Surplus Lines Principles and Practices
What Surplus Lines Is
Surplus lines insurance is coverage written by nonadmitted insurers for risks that authorized insurers will not accept, or will not accept on the same terms. Nonadmitted insurers are not licensed in Arizona but may write eligible business through a licensed surplus lines broker. They are not subject to the same rate and form filing requirements, which is the reason surplus lines can respond quickly to unusual or hard-to-place risks, and also the reason the insured has less regulatory protection.
Eligibility and the Diligent Search
Before placing with a nonadmitted insurer, the broker must confirm the risk is eligible surplus lines business and complete the required diligent search of authorized insurers. Some classes are on the export list and skip the individual search. A common trap is assuming that because a risk is unusual, the diligent search is automatically waived; it is waived only for exported classes or where the statute otherwise allows.
Broker Duties and Documentation
Surplus lines brokers must maintain records of the search, the declinations, and the placement, disclose that the insurer is nonadmitted and not guaranty-fund protected, and handle premium and taxes correctly. The surplus lines premium tax is generally collected from the insured and remitted by the broker. Records must be retained for the period the statute requires and made available to DIFI on request.
Unauthorized Insurers and Enforcement
Placing with an ineligible or unauthorized insurer, failing to document the search, or misrepresenting the insurer's status can lead to license discipline and civil penalties. Brokers should also verify the nonadmitted insurer's financial standing and eligibility to write the class.
Rule of thumb: if the risk is on the export list, no individual diligent search; if it is not, document the search before binding.
Worked example: a broker places a difficult liability risk with a nonadmitted insurer without any declinations and without checking the export list. The placement is deficient because the broker skipped eligibility and search steps.