Excess & Surplus Insurance

The Excess and Surplus Insurance (E&S) marketplace represents a small, but important, segment of the overall insurance industry. Its function is to fill the gaps in the traditional insurance markets. When most people think of insurance, they think of the common forms that insure typical risks: automobile, housing and renters, life, health and, possibly, credit. While these policies are frequently advertised and sold, countless other insurance risks need coverage. Large boilers, nuclear reactors, cruise vessels and factories all require insurance. Companies that manufacture medical devices, work with toxic chemicals, or make dangerous materials like explosives or ammunition also need insurance.

As an insurance company, it would probably not difficult to determine how much you need to charge a customer to insure a home against fires, storms, break-ins and general mishaps that cause injury, such as slips and falls on icy sidewalks. As an insurer, you have probably dealt with hundreds, if not thousands, of homeowners in the same area and know what to expect from knowing what has happened in the past. Not every risk an insurer is asked to cover, however, has a statistical history the way home losses, auto accidents and human life does. The E&S market was developed to provide coverage for those types of risks.

Excess and surplus insurance risks are generally viewed as containing at least one of three components. The first type of E&S insurance is designed for risks that do not fit the standard markets. When businesses first sought insurance for their officers and directors in the event they would be sued for mismanaging the company by unhappy shareholders, this presented a unique insurance situation. At that time, those companies were told to look to E&S insurers to provide them with coverage. The idea of this insurance caught on; however, and now it is no longer considered outside of the standard market. The second need for E&S coverage is presented by the uniqueness of the insurance risk. This type of risk is the kind that is presented when a movie studio insures the lead actor during the filming of a multimillion-dollar movie. Outside of that particular situation, no one else would have reason to insure the same risk. The third situation arises when the amount of coverage that is needed is significantly higher that usual. An airline might generally insure the freight it carries on any given flight; but if it happens to be transporting the King Tutankhamun exhibit for the Kingdom of Egypt or the Crown Jewels from the Queen of England, it may require substantially more coverage then usual to compensate for any damage to that irreplaceable cargo. These types of risks are generally harder to put a price tag on. The chance that a loss might occur may be no more likely than on any other flight, but because of the potentially substantial damages, it becomes an E&S matter.

The E&S market provides the insurance shopper with the opportunity to educate the insurance company about the type of risk they present. Unlike insureds in the traditional market, where everything from the premiums you pay to coverage and exclusions you get must be approved by the state before being offered to you, E&S shoppers are on their own. These insurance seekers enjoy the benefit of being able to truly negotiating for their coverage since just about every term is open for discussion. The rate ultimately be paid will depend on the total amount of coverage desired, the type of deductibles you will bear, as well as other limits and exclusions. However, for the inexperienced purchaser, protections they have become accustomed to may not be included. Things like grace periods and renewal notices are not standard in E&S insurance and can lead to instant cancellation and a loss of coverage.

Even though E&S carriers are licensed and regulated by their home state, without the benefit of policy examinations performed by your state regulators, an insurance customer in the excess and surplus market has few resources on which to rely when choosing coverage and companies. Insurance customers that do not pay attention to policy dates are prone to find themselves without coverage if a carrier decides not to renew and fails to notify you of that decision. A trusted insurance broker can be a real boon to navigate through the group of insurance companies willing to take on your risk; but without that resource, independent rating agencies such as A.M. Best can provide you with some assistance. At the very least, they can help you avoid those insurers that might not be around to pay your claim after a loss.

It is also important for an insured in the E&S market to pay attention to changes in the industry. As markets change, the risk you need covered may no longer be treated as non-standard and you may be able to find licensed insurers within your state that will now provide you with coverage. Many now-standard risks, like officers' and directors' coverage discussed above, started out as E&S risks and created their own markets. As more customers request the same insurance, and as loss information becomes more readily available, your E&S needs may become part of the standard market.

Even if you are working with a trusted broker, you may find it prudent to consult with both your business attorney and financial consultant to ensure that the coverage you obtain is sufficient for the exposure you face and the assets you hold. Together, these experts can advise you on necessary policy terms and sensible limits and deductibles to make sure that the coverage you are paying for will be sufficient to protect your business.

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How Do I Decide If I Need Excess & Surplus Insurance and How Much I Need?

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