What is the difference between a Licensed insurer and a Non Admitted insurer (also known as surplus lines insurer)?
Every State in the United States differentiates between the two types of insurer. Non admitted insurers accept risks that Licensed insurers will not. This may be because the risk is too hazardous for the Licensed insurer to accept or there have been too many claims. Because Non Admitted insurers are willing to insure these more difficult situations they are granted certain exceptions that apply to Licensed insurers. For example they are not required to get approval for the policy forms that they use or the premiums that they charge. They are also exempt from rules concerning the cancellation or non renewal of policies.
It is important that as with any insurance transaction that you carefully read the policy so that you fully understand the coverage being offered and any exclusions that apply to certain situations and claims.
Are Non Admitted insurers as financially secure as Licensed insurers?
A.M.Best, a nationally ranked rating agency, conducts annual research into the insolvencies of both Licensed and Non Admitted insurers. They have found that insolvencies are less frequent in Non Admitted insurers and that they are financially secure. It is always a wise move to ask your agent for the financial rating of your insurer.
Am I covered by the State Guaranty Fund?
No. In the unlikely event that the Non Admitted insurer providing your policy were to become bankrupt you would have no recourse from the State Guaranty Fund.
Does an insurance representative that negotiates with a Non Admitted insurer have to have any special qualifications to handle my insurance?
Yes. In order to protect consumers resident insurance producers that negotiate with Non Admitted insurers must obtain a special license, a surplus lines license, after they have passed a special test established by the State Legislature. Non resident producers are not required to pass the state test and may obtain a non resident surplus lines license.
Does my licensed insurance representative have to make sure that a Licensed insurer will not provide insurance before they insure me with a Non Admitted insurer?
Yes. The Division of Insurance requires that an insurance producer determine that your risk cannot be insured with a licensed insurer. This process is called “Due Diligence” However, if you are classified as a Commercial Exempt Policyholder the producer may not have to conduct this search. This is because the State Legislature recognizes that you are a sophisticated insurance buyer that recognizes the differences between the two types of insurers.
It is the responsibilty of the insurance producer to search licensed markets for coverage at every renewal.
Can a Non Admitted insurer terminate or non renew my policy without notice or without providing me with a reason?
Yes. Because they accept certain types of risks that have greater exposure the State Legislature allows them to terminate liability without giving notice that may be required for licensed insurers. However, all insurance policies contain specific provisions that may require the Non Admitted insurer to give notice. You should read your policy.
How much is the surplus lines premium tax?
The tax is calculated at a rate of 3% of the total of premium plus any fees charged by the insurer or broker. There are no other state mandated fees.
Why am I responsible for paying the tax on my insurance premium?
Colorado collects premium taxes on all insurance policies. However an insurance company that is licensed in the State is allowed to collect the tax on behalf of the state and pay it annually. Because the Division of Insurance does not exercise authority over a non admitted insurer they expect the consumer (policy holder) to pay the tax to their agent who forwards it to the surplus lines broker. The surplus lines broker has a legal obligation to remit all taxes to the state.
Are there situations where I am not liable to pay surplus lines tax to Colorado?
In accordance with the Non Admitted and Reinsurance Recovery Act (NRRA) the state of Colorado can only collect surplus lines tax from individuals or corporate entities that have “home state” status in Colorado. If you have “home state” status in a state other than Colorado you are not required to pay surplus lines taxes here.
I am a non profit organization. Do I have to pay surplus lines tax?
Yes. If you purchase insurance from a licensed insurer the premium tax is collected by them and paid to the State on your behalf. Therefore you are liable to pay premium tax on a premium paid to a Non Admitted insurer. This tax is collected by the surplus lines broker and paid to the state.
We are a Native American tribe with sovereign rights. Do we have to pay surplus lines tax?
Effective 8/20/2014 the DOI has determined that sovereign property and exposures located on Native American reservations are exempt from surplus lines tax. Property and exposures located elsewhere and property and exposures of other insureds located on reservations is subject to surplus lines tax.