“The quote I got from my broker indicates that the insurer is a ‘Surplus Lines Insurer’. What is a Surplus Lines Insurer and why does it matter?”
Surplus Lines Insurers, also known as ‘Non-admitted Insurers’, are companies that specialize in providing coverage for exposures that most regular companies do not want to insure. Regular insurers, which are also known as ‘Admitted Insurers’, are insurers that have filed as such with the State Department of Insurance in your state and have had their rates and policy language approved by the Department of Insurance. Admitted Insurers policies are also subject to your state’s ‘Guarantee Fund’ which bails out bankrupt insurance companies. Surplus Lines Insurers’ policies are not subject to Guarantee Funds so that if the insurer is not financially able to pay claims, the claims will go unpaid.
Surplus Lines Insurers often will write types of policies that admitted insurers won’t, or cover people that have significant previous claims, or provide insurance for classes of business that admitted insurers won’t. However, Surplus Lines policies are often subject to MANY more exclusions and SERIOUS limitations than standard policies are. Likewise, premiums are likely to be higher. Surplus lines policies are also subject to policy fees and taxes that admitted policies are not. While most Admitted Insurers will allow directly billed installment payment plans, Surplus Lines insurers want to have the entire estimated premium paid in advance. If a policyholder needs to make payments in installments, premium financing is usually the only option.
In some states, it is illegal to offer a Surplus Lines policy that is lower in price than an Admitted policy providing similar coverage. Likewise some states make it illegal to offer a Surplus Lines policy if there are Admitted Insurers willing to offer coverage. These administrative rules have been put in place because where an admitted insurer is willing to offer the coverage the insurance consumer is nearly always better off buying the coverage from an admitted insurer.
Because state guarantee funds don’t apply to Surplus Lines policies, it is critical to make sure that any Surplus Lines insurer quoting is stable financially, otherwise you may find that in the event of a claim there is no money to pay the claim or even if there isn’t a claim your customers may be unwilling to accept a certificate of insurance issued by a financially weak insurer.
There are some Surplus Lines Insurers that quote low premiums while adding some oddball extra coverage, that few people if anyone at all would buy, to get around the rules that prohibit offering such policies at lower than Admitted insurers. Don’t be fooled by that approach. Even if technically not a violation of the law, you’ll still be subject to all the downsides of a Surplus Lines policy.
If you’re in the cleaning business and you do exterior windows above 3 stories or you do floor waxing at grocery, drug or other locations with large tile or linoleum floors you probably should be insured with a Surplus Lines insurer. Likewise if you had several losses or if you use a lot of subcontractors you may find that Surplus Lines insurers are willing to provide coverage for you even if Admitted insurers will not.