What Is a Surplus Lines Broker?
Like most business owners, you probably purchase business insurance from a standard insurer through an insurance agent or broker. However, some businesses have risks that "regular" insurers won't cover. If your agent or broker is unable to obtain coverage on your behalf from a traditional insurer, the agent may contact a surplus lines broker.
Why You Might Need a Surplus Lines Broker
All insurers set parameters regarding the types of risks they are willing to insure. Most refuse to insure risks that have certain characteristics. For instance, many insurers decline to insure a 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.
- Needs an unusual type of coverage. Examples are ambulance malpractice and pollution liability insurance.
- Is a new venture and, thus, has no loss history
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 insuring risks that most insurers won't cover. They are nonadmitted insurers, meaning they are not licensed in the states in which they operate (other than their home state).
To place business with an E&S insurer, a broker must have a surplus lines license. The broker must also have a standard license to sell property and casualty insurance. An SL broker does not deal directly with you (the policyholder) but acts as an intermediary between your agent or broker and the nonadmitted insurance company. Most SL brokers have access to one or more E&S insurers, which may include certain syndicates at Lloyd's of London.
Most states require an agent or broker to conduct a "diligent search" before contacting an E&S broker, which means that the agent or broker must try to obtain coverage on the buyer's behalf from a specified number of standard insurers. Once the required number of insurers have declined to provide coverage, the agent or broker may approach an SL broker.
State laws often make exceptions for coverages that are not available in the standard market. For instance, suppose that no standard insurers will insure a tattoo studio. If you own a tattoo studio that needs insurance, 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. A wholesale brokerage serves as an interface between your 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 to the broker, who forwards it to your agent. If you, your retail agent and the insurer agree on the coverage and price, the insurer issues a binder.
The binder is replaced by a policy. The wholesale broker may charge a fee for her services. This fee may be added to your premium.
A managing general agency (MGA) is an insurance agency that reviews risks and issues policies on an insurer's behalf. A contract between the insurer and the MGA defines the scope of the MGA's underwriting authority. If your retail agent submits an application to an MGA broker, the broker may provide a quote. If all parties agree on the coverage and price, the broker may bind coverage and issue a policy on your behalf.
While E&S insurers are not subject to the same regulations as standard insurers, they must meet basic financial standards established by the states. Many states maintain a list of "approved" or "eligible" E&S insurers that meet these standards. Most E&S insurers are not licensed by the states in which they operate. Thus, they are free to use whatever policy forms, rates, and rating methods they choose.
Most of the regulation of the E&S marketplace is directed at SL brokers. State laws stipulate what SL brokers may do and how they may conduct business. 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 seek coverage from an E&S insurer if that coverage is available from a standard insurer through a diligent search.
- Insurer Quality. Brokers can obtain coverage only from E&S insurers that are on a state's list of approved insurers. Nevertheless, brokers (not the state) are ultimately responsible for ensuring that the E&S insurers with which they do business 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. They must make periodic reports to various state authorities.
- Tax Collection. A special surplus lines tax is applied to policies issued by E&S insurers. This tax is paid by policyholders. The broker must collect the tax and remit it to the state.
Nonadmitted and Reinsurance Reform Act
Most E&S insurers sell policies in states in which they are not licensed. Moreover, many SL brokers conduct business outside their state of residence. In the past, conflicts often arose as to which state had jurisdiction over an SL broker. There were also disputes over which state was entitled to collect the surplus lines tax. A federal law passed in 2010 resolved these issues. The law is entitled the Nonadmitted and Reinsurance Reform Act (NRRA).
Under the NRRA, only the insured's home state may require an SL broker to be licensed to sell insurance in that state. In addition, only the insured's home state may collect the surplus lines premium tax.