The surplus lines market is known as the Non-Admitted Market or as the Excess & Surplus Lines Market.  Carriers in the Surplus Lines Market are not licensed with a state, and are heavily regulated, but not in the same way as a carrier that is licensed in a state.  Carriers in the Surplus Lines Market are not required to file their rates or forms and do not have any guaranty fund protection as in the Admitted Market.  The Surplus Lines Market writes business that is not available in the Admitted Market, risks that have no historical data, high loss ratios, or require coverages in excess of what the Admitted market will not provide.

A non-regulated carrier and is not required to submit their rates or forms to a state department of insurance for approval. These carriers are required to meet minimum financial requirements and guidelines per state statutes.

In the surplus lines market, or non-admitted market, the surplus line broker is the regulated entity and not the carrier.

In the surplus lines market, since the regulated entity is the surplus lines broker, it is the surplus lines broker that holds state taxes and fees in a fiduciary capacity until such time the taxes are paid to a state, as opposed to the Admitted Market, where the admitted carrier pays the taxes and fees to a state.

Surplus lines taxes are filed in the state in which the risk is located, typically to the states department of insurance or state surplus lines stamping office.

Diligent effort refers to the process of verifying that a particular risk is not covered by traditional carriers. Before coverage can be obtained from the surplus lines market, the originating producer must obtain 3 to 5 declinations from licensed carriers in the Admitted Market.

The guaranteed fund exists as additional protection to the insured in the event that an insurance company cannot fulfill its obligations when a claim is made. Surplus lines insureds cannot make a claim to this fund, and The Guaranteed Fund disclosure makes this clear to the insured.

Broker Responsibility refers to those states that do not maintain a list of eligible surplus line carriers for that state. Instead, the broker is responsible for determining if the surplus line carrier meets that state’s financial criteria.

Courtesy filing is the act of utilizing other agency’s surplus lines licenses to report and pay surplus lines taxes in a particular state without any involvement in the placement of the risk.

An insured who procures the insurance of any risk or risks by use of the services of a full-time employee acting as an insurance manager or buyer or the services of a regularly and continuously retained qualified insurance consultant. Generally, this means that the Exempt Commercial Insured is exempt from certain regulatory requirements. (Refer to the NRRA Definition and the Home State Definition).    The NRRA established the federal definition for Exempt Commercial Purchaser:  The term ‘‘exempt commercial purchaser’’ means any person purchasing commercial insurance that, at the time of placement, meets the following requirements:  

1. The person employs or retains a qualified risk manager to negotiate insurance coverage.  
2. The person has paid aggregate nationwide commercial property and casualty insurance     premiums in excess of $100,000 in the immediately preceding 12 months.  
3. The person meets at least 1 of the following criteria:  
4. The person possesses a net worth in excess of $20,000,000,   
5. The person generates annual revenues in excess of $50,000,000,   
6. The person employs more than 500 full-time or full-time equivalent employees per individual insured or is a member of an affiliated group employing more than 1,000 employees in the aggregate.  
7. The person is a not-for-profit organization or public entity generating annual budgeted expenditures of at least $30,000,000,  
8. The person is a municipality with a population in excess of 50,000 persons.

Surplus line taxes are calculated based on the policy premium plus fees charged by the carrier and surplus line broker and the state tax rate, and there could be anywhere from one to three taxes charged by the state, i.e., surplus line tax, stamping fee tax, assessment tax, fire marshal tax, or municipality tax.  Depending on the state, the carrier fees and the surplus line broker fees may or may not be subject to one or all three taxes.   Use our free Surplus Lines tax calculator to make calculating surplus lines taxes a breeze!

The Home State as defined by the NRRA is determined by the State in which an insured maintains its  principal place of business or, in the case of an individual, the individual’s principal residence.  If 100 percent of the insured risk is located in a state that is not the insured’s principal place of business or residence, the state to which the greatest percentage of the insured’s taxable premium for that insurance contract is allocated.