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Surplus-Lines Insurance is insurance with an insurer that is not licensed to transact business within the state where the risk is located. It is also termed excess-lines insurance.
Since this insurer is not licensed in insured’s state, they are not regulated by insured’s state's Department of Insurance in the same way licensed insurers are regulated (they are, however, regulated in the state or country where they are domiciled or located). Since they are not strictly regulated by insured’s state, they are generally free from the form or rate regulations imposed on licensed insurers. This gives the insurer the freedom to maintain broader internal guidelines for accepting risks. They have more flexibility to design and price their policies and can, therefore, accept risks that licensed insurers will not.
In many states, including Illinois, the licensed surplus line producer is required to ascertain that the insurer meets certain financial standards before buying a policy from them. In many other states the Department of Insurance, or some other authority, monitors the financial condition of surplus line insurers and maintains a list of insurers that surplus line producers are allowed to use. Whether done by the surplus line producer, the state Department of Insurance, or some other entity, this financial monitoring is an important function because if the insurer were to fail (go bankrupt), there is no guaranty fund protection for you.
It is important to note that these insurers are generally not unable to obtain a license in the insured’s state, rather they choose to operate on an unlicensed, surplus line basis.