Surplus Lines Distribution Systems
SLI is generally produced through o
ne of two distribution systems. One, generally referred to as a retail
distribution system, involves a single broker accessing the surplus lines company directly to place insurance. The
second, generally referred to as a wholesale distribution system, involves a surplus lines broker that operates as an
intermediary between a “retail agent” and a surplus lines company. In the retail distribution system, there is
only one producer in a transaction, so that producer would need to conduct the diligent search of the admitted
markets prior to accessing the surplus lines markets, unless there is some exception, such as a large commercial
purchaser or an export list. In the wholesale distribution system, the diligent search is often conducted by the retail
broker, who determines that there is no admitted market prior to contacting the surplus lines wholesale broker;
however, some states have different requirements.
The vast majority of the states take the position that a broker conducting a diligent search would need a P/C
agent’s license because it is necessary to solicit insurance, take an application, and make a submission to an admitted
company. Many states do not require a retail producer to obtain a surplus lines broker’s license unless the broker
is going to access the surplus lines companies directly. There are a couple of states that require a retailer to have a
surplus lines license before using the services of a surplus lines wholesale broker.
Diligent Search Requirements
The vast majority of states require a “diligent search” of the admitted market to determine if there is an admitted
carrier willing to write the risk, prior to accessing the surplus lines markets. A couple of states have abolished
the diligent search requirement. Many states require that brokers search those admitted companies that are actually
writing the coverages sought. If there is no admitted carrier willing to write the risk, the risk can be placed in the
surplus lines markets. Many states require an affidavit to be completed documenting that the diligent effort
was completed. Recently, a number of states have replaced the affidavit, which was sworn under penalty of perjury,
with a report from the surplus lines licensee that the diligent search was conducted. Some states have also replaced
the requirement that the affidavit, or report, be filed with the insurance department or Surplus Line Association
(SLA) with a requirement that the report of the diligent search be maintained in the office of the broker and
available for audit by the insurance department.
Many states specify that the diligent search can be conducted by the retail broker, commonly called producing
broker, when a surplus lines wholesaler accesses the surplus lines markets. The retail broker has access to admitted
markets. The retailer uses the services of a surplus lines wholesale broker only after the retail broker has
determined that the admitted markets are not willing to underwrite the risk.
The most common diligent search standard requires declinations from three admitted carriers, but as many as five
are required. Other states simply require the producing broker to make an effort, a reasonable effort or a good faith
effort, to place the coverage in the admitted markets. A couple states require that the insurance not be
procurable after a diligent effort has been made to place the coverage among a majority of insurers, but this
standard has been called into question as unclear and impractical. A number of exceptions to the diligent search
requirement exist in state law, and the NRRA implemented a national exception to the diligent search rules for
insureds that qualify as exempt commercial purchasers (ECPs). Twenty-two states have laws authorizing an
“export list” of coverages that the insurance commissioner has determined are not generally available in the
admitted markets. Coverages on the export list can be placed in the surplus lines market without a diligent search.
In some states, the state insurance department is required to conduct an annual public hearing regarding the export
list. The purpose of the hearing is to take testimony on the export list to determine whether any items should be
added or removed.
The former NARAB (EX) Working Group updated the NAIC’s standard for determining compliance with the
GLBA’s previous reciprocity provisions. In a report that was adopted by the NAIC in September 2009, the
Working Group refined its approach to reciprocity relating to any underlying P/C licensing requirements for
nonresident surplus lines producers. The Working Group determined that if a state requires the surplus lines
producer to perform the diligent search of the admitted market, then the state may require the nonresident surplus
lines producer to obtain an underlying nonresident P/C license in addition to a nonresident surplus lines license.
However, the Working Group determined that a state may not require a nonresident surplus lines producer to also
obtain a nonresident P/C license if they do not perform the diligent search. Many surplus lines producers do not
© 2009-20 National Association of Insurance Commissioners