Uncovering the Mystery: Admitted Insurers vs. Surplus Lines

By Frank O'MalleyGeneral

Chances are if you have been in the insurance industry long enough then you have heard the terms admitted (or standard) and surplus lines (or non-admitted) used to describe insurance carriers. Although these terms share many characteristics, there are some glaring differences as well. What do these terms mean and what sort of protection are you providing or not providing your client by placing coverage with these different types of insurance carriers? Let’s take a minute to identify the major differences and misconceptions associated with each.

Admitted Insurers

An admitted insurer, which can also be referred to as a standard market, is a term used to classify an insurance carrier that is licensed by a state insurance department to do business in the insured’s state. The major benefit of an admitted insurance company is that the insured is protected by the state’s guaranty (insolvency) fund should the insurer become insolvent and unable to fulfill their contractual obligation to pay covered losses. These state funds do not prevent insurer insolvency but they do mitigate its effect by providing payment for unpaid claims. State guaranty funds vary by state, however most have the following characteristics in common:

  • Assessments are made only when an insurer fails
  • Policies usually terminate within 30 days after the failure date
  • Claims are subject to maximum limits
  • Most states provide a refund of unearned premium

Surplus Lines

Surplus lines insurers, also known as non-admitted markets, are deemed eligible by the state to insure risks that do not qualify for coverage with an admitted insurer. These types of insurers are not licensed in the states they write in.

Aside from not being supported by the guaranty fund, unlicensed or non-admitted carriers are not bound by most of the rate and form regulations imposed on admitted insurers, giving them the flexibility to change forms and rates without the time constraints or financial costs of the filing process.  This flexibility may result in your client being left with sudden restrictions or significant gaps in coverage that were not anticipated.

When a producer needs to access a non-admitted carrier, they often have to go through a surplus lines intermediary, also known as a wholesaler or aggregator, rather than contact the non-admitted insurer directly. The circumstances for accessing a non-admitted market vary by state, but usually involve the following:

  • Hard to place risks with unique or high loss exposures
  • Recent losses or extensive loss history

Which is better?

Due to the nature of non-admitted insurers, agents and brokers alike must exercise extreme caution when navigating the surplus lines marketplace. The consistency and familiarity found in the admitted market does not always exist in the non-admitted arena and this may prove costly for your client. For exactly this reason, many producers will only place business with admitted insurers.

It is the producer’s responsibility to conduct a diligent search, which may require them to document a specific number of admitted markets that have declined the risk before attempting to secure coverage in the non-admitted market. Before approaching any non-admitted carriers, you should be sure that you have exhausted all of your options with the admitted carriers you have access to.

Hospitality Insurance Group is a licensed and admitted insurance carrier specializing in hard to place risks within the hospitality industry. We are currently writing business in the states of CT, MA, NC, NH, PA, RI & VT.

 

Please be advised that the opinions expressed are the views of the author alone and should not be attributed to any other individual or entity and shall not constitute a legal opinion.