Exclusively from Foa & Son
It’s more common than ever these days for insurance buyers to find themselves buying policies from non-admitted insurance companies. Seeing the words “not licensed”, “insolvency” and “payment of claims may not be guaranteed” on an insurance policy can understandably cause concern, especially for insurance buyers with limited experience with the excess and surplus (E&S) marketplace.
State insurance regulatory authorities will also typically require some form of disclosure to buyers of policies from surplus lines insurance companies. You may be presented with such a form, along with a request for your signature, so it’s worth taking a look at what these disclosures mean, and what you should know.
Here’s a fairly typical sample of wording from a fairly representative state surplus lines disclosure form: “This insurance has been placed with an insurer that is not licensed as an admitted carrier by the State of XXX.”
Wording like this that references an unlicensed carrier means that the policy in question is offered by a nonadmitted insurance company. A non-admitted insurance company is one that is not licensed in the state where the risk or insured is located, and does not file rates in that state. It’s important to remember that “not licensed” as an admitted carrier doesn’t mean unregulated; each insurer must meet certain criteria to be an eligible nonadmitted market, including regulations for financial strength and solvency. It does mean that the carrier has the ability to set their own rates and terms for the classes of business they write, leading to the flexibility in rate and form that is a key differentiator in the E&S marketplace, and key advantage to insurance buyers. It’s for these reasons that these carriers and policies are most often found in specialty types of insurance policies.
Here’s another phrase often seen in these various state disclosure forms: “In case of insolvency, payment of claims may not be guaranteed.”
Most states have guarantee funds, paid into and supported by admitted carriers, that will offer some limited claims recovery to policyholders affected by the insolvency of an admitted insurance company. Non admitted carriers are not covered by these funds. This means that the guaranty fund of the state in question will not step in to compensate a qualified insured if the non-admitted carrier goes bankrupt and cannot pay claims. While that may seem pretty intimidating on the surface, as a practical matter there is not a substantial difference in the risk posed by a potential insurance company insolvency to an insured.
The fact that an insurance company may be nonadmitted in your state has no bearing on their financial strength. In fact, insurance ratings agencies generally rate the financial strength of surplus lines insurance companies somewhat higher than admitted carriers. Almost 97% of surplus lines insurers have A.M. Best ratings of A- (Excellent) or higher, compared with 77% for the total P&C industry. And even though financial impairments in the U.S. admitted insurance industry in 2013 were at their lowest level since 2007, for the surplus lines market, 2013 marked the 10th consecutive year without any reporting financial impairment; none at all.
It’s also important to note that State guarantee funds ability/authority to pay claims in case of an admitted carrier insolvency is typically very limited. Guaranty funds vary by state and can impose significant limitations on the payment of funds to policyholders of insolvent insurers. Insureds with significant assets may be excluded or limited in their ability to file a claim; coverage does not apply to all lines of business and limitations on the amount of a claim payment either through a maximum cap or deductibles is the norm. You may get some money, but coverage won’t be as broad nor limits as high as what you originally paid for. All this negates much of the perceived value of admitted over non-admitted paper.
So what does this all mean? Non-admitted insurance companies are not something to fear, and due to their greater flexibility in rates and forms, may often be preferable. Whether admitted or non-admitted, you need to be careful to deal only with financially sound insurance companies. This is just common sense; an insurance policy is basically just a promise to pay at some point in the future if some covered event happens, you want to have some comfort the policy is written by a company that will be around when the time comes to start cutting checks.
For our part expect us to only deal with financially sound insurance companies. There may be times when we show you a carrier with a less than top rating, but those will be unique and unusual situations. We’ll always fully disclose any carrier we show you with less than excellent ratings, and explain why we are showing them to you. And we keep an eye on the insurance companies we use, so we can keep you informed of any changes with those you buy from.