Standard Carriers vs. Excess Surplus Carriers
As a manufacturer or recycler, you may’ve heard an insurance agent mention that your policy is a “non-standard” or “excess and surplus” coverage. But what does this mean to you, and how can it affect your risk management program?
The standard marketplace is one where a carrier is “admitted” to offer a certain product under specified conditions. These carriers are subject to strict guidelines regarding the type of risks they can write, policy language they can use, and rates they can charge. While this means they can write a fewer number of businesses, in exchange they get benefits of state regulation such as access to state “guarantee fund” backstops which help pay policyholder claims if the carrier can’t.
A “non-admitted” carrier doesn’t have to undergo the same scrutiny as an admitted carrier. However, this doesn’t mean they’re unregulated. They still follow various state laws, but such laws are usually much less restrictive. This means they have great flexibility in the type of products they can offer. This secondary marketplace is referred to as the “surplus lines” market, referencing the state surplus lines authorities that oversee them.
It’s important to know that surplus lines carriers don’t enjoy access to state guarantee funds. Because of this, it’s important you know the ratings provided to these carriers. Independent organizations such as “A.M. Best” produce these ratings, which quantify the financial strength of a carrier.
So admitted carriers are more highly regulated and backed up by state funding programs, while surplus lines carriers are much more flexible but don’t have the same benefits. So what marketplace you purchase coverage from will be highly dependent on the type of operations you have; the more unique your operations, the more likely you’ll need surplus lines coverage.
Because surplus lines carriers tend to take on higher risk, they often use propriety policy forms. A rule of thumb is that these forms often contain restrictions not found in their admitted counterparts. However, because surplus lines forms don’t need to be pre-approved, they can also greatly enhance coverage; a surplus lines carrier can, with relative ease, tailor policy conditions to your specific needs.
All things being equal, admitted coverage is preferable to surplus lines coverage for the simple sake of access to state guarantee funds. But the reality is that admitted carriers have many restrictions placed on them that prevent them from offering certain coverages or writing certain businesses. In this scenario, a surplus lines carrier can fill the gap in your risk management program and may even be able to offer broader coverage. But before any decision is made, make sure you consult with your Assurance agent, as coverage needs to be reviewed – and often modified – for your particular business.
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