By Ken Kukral
The answer….. as usual… it depends.
This is usually a state by state issue. Some states such as Ohio do not have any statutes at all regarding this issue. They used to have a statute that said if there is a 10% difference in premium or significant difference in terms, you can place the account surplus lines.
One example of this dilemma is Florida, where their statute states:
“This means that you are now free to quote any risk falling into the specified classes irrespective of the fact that it may be currently written in an admitted carrier or if an admitted carrier is willing to quote the coverage. You will be able to quote on both a surplus lines and admitted basis. Surplus lines quotes may be at a lower price or on broader terms than admitted quotes.”
So what should you do?
1. Research your specific state statute. Make sure you follow the regulation to the letter of the law. If a problem arises later on, and you DID NOT follow the statute, it will be tough to mount a defense. Following the statute does not guarantee you will have a solid defense, but does help your case.
I am not as big fan of just calling your state insurance department. Depending on who you talk to, you can get differing answers. When a problem arises later, you may not be able to rely on incorrect information you may have received, if it conflicts with the actual statutes.
Check with your state surplus lines association. They have been asked this question numerous times and may have something official they can send you or they can direct you to the state statute that applies.
2. Many states have affidavit or due diligence forms. You need to make sure these are accurately completed. Don’t just go “through the motions” with the due diligence process, make sure you take the form seriously and get formal or “solid” declinations from the admitted markets you have access to. Keep in mind that when a problem arises, it may be years later and this form could become a key document. Do not list carriers that you will be providing admitted quotes from or that you already have a quote from.
3. Document your file. If the client chooses a non-admitted carrier over an admitted carrier they must be told that there is not a guaranty fund to back up the carrier if they were to become insolvent. Keep in mind that you will be viewed as the “professional” if there is a problem. The more you can document your reason for offering a non-admitted option when an admitted quote was available will help support your decision. Things such as pricing, broader terms, meeting the insurance requirements you client asked for or providing more basic coverage when your client cannot afford the higher price may all be reasonable reasons for your decision. The more you can show that your client made an “informed” decision, the better off you will fare. Keep in mind that “price isn’t everything”.
4. Do some research on the financial stability of the non-admitted carrier you are placing the account with. This will help show the effort you made in placing the account with a non-admitted market over an admitted carrier, taking into account that the carrier needs to be financially stable since they will not be covered by a state guaranty fund. Checking their rating with one of the insurance carrier rating services such as AM Best and even putting the carriers rating on the quote will help.
5. Understand that you are taking a risk. You need to manage that risk by making sure you take proper steps to reduce that risk. Dotting all your i’s and crossing all your t’s is important and some extra effort in placing the account properly must be taken. Doing what is “best” for your client is key in this situation.
This situation may never arise in your insurance carrier but if it does, you need to be methodical and deliberate. How you document your file and taking the proper steps will be critical if a “problem” (insolvency of the non-admitted carrier or an uncovered loss) happens down the line. Dealing with a knowledgeable and seasoned wholesaler will provide some assurances that you have done “the right thing”.