Diligent Search and Declination Documentation
A commercial client seeks property coverage for a $2.5 million building in a rural Alaska town. The broker contacts five admitted insurers; three decline due to wildfire exposure, one offers a quote at triple the standard rate with a $50,000 deductible, and one does not respond. The broker then obtains a surplus lines quote with a $25,000 deductible at a premium 40% lower than the admitted insurer's quote. The client wants to bind coverage immediately. The broker has documented all communications but has not yet obtained a written declination from the non-responding insurer.
1. Has the broker conducted an adequate diligent search? Explain your reasoning.
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The broker's diligent search appears adequate. Alaska requires a diligent search of admitted insurers before placing coverage with a surplus lines insurer. The broker contacted five admitted insurers; three declined, one offered a quote, and one did not respond. The non-response can be treated as a declination if the broker documents the attempt and the lack of response. However, the broker must ensure that the search is documented in the surplus lines affidavit. The fact that one admitted insurer offered a quote does not preclude surplus lines placement if the broker can demonstrate that the admitted insurer's quote was not competitive or was unreasonable. The broker should document why the admitted quote was rejected (e.g., price, deductible, or terms). The non-responding insurer should be sent a follow-up and the attempt documented. If the broker can show that the admitted market did not offer coverage on reasonable terms, the diligent search requirement is satisfied.
2. What steps should the broker take before binding the surplus lines policy to comply with Alaska's declination requirements?
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Before binding, the broker must: (1) Obtain written declinations from the three insurers that declined, or document their oral declinations with dates and names. (2) Document the non-response from the fifth insurer, including the date of the request and any follow-up attempts. (3) Document the admitted insurer's quote and the reasons it was rejected (e.g., premium, deductible, or coverage restrictions). (4) Complete a surplus lines affidavit that lists all admitted insurers contacted, their responses, and the reason for placing coverage with a surplus lines insurer. (5) Ensure that the surplus lines insurer is eligible and authorized in Alaska. (6) Provide the required disclosures to the client. Only after these steps should the broker bind coverage.