What Is Surplus Lines Insurance?

What Is Surplus Lines Insurance?

Let me explain surplus lines insurance to you directly: it's coverage that steps in for financial risks that are either too big or too unusual for a standard insurance company to handle. You can get this as an individual or for your business.

Understanding Surplus Lines Insurance

Surplus lines insurance is part of the property and casualty category. Often, it's used for emerging risks where traditional insurers hesitate because they don't have enough historical data to set prices accurately.

As the National Association of Insurance Commissioners (NAIC) points out, once enough data builds up, this coverage might shift to the standard market and become more widely available.

Unlike typical insurance, surplus lines can come from insurers not licensed in your state. That said, the insurer needs a license in its home state, and the brokers selling it must be licensed where they operate.

Here's a key risk for you as the policyholder: there's no state guaranty fund to cover claims if the surplus lines insurer goes bankrupt, unlike with standard policies where other insurers fund payouts in such cases. Still, the NAIC notes that surplus lines insurers have a historically low insolvency rate.

Who Sells Surplus Lines Insurance?

The surplus lines market is largely controlled by insurers linked to the UK's Lloyd's of London. According to the Insurance Information Institute, Lloyd's holds 16.8% of the market with $13.9 billion in direct premiums, and after that, the top 25 insurers drop to single-digit shares.

Other major players in the top 25 include Berkshire Hathaway Insurance Group, American International Group (AIG), Markel Corporation Group, W.R. Berkley Insurance Group, Nationwide Group, Fairfax Financial (USA) Group, Chubb INA Group, and Liberty Mutual Insurance Companies.

Types of Surplus Lines Insurance

Surplus lines insurance addresses a wide range of financial hazards, especially those seen as nonstandard by conventional insurers.

For instance, the Texas Department of Insurance explains that a business might need it for liability on special events or transporting hazardous materials. As an individual, you could use it if standard homeowners insurance isn't available, or to cover high-value items like expensive art or a classic car collection.

Sometimes, it offers higher coverage limits than what standard insurers provide.

States keep export lists of insurance types hard to get from licensed companies, making surplus lines eligible. In California, this includes coverage for kidnap and ransom, amusement parks, sawmills, demolition contractors, fireworks displays, and hot air balloons, among others.

Flood insurance appears on some states' lists under specific conditions. In New York, for example, surplus lines can provide it if the property doesn't qualify for federal flood programs or if those programs don't offer enough coverage.

Surplus Lines Insurance vs. Standard Insurance

Standard or admitted carriers must stick to state rules on pricing and what risks they cover. Surplus lines carriers don't, so they can handle higher risks.

You might hear surplus lines insurers called non-admitted or unlicensed, but that doesn't invalidate their policies or mean they're unregulated. It just means they follow different rules than admitted carriers.

A lot of the surplus lines market comes from alien insurers based outside the US.

Who Licenses Insurance Companies?

States handle licensing for insurance companies, as well as for brokers and agents.

Does the Federal Government Regulate Insurance?

Mostly, no. The McCarran-Ferguson Act of 1945 gave that power to the states, keeping most insurance companies and products out of federal oversight.

What Is Excess and Surplus (E&S) Lines Insurance?

Excess and surplus (E&S) lines insurance is essentially another term for surplus lines insurance, used by some providers.

The Bottom Line

If you're an individual or run a business, you turn to surplus lines insurance for risks too large or rare for standard companies to accept. These policies can come from insurers not licensed in your state, and they lack guaranty fund protection if things go wrong with the insurer.