Surplus lines broker bonds are a special and unique type of surety bonds. A surplus line broker is a particular kind of insurance broker. When a customer or entity’s situation is too risky to be insured by any of the state’s registered insurers (insurance companies), the surplus line broker comes in. The job of the surplus line broker is to find a policy in an external (out of state) insurer that might satisfy the special requirements of the customer. Out of state insurers are not regulated by the standard state laws, and thus have broader internal guidelines and more flexibility in writing and pricing particular policies that will enable the special costumer to be insured. However, since the regional state laws do not regulate the insurer, they also do not protect it; this means that the state Guaranty Association does not cover any surplus line insurer. A state Guaranty Association is a state fund built from gathering and investing the annual premiums (fees) paid by licensed and regulated insurers within the state limits. This fund protects the customers if an insurer declares itself broke. This is the main reason behind the great importance of surplus lines broker bonds. This bond will protect the consumer from any unlawful action committed by the surplus lines broker.
Even if surplus lines insurers are not regulated by the state, most states have a list of certified surplus lines brokers and insurers that have proved to be trustful. If an insurance broker wishes to obtain a license to work with surplus lines insurances, the state requires a surplus lines broker bond to be purchased in order to assure adherence to the law.
As any other surety bond, the surplus lines broker bond is a contract between three parties. The first one is known as the Principal. This is the insurance broker that wishes to obtain or renew his license that enables him as a specialized surplus lines broker. When a broker purchases a bond, an agreement is made to act always within the bond and state regulations for the industry. This is made to protect the customer and it is a financial guarantee that every service or information the surplus line broker provides is honest and lawful.
The second party is the Obligee. Most of the time, the state’s Department of Insurance (or similar regulatory agency) plays the part of the obligee. This is the party that will require the purchase of a surplus line broker bond before issuing any permit for working with surplus lines insurers. An obligee is also protected by the bond for any financial loss that comes from the principal failure to act within the law and industry regulations limits.
The third and final party is the Surety. This is the party that sells, underwrites and issues the bond. It must be a financially strong business, and thus most of the time an insurance company is the main provider of a surety bond. As the issuer of the bond, the surety has the obligation to investigate whenever there is a claim against the bond. In the event of a valid claim, the surety will pay the obligee any amount for damages that result from the unlawful behavior of the principal. The surety will seek reimbursement with the principal for all the fees paid plus any other legal fees incurred during the investigation.
Surplus lines broker bonds are of essential importance to any surplus lines insurance costumer. They represent one of their main protections against fraudulent transactions, misguided information, ethically dubious actions or unlawful behavior. Surplus lines insurance is a business that is not as regulated as any other insurance company, and thus the customer must seek other ways of protecting his investment. A surplus lines broker bond will enable the insurance broker to provide an honest and lawful service; it promotes the industry’s credibility and helps create successful transactions and good business relationships between surplus lines brokers and customers.