If your insurance agent or broker is unable to obtain insurance on your behalf from a standard insurance company, he or she will probably contact a surplus lines broker. A surplus lines (SL) broker is an insurance professional who negotiates coverage on your behalf from a non-admitted insurer. A SL broker does not deal directly with you (the policyholder). Rather, he or she acts as an intermediary between your agent or broker and the non-admitted insurer.


To place business in the non-admitted market a broker must have a special license called a surplus lines license. He or she must also have a standard license to sell property and casualty insurance.

Non-admitted insurers are often referred to as excess and surplus lines (E&S) insurers. These insurers specialize in insuring risks that "regular" insurers won't cover. Here are some examples: 

• a business that has a poor loss history
• a business that is risky, unusual or whose risks are difficult to assess. Examples are vacant buildings, nursing homes, amusement parks and a hole-in-one golf tournament.
• a business that needs a higher limit or more coverage than a standard insurer will provide
• a business that is a new venture and thus, has no loss history

Diligent Search Required

Most states require a "regular" (retail) agent or broker to conduct a "diligent search" in the standard market before seeking coverage from an E&S carrier. Typically, your agent or broker cannot contact a SL broker unless a specified number of standard insurers (say, three) have declined to provide you coverage.

State laws often make exceptions for coverages that are not available in the standard market. For instance, suppose that you operate a tattoo studio. If no standard insurers will insure a tattoo studio, your agent may be permitted seek coverage on your behalf in the E&S market without performing a diligent search.

Finding a Surplus Lines Broker

Most SL brokers work for a wholesale insurance brokerage or a managing general agency. In either case a SL broker should have access to one or more E&S insurers, which may include certain syndicates at Lloyd's of London.

A wholesale brokerage serves as an interface between your retail agent and E&S insurers. Wholesale brokers cannot initiate (bind) coverage on your behalf. Instead, they forward a completed application on your behalf to an E&S insurer. The insurer provides a quote to the broker, who forwards it to your agent. If you, your retail agent and the insurer agree on the coverage and price, the insurer issues a policy. The wholesale broker may charge a fee for his or her services. This fee may be added to your premium.

A managing general agency (MGA) is an insurance agency that reviews risks and issues policies on an insurer's behalf. The scope of the MGA's underwriting authority is outlined in an agreement between it and the insurer. If your retail agent submits an application to a MGA broker, the broker may provide a quote. If all parties agree on the coverage and price, the broker may bind coverage and issue a policy on your behalf.

Broker's Obligations

While E&S insurers are not subject to the same regulations as standard insurers, they must meet basic financial standards established by the states. Many states maintain a list of "approved" or "eligible" E&S insurers that meet these standards. Most E&S insurers are not licensed by the states in which they operate. Thus, they are free to use whatever policy forms, rates and rating methods they choose.

Most of the regulation of the E&S marketplace is directed at SL brokers. State laws stipulate what SL brokers may do and how they may conduct business. The laws vary from state to state, but many have the following general requirements:

• Licensing Brokers must secure and maintain the proper licenses.
• Placement Brokers cannot obtain coverage from an E&S insurer that is available from a standard insurer through a "diligent search."
• Insurer Quality Brokers must secure coverage from an E&S insurer that is on a state's list of approved insurers. Nevertheless, a broker (not the state) is ultimately responsible for ensuring that any E&S insurer with which the broker does business is financially sound.
• Disclosure Brokers must inform the policyholder that the E&S insurer is neither licensed by the state nor covered by the state's guaranty fund.
• Recordkeeping and Reporting Brokers must keep records of policies, premiums and other data. They must make periodic reports to various state authorities.
• Tax Collection A special surplus lines tax is applied to policies issued by E&S insurers. This tax is paid by policyholders. The broker must collect the tax and remit it to the state.

Nonadmitted and Reinsurance Reform Act

A law passed in 2010 helped streamline the way the E&S marketplace functions. This law is entitled the Nonadmitted and Reinsurance Reform Act (NRRA). One key provision of the Act is its definition of the insured's "home state" when the insured operates in multiple states. Before the law was enacted conflicts often arose as to which state had jurisdiction over the SL broker. There were also disputes over which state was entitled to collect the surplus lines tax. The NRRA resolved these issues.