To protect the public, surplus lines laws in each state restrict surplus lines licensees to placing coverage only with insurers that satisfy specific criteria. What must the surplus lines licensees verify for each nonadmitted insurer providing coverage?
A. Their claim-payment and customer service complaint records
B. Their past and projected revenue statements
C. Their history and mission statement
D. Their financial strength and viability
The correct answer and explanation is:
The correct answer is D. Their financial strength and viability.
Surplus lines insurance refers to coverage placed with nonadmitted insurers that do not hold a license to operate in a particular state. In many cases, these insurers offer coverage when traditional, admitted insurers are unable to do so due to the nature of the risk involved. Surplus lines licensees act as intermediaries between these insurers and individuals or businesses seeking coverage.
To protect the public from potential financial instability or inability to pay claims, surplus lines licensees are required to verify that the nonadmitted insurers they place coverage with are financially sound. This verification typically focuses on the insurer’s financial strength and viability to ensure that it has sufficient resources to meet its future obligations, including paying out claims.
Insurance regulators, as well as surplus lines laws in each state, emphasize the importance of maintaining a high standard of care when selecting nonadmitted insurers. These regulations often require surplus lines licensees to conduct a thorough assessment of an insurer’s financial health. This can involve reviewing ratings provided by recognized credit rating agencies like A.M. Best, Moody’s, or Standard & Poor’s, which evaluate an insurer’s ability to meet its claims and long-term liabilities.
Without this safeguard, policyholders could be left vulnerable if the insurer were to become insolvent or otherwise fail to pay out claims. Ensuring the financial stability of nonadmitted insurers helps protect the public by mitigating the risk of a coverage gap due to the insurer’s financial distress. Therefore, surplus lines licensees must thoroughly assess and verify the financial strength and viability of each insurer to ensure that the public is adequately protected from potential losses.