Excess and Surplus lines insurance (E&S) is notably different than “regular” insurance.
Most of us don’t need an insurance policy from an E&S carrier, so if you’re reading this post, you’re probably not like the rest of us. Let’s shed some light on E&S insurance.
Basics of Insurance?
Insurance companies like predictability. In fact, the “standard” insurance market is entirely based on predictability.
The goal of any insurance company is to offer the cheapest possible policy to as many people as possible to make enough money to pay for the claims, the necessary administration (running the company) and hopefully turn a profit (often through investing our premiums).
In short, the more information insurers have about past experience, the better they can predict future claims and generate a profit.
Where Does E&S Fit In?
Based on the above, the less predictable or inherently dangerous your policy is, the more likely standard market insurers will tell you to take a hike.
In fact, you have to be denied coverage in the standard market to qualify for a surplus lines policy.
This is where Excess and Surplus lines insurers come into play.
Below are the types of risk they specialize in:
Distressed Risk – Requesting a certain type of coverage when you have had multiple previous claims for the same coverage with other carriers.
Complex Risk – Coverage for a nuclear power plant.
Unique Risk – A motorcycle rally event.
Capacity – You or your company require HUGE liability limits.
New Risks – Not new in business (although that may be the case for some new businesses). If your line of work deals with a type of risk insurers don’t have a claims history to model pricing for.
You will certainly be dealing with an E&S insurer if you fit any of the above characteristics.
How is E&S Different than Standard Market Insurers?
Standard carriers are “admitted” in each state in which they do business. Admitted means they have a license from the State Department of Insurance (or similar governing body) to operate in the state and are regulated by that governing body.
Regulation is the idea here. Standard carriers must have their rates approved, are financially regulated, are subject to oversight for their “behavior” in the state, and must have all of their policy forms approved before release to the public.
E&S carriers, on the other hand, are non-admitted, do not need a license, and are not subject to state regulation for their finances or policy forms.
They offer insurance in the manner they choose…often by choice rather than because any particular state won’t approve them.
Well, it’s not like you have a choice if you have been denied coverage by the standard markets, but there is a downside risk to procuring coverage via the E&S market.
Since there is no state financial regulation, E&S policies are not financially backed by the state they operate in.
If they become insolvent (fancy term for not enough money to pay claims), you are not guaranteed any coverage by state run “pool” funds, which typically cover claims for you when your insurer can’t pay them.
You see, any standard (admitted) carrier has to pitch in a certain percentage of their yearly premiums to a pool in order to obtain the right to sell insurance in a particular state.
If any insurance company becomes insolvent, the pool is tapped by the state fund and claims are paid.
You will likely be dealing with a licensed E&S broker in the event your risk requires this type of coverage (hello insurance broker fees).
So your best bet is to find a local independent insurance agent to point you in the right direction. Often, such agents are also licensed as E&S brokers.