What Is a Surplus Lines Broker?
While most businesses purchase insurance policies from standard insurers, some have risks that "regular" insurers won't cover. If your insurance agent or broker is unable to obtain business insurance on your behalf from a traditional insurer, he or she may contact a surplus lines broker.
What Is a Surplus Lines Broker?
A surplus lines (SL) broker is an insurance professional who negotiates coverage on your behalf from an excess and surplus lines (E&S) insurer. E&S insurers specialize in risks that standard insurers won't cover. They are nonadmitted, meaning they operate in states in which they aren't licensed.
To place business with an E&S insurer, a broker must have both a standard license to sell property and casualty insurance and a surplus lines license. An SL broker does not deal directly with insurance buyers. Instead, he or she acts as an intermediary between your agent or broker and the nonadmitted insurance company. Many SL brokers have access to multiple E&S insurers, including certain syndicates at Lloyd's of London.
Who Needs An SL Broker?
All insurers establish underwriting guidelines that their underwriters and agents must follow. These delineate the types of risks the insurer is willing to insure and those it won't accept. A standard insurer may decline to insure any business that:
- Has a poor loss history
- Engages in activities that are unusual, hazardous, or difficult to assess. Examples are vacant buildings, day care centers, amusement parks, and hole-in-one golf tournaments.
- Seeks a coverage the insurer doesn't offer. For instance, a business needs ambulance malpractice or pollution liability insurance, which most insurers won't write.
- Is a new venture
- Needs higher limits or broader coverage than standard insurers will provide
Most states require an agent or broker to conduct a "diligent search" before contacting an E&S broker. This means an agent or broker must try to obtain coverage on the buyer's behalf from a specified number of standard insurers. Once these insurers have declined to provide coverage, the agent or broker may approach an SL broker.
In many states, a diligent search is not required if the insured seeks coverages that are not available in the standard market. For instance, suppose you have asked your agent to secure general liability insurance for a tattoo studio you own. If no standard insurers will insure a tattoo studio in your state, your agent may be permitted seek coverage on your behalf in the E&S market without conducting a diligent search.
Finding a Surplus Lines Broker
Most SL brokers work for a wholesale insurance brokerage or a managing general agency (MGA). A wholesale brokerage serves as an interface between your "regular" (retail) agent and E&S insurers. Wholesale brokers cannot initiate (bind) coverage on your behalf. Instead, they forward a completed application on your behalf to an E&S insurer. The insurer provides a quote, which the broker forwards it to your retail agent. If you, your agent, and the insurer agree on the coverage and price, the insurer issues a binder. The binder should be replaced by a policy within a short time period, typically 30 days.
An MGA is an insurance agency that is authorized to review risks and issue policies on an insurer's behalf. A contract between the insurer and MGA outlines the scope of the MGA's underwriting authority. 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 and MGAs typically charge a fee for their services. In addition, they are required by the state collect the applicable surplus lines premium tax. Both the service fee and the premium tax are added your premium.
Nonadmitted and Reinsurance Reform Act
An E&S insurer is licensed and regulated only by the state in which it is domiciled. It is not licensed or regulated by other states in which it operates. Similarly, many SL brokers conduct business outside their state of residence. In the past, conflicts arose as to which state had jurisdiction over the brokers and which was entitled to collect the surplus lines tax. To resolve these issues, the federal government passed a law in 2010 called the Nonadmitted and Reinsurance Reform Act (NRRA).
Under the NRRA, an SL broker must comply with the statutes and regulations of the insured's home state, meaning the state where an insured maintains its principal place of business. A broker that places insurance on an insured's behalf in multiple states is subject to the laws of the home state only. The NRRA also stipulates that no state other than the insured's home state may impose a premium tax on an E&S insurer.
Regulation of SL Brokers
While states don't regulate E&S insurers that aren't domiciled within their borders, they exert some control over these insurers by regulating SL brokers. The laws vary from state to state, but many have the following general requirements:
- Licensing. Brokers must secure and maintain the proper licenses.
- Placement. Brokers cannot contact an E&S insurer to obtain coverage that is available from a standard insurer through a diligent search.
- Insurer Quality. Most states require brokers to ensure that E&S insurers meet certain financial requirements before placing business with them. States may monitor insurers and provide a list of "approved" carriers. Nevertheless, brokers are ultimately responsible for ensuring that the E&S insurers they utilize are financially sound.
- Disclosure. Brokers must inform policyholders that E&S insurers are not licensed by the state, nor are they covered by the state's guaranty fund.
- 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 surplus lines premium tax and remit it to the state.