A surplus lines broker is an insurance broker who's authorized to place insurance with non-admitted insurers that aren't licensed in the state where the insured does business.
Learn more about surplus lines brokers, how they work, and who should use them.
What Is a Surplus Lines Broker?
A surplus lines (SL) broker is a licensed insurance professional who secures coverage on your behalf from an excess and surplus lines (E&S) insurer. Some businesses have characteristics, such as a poor loss history or risky operations, that make them unattractive to standard insurers. To obtain the insurance coverages they need, these businesses may need a surplus line broker's services.
E&S insurers specialize in risks standard insurers won't cover.
SL brokers serve as intermediaries between insurance agents and brokers and E&S insurance companies; they don't deal with insurance buyers directly. If your agent is unable to secure business insurance for you from a standard insurer, they will enlist an SL broker to find coverage in the E&S marketplace. SL brokers must hold two kinds of licenses:
- A standard license to sell the type of insurance they handle, such as property and casualty insurance
- A surplus lines license
Businesses may need the services of an SL broker if they have characteristics like those listed below, which can make them unacceptable to standard insurance companies:
- A poor loss history
- Business operations that are unusual, hazardous, or difficult to assess, such as environmental cleanup, amusement parks, oil and gas drilling, and wind farms
- Need coverages that standard insurers won't offer, like a railroad liability insurance
- Starting a new venture
- Need higher limits or broader coverage than standard insurers will provide
Market conditions can change rapidly. Standard insurers may suddenly refuse to insure risks they readily accepted weeks or months previously.
How Surplus Lines Brokers Work
In most states, agents and brokers cannot utilize an SL broker's services unless they have first conducted a diligent search in the admitted market. Typically, the agent may approach an SL broker only after three admitted insurers have declined to provide coverage.
Some states don't require a diligent search if the insured fits a class of business or seeks a coverage on the state's export list. For example, suppose you have asked your agent to secure general liability insurance for a tattoo studio you own. If tattoo businesses are included in the export list in your state, your agent may seek coverage on your behalf in the E&S market without conducting a diligent search.
Most insurance agents and brokers can find an SL broker by contacting a wholesale brokerage or managing general agent (MGA). A wholesale brokerage serves as an intermediary between your regular (retail) agent and E&S insurers. The broker submits a completed application on your behalf to an insurer, which provides a quote, then forwards the quote to your retail agent. If you agree to the coverage and price, the insurer issues a binder or policy.
Since SL brokers don't interface with insurance buyers, the onus of finding an SL broker falls on your insurance agent or broker.
An MGA is an insurance agency that specializes in unusual risks or coverages and is authorized to issue policies on an insurer's behalf. If your retail agent submits an application to an MGA, the latter may provide a quote. If all parties agree on the coverage and price, the MGA may bind coverage and issue a policy on your behalf.
SL brokers are required by state law to collect a premium tax from the insured, and in some states, brokers may charge a fee for their services. Both the premium tax and the broker's service fee are added to the policy premium.
Types of Regulations
Many SL brokers secure coverage for businesses that operate in multiple states. Likewise, many E&S insurers issue policies in one state that cover risks located in other states. In the past, disputes often arose as to which state's regulatory requirements applied to the SL broker. Disagreements also arose over which state was entitled to collect the premium tax.
To resolve these issues, Congress passed a law in 2010 called the Nonadmitted and Reinsurance Reform Act (NRRA). Under the NRRA, only the insured's home state may tax or regulate surplus lines insurance transactions. This means that an SL broker must comply only with the statutes and regulations of the insured's home state. It also means that only the insured's home state may collect a premium tax from an E&S insurer.
The NRRA defines the insured's home state as the state where the insured maintains its principal place of business.
State insurance departments regulate SL brokers. If a broker secures coverage for a business that operates in multiple states, the broker must be licensed in the insured's home state. The broker doesn't need to be licensed in all of the states in which the insured conducts business. The laws governing SL brokers vary from state to state, but many have the following general requirements:
- Licensing: Brokers must secure and maintain proper licenses.
- Insurer quality: Some states require SL brokers to ensure that E&S insurers meet certain financial requirements before placing business with them. States may monitor insurers and provide brokers a white list of approved carriers.
- Disclosure: SL brokers must inform policyholders that E&S insurers aren't licensed by the state and aren't covered by the state's guaranty fund.
- Fees: Some states permit SL brokers to charge a service fee as long as they disclose the fee to the policyholder. Other states prohibit brokers from charging a fee.
- Recordkeeping and reporting: Brokers must keep records of policies, premiums, and other data, and file reports to various state authorities.
- Tax Collection: The broker must collect the premium tax and remit it to the state.
- Surplus lines brokers specialize in finding coverage for risks that standard insurers won't insure.
- Surplus lines brokers serve as intermediaries between regular agents and brokers and non-admitted insurers.
- A surplus lines broker must adhere to state surplus lines regulations.