Declinations Before Surplus Lines Placement
A producer at an Arkansas surplus lines brokerage is asked to place commercial property coverage on a 40-year-old warehouse in Crittenden County valued at $2.4 million. The building has aluminum wiring and a prior water-damage claim of $90,000 from 2022. The producer contacts three admitted carriers. Carrier A declines verbally by phone. Carrier B declines in writing, citing the aluminum wiring. Carrier C returns a quote but with a $25,000 wind/hail deductible and a 20% coinsurance requirement that the insured rejects as unaffordable. The insured is pushing to bind immediately because its current policy expires in five days. The producer has a signed surplus lines affidavit template on file but has not yet completed the diligent effort documentation.
1. Has the producer satisfied the diligent effort requirement needed to place this risk with a surplus lines insurer? Explain your reasoning and identify what is missing.
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Not yet. Arkansas requires a documented diligent effort to place the risk with admitted insurers before using the surplus lines market. Three contacts were made, but the quality of documentation matters:
- Carrier A's verbal phone declination is weak evidence; it should be reduced to writing or at least logged with date, contact name, and reason.
- Carrier B's written declination citing aluminum wiring is solid documentation.
- Carrier C did not decline - it quoted. A quote the insured rejects as unaffordable is not automatically a declination. The producer must document why the quoted terms (high wind/hail deductible plus 20% coinsurance) do not meet the insured's needs, and ideally obtain a written statement from Carrier C or a documented explanation of the coverage gap.
The file needs a completed diligent effort record showing each carrier, the date of contact, the coverage requested, and the specific reason coverage was unavailable or insufficient. Binding in five days is a business pressure, not a legal excuse to skip documentation.
2. The insured wants to bind in five days. What should the producer do first, and what is the risk of skipping steps?
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The producer should complete and memorialize the diligent effort record - converting Carrier A's verbal declination to writing, obtaining a written explanation from Carrier C about why its terms were unacceptable, and documenting the coverage the insured needed versus what was offered - before binding any surplus lines policy. The producer should also confirm the surplus lines insurer is eligible in Arkansas and prepare the affidavit and filing.
Risks of skipping steps: the placement may be deemed improper because the diligent effort requirement was not met; the producer and brokerage face regulatory exposure; the policy could be challenged; and the surplus lines premium tax filing and affidavit could be defective. Speed does not cure a documentation defect, and the producer should communicate realistic timing to the insured rather than bind on an incomplete file.