Physicians, Midwives and other health care providers are newly finding that they can access a Malpractice Insurance market that previously had been available only to very large groups and to practitioners who could not find coverage because they did procedures that were considered high risk, like bariatric surgery, or had an extensive claims history or other underwriting concerns. This market is the surplus lines market and more and more it is becoming available to mainstream practitioners. Surplus lines companies can offer more flexible coverage terms and more competitive premiums than are available in the standard markets and many are highly rated.
A little history and law will be helpful to understanding this product. There are generally two forms that Malpractice Insurance companies can take to be approved to sell their products in a given state; admitted and nonadmitted. Both of these forms require that the states in which the company is selling its products submit significant financial documentation to show that it meets the state’s requirements for financial solvency and adequate capital. Admitted companies must take one further step and submit to the state for approval the premium rates it intends to charge its customers and the policy forms, and endorsements that it will issue together with any actuarial, policy and procedures information required for state review. After the state has reviewed the company’s rates and forms and approved them, the admitted insurance company can sell only within the rate parameters that have been approved and only on the policy forms that the state has approved.
The Nonadmitted or surplus lines insurance company is approved to sell without submitting its rates and forms for state review. It is limited by any state laws that apply to all companies but is otherwise free to meet insurance needs with great flexibility and if the risk is attractive to it, can offer pricing that can be significantly better than the premiums offered by admitted companies that are locked in to their state-approved premiums.
The natural question is why would any company want to be admitted? That’s where history comes in. Surplus lines was designed to meet the needs of markets where there were no admitted companies. So, for example, when Teleradilogy and Bariatric Surgery first emerged, there was a paucity of admitted companies willing to cover these exposures and the surplus lines market was needed. In order to show unavailability, most states required the insurance broker securing coverage in the surplus lines market to demonstrate that it sought this protection in the admitted market and was rejected by at least three companies. As this evolved, some states maintained a list of risks for which it recognized that insurance was not available, and for which three declinations were not necessary. The states also recognized that the consumer protection offered by approval of rates and forms might not be necessary to large and sophisticated customers and some states excluded these customers from the three declination rule. The last steps that have affected these rules have come from federal statutes that supersede state law and allow the sale of surplus policies without declinations on a customer by customer basis or even on any basis. The clear direction of this history is to make surplus lines policies as readily available to small consumers as to large ones.
There is one other aspect of this dichotomy that bears discussion. Most states maintain a guarantee fund which protects policyholders insured in the admitted markets from company failures. So if the admitted company insuring a party goes bankrupt, the state fund will step in and take over management of all claims and for policies that had per claim limit of, for example $1,000,000, the state will provide protection of approximately $300,000-$400,000. For an insured in that position, that is good news and bad news: good news because there is some coverage where there otherwise could be none; and, bad news because history has shown that state management of these claims is simply an effort to close down a bad situation and many cases that would have been defended by a solvent insurance company and won, are settled at the per claim cap and besmirch the insured’s claims record. And where does this guarantee fund money come from? It is taxed against the remaining admitted insurers in the state selling that line of insurance. So even though they behaved responsibly, they bear the cost of the irresponsible behavior of the insolvent insurance company that was their competitor.
The disinclination to participate in these guarantee funds is one of the primary considerations for many companies who elect surplus lines status. At the end of the day, they do not mind sharpening their pencils and offering competitive rates to prospects that deserve it, but if they operate lean, they don’t want the state coming with its hands out for millions of dollars to cover the behavior of companies that acted irresponsibly. The second motivating consideration is that surplus lines companies are confident in their abilities to underwrite risk responsibly while still fashioning flexible coverages that may not be available from admitted carriers, coverages for such exposures as HIPPA, Directors and Officers and Cyber losses.
So what’s the best way to insure, admitted or surplus? The answer is simpler than it seems. Healthcare professionals should get quotes from both markets and should assure that quotes are presented only by companies with high ratings of “A-Excellent” or better from A. M. Best, the nation’s oldest and most respected insurance company rating service. Certainly, A. M. Best has called some wrong, but it remains the best and most reliable rating service and there are many services that give high rating to companies whose financials and experience do not warrant a good rating. If a company has no A. M. Best rating or a rating below “A-“ the insured is accepting significant risk and should decline those offers. I would say the same for admitted companies, even though they are approved by the state.
Secondly, the brokers presenting the admitted and surplus lines products should be asked to make a written comparison of the differences in price, ratings and policy terms offered by all companies being considered. Also, determine which attorneys the companies will use to defend you. Make sure they are recognized in the field. If, as a customer, you see greater value offered by a highly rated surplus lines company, you should not hesitate to go that route.