Insurance Company Classifications and Surplus Lines Insurance

Insurance Company Classifications by Location

  • Domestic Insurers:

    • Adhere to the laws of a specific state.

    • Housed in that state.

  • Foreign Insurers:

    • Adhere to the laws of the United States or a specific state.

    • Not necessarily housed in that state.

  • Alien Insurers:

    • Adhere to the laws of a country other than the United States and its territories.

Surplus Lines Insurance

  • Definition: A type of insurance that addresses coverage gaps when standard insurers are unable or unwilling to cover certain risks.

  • Reasons for Coverage Denial by Standard Insurers:

    • High risk

    • Unique coverage requirements

    • Not meeting the insurer's conditions

  • Examples of Assets Difficult to Insure in the Standard Market:

    • Homes built in dangerous areas

    • Businesses with excessively high liability risks

    • Body parts of famous athletes

Standard vs. Surplus Lines Insurers

  • Standard Insurers (Admitted/Authorized):

    • Licensed by the state to sell specific insurance lines.

    • Regulated by the state's Department of Insurance.

    • Rates and policy forms must be approved by the Department.

    • Contribute to a State Insurance Guarantee Fund, which protects policyholders if the insurer becomes insolvent.

  • Surplus Lines Insurers (Non-Admitted/Unauthorized):

    • Not licensed to do business in the state but permitted to provide surplus/excess lines insurance under certain conditions.

    • May be foreign insurers licensed in their home state.

    • May be domestic insurers selling new/experimental coverages.

    • Not protected by guarantee associations, making them riskier for consumers.

    • Provide a way to test out new coverages and gather loss data.

    • Often must prove financial stability to the state's Department of Insurance.

Surplus Lines Brokers

  • Insurance brokers must have a surplus lines license in the state where they sell the policy.

Regulations and Limitations of Surplus Lines Insurance

  • Surplus lines insurance is typically a last resort.

  • States prioritize covering citizens through standard admitted insurers.

  • Surplus lines insurers generally cannot provide insurance available in the standard market.

  • Brokers must first search for in-state options.

    • If no admitted insurer provides coverage, brokers often must sign an affidavit confirming their diligent search.

  • Export List: Some states publish a list detailing coverages generally unavailable through the admitted market and brokers may skip the diligent search process if the coverage is on the export list.

  • Exporting Coverage: Placing insurance with a non-admitted insurer.

Unauthorized Insurers

  • Insurers cannot sell insurance that isn't approved/authorized by their state.

  • Unauthorized insurers lacking permission to sell surplus lines insurance are likely fraudulent.

  • Consumers and producers must exercise caution.

  • Selling unauthorized insurance may result in:

    • Liability for unpaid claims

    • Misdemeanor charges

    • Insurance fraud charges

  • It is important to consult the state's list of approved non-admitted carriers.

Summary of Key Terms

  • Domestic Insurer: Resides in a particular state and follows its laws.

  • Foreign Insurer: Resides in and follows the laws of a different state within the U.S.

  • Alien Insurer: Located in and abides by the laws of another country.

  • Admitted Carrier: Licensed to sell specific lines of insurance, regulated by the state's Department of Insurance, and participates in a guarantee association.

  • Non-Admitted Carrier: Not licensed in the state but has permission to sell surplus lines insurance.

  • Important reminder: Always check with the state's list of approved non-admitted insurers before participating in the surplus lines market.