How Surplus Lines Insurance Works? A Comprehensive Overview

Surplus lines insurance provides coverage for risks that standard insurers choose not to underwrite due to their complexity, size, or unusual nature. When a business or individual could not find coverage through traditional carriers, surplus lines insurers offer an alternative solution.

This blog outlines how excess & surplus insurance works and how businesses could fill complex coverage gaps while maintaining compliance and protection.

What is surplus lines insurance?

Looking for a clear surplus lines insurance definition?

It refers to the coverage for financial risks that are not typically managed by admitted insurance companies. This type of insurance is written by companies that are not licensed in the insured’s state, meaning they do not follow the same rate and form regulations as the admitted market.

However, they are still monitored for financial stability and market conduct. A licensed surplus lines insurer acts like a bridge between the policyholder and the non-admitted carrier. 

The plus point is that surplus line carriers have more flexibility in creating customized policies based on the unique requirements of the surplus lines market. This flexibility is especially beneficial for startups, unique commercial properties, or businesses in unstable industries.

While it doesn’t always offer the same amenities as regular insurance, surplus line coverage is sometimes the only way to stay protected. 

Surplus lines insurance types

The following are some of the most common E&S insurance examples businesses and individuals could use:

• Commercial general liability: This type of insurance is for businesses with high liability risks. It covers incidents that could result in substantial financial loss, such as lawsuits, accidents, or property damage.

• Fire insurance: Fire insurance policies are designed for properties in areas prone to wildfires or those built with unconventional materials. 

• Mobile home policies: Mobile homes might not qualify for standard homeowners insurance, particularly in areas with high risks like storms or flooding. In such cases, surplus lines insurance comes to the rescue while offering coverage tailored to these homes.

• Automobile physical damage: For expensive or unique vehicles, such as luxury cars, classic cars, or specialty vehicles, surplus lines insurance may provide coverage that regular car insurance policies do not.

• Medical malpractice insurance: Healthcare professionals practicing in high-risk fields, such as surgery or emergency medicine, often turn to surplus lines insurance for medical malpractice coverage when standard insurers do not provide adequate protection.

• Flood insurance: Properties in high-risk flood zones struggle to find coverage through standard flood insurance. Private flood insurance policies usually offer building coverage limits of up to $1 million or more. They also provide higher and broader coverage for personal belongings and feature a shorter waiting period.

• Homeowners insurance: Some homes with unique features, high value, or located in disaster-prone areas might not meet the criteria for traditional home insurance. Surplus lines policies offer specialized protection for these properties.

 

Standard insurance vs. surplus lines insurance

The difference between excess and surplus insurance is in how each type of coverage addresses risk. Standard insurance is offered by licensed, state-regulated companies that must adhere to specific rules regarding pricing and policy structures. These companies typically handle claims that carry low to moderate risk.

In contrast, surplus lines insurance is provided by non-admitted insurers who are not licensed in the state. These insurers could take on higher-risk policies that traditional insurers often lack, such as properties in disaster-prone areas or specialized businesses.

The key difference between the two lies in the flexibility of surplus lines insurance. Since the same regulations do not bind these insurers, they could create custom-built insurance solutions tailored to unique needs. However, this flexibility often results in higher costs and fewer consumer protections, as state guaranty funds generally do not support surplus line carriers. While both types of insurance offer financial protection, excess and surplus lines insurance is better suited for situations that fall outside the reach of the standard market.

What does surplus lines insurance cover?

Surplus lines insurance is designed for risks that are unusual or high in nature, which makes them hard to insure through the standard market. Examples of areas typically covered by surplus lines insurance include:

• High-risk commercial properties: Properties in areas prone to natural disasters, such as hurricanes, earthquakes, or floods, are often covered under surplus lines insurance.
• Specialized industries: Businesses in industries like cybersecurity, aviation, or oil and gas might need surplus lines coverage due to the risks involved in their operations.

• New ventures or startups: Startups or businesses with an unproven track record often face challenges finding coverage through traditional insurance. Here, surplus lines could provide a tailored policy.
• Product liability: Surplus insurance could cover manufacturers or distributors of products with higher-than-average risks, such as electronics or consumer goods with potential for injury.
• Large events: Large events, such as music festivals or sports tournaments, carry unique risks. Surplus lines insurers offer event insurance that covers liability, weather cancellations, and equipment damage, which is especially valuable for large-scale or high-profile events.
• High-value items: Surplus line insurance covers high-value items such as fine art, collectibles, yachts, or unusual structures. It also offers tailored policies for these valuable and non-standard assets.
• Difficult-to-insure sectors: High-risk sectors like healthcare, finance, and e-commerce often require more comprehensive cyber liability insurance. Surplus lines insurance can provide higher limits and broader protection than standard insurers, especially for businesses that are at a significant risk of cyberattacks or data breaches.
• Casualty risks: Surplus lines insurance often covers casualty losses such as accidents, injuries, or property damage, which traditional insurers might exclude.

These types of coverage require flexible underwriting and specialized expertise in the application of surplus lines insurance. Understanding what a surplus lines insurer does helps carriers operate outside standard state licensing and provide tailored coverage for risks that most admitted insurers avoid.

What does surplus lines insurance not cover?

Surplus line insurance offers flexibility and coverage for unique risks. Here are some standard exclusions:

• Standard auto liability: Excess and surplus lines insurance generally do not cover standard auto liability. For everyday vehicle coverage, admitted insurance for traditional auto insurance is the preferred option.
• Life and health insurance: Surplus lines insurance generally excludes life and health coverage. These types of policies must be purchased through the standard insurance market.
• Guaranty fund coverage: Unlike admitted insurers, surplus line carriers are not supported by state guaranty funds. This means state funds do not protect policyholders if the insurer becomes insolvent.

What Is excess and surplus (E&S) lines insurance?

For agents and clients unfamiliar with the term, the simplest E&S insurance meaning is that it represents a flexible, non-traditional solution for insuring high-risk or unconventional exposures. Excess and surplus (E&S) lines insurance has two key components: excess coverage and surplus lines insurance.

1. Excess coverage refers to insurance that provides additional protection above the limits of an existing primary policy. This extra coverage helps protect against larger-than-expected losses that exceed the standard policy’s coverage limits.
2. Surplus lines insurance deals with unusual or high-risk exposures that traditional insurers are unwilling to cover. Surplus line insurers are not regulated like admitted insurers, which allows them more flexibility in customizing policies for non-standard risks.

While both E&S lines insurance and surplus lines insurance offer coverage for unique or high-risk situations, the key difference is that excess and surplus insurance cover excess risks (additional coverage above a primary policy’s limits) and surplus lines risks (non-standard, hard-to-insure exposures). E&S lines combine specialized coverage and higher-than-usual limits, making them suitable for businesses or individuals facing more complex risks. 

Tips on getting surplus lines insurance coverage

When helping clients secure surplus lines insurance, it’s important to follow a methodical strategy to ensure the process goes smoothly. 

Here are First Connect’s top tips on getting the best surplus lines insurance coverage.

Ensure a diligent search

State regulations require agents to demonstrate that a diligent search was conducted, proving that standard insurers were unable to offer the needed coverage. Maintaining thorough records ensures compliance with state regulations and avoids penalties.

Choose a licensed surplus lines broker

Ensure that surplus lines policies are placed through a licensed surplus lines broker. Agents must partner with experienced brokers to navigate the process efficiently and compliantly.

Understand the risk profile

Surplus lines insurance is designed for high-risk or unique exposures. It is essential to clearly understand your client’s risk profile and needs before seeking coverage. This ensures that you could match them with the right insurer and avoid unnecessary delays.

Communicate state-specific requirements

Each state has different regulations for surplus line insurance, including placement procedures and tax rates. Familiarize yourself with the requirements in your state to avoid compliance issues.

Explain the exclusions

Surplus lines insurance often has specific exclusions, such as limited coverage for certain property types or liabilities. Make sure your clients are fully aware of what is and isn’t covered before finalizing the policy.

At First Connect, we help independent agents connect with a wide network of surplus lines carriers quickly and easily, with no upfront fees and no production requirements. Our platform simplifies the process, so you can focus on protecting your clients.