Understanding the Unauthorized Market
In the insurance world, the term unauthorized insurer (or non-admitted insurer) refers to a carrier that is not licensed by a specific state's insurance department but is permitted to write business within that state under surplus lines laws. Placing business with these insurers is not a standard procedure; it is a regulated fallback mechanism for risks that the standard, admitted market cannot or will not cover. For those preparing for the complete E&S Lines exam guide, understanding the mechanics of this placement process is essential.
Unlike admitted insurers, unauthorized insurers do not have their rates or forms approved by the state. This provides them with the freedom of rate and form, allowing them to customize coverage for unique, high-capacity, or distressed risks. However, because they are not part of the state's regulatory umbrella in the same way, the placement process involves strict compliance steps to protect the consumer.
The Diligent Search: The First Step
The process of placing business with an unauthorized insurer begins with the diligent search. A retail agent cannot simply bypass the admitted market to find a cheaper premium in the surplus lines market. State laws generally require that a diligent effort be made to place the risk with admitted carriers first.
- The Three-Rejection Rule: In many jurisdictions, a diligent search is evidenced by obtaining rejections from at least three admitted insurers that are known to write the type of risk being sought.
- Export Lists: Some states maintain an "export list" of specific classes of insurance that have already been determined to have no admitted market. If a risk is on this list, the diligent search requirement may be waived.
- Documentation: The retail agent or the surplus lines broker must document these efforts, often filing an affidavit with the state surplus lines office or stamping office.
Admitted vs. Unauthorized Placement Workflow
| Feature | Admitted Market | Unauthorized (Surplus) Market |
|---|---|---|
| Market Entry | Direct or through retail agent | Must use a licensed Surplus Lines Broker |
| Form Regulation | State-approved forms | Freedom of rate and form |
| Guaranty Fund | Protected by state fund | No protection if insurer fails |
| Taxation | Premium tax paid by insurer | Surplus lines tax paid by insured |
The Role of the Surplus Lines Broker
Because unauthorized insurers do not have a certificate of authority in the state where the risk is located, they cannot deal directly with retail agents or the public. Instead, the transaction must be facilitated by a specially licensed surplus lines broker.
The surplus lines broker acts as a middleman between the retail agent (who represents the insured) and the unauthorized insurer. The broker's responsibilities include:
- Verifying that the unauthorized insurer is on the state's Eligible Unauthorized Insurers List (or White List).
- Ensuring the diligent search has been completed and documented.
- Collecting the required surplus lines premium taxes and fees from the insured.
- Remitting those taxes to the state regulatory authorities.
- Affixing a mandatory notice/disclosure stamp to the policy, informing the insured that the policy is not subject to the same regulations as admitted policies.
The Absence of Guaranty Fund Protection
One of the most critical disclosures in the placement process is the notification that the policy is not protected by the State Guaranty Fund. If an unauthorized insurer becomes insolvent, there is no state-backed safety net to pay outstanding claims. This is why verifying the financial strength of a non-admitted carrier is a primary duty for the surplus lines broker.
Binding, Compliance, and Taxation
Once the broker finds a willing unauthorized insurer and the retail agent accepts the quote, the business is "bound." However, the administrative work is far from over. The surplus lines broker must ensure that the policy is filed with the state's surplus lines stamping office (if one exists). This office reviews the filing for compliance with state law.
Premium Taxes: In a standard admitted transaction, the insurer pays premium taxes. In an unauthorized placement, a specific Surplus Lines Tax is levied on the premium. This tax is typically passed through to the insured. The broker is responsible for calculating this tax correctly, which can be complex if the risk involves multiple states. Under the Nonadmitted and Reinsurance Reform Act (NRRA), the home state of the insured is generally the only state allowed to collect these taxes. To practice these calculations, see our practice E&S Lines questions.