Surplus Lines Insurance

What is Surplus Lines Insurance?

Surplus lines insurance (also called excess and surplus lines, or E&S insurance) is coverage placed with insurance carriers that are not licensed (not "admitted") in the state where the risk is located. This non-admitted market exists to provide coverage for risks that standard admitted carriers decline to insure.

The admitted market - traditional carriers licensed in each state - focuses on standard, predictable risks that fit their underwriting appetite and rate filings. But many risks don't fit: the exposure is too unusual, the limit requested is too high, the loss history is poor, the industry is specialized or high-risk, or the coverage needed isn't offered in the admitted market.

For these risks, surplus lines provides a solution. Surplus lines carriers are not subject to state-approved rate and form requirements, giving them flexibility to price unique risks and create custom coverage. They don't participate in state guaranty funds, so policyholders don't have protection if the carrier becomes insolvent - but in exchange, they offer coverage admitted carriers won't provide.

When Surplus Lines Applies

State insurance regulations generally require that insurance be placed with admitted carriers when available. Surplus lines can only be used when the admitted market is genuinely unavailable. This requirement is enforced through "diligent search" or "diligent effort" rules:

Admitted Market Declines Coverage: The broker must first seek coverage from admitted carriers. If admitted carriers decline to quote, or quote but with unacceptable terms or exclusions, surplus lines becomes permissible. Most states require documented evidence of this effort - declinations from admitted carriers, quotes showing inadequate coverage, or other proof that the admitted market won't provide suitable coverage.

Coverage Not Available in Admitted Market: Certain specialized coverages simply don't exist in the admitted market. Specialty professional liability for emerging industries, cyber liability for high-risk sectors, terrorism coverage above standard limits, environmental liability for contaminated sites - these coverages are offered almost exclusively in the surplus lines market.

Unique Risks Requiring Custom Solutions: A business with very unusual operations, extremely high limits needs (billions in coverage), complex international exposures, or other characteristics that don't fit standard admitted market offerings needs surplus lines solutions. An admitted carrier working from state-approved forms and rates can't easily accommodate these unique needs.

How Surplus Lines Differs from Admitted Insurance

The surplus lines market operates under different regulatory and operational rules than admitted insurance:

Non-Admitted Carriers: Surplus lines carriers are not licensed in the state where the risk is located. They are typically licensed in their home state or domicile and may be eligible to write surplus lines nationally, but they have not gone through state-by-state licensing to become admitted. This means they don't file rates or forms with state insurance departments for approval and aren't subject to some state regulatory requirements that apply to admitted carriers.

No State Guaranty Fund Protection: Admitted carriers participate in state guaranty funds that provide protection to policyholders if the carrier becomes insolvent. If an admitted carrier fails, the guaranty fund pays covered claims (typically up to certain limits like $300,000-500,000). Surplus lines carriers don't participate in guaranty funds, so policyholders bear the credit risk. This is why broker due diligence on carrier financial strength is critical in surplus lines placement.

Regulatory Differences: Surplus lines carriers are subject to their home state's regulation but not to the insurance department regulations in every state where they write business. They report to the surplus lines stamping office in each state but don't need formal licenses. This lighter regulatory burden provides flexibility to offer broader coverage terms and faster underwriting decisions.

Pricing and Form Flexibility: Admitted carriers must use state-filed rates and policy forms. Changes require regulatory approval, creating lengthy delays. Surplus lines carriers can create custom policy wording, negotiate pricing freely, and respond quickly to unique risk characteristics. This flexibility is why surplus lines works for unusual risks.

Surplus Lines Brokers and Their Role

Not every insurance agent or broker can place surplus lines business. Most states require special surplus lines broker licensing or eligibility:

Surplus Lines Broker License: Brokers placing surplus lines coverage must typically hold a surplus lines license in addition to their standard property-casualty license. Licensing requirements vary by state but generally include passing an examination demonstrating knowledge of surplus lines law, requirements, and tax obligations.

Diligent Search Responsibility: The surplus lines broker is responsible for conducting and documenting the diligent search of the admitted market before placing coverage in surplus lines. This documentation is critical for regulatory compliance and must be maintained in the broker's files. Some states require specific forms documenting the search effort.

Tax Collection and Remittance: The surplus lines broker is responsible for collecting surplus lines taxes and fees from the insured, reporting the policies to the state stamping office, remitting taxes and stamping fees, and maintaining records of all surplus lines placements. This tax collection responsibility is unique to surplus lines - for admitted business, the carrier handles premium tax.

Tax Compliance Requirements by State

Surplus lines insurance is subject to state-specific premium taxes, stamping fees, and filing requirements. Compliance is complex because requirements vary by state:

Surplus Lines Taxes: Every state imposes a premium tax on surplus lines policies covering risks in that state. Tax rates range from 2% to 6% of premium depending on the state. For multi-state policies, premium must be allocated across states based on where the exposure is located, and tax is calculated separately for each state. California surplus lines tax is 3%, while New York is 3.6% - the broker must apply the correct rate.

Stamping Fees: Most states require surplus lines policies to be "stamped" - filed with the state-designated surplus lines stamping office. The stamping office reviews filings for compliance, maintains records, and charges stamping fees (typically 0.1-0.3% of premium). Filing deadlines vary - some states require filing within 30 days of binding, others within 60 days or by quarterly deadlines.

State-Specific Reporting: States have varying forms and data requirements. Some states use the Surplus Lines Information Database (SLIMPAY) system for electronic filing. Others require state-specific forms submitted by mail or through state portals. The broker must track and comply with each state's unique requirements.

Multi-State Policies: For policies covering risks in multiple states, the broker must: allocate premium to each state based on exposure distribution (payroll by state for workers' comp, property values by location for property, revenue by state for general liability), calculate tax for each state at that state's rate, file with stamping offices in all applicable states, and maintain documentation supporting the allocation methodology.

Automation of Surplus Lines Processing

The complexity of surplus lines compliance makes it a prime candidate for automation:

Automated Tax Calculation: Modern systems automatically calculate surplus lines taxes by jurisdiction based on policy details, premium allocation across states, state-specific tax rates, and applicable exemptions (some states exempt certain policy types or have reduced rates for specific coverages). The system applies the current tax rate for each state, adjusting when rates change.

Stamping Office Filing Management: Automation tracks stamping filing requirements by state, generates required forms and data files, submits filings electronically through SLIMPAY or state systems where available, tracks filing deadlines and generates alerts for upcoming due dates, and maintains records of all filings and stamping office confirmations.

Compliance Tracking: Systems track diligent search documentation requirements, maintain records proving admitted market was unavailable, track carrier eligibility (ensuring carriers are approved for surplus lines in each state), and generate compliance reports for audit purposes.

Multi-State Policy Management: Automated allocation of premium across states based on configurable rules (payroll, property values, revenue), separate tax calculation for each jurisdiction, and generation of state-specific filings from a single policy record.

E&S Market Trends

The surplus lines market has grown significantly in recent years:

Market Growth: Surplus lines premium in the US exceeded $70 billion in 2023, up from $40 billion a decade earlier. Growth is driven by admitted carriers withdrawing from certain coverages and geographies (catastrophe-exposed property, cyber liability, abuse and molestation), emerging risks not covered in admitted market (cannabis, cryptocurrency, sharing economy businesses), and social inflation driving liability costs beyond admitted carrier appetite.

Technology Investment: Surplus lines wholesalers and MGAs are investing heavily in technology to streamline placement, manage complex compliance requirements, and integrate with retail broker systems. The firms with modern platforms gain competitive advantage through faster quoting, lower operational costs, and better compliance.

For brokers, MGAs, and wholesalers operating in the surplus lines market, automation of tax calculation, stamping office compliance, and documentation requirements is no longer optional - it's fundamental infrastructure for efficient, compliant operations.