We are sometimes asked, what is a surplus company? This usually happens when working on a case involving Lloyds from London, as it is the biggest surplus player. I used the phrase "player" because Lloyds is not really an insurance company, but an exchange where insurance is bought and sold.
In general, a surplus company provides insurance when there are no authorized carriers providing insurance. In most states, a diligent search for insurance by a licensed agent is required for surplus insurance to be available. Some states require three denials from permitted carriers before surplus lines will be available. Pennsylvania Supreme Court has given a comprehensive description of surplus lines:
Surplus Line Protection is an unlicensed insurance company appointed by the Insurance Commissioner to provide insurance to Pennsylvaniaers that they would not otherwise be able to obtain, provided a licensed agent has made a diligent effort. such insurance from a licensed insurance company, that the premium charged is not lower than the minimum premium approved by the client for the use of a licensed insurance company, and that the policy or agreement used by the surplus insurer does not differ significantly from insurance or agreements normally used by licensed insurance companies. 1
There are two differences in principle between surplus lines and permitted carriers. The first is what happens when an insurer becomes insolvent. Secondly, what types of policy languages are allowed.
Most states have guarantee funds that will provide some recovery if an approved carrier becomes insolvent. Insurance companies with surplus lines do not have this guarantee. New Jersey is the exception. 2 Because of this additional risk, surplus insurance companies are generally required to have higher levels of capitalization that are subject to scrutiny by each individual state.
Authorized insurance companies must use forms approved by each State insurance department. For example, Fla Stat. 627,410 requires that an insurance be approved by the insurance department before delivery. Insurance companies usually use ISO forms or some other variant.
Surplus lines often carry higher risks. As such, surplus insurance companies change forms of insurance to make the risk acceptable. For more information on the difference between surplus lines and permitted carriers, see Understanding the differences between standard and surplus / surplus lines . 3
Thought for the day
Dog – a kind of supplementary or subsidiary company created to capture the abundance and surplus of world worship.
1 Triage, Inc. v. Prime Ins. Syndicate, Inc. 887 A.2d 303, 306 (2005).
2 See Holly C. Bakke & Richard R. Spencer, Jr., Surplus Lines Insurer Insolvency Claims NJ Law., Oct./Nov. 1995.
3 Denise Johnson, Understanding the differences between standard and surplus / surplus lines Claims Journal, 31 July 2014.