Surplus Lines Insurance

(January 2007)

Traditional insurance markets consisting of Texas-licensed ("admitted") companies aren´t always available for every risk.

Perhaps the risk is unusual or difficult to evaluate, like an art collector´s priceless Van Gogh, or perhaps a business wants more liability insurance than admitted carriers feel secure in offering. Likewise, admitted companies might be uneasy about insuring mobile homes on the Gulf Coast or day care centers needing liability insurance.

Texas law recognizes the special needs of these risks by allowing certain non-admitted companies to sell insurance on a "surplus lines" basis. About 200 surplus lines companies operate in Texas, writing more than $1 billion a year in premiums.

Surplus lines insurance is coverage that is legally placed with eligible non-admitted carriers when coverage through licensed admitted carriers is unavailable.

Surplus lines companies are not licensed to sell insurance in Texas. To be eligible, however, they must be licensed in their home country or home state to sell the kind of insurance they sell in Texas.

Only licensed surplus lines agents can place coverage with these companies. An agent must pass a special examination to qualify for a surplus lines agent´s license.

Surplus lines agents can place risks with surplus lines companies only after making a "diligent effort" to find an admitted carrier to issue a policy. If you´re not satisfied with the results of the agent´s search, keep shopping for a licensed company, perhaps with another agent.

Because surplus lines companies insure non-standard risks that admitted carriers won´t accept, their premiums are generally - but not always - higher.

An unauthorized insurer is one that attempts to sell insurance without being legally licensed or otherwise eligible or registered to do so. Unauthorized insurers often claim to be licensed in another country and sometimes claim to be surplus lines carriers. Unlike legitimate surplus lines companies, however, they have not demonstrated financial soundness or met other consumer protection requirements to be eligible to sell surplus line coverage in Texas.

Before you buy a surplus lines policy, it´s important that you verify that the company is an eligible surplus lines company. Also, verify that the agent is specifically licensed to sell surplus lines policies. You can verify a surplus lines company´s eligibility and an agent´s license status by calling the Texas Department of Insurance (TDI) toll-free Consumer Help Line

1-800-252-3439
463-6515 in Austin

Types of Insurance Written in the Surplus Lines Market

Surplus lines business consists primarily of property and casualty coverages. These include commercial general liability insurance, fire insurance, mobile home policies, automobile physical damage coverage, medical malpractice policies, etc.

Most surplus lines policies are sold to businesses. A small percentage of surplus lines policies are sold to individual consumers who can´t find residential property or automobile physical damage coverage from admitted companies.

Life insurance and health insurance generally are not sold in the surplus lines market.

By law, workers´ compensation insurance must be written by a licensed, admitted carrier. If an employer purchases workers´ compensation coverage through a surplus lines company or other non-admitted carrier, the employer loses immunity from lawsuits arising from worker injuries and also loses such key legal defenses as employee negligence.

Surplus lines carriers also won´t write automobile liability policies. If you cannot find an automobile insurer willing to write you the basic liability policy required by Texas law, you can purchase coverage through the Texas Automobile Insurance Plan Association.

A surplus lines agent must place the following notice on the first page of a surplus lines policy:

This insurance contract is with an insurer not licensed to transact insurance in this state and is issued and delivered as surplus line coverage under the Texas insurance statutes. The Texas Department of Insurance does not audit the finances or review the solvency of the surplus lines insurer providing this coverage, and this insurer is not a member of the Property and Casualty Insurance Guaranty Association created under Article 21.28-C, Insurance Code. Section 12, Article 1.14-2, Insurance Code, requires payment of 4.85 percent tax on gross premium.

In addition, Texas law requires each surplus lines policy to show the name and address of the surplus lines agent who sold it.

Surplus lines carriers´ rates and policy language are not subject to TDI rview or to most Texas insurance laws. This gives surplus lines carriers maximum flexibility to provide a market for unusual, large, or hard-to-place risks.

However, TDI does exercise limited oversight over the surplus lines market by

• licensing and regulating surplus lines agents, who may place business only with eligible surplus lines carriers
• determining whether non-admitted companies are legally eligible to operate in Texas
• maintaining a list of eligible surplus lines companies
• monitoring the financial condition of surplus lines companies.

Surplus lines carriers chartered in other states must comply with those states´ requirements, including periodic audits. In addition, surplus lines companies are subject to lawsuit in Texas, and their contracts are subject to the same rules of interpretation as other contracts.

Surplus lines insurers must have at least $15 million in combined capital and surplus to conduct business in Texas. (Capital and surplus are a company´s financial cushion against unexpected claims.)

In addition, an alien insurer - one based in a foreign country - must have a trust fund of at least $5.4 million in a Federal Reserve member bank to protect its U.S. policyholders.

Surplus lines agents can place your coverage only with eligible insurers that meet Texas´ financial requirements. Additionally, Texas law requires a surplus lines agent to make a "reasonable effort" to ascertain a surplus lines insurer´s financial condition before placing your coverage.

It´s important to note that Texas law specifically excludes surplus lines companies from protection by the Texas Property and Casualty Insurance Guaranty Association. This means that if the surplus lines insurer goes broke, claims against your policy might go unpaid.

The Surplus Lines Stamping Office of Texas (SLSOT) is a non-profit association that helps TDI oversee the surplus lines market. It also assists TDI to identify surplus lines companies and agents currently writing coverage for various kinds of risks.

Surplus lines agents must send SLSOT a copy of each surplus lines insurance policy they sell. The stamping office reviews each policy to make sure it was properly placed with an eligible surplus lines company instead of an admitted carrier.

Surplus lines insurers must submit annual financial statements to TDI and SLSOT, which analyze them for signs of financial trouble. A company can lose its eligibility if it falls below Texas standards. Historically, however, very few surplus lines companies have lost eligibility for financial reasons.

For More Information or Assistance

For answers to general insurance questions or for information on filing an insurance-related complaint, visit our website or call the Consumer Help Line between 8 a.m. and 5 p.m., Central time, Monday-Friday

www.tdi.state.tx.us
1-800-252-3439
463-6515 in Austin

For printed copies of consumer publications, call the 24-hour Publications Order Line

1-800-599-SHOP (7467)
305-7211 in Austin

Help us prevent insurance fraud. To report suspected fraud, call our toll-free Fraud Hot Line

1-888-327-8818

To report suspected arson or suspicious activity involving fires, call the State Fire Marshal’s 24-hour Arson Hot Line

1-877-4FIRE45 (434-7345)

The information in this publication is current as of the revision date. Changes in laws and agency administrative rules made after the revision date may affect the content. View current information on our website. TDI distributes this publication for educational purposes only. This publication is not an endorsement by TDI of any service, product, or company.

For more information contact: ConsumerProtection@tdi.state.tx.us