The Foundation of Surplus Lines Placement
In the world of insurance regulation, the diligent search requirement serves as the fundamental gatekeeper between the admitted and non-admitted markets. Because admitted insurers are subject to state rate and form regulations and provide protection through state guaranty funds, regulators require that every effort be made to place a risk in the admitted market before seeking coverage from a surplus lines insurer.
A diligent search is defined as a good-faith effort by a licensed producer to find coverage from insurers who are authorized (admitted) to do business in the home state of the insured. This requirement ensures that surplus lines remain a market of last resort, used only for risks that the standard market cannot or will not underwrite. For students preparing for the complete E&S Lines exam guide, understanding the mechanics of this search is critical for passing the licensing exam.
Admitted Market vs. Surplus Lines Access
| Feature | Admitted Market | Surplus Lines Market |
|---|---|---|
| Regulatory Oversight | Strict rate and form filing | Freedom of rate and form |
| Market Position | Primary/Standard market | Market of last resort |
| Guaranty Fund | Protected | Not protected (usually) |
| Placement Prerequisite | None | Diligent Search Required |
The 'Three Refusal' Standard
While specific requirements can vary slightly by jurisdiction, the most common standard for a diligent search is the three-refusal rule. This typically requires the producing agent or surplus lines broker to receive declinations from at least three admitted insurers that are actually writing that class of business.
- Rejections must be based on underwriting: A search is not considered diligent if the producer only contacts insurers that they know do not write that specific type of risk.
- Price is not a valid reason: In most states, a risk cannot be exported to the surplus lines market simply because the surplus lines premium is lower than the admitted market premium. The admitted market must be truly unavailable for the risk.
- Documenting the Search: Every declination must be documented, including the name of the insurer, the individual contacted, and the reason for the refusal.
Candidates should test their knowledge on these specific procedural steps by reviewing practice E&S Lines questions to see how these rules apply in various scenarios.
The Role of the Producing Broker
It is important to note that the responsibility for the diligent search often rests with the retail producer (the agent working directly with the client). The surplus lines broker who actually places the business must receive an affidavit or written confirmation from the retail producer stating that the search was performed before the policy can be legally bound.
Exceptions to the Search Requirement
Not every placement requires a manual search of three admitted insurers. State regulators recognize that some risks are so unique or consistently rejected by the standard market that a search would be a waste of time. There are two primary exceptions: Export Lists and Exempt Commercial Purchasers (ECPs).
The Export List
Many state insurance departments maintain an "Export List." This is a list of specific classes of insurance or types of risks that have been pre-determined to have no reasonable market among admitted insurers. If a risk is on the state's export list, the diligent search requirement is waived, and the broker can place the coverage directly in the surplus lines market.
Exempt Commercial Purchasers (ECP)
Under the Nonadmitted and Reinsurance Reform Act (NRRA), sophisticated commercial buyers are often exempt from the diligent search requirement. To qualify as an ECP, the insured must meet specific criteria, such as:
- Employing a qualified risk manager.
- Meeting high net worth or annual revenue thresholds.
- Paying a minimum annual aggregate property and casualty premium.
Key Compliance Metrics
Frequently Asked Questions
Generally, no. Most state statutes specify that a risk cannot be exported solely for the purpose of obtaining a lower premium. The diligent search must prove that the coverage is unavailable in the admitted market, not just that it is more expensive.
The affidavit is typically signed by the producing agent who performed the search, though in some jurisdictions, both the producer and the surplus lines broker may share responsibility for certifying that the search was completed.
Yes. The NRRA streamlined surplus lines regulation by establishing that only the 'Home State' of the insured can require a diligent search, and it created the 'Exempt Commercial Purchaser' category to waive the search for large, sophisticated entities.
Failure to perform or document a diligent search can result in administrative fines, suspension of the surplus lines license, and in some cases, the broker being held personally liable for claims if the non-admitted insurer becomes insolvent.