What is a “Surplus Lines Carrier” versus a “Standard Admitted Carrier”?
Are you not familiar with a “surplus lines carrier” versus a “standard admitted carrier”? What is the difference? Let’s discuss below.
Surplus Lines Carrier
A “surplus lines carrier” (can also be referred to as “excess lines carrier” ) is an insurance company who is not licensed by the state but is allowed to do business in the state via a managing general agent or wholesale broker.
A general rule of thumb is the policy can only be written after it has been rejected 3 times by a standard admitted market. (Rejection, in this case, would be the admitted markets declined to offer a quote.)
Sometimes a surplus lines carrier can be licensed in one state and operate in a number of additional states. They can also be domiciled outside of the U.S. For example, Lloyds of London is the largest surplus lines writer of insurance in the U.S. Market and is based out of the U.S.
If your business is hard to insure due to the high risk caused by the business nature or has high losses then it can become a candidate to be placed with a surplus lines carrier as most standard admitted markets will decline to offer coverage. However, if this is not the case you should avoid this type of policy placement.
Typically surplus lines carriers do not have the protection afforded by the state’s guaranty fund. They also have less regulation by the state than standard admitted markets.
The insurance broker selling the surplus lines policy must complete an SL-2 Form: Diligent Search Report for compliance documentation where they must list at a minimum 3 standard markets they approached for a quote and log the date of the communication, name of the underwriter, underwriter contact info, name of the admitted carrier, and reason for decline.
Standard Admitted Carrier
A “ standard admitted carrier” is an insurance company who is licensed by the states in which they offer coverage and are mandated to conform to the rate and form regulations of their State’s Insurance Commission.
With standard admitted carriers there are no additional surplus lines tax fees, and additional compliance paperwork needed to accept coverage.
Standard Admitted Carrier policy has rate and form regulations. Each carrier will enhance and strengthen their coverage offerings from the standard requirements to differentiate their policy from their competition.
Another big difference between Surplus Lines Carriers Versus Standard Admitted Carriers is how claims are handled.
Surplus lines carriers have additional parties involved in the relationship. There is the insurance broker, wholesale broker, can be multiple insurance carriers who are offering the insurance, the managing general agent and then the client (policyholder).
For standard admitted carriers the relationships involved are very simple, the insurance broker, the admitted carrier and the client (policyholder).
When a claim occurs it is very clear for an admitted carrier as the admitted carrier is the one to handles the claim start to finish.
With a surplus lines policy since there may be multiple insurers involved in the claim, there can be different interpretations of the policy form which ultimately can slow down the claims handling process and cause more complications and friction. Essentially the common saying, “too many cooks in the kitchen”.
What are some common standard admitted carriers for small business insurance?
Some common standard admitted carriers are the following:
- Liberty Mutual
- The Hartford
- CNA
- Chubb
- Travelers
These are all well know, well-respected carriers and great choices for a carrier for small business insurance.
How do you know when a broker is selling you a surplus lines carrier?
The quote should disclose the carrier is a surplus lines carrier. However, if it does not, you can look at the premium breakdown of fee’s & taxes.
Ask for a breakdown of premium costs in a line item. In the line item look for the following:
- SL Tax (Surplus Lines Tax)
- Additional “broker fees” & “wholesaler broker fee”
Insurance brokers tend to add a “broker fee” onto these types of quotes. Be careful because they may be charging you a “broker fee” for themselves (this typically is in addition to the commission they will receive from selling the policy.) and a “broker fee” for the company they may have used to access the surplus lines carrier since surplus lines carriers typically do not work directly with insurance brokers. Insurance brokers typically have to access them through another broker (referred to as a “wholesale broker” which is essentially a broker to a broker). In a nutshell, this is additional fees for just selling you the policy. Not a fun situation to be in for you the business owner.
Pro-tip: Avoid these types of quotes if possible as they are fee heavy.
What you should ask before you purchase a surplus lines carrier’s policy?
- Confirm with the insurance broker he/she approached 3 standard admitted markets for a quote and they declined to offer a quote.
- Ask for the names of these carriers & reason of the declination for your records.
- How many years the surplus lines carrier has been in business?
- What is the “minimum earned” on the policy and cancelation terms?
- The minimum earned is going to the be the percentage of the premium you will be on the hook to pay even if you cancel the policy. Typically it is 25% of the premium. If the policy is $5,000 (inclusive of all taxes and fees), with a 25% minimum earned you will owe $1,250 regardless if you cancel the policy or not.
5. In the event of a claim, who all are involved in the claims administration process?
6. What is the surplus lines carrier A.M. Best Rating, Financial Size and Financial Outlook?
- Pro- tip: Do not accept coverage from a carrier who has an A.M. Best Rating below A-.
- Resource: You can look up the A.M. Best Rating of any carrier here.
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Important Disclaimer: This is general information for educational purposes only. Each insurance carrier has their own specific policy language which dictates what their specific policy will cover. It is important to read your policy and ask questions on any language you are not clear about.
If there is a specific question you would like to have answered please email us at hello@beemabroker.com and we will be happy to help!
