understanding new jersey surplus lines

What is a surplus-lines policy?

It is a policy written by an insurance company that is not authorized (not licensed) in the state of New Jersey. A surplus-lines policy from an unauthorized company may be legally written through surplus-lines producers, when the insurer is deemed to be an eligible surplus-lines insurer. This means the insurer has met the standards for financial integrity and other standards of New Jersey law. Eligible surplus-lines insurers hold a certificate of eligibility issued by the Department of Banking and Insurance and are included on the department’s eligible surplus-lines insurer list (also known as the “white list”).

Is a surplus-lines company less safe than other companies?

Not at all. A surplus-lines company is no more likely to become insolvent than an authorized company. The difference is that the DOBI is not monitoring in depth the company’s financial records on an ongoing basis, although certain qualifying standards must be maintained to remain on the list of unauthorized insurance companies that may transact surplus-lines insurance in New Jersey

For your protection, significant oversight is achieved through other means. Regulators in the jurisdiction where the company is domiciled examine the company’s financial records, as well as various independent rating agencies, such as A.M. Best.

Isn’t there a state fund to protect policyholders from company insolvencies?

There is protection under New Jersey’s guaranty funds for the insolvency of insurance companies that are authorized in New Jersey. However, with only two exceptions, surplus-lines policies are not covered by any state guaranty fund (only medical malpractice liability insurance and property insurance covering owner-occupied dwellings of less than four dwelling units are covered by the New Jersey Surplus Lines Guaranty Fund). This is a significant distinction for policyholders insured by a surplus-lines company, and the lack of insolvency protection must be considered when making the purchase decision. Nevertheless, placement with a financially sound surplus-lines insurance company may be more prudent than placement with an authorized insurance company that is financially impaired.

Why would my insurance producer offer me a surplus- lines policy?

There are several reasons why it may be necessary to look for coverage in the surplus- lines market. First, the risk of loss may be too great for acceptance by regular markets. Second, the risk may be too little understood by regular markets to select and price the risk appropriately. Third, there may be no other way to access an exclusive program for a particular type of risk.

Nevertheless, placement of risks in the surplus-lines market usually is considered a last resort, when authorized insurance companies have not been able to satisfy your insurance needs. Before placement can be made with a surplus-lines company, a diligent effort to place coverage with authorized companies usually will be required, unless the type of risk is one that has been placed on the department’s “exportable list”—a list of risks assumed to be difficult to place with authorized companies.

What should I know about forms and rates used by a surplus-lines company?

Effective Sept. 1, 2003, policy forms used by a surplus-lines company no longer are regulated by the DOBI. These policy forms can deviate significantly from standard forms, which means they must be read carefully, especially the exclusions. Rates generally cannot be lower than the lowest rate filed by any authorized insurance company. Otherwise, a surplus-lines company does not need DOBI approval for its rates, except that rates are not permissible if they are deemed to be excessive, inadequate or unfairly discriminatory.

What about adherence to cancellation and nonrenewal laws?

Unlike the authorized companies, surplus-lines insurance companies are not subject to New Jersey cancellation and nonrenewal laws. Consequently, the terms for canceling and nonrenewing the policy must be found in the policy itself. For example, before coverage is bound by the insurance company, you should determine what the minimum-earned premium will be if the policy is canceled a short time later.

Why am I being billed for a New Jersey state tax on my policy?

The 5 percent surplus-lines tax you see on your bill serves as a substitute for the franchise tax that would have been collected from the insurer were it authorized in New Jersey.