Alabama Surplus Line Broker Bond
What Is the Purpose of the Surplus Line Broker Bond?
In the state of Alabama, certain insurance brokers who provide coverages that cannot be insured by authorized insurers, also known as “surplus lines”, are required under the Code of Alabama Section 27-10-24 to obtain a license through the National Insurance Producers Registry (NIPR) and post a surety bond in the amount of $50,000 with the AL Department of Insurance (AL DOI).
The purpose of the surety bond is to ensure that the surplus line brokers act within the acceptable standards of the industry, as well as to provide a financial guarantee to the state of Alabama that surplus line brokers will pay the appropriate taxes incurred in the course of their business.
Who Needs the Surplus Line Broker Bond?
Under the Code of Alabama Section 27-10-20, the Surplus Line Broker license and surety bond are required for any resident broker who desires to contract surplus lines to the public. In order to qualify as a surplus line broker, a resident insurance producer must be deemed sufficiently experienced and competent for this particular line of business by the Commissioner of the ALDOI.
The surety bond requirement only applies to individual applicants, and not to business entities acting as surplus line brokers. They do however need to designate each individual producer acting under the license. Also, the bond requirement applies to Alabama residents, and not to non-resident surplus line brokers operating in the State.
What Do Surety Underwriters Need to Know About the Surplus Line Broker Bond?
While discussing with the obligee and industry experts familiar with surplus line brokerage, the Suretypedia team has found that reported loss ratios are exceedingly low for the Alabama Surplus Line Broker bond. The main source of risk for the Surplus Lines Broker bond likely lies in the non-payment of taxes. Ideally, that risk is mitigated by the screening process put in place by the AL DOI, and the restrictions outlined in the Code.
When vetting applicants, it is highly recommended that surety underwriters conduct a soft credit check to obtain a picture of the personal financials of the applicant. Uncommon tax burdens and overdue accounts could provide an important insight into the claim risk posed by a particular insurance producer. By in large, surplus brokers are held to a high standard to continue operating in the state, and can have their license revoked for failing to file statements, failing to pay taxes, failing to keep adequate records, or preventing investigation. Combined with the stringent entry requirements, surplus line brokers do not carelessly invite penalties that could jeopardize their license.
It is also important for underwriters to know that despite the $50,000 bond limit enumerated in the Code of Alabama, there is also a provision for the Commissioner of the ALDOI to increase the bond limit based on the amount of surplus line taxes paid by the broker in recent years.
What Do Surety Claims Handlers Need to Know About the Surplus Line Broker Bond?
Claims against the Surplus Line Broker bond would originate from the AL DOI
How Much Does the Surplus Line Broker Bond Cost?
Prices for the Alabama Surplus Line Broker bond typically range from 1% to 10% of the bond limit, or $500 to $5,000.
How Is the Surplus Line Broker Bond Filed?
Along with the license requirements promulgated by NIPR, the original bond form must be mailed to the AL DOI at the following address:
Alabama Department of Insurance
P O Box 303351
Montgomery, AL 36130-3351
Can the Surplus Line Broker Bond Be Cancelled?
Yes, the Surplus Line Broker bond can be cancelled at any time by providing the Commissioner of the AL DOI 30 days written notice.
Do Surplus Line Broker Bonds in Surplus Line Broker Renew? Are Surplus Line Broker Bonds Renewable?
Yes, both the Surplus Line Broker license and surety bond are continuous and must be renewed annually based on the expiration date of the bond. Without renewal, the license will be revoked, and the former licensee will no longer be authorized to conduct surplus line business in the State.