

If your business involves extraordinary or unique risks, you may need to buy surplus lines insurance to ensure proper coverage. Speaking with an experienced surplus lines agent about your options is an excellent first step. If you have legal questions about surplus lines insurance, it is wise to contact an attorney. Find an experienced insurance lawyer in your area to learn more.