The insurance industry has become an increasingly globalized marketplace. Overseas companies are significant participants in the U.S. insurance markets. The most well-known foreign insurer of U.S. risks is Lloyd’s of London—historically the market leader for U.S. surplus lines business. This article provides a general overview of issues involved in purchasing insurance coverage from a non-U.S. insurer. Readers with questions concerning coverage or policy should consult with a properly licensed agent or broker.
Subject to a few narrow exceptions detailed below, U.S. insurers may only issue an insurance policy in a state where it is admitted to transact business as a licensed insurer. Licensed insurers in the U.S. are strictly regulated with respect to issues involving solvency, rates and forms and market conduct. They also are required to participate in state guaranty funds that provide coverage in the event of insurer insolvencies.
An insurance company incorporated under the laws of a country other than the U.S. is commonly referred to as an alien insurer. Most alien insurers are not licensed in the U.S. and may only insure U.S. risks on a non-admitted (or unlicensed) basis in the following ways:
- On a surplus lines basis
- Through a direct placement
- Pursuant to other exemptions to state insurer licensing laws.
An alien insurer may also be licensed to insure U.S. risks on an admitted basis by establishing a U.S. branch. A U.S. branch of an alien insurer is regulated much like U.S. domiciled insurers, and must participate in state guaranty funds that provide policyholders with protection in the event of insurer insolvency.
State insurance laws contain an exception to insurer licensing requirements by permitting a special class of unlicensed surplus lines insurers to insure certain risks not readily available from licensed insurers. Alien surplus lines insurers are subject to less regulatory oversight than licensed insurers. For example, policy forms and rates of surplus lines insurers are not generally subject to regulatory oversight, which allows surplus lines insurers to tailor policies to meet the needs of the insured. Significantly, alien surplus lines insurers are not required to participate in state guaranty funds in most states and, as such, policyholders do not receive guaranty fund protection in the event of insurer insolvency.
Not all types of insurance, however, may be written on a surplus lines basis. Some characteristics of risks written in the U.S. surplus lines market include risks:
- With poor loss experience
- Not satisfying the underwriting criteria of licensed insurers
- That are unique or hard to evaluate
Requiring high limits not available from licensed companies
The second method of accessing the non-admitted market is known as a direct placement or independent procurement transaction in which the insured elects to go out of state and purchase coverage from an unauthorized carrier either directly or through a broker not licensed by the jurisdiction in which the risk is located.
Under current case law, an insured can obtain coverage on a direct placement basis in the following circumstances:
- The insured does not access the non-admitted insurer through a resident agent or surplus lines broker
- There is no activity by the non-admitted insurer in the state in either the making or the performance of the contract
- The transaction takes place “solely” (or, in New York, “principally”) outside of the state where the insured is located
The third method of accessing the non-admitted market is through an exemption from insurer licensing requirements. Certain U.S. jurisdictions exempt non-admitted insurers from surplus lines regulation for insurance procured by industrial insureds. State statutes define industrial insureds in various ways, but, in most states, the exemption applies to “sophisticated commercial buyers” having at least $25,000 in annual premium for non-mandatory coverages, full-time risk managers or outside insurance consultants advising them of procuring insurance, and a certain number of full-time employees (usually 25) or amount of gross sales. Most U.S. jurisdictions also have some type of ocean marine and transportation exemption from insurer licensing laws that, in some states, also extends to aviation and transport risks.
Significantly, insurers issuing coverage on a direct placement basis or pursuant to an exemption are not subject to oversight by U.S. insurance regulators and insureds do not receive guaranty fund protection on policies issued by such unauthorized insurers. Certain jurisdictions also require the insured to pay a tax on insurance obtained on a direct placement basis or pursuant to an exemption.