Surplus Lines Insurance

What is 'Surplus Lines Insurance'

Surplus lines insurance protects against a financial risk that is too high for a regular insurance company to take on. Surplus lines insurance, unlike regular insurance, can be purchased from an insurer that is not licensed in the insured’s state, though the surplus lines insurer will still need to be licensed in the state where it is based. An insurance agent must have a surplus lines license to sell a surplus lines policy. Also called excess lines insurance, surplus lines insurance makes it possible to get insurance for entities with unique risks that most insurers don’t cover or those with a claims histories that makes them otherwise uninsurable.

BREAKING DOWN 'Surplus Lines Insurance'

Surplus lines insurance carries additional risk for the policyholder as there is no guaranty fund from which to obtain a claim payment if the surplus line insurer goes bankrupt. A policyholder’s claim on a regular insurance policy can be paid out of a state guaranty fund that all the state’s regular insurance issuers contribute to in case one insurer goes bankrupt. Regular insurance carriers, also called standard or admitted carriers, must follow state regulations about how much they can charge and what risks they can and cannot cover. Surplus lines carriers don’t have to follow these regulations, which allows them to take on higher risks.

A surplus lines insurer may be referred to as a non-admitted or unlicensed carrier, but this doesn’t mean their policies aren’t valid. It just means they are subject to different regulations from those that govern admitted or standard carriers.

Surplus lines insurers

Example of a major surplus lines insurers include American International Group, Nationwide Mutual Insurance, W.R. Berkley Corp., Zurich Insurance Group, Markel Corp., Chubb, Ironshore Inc., Berkshire Hathaway Inc., Fairfax Financial Holdings, CNA Financial Corp., XL Group plc and Lloyd's of London. Lloyd's is foreign licensed but is able to issue surplus lines policies in the United States. One type of surplus lines insurance that consumers might purchase is flood insurance. Lloyd’s offers this insurance through the Natural Catastrophe Insurance Program, which offers an alternative to the Federal Emergency Management Agency’s (FEMA) flood insurance. Consumers who find FEMA’s insurance too expensive might be able to get a more-affordable policy through surplus lines insurance. That being said, surplus lines insurance is often more expensive than regular insurance because it protects against unusual or higher-than-usual risks that other insurers won’t cover.