Surplus lines insurance is coverage developed by nonstandard carriers that’s designed to cover particularly risky operations. Because they cover riskier operations, surplus lines are usually more expensive than standard policies. How much surplus lines insurance costs depends largely on the specific policy, the nature of the risk, and the carrier offering the policy.
What Is Surplus Lines Insurance?
Surplus lines insurance refers to products developed by non-admitted insurers, or an insurer that’s not licensed in a particular state or county. This status allows surplus lines insurers to cover risks standard (admitted) carriers often decline. Surplus lines insurers can develop both personal lines and business insurance policies.
The types of risk surplus lines insurance typically cover fall into three basic categories:
- High-capacity risks: Surplus lines can usually cover risks when the insured wants more coverage than most insurers are willing to provide. For example, a retailer who sells herbal supplements may need to go to a surplus lines provider for higher product liability limits than what a standard insurer can offer in its general liability insurance.
- Distressed risks: These are risks that fall outside underwriting guidelines for standard carriers and may include businesses that have had a lot of customer accidents, do a poor job of maintaining its property, or are involved in high-risk operations like serving alcohol to the public.
- Unique risks: Standard carriers, also called admitted insurers, have to file policy forms and rates with state insurance boards. Surplus lines carriers don’t have to, so they can often cover unique risks. This often happens with new risks like data breaches where surplus carriers’ flexibility allowed them to respond to this risk immediately while standard insurers developed cyber liability insurance.
These examples may sound very similar to small business owners who don’t have a lot of insurance experience. Suffice it to say that surplus lines providers cover businesses when their risks are either too great or too new for standard carriers.
How Surplus Lines Insurance Works
Surplus lines insurance is offered by surplus lines carriers, also called non-admitted insurers, that are regulated differently than standard carriers. As a result, surplus lines insurers can often take on higher risks. Many common insurance coverages started out in surplus lines insurance. New coverages such as cyber risk, directors and officers insurance, umbrella liability all began in the surplus lines market.
Surplus Lines Insurance Underwriting
Underwriting, the process where an insurer decides whether or not to offer a policy to an applicant, is handled differently between standard and surplus lines carriers. The most important difference is that surplus lines carriers do not have to get their underwriting rules approved by state boards. This allows them to modify coverage and offer policies when standard insurers can’t.
Often surplus lines markets have managing general agents (MGA) who have been given binding authority by the carrier. This means the MGA functions as the underwriter and can issue policies for the surplus lines insurance carrier.
Surplus Lines Insurance vs Standard Lines Insurance
Insurance products typically come in two forms: standard and surplus. Standard lines insurance products are developed by companies that have been admitted by the state, which means they’ve filed the policy form and rates with the state board of insurance. It also means the policy is backed financially backed by the state, so if the insurer fails, the state may step in to cover claims.
The forms and rates for surplus lines insurance do not have to be filed with the state, so the carrier isn’t required to follow state regulations. This allows them to use standard forms but endorse them so they can cover high-risk businesses. However, if a surplus lines carrier goes bankrupt, the state isn’t going to cover policyholders’ losses. To offset that risk, state laws usually require surplus carriers to have a large amount of capital to protect their policyholders.
Pros & Cons of Surplus Lines Insurance
The advantages of surplus lines insurance are:
- Coverage: Surplus lines carriers can cover businesses that otherwise could not get insured
- Flexibility: Surplus lines carriers can endorse standard coverage forms so they insure new and unusual risks
- Regulations: While surplus lines aren’t regulated in the same way as standard insurance, they are regulated. One common regulation is a requirement to have a significant amount of cash on hand to cover claims and protect against insolvency
Disadvantages of surplus lines insurance include:
- Costs: Surplus insurance covers high-risk operations, so policies are usually more expensive than standard coverage. Policyholders often find additional taxes and fees associated with surplus lines too.
- Risk: Policyholders cannot turn to the state if a surplus carrier fails because the carriers aren’t admitted with your state’s department of insurance.
Are Surplus Lines Insurance Safe?
Surplus lines insurance carriers are subjected to the same good faith laws set up to protect customers that admitted carriers follow. Additionally, most states have an office dedicated to monitoring surplus lines insurance. This office usually requires insurers provide financial documentation to demonstrate their ability to cover claims before being placed on the list of surplus lines carriers.
Another way to know if a surplus insurer is a safe bet is to check their A.M. Best rating. A.M. Best rates insurers on their ability to fulfill their financial obligations. Top insurers receive a rating of Superior, or A+, which means they have superior ability to pay claims. Business owners should check the financial rating of their insurers whether they are admitted or not.
“Surplus insurance companies are a great option to explore for those customers who require more than standard insurance companies can offer at that time. Without the surplus insurance companies, a lot of people and businesses would not have insurance, due to high levels of regulations of the insurance industry at the state level.”
—Earl Jones, Agent, Farmers Insurance
Who Is Surplus Lines Insurance Right for?
Business owners with risky operations typically find coverage through surplus lines carriers. “Risky” operations are typically defined as activities that are especially hazardous,like firearms manufacturing, or require more coverage than most. A business might also be considered risky if it has a history of multiple or severe claims.
Some examples of risks typically covered by surplus lines insurance include:
- Poor loss history: Businesses with a history of excessive claims and losses are often a poor fit for standard carrier guidelines and have to go to a surplus carrier for insurance.
- New business ventures: Standard insurers often decline businesses that are brand-new or where the owner has limited industry experience.
- Businesses that fall outside of underwriting guideline: Surplus lines insurance can usually cover businesses that admitted insurers cannot, including businesses with older properties or multiple cancellations. Insurers also may decline businesses with high-risk operations like gun manufacturing or alcohol service.
- Businesses requiring excessive coverage limits: Insurance carriers often set a limit to the amount of coverage they’re willing to offer. Businesses that require coverage beyond that amount may have to work with a surplus line insurer.
- Special events: General liability includes some coverage for special events, but the larger events are difficult for a standard insurer to cover. For instance, a business that wants to host a concert with hundreds of spectators probably needs surplus lines insurance.
- Catastrophe-prone properties: Business and homeowners in areas that see more than their fair share of natural disasters such as hail, tornadoes, or other severe weather often have to get insurance through surplus lines carriers.
- Flood exposure: Surplus lines insurance carriers can help properties that are exposed to floods find coverage.
Industries that often work with surplus lines insurance companies include:
- Amusement parks
- Drug and alcohol rehabilitation centers
- Medical centers
- Mobile home parks
- Security services
- Sports facilities
Where to Get Surplus Lines Insurance
The most common way to get surplus lines insurance is to go through a licensed insurance agent who contacts a surplus lines broker. Most states require the surplus lines broker to first perform a diligent search of standard carriers. If the broker cannot find coverage with standard carriers, then he can try to get it with surplus carriers. Business owners may need to do this a number of times before they find the right surplus insurer for your risk.
Tips for Getting Surplus Lines Insurance
Getting the right insurance coverage is essential to the success of your business. That might be even more true if your business requires surplus lines insurance. Below are three tips to help you find the appropriate surplus lines insurance for your business.
1. Research Surplus Lines Carriers’ A.M. Best Rating
Surplus lines companies need to demonstrate excellent financial solvency, and you can find out how a carrier stands by checking out its A.M. Best rating. The company considers the insurer’s balance sheet strength, operating performance, and business profile and gives it a letter grade to represent its financial stability and creditworthiness.
2. Make Sure Your Surplus Lines Broker is Licensed
It is very important that a person who sells, handles, or negotiates surplus lines insurance hold a license within that line of authority. Those seeking surplus lines insurance coverage should contact a surplus lines broker who is licensed and specializes in your industry.
3. Secure a Relationship with your Broker
Finding a quality broker is essential for the surplus lines insurance process and especially important at the expiration of the policy term. Because a surplus lines policy is not subject to the same regulations and requirements as a standard carrier, premium increases or new conditions may not be available until the policy renews. Your surplus lines broker can help you examine your policy at renewal time.
Frequently Asked Questions (FAQs)
Surplus lines insurance can be difficult to navigate, even for a seasoned pro. We’ve answered some of the most commonly asked questions about surplus lines here.
What is a surplus lines insurance policy?
A surplus lines insurance policy provides coverage for businesses that are typically declined by admitted or standard carriers. It fills the need for coverage not supplied by standard insurers. New ventures or businesses with excessive claims may need surplus lines carriers for their insurance.
What are excess and surplus lines of insurance?
Excess and surplus (E&S) is another name for surplus lines insurance, a type of property and casualty insurance offered through non-admitted carriers. E&S insurance may also be called specialty lines. This coverage is for hard-to-insure businesses when they can’t get a policy through standard insurance carriers.
What is non-admitted insurance?
Non-admitted insurance is coverage created by carriers that are not licensed with the state or states they operate in. This means the carrier does not have to comply with all state regulations so can often cover risks other carriers decline. However, non-admitted insurance carriers are not financially backed by the state, so policyholders cannot turn to the state for assistance should the insurer go bankrupt.
Is Lloyd’s of London surplus lines?
Lloyd’s of London is a well-known surplus lines carrier. Based out of the United Kingdom, it is a financially strong surplus option with an A.M. Best Rating of A (Excellent) that provides coverage in all of the United States and its territories.
What is a surplus lines broker?
A surplus lines insurance broker is an insurance professional who provides access to surplus lines insurers for their customers. Brokers negotiate surplus lines coverage for their clients who typically cannot get policies from standard carriers.
Surplus lines insurance helps protect businesses with unique risks standard insurance carriers cannot cover. A licensed surplus lines insurance agent or broker can help you locate the right surplus lines insurance carrier to meet your coverage and policy needs.