What is Excess & Surplus Lines Insurance?
In the U.S., insurance is regulated by the states. For most insurers, the state's Insurance Department will approve the policy language and the premium rates to ensure they are fair. These insurers are known as "admitted insurers." Specific "Surplus Lines" laws permit certain insurers to bypass this approval process. These Surplus Lines insurers must still be approved by the state but undergo less scrutiny on both coverage and price. This article explains basic differences between the two types of insurers and what these differences mean to you.
What are "admitted insurers?"
"Admitted insurers" usually must file and receive approval from the state insurance regulator for both the policy forms (the insurance contract) and for the premium rates they charge for those policies. The process can be burdensome, but is designed to protect consumers by making sure the policy language complies with state laws and that pricing is fair and not excessive.
What are "Excess & Surplus Lines" insurers?
Excess & Surplus (E&S) insurers are not required to go through the same rigorous process. The forms they use are more flexible and not subject to prior approval by the state's insurance department; neither are the premiums they charge. This generally allows E&S insurers to be more nimble and quicker to react to market changes or needs.
What do E&S insurers do?
E&S insurers tend to specialize in hard-to-place risks or exposures that are less common or generally more difficult to evaluate and insure. E&S insurers are also often the first to provide insurance solutions to emerging exposures.
Can you give an example?
Sure. Let's say an admitted insurer insures a run-of-the-mill mall commercial businesses including flower shops, bakeries, or accounting offices, and you own a company that manufactures fireworks. The insurer may be uncomfortable determining the right coverage and the right price for your exposure if that insurer is not familiar with the proper way to assess effective risk prevention in these types of facilities. The admitted insurer may decline your application, and your independent agent may have to find an E&S insurer willing to provide coverage for you.
Are there other circumstances where someone could end up with an E&S insurer?
Yes. Someone who has had a fair number of losses may struggle to find an insurer willing to offer a quote, or a quote that includes the coverage that person wants. If that's the case, your independent agent may have to seek a proposal from an E&S insurer. In addition, E&S insurers can also act as trailblazers, providing insurance solutions for emerging risks for which there is little or no history and no established knowledge of proper risk prevention strategies.
What if I am one of those hard-to-place risks?
If you are having difficulty finding an insurer willing to cover your exposures, you have options:
- If the coverage you are seeking is mandated by law (for example auto liability or workers' compensation), the state generally provides an alternate mechanism, such as an assigned risk plan, to guarantee you will have insurance. That insurance will not be E&S insurance.
- If the coverage you are seeking is necessary but not mandated by law, your independent agent may be able to provide an offer from an Excess & Surplus Lines (E&S) insurer.
What are the pros of using E&S insurance?
The pros are clear:
- Insurance becomes available where it wasn’t.
- E&S programs tend to be more tailored to the risk.
- Sometimes coverage or pricing (or both) are better than they would be in the standard "admitted" market.
What are the cons of using E&S insurance?
E&S insurers are not subject to the same licensing requirements as "authorized" or "admitted" insurers:
- They are subject to limited regulation; therefore, the insured enjoys less protection from the state.
- There is no Guaranty Fund* protection if the insurer becomes insolvent.
- The policy coverage form (the insurance contract) is not standard, making it difficult to compare with more traditional insurance policies.
- It may be expensive (although that's not always the case).
What can I do if this is my only option for coverage?
You can check into the financial rating for the E&S insurer that offered a quote to see if their financials appear sound (since the Guaranty Fund* will not be available). Your independent agent may be able to help you with that. As with any insurance program, review the policy to understand what's covered and what isn't, and contact your independent agent if you have any questions.
*The Guaranty Fund is a state fund that is designed to pay claims for eligible customers whose insurer has become insolvent. State guaranty funds were created by federal statute in 1969, and are non-profit systems operating in all 50 states, Washington, D.C., Puerto Rico, and the Virgin Islands.