For business owners who don’t have a lot of experience when it comes to shopping for policies that best fit the needs of their business, the process of buying professional liability insurance can be confusing. This is especially true when there are industry-related terms being thrown around like they are a part of everyone's daily language.
One of these industry terms is admitted vs non-admitted insurance carriers. You may have heard a carrier tout that they are an admitted carrier. Or, maybe you’ve seen the distinction between the two in insurance carrier directories, such as the one on the American Bar Association website.
This begs the question, what is the distinction between the two? And why is it important?
As an insurance agent, I have found myself informing lawyers that the insurance policy at Protexure Insurance Agency is admitted. Oftentimes the following question from the attorney is, “What is the difference between admitted and non-admitted insurance carriers?”
We will explain the differences, advantages and disadvantages of admitted vs non-admitted carriers throughout this article.
The main difference between the two is related to the regulations that these carriers who sell admitted products must follow. As a result, you may not be able to get a particular type of insurance from an admitted company that a non-admitted company offers, and vice versa.
When a product is admitted, that means that the product is licensed by the insurance commissioner of the state in which they operate. What this means is that the commissioner has approved the rates and forms of the insurance product that is being sold to the public.
While this definition can make admitted products appear to be more legitimate, that’s not always the case. It’s important to remember that the designation is an administrative one and has no real bearing on the overall quality of the product or the stability of the carrier offering it.
Let’s take a more in-depth look at the differences between admitted and non-admitted insurance.
An admitted insurance company is one that is "admitted" by a particular state to do business as an insurance company. To be an admitted carrier, an insurance company must conform to the regulations of a particular state's Department of Insurance.
In addition to meeting minimum regulations for admission, admitted carriers must also file their rates with the state, which the state must approve.
It is a fairly complex process that requires the carrier to make sure that all of the rates and forms are in compliance with state recommendations and regulations, which is why the process of getting an admitted insurance product approved is usually a fairly slow and drawn out one.
Once the request has been approved and the product has obtained the status of an admitted one, a percentage of the annual income earned from selling this product will have to be paid to the state’s insurance guaranty association.
While insurance companies might all have different reasons for wanting to sell admitted products, one of the major benefits of working with an admitted carrier is that the state has the responsibility to pay an insurer's claims, up to state-specified limits, in the event of the company's insolvency.
Non-admitted carriers are often referred to as “excess and surplus line carriers.” While the products they sell are not regulated by the state insurance commissioner, they are regulated by the state surplus lines office.
A non-admitted insurance company is one that doesn't operate under an individual state's insurance laws. As a result, a non-admitted insurance company doesn't enjoy the benefit of having its claims resolved in the event of a bankruptcy.
However, non-admitted companies also have much more pricing flexibility, as they don't have to submit their rates to the individual states for review, but non-admitted carriers still need to submit company information such as articles of incorporation, a list of officers, and various financial information to the surplus lines office.
They are taxed by the state as well and all agents working in non-admitted companies need to be licensed brokers. Consequently, non-admitted carriers can insure higher-risk events, such as earthquakes, or specialty risks, such as professional liability insurance, that admitted carriers often can't afford to cover.
Since non-admitted insurance carriers do not have to operate under their state’s insurance laws, they don’t have the benefit of having the state in their corner in the event of insolvency. That also means that companies that purchase non-admitted policies do not have the protection of the state’s guaranty fund either, which might make non-admitted companies appear a bit riskier to deal with. Because of this, it’s not uncommon to see non-admitted insurance carriers having to pay higher taxes.
Another significant difference between the two lies in the types of insurance policies that each can offer. Non-admitted companies, generally, can’t write insurance policies that are available on the admitted market. Typically, the only way a non-admitted carrier can offer an insurance policy that’s present on the admitted market is if the policy has previously been rejected by three different admitted carriers.
While non-admitted carriers can’t write policies that are on the admitted market, the good news is that they can write policies that cover unique and more specific risks that admitted insurers won’t touch.
Since they don’t have to adhere to the rates prescribed by the state, the pricing of their policies is a lot more flexible, which means that non-admitted companies can fill the gaps in risk that admitted carriers can’t or won’t insure.
For example, if your company needs to protect itself from high-risk events such as floods and earthquakes, admitted carriers might not be able to afford to cover such instances, while non-admitted carriers would.
Furthermore, since regulations are relaxed for non-admitted companies, getting covered, and changing your coverage if need be, often takes less time and doesn’t include the financial costs related to filing that an admitted insurer would have to charge.
When an admitted company is to be liquidated, the state’s guaranty fund will take over all processing and payment of current and future claims. However, the state fund is not obligated to pay claims in full because of existing regulations that will limit how much it can pay in claims according to the fund’s cap. And if the revenue threshold of the company is very high, the company might not qualify for any state coverage.
Furthermore, if the guaranty fund is dealing with a number of big liquidations at the same time, the coverage it would be able to offer would be further restricted. In these types of cases, the policyholders are the ones who truly lose out, because the guaranty fund simply won’t be able to cover their true loss amount, sometimes not even close to it. On top of that, payments made through the fund to policyholders in such cases can take a very long time to process.
Even though the state guaranty fund does provide some coverage for the carriers that face liquidation, policyholders can be left with very little help getting their payments and could stand to get a lot less coverage than they paid for originally.
When a non-admitted insurance carrier faces liquidation, the process is quite similar to what happens in most common bankruptcy proceedings. The liquidator will collect the company’s assets, determine all creditors outstanding, and then work on a plan that will enable them to pay out the amounts necessary using company assets. That plan is then submitted to the court for approval.
The outcome is often just as unfortunate for policyholders, who will have to pay legal costs themselves in an effort to receive settlement payments. Again, the payments often are, in the end, far from what they expected to get when initially buying the coverage.
Choosing a high-quality insurance carrier is what’s most important when making this decision, regardless of whether the carrier is admitted or non-admitted. What’s most important is making sure that the insurer can cover all of your risks appropriately, that the terms of the coverage are competitive, and that the company is financially sound and stable.
Most businesses tend to deal with admitted carriers when they need a standard insurance policy and turn to non-admitted carriers when the coverage they need is either difficult or impossible to obtain through an admitted carrier.
Non-admitted companies are able to provide more flexible premiums and will be more willing to work out coverage for high-risk situations.
It’s important to note that there is no right answer and no option is unequivocally better than the other. Some of the largest insurance providers are non-admitted companies and can be just as financially secure, if not more so, than admitted companies.
Understanding the key differences between non-admitted and admitted insurance carriers is just one way to help you make better insurance decisions for your business. After all, you’ve worked hard to build your business to where it is today, and properly insuring that business can help protect the balance sheet from loss so you can continue to build into the future.