Surplus Lines Insurance: What Gulf Coast Associations Need to Know

If your community association is located anywhere along the Gulf Coast — particularly in Florida — there's a growing chance your master property insurance is placed through a surplus lines carrier rather than a traditional admitted carrier. For many boards, this is unfamiliar territory, and the terminology alone can create unnecessary anxiety.

Surplus lines insurance isn't inherently better or worse than admitted coverage. But it is different in important ways that your board should understand before approving a placement.

Admitted vs. Surplus Lines: The Basics

Admitted carriers (also called standard or authorized carriers) are licensed by the state insurance department to do business in that state. They file their policy forms and rates with the regulator, participate in the state guaranty fund, and are subject to direct regulatory oversight.

Surplus lines carriers (also called non-admitted or excess and surplus lines carriers) are not licensed in your state but are eligible to write business there through the surplus lines market. In Florida, they must be listed as eligible surplus lines insurers by the Office of Insurance Regulation. They are regulated — just differently.

The surplus lines market exists specifically to provide coverage that the admitted market is unable or unwilling to offer. This is exactly what's happening with coastal association property insurance — as admitted carriers have pulled back from wind-exposed coastal risks, surplus lines carriers have stepped in to fill the gap.

Why More Associations Are in Surplus Lines

Several factors have driven this shift:

Admitted carrier withdrawals. Multiple admitted carriers have reduced or eliminated their exposure to Florida coastal property risks in recent years, citing catastrophic loss experience, reinsurance costs, and litigation trends.

Capacity constraints. Even admitted carriers still writing coastal business have reduced their limits and become more selective. A large condominium complex that was easily placed five years ago may no longer fit any single admitted carrier's appetite.

Rate adequacy. Admitted carrier rates are subject to regulatory approval. If carriers believe the approved rates don't adequately reflect the risk, they stop writing the business rather than accept inadequate pricing. Surplus lines carriers can set rates based on their own assessment of the risk.

Reinsurance market pressure. The global reinsurance market (the insurance that insurance companies buy) has tightened significantly, and those costs flow through to primary carriers. Surplus lines carriers often have more flexible reinsurance structures.

Key Differences Your Board Should Know

Guaranty Fund Protection

The most significant practical difference: surplus lines policies are not covered by the Florida Insurance Guaranty Association (FIGA). If an admitted carrier becomes insolvent, FIGA steps in to pay covered claims (subject to limits). No equivalent protection exists for surplus lines carriers.

This means the financial strength of your surplus lines carrier matters enormously. Your agent should be able to explain the carrier's AM Best rating, its financial position, and its track record with association risks.

Rate Regulation

Admitted carrier rates must be filed with and approved by the state regulator. Surplus lines rates are not subject to this approval process — the carrier sets its pricing based on its own underwriting assessment of the risk.

This can work in both directions. Surplus lines carriers can charge more than admitted carriers for the same risk, but they can also offer more flexible pricing for well-maintained, lower-risk properties. The absence of rate regulation means there's a wider range of pricing outcomes.

Policy Forms

Admitted carriers use standardized policy forms (often ISO forms) that are filed with the regulator. Surplus lines carriers can use manuscript (custom) policy forms. This means the specific terms, conditions, and exclusions may differ from what you'd see in an admitted carrier's policy.

Your agent should review the surplus lines policy form carefully and explain any material differences from a standard admitted policy. Pay particular attention to:

• Named storm coverage and deductibles — how wind and named storm losses are defined and deducted
• Water damage provisions — how storm surge, flood, and water intrusion are treated
• Cancellation terms — how much notice the carrier must provide and under what conditions they can cancel
• Vacancy provisions — how coverage is affected if units are unoccupied

Surplus Lines Tax

Florida imposes a surplus lines tax (currently 5% on the premium) on surplus lines placements. This is in addition to the premium itself and is a cost your association doesn't pay with an admitted carrier. Your agent should disclose this cost as part of the total placement cost.

Evaluating a Surplus Lines Placement

When your agent recommends a surplus lines placement, your board should ask:

1. Why surplus lines? Is admitted coverage genuinely unavailable, or has the agent simply not pursued admitted options? Florida law requires a "diligent effort" to place coverage in the admitted market before going to surplus lines. Your agent should be able to document which admitted carriers were approached and why they declined.

2. Who is the carrier? What's their AM Best rating? How long have they been writing coastal association risks? What's their claims-paying track record after hurricanes?

3. What does the policy form look like? Are there non-standard exclusions or limitations that differ from a typical admitted policy?

4. What's the total cost? Premium plus surplus lines tax and any broker fees. How does it compare to the last admitted carrier quote your association received (if one was available)?

5. What's the deductible structure? Surplus lines policies may have higher or differently structured deductibles than admitted alternatives.

It's Not a Red Flag — It's the Market

The most important thing for boards to understand is that a surplus lines placement doesn't mean your association is uninsurable or that something is wrong with your property. For many Gulf Coast associations, surplus lines is simply where adequate coverage is available in today's market.

What matters is not the regulatory category of your carrier — it's the quality of the coverage, the financial strength of the carrier, and whether your agent has structured the placement to properly protect your association.

---

Common Elements will specialize in both admitted and surplus lines placements for Gulf Coast community associations when we launch. Join our waitlist for a complimentary coverage review.