As part of developing ILSA’s latest online compliance tool, the Surplus Lines Calculator & Tax Tool (CATT), I had an opportunity to closely review the language of the stamps required by state regulators on surplus lines policies. These notices play an important role in ensuring the policyholders understand the conditions under which brokers place business in the non-admitted market.
Why It Matters: Protecting Consumers
To understand how stamps help inform and protect consumers, it’s important to understand the difference between admitted and non-admitted (or surplus lines) insurers. Firstly, insurance carriers undergo a rigorous screening process by the Department of Insurance before regulators admit them to accept insurance business in the state. This generally involves a careful review of the company’s:
- Ownership and governance,
- Financing and capitalization,
- Policy forms and rates,
- Claims procedures, and more.
Admitted carriers also must continue to comply with all relevant state insurance regulations.
Additionally, admitted carriers must pay a percentage of the value of the insurance it sells into the state’s guaranty fund. If the insurance carrier becomes insolvent and cannot pay out on claims, policyholders can apply to the guaranty fund for relief. Policyholders who feel an admitted carrier has mistreated them can also file a complaint with the state insurance department.
While surplus lines carriers certainly aren’t unregulated by the state, they don’t undergo the same level of scrutiny. Obviously, the policyholder benefits by being able to obtain coverage from a surplus lines carrier that wouldn’t be available otherwise. But surplus lines policyholders don’t have the same protections and need to understand what they’re agreeing to. That’s where state stamps come into play.
Elements of a Surplus Lines State Stamp
Although the exact requirements for stamps vary from state to state, the essentials remain fairly consistent.
Most states require that the broker placing the coverage in the non-admitted market be clearly identified. This usually means providing the name of the broker, their initials, and/or signature. A few states also require the broker’s surplus lines license number or additional contact information. The goal of this information is to ensure that an insured knows who to contact if they have a question or issue concerning the policy.
Many states specify a minimum font size for the state stamp and/or require it to be printed in a boldfaced type. A few states want the notice to appear in a contrasting color, for example, red. Others require that a box or border surround the notice. The point is to ensure that the stamp stands out from the text of the policy and is clearly legible.
The final component of most state stamps is a legal notice. The notice makes it clear that the policy is being placed with an eligible non-admitted insurer. It also explains that the policyholder cannot seek compensation from the state’s guaranty fund if the insurer becomes insolvent. Many stamps offer resources to help insureds verify that the selected carrier is eligible or to obtain further information about the insurer’s financial status. Many states also dictate exactly what wording must be used. This is because the notice ensures that policyholders are informed about the limitations of their protection under state law. Accordingly, it’s not uncommon for notices to reference specific sections of state law or insurance statutes.
To sum up, surplus lines compliance requires careful attention to detail and adhering to a sometimes bewildering variety of state requirements. Keeping the essentials in mind and understanding the why behind these requirements, however, can make compliance easier.
Note: The Premium Edition of the ILSA’s Surplus Lines Calculator & Tax Tool (CATT) includes instructions and specified language for state stamps for all states that require them. For more information about this tool, contact email@example.com.