Diligent Search and Declination Requirements
The search duty
Before placing surplus lines, the surplus lines agent must make a documented diligent search of the authorized market. The file should identify the authorized insurers approached, the dates, the coverage requested, and the reason each declined or could not provide the full coverage. Michigan exam questions focus on proof: a conclusory statement that "the market declined" is not enough. The agent should retain the declination documentation with the policy file.
Full coverage, not just any quote
A declination is not the same as a higher-priced quote. If an authorized insurer offers the full coverage requested, coverage is procurable and the surplus lines placement is generally not justified by price alone. If the authorized insurer offers only a restricted form, lower limit, or unacceptable exclusion, that can support the search, but the file should explain the gap.
Exempt commercial purchaser exception
For a qualifying exempt commercial purchaser, the diligent search requirement may be waived if the broker discloses in writing that coverage may be available from authorized insurers. The exemption depends on the statutory definition and the disclosure; it is not a general waiver for large accounts.
Worked example
An agent approaches three authorized carriers. Two decline; the third offers a policy with a total pollution exclusion that the insured cannot accept. The agent documents each response and explains why the third quote is not full coverage. That record supports surplus lines placement. If the third carrier had offered full coverage at a higher premium, the agent would need a different justification.
Traps that cost marks
Do not treat a high premium as a declination. Do not leave out dates, insurer names, or coverage terms. Do not use an affiliate of the surplus lines insurer as a fake declination. Do not waive the search for an exempt commercial purchaser without the required written disclosure.