Surplus Line Insurance
Various types of insurance can protect us from the many risks inherent in our society. However, some activities and ventures are so risky that typical insurance companies simply aren’t willing to take on the risk of covering them. Luckily, there are other options for coverage. Read on to learn more about surplus line insurance.
Surplus Line Insurance and Diligent Search Requirements
Surplus line insurance is a method of insurance for activities and endeavors that involve a level of risk that is either too high or too unknown for a regular insurance company to take on. This comprises only about 7% of the total market. A well-known insurance market that provides surplus line coverage is Lloyds of London, a U.K. market that can issue surplus lines policies to U.S. consumers. Surplus line insurance is typically more expensive than regular insurance, due to the high risks involved.
The types of situations that are covered by surplus line insurance include:
- A business with a poor loss history, or a new venture business that has no loss history
- A business that by nature is 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
Unlike other types of insurance, surplus line policies can be purchased from an insurer that is not licensed by that particular state. However, there are special licensing requirements for selling surplus line insurance. Surplus line carriers don't have to follow some regulations that apply to other insurance carriers, which allows them to take on more risk. However, due to the decreased regulation, there’s no way to get a claim paid if the insurer goes bankrupt. With regular insurance policies, a state guarantee fund pays out claims in the event that an insurer files for bankruptcy. There are no such assurances with surplus line insurance.
Most states require that an insurance broker conduct a "diligent search" in the standard market before seeking coverage from a surplus line provider. Typically, that means that a specified number of standard insurers (for example, three) must have denied you coverage before your broker may contact a surplus line provider. State laws make exceptions for coverages that aren't available in the standard market.
Surplus Line Insurance and the Law
In 2010, the Nonadmitted and Reinsurance Reform Act (NRRA) was enacted as part of the Dodd-Frank Wall Street and Consumer Protection Act. The goal of the NRRA was to streamline the surplus line market and establish federal standards for the collections of surplus line premium taxes, insurer eligibility, and commercial purchase exemptions. To date, all of the states except Michigan and Washington, D.C. have enacted legislation to implement the NRRA provisions at a state level.
An important provision of the NRRA defines an insured's "home state" in the event that 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, and consequently which state was entitled to collect the surplus line tax. The NRRA resolved these disputes.
Speak with an Attorney about Surplus Line Insurance
If your business involves extraordinary or unique risks, you may need to buy surplus line insurance to ensure proper coverage. A good first step is speaking with an experienced insurance broker about your options. If you have legal questions about surplus line insurance, you may also want to confer with an attorney. Find an experienced insurance lawyer in your area to learn more.