Three Declinations, One Price Complaint, and a Surplus Lines Placement
Kessler Holdings owns a 40-unit apartment complex in St. Louis with a $6.5 million replacement-cost value and $180,000 of water-damage losses over three years. The admitted carrier nonrenews. Its broker, licensed in Missouri for surplus lines, documents the following: Carrier A declines in writing, "habitational over 30 units is outside our appetite"; Carrier B's underwriter tells the broker by phone, "we won't touch that loss history, don't waste the submission"; Carrier C quotes $78,000 with a $50,000 wind/hail deductible and an actual-cash-value roof endorsement, which the owner rejects. A nonadmitted carrier then quotes $54,000 with a $10,000 deductible and replacement cost. Kessler has a net worth of $8 million and 12 employees. The broker places the $54,000 program and remits $1,620 in premium tax.
1. Is the diligent search adequate to support the surplus lines placement?
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Not as documented. Three contacts is not the issue; the quality of each is.
- Carrier A is a clean declination. Written, specific, from the carrier, and tied to underwriting appetite. This one supports the file.
- Carrier B is not a declination. A phone comment from an underwriter that it is "not worth submitting" is not the insurer's response to a submission. The broker must actually submit the risk and obtain a written declination or quote. Skipping the submission converts an assumption into a missing declination.
- Carrier C produced an offer, so the market was not closed to this risk.
With only one genuine declination out of three, the file does not demonstrate that the full coverage could not be procured from authorized insurers. The broker should submit to Carrier B and to additional admitted writers of habitational risk - regional mutuals and specialty habitational programs - and document each submission date and response before relying on the surplus lines market.
2. Was rejecting Carrier C's quote permissible, given the premium was 44% higher than the surplus lines alternative?
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Price alone would not justify it. Surplus lines exists to fill gaps in the admitted market, not to shop for a cheaper number, and a file showing "we saved $24,000" is a file that invites a finding that the admitted market was available.
The coverage terms, however, give the broker a defensible basis if he documents them properly. Carrier C's program carries a $50,000 wind/hail deductible and an actual-cash-value roof settlement, against a $10,000 deductible and replacement cost in the proposed program. Those are material differences in what the insured would actually collect after a loss, not mere pricing differences, and the insured's stated objective was replacement-cost protection on a building with a claim history.
The file must say that explicitly: a comparison of deductibles, valuation basis, and limits side by side, the insured's written rejection of the Carrier C terms on coverage grounds, and the broker's conclusion that the admitted offer was not substantially equivalent to the coverage requested. If the broker simply records "too expensive," the placement is vulnerable even though the outcome may have been right.
3. The Department later finds the search inadequate. What are the consequences, and what should the broker have known about the insured's status?
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Kessler is not an exempt commercial purchaser, so no shortcut was available. At $8 million net worth and 12 employees it fails every size test, and nothing in the file suggests it used a risk manager. The full diligent search requirement applied.
An inadequate search means the placement was an improper surplus lines transaction. Consequences fall in three places: the Department can penalize the broker, order corrective action, and examine or suspend the license; the insured loses the argument that it was properly placed and, if the nonadmitted insurer fails, has no guaranty association protection and an E&O claim against the broker for the gap; and the broker's own professional liability coverage is exposed because the missing Carrier B submission is exactly the kind of file defect an examiner or plaintiff's counsel finds first.
The lesson is that the surplus lines file is a record of what the admitted market said, in writing, on a submitted risk. A phone shrug and a price comparison are not a diligent search.