What it means
Most insurance is bought from admitted insurers, which are licensed locally and whose rates and policy wordings are filed with the regulator. Surplus lines, also called excess and surplus or non admitted cover, sits deliberately outside that system.
Insurers writing it can set their own wordings and prices, which is precisely why they will take on risks that nobody in the standard market wants. Access runs through a specialist surplus lines broker rather than an ordinary agent.
In most jurisdictions the broker must first demonstrate that the risk was declined by a set number of admitted insurers, a step usually called the diligent search. The broker then handles the regulatory filings and pays the taxes that fall due on the premium.
Typical buyers include contractors working at height, chemical processors, large event organisers, businesses in newly legal industries and companies with a poor claims history. Cyber liability for a firm that has already been breached, and directors' cover for a company in difficulty, also frequently end up here.
The important warning is that surplus lines policies are generally not protected by the state guaranty funds that step in when an admitted insurer fails. Buyers therefore have to check the insurer's own financial strength rating rather than relying on a safety net.
Wordings are bespoke as well, so exclusions must be read line by line rather than assumed to match the standard market. Cost is the other difference worth planning for, since premium taxes and stamping fees are charged on top of the premium and are almost always passed straight to the customer.
A budget built on the quoted premium alone will come up short.
In practice
Real-world examples.
Example
A demolition contractor is declined by every admitted insurer after two serious incidents. Its broker completes a diligent search, documents the declinations and places a $1,200,000 liability programme in the surplus lines market at roughly triple the previous premium.
Example
A music festival organiser needs cover for cancellation caused by extreme weather, adverse publicity and artist non appearance. No standard policy combines those perils, so the cover is written on a bespoke surplus lines wording negotiated clause by clause.
Example
A technology company suffers a ransomware attack and finds its cyber insurer will not renew. It obtains replacement cover from a non admitted insurer at a higher price, with a much larger retention and a specific exclusion for the systems involved in the original breach.
Think of it
“Surplus lines is non-standard insurance-coverage from carriers not licensed in your state.
Formula
Calculation
Total cost to the buyer = Premium + (Premium x Surplus lines tax rate) + (Premium x Stamping fee rate) + Broker fee
A haulage firm with a poor claims record cannot obtain fleet cover in the admitted market and places it with a surplus lines insurer at a premium of $250,000. The state applies a 5% surplus lines tax and a 0.18% stamping fee, and the broker charges a flat fee of $2,500.
The tax is $250,000 x 0.05 = $12,500 and the stamping fee is $250,000 x 0.0018 = $450. Total cost is $250,000 + $12,500 + $450 + $2,500 = $265,450, which is $15,450 above the headline premium, or 6.18% more than the figure quoted on the schedule.Case study
Seen in the real world.
The following is an illustrative and entirely fictional example. Harlow Vale Cold Storage, an invented operator of refrigerated warehouses, expanded into ammonia based refrigeration and immediately found its long standing admitted insurer unwilling to renew. Six other admitted carriers declined the risk, which satisfied the diligent search requirement and opened the surplus lines route.
The replacement policy cost $310,000 against a previous premium of $185,000, and once taxes, stamping fees and broker fees were added the total reached roughly $330,000. Harlow Vale's finance director had budgeted only for the quoted premium and had to find the difference mid year.
More significantly, the fictional company's risk manager read the wording carefully and found a maintenance warranty requiring quarterly inspection of the ammonia plant by a certified engineer. Compliance cost $16,000 a year, but failing it would have voided the cover completely, which is exactly the kind of clause that never appears in a filed admitted policy.
Watch out
Common mistakes.
- Budgeting only for the quoted premium and being caught out by surplus lines taxes, stamping fees and broker fees added on top.
- Assuming a non admitted policy carries the same wording as a standard one, when exclusions, warranties and conditions are individually negotiated.
- Overlooking the absence of guaranty fund protection and failing to check the insurer's financial strength rating before binding cover.
Questions
People also ask.
Is surplus lines insurance unregulated?
No, the insurers are regulated in their home jurisdiction and the brokers are licensed, but the rates and wordings are not filed with the local regulator.
Why is the cover more expensive than the standard market?
Because the risks placed there are ones admitted insurers have declined, and the price reflects that plus the taxes and fees layered on top.
Can a business move back to the admitted market later?
Often yes, once the claims record improves or the hazardous activity ends, and brokers routinely re-approach admitted insurers at each renewal.
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