Admitted Insurers vs. Surplus Line Insurers
Before making the decision to accept a proposal from an insurer the applicant should consider whether the insurer is admitted to do business in the state or only allowed to do business as a surplus line insurer.
An admitted insurer is an insurance company authorized to do business in the state. The process of becoming an admitted insurer is determined by the state Department of Insurance or other entity authorized by the state to regulate the business of insurance in the state.
A Domiciled Surplus Line Insurer is an insurer that is specially licensed under the a specific state statutes that is either domiciled in the state but, unlike all other state-domiciled insurers, can write surplus line policies in the state.
U.S. based insurers are always licensed by their state of domicile. Prior to the inception of a surplus line law, U.S. based surplus line insurers had to operate on a licensed, admitted basis in its state of domicile. Therefore, if an insurer wanted to write surplus line contracts in all fifty states, two companies had to be created and capitalized. For example, a primary insurance company would be domiciled in the state to write policies in 49 states (all states except the state of domicile), and a secondary insurance company had to be created and capitalized (domiciled in a different state) just to write surplus line policies.
Surplus line insurance is a specialized coverage (typically a distressed, complex, unique, or high-capacity commercial coverage) that can be obtained from certain insurers, not licensed in California, but eligible as surplus lines carriers. The risk must be rejected by admitted carriers pursuant to California Insurance Code Section 1763 (unless otherwise exempted pursuant to California Insurance Code Section 1763.1).
As defined in California Insurance Code Section 1760.1 (m), surplus line insurance means any property and casualty insurance permitted to be placed directly, or through a surplus line broker, with a surplus line insurer eligible to accept such insurance.
As defined in California Insurance Code Section 1760.1 (n), a surplus line insurer is an insurer not licensed or admitted in California. Such an insurer is licensed in another state or jurisdiction, just not in the insured’s home state. Generally, surplus line insurers can be classified into two types:
- U.S. insurer (or Foreign insurer) – an insurer domiciled in one of the United States, or its territories.
- Non-U.S. insurer (or Alien insurer) – an insurer domiciled in and licensed under the laws of a country other than the United States.
Surplus line insurers are not required to be licensed in the individual state where they do business nor file rates with the state.
Insurers on the National Association of Insurance Commissioners quarterly Listing of Alien Insurers are considered eligible in most states.
All coverage in the surplus line market must be placed through a resident or nonresident insurance agent or broker who is licensed for “surplus lines.”
Almost every state has a Surplus Line Association and collects surplus lines taxes.
LASLI stands for “List of Approved Surplus Line Insurers”. It is an optional listing of both U.S. and Non-U.S. surplus line insurers that the state Department of Insurance has approved for surplus line placements. These insurers have satisfied the standards as set forth in state statutes. The LASLI lists are available from the state’s web site or the web site of the state surplus line association.
An ineligible insurer is a surplus line insurer that does not qualify as an eligible surplus line insurer under the requirements of state statutes. In addition, if the state determines that an insurer is not eligible, the state may issue an order and ask The Surplus Line Association of California to notify all surplus line brokers that the insurer is no longer eligible.
Insurance through a surplus line insurer is not protected by the state’s Insurance Guaranty Association and, therefore, if it becomes insolvent the insured has no recourse and will incur an uninsured loss.
Surplus line insurance is usually placed by a specialist broker called a surplus line broker or wholesale broker. The surplus line broker never deals directly with people seeking insurance but only negotiates on behalf of surplus line insurers with independent brokers and agents who cannot place insurance through its local markets.
The surplus line broker is licensed by the state after passing the Property Broker-Agent and Casualty Broker-Agent examinations to receive the Surplus Line Broker license. In addition the broker must complete continuing education requirement of, at least, 24 hours for each two-year license term and three hours of ethics continuing education as a part of, and not in addition to, their continuing education requirement during each two-year license term.
The Nonadmitted and Reinsurance Reform Act (“NRRA”) came into effect on July 21, 2011 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The purpose of the NRRA was to create a more simplified and efficient surplus lines tax payment and regulatory system by limiting regulatory authority of surplus lines transactions to the home state of the insured and by establishing federal standards for the collection of surplus lines premium taxes, insurer eligibility, and commercial purchaser exemptions.
Thus far, all states, except Michigan and Washington DC, have enacted legislation to implement the NRRA although both jurisdictions continue to comply with the NRRA’s home state tax approach. These state laws focus on surplus lines premium taxation, which is the most challenging compliance issue for both brokers and state regulators. In addition to the tax issue, most of the states have attempted to conform their laws to the other issues addressed by the NRRA, including the exempt commercial purchaser exemption and surplus lines insurer eligibility standards. However, even if a state has not taken appropriate action, the NRRA standards still apply. Therefore, surplus lines brokers must look to both the NRRA and the laws of the home state of the insured to determine what they need to do to comply with all applicable rules under NRRA.
The NRRA grants the insured’s home state with exclusive authority to regulate placement of nonadmitted insurance. The federal act states that no state, other than an insured’s home state, may require a surplus lines broker to be licensed in order to sell, solicit, or negotiate non-admitted insurance with respect to such insured. In addition, the NRRA explicitly provides for the preemption of laws, regulations, provisions, or actions of any state that applies to nonadmitted insurance sold, solicited by, or negotiated with an insured whose home state is another state. This preemption, however, does not extend to workers’ compensation insurance and any law, rule or regulation that prohibits placement of workers’ compensation or excess insurance for self-funded workers’ compensation plans with a nonadmitted insurer.
Under the federal act, only the insured’s home state is permitted to collect premium taxes for nonadmitted insurance. All other states are preempted from applying their surplus lines laws to such transactions. As defined in the NRRA, ‘‘home state’’ means: (i) the state in which an insured maintains its principal place of business or in the case of an individual, the individual’s principal residence; or (ii) if 100 percent of the insured risk is located out of the state referred to in clause (i), the state to which the greatest percentage of the insured’s taxable premium for that insurance contract is allocated.
Every U.S. jurisdiction has a surplus lines law, although the regulation of surplus lines business is primarily focused on surplus lines brokers. Despite the increasing interest in the solvency of non-admitted insurers, which has made the approval process somewhat more detailed, there is still almost no rate and form regulation of surplus lines insurers. By contrast, licensed insurers in the U.S. are broadly regulated as to solvency, rates and forms, market conduct, permissible investments, leverage (whether as to capital structure, premium to surplus ratio, or limit of risk to surplus) and affiliate relationships. Licensed insurers are also required to participate in a variety of government mandated insurance programs and pay assessments levied by state guaranty funds in the event of insurer insolvencies.
In theory, surplus lines insurers may not compete directly with licensed insurers for business and should write only business that licensed insurers will not write. Such “surplus” business must be “exported” by specially licensed surplus lines brokers who ensure that the required diligent search of licensed insurers has been accomplished and who also make appropriate tax and other filings. Certain jurisdictions maintain lists of coverages which are deemed to be generally unavailable from the admitted market (“export” lists), obviating even the need for the broker to first attempt to place these kinds of insurance with licensed carriers. In order for an unauthorized insurer to avail itself of the opportunity to write business under the surplus lines laws of the various jurisdictions, it must first become an eligible surplus lines insurer in those jurisdictions.
For a listing and analysis of all 50 states surplus line laws see “2017 Excess and Surplus Lines Laws in the United States” by the law firm, Locke Lord and John P. Dearie, Jr., Editor, https://www.lockelord.com/surpluslines/~/media/0D0012BA3B114DA48CF21DF3C367E39B.
Adapted from a work in progress soon to be published and tentatively called “How to Successfully Acquire a Commercial Property Policy and Effectively Present and Collect an Insurance Claim”.
© 2018 – Barry Zalma
I have placed these books on Amazon.com as both e-books and as paperbacks to explain, in fiction based on reality, information to help everyone understand that insurance fraud can be defeated by a thorough investigation.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
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