Posted By:
Frank FloodI usually shake my head at how knowledgeable people are on this forum. With this question, I finally have something to share.
Todd Schultz's comments up above are right on the money; if he's not an insurance lawyer, he should be.
Insurance companies licensed to write insurance in the state in which we live provide most of the insurance we buy. Allstate or State Farm, which provide auto and homeowners insurance, and CNA or Travelers, which provide business insurance, are called "admitted" insurers. They have met certain financial and organizational standards and your state has admitted them to write insurance. The trade-off for being admitted is to agree to state regulation. Generally, each state regulates the policy forms and premiums charged for personal lines (auto and homeowners) to a greater degree than they do commercial or specialty lines.
There are some risks that admitted insurers don't cover for reasons such as high risk (dynamite factories) or the requirement of some uncommon knowledge base (collectibles). While the state has an interest in regulating the insurers, they have an equal or perhaps greater interest in seeing that their consumers can buy the insurance they need. So the deal the state department cuts with the insurance industry is they will allow "non-admitted" insurers to provide this needed insurance and they will not regulate the terms of, or premiums charged for, the coverage. This insurance is said to be placed on the "surplus lines" insurance market (sometimes called the excess lines market or E&S).
Every state but Alabama, DC, Indiana and Massachusetts (barring some recent change in law) requires a surplus lines policy to have some specific statement that the insurer is not admitted, is not regulated or is not covered by the state insurance guaranty fund. The notice on the New Jersey policy complies with that state's requirements.
The effect? The terms of your policy have not been regulated or reviewed, so this is more of a free market approach: a willing policyholder and a willing insurer have cut their deal for coverage.
Your risk? If an admitted carrier goes into receivership or liquidation (more likely in these troubled times than previously), your state has a guaranty fund that will pay at least some of your claims somewhat like the way the FDIC insures bank deposits. E&S carriers are outside of guaranty fund coverage, however, so if your insurer goes under your claim may be unpaid.
Frank Flood