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North Carolina Surplus Lines study materials
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North Carolina Surplus Lines practice questions

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Question 1North Carolina insurance statutes and regulations governing surplus lines

Under North Carolina law, which entity is responsible for issuing licenses to surplus lines brokers?

  1. The North Carolina Rate Bureau
  2. The North Carolina Department of Insurance Correct answer.
  3. The Surplus Lines Association of North Carolina
  4. The National Association of Insurance Commissioners

Explanation

The North Carolina Department of Insurance, through the Commissioner of Insurance, licenses resident and nonresident surplus lines brokers. The Rate Bureau handles residual market and rate matters, not surplus lines broker licensure.

Question 2North Carolina insurance statutes and regulations governing surplus lines

A surplus lines broker places coverage with an eligible nonadmitted insurer. What must the broker do regarding the insured's signature before the placement is binding?

  1. Obtain the insured's written promise to buy admitted coverage at renewal
  2. Obtain the insured's notarized statement of net worth
  3. Obtain the insured's written acknowledgment that the insurer is not admitted and is not protected by the guaranty association Correct answer.
  4. Obtain the insured's written consent to waive all policy exclusions

Explanation

North Carolina requires a written disclosure signed by the insured acknowledging that the insurer is not licensed in the state and is not covered by the North Carolina Insurance Guaranty Association. This protects the insured from surprise about the lack of guaranty fund protection.

Question 3North Carolina insurance statutes and regulations governing surplus lines

Before placing a risk with a nonadmitted insurer, a surplus lines broker must generally demonstrate a diligent effort to procure coverage from admitted insurers. Which statement best describes the diligent effort standard?

  1. A single verbal declination from any licensed producer is sufficient
  2. The broker may skip the search whenever the insured requests nonadmitted coverage in writing
  3. Diligent effort is required only for personal lines risks
  4. Declinations must be obtained from at least three authorized insurers that actually write the type of coverage sought Correct answer.

Explanation

North Carolina requires the broker to make a diligent effort to place the risk with authorized insurers, generally documented by declinations from at least three authorized insurers that write the class of business. The purpose is to ensure the admitted market is genuinely unavailable.

Question 4North Carolina insurance statutes and regulations governing surplus lines

Which class of insured may qualify as an exempt commercial purchaser, allowing a surplus lines broker to place coverage without the full diligent effort search?

  1. Any insured purchasing homeowners coverage
  2. Any sole proprietorship with fewer than ten employees
  3. A nonprofit organization of any size
  4. A large commercial buyer meeting statutory size and sophistication thresholds Correct answer.

Explanation

The exempt commercial purchaser definition uses thresholds for net worth, revenue, and number of employees, plus representation by a qualified risk manager. Such buyers may be placed with nonadmitted insurers without the full diligent effort documentation.

Question 5North Carolina insurance statutes and regulations governing surplus lines

Within what timeframe must a surplus lines broker file the required report and pay the surplus lines premium tax on a placement in North Carolina?

  1. By March 1 following the calendar year in which the policy was placed, or as otherwise specified by statute Correct answer.
  2. Only at the end of the policy term
  3. Within 24 hours of policy issuance
  4. Within five business days of binding the coverage

Explanation

North Carolina surplus lines premium tax reporting and payment are generally due annually by March 1 for the preceding calendar year, following the statutory schedule administered by the Department. Brokers should confirm current filing instructions with the Department.

Question 6North Carolina insurance statutes and regulations governing surplus lines

Which of the following is a required element of the surplus lines broker's policy records for each placement?

  1. Documentation of the diligent effort and the disclosure signed by the insured Correct answer.
  2. The admitted insurer's rate filing
  3. The producer's personal credit report
  4. The insured's tax returns

Explanation

Surplus lines brokers must maintain records showing the diligent effort and the signed disclosure for each placement, subject to examination by the Department. These records demonstrate compliance with placement rules.

Question 7North Carolina insurance statutes and regulations governing surplus lines

An eligible surplus lines insurer must meet which minimum requirement under North Carolina standards?

  1. It must maintain a minimum capital and surplus and be listed as eligible by the Department Correct answer.
  2. It must be licensed as an admitted insurer in North Carolina
  3. It must be a domestic North Carolina company
  4. It must be owned by a North Carolina resident

Explanation

To be eligible, a nonadmitted insurer must satisfy capital and surplus requirements and appear on the Department's list of eligible surplus lines insurers. It is by definition not admitted in North Carolina.

Question 8North Carolina insurance statutes and regulations governing surplus lines

A broker places a risk with a nonadmitted insurer that is not on the Department's eligible list. What is the consequence?

  1. The placement violates North Carolina surplus lines law and may subject the broker to disciplinary action Correct answer.
  2. The placement becomes valid after 30 days
  3. The placement is automatically valid if the insured signs a waiver
  4. The placement is valid because eligibility applies only to admitted insurers

Explanation

North Carolina law restricts surplus lines placements to eligible nonadmitted insurers. Placing coverage with an ineligible insurer can trigger regulatory discipline against the broker and undermines the protections built into the eligibility list.

Question 9North Carolina insurance statutes and regulations governing surplus lines

The North Carolina Insurance Guaranty Association does which of the following with respect to surplus lines policies?

  1. It covers only property claims under surplus lines policies
  2. It covers surplus lines claims after a 12-month waiting period
  3. It does not provide protection for claims under nonadmitted surplus lines policies Correct answer.
  4. It fully covers all surplus lines claims up to the policy limit

Explanation

The guaranty association protects policyholders of insolvent admitted insurers. Surplus lines policies written by nonadmitted insurers are excluded, which is why the insured must receive written notice of that lack of protection.

Question 10North Carolina insurance statutes and regulations governing surplus lines

Which placement is generally prohibited from being written through the surplus lines market in North Carolina?

  1. A risk where the coverage is readily available from authorized insurers and the diligent effort requirement has not been met Correct answer.
  2. A risk requiring a specialty endorsement not offered by admitted carriers
  3. A risk with unusual exposure that admitted insurers decline
  4. A risk located in a coastal area where admitted insurers decline wind coverage

Explanation

Surplus lines is a market of last resort; coverage may be placed nonadmitted only when admitted insurers cannot or will not provide it after a diligent effort. Placing readily available coverage in the surplus lines market violates that principle.

Question 11North Carolina insurance statutes and regulations governing surplus lines

What must a surplus lines broker provide to the insured at the time of placement regarding the insurer's status?

  1. A written notice that the insurer is not admitted in North Carolina and is not subject to the state's guaranty fund Correct answer.
  2. A statement that the policy is backed by the full faith and credit of North Carolina
  3. A certificate of admitted status
  4. A copy of the insurer's annual report

Explanation

The required disclosure informs the insured that the surplus lines insurer is not admitted and that the guaranty association will not respond to its insolvency. This notice must be signed and retained by the broker.

Question 12North Carolina insurance statutes and regulations governing surplus lines

Which entity is authorized to examine the records of a surplus lines broker in North Carolina?

  1. Only the Internal Revenue Service
  2. Only the insurer's home-state regulator
  3. The Commissioner of Insurance through Department examiners Correct answer.
  4. A private auditing firm selected by the insured

Explanation

The Commissioner has examination authority over licensed surplus lines brokers, including access to placement records, disclosures, and tax filings. This supports enforcement of the surplus lines statutes.

Question 13North Carolina insurance statutes and regulations governing surplus lines

A broker collects a policy fee from the insured in a surplus lines transaction. How is that fee treated for premium tax purposes?

  1. It is taxed at twice the premium rate
  2. It is reported only if the insured requests it
  3. It depends on whether the fee is part of the premium charged for the insurance, which the broker must report accordingly Correct answer.
  4. It is always exempt from premium tax

Explanation

Surplus lines premium tax applies to the premium for the insurance, and the broker must correctly identify which charges constitute premium. Fees that are part of the consideration for coverage are generally reportable, so proper classification matters.

Question 14North Carolina insurance statutes and regulations governing surplus lines

Which of the following best describes the role of the Surplus Lines Association of North Carolina?

  1. It sets mandatory rates for nonadmitted insurers
  2. It adjudicates coverage disputes between insureds and surplus lines insurers
  3. It supports the surplus lines industry through stamping, data, and compliance assistance functions Correct answer.
  4. It issues surplus lines broker licenses

Explanation

The association functions as an industry and stamping office that assists with filing, data reporting, and compliance support. Licensing remains with the Department, and rate setting and dispute adjudication are not its functions.

Question 15North Carolina insurance statutes and regulations governing surplus lines

A surplus lines broker wants to advertise a nonadmitted insurer to North Carolina consumers. Which statement is accurate?

  1. The broker may describe the insurer as state-approved because it is on the eligibility list
  2. The broker may state that guaranty fund protection applies
  3. The broker must not misrepresent the insurer as admitted or otherwise approved in a way that misleads the public Correct answer.
  4. The broker may use the state seal in advertisements

Explanation

Advertising rules prohibit misrepresenting a nonadmitted insurer's status. Being on the eligibility list does not make an insurer admitted, and claiming state approval or guaranty coverage would mislead consumers.

Question 16North Carolina insurance statutes and regulations governing surplus lines

When a surplus lines policy is canceled mid-term, how should the broker handle the premium tax on the returned premium?

  1. The broker keeps the full tax with no adjustment and no reporting
  2. The broker should reflect the cancellation and returned premium in the reporting so tax is adjusted consistent with Department procedures Correct answer.
  3. The broker refunds tax directly to the insured from personal funds
  4. The broker reports the cancellation only to the insurer

Explanation

Premium tax is based on premium actually charged, so cancellations and return premiums must be reflected in surplus lines tax reporting according to Department procedures. The broker cannot simply retain tax on premium that was returned.

Question 17North Carolina insurance statutes and regulations governing surplus lines

Which of the following is true about a nonresident surplus lines broker seeking to do business in North Carolina?

  1. The broker may operate using only a home-state license with no North Carolina filing
  2. The broker must establish residency in North Carolina
  3. The broker must be appointed by an admitted insurer
  4. The broker must obtain a North Carolina nonresident surplus lines license and comply with state surplus lines rules Correct answer.

Explanation

Nonresident brokers must be licensed in North Carolina as surplus lines brokers and follow the same placement, disclosure, and tax rules. A home-state license alone does not authorize North Carolina placements.

Question 18North Carolina insurance statutes and regulations governing surplus lines

A broker discovers after placement that the insured's disclosure signature was never obtained. What is the best compliance response?

  1. Alter the date on the disclosure to match the binding date
  2. Ignore the omission because coverage is already bound
  3. Obtain the required signed disclosure promptly and document the file, recognizing the original placement was deficient Correct answer.
  4. Ask the insurer to waive the disclosure requirement

Explanation

The signed disclosure is a statutory requirement, and a missing signature is a compliance deficiency that should be corrected and documented. Backdating or ignoring the gap would compound the violation.

Question 19North Carolina insurance statutes and regulations governing surplus lines

Which statement accurately reflects the relationship between surplus lines eligibility and insurer financial standards in North Carolina?

  1. Eligibility is granted automatically upon application without financial review
  2. Eligibility is determined solely by the insurer's country of domicile
  3. Any insurer with a business license may be used
  4. Eligible insurers must meet minimum capital and surplus standards set by statute or regulation Correct answer.

Explanation

Eligibility requires the insurer to demonstrate financial strength through minimum capital and surplus thresholds and to be placed on the Department's eligible list. Financial review is central to protecting insureds who lack guaranty fund protection.

Question 20North Carolina insurance statutes and regulations governing surplus lines

What is the primary purpose of the diligent effort requirement in North Carolina surplus lines law?

  1. To increase commissions for surplus lines brokers
  2. To prevent insureds from changing insurers
  3. To require insureds to purchase the lowest-priced coverage available
  4. To ensure the admitted market genuinely cannot provide the coverage before a nonadmitted insurer is used Correct answer.

Explanation

The diligent effort requirement enforces the market-of-last-resort principle by documenting that authorized insurers declined or could not write the risk. It protects consumers and preserves the admitted market.

Question 21North Carolina insurance statutes and regulations governing surplus lines

A surplus lines broker is unsure whether a particular risk qualifies for surplus lines placement. Which action best reflects compliance?

  1. Document the diligent effort and confirm the risk cannot be placed with an authorized insurer before binding nonadmitted coverage Correct answer.
  2. Bind the nonadmitted policy first and conduct the search afterward
  3. Place the risk with a nonadmitted insurer and skip the disclosure
  4. Rely on the insured's assurance that admitted coverage is unavailable

Explanation

Compliance requires completing and documenting the admitted-market search before binding nonadmitted coverage. Retroactive searches, unverified assurances, and skipped disclosures all undermine the statutory protections.

Question 22North Carolina insurance statutes and regulations governing surplus lines

Which of the following charges is typically included in the surplus lines premium subject to North Carolina premium tax?

  1. The broker's office rent
  2. The premium charged by the nonadmitted insurer for the coverage Correct answer.
  3. The insurer's claim adjustment expenses
  4. The insured's deductible

Explanation

Surplus lines premium tax is imposed on the premium charged for the insurance. Office overhead, deductibles, and claim expenses are not premium and are not part of the taxable base.

Question 23North Carolina insurance statutes and regulations governing surplus lines

Which statement about the Commissioner's authority over surplus lines brokers is correct?

  1. The Commissioner must obtain court approval before any license action
  2. The Commissioner has no authority over nonresident brokers
  3. The Commissioner may deny, suspend, or revoke a surplus lines license for violations of the insurance laws Correct answer.
  4. The Commissioner may only issue warnings with no license consequences

Explanation

The Commissioner holds administrative authority to deny, suspend, or revoke licenses and to impose other remedies for violations. This authority applies to resident and nonresident surplus lines brokers alike.

Question 24North Carolina insurance statutes and regulations governing surplus lines

A broker places a surplus lines policy but fails to file the required report and pay premium tax. What is the most likely regulatory outcome?

  1. The policy is voided and the insured receives a full refund
  2. The Department waives the tax if the insured did not file a claim
  3. The broker may face penalties and disciplinary action in addition to the unpaid tax Correct answer.
  4. The insurer becomes admitted automatically

Explanation

Failure to report and remit surplus lines premium tax exposes the broker to penalties, interest, and license discipline. The obligation exists regardless of whether the insured ever files a claim.

Question 25North Carolina insurance statutes and regulations governing surplus lines

Which document best demonstrates that a surplus lines broker satisfied the diligent effort requirement for a commercial risk?

  1. Written declinations from authorized insurers that write the class of business Correct answer.
  2. A note that the insured preferred a nonadmitted insurer
  3. A copy of the nonadmitted insurer's marketing brochure
  4. A verbal statement from the retail agent

Explanation

The diligent effort is evidenced by written declinations from authorized insurers that actually write the type of coverage. Preferences, brochures, and verbal statements do not establish that the admitted market was unavailable.

Question 26North Carolina insurance statutes and regulations governing surplus lines

Under North Carolina surplus lines law, a broker may place a risk with a nonadmitted insurer only after making a diligent effort to procure coverage from admitted insurers. What does a diligent effort primarily require the broker to do?

  1. Purchase coverage from at least three nonadmitted insurers for comparison
  2. Search the admitted market for the coverage before turning to nonadmitted insurers Correct answer.
  3. Obtain written approval from the Commissioner before each surplus lines placement
  4. Notify the North Carolina Insurance Guaranty Association of the placement

Explanation

The diligent effort requirement means the broker must first attempt to place the risk with authorized (admitted) insurers that are licensed to write that class of business in North Carolina. Only when admitted insurers decline or cannot provide the coverage may the broker use the surplus lines market. The requirement protects consumers by reserving the surplus lines market for risks the admitted market will not accept.

Question 27North Carolina insurance statutes and regulations governing surplus lines

North Carolina law requires a surplus lines broker to keep records of each surplus lines transaction. Which statement best describes the recordkeeping obligation?

  1. Records may be discarded once the policy term ends and the premium tax is paid
  2. Records must be kept only if the policy exceeds a statutory premium threshold
  3. Records must be retained for a set period and made available to the Commissioner on request Correct answer.
  4. Records must be filed with the county clerk in the county where the insured resides

Explanation

Surplus lines brokers must maintain records of each placement for the period prescribed by statute and regulation and must produce them when the Commissioner examines the broker's business. These records support verification of diligent effort, eligibility of the insurer, and correct premium tax reporting. The Commissioner's examination authority depends on the broker's duty to preserve the records.

Question 28North Carolina insurance statutes and regulations governing surplus lines

A North Carolina surplus lines broker is preparing the disclosure that must be delivered to the insured at placement. Which item must that disclosure convey?

  1. That the insurer is fully licensed and backed by the North Carolina Insurance Guaranty Association
  2. That the insured may cancel without penalty if a licensed insurer later offers coverage
  3. That the Commissioner has personally approved the insurer for this specific risk
  4. That the insurer is not licensed by North Carolina and is not subject to the state's guaranty fund protection Correct answer.

Explanation

The surplus lines disclosure informs the insured that the coverage is written by an insurer not licensed in North Carolina and that the policy is not protected by the North Carolina Insurance Guaranty Association. This warning lets the insured knowingly accept the different regulatory status of a nonadmitted insurer. The disclosure requirement is a core consumer protection in surplus lines law.

Question 29North Carolina insurance statutes and regulations governing surplus lines

Which of the following is the correct treatment of the surplus lines premium tax that a North Carolina broker collects from the insured?

  1. The broker remits the tax to the state on the schedule set by statute and regulation Correct answer.
  2. The broker retains the tax as compensation for administrative costs
  3. The tax is waived when the insured is a large commercial purchaser
  4. The insurer remits the tax directly to the Department without broker involvement

Explanation

The surplus lines broker is responsible for collecting and remitting premium tax on surplus lines policies written in North Carolina, reporting and paying on the schedule the statutes and Department rules establish. The broker acts as the collection point because the nonadmitted insurer has no admitted-market tax reporting relationship with the state. Failure to remit exposes the broker to penalties and license consequences.

Question 30North Carolina insurance statutes and regulations governing surplus lines

A North Carolina surplus lines broker places a policy with an insurer that appears on the Department's eligible surplus lines insurer list. Later the insurer is removed from the list for failing financial standards. What is the broker's position regarding the existing policy?

  1. The policy remains in force, but the broker must consider the insurer's changed status before any renewal or new placement Correct answer.
  2. The broker must surrender the license because a placement was made with a subsequently delisted insurer
  3. The broker must immediately replace the policy with an admitted insurer at the broker's expense
  4. The existing policy is automatically void as of the date the insurer was removed from the list

Explanation

Eligibility is assessed at the time of placement, so a policy placed with a then-eligible insurer is not retroactively invalidated by later removal from the list. The broker must, however, monitor the insurer's status and cannot make new placements or renewals with an insurer that is no longer eligible. This reflects the prospective nature of the eligible insurer list.

Question 31North Carolina insurance statutes and regulations governing surplus lines

A North Carolina surplus lines broker exports a risk to a nonadmitted insurer and learns that the insured signed the required disclosure statement only after the policy was issued. What is the most appropriate corrective action?

  1. Void the policy and return all premium because the placement was invalid from inception
  2. Take no action because the signature requirement applies only to personal lines
  3. Obtain the signed disclosure promptly, document the file, and retain it with the placement records Correct answer.
  4. Report the omission to the Guaranty Association and request coverage confirmation

Explanation

The disclosure and acknowledgment requirement is satisfied by obtaining the insured's signed statement and preserving it in the transaction file; a late-obtained signature should be secured promptly and the file documented. The placement itself is not automatically void for a procedural timing lapse. The broker's records must demonstrate compliance when the Department examines the account.

Question 32North Carolina insurance statutes and regulations governing surplus lines

A North Carolina surplus lines broker is uncertain whether a particular risk may lawfully be placed in the surplus lines market. Which action best reflects compliance with North Carolina law?

  1. Document the admitted-market search and confirm the risk is not one the statute requires to be written by admitted insurers before exporting it Correct answer.
  2. Ask the nonadmitted insurer to certify that the risk is exportable and rely on that certification
  3. Place the risk with a nonadmitted insurer immediately and resolve the eligibility question at renewal
  4. Place the risk through an admitted insurer first and then rewrite it as surplus lines the same day

Explanation

Before exporting a risk, the broker must confirm that the coverage is unavailable from admitted insurers and that the risk is not one the statutes require to be written only by authorized insurers. The diligent effort search should be documented in the file. Relying on the nonadmitted insurer or on a same-day rewrite does not satisfy the broker's independent statutory duty.

Question 33North Carolina insurance statutes and regulations governing surplus lines

Which of the following best describes how North Carolina treats a surplus lines broker's handling of returned premium when a policy is canceled before its expiration date?

  1. The broker keeps the full original tax remittance because tax liability is fixed at inception
  2. The broker adjusts the premium tax reporting to reflect the returned premium in accordance with statutory requirements Correct answer.
  3. The broker refunds the tax to the insured directly from the state treasury
  4. The broker applies the returned premium as a credit toward the next client's tax liability

Explanation

When premium is returned to the insured on a canceled surplus lines policy, the premium tax reporting must be adjusted to reflect the reduced premium actually earned, following the statutory and regulatory process for refunds or credits. The tax follows the premium, so the broker cannot treat the original remittance as permanently fixed. Proper documentation of the cancellation supports the adjustment.

Question 34North Carolina insurance statutes and regulations governing surplus lines

A nonresident surplus lines broker wants to place surplus lines coverage for a North Carolina risk. Which statement about the nonresident broker's authority is accurate?

  1. The broker may place the risk freely because North Carolina grants automatic reciprocity to any licensed broker
  2. The broker must be licensed and authorized in North Carolina, typically through reciprocal or nonresident licensing, before placing the risk Correct answer.
  3. The broker may place the risk if the nonadmitted insurer appoints the broker in writing
  4. The broker may place the risk only if the insured maintains a second office outside North Carolina

Explanation

A nonresident broker must hold the appropriate North Carolina license or authorization, generally obtained through nonresident licensing reciprocity, before transacting surplus lines business for a North Carolina insured. Licensing ensures the broker is subject to the Commissioner's jurisdiction and the state's tax and reporting duties. An insurer appointment alone does not confer the required license.

Question 35North Carolina insurance statutes and regulations governing surplus lines

Which of the following statements about the Commissioner's authority over North Carolina surplus lines brokers is correct?

  1. The Commissioner may place a nonadmitted insurer into receivership under North Carolina law
  2. The Commissioner may require the broker to use only admitted insurers for commercial risks
  3. The Commissioner may examine the broker's records and take disciplinary action for violations of the surplus lines statutes Correct answer.
  4. The Commissioner may set the premium rates charged by eligible nonadmitted insurers

Explanation

The Commissioner supervises surplus lines brokers, including the power to examine records and to discipline brokers who violate licensing, reporting, disclosure, or tax obligations. The Commissioner does not rate nonadmitted insurers, cannot place an unlicensed insurer into state receivership, and cannot erase the statutory role of the surplus lines market for risks the admitted market will not write.

Question 36North Carolina insurance statutes and regulations governing surplus lines

A surplus lines broker collects a separate policy fee from the insured in connection with a North Carolina surplus lines placement. How should the broker treat that fee for premium tax purposes?

  1. Include the fee in the taxable premium base when it is part of the consideration charged for the insurance Correct answer.
  2. Exclude the fee from tax entirely because it is broker compensation rather than premium
  3. Report the fee to the Guaranty Association instead of the Department
  4. Remit tax on the fee only if the insured requests a separate receipt

Explanation

Charges that form part of the consideration for the insurance are generally included in the premium subject to surplus lines premium tax, and the broker must report them accordingly. Labeling a charge as a fee does not by itself remove it from the taxable base. The broker should follow the statutory definition of premium and Department guidance when reporting.

Question 37North Carolina insurance statutes and regulations governing surplus lines

A surplus lines broker has a question about whether a particular coverage line can be exported and about the reporting format for a complex multi-state placement. Which resource is designed to assist North Carolina surplus lines brokers with such operational and compliance questions?

  1. The admitted insurers' rate bureau, which approves surplus lines forms and rates
  2. The Surplus Lines Association of North Carolina, which supports brokers with market and compliance information Correct answer.
  3. The North Carolina Insurance Guaranty Association, which reviews surplus lines placements for eligibility
  4. The county register of deeds, which records surplus lines export certifications

Explanation

The Surplus Lines Association of North Carolina functions as a trade and service organization that assists licensed surplus lines brokers with market access, compliance information, and operational questions. It does not approve placements, set rates, or provide guaranty fund protection. Brokers remain responsible for their own statutory compliance.

Question 38North Carolina insurance statutes and regulations governing surplus lines

A North Carolina surplus lines broker wants to advertise the availability of coverage from a specific nonadmitted insurer to state consumers. Which statement is accurate?

  1. Advertising a nonadmitted insurer is permitted without restriction because surplus lines are exempt from advertising rules
  2. Advertising a nonadmitted insurer is permitted only in newspapers of general circulation
  3. Advertising a nonadmitted insurer requires prior written approval of each advertisement by the Commissioner
  4. Advertising a nonadmitted insurer in a way that misleads consumers about its licensed status is prohibited, and the advertisement must not imply state approval Correct answer.

Explanation

Surplus lines advertising must not misrepresent the insurer's licensing status or suggest that the nonadmitted insurer is approved or supervised by North Carolina in the same way as an admitted insurer. Misleading advertising is an unfair trade practice subject to Commissioner discipline. The broker may advertise but must do so truthfully and with the required disclosures.

Question 39North Carolina insurance statutes and regulations governing surplus lines

A broker places a North Carolina surplus lines policy but fails to file the required report and remit the premium tax when due. Which consequence is most consistent with North Carolina law?

  1. The nonadmitted insurer becomes automatically eligible for guaranty fund protection
  2. The insured becomes personally liable for the broker's penalty
  3. The policy is automatically reformed into an admitted-market policy
  4. The Commissioner may impose penalties and take disciplinary action against the broker's license Correct answer.

Explanation

Reporting and premium tax remittance are core statutory duties of the surplus lines broker, and noncompliance exposes the broker to penalties, interest, and license discipline by the Commissioner. The violation is the broker's, not the insured's. It does not convert the policy into admitted coverage or extend guaranty fund protection.

Question 40North Carolina insurance statutes and regulations governing surplus lines

A North Carolina broker is reviewing a commercial account and must decide whether the risk can be exported. The insured has substantial premium volume, and several admitted insurers have declined the risk in writing. Which factor is most important in the broker's analysis?

  1. Whether the coverage is available from an authorized insurer and whether the class of risk is one the statutes permit to be exported Correct answer.
  2. Whether the insured has previously purchased surplus lines coverage
  3. Whether the insured's premium volume exceeds the threshold for large commercial purchasers
  4. Whether the nonadmitted insurer has appointed the broker as its agent

Explanation

Exportability turns on whether authorized insurers are willing to write the coverage and whether the statutes and regulations permit that class of risk to be placed in the surplus lines market. Premium size, prior surplus lines history, and insurer appointments do not by themselves authorize an export. Documented declinations from admitted insurers support the broker's diligent effort determination.

Question 41Eligibility and due diligence: diligent search and authorized market declinations

Under North Carolina surplus lines law, a diligent search is best described as which of the following?

  1. A credit check on the applicant performed by the surplus lines broker
  2. A filing made with the Department of Insurance after the policy is bound
  3. A documented, good-faith effort to place the risk with authorized insurers before using the surplus lines market Correct answer.
  4. A verbal inquiry to one admitted carrier that may be skipped when the producer is busy

Explanation

The diligent search requirement obligates the surplus lines licensee to make a documented, good-faith attempt to procure coverage from authorized insurers before placing the risk in the nonadmitted market. The effort must be evidenced in the broker's records, not merely assumed. It is a precondition to lawful surplus lines placement.

Question 42Eligibility and due diligence: diligent search and authorized market declinations

Which market must a North Carolina surplus lines licensee search first before approaching a nonadmitted insurer?

  1. Other surplus lines carriers
  2. Any Lloyd's syndicate
  3. The residual market pool only
  4. The authorized (admitted) insurance market Correct answer.

Explanation

North Carolina requires that the risk first be presented to authorized insurers, meaning carriers licensed to transact that line in the state. Only after those markets decline may the licensee turn to nonadmitted insurers. Searching other surplus lines carriers first defeats the statutory purpose.

Question 43Eligibility and due diligence: diligent search and authorized market declinations

A surplus lines broker obtains three declinations from authorized insurers and places the risk with a nonadmitted carrier. What must the broker retain regarding the diligent search?

  1. A copy of the nonadmitted insurer's annual statement
  2. Nothing, provided the policy is issued
  3. Only the final bound policy
  4. Written evidence of the search and declinations in the broker's records Correct answer.

Explanation

The licensee must maintain documentation of the diligent search, including which authorized insurers were contacted and why each declined. This record supports the propriety of the export and is subject to examination. Retaining only the bound policy does not demonstrate compliance.

Question 44Eligibility and due diligence: diligent search and authorized market declinations

When is a diligent search for authorized coverage generally not required before a surplus lines placement in North Carolina?

  1. When the risk is of a type that no authorized insurer is licensed to write in the state Correct answer.
  2. When the producer has used the surplus lines market for that insured before
  3. When the premium exceeds a fixed dollar threshold
  4. When the insured is a large commercial entity

Explanation

Where the class of business is one that authorized insurers are not licensed to write in North Carolina, there is no authorized market to search, so the export may proceed without declinations. The exemption is based on the absence of an authorized market for that line, not on the size or history of the account.

Question 45Eligibility and due diligence: diligent search and authorized market declinations

Which of the following is the most reliable evidence that an authorized insurer declined a risk?

  1. A general market report showing tightening conditions in the line
  2. A colleague's recollection of a phone conversation
  3. A note in the producer's file stating the market was 'not interested'
  4. A dated declination from the authorized insurer or a contemporaneous record of the contact and reason Correct answer.

Explanation

The best evidence is a written declination or a contemporaneous, dated record identifying the insurer contacted and the reason given. Such documentation lets a regulator verify the search actually occurred. Vague or secondhand recollections are weak proof.

Question 46Eligibility and due diligence: diligent search and authorized market declinations

A surplus lines broker contacts only one authorized insurer, which declines, and then exports the risk. The broker's file contains no other search records. This most likely fails to satisfy which requirement?

  1. The requirement to notify the insured of the carrier's rating
  2. The requirement to file the policy with the surplus lines stamping office
  3. The good-faith diligent search standard, because the effort was not reasonably thorough Correct answer.
  4. The requirement to obtain a minimum number of declinations established by statute for every risk

Explanation

The statute demands a good-faith, reasonably thorough search, not a token inquiry. A single contact with no supporting record generally will not demonstrate that the authorized market was adequately tested for that risk. The deficiency is in the quality of the search, not in a numeric declination quota.

Question 47Eligibility and due diligence: diligent search and authorized market declinations

How does the diligent search obligation relate to the surplus lines broker's duty to act in the insured's best interest?

  1. The search supports the duty by showing the insured could not obtain the coverage from an authorized carrier Correct answer.
  2. The search is required only when the insured requests it in writing
  3. They are unrelated; the search is purely a filing formality
  4. The duty is satisfied automatically once any nonadmitted carrier quotes a price

Explanation

The diligent search is substantive: it documents that the insured had no available authorized market for the coverage sought. That evidence protects the insured from unnecessary placement in the less-regulated market. It is not a mere formality or an optional step.

Question 48Eligibility and due diligence: diligent search and authorized market declinations

A producer documents that three authorized insurers declined a risk because of the applicant's poor loss history. A fourth authorized insurer was never contacted but writes the same class. What is the best characterization of this search?

  1. Fully compliant because three declinations were obtained
  2. Deficient because a known authorized market for the class was not approached Correct answer.
  3. Compliant because the applicant's loss history justified skipping markets
  4. Irrelevant because the surplus lines carrier already quoted

Explanation

A diligent search should include authorized insurers that write the class and could plausibly accept the risk. Overlooking a known market for the same line weakens the showing that authorized coverage was unavailable. The number of declinations is not the test; coverage of the relevant market is.

Question 49Eligibility and due diligence: diligent search and authorized market declinations

Which fact is least relevant to determining whether an authorized insurer should be contacted as part of the diligent search?

  1. Whether the insurer writes the type of coverage requested
  2. Whether the insurer is licensed for the class of business in North Carolina
  3. Whether the insurer has appetite for the risk characteristics
  4. Whether the insurer's office is located in the same city as the producer Correct answer.

Explanation

Relevance turns on licensing for the class, product fit, and appetite for the risk, not geographic proximity of the insurer's office. A nearby office that does not write the line is not a meaningful market. The search should target insurers that could actually write the coverage.

Question 50Eligibility and due diligence: diligent search and authorized market declinations

A surplus lines broker places a homeowners risk with a nonadmitted insurer after documenting that authorized insurers declined it. Later the broker learns an authorized insurer would have written it. What is the most accurate statement?

  1. The placement may still be valid, but the adequacy of the original search is subject to scrutiny Correct answer.
  2. The broker must refund all commission to the insured
  3. The insured must immediately replace the policy with an authorized carrier
  4. The placement is automatically void and the policy must be cancelled

Explanation

Placement validity is judged by whether a good-faith diligent search was made at the time, not by later hindsight alone. However, evidence that an authorized market was available can call the original search into question on examination. The remedy is regulatory scrutiny, not automatic voiding.