Admitted vs Non-Admitted Insurance – What's the Difference?Focus on an insurance company's financial strength rather than whether the company is admitted.
By Bruce W. Brownyard
It used to be very important for an insurance company to be admitted in the state in which the policyholder was operating. The primary reason why an insurance professional would recommend an admitted insurance carrier over a non-admitted company was because the policyholders of admitted insurers were protected by their state's insolvency fund. And for many years, state insolvency funds protected policyholders against the insolvency of admitted insurance companies regardless of the size of the loss that was suffered. Policyholders could have a million dollar loss assessed against them and, if their insurance company went bankrupt, their state insolvency fund would step in and pay the million dollars.
Not so anymore. Today, state insolvency funds cap the amount they will pay for any one loss to well under a million dollars. In most states that we have surveyed, losses are capped at $300,000. In today's litigious society, $300,000 is just not enough. There have been numerous multimillion dollar settlements & awards against private security companies in the last decade.
A New England security company unfortunately came face to face with this issue a number of years ago. They had purchased a $1,000,000 Commercial General Liability policy from the Frontier Insurance Company, which was licensed and admitted in their state. Shortly thereafter Frontier was placed in liquidation. While insured by Frontier, the security company incurred a liability loss that was ultimately settled for $500,000. The state's insolvency fund only paid $300,000 of the loss and the remaining $200,000 had to be paid out of pocket by the security company.
Because of the obvious inadequacy of state insolvency funds to fully protect policyholders, we now recommend that a prospective insurance buyer focus more on an insurance company's financial strength and size rather than on whether the company is admitted or not. Most insurance professionals rely on Best's Key Rating Guide to determine the financial strength and size of an insurance company.
Best's utilizes capital letters along with plusses and minuses to characterize the financial strength/ stability of an insurance company and Roman numerals to characterize their financial size. We recommend that private security companies insist that the insurance company that insures them has a minimum financial strength rating of A (Excellent) and a financial size rating of Class X ($500,000,000 to $750,000,000 policyholder surplus} in Best's.
Hindsight is always better than foresight, but Frontier would not have met the minimum financial standards we now recommend for private security companies big and small. However, they would have been close to meeting them. Just before failing in the late 1990's, Frontier was rated A- Class IX in Best's. Ideally, we would like to see even higher standards: Best's ratings of A (Excellent) Class XIII ($1.25 Billion to $1.5 Billion policyholder surplus) would be ideal. And not surprisingly most of the major insurers of private security companies in the US today could meet these "ideal" rating standards.
Bruce W. Brownyard has been in the insurance business for the last 30 years. He is President of Brownyard Programs, Ltd.,a wholesale insurance agency. He has a B.A. Degree in communications from St. Louis University and is a well known speaker and writer on the subject of insurance as it relates to The Private Security Industry.
This information contained herein is provided for information purposes only and is not intended to be a representation of coverage that may exist in any particular situation under a policy issued by one of the companies within Crum & Forster. All conditions of coverage, terms, and limitations are defined and provided for in the policy. This information is intended for use as a guideline and is not intended as, nor does it constitute, legal or professional advice. In no event will Crum & Forster or any of its affiliates be liable in any manner to anyone who has access to or uses this information.