Should you stress if the insurance company issuing the policy that is supposed to be protecting your business—whether in a certificate of insurance you received from a third party or within your own insurance portfolio—is “non-admitted”? As discussed below, there is no need to sweat.
An “admitted” insurance company is one that has been approved by a state’s department of insurance. This generally means that the insurance company must file policy forms, underwriting guidelines, and rates with the state for approval. Admitted insurers also pay into state guaranty funds, which are designed to step in if the insurer becomes insolvent. Non-admitted insurers, also called surplus lines insurance, are not subject to those same regulations.
At first blush, it would seem more prudent to have an insurance company backed by the state insurance commissioner, particularly if the insurance company goes out of business. But, the truth is that non-admitted/surplus lines insurance is subject to other regulations and can actually be better suited to address some of the unique risks for tech and other companies that are trying to implement creative innovations to disrupt the marketplace.
Generally, surplus lines insurance is sold through surplus lines brokers, who themselves are regulated by each state. In most states, qualified brokers are required to demonstrate that they attempted in good faith to place insurance with an admitted carrier before going the non-admitted route. Why would an admitted insurer decline to insure a particular risk? For lots of legitimate reasons. Typical risks underwritten by the surplus lines market fall into three basic categories: (a) non-standard risks that do not have typical underwriting characteristics, (b) unique risks that are not addressed by standard policy forms, and (c) higher-than-normal coverage limit requirements, where a business seeks more coverage than insurers are willing to provide.
Business insurance for contractors in New York City, for example, is sometimes unavailable because some underwriters find certain operations in that market too risky. Similarly, businesses along the Gulf Coast may not find property insurance from admitted insurers. The same might be said for emerging technologies for which insurers do not have a lot of past experience.
Is the insurance itself unreliable, particularly if there is no state guaranty fund? Statistics from the credit rating firm A.M. Best show that the record of insolvency for surplus lines is roughly equivalent to that for the admitted marketplace. If your broker is unable to place insurance with an admitted insurer, obtaining coverage from a non-admitted insurer might not be a bad thing (although it might cost you more). Rather than a one-size-fits-all policy form, surplus lines can offer more flexibility for new products and innovations. Standard market forms might suit certain risks just fine. But they might also be completely inadequate to unique business models or risks, whether driven by tech advances or by something as simple as a geographic focus that is unfamiliar to admitted carriers, or one they are not used to underwriting (e.g., no loss history based on similar past claims).
Some suggestions: for your own insurance needs, retain a skilled broker with experience handling businesses and technologies as innovative as your own. Such a broker is likely to be in the best position to track down the types and levels of insurance that best fit your business profile. This may or may not include surplus lines. If your business model is unique enough, coverage from a non-admitted insurer may be appropriate. Coverage counsel can also advise you about whether the insurance proposed by your broker (or in a certificate of insurance) properly takes your business and risks into account.
Many businesses protect themselves by requiring vendors and other third parties with whom they are doing business to expressly indemnify them and add them as additional insureds under the third party’s insurance.
Check the ratings of the insurance company providing insurance to you or to the third party supplying you with a certificate of insurance
You can protect your business by insisting in your agreements on minimum ratings for the insurance that a third party is required to have (for example, A+) and requiring in advance copies of (a) relevant certificates of insurance and (b) the policy language or endorsement that makes you an additional insured; and—if you really want to protect yourself—reserving for yourself the right to inspect the third party’s insurance policies, so that you can verify the coverage language and double-check the credit ratings of the insurance companies proposed.