Diligent Effort When an Admitted Market Exists
An Arkansas surplus lines broker is asked to place a $1.5 million commercial auto liability policy for a delivery company with 12 vehicles and two at-fault accidents in the past three years. The broker contacts four admitted carriers. Two decline. One offers a quote at a significantly higher premium than the expiring policy. The fourth admitted carrier says it can write the risk but only with a $10,000 physical damage deductible and exclusion of two drivers, which the insured refuses. The insured insists the surplus lines market will be cheaper. The broker finds a surplus lines insurer willing to write the full coverage at a premium lower than the admitted quote. The broker wants to bind the surplus lines policy the same day.
1. Can the broker bind the surplus lines policy now? Analyze the diligent effort requirement.
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The broker must be careful. The diligent effort requirement is satisfied when coverage cannot be obtained from admitted insurers - not merely when surplus lines is cheaper. Here, the facts are mixed:
- Two admitted declinations are helpful documentation.
- The higher-priced admitted quote is not a declination; a premium difference alone does not justify surplus lines if the admitted carrier will write the risk on acceptable terms.
- The fourth carrier's offer includes a $10,000 physical damage deductible and exclusion of two drivers, which the insured refused. That refusal must be documented as a coverage deficiency, not a price objection.
The broker should document why the admitted offers did not meet the insured's coverage needs and confirm that the admitted market genuinely could not provide the requested coverage. If the only barrier is price, the surplus lines placement is improper.
2. The insured says surplus lines will be cheaper. How should the broker respond, and what documentation is needed?
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The broker should explain that cost alone is not a lawful basis for going to the surplus lines market. The test is whether admitted insurers declined or could not provide the coverage on terms acceptable to the insured. The broker should:
- Document each admitted carrier contact (date, contact, coverage requested, response, and specific reason for declination or inadequacy).
- Specifically document the fourth carrier's deductible and driver-exclusion terms and why the insured found them unacceptable as a coverage matter.
- Obtain written confirmation where possible.
If the documentation shows a genuine coverage gap, the broker may proceed to bind with an eligible surplus lines insurer and complete the affidavit and filing. If the only reason is price, the broker should place the risk with the admitted carrier or explain to the insured that the surplus lines market is unavailable for that reason.