Confusion sometimes arises about the difference between "admitted" and "non-admitted" insurance carriers and about the consequences of the difference. The designation of an insurance company by a state’s Insurance Commissioner as “admitted” may seem to give the company a stamp of authority, but this designation is primarily an administrative one rather than a mark of quality or stability. Other factors should be more important in the choice of a carrier.
Let’s take a close look at what admitted v. non-admitted really means.
What is an “Admitted” Insurance Company? - An admitted carrier is often referred to as a “standard market carrier.” To qualify as an admitted carrier, an insurance company must file an application with each state’s insurance commissioner and be approved. Approval requires compliance with a state’s insurance requirements, including the filing and approval of that company’s forms and rates. This process often takes a long time.
Once a carrier is licensed to transact insurance business in a certain state, the carrier is required to pay a portion of its income into the state's insurance guaranty association. One of the main selling points of being an admitted is that the carrier’s liabilities are backed by that state’s “guaranty fund.” If an admitted company becomes insolvent, the state will help pay off policyholders’ claims.
What is a “Non-Admitted “Insurance Company? - A non-admitted carrier is often referred to as an “excess and surplus line carrier” and operates in a state without going through the approval process required for admitted companies. Non-admitted carriers are not bound by filed forms or rates and therefore have much greater flexibility to write and design policies to cover unique and specific risks, and to adjust premiums accordingly. When standard markets can’t or won’t write a risk, or when an admitted carrier cannot offer the appropriate terms, the non-admitted market is available to fill this gap.
Non-admitted insurance carriers are regulated by the state Surplus Lines offices, but regulation is far less invasive than for the admitted markets. The most obvious difference between admitted and non-admitted is that purchasers of non-admitted policies do NOT have the protection afforded by the state’s guaranty fund. Each state does charge taxes for non-admitted insurance, and agents must be licensed in surplus lines to sell non-admitted insurance.
The designation as “non-admitted” should not be taken as an indication that these insurance carriers aren’t legitimate or financially stable. In fact, to sell surplus lines insurance, non-admitted insurance companies have to set aside a large monetary reserve or secure adequate re-insurance.
Insolvency - When an insurance commissioner determines that an insurance company is having significant financial difficulties, the insurance company will go through a process called “rehabilitation.” The state’s insurance commissioner will make every attempt to help the struggling company regain its financial footing. If the company cannot be rehabilitated, the company is declared insolvent, and the court will order liquidation.
Liquidation of an Admitted Carrier - If the carrier to be liquidated is an admitted company, the processing/payment of existing and future claims is taken over by that state’s guaranty fund. However, the guaranty fund’s obligations are limited by regulations and will only pay claims up to that state’s cap. In some cases, if insureds exceed a certain revenue threshold they may not quality for any guaranty fund coverage.
Depending on the state, guaranty funds usually provide only $100,000 to $500,000 of protection per policy even if the policy had a much higher limit. Most states are at $300,000. In addition, if several liquidations take place in one state, the state’s guaranty fund may be depleted. Policyholders often only receive pennies on the dollar of their true loss amount from a guaranty fund.
While state guaranty funds try to pay claims as quickly and efficiently as possible, payments are often slow.
In sum, although the guaranty funds provide some level of comfort if a carrier becomes insolvent, in reality, policyholders can be left with little or no assistance.
Liquidation of a Non-admitted Carrier - If a non-admitted insurance company goes “belly up,” the liquidator/receiver collects the assets of the company, determines all the liabilities/creditors outstanding, develops a plan to distribute the company’s assets and submits the plan to the court for approval (much like a typical bankruptcy proceeding). In most cases, the insurance company’s estate will not yield sufficient money to pay the company’s creditors (including their policyholders' claims) in full. Policyholders often have to fund defense and settlement payments themselves before they can request reimbursement from the estate. Usually, the policyholder will have to wait patiently and will, again, only get pennies on the dollar.
The largest surplus lines writer in the U.S. is Underwriters at Lloyd’s, London. In 1925, Lloyd’s created the Lloyd’s Central Fund, which pays claims in case any underwriting member should be unable to meet his or her liabilities. Unlike the guaranty funds, the Central Fund does not have a cap. The only cap for the Central Fund is the policy limit. (Illinois, Kentucky and the Virgin Islands are exceptions because Lloyd’s is admitted there and is subject to the state guaranty funds.)
Bottom Line - The choice between admitted and non-admitted insurance companies is something that needs to be considered, but examining the financial strength of the individual providers, the breadth of coverage and competitiveness of terms is more important. The priority should always be to seek a high-quality provider, regardless of whether the company is admitted or non-admitted.
