Surplus Lines understanding the 'misunderstood market'

The tightening of homeowners insurance availability by insurers alarmed at the recent eruption of mold claims led some agents to place customers in the "misunderstood market" of surplus lines companies.

The surplus lines market has been labeled "misunderstood" because it exists apart from the normal market of licensed and regulated insurers and doesn't play by the same rules. Individual consumers seldom deal with surplus lines companies, which serve mainly business customers. While the surplus lines market is a useful safety valve for hard-to-place insurance risks, consumers should enter it only with their eyes wide open.

Surplus lines companies sometimes are called "non-admitted" companies. This contrasts them with licensed, or "admitted," companies. Although not licensed in Texas, surplus lines companies are allowed to operate here if they meet certain eligibility requirements. These include at least $15 million in capital and surplus and a license in their home country or home state to sell the types of insurance they offer in Texas.

In summary, these are the characteristics of surplus lines companies:

• Based in another state or country.
• Not licensed in Texas.
• On TDI's "eligible list," based on financial standards and licensure at home. This list is available from TDI's Company Licensing and Registration Division, 512-322-3535.

Only licensed surplus lines agents, who must pass a special examination, are allowed to place customers' business with surplus lines companies. You can verify that an agent has the appropriate licensing by calling TDI's consumer help line, 1-800-252-3439.

Agent and company licenses, and surplus lines carriers' eligibility, also can be verified on TDI's Web site, www.tdi.state.tx.us.

A surplus lines agent may place a risk with a surplus lines carrier only after making a diligent effort to find admitted companies that will cover the risk. If you're not satisfied with the results of the agent's search, keep shopping, perhaps with a different agent.

Policies issued by surplus lines companies must disclose on the front page that the policy is with a company not licensed in Texas. This disclosure also summarizes some of the disadvantages of surplus lines coverage, including:

• Surplus lines insurers do not participate in state guaranty associations, which pay the claims of insurance companies that go broke.
• The customer must pay a tax equal to 4.85 percent of the premium. This is more than the premium tax paid by licensed insurers and built into the price of their policies. In addition to the tax, a customer must pay a stamping fee equal to 0.15 percent of the premium.
• Surplus lines companies are not required to use standard policies with state-approved language designed to protect consumers.
• Surplus lines policies are not subject to many Texas insurance laws and rules.
• Premiums for surplus lines policies are usually - but not always - higher than for policies sold by admitted companies.

Again, it's good to have a marketplace for hard-to-place insurance risks, but it's important for a consumer to understand the difference between surplus lines and more conventional insurance coverage. If you want to learn more about surplus lines coverage, check TDI's Web site, www.tdi.state.tx.us for our on-line consumer publication, Understanding Surplus Lines Insurance, or call 1-800-599-7467 for a printed copy.

For more information contact:

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