Surplus lines insurance for professional liability (Errors & Omissions or E&O) is generally not a bad idea if it is the only or best option available for your specific risk profile. It serves as a crucial “safety valve” for the insurance industry, providing coverage when the standard, or admitted, market declines a risk or cannot offer sufficient coverage.
The Role of Surplus Lines
Surplus lines carriers are not licensed in a specific state but are still legally allowed to operate and are monitored for financial stability in their home jurisdiction. They offer coverage for risks that fall into three main categories:
- Unique Risks: Niche businesses or emerging fields where standard insurers lack the data to price policies.
- Non-Standard Risks: Businesses with unusual underwriting characteristics or a history of high claims activity.
- High-Capacity Risks: Situations where higher coverage limits are needed than an admitted carrier can provide.
Potential Disadvantages and Considerations
While there is a valuable solution, there are some important drawbacks to consider:
- No State Guaranty Fund Protection: This is the primary disadvantage. If a surplus lines insurer becomes insolvent (bankrupt), the state’s guaranty fund will not pay the claims, which it would for an admitted carrier.
- Higher Costs: Premiums for surplus lines policies are typically higher due to the increased risks involved.
- Fewer Consumer Protections: It may be more difficult to escalate a complaint with your state insurance department if you believe a claim was mishandled.
- Policy Specifics: Policies may have more exclusions or different terms and conditions than standard policies, and non-renewal may occur without as much notice.
- Taxes and Fees: These policies are subject to specific state taxes and potentially extra administrative fees that a surplus lines broker collects and remits.
Key Advice for Professional Liability
When considering a surplus lines policy for professional liability, it is essential to exercise due diligence:
- Work with a Specialist Broker: A licensed surplus lines broker has specialized knowledge and can navigate the complexities of this market.
- Verify Financial Strength: Only work with carriers that have a strong financial rating (an “A-” or better from A.M. Best is a common benchmark).
- Review Policy Language Carefully: Ensure you understand all the terms, conditions, and potential exclusions, and get a written comparison of options from your broker.
- Understand Defense Counsel Options: Determine which attorneys the insurer uses for defense and if they are reputable in your field.
Ultimately, a surplus lines policy is a practical and often necessary solution for specific situations, not inherently “bad,” provided you take the necessary steps to ensure the carrier is financially sound and the coverage meets your needs.
Am Best Rating website: https://web.ambest.com/home
If your firm has any questions about surplus lines professional liability policy please call, or email, your Professional Underwriter agent for assistance.