The impetus of this article is simple – we are asked multiple times a day by well-intentioned investors... More...
‘Standard’ insurance is the common name used when referring to the traditional and financially-conservative ‘low risk box’ that many insurance companies wish to do business in. ‘Standard’ insurance companies deal in normal risks and insurance products such as business owner policies (BOPs), homeowners, auto, boats and motorcycles, personal umbrellas, and a few rental properties. Some ‘standard’ insurers include State Farm, Allstate, GEICO, Nationwide, and many other such companies. They have a very narrow and conservative ‘box’ that they do business in.
However, there are many risks and needs for insurance that are outside of this ‘box’, such as general liability, commercial umbrellas, vacant property, professional liability, and numerous others. In these situations, there is a separate insurance market, known as ‘Excess and Surplus Lines’ (ESL), which deal exclusively in these types of unusual or high risks. The laws and regulations differ from the standard market and it requires special licensing and education to issue these types of policies, though very few agents writing these policies actually posses the license or experience required – which can be dangerous for you since they are actually writing business without a license (yes, we have the correct licenses!). The Surplus Lines market is where you find such insurance syndicates and companies as Lloyd’s of London and many others. Also, because of the differing regulation and state laws, Surplus Lines policies always include state taxes and policy fees which are considered ‘fully earned and non-refundable’ as soon as the policy is issued. As mentioned above, types of risks commonly written in the Excess and Surplus Lines market include vacant property, most general liability, some builder’s risk, and specialty or high-risk dwellings.
‘Surplus Lines’ insurers are not licensed to do business in the state in which they are considered a ‘surplus lines insurer’; however this is not to say that they aren’t licensed or regulated, they are just not regulated by your state’s Department of Insurance in the same way licensed insurers are regulated (they are, however, tightly regulated in the state or country where they are domiciled or located) and they are not insured by the state’s guaranty fund. The financial condition of these insurers is also regularly monitored by your state’s Department of Insurance and most surplus lines insurers are actually ‘A-rated’ or better with very strong financial reserves and reinsurance and in most states, the licensed surplus line producer is required to ascertain that the insurer meets certain financial standards before buying a policy from them. In many other states the Department of Insurance, or some other authority, monitors the financial condition of surplus line insurers and maintains a list of insurers that surplus line producers are allowed to use.
It is also important to note that it is NOT that these insurers are unable to obtain a license in your state, rather they choose to operate on an unlicensed, surplus line basis due to the fact that since they are not strictly regulated by your state, they are generally free from the ‘form or rate’ regulations imposed on licensed insurers – which gives them the freedom to maintain broader internal guidelines for accepting risks and they have much more flexibility to design and price their policies and they can, therefore, accept risks that licensed ‘standard’ insurers will not. In other words, it’s an intentional business decision to operate on a ‘surplus’ basis.