Chapter 6: Licensing Rules, Regulations and Guidelines

Licensing Rules and Regulations

Congress’ passage of the Gramm-Leach-Bliley Act (GLBA) caused the NAIC to speed the development of the new NAIC Producer Licensing Model Act (PLMA). 

The reciprocity provisions of the PLMA also extend to surplus lines producers. A majority of states treat surplus lines as a distinct license type. Persons holding a surplus lines producer license in their home states shall receive nonresident surplus lines producer licenses unless some other reason for disqualification exists.

Under the uniform resident licensing standards (“URLS “) promulgated by the NAIC, a producer who wishes to engage in the sale of surplus lines insurance (SLI) must first obtain a surplus lines producer license. This is considered a license type and not a line of authority. The URLS require that a resident hold both property and casualty lines of authority before a SLI producer license can be issued.

Under the reciprocity provisions of GLBA, if a producer holds the SLI license in the producer’s home state and is in good standing in the producer’s home state, the nonresident state must grant a license. The NAIC Uniform Application is to be used for application as a surplus lines producer.

Some states also require a resident producer placing SLI to complete an examination or post a bond. However, to comply with the reciprocity provisions of GLBA and Section 8 of the PLMA, these requirements cannot be imposed on nonresidents. States also cannot impose an additional CE requirement on nonresident SLI producers.

SLI producers are routinely subject to additional state administrative requirements. The administration of surplus lines by states is different than other types of insurance because states typically require the producers to perform certain compliance activities that would usually be the responsibility of the insurance company.

One example of these additional requirements is that a producer must first establish that coverage is not available from the admitted market before going to the surplus lines market.  In order to determine whether or not such coverage is available in the admitted market, typically the producer must perform a diligent search. A diligent search requires a producer to obtain a specific declination of coverage from a certain number (generally three) of admitted companies who are engaged in writing the type of coverage sought. If no admitted company is writing this type of insurance, the producer may approach those nonadmitted companies who would most likely write the type of coverage sought.

State insurance laws require that surplus lines insurers satisfy specific financial criteria in order to be eligible to write surplus lines insurance in the state.  With the exception of New Jersey, states do not have guaranty funds to pay for losses incurred by policyholders of surplus lines insurers which become insolvent.  

Diligent Effort Form

The search for coverage from licensed insurers must be conducted pursuant to state requirements. An example form is included at the end of this section, but some states require that their specific form be used. Generally, the Diligent Effort Form stipulates that the retailer must have tried to place the particular risk in question with three admitted carriers before moving to the non-admitted market. It is the Retailers responsibility to complete the form.

Premium Tax

The Wholesaler must collect and pay a state premium tax on surplus lines policies. Regulations vary by state. The Wholesaler must pass this tax on to the Retailer, who, in turn, passes it on to the insured. There may also be a “policy fee” on “non-admitted” carriers and Lloyd’s. This “policy fee” is in addition to the premium tax and in most cases is fully earned. It should be reasonable in relation to the total premium. In some states a “policy fee” is not allowed.

Please check state websites for more information on applicable taxes and tax regulations.


The question of whether or not inspections are required by the insuring company and who pays for the inspections would have to be resolved by the Wholesaler with the insuring company. This information would then be passed on to the Retailer along with advice as to what inspection company should be used and the inspection fee payable.

Application Forms

The application forms used in the Wholesale market can vary significantly in both form and content. Because of these variations, the Retailer’s need for caution in understanding each application form is vital. It is important to note that many applications contain warranties that actually become a part of the policy.

Fully completed applications on original forms, containing the actual signature of the insured, are always required. The information requested by the application must be accurate. It is important that the application match the coverage requested. Because of warranty provisions, the Wholesaler will need all the documentation available from the Retailer and the insured (i.e., brochures, loss experience, insured’s business experience, and other pertinent data). The Retailer will receive a faster response from the Wholesaler by indicating on the application form whether the request is for “policy issue” or “quotation.”

Timely submission of applications has a significant effect on the placement of coverage. The Retailer should be aware that the class of business, size of the risk, total premium involved and the capacity of the market will determine the time it will take the Wholesaler to place the risk. Adequate lead time assures a much better possibility of placement by the Wholesaler.

Policy Forms

Some Wholesalers provide policy forms and some do not. Since the majority of the policies issued through the Wholesale market involve non-admitted carriers, it is suggested that a file of policy forms be supplied to the Retailer if the Wholesaler is using nonstandard forms.

When the Wholesaler is providing markets that use nonstandard forms, the Retailer should be furnished a checklist by the Wholesaler that emphasizes significant points of coverage which need to be reviewed. Some of the more important include:

  • Policy exclusions and endorsements
  • Territorial restrictions
  • Any warranty conditions of the policy

The Wholesaler should advise the Retailer of any nonstandard policy conditions, coverage restrictions or limitations. This is an area where the need for full disclosure and communication between the Wholesaler and Retailer is critical.


The Wholesaler’s quotes should be in written form and contain all the terms and conditions pertaining to the involved risk. If there are warranties such as Ansul System, Cleaning Contracts, No Entertainment or Dancing, Correctness of Claims Information, Mileage Restrictions, etc., these should appear prominently in the quotation.

Exclusions may differ from those the Retailer normally sees for the class of risk being quoted, and it is important to make special note of them and advise the insured.

The quotation may have an expiration date (30 or 60 days), and it will be necessary for the Retailer to inquire as to the validity of a quote which has expired. It may be necessary to submit a new application in some instances.

Binding Orders

The Retailer should be aware of the Wholesaler’s requirements to bind a risk after it has been quoted. Binding could require full or partial payment of the premium, may be subject to receipt of the original signed application prior to binding, or both. No backdating of effective dates are allowed.

In most cases, Wholesalers require the Retailer to send a written order to bind even when nothing further is required to put the coverage into effect. The written order indicates to the Wholesaler that the Retailer is completely familiar with all the terms, conditions and warranties of the quotation as well as any cancellation restrictions with respect to earned premiums and fees.

Statement of Dilligent Effort (PDF)