Understanding Surplus Lines

When model Heidi Klum insured her legs for $2.2 million and guitarist Jeff Beck insured each of his fingers for $1 million, you can bet a standard insurer didn’t cover those risks. These celebrities turned to the surplus lines market. Although your organization probably won’t need to insure body parts, you might need the services of the surplus lines market.

Most organizations can meet the majority of their insurance needs in the “standard” insurance market. . The “standard” market consists of “admitted” companies that are licensed to do business in specific states. The state insurance department regulates their coverages and rates. Surplus lines carriers differ in that they are “non-admitted,” and they cover risks that admitted companies are unwilling to write.

Although surplus lines insurers are “non-admitted,” that does not mean they lack regulation. Each surplus lines insurer must be admitted (licensed) in one of the 50 states and must meet that state’s financial solvency requirements. The state of domicile becomes that insurer’s regulator.

Surplus lines companies are able to offer special coverages because they are largely free of rate and form restrictions that make it difficult for standard companies to write the risk. Their flexibility allows them to design policies that meet unique customer needs.

Flexibility from the Exotic to the Everyday

In addition to insuring a model’s body parts, surplus lines insurers also handle a broad range of more common business risks. NAPSLO, the National Association of Professional Surplus Lines Offices, Ltd., cites these examples of the types of risk commonly insured by excess and surplus lines insurers:

• A developer re-building homes and businesses in hurricane-prone areas
• A sports celebrity who wants to insure his or her legs or hands
• A school district building a new high school
• A nonprofit that seeks to provide food, medical care and education in Third World countries
• A research lab working on a promising, yet unproven new drug
• A law firm specializing in intellectual property work

However, many other types of risk can require surplus lines coverage. Often you find out that your policy must be obtained in the surplus lines market when your agent or broker cannot place your risk with a standard market. Just a subtle difference in your business may be the cause, such as a small change in your marketing strategy. For instance, if a contractor installs kitchen cabinets in rental apartment buildings, he probably buys liability coverage in the standard market. However, if he takes a similar job for condominiums, he will probably need surplus lines liability coverage. Why? Because his potential liability is greater. If there were a construction defect, the contractor could be sued by each condo owner, rather than just one building owner.

Accessing Specialty Markets

Surplus lines companies sell their products through special brokers — called surplus lines brokers or wholesalers — and through managing general agents (MGAs). MGAs (which can be individuals or business entities) hold “appointments” from insurance companies, which give them the authority to solicit insurance applications from agents and negotiate coverage. MGAs generally specialize in particular types of risks and know which insurers are most likely to accept your risk.

The end customer has no direct access to those agents or to the non-admitted market, which means that you can only access these brokers through your own broker or agent. If your situation requires placement in this market, a knowledgeable agent or broker will know this and know how to “shop” your needs.