Puna Resort Property Placement: Diligent Effort and Disclosure
A Honolulu surplus lines broker is asked to place $8 million commercial property coverage for a 120-room resort in Puna, Hawaii, effective July 1. The risk includes lava-zone exposure and a prior volcanic damage claim. The broker contacts five authorized insurers. Insurer A declines because it does not write resort risks in lava zones. Insurer B declines, citing reinsurance capacity. Insurer C quotes a premium 40% higher with a $500,000 hurricane deductible; the client rejects the quote as unaffordable. Insurer D does not respond within ten business days. Insurer E is an authorized carrier that writes only personal lines. The broker places the risk with an eligible unauthorized insurer and documents the five contacts. The client later asks why the policy is with a non-admitted company. The file contains no signed disclosure that the insurer is unauthorized and no explanation of the guaranty fund exclusion.
1. Did the broker satisfy Hawaii's diligent effort requirement? Analyze each of the five insurer contacts and identify what the file should contain.
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Hawaii requires a documented diligent effort in the authorized market before a surplus lines placement. A contact counts only if the insurer was asked to write the class and risk at issue.
- Insurer A: not a valid declination; it does not write resort risks in lava zones, so it was never a viable market.
- Insurer B: valid capacity declination.
- Insurer C: produced an authorized-market quote at a higher price. The client's rejection can support a surplus lines placement, but the file must include the quote, terms, and the client's documented rejection.
- Insurer D: silence is not a declination. The broker needed follow-up attempts and dates.
- Insurer E: personal-lines-only carrier; not a valid declination for commercial resort property.
The file therefore shows at most two meaningful authorized-market responses. That is thin for an $8 million lava-zone risk. The broker should have approached additional authorized commercial property writers and documented each date, underwriter, coverage line, response, and reason. Conclusion: the diligent effort is probably insufficient; the broker should cure the file before audit but cannot create retroactive declinations.
2. What must the broker disclose to the client about the unauthorized insurer, and what are the consequences of the missing signed disclosure?
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Hawaii requires written disclosure before placement that the insurer is not authorized in Hawaii, is not subject to the same solvency and market-conduct oversight as an admitted carrier, and that the Hawaii guaranty association will not pay claims if the insurer fails. The disclosure should be acknowledged or signed by the insured and retained. The broker also should explain the policy's claims, jurisdiction, and arbitration provisions.
Missing disclosure is not a technicality: it undermines the client's informed consent and supports regulatory discipline and a broker liability claim if coverage fails. The broker should deliver the disclosure now, document the client's receipt, and not backdate it. The client should also be told what to do if the insurer becomes insolvent and why the policy may be harder to enforce than an admitted-carrier policy.