Surplus lines insurance companies are a different breed of insurance cat. They are not admitted carriers in the state in which they do business. Thus, most states have consumer protection laws specifically regarding how surplus lines insurance carriers can do business.
Surplus lines carriers are very important to the insurance marketplace. They will often insure the risks many admitted carriers find too risky or novel. For example, when a property owner buys surplus flood insurance or a complex Difference in Conditions policy, it is often sold through the surplus lines market.
Generally, surplus lines carriers are free from the rate approval process admitted carriers have to go through. In many states, they do not have to file policy forms for regulatory approval and are not subject to financial audits for solvency. In short, surplus lines carriers are free from many laws and regulations that admitted carriers have to follow.
Invariably, questions arise regarding how much freedom surplus lines carriers should have from the insurance laws where they underwrite risks. Typically, the surplus lines carrier, following a loss, does not want to comply with claim regulations because doing so would provide coverage or more benefits to the policyholder. The attorneys for the surplus lines carriers argue that their clients do not have to follow claims laws because the legislatures have exempted them from such state rules and regulations.
More than one judge has heard me say in response:
"Your honor, if it does not have to follow this state’s law, what law does it have to follow? The law of Mars?"
Donna DeVaney beat a surplus lines carrier on this very issue. She represented a client with sinkhole loss. Scottsdale Insurance Company, a surplus lines carrier, hired Rimkus Engineering to conduct a test. Rimkus confirmed the loss was caused by a sinkhole. Scottsdale then denied the claim, saying that sinkhole loss was not covered under the policy. (How much do you want to bet that Rimkus would have found a different cause of loss if Scottsdale admitted sinkhole loss was covered?)
Donna filed a Motion for Partial Summary Judgment and a Memorandum on this issue. Interestingly, she did some investigation and showed the trial Court that Scottsdale had paid at least two other policyholders for sinkhole loss with the same policy. The Court, citing the recent Florida Supreme Court case of Essex v. Zota, 985 So. 2d 1036 (Fla. 2008) issued an Order ruling in our client’s favor.
Surplus lines insurance policies can be complex because it is never clear which laws apply, and do not apply, to their contracts. Policyholders and adjusters have to be vigilant to understand the legal framework of these contracts to make certain all benefits are claimed and received.