What Are Surplus Lines?
Surplus lines insurance is coverage provided by insurers that are not licensed (admitted) in the state. It's used when coverage cannot be obtained from the regular (admitted) market.
Admitted Insurers
- • Licensed by the state
- • Regulated by state insurance department
- • Covered by state guaranty fund
- • Rates and forms approved by state
Surplus Lines (Non-Admitted)
- • NOT licensed in the state
- • Less state regulation
- • NOT covered by state guaranty fund
- • More flexibility in rates and coverage
When Are Surplus Lines Used?
- • Unusual or unique risks that admitted insurers won't write
- • High-risk businesses (nightclubs, fireworks manufacturers, etc.)
- • Hard-to-place coverage (cyber liability, special events, etc.)
- • Risks that have been declined by the regular market
Diligent Effort Requirement
Before Placing with Surplus Lines...
The surplus lines broker MUST have made a diligent effort to place the risk with an admitted insurer first.
What is "Diligent Effort"?
A process by which a licensed producer places coverage with a surplus lines insurer only after the risk has been declined by:
3
Authorized (Admitted) Insurers
Each of the 3 insurers must:
- 1 Be authorized to write the kind of insurance requested
- 2 Be an insurer that the producer has a good faith reason to believe might consider writing the type of coverage or class of insurance involved
Example: Diligent Effort in Action
A nightclub owner needs liability insurance. The producer must:
- 1 Approach Insurer A (writes commercial liability) - DECLINED
- 2 Approach Insurer B (writes entertainment venues) - DECLINED
- 3 Approach Insurer C (writes hospitality) - DECLINED
- ✓ NOW can place with surplus lines insurer (Lloyd's of London, etc.)
What Doesn't Count as Diligent Effort:
- • Asking 3 insurers who don't write that type of coverage
- • Asking insurers you know will decline without reviewing
- • Getting 3 quotes that are too expensive (price alone isn't declination)
- • Skipping straight to surplus lines because it's easier
The Exportable List
The Exportable List is an exception to the diligent effort requirement. For risks on this list, you can go directly to surplus lines without getting 3 declinations.
How the Exportable List Works:
Commissioner Declares
The Commissioner may declare certain lines or classes of insurance eligible for export
After a Hearing
It must be determined that there is no reasonable or adequate market among authorized insurers in the state
Annual Compilation
The list is compiled annually - it can change each year
Types of Coverage Often on Exportable Lists:
Excess & Umbrella
High-limit coverage
Unique Risks
One-of-a-kind exposures
Hard-to-Place
Limited market availability
Special Events
Concerts, festivals
Product Recall
Manufacturer coverage
Cyber Liability
Data breach coverage
Real-World Scenario: Exportable List in Action
The Setup: A tech company needs $5 million in cyber liability coverage with ransomware protection.
The Situation: Cyber liability insurance is on NJ's exportable list because admitted insurers have limited capacity for this specialized coverage.
What Happens: The producer can go directly to a surplus lines insurer (like Lloyd's of London) without getting 3 declinations first. The exportable list saves time because the Commissioner has already determined there's no adequate admitted market.
Compare to: If the same company needed standard commercial general liability (NOT on exportable list), the producer would need 3 declinations before using surplus lines.
Exam Tip!
If a risk is on the exportable list, you can skip the 3-declination requirement. If it's NOT on the list, you must show diligent effort (3 declinations) before placing with surplus lines.
No Guaranty Fund Protection
Critical Warning for Insureds
Surplus lines policies are NOT protected by the NJ Property-Liability Insurance Guaranty Association. If the surplus lines insurer becomes insolvent, policyholders may lose coverage and unpaid claims.
Real-World Scenario: Why This Matters
The Setup: Joe's Fireworks Manufacturing couldn't get coverage from admitted insurers, so he purchased liability insurance from a surplus lines insurer for $50,000/year premium.
What Happens: A year later, a massive explosion at Joe's warehouse injures several workers. The claim is worth $2 million. But before the claim is paid, the surplus lines insurer goes bankrupt.
The Result:
- + If Joe had an ADMITTED insurer: The NJ Guaranty Fund would step in and pay the claim (up to limits)
- + With his SURPLUS LINES insurer: No guaranty fund protection. Joe is personally liable for the $2 million. He may need to sue the bankrupt insurer's estate and hope for pennies on the dollar.
The Lesson: Surplus lines offer flexibility for hard-to-place risks, but the tradeoff is less protection if the insurer fails. Brokers MUST disclose this risk to clients.
Surplus Lines Broker Responsibilities
Must Do:
- ✓ Be licensed as a surplus lines broker
- ✓ Document diligent effort (keep records of declinations)
- ✓ Use only eligible surplus lines insurers
- ✓ Collect and remit surplus lines tax
- ✓ Disclose that coverage is NOT from admitted insurer
Cannot Do:
- ✗ Place with surplus lines without diligent effort
- ✗ Use unauthorized/ineligible insurers
- ✗ Misrepresent the nature of coverage
- ✗ Fail to inform insured about guaranty fund
Quick Reference: Surplus Lines
3
Declinations Required
Annual
Exportable List Updated
0
Guaranty Fund Protection
Remember:
- • Diligent Effort = 3 declinations from authorized insurers
- • Each insurer must be authorized to write the type of coverage
- • Producer must have good faith reason to believe they might write it
- • Exportable List = Skip the 3-declination requirement
- • Surplus lines = NOT protected by state guaranty fund