This year saw a trend of insurance companies either limiting coverage or withdrawing business from certain states entirely. This widespread departure has been covered in publications ranging from The Los Angeles Times, to CNBC, to Yahoo Finance. With insurers becoming more hesitant to write new policies in particular risk-prone areas, consumers are increasingly forced to consider alternative means of procuring coverage.
States prone to natural disasters such as California, with its destructive wildfires, and Florida, with its devastating hurricanes, have been impacted most. For example, a homeowner living in a wildfire-prone area of Los Angeles County, California, may be unable to find a familiar insurance company able or willing to provide coverage due to the innate risk of the location.
Given the current insurance landscape, consumers are more likely than ever to be confronted with the proposition of acquiring coverage from a non-admitted insurance carrier.
Generally speaking, admitted carriers are licensed by the regulatory body in the state where they operate and are subject to the state’s regulations. While the approval process and requirements differ between the states, carriers seeking to be admitted may need to submit their insurance rates and policies to the state for approval. The approval process generally includes a comprehensive review of the insurance companies’ financial stability, claims handling, and management.
Once approved, admitted carriers are generally tasked with issuing policies at approved rates uniformly. Admitted insurance carriers may have difficulty altering their rates or charging the premium they calculate as adequate to cover high-risk properties.
Because admitted insurance companies’ rates and policies are approved by the state, many carriers are choosing to forgo issuing policies in risk-prone areas. So homeowners who need hard-to-place or more customized coverage due to the inherent risks of their property will now often need to consider non-admitted carriers.
A non-admitted insurance carrier, generally speaking, is a carrier that is allowed to do business in the state but is not required to submit its rates or policies to be licensed by the individual state’s regulatory body.
Because non-admitted insurance carriers’ rates and policies are generally not approved, they may be able to insure higher, more particularized risks that admitted carriers often are unable to cover.
Fortunately, consumers are not typically tasked with making the choice between admitted and non-admitted carriers. Most states have a “diligent search requirement,” requiring that a consumer first receive at least three declinations from admitted carriers prior to being placed with a non-admitted carrier. Some states, such as Maine, mandate that a risk cannot be placed in the non-admitted market “if the desired coverage exists in the admitted market.” (Bulletin 457, dated April 14, 2021). However, in states that have no diligent search requirement, such as Mississippi and Louisiana, consumers may have to make this decision on their own.
Using an admitted insurance carrier comes with benefits and protections for the consumer. For example, states maintain their own guarantee funds to protect against admitted insurer insolvencies. If a claim is made against an admitted insurer, and that insurer becomes insolvent, the state guarantee fund will cover the claim up to a certain limit.
In Florida, for example, admitted insurance carriers are backed by the Florida Insurance Guaranty Association (“FIGA”). Take, for example, a Florida homeowner who finds themselves sued for a slip and fall that occurred at their residence. Soon after being served with the complaint, the insured learns their admitted carrier has been declared insolvent due to financial hardships arising from property damage claims from a recent hurricane. Luckily, assuming the claim is covered, FIGA will provide the insured with casualty coverage up to the insured’s policy limit, or $300,000, whichever is lower.
To slightly change the hypothetical, now assume that the Florida homeowner’s property was also damaged by a recent hurricane. Assuming the claim is covered, and that the insured’s carrier has been declared insolvent, FIGA will be able to provide some relief. For damages to the structure and its contents, FIGA will provide an additional $200,000 on top of the $300,000 limit, providing the insured with up to $500,000 in total coverage.
In California, the California Insurance Guarantee Association, or “CIGA,” offers up to $1 million, or the policy limit, whichever is less, for residential property damage claims. For automobile and personal injury claims, CIGA offers up to $500,000, or the insured’s policy limit, whichever is lower. Likewise, New York maintains the “Property/Casualty Insurance Security Fund” with a limit of $1 million for covered claims.
The additional state-funded protection that comes with admitted insurance carriers may be preferrable for most consumers; however, some consumers may require the customized coverage that non-admitted carriers can provide. While non-admitted carriers are not safeguarded by the state’s guarantee fund, some states offer additional protections to policyholders insured by non-admitted carriers.
Most states maintain somewhat stringent requirements for non-admitted carriers. Often, non-admitted carriers are required to be licensed in the state where they are domiciled and must have their financials vetted prior to approval. Several states also require that non-admitted insurers maintain approximately $15 million in capital and surplus to protect against claims. California, for one, requires that non-admitted carriers maintain a minimum of $45 million in capital and surplus.
Added protections may also be available. For example, in California, under Insurance Code section 1616, a non-admitted insurer may be prohibited from filing a pleading when sued until it has placed a bond with the court sufficient to secure a possible final judgment. Similarly, New York’s Insurance Law section 1213 also requires non-admitted insurers to post bonds prior to filing pleadings in proceedings against it.
The bond posting requirement can add an additional level of protection against insurer insolvency and also prevents an in-state policyholder from having to enforce a judgment in a foreign state.
To provide even more protection for their residents, many states have taken legislative action to limit non-admitted carriers’ ability to include choice-of-law provisions within their policies.
For example, Arizona’s Revised Statutes section 20-1115 generally prohibits insurance contract provisions that require the policy to be construed according to the laws of any other state or country. Similarly, Texas Insurance Code section 21.42 mandates that any insurance contract by any insurance company doing business in the state be deemed to have been made and entered into under the laws of Texas.
This means that contract disputes will still be governed by the state’s contract law, and the non-admitted insurer will still be obligated to adhere to the policy provisions. In addition, any legal remedy for breach of contract or breach of the duty of good faith and fair dealing that an insured could pursue against an admitted carrier can similarly be sought against non-admitted carriers.
While conducting business with an unlicensed insurance company may seem daunting to many consumers, they may be relieved to learn that non-admitted does not mean that the non-admitted insurer is beyond the reach of the law. As coverage through non-admitted insurers becomes more common, consumers may find the idea at least a little less unsettling than they originally imagined.
