What is Excess or Surplus Insurance
In order to understand what surplus line insurance is, it is helpful first to understand a few things about the insurance marketplace and to understand what surplus line insurance is not.
The first player in the marketplace is the insurance company, also known as a carrier or insurer. The insurance company writes the policy. If a claim is made they will pay the claim from the pool of collected premiums. Admitted or standard lines companies are licensed in each state they serve. Each state has it’s own Dept. of Insurance who regulates the finances of insurance companies, honesty and market conduct. They also regulate and approve the policy forms and rates. Contributions from the insurance companies are paid to the state insurance full called a guaranty fund that is used to pay claims if an insurance company should fail (go bankrupt).
The next player is the agent or broker (also known as a producer). Individuals or businesses contact the producer for insurance who acts as the middleman between you and the insurer. The producer is also licensed and regulated by the state. When requesting insurance, the producer will find a licensed insurance company. In some cases the insurers will not accept a risk or the cost is too high, so the producer contacts a surplus lines producer who will find the proper surplus lines company also known as a non-admitted insurance company to write the policy.
Since the surplus lines insurer is not licensed they have more liberty than the licensed (standard) insurers. They have more flexibility to design and price their policies and can, therefore, accept risks that licensed insurers will not. They do not contribute to the state guarantee fund therefore if they go bankrupt then the client has no recourse to have a claim paid. In the past 9 years, no surplus lines insurance company has gone insolvent.
Risks (policies) typically written in the surplus lines market is because the standard carriers have elected not to cover for the following reasons.
- The risk does not meet the guidelines of the standard market due to age, location, loss history or cancellation
- The policy limits exceed the guidelines for the standard market
- The risk is complex or “outside the box” of what the standard carriers are comfortable writing. Examples: pet insurance, automobile races, protection for an amusement park, satellites, towers, etc.
- The risk is “extraordinary” and the standard carriers may not be comfortable covering such a risk. Usually these are very large exposures with equally high potential for loss such as aviation liability insurance, protection for a demolition business, etc.
- Very high limits of insurance are needed.
This agency occasionally uses the surplus lines market. We prefer to deal with the standard market. Here is the surplus lines statement that we present with quotations.
Customer will be placed in the Surplus – Excess Lines Market
Coverage will be placed with a “non-standard” insurance company. We have approached our “standard” insurance companies to write your coverage, however they have declined because of the type of work you do. Therefore we have approached the “excess / surplus lines” market and have obtained quotations. The coverage may not be standard; there may be exclusions and limitations, and the policy forms may not be standard. We urge you to carefully examine our quotation and to make sure you have informed us of all your operations.
Coverage will be placed with a non-admitted insurance company, since we have received declination from three admitted standard insurance companies. When coverage is written with a non-admitted company, you lose the ability to collect from the state insolvency fund in the event the non-admitted company is declared bankrupt. Any claims that are outstanding on the date of the insolvency would be your responsibility to pay. Although many non-admitted companies are financially stable, we must advise you that the possibility exists that your insurance may be uncollectible in the event of a loss.
The policy will be written by a surplus lines insurer and is not subject to the filing or approval requirements of the New Jersey Department of Banking and Insurance. Such a policy may contain conditions, limitations, exclusions and different terms than a policy issued by an insurer granted a Certificate of Authority by the New Jersey Department of Banking and Insurance. The insurer has been approved by the Department as an eligible surplus lines insurer, but the policy is not covered by the New Jersey Insurance Guaranty Fund, and only a policy of medical malpractice liability insurance as defined in N.J.S.A. 17:40D-3d or a policy of property insurance covering owner-occupied dwellings of less than four dwelling units are covered by the New Jersey Surplus Lines Guaranty Fund.
Besides the quotation below that was typed by this agency, see the attached quotation provided by the excess surplus lines broker or insurance company. See the policy forms detailing coverage, limits, exclusions, limitations, and policy conditions.