7 Things You Need to Know About Surplus Lines Insurance

Surplus lines coverage can be complicated. We’re here to explain it. Keep reading to discover everything you need to know about surplus lines insurance and how it works.

What is Surplus Lines Insurance?

Surplus lines insurance is a type of insurance coverage that covers nonstandard risks – like risks ordinary insurance will not cover.

Some insurers refer to surplus lines insurance as excess and surplus (E&S) lines insurance.

Most surplus lines insurance policies cover businesses. However, some homeowners buy surplus lines insurance to cover nonstandard risks – like homes or home features an ordinary policy won’t cover.

Here’s how the Texas Department of Insurance defines surplus lines coverage:

Surplus lines insurance is a special type of insurance that covers unique risks. It fills a gap in the standard market by covering things that most companies can’t or won’t insure.

Roughly 10% of the property and casualty insurance market in the United consists of surplus lines coverage.

What Does Surplus Lines Insurance Cover?

Surplus lines insurance covers a virtually unlimited number of things – from the voices of famous singers to the limbs of professional athletes.

Most surplus lines insurance claims, however, fall into one of three categories:

1. Distressed Risks: Some risks are considered distressed risks. For various reasons, a standard insurer won’t cover these risks, forcing policyholders to turn to the surplus lines marketplace.
2. Unique Risks: Some risks are so unique, there’s no good way to predict their occurrence. Many insurers err on the side of caution by avoiding this risk entirely. In this situation, you may want to buy surplus line coverage.
3. High Capacity Risks: Some risks are predictable, but the cost of the risk is so high that an insurer will not cover it. In this case, a homeowner or business owner may buy surplus lines coverage.

In all of these situations, surplus lines insurance would cover the cost of repairing or replacing damage to a property caused by one of the risks above – similar to how an ordinary homeowners insurance policy works.

Who Sells Surplus Lines Insurance?

Some of the world’s largest insurance companies offer surplus lines insurance – including Berkshire Hathaway Insurance Group (owner of GEICO), AIG, Chubb, Liberty Mutual, and others.

Famous insurer Lloyd’s of London is also one of the best-known names in the space, and the insurer has a proven track record of covering unique risks – like David Beckham’s legs and the Titanic.

Even if working with an ordinary insurance company, you may end up with surplus lines insurance. You may have ordered a homeowners insurance policy from State Farm, for example, only to receive a notification that your policy will be provided through surplus lines insurance because of a unique risk. This is most often seen with coverage for things like a mudslide or items that are highly valued.

Who Needs Surplus Lines Insurance?

If you cannot buy insurance from the ordinary marketplace, then you may need to buy surplus lines coverage.

Some of the people who may need surplus lines insurance include:

• People who own uniquely valuable items – like high-end artwork, a fleet of classic cars, or high-value collectible items.
• Someone with a unique or difficult-to-insure item – like an ultra high-end racehorse.
• Someone with a custom-made home, yacht, or other unique high-value item.
• A business with a large liability risk – like an amusement park or demolition contractor
• Homeowners who live in a unique, difficult-to-insure location – like on the shores of an eroding island or on a steep mountainside
• Any other business owner or homeowner with a large, unique, or unpredictable risk.

In all of these situations, the homeowner or business owner may be unable to obtain insurance through the ordinary market, leading them to the surplus lines marketplace.

Some States Have an “Export List” for Surplus Lines Insurance

Unsure if your insurance needs fall under surplus lines coverage? Some states have an “export list” outlining specific coverages that may fall under surplus lines.

In California, for example, the export list includes insurance policies covering kidnapping, ransom, amusement parks, demolition contractors, and hot air balloon businesses, among others.

Some states, meanwhile, include flood insurance on the export list. Insurers in New York may sell flood insurance if the homeowner isn’t able to obtain coverage through federal flood insurance programs (like FEMA’s NFIP).

How to Buy Surplus Lines Insurance

Insurance agents sell surplus lines coverage across the United States. You can contact an insurance agent directly or call a surplus lines provider.

In many cases, however, homeowners may not even know they’re getting surplus lines coverage until receiving a notification from their insurer. Your insurer may notify you that they were unable to provide coverage for a certain risk, however, which is why you’re getting surplus lines coverage instead.

You May Have Limited Recourse If Your Insurer Goes Bankrupt

You depend on insurance to be there when you need it most. However, if your surplus lines insurer goes bankrupt, you may have limited recourse. This makes your research into the coverage much more important.

As the Texas Department of Insurance explains, surplus lines companies aren’t members of a guaranty association. Guaranty associations protect policyholders when insurers fail or go bankrupt. Typically, policyholders receive some compensation through a guaranty association after their insurer goes bankrupt. With surplus lines coverage, however, that’s not the case.

Final Word: You May Need Surplus Lines Insurance

If you have a unique insurable need and are unable to obtain insurance through the ordinary marketplace, then you may require surplus lines insurance.

Whether you’re a homeowner or business owner, you could require surplus lines insurance to cover a unique risk – like a large liability or a home built in a unique location.

Stephanie Corona

Stephanie is a property insurance claim expert with over 20 years of experience working as an insurance adjuster, expert witness, appraiser and umpire. She is passionate about sharing her expertise, knowledge, tips and training to help both property owners and Public Adjusters in their pursuit of effectively managing claims and recovering the claim settlement they deserve after a loss.