What is Excess & Surplus Lines Insurance?

Insurance policies, and especially business insurance policies are often categorized as admitted or non-admitted insurance. Other terms for non-admitted insurance policies are excess and surplus, E&S, surplus, and surplus lines. An admitted insurance policy is one that the insurance carrier has submitted for acceptance to the state and received approval to add the policy to the admitted policy list. Admitted policies have the advantage that any agent licensed in the given line of business (usually property and casualty, but it doesn't have to be), can sell it.

By default and often design, non-admitted, or excess & surplus lines insurance policies are generally more complicated and require greater skill to understand and present to a client. Often, admitted policies are designed with a more or less "one size fits all" design. It makes sense, since the insurance company must spend a lot of money, time and resources designing, presenting to any given insurance commissioner for approval, and maintaining the administrative overhead required. In fact, the whole purpose of having admitted polices is so that any agent with the appropriate license can count on certain features within the given policy and can sell it. It's why new agents almost always only sell admitted policies.

 Any policy that is non-admitted in any given state that is sold in the state is considered excess and surplus. Thus, you can also think of excess and surplus insurance as being non-admitted, and insurance policies that have been admitted by the regulatory body (often called an insurance commissioner).

Excess & surplus insurance doesn't go through the approval process for standardization, so this type of insurance has the ability to be customizable based on the clients needs. The customization ability is often a major advantage because it can save the client significant amounts of premium dollars and/or be tailor-made of the type of risk transfer desired. Because admitted policies aren't cookie-cutter, the level of skill required to sell the policies is higher. The typical regulatory body understands the need for greater skill and requires agents to add another license in order to sell non-admitted polices. The license is often called a surplus license.

Because many agents don't have the skill or access to the surplus markets (or frequency to stay proficient), they may be tempted to make negative comments about the surplus market. This has led to a wrongly earned negative connotation for surplus lines insurance. However, nothing could be further from the truth. Not only is excess & surplus insurance as valuable to commerce as admitted policies, in some way it's more valuable because it wouldn't be cost effective any other way.

Examples of common excess & surplus insurance policies that local businesses use include the following:

Roofing and siding. All the new roofing company clients I have are insured via excess and surplus. Until a company has years of proven management and experience, most if not all standard business insurance carriers won't write policies for them. The small roofing companies would have to self-insure or not go into business. Because my locations require insurance to get a license, excess and surplus insurance is the only avenue for them.

Media personalities often buy policies that are E&S because the standard insurance markets aren't flexible enough to customize a policy.

Hole-in-one, weddings, special events, pawn shops, taverns, contractors, unusual types of companies, and businesses with homes on the same parcel often turn to excess and surplus (specialty) insurance solutions to transfer their risk. 

For consumers, knowing the company you're doing business with has an insurance company backing them up in case there's a problem is essential. Otherwise, most small businesses would be out of business with a mishap and the consumer would be out of luck in attempting to receive compensation for his/her loss.

As you can quickly realize, excess and surplus lines (E&S) insurance plays a valuable role in the insurance industry.

Often, it's the difference between a business being able to find coverage and having to self insure. However, there seems to be a lot of confusion as to what Excess and Surplus is and the quality level between the admitted and non-admitted (E&S).

In the jurisdictions I have licenses in, admitted policies pay into a fund in the case of insolvency. The funds are designed to help mitigate losses for the insureds (people who bought policies), but the amount in the fund and state law for backstopping coverage can lead to insureds not receiving all the money from the original policy they anticipated (usually applies to life insurance, but can apply to any type). As a result, the notion that admitted polices are safer, less risk, or better "just in case" isn't exactly correct. In fact, Wisconsin doesn't allow insurance agents to use the state's fund as a selling point for exactly this type of reason.

Also, often excess and surplus lines have their own backstop including Lloyds of London, one of the most famous non-admitted insurance organizations known. The member syndicates (insurance companies/groups/members) pay into a fund so that if any one member fails, the customers who bought policies from the failed member aren't totally out in the cold. Surplus lines policies typically pay a state tax and depending on the state, a special tax stamp also based on the premium collected.

Using Wisconsin as an example again, the tax for surplus lines insurance is 3%. So surplus insurance also contributes proportionally to any given state based on the volume they sell in said state. Minnesota has a tax and a tax stamp. Minnesota's tax rate is 3%, but polices also need an additional tax stamp of .0006 (at the time of writing) and the amount is subject to change. All the tax rates are subject to change, but Minnesota did change the tax stamp rate a few years ago. The rates are based on the gross amount, including fees charged.

Michigan on the other hand charges only 2.5% surplus lines tax, and it's based only on the premium, not fees added by brokers and or agencies. In other words, the tax rate, and what the tax is based on varies from state to state. In order to know what your state's tax rate is, go to your state's insurance website or perform a web search for surplus lines tax in ________.

Hopefully, this has been helpful in your understanding of what surplus lines insurance is and what role it plays in the insurance industry, especially for business insurance. If you have questions, be sure to give 1 Reason Insurance a call or email to get the answers you want, and maybe an insurance policy that's right for you and/or your business.

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