Excess and surplus (E&S) insurance is a type of insurance policy that's sold by E&S insurers. Often, an E&S policy can cover people that other carriers – sometimes called standard or admitted carriers – can't cover. For example, a standard carrier might not offer you a policy if your application shows insuring you is too risky. This can happen if you:
- Live in a high-risk area. For example, homeowners may find it difficult to get standard home insurance because of their increased risk for wildfires or floods.
- Have an unusual situation. Any number of characteristics can put you outside of a standard insurer’s underwriting guidelines. These might include unique building materials, a severe loss history, or criminal convictions.
- Require higher limits. Every insurer has a coverage limit that makes them tap out, and your mansion on 30 acres may hit their max.
E&S insurers can often offer coverage when standard carriers can’t because they’re not licensed (or admitted) to do business in the state. That doesn’t mean they aren’t licensed at all.
In fact, every state has laws for how E&S insurers operate. Most have to be licensed as a surplus lines producer in the state where they operate. Many are licensed as admitted carriers in the state where they incorporated. They're also usually required to meet certain financial thresholds to operate in a state. But because they aren’t admitted, they have more flexibility in the insurance coverage they offer.
E&S insurance may be more expensive than standard coverage because of the types of risks it covers.
What is an admitted carrier?
Admitted carriers, also called standard carriers, are simply insurance companies licensed by the state to write and sell insurance in that state. To be admitted, the company has to:
- File their premium rates and policy forms, or contracts, with the state’s department of insurance.
- Comply with state insurance regulations.
- Contribute to the state’s guaranty fund.
The guaranty fund pays policyholders’ claims if an admitted carrier becomes insolvent by paying claims.
Who needs E&S insurance?
Property owners who are unable to obtain insurance from an admitted carrier can get coverage from a surplus lines producer that offers E&S insurance. The most common reason people turn to E&S insurance is because their property faces higher-than-normal risk. Homes and businesses on the coast, in wildfire zones, or even in high-crime neighborhoods may need excess and surplus insurance.
One good example of where homeowners often need E&S insurance is Louisiana, particularly on the Gulf Coast. The area’s devastating history of hurricanes means fewer admitted carriers want to cover the cost of claims. This pushes more Louisianans towards E&S insurers for their homeowners insurance policies.
How are E&S insurance companies regulated?
Excess and surplus insurance companies don’t deal with the same regulations as admitted carriers, but that doesn’t mean they can do whatever they want.
Most states require non-admitted insurers meet certain financial criteria to be eligible to operate in the state. Moreover, anyone who sells E&S insurance must have a surplus lines insurance license. These individuals are usually responsible for:
- Finding an E&S insurance provider.
- Reporting the transaction to the state insurance regulators.
- Submitting the premium tax to the state tax authority.
- Making sure the transaction complies with the state E&S insurance laws.
Most states have something called a “diligent search requirement” that must be fulfilled before a surplus lines broker can even look for an E&S policy. This means the broker must try to find coverage from an admitted carrier first. In many places, an applicant has to be denied coverage at least three times before a broker can turn to an excess and surplus insurance provider.
Additionally, every state has a guaranty fund to pay policyholder’s claims if an admitted carrier becomes insolvent. However, almost every state also has some sort of entity that monitors the financial health of non-admitted carriers.
Are E&S policies different from standard policies?
E&S insurance policies can be different from policies offered by admitted carriers. The less stringent regulations means E&S providers can modify the policy forms used by standard carriers to create more customized coverage. Some E&S providers develop their own forms to better manage risk in the high-risk zones.
These differences make it important for homeowners to read through their home policies in detail so they know what’s covered and what’s not. Ask plenty of questions so you know that you have sufficient coverage.
