For agents and brokers facilitating the placement of insurance policies in California, it is critical that their clients understand the differences between admitted and non-admitted carriers. And that is because the distinctions between the two may factor into any given client’s purchasing decision.
This is particularly true in California, a state plagued by natural disasters (read: fires, mudslides, floods, and the like) and resulting insurance claims that have significantly impacted the availability and cost of certain policies. These risks have also created a thriving market for products—including high-limit and hard-to-place policies—sold by non-admitted companies, also known as surplus lines carriers.
Big picture, admitted companies are highly regulated by the state, whereas surplus lines carriers are subject to minimal regulation. Also, if an admitted insurer becomes insolvent, insurance guarantee funds—like the California Insurance Guarantee Association (CIGA)—financially guarantee their covered claims. This is not the case for surplus lines carriers. In addition, unlike admitted companies, the policy applications, forms, endorsements, and rates offered by surplus lines carriers are not subject to review or approval by the California Department of Insurance (CDI). And lastly, agents and brokers must place surplus lines business through a licensed surplus lines broker.
All that being said, there are plenty of reasons for an insured to consider coverage issued by a surplus lines carrier. To that point, what follows is an outline of the benefits of both admitted and non-admitted companies.
Pros of Admitted Carriers:
- Rates are subject to approval by the CDI, which tends to keep costs down or—at the very least—prevents meaningful increases after significant claims events.
- In the event of insolvency, covered claims are backed by CIGA or similar insurance guarantee funds.
- Standardized (i.e., ISO) coverage forms approved by the CDI.
- Minimal fees—surplus lines policies are subject to a surplus lines tax and other fees that admitted carriers do not charge.
Pros of Non-Admitted Insurance Companies
- Coverage for higher risk events.
- Ability to offer unique coverages and coverage forms without state approval.
- Competitively priced premiums that are oftentimes subject to negotiation.
- Many surplus lines carriers are rated A or better by AM Best and have more than adequate reinsurance, a solid history of paying claims, and business longevity—all of which makes the placement of insurance with a non-admitted carrier a rather safe choice.
- Of note, surplus lines carriers included on California’s List of Approved Surplus Line Insurers (LASLI) have been reviewed and approved by the CDI, and are actually admitted insurance carriers in a state or domicile other than California. Companies on the LASLI List must, among other things, maintain a minimum of $45M in capital and surplus and adhere to specific capitalization, investment, and solvency standards established under the California Insurance Code.
Disclosure, Disclosure, Disclosure
A producer whose customer decides to have coverage placed with a surplus lines carrier will be required to obtain the client’s signature on a D-1 Disclosure advising that application is being made with a non-admitted company. So that the producer’s file is adequately documented and establishes that the customer is fully aware that insurance is being placed with a surplus lines carrier, it is recommended that he or she sign an Acknowledgment and Informed Consent, like the one found here, included among a list of comprehensive templates assembled by the American Agents Alliance. Members of the American Agents Alliance have access to these valuable forms and tools.
Mark B. Robinson is founding partner of Michelman & Robinson, LLP, a national law firm headquartered in Los Angeles. He is an insurance industry specialist, who primarily represents retail brokers and agents, and a recognized authority on regulatory issues. Mark can be contacted at 310-299-5500 or firstname.lastname@example.org .