In the 2023 E&S edition of PIA Magazine, I wrote about the perils and pitfalls that insurance producers face when placing business in the nonadmitted—or excess & surplus lines—marketplace through the lens of Lord of the Rings. [EDITOR’S NOTE: You can access that issue, and other back issues of PIA Magazine on PIA Northeast News & Media in the Media Gallery.] Whether it was that article, a naive attempt to get my kids into reading the same stuff I’m into, or my internal-nerd clock going off, shortly thereafter I decided to re-read The Hobbit.
Looking back on the book, I’m struck by how the journey of Bilbo Baggins resembles that of insurance producers searching for the proper coverage for their clients.
When The Hobbit begins, our titular hobbit, Bilbo Baggins, is resting comfortably in his home within the bucolic Shire. Like any good hobbit, Bilbo is planning his next meal when he is interrupted suddenly by a wizard and a company of dwarves. Before he knows it, Bilbo is off on an adventure that will have him face trolls, goblins, giant spiders and a dragon.
Most insurance producers sell and provide service to clients within the comfortable confines of the admitted market, with insurance companies, with which they enjoy equally comfortable relationships (and hopefully legally binding contracts). However over time, markets restrict and carrier appetites change, and insurance producers may have to look outside the usual roster of company partners.
Then, the producer will turn to the nonadmitted marketplace. This market caters to risks that are not insurable in the standard or admitted insurance market due to their uniqueness, high-risk level, or other complexities that admitted insurers are unwilling or unable to underwrite. However, before embarking on a great adventure, producers must be equipped properly.
License to sell
The first step on our journey to the E&S marketplace is licensing. To access the E&S marketplace, retail producers must have the right licensure. Generally, state insurance law prohibits an insurance agent from placing/obtaining coverage in the E&S marketplace. Retail producers—sometimes referred to as producing brokers—must hold either a resident or nonresident broker license in the state in which the risk is located when placing/obtaining insurance in the nonadmitted marketplace.
That is not the end of the license journey. As Bilbo was joined in his journey by a cadre of dwarves (and the occasional grey wizard), retail brokers are joined in their journey by the excess-line broker.
Just as a troll may confuse a hobbit with a dwarf, it is not uncommon to mix up a retail broker with an excess-line broker. After all, both types of licenses are necessary in an E&S transaction. For those who need a refresher: A retail broker interacts with insurance buyers directly, and he or she works to find them the coverage they need, whereas an excess-line broker has a specific license to place insurance with a nonadmitted insurance carrier. This type of broker works with the retail broker to find the needed coverage.
Since the nonadmitted marketplace is, by definition, less regulated than the admitted marketplace, most states require specialization from the broker accessing the marketplace. That specialization comes in the form of the excess-line broker license. Just as a retail insurance broker specializes in placing property/casualty risk in the admitted market, an excess-line broker will have specialized knowledge of the nonadmitted market. That specialized knowledge is gained not only through original licensure, but through continuing-education requirements—not to mention the experience of doing. Given the similarities between a retail- and excess-line broker license, it’s probably no surprise that most states make obtaining a retail broker’s license a prerequisite to gaining an excess-line broker’s license.
If your particular E&S journey takes you outside of your home state (or Shire), be aware that it will likely present new licensing challenges. Thankfully, most states offer licensing reciprocity, granting excess-line licenses to those brokers who hold E&S licenses in their home state. However, there is a Misty Mountain-sized exemption to this reciprocity. Many states do not extend reciprocal status to those brokers licensed in Florida and vice versa. So, those individuals doing business in the Sunshine State may encounter additional licensing requirements.
Due diligence
Wielding the appropriate licensure (like Sting itself—the sword, not the singer), brokers now can take the next, and perhaps most critical, step in the E&S journey. Brokers must face a foe only slightly less intimidating than the dragon Smaug: regulatory due diligence.
Many states require the excess broker, or more likely, the retail broker to seek coverage in the admitted market first. Only after going through a diligent effort to place a risk in the admitted marketplace can a broker turn to the nonadmitted market. Typically, this diligent effort is demonstrated through obtaining a certain amount of coverage declinations from admitted carriers, but not any carrier will do.
Something to believe in
To truly demonstrate that a diligent effort has been made, a broker must show that he or she attempted to place coverage with an admitted carrier that the broker had reason to believe would write the risk at issue.
This reason-to-believe standard is used to evaluate the justification for rejections. A retail producer is required to demonstrate that there is a rational basis for believing that the authorized insurers that have declined the risk specialize in providing the specific type or category of coverage in question. For those having second thoughts on embarking on this journey after reading those words, know that there is a lot of grey area in the reason-to-believe standard.
Brokers are not required to scour every possible admitted carrier in search of coverage. Generally, they will have satisfied this requirement if they have sought coverage from a carrier that has either written the type of insurance sought to be insured, or that the broker had reason to believe has written the type of insurance sought. For example, if an agent attempted to place a commercial auto risk (the type of insurance sought) with a carrier whom he or she knew wrote commercial auto, the agent would satisfy the requirement. However, if the agent tried to place the commercial auto risk with a carrier that he or she knew wrote exclusive professional liability, it is unlikely the requirement would be met.
That is true even if the broker may not believe that a carrier would write the particular risk in question. For example, let’s say a broker is attempting to place coverage for a second home along the coast. The broker would likely satisfy the reason-to-believe standard if he or she attempts to place the policy with a carrier whom the broker knew would write homeowners policies—even if the carrier had no track record of writing homes along the coast or of writing second homes.
While there is no bright-line rule to ensure compliance with the reason-to-believe standard—generally speaking, brokers will have complied with the standard if they seek coverage from admitted carriers that have accepted the risk of the coverage or class before, or if they have advertised that they would provide said coverage.
Don’t forget a handkerchief!
As our journey through the complex—and often mystical—world of E&S insurance comes to a close, it’s clear that the path of an insurance producer—much like Bilbo Baggins’ adventure—is filled with unexpected twists, formidable challenges and invaluable lessons.
Bilbo returned to the Shire with more experience and wisdom. And, insurance producers who learn to navigate the E&S marketplace can find that they also emerge more knowledgeable of and adaptable to this sector of the insurance industry.
So, to all insurance producers embarking on their own E&S quests, remember: The road ahead may be uncertain, but there are rewards for those willing to navigate it.
This article originally appeared in the May 2024 issue of PIA Magazine.
Bradford J. Lachut, Esq.
Bradford J. Lachut, Esq., joined PIA as government affairs counsel for the Government & Industry Affairs Department in 2012 and then, after a four-month leave, he returned to the association in 2018 as director of government & industry affairs responsible for all legal, government relations and insurance industry liaison programs for the five state associations. Prior to PIA, Brad worked as an attorney for Steven J. Baum PC, in Amherst, and as an associate attorney for the law office of James Morris in Buffalo. He also spent time serving as senior manager of government affairs as the Buffalo Niagara Partnership, a chamber of commerce serving the Buffalo, N.Y., region, his hometown. He received his juris doctorate from Buffalo Law School and his Bachelor of Science degree in Government and Politics from Utica College, Utica, N.Y. Brad is an active Mason and Shriner.
