What happens if our surplus lines carrier becomes insolvent?

Admitted carriers file rates and forms with the state and are constrained by them. Senior care liability requires forms with abuse sublimits, defense treatment variations and rates that move faster than a filing cycle allows, so most of the capacity in this class sits in the surplus lines market where rate and form freedom exist.

That freedom is the reason the coverage is available at all. The trade is the loss of the guaranty fund backstop and, in most states, the loss of the state complaint and market conduct apparatus.

A liquidation order is entered, claims against the estate are filed by a deadline, and policyholders become general creditors sharing in whatever the estate ultimately distributes, often years later and often at a fraction of the claim. Open claims may be handled by the liquidator without the resources a functioning claims department would apply.

For a claims-made professional liability program, the second problem compounds the first: you now need replacement coverage with prior acts back to your original retroactive date, and you are seeking it from a market that knows why you are asking.

Check the financial strength rating of every participant in the tower, not just the primary, and set a written minimum. Most lender and lease insurance exhibits already specify a minimum rating, which gives you a standard to point to.

Then check whether the carrier is on the eligible surplus lines list in each state where you operate, since eligibility is a state-level determination and it is a meaningful screen.

Diversify the tower. A tower assembled from several participants across the layers means one insolvency creates a hole rather than a collapse. That is one of the few advantages of the quota share structure this market has moved toward.

And confirm whether your excess policies drop down on insolvency of an underlying carrier. Most do not, which means an insolvent primary leaves you funding the primary layer yourself before the excess attaches. Ask for a drop-down provision where the market will grant one.

Where a state licensure requirement or a lender specifies admitted paper, that small admitted policy does carry guaranty fund protection subject to state caps. Know which of your coverages are admitted and which are not, because operators frequently assume the whole program has the same status when it does not.