What is a surplus lines insurance policy?

What is a surplus line policy? A surplus lines insurance policy is a policy written by an insurance company that is not authorized (not licensed) in the state of Connecticut. While a policy from an unauthorized company may be written legally through a surplus lines broker, this transaction places on the policyholder more responsibility for policy negotiation and protection against the insurance company’s insolvency.

What is a surplus line broker?

A surplus line broker means a broker specifically licensed to place insurance with an unauthorized insurance company. Surplus line insurance purchased in Connecticut must include a surplus line broker in the transaction. Generally, your retail broker must procure the policy through a wholesale broker (licensed as a surplus line broker) that provides access to the surplus line market.

Is a surplus line company less safe than other companies?

Not at all. A surplus line company is no more likely to become insolvent than an authorized company. The difference is that the Connecticut State Insurance Department is not monitoring in depth the company’s financial records on an ongoing basis, although certain qualifying standards must be maintained to remain on the list of unauthorized insurance companies that may transact surplus line insurance in Connecticut.

For your protection, significant oversight is achieved through other means. Regulators in the jurisdiction where the company is domiciled examine the company’s financial records, as well as various independent rating agencies, such as A.M. Best. Also, surplus line brokers will use due care in selecting an unauthorized insurance company to provide the desired coverage.

Is there a state fund to protect policyholders from company insolvencies?

There is protection under Connecticut security funds only for the insolvency of insurance companies that are authorized in Connecticut. This is a significant distinction for policyholders insured by a surplus line company, and the lack of insolvency protection must be considered when making the purchase decision. Nevertheless, placement with a financially sound surplus line insurance company may be more prudent than placement with an authorized insurance company that is financially impaired.

Why would my broker offer me a surplus line policy?

There are several reasons why it may be necessary to look for coverage in the surplus line market. First, the risk of loss may be too great for acceptance by regular markets. Second, the risk may be too little understood by regular markets to select and price the risk appropriately. Third, there may be no other way to access an exclusive program for a particular type of risk. Nevertheless, placement of risks in the surplus line market is considered a last resort, when authorized insurance companies have not been able to satisfy your insurance needs. Before placement can be made with a surplus line company, three declinations from authorized companies usually will be required, unless the type of risk is one that has been placed on the Insurance Department’s “export list”—a list of risks assumed to be difficult to place with authorized companies. Note that a higher premium quoted by an authorized company is not considered a declination.

Also, an “exempt commercial purchaser” can request in writing that coverage be placed with a surplus line company. Among other requirements, an “exempt commercial purchaser” must employ or retain a qualified risk manager to negotiate insurance coverage.

What should I know about forms and rates used by a surplus line company?

A surplus line company is exempt from the laws requiring rates and forms to be fi led with the Insurance Department. This means forms may vary significantly from standard forms used by authorized insurance companies. The flexibility offered by this freedom from fi ling can work to the benefit of the policyholder by permitting coverage to be tailored to individual needs. However, reductions in standard coverage may be necessary in order to turn an uninsurable risk into one that is insurable. The important thing to remember is that coverage analysis is essential in this market and insurance companies are more inclined to negotiate policy terms.

What about adherence to cancellation and nonrenewal laws?

Unlike many other states, surplus line companies in Connecticut must adhere to most of the policy termination rules applicable to authorized companies. These rules exist to protect policyholders from being disadvantaged by arbitrary nonrenewal and cancellation provisions in the policy.

Why am I being billed for a Connecticut state tax on my policy?

The 4 percent surplus line tax that you see on your bill is paid quarterly by the surplus line broker to Connecticut. It serves as a substitute for the franchise tax that would have been collected from the insurer were it authorized in Connecticut.

What other expenses and fees might I be requested to pay for as specified on the Surplus Line Affidavit, which must be signed by the policyholder and the surplus line broker?

Reimbursement fees. When a surplus line broker pays a contractor to perform an inspection of the premises, the fee likely will be passed on to the policyholder. Other expenses incurred by the retail broker or surplus line broker that are necessary for underwriting may be billed for reimbursement, but must be disclosed on the affidavit.

Service fee. Sometimes, a retail broker may not receive any fixed commission from the surplus line broker when writing a policy or the commission rate may be insufficient to cover all the services being provided the policyholder. In that case, it may be necessary to negotiate a service fee to adequately compensate the broker for services rendered. There also may be times the surplus line broker charges a fee for services rendered. Regulation places an aggregate cap on the combined service fee amount the retail broker and surplus line broker may charge.

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