Your Professional Insurance Agent … We want you to know about the insurance you're buying.What is an excess line (or surplus line) policy?
It means a policy written by an insurance company that is not authorized (not licensed) in the state of New York. While a policy from an unauthorized company may be written legally through an excess line broker, this transaction places on the policyholder more responsibility for policy negotiation and protection against the insurance company’s insolvency.
An excess line broker means a broker specifically licensed to place insurance with an unauthorized insurance company. Excess line insurance purchased in New York state must include an excess line broker in the transaction. Generally, your retail broker must procure the policy through a wholesale broker (licensed as an excess line broker) that provides access to the excess line market.
Not at all. An excess line company is no more likely to become insolvent than an authorized company. The difference is that the New York State Insurance Department is not monitoring in depth the company’s financial records on an ongoing basis, although certain qualifying standards must be maintained to remain on the list of unauthorized insurance companies that may transact excess line insurance in New York state.
For your protection, significant oversight is achieved through other means. Regulators in the jurisdiction where the company is domiciled examine the company’s financial records, as well as various independent rating agencies, such as A.M. Best. Also, excess line brokers are required by law to use due care in selecting an unauthorized insurance company to provide the desired coverage. In their endeavor to exercise care, brokers are assisted by the Excess Line Association of New York.
There is protection under New York security funds only for the insolvency of insurance companies that are authorized in New York state. This is a significant distinction for policyholders insured by an excess line company, and the lack of insolvency protection must be considered when making the purchase decision. Nevertheless, placement with a financially sound excess line insurance company may be more prudent than placement with an authorized insurance company that is financially impaired.
There are several reasons why it may be necessary to look for coverage in the excess line market. First, the risk of loss may be too great for acceptance by regular markets. Second, the risk may be too little understood by regular markets to select and price the risk appropriately. Third, there may be no other way to access an exclusive program for a particular type of risk.
Nevertheless, placement of risks in the excess line market is considered a last resort, when authorized insurance companies have not been able to satisfy your insurance needs. Before placement can be made with an excess line company, three declinations from authorized companies usually will be required, unless the type of risk is one that has been placed on the insurance department’s “export list”—a list of risks assumed to be difficult to place with authorized companies.
An excess line company is exempt from the laws requiring rates and forms to be filed with the insurance department. This means that forms may vary significantly from standard forms used by authorized insurance companies. The flexibility offered by this freedom from filing can work to the benefit of the policyholder by permitting coverage to be tailored to individual needs. However, reductions in standard coverage may be necessary in order to turn an uninsurable risk into one that is insurable (for example, terrorism may be excluded). The important thing to remember is that coverage analysis is essential in this market and that insurance companies are more inclined to negotiate policy terms.
Unlike authorized companies, commercial policies written by excess line insurance companies are not subject to the New York state cancellation and nonrenewal laws. Consequently, the terms for canceling and nonrenewing the policy must be found in the policy itself. For example, before coverage is bound by the insurance company, you should determine what the minimum-earned premium will be if the policy is canceled a short time later.
The 3.6 percent excess line tax that you see on your bill is paid annually by the excess line broker to New York state. It serves as a substitute for the franchise tax that would have been collected from the insurer were it authorized in New York state.
Normally, the policyholder agrees to pay this tax when signing the Total Cost Form, even if the policyholder is a tax-exempt nonprofit organization. The Total Cost Form is the policyholder’s agreement with the retail broker to pay designated taxes, expenses and fees associated with the policy’s placement with an excess line insurance company.
ELANY stamping fee. Each month the excess line broker is billed an amount equal to 0.2 percent of all premiums written by that broker the prior month. This fee supports certain services provided by the Excess Line Association of New York, whose stamp must be placed on every excess line policy sold in New York state.
ELANY was formed by a statute in 1988 as a nonprofit advisory organization under supervision of the insurance department. It provides assistance to excess line brokers in complying with all excess line laws and regulations. Paramount in its responsibility is the duty to place its stamp only on those policies written by unauthorized companies that meet prescribed standards of eligibility.
Inspection fee. When an excess line broker pays a contractor to perform an inspection of the premises, the fee likely will be passed on to the policyholder.
Service fee. Sometimes, a broker may not receive any fixed commission from the excess line broker when writing a policy, or the commission rate may be insufficient to cover all the services being provided the policyholder, so it may be necessary to negotiate a service fee to adequately compensate the broker for services rendered.
Your Professional Insurance Agent … We want you to know about the insurance you're buying.