Rob owns a small roofing company called Reliable Roofing. Rob is worried. He has just finished a phone conversation with Hal, his insurance agent. Hal called to say that yet another insurer has refused to provide Rob a quote for liability and workers compensation insurance. This is the third insurer that has rejected Rob's insurance applications.

Rob needs to find insurance coverage soon! His current insurer, Elite Insurance, is non-renewing Rob's general liability and workers compensation policies.

Reliable Roofing has an excellent safety record and has never filed a claim. Nevertheless, Elite Insurance has decided that it no longer wants to insure small roofing companies like Rob's. It contends that roofing work is hazardous, and that the premiums generated by Rob's policies are inadequate to cover the risks his company generates. Hal says it's time to contact a surplus lines broker and obtain a quote from a non-admitted insurer.

What is a surplus lines broker? What is a non-admitted insurer and how does it differ from a standard admitted insurer? This article will answer those questions.

Admitted Insurers

The term admitted insurer means an insurance company that is licensed by a state's insurance regulatory body to do business in that state. All states impose regulations on admitted insurers to ensure they are financially sound. These regulations vary. For instance, some states impose strict rules on rates, prohibiting insurers from using any rates that have not been approved by the state insurance authority.

Other states allow insurers to use whatever rates they choose as long as the rates are adequate. In recent years, many states have become more flexible, allowing market forces, rather than a regulatory body, to determine what rates (and policy forms) are used in the marketplace.

In spite of state regulations, insurance companies occasionally become insolvent. Because an insolvent company is unable to pay claims, a state will likely take control of it for rehabilitation or liquidation. All states and the District of Columbia maintain a guaranty fund (or guaranty association) to protect policyholders against insurer insolvencies. If your insurer becomes insolvent, the guaranty fund will pay claims on your insurer's behalf. A state may limit the amount its guaranty fund pays for each claim. Thus, you may receive less than 100% of the amount you would have received if your insurer had not become insolvent.

Admitted insurers are required to participate in guaranty associations. The associations are funded by assessments on insurers. In some states, insurers are required to charge policyholders a fee to fund the guaranty association. For instance, your state may require your workers compensation insurer to add a surcharge to your workers compensation premium. If your insurer becomes insolvent, the funds will be used to provide benefits to injured workers.

While most small businesses can obtain the insurance they need from admitted insurers, some must look elsewhere for coverage. Traditional insurers may refuse to insure your company for several reasons. These include the nature of your business (hazardous or unique), a poor loss history, and a need for large policy limits.

Non-admitted Insurers

Most states allow you to obtain coverage through a non-admitted carrier only if your agent or broker has done a diligent search for coverage in the admitted market. Moreover, many states prohibit you from using a non-admitted insurer unless you have been refused coverage by at least three admitted insurers.

A non-admitted insurer (also called a surplus lines insurer) is an insurer that is not licensed by the state. Non-admitted insurers are not subject to state regulations regarding rates and policy forms. Thus, they are free to use whatever rates and policy forms they want. Note that non-admitted insurers are not members of state guaranty associations. If your non-admitted insurer becomes insolvent, the state guaranty association will not step in to pay claims on your insurer's behalf. Your only recourse for unpaid claims may be to sue the insolvent insurer.

While they are not required to adhere to all of the laws that apply to admitted insurers, non-admitted insurers may be subject to some state oversight. Many states monitor the financial health of non-admitted insurers and maintain a list of those that meet certain standards. Brokers may be required to refer to the list of approved insurers when placing business with non-admitted insurers.

Surplus Lines Broker

If your agent or broker cannot obtain coverage on your behalf from an admitted insurer, he or she may contact a surplus lines broker. This term means a broker who has a special license, called a surplus lines broker license, to conduct business with non-admitted insurers. Before seeking coverage for you from an admitted insurer, a surplus lines broker must research the insurer's financial condition. If your state maintains an "approved" list of insurers, the broker must place your coverage with one of those insurers. If your state does not maintain such a list, then the broker may be ultimately responsible for ensuring that a non-admitted insurer is financially stable.

A surplus lines broker must inform you that your policy has been issued by an insurer that is not licensed by your state. The broker must also notify you that the state guaranty association will not step in to pay claims if your non-admitted insurer becomes insolvent.

Surplus Lines Fees

Policies written by non-admitted insurers are subject to taxes. The tax is based on a certain percentage (such as 5%) of the premium. In addition, some states charge an administrative fee called a "stamping fee."