Understanding Surplus Lines Insurance: Coverage, Risks & Types

What Is Surplus Lines Insurance?

Surplus lines insurance protects against a financial risk that is too great or too uncommon for a regular insurance company to take on. Surplus lines insurance can be purchased by individuals or companies.

How Surplus Lines Insurance Works

Surplus lines insurance falls into the category of property and casualty insurance. In many cases, it is used to cover relatively new risks that conventional insurers shy away from because they lack historical data to properly price their policies.

“After the new coverage has generated sufficient data, it may become a more standard product and become available in the admitted market,” the National Association of Insurance Commissioners (NAIC) says.

Unlike most types of insurance, surplus lines insurance can be sold by insurers that are not licensed in the buyer’s state. Surplus lines insurers need a license in their home state, and brokers must be licensed in theirs.

Surplus lines insurance carries additional risk for the policyholder: There is no guaranty fund from which to obtain a claim payment if the surplus lines insurer goes bankrupt, as is the case with standard insurance policies. A policyholder’s claim on a regular insurance policy is often paid out of a state guaranty fund, which is funded by other insurers in case one of them goes bankrupt. However, according to the NAIC, “the insolvency rate of surplus lines insurers has been historically low.”

Leading Providers in the Surplus Lines Insurance Market

Insurers linked to the UK's Lloyd’s of London heavily dominate the surplus lines insurance market. Insurance Information Institute data shows Lloyd's insurers control 16.8% of the surplus lines market with $13.9 billion in premiums. Following Lloyd’s, surplus lines market share drops down to the single digits for all of the top 25 surplus lines insurers.

Examples of other top 25 surplus lines insurers include Berkshire Hathaway Insurance Group, American International Group (AIG), Markel Corporation Group, W.R. Berkley Insurance Group, Nationwide Group, Fairfax Financial (USA) Group, Chubb INA Group, and Liberty Mutual Insurance Companies.

Various Types of Surplus Lines Insurance Coverage

Surplus lines insurance covers diverse financial hazards, often handling risks considered nonstandard by traditional insurers.

For example, according to the Texas Department of Insurance, a business “might need liability coverage for a special event or to move hazardous materials.” The department says individuals might buy surplus lines insurance if standard companies don't cover their home. “Others buy it to cover very costly items, like an expensive art or classic car collection.”

Sometimes, surplus lines insurance offers coverage limits exceeding what conventional insurers provide.

States maintain export lists, showing the kinds of insurance that may be unobtainable through regular, state-licensed insurance companies in their state, making surplus lines coverage eligible for sale and purchase there. In California, for example, the list includes (among many other things) insurance to cover kidnap and ransom, amusement parks and carnivals, sawmills, demolition contractors, fireworks displays, and hot air balloons.

Flood insurance is also on the export list for some states and in certain circumstances. In New York, for example, surplus lines insurers may sell flood insurance if the property isn’t eligible for primary coverage by the federal flood insurance program or if the federal program won’t provide a sufficient amount of coverage.

Comparing Surplus Lines Insurance with Standard Insurance

Regular insurance, or admitted, carriers must adhere to state rules on pricing and which risks they cover. Surplus lines carriers do not have to follow these regulations, which allows them to take on higher risks.

Surplus lines insurers, often called non-admitted or unlicensed, still provide valid and somewhat regulated policies. The designation only means that they are subject to different regulations from those that govern admitted or standard carriers.

Insurers headquartered outside the United States, called alien insurers, make up much of the surplus lines market.

The Bottom Line

Individuals and businesses buy surplus lines insurance to protect themselves against financial risks that are too large or too rare for a regular insurance company to be willing to take on. Surplus lines insurance can be sold by companies not licensed in the buyer's state, unlike most other insurance types. They are not covered by state guaranty funds in the case of default.