The Purpose of Surplus Lines Affidavits
In the world of insurance regulation, the surplus lines market acts as a safety valve for risks that the admitted market cannot or will not cover. However, because non-admitted insurers are not subject to the same rate and form regulations as admitted carriers, states require strict documentation to ensure that brokers do not bypass the admitted market unnecessarily. The Surplus Lines Affidavit (sometimes called a Diligent Search Report) is the primary legal document used to prove compliance.
Filing these affidavits correctly is not just a clerical task; it is a statutory requirement for maintaining a surplus lines broker license. For students preparing for the complete E&S Lines exam guide, understanding the nuances of these filings is critical for both the exam and real-world practice. The affidavit serves as a sworn statement that the broker has made a good-faith effort to place the coverage with authorized insurers before turning to the surplus lines market.
Critical Components of an Affidavit
Executing the Diligent Search
Before an affidavit can be filed, a diligent search must be performed. While specific requirements vary by state, the standard procedure involves approaching a minimum of three admitted insurers that are known to write the type of risk in question. If you are preparing for your certification, you should review practice E&S Lines questions to understand how different jurisdictions handle exceptions to this rule.
A valid diligent search must document:
- The name of the admitted insurer contacted.
- The individual representative who declined the risk.
- The reason for declination (e.g., risk exceeds capacity, class of business not written, or hazardous exposure).
- The date the declination was received.
It is important to note that price alone is generally not a valid reason for moving a risk to the surplus lines market. If an admitted carrier is willing to write the risk at a higher premium than the surplus lines carrier, the broker is technically required to place it with the admitted carrier in most states.
Affidavit Requirements: Standard vs. Export List
| Feature | Standard Risk | Export List Risk |
|---|---|---|
| Diligent Search Required | Yes | No |
| Number of Declinations | Usually 3 | 0 |
| Affidavit Filing | Required | Simplified/Automatic |
| Regulatory Oversight | High | Reduced |
Common Filing Pitfalls and Best Practices
Errors in affidavit filing can lead to administrative fines, license suspension, or premium tax penalties. One of the most common mistakes is failing to file within the state-mandated timeframe. Most states require the affidavit to be submitted to the Surplus Lines Stamping Office or the Department of Insurance within a specific number of days following the effective date of the policy.
Best practices for brokers include:
- Automated Tracking: Use agency management systems to flag policies that require affidavits as soon as the binder is issued.
- Detailed Notes: Do not rely on memory. Document the specific reasons for declination immediately after the conversation with the admitted underwriter.
- Verifying Signatures: Ensure the licensed surplus lines broker signs the document. In many jurisdictions, an unlicensed staff member cannot sign an affidavit on behalf of the broker.
- Home State Rule: Following the Nonadmitted and Reinsurance Reform Act (NRRA), ensure you are filing the affidavit in the Home State of the insured, as that state's laws govern the entire transaction.
The Role of the Stamping Office
In many states, the Stamping Office acts as an intermediary. They review affidavits for completeness and accuracy before the data is transmitted to the state regulators. They also play a key role in reconciling premium tax payments with the filed affidavits.
Frequently Asked Questions
Not necessarily. Most states maintain an Export List of coverages that have already been determined to have no admitted market. For these specific risks, the diligent search requirement—and thus the detailed affidavit—is often waived or simplified.
If the market is extremely limited and fewer than three admitted insurers write that specific class of business, the broker must document that they contacted all available admitted insurers. This is usually accepted as a diligent search, provided the broker can prove no other admitted options exist.
Generally, the surplus lines licensee (the broker who actually places the coverage with the non-admitted insurer) is responsible for the filing and the payment of premium taxes. However, they often rely on the retail agent to provide the declination information from the diligent search.
Yes, most modern Stamping Offices and Departments of Insurance accept electronic signatures and digital filings. In fact, many states now mandate electronic filing to streamline the process and reduce errors.