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Taking the Mystery Out of Surplus Lines

It is probably safe to say that most people do not know the difference between “surplus” (also referred to as Non-Admitted, E & S or Excess & Surplus) and “admitted” lines.  However, understanding the important similarities and differences will help make you an informed insurance consumer.

Many insurance consumers are completely untouched by the surplus lines marketplace.  Still others purchase coverage from surplus lines carriers unaware of that fact.  If you buy coverage from a Lloyds of London syndicate, you may think you are simply buying from a foreign insurer, but in fact, you may be buying coverage from a US based subsidiary of a large insurance company. 

Surplus lines insurers operate in hard and soft markets, but they thrive when admitted companies withdraw from the marketplace leaving them to fill the void in certain coverage lines.  According to the National Association of Professional Surplus Lines Offices, Ltd.(NAPSLO), while the property/casualty industry grew by 11% during 2001, the surplus lines portion of the industry grew by nearly 35%, reflecting the hardening of the market and the contribution of the events of 9/11.    

Following are a few highlights of the differences between surplus lines and admitted:

·        Admitted insurers usually have to file and receive approval for their rates and policy forms in most states in which they operate.  Some states only require that rates be filed, others require only forms.  Some require the insurer to withhold a product from the marketplace until they have received approval. Other states allow what is called “use and file” meaning the insurer is free to use the form and rates, but must file them with the state and if necessary, make any changes that the state requests in order to comply with its rules and regulations.  Surplus lines insurers do not have to go through this rigorous process and can react more quickly to changing internal and external conditions and events.

·        Surplus lines insurers must work with surplus lines brokers to comply with certain state required filings such as surplus lines taxes, which vary, but usually range between 2 – 4% of the premium.  Surplus lines brokers also file affidavits acknowledging what is called a diligent search that states the insured risk was submitted to the admitted market but received declinations from those specific carriers.  Admitted insurers bear the responsibility of paying whatever state taxes are required.  These taxes are figured into their pricing models so the premium you pay includes any tax payable to the state.  In the case of surplus lines, all taxes and fees are built on top of the basic premium.

·        Admitted carriers must comply with state requirements for policy language, most notably, cancellation and non-renewal requirements.  While most admitted policies require a 30 or 60 day notice to the insured if the carrier intends to cancel or non-renew the policy, most surplus lines insurers reserve the right to cancel or non-renew for any appropriate reason.  Despite this difference, and the language to this effect built into the admitted policy, surplus lines insurers are in many states required to adhere to the same standards. Despite the freedoms they enjoy, there are a myriad of rules and regulations that surplus lines insurers must contend with, including a rigorous and costly state licensing system that puts the insurer on the map as a “white-listed” carrier.

·        Probably the most noticeable difference between the two insurance types is the availability of funds to pay for claims should the carrier become insolvent.  If you buy a policy from a surplus lines insurer, you should be aware that the state guaranty funds will not apply should your carrier’s insolvency leave you stranded when a claim occurs.  Not so with admitted carriers.  However, NAPSLO points out that in 2002, as has been the case in previous years, the median Best’s Rating for surplus lines carriers was A, versus the industry as a whole, which maintained a median rating of A-.   Naturally, it becomes more important to monitor your carrier’s rating with a surplus lines policy.

While the differences are many, the nuts and bolts of both types of policies are virtually identical.  Different compliance endorsements attached to admitted or surplus lines policies will be the only differences you notice.  While the preference, all other things being equal, should always be admitted, there are many reasons to feel comfortable with a surplus lines policy, particularly if it is backed by a financially sound and stable insurance company.  Many surplus lines companies have been paying claims for decades, and in some cases, centuries!