Insurance expert witnesses may opine on insurance customs, insurance practices, malpractice insurance, surplus insurance and more. Here the Surplus Line Association of Illinois answers the question: What is surplus line insurance?
In order to understand what surplus line insurance is, it is helpful first to understand a few things about the insurance marketplace and to understand what surplus line insurance is not.
The first player in the marketplace we’ll discuss is the insurance company, sometimes referred to as an insurance carrier or insurer. The insurer is the company that actually writes the policy and accepts the risk that something will happen. They collect your premiums and those of other insureds and invest them. If a claim is made, they pay the claim from this pool of collected premiums.
Insurers are licensed on a state by state basis in the United States. Generally, an insurer must get a license in any state where it wants to write policies. Each state has a Department of Insurance (or similar regulatory body) that regulates these insurers. The regulation takes many forms and varies from state to state, but it can basically be divided into two general areas. First, the regulators monitor the finances and market conduct of the insurers to see that they are financially sound and using fair and honest business practices. Second, they regulate or approve the insurer’s policy forms (the actual content of the policies) or the insurer’s rates, or both. These insurers contribute to a state fund, called a guaranty fund, that is used to pay claims if any of these licensed insurers were to fail (go bankrupt).
The next player is the agent or broker (we’ll collectively refer to them as producers). If you are an individual or company that needs insurance, the producer acts as the middleman between you and the insurer. The producer is also licensed and regulated by the state. When you tell the producer you need insurance, the producer must try to find you a policy from one of the insurers that is licensed to operate in your state. There are some cases, however, (generally less than 10% of policies nationwide) where the licensed insurers will not accept a risk because it does not meet their internally established guidelines. The risk may be too big, too unusual or substandard. In these cases, a specially licensed producer called a surplus line producer gets involved. Their special surplus line license allows them to procure a policy for you from an insurer that is not licensed in your state.