The Safety Valve of the Insurance Market
In the New York insurance landscape, the majority of risks are covered by admitted insurers. These are companies that have received a Certificate of Authority from the Department of Financial Services (DFS) to transact business in the state. However, some risks are too large, unusual, or hazardous for the standard market to handle. This is where the Excess and Surplus (E&S) lines market comes into play.
The surplus lines market acts as a "safety valve," providing coverage for risks that admitted carriers will not or cannot accept. While these non-admitted insurers are not subject to the same rate and form regulations as admitted carriers, they are still monitored for financial solvency. For those preparing for the complete NY P&C exam guide, understanding the distinction between these markets and the specific regulatory requirements for placement is essential.
Admitted vs. Non-Admitted (Excess Line) Markets
| Feature | Admitted Market | Excess Line Market |
|---|---|---|
| Regulation | Strictly regulated rates and forms | Freedom of rate and form |
| Security Fund | Protected by NY Security Fund | No Security Fund protection |
| Licensing | Licensed in New York | Unauthorized but eligible |
| Access | Any licensed producer | Only through Excess Line Broker |
The Diligent Effort Requirement
Before a risk can be exported to the surplus lines market, New York law requires a diligent effort to find coverage in the admitted market. This is not a casual search; it is a strict regulatory prerequisite designed to ensure that the surplus lines market remains a last resort.
The standard for diligent effort involves:
- A search of the admitted market to determine if the full amount or type of insurance is available.
- The producer must receive three declinations (refusals) from admitted insurers that are actually writing that type of coverage in the state.
- The producer and the excess line broker must complete and sign an affidavit (Form EL-1 and/or EL-2) documenting these refusals and the details of the placement.
If you are studying for your license, you can test your knowledge on these requirements with practice NY P&C questions.
The New York Export List
Recognizing that certain types of risks are almost never accepted by the admitted market, the Superintendent of Financial Services maintains the Export List. This list consists of specific classes of insurance for which the Superintendent has determined there is no reasonable likelihood that coverage will be found among admitted insurers.
The primary benefit of a risk being on the Export List is that the diligent search requirement is waived. If a risk or class of insurance is on the list, the excess line broker does not need to obtain three declinations before placing the business with an unauthorized insurer. Common items on the Export List often include high-risk commercial liabilities, specialized aviation coverages, and unique professional liability risks.
The Role of ELANY
The Excess Line Association of New York (ELANY) is a non-profit organization that serves as the state's "stamping office." Every excess line policy placed in New York must be submitted to ELANY for review. They ensure the broker is licensed, the insurer is eligible, and the required taxes are calculated correctly. ELANY also helps maintain the integrity of the market by acting as a liaison between the industry and the DFS.
Key Regulatory Facts
Taxes, Disclosures, and Producer Responsibility
Placing business in the excess line market carries specific financial and administrative burdens. Because non-admitted insurers do not pay standard state premium taxes, New York imposes an excess line premium tax (currently 3.6% of the gross premium). This tax is typically passed on to the insured and must be collected by the excess line broker and remitted to the state.
Furthermore, because surplus lines policies are not protected by the New York Property/Casualty Insurance Security Fund, every policy must include a prominent disclosure. This notice informs the policyholder that in the event of the insurer's insolvency, the state will not step in to pay claims. Producers must ensure that clients understand this trade-off: they are getting coverage they couldn't get elsewhere, but they are assuming a higher level of credit risk regarding the insurer.