This is PRETTY BORING, so save it for bedtime if you're having trouble sleeping . . .

The designation "Surplus Lines" (Also called "Non-admitted") does not equate to fly-by-night in describing an insurance company.  The basic characteristics of these insurers have to do with their operating style, types of insurance accepted and regulatory domains.

The use of non-admitted insurance companies has been widespread for years, having developed as insurance consumers sought types of coverage which conventional companies refused to supply.  In addition, there are needs for insurance on exceptionally high-risk or unique exposures, as well as needs for very large amounts of insurance which are better suited to highly specialized and/or layered types of policies and underwriters.

Of principal interest is that these carriers are not supported by state guarantee funds. (Meaning that if they fail, your premium and your insurance is probably lost.)  Surplus lines insurers are generally not subject to regulation by your individual state insurance department, although some states maintain a list of so-called "Approved" insurers who are permitted to operate. This means that you generally cannot obtain assistance from your state insurance department if you're treated unfairly.  Clearly, the financial ratings & industry reputation for a non-admitted insurer are of great importance before you buy.  One of the foremost references for ratings is Best's

It is normally required that your business be first offered to admitted carriers before it is placed in the surplus lines market.

Non-admitted insurers contract with specialized brokers in individual states to underwrite & service their business, paying them on a commission basis per policy, similar to what is received by retailing agents. (These brokers are required to hold a special license & are themselves regulated by state agencies or associations.) Some or all of servicing fees, inspection fees or other costs may be passed on to you as a separate item in your premium invoice. Record-keeping entities may also charge fees, and state taxes are collected on policies individually, for subsequent payment to the state.

The scary insurance companies ("Alien" carriers) typically operate from a base somewhere outside the U.S. Many have impressive sounding names, and few if any real trust funds in the US  If you wish to utilize such a carrier, keep in mind that enforcement of remedies against them is unlikely at best.

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