Surplus lines is the term used for specialty insurance that is beyond what “normal” or standard insurance provides. Surplus lines policies are not “cookie-cutter” policies, but are often hand-tailored policies that can be adapted to your specific needs. While this might sound intimidating and expensive, when you find the right specialist that fits your specific need, the wide range of surplus lines insurance can help your company navigate some very real risks.
What Is Surplus Lines Insurance?
Surplus lines insurance is a type of insurance coverage for buyers who can not buy coverage in the standard/admitted market. Usually, standard firms do not write policies for extraordinary or high risks.
Surplus lines policies insure against a risk that a regular insurance company will not take upon their shoulders. It may comprise old homes located in isolated areas, yachts, day-care liability, product liability, or medical malpractice requirements. The surplus lines market also gives coverage for unique risks, such as skilled athletes who safeguard their body parts.
Surplus line insurance can be utilized by firms or acquired individually. Unlike ordinary insurance, you can purchase this insurance from an insurer not authorized in the insured’s state. This is known as “non-admitted insurance,” but that generally means that the insurance company is registered in another state.
However, you state does indirectly control surplus lines through surplus lines brokers. A surplus line agent should be authorized by the state and thus governed by the state. Surplus lines insurance is mostly composed after coverage has been denied within the standard insurance market. Most states expect surplus lines agents to verify there was a diligent effort to ensure insurance from duly licensed firms before resorting to surplus lines insurance.
Risks And Benefits Associated
Risks that are generally written in surplus lines commonly fall into three categories. It includes:
● Capacity or catastrophe-prone risks- Coverage is too extensive or too risky than insurance companies are ready to take on. Such as a company located near a cyclone or earthquake-prone region or a rock victim firm.
● Unique risks- for example, a company such as an Emu farm.
● Non-standard risks with individual underwriting factors- For example, a high-rise window cleaning or a food truck operator.
Can Surplus Line Agents Obtain Policies With Any Non-admitted Insurance Carrier?
No agent or broker shall obtain policies from unlicensed firms:
● Without practicing diligent effort to ensure the required company is duly legitimate firm;
● Whose criteria of solvency and administration do not serve the prerequisites essential for the safety of the policyholders;
● For any risk which could be placed with a licensed firm except for unusual requirements of the policy; and
● Covers the risk of a class typically covered in the District by licensed companies and which authorized firms would cover at a rate not more than that ordered by licensed firms on other District risks of the similar class.
Surplus Lines Insurance vs. Normal Insurance
Normal insurance companies, also called standard or admitted carriers, obey state laws about how much they can charge and what risks they can and cannot include. On the other hand, Surplus lines insurance does not have to fulfill these laws, enabling them to take on higher risks.
A surplus lines insurer is sometimes cited as a non-admitted or unlicensed carrier, but this does not imply their policies aren’t credible. The designation only indicates they are liable to various laws from those that govern admitted or standard carriers.
Insurance agents are typically licensed as “property and casualty” or “life and health.” An insurance agent that wants to sell surplus lines must be licensed in property and casualty and must take an additional license in surplus lines.
Notable differences in brief :
● According to the American Association of Managing General Agents, admitted carriers are authorized by the states they write and conform to rate and form laws. Surplus lines insurance companies are not licensed by the state but are entitled to run business in a state through a wholesale broker or managing general broker. Typically, a policy can be written after being dismissed by a regular line insurance company three times.
● Normal insurance is subject to state laws, whereas surplus line insurance is not subjected to state regulations because they are not technically regulated. They’re not liable to the rating and form laws, most significantly. That’s what provides surplus lines insurers their substantial advantage; it allows them to work in parallel to the standard insurance, which is actually to an additional market for risks that cannot be covered in the standard insurance.
● Surplus lines companies are not accountable to a particular state’s restrictions regarding rates and forms; they possess the freedom to expand the rates to the point that’s required to cover the unique, sometimes unacceptable threats.
● In addition, they can make revisions in the policy forms that render the risk acceptable. For instance, they can include additional exclusions or other requirements that might compel the insured to do specific things. Through both of those things, altering the rate and rewriting the form they have the autonomy to do can make those threats acceptable.
● Because surplus lines insurance is not regulated, the policies are often “hand crafted” for each policyholder. Rather than a “take-it-or-leave-it” policy quote that you might get for your car insurance, surplus lines policies can be extensively negotiated and tailored for your needs. This means you probably want a independent insurance broker with experience in this specific type of insurance to negotiate on your behalf.