Understanding Admitted vs. Non-Admitted Insurance Companies
When shopping for insurance, you might come across terms like “admitted” and “non-admitted” insurance companies. These distinctions can be crucial in your decision-making process. Let’s break down what these terms mean and how they impact you as a customer. Let’s compare the differences of admitted vs. non-admitted insurance companies.
What is an Admitted Insurance Company?
An admitted insurance company is one that has been approved by the state’s insurance department. This approval means the company must adhere to state regulations, which are designed to protect you, the policyholder. Here’s what that entails:
- State Regulation Compliance: Admitted insurers must follow the state’s rules regarding policies, premiums, and claims handling.
- Financial Stability Requirements: They must meet certain financial criteria to ensure they can pay out claims.
- State Guaranty Fund Participation: If an admitted insurance company goes bankrupt, the state guaranty fund can help cover claims. This fund is like a safety net for policyholders.
- Insurance Policy Standardization: Policies from admitted insurers are usually standardized, making it easier to compare different insurance offerings.
What is a Non-Admitted Insurance Company?
A non-admitted insurance company, on the other hand, is approved to do business in the state by the state insurance department. But, they do not have to get their insurance policies and premium rates approved by the state in order to use them in the state. These companies don’t have to follow all of the same state regulations as admitted insurers. Here’s what you should know about non-admitted insurers:
- Flexibility in Coverage: Non-admitted insurers can offer more flexible and customized coverage options. This is particularly useful for unique or high-risk situations that admitted insurers might not cover.
- No State Guaranty Fund: If a non-admitted insurance company goes bankrupt, there’s no state guaranty fund to back you up. This means there’s a higher risk involved.
- Premium and Policy Differences: Non-admitted insurers have more freedom to set premiums and policy terms, which can sometimes, but not always result in higher costs but more tailored coverage.
- Minimum Premiums, Policy Fees and Surplus Lines Premium Taxes: Non-admitted insurance policies usually come with a minimum earned premium of 25% of the annual premium. This means that even if you cancel the policy one day after buying it, the insurance company will keep 25% of your premium. They also come with policy and broker fees. To offset some of their costs, the non-admitted carrier will charge a non refundable policy fee. This fee can range from $50 to several hundred dollars. In addition, they also have to charge a surplus lines premium tax that they collect to pay to the state. In Maryland, the surplus tax rate is 3% of the policy premiums.
Pros and Cons of Admitted and Non-Admitted Insurance
Let’s weigh the pros and cons of each to help you decide which might be better for your needs.
Admitted Insurance Companies
Pros:
- Regulatory Oversight: Ensures adherence to state laws. Admitted insurance companies are heavily regulated by the states that they operate in. Because of this, if an admitted company takes an action that does not follow their filed rules or state regulations, you can protect that action to the state insurance commissioner to review and make a ruling on the action..
- Financial Safety Net: Protection via the state guaranty fund. If the company goes bankrupt or becomes insolvent, the state guarantee fund would step in to cover any claims that your policy may have while it is still in force.
- Consumer Protections: More standardized policy terms.
Cons:
- Less Flexibility: Limited customization of policies. Because all of their rules, policies and forms have to be filed with the states, admitted insurance companies have less flexibility to deviate from their filed rules and rates.
- Potentially Limited Coverage Options: May not cover high-risk or unusual situations.
Non-Admitted Insurance Companies
Pros:
- Customizable Policies: Tailored to specific, often high-risk needs.
- Broader Coverage Options: Willing to insure risks that admitted companies won’t.
Cons:
- Higher Risk: No state guaranty fund protection.
- Less Regulatory Oversight: Policies and premiums are less standardized, which can lead to higher costs. Also, since they are not regulated by the state insurance commissioner, you cannot protest an action of the non-admitted company to the insurance commissioner. You would have to file a lawsuit and take them to to court to get a resolution.
Which Should You Choose?
The choice between admitted and non-admitted insurance depends on your specific needs. If you prefer the security of regulatory oversight and a financial safety net, an admitted insurer might be the best choice. In most states, if there is an admitted insurance company that is willing to write your business, your insurance agent has to offer you that option.
However, if you have unique or high-risk insurance needs that standard policies don’t cover, a non-admitted insurer could provide the flexibility and coverage you need. In fact, the non-admitted insurance company may be your only option.
Business Type and Insurance Policy: Admitted vs. Non-Admitted
When choosing between admitted and non-admitted insurance policies, the type of business you operate can significantly influence which option is available or preferable. Here’s how:
Specialized or High-Risk Businesses
If your business falls into a specialized or high-risk category, you might find that admitted insurance companies either don’t offer coverage or provide limited options. Examples of such businesses include:
- Entertainment and Special Events: Concerts, festivals, and other large gatherings often face unique risks that standard insurers may shy away from.
- Bars & Night Clubs: Bars and clubs that are heavy in alcohol sales and provide entertainment often have to get their insurance
- Construction and Contracting: Certain types of construction projects, especially those with high liability or unusual risk factors, may require non-admitted coverage.
- Emerging Industries: Businesses in new or rapidly evolving sectors, like tech startups or cannabis companies, often have risks that are hard to predict and therefore not covered by standard policies.
In these cases, non-admitted insurance companies can step in to offer the necessary coverage. They have more flexibility in underwriting and can tailor policies to fit these unique risks.
Traditional or Low-Risk Businesses
Conversely, if your business operates in a more traditional or low-risk sector, you’re likely to find that admitted insurance companies offer ample coverage options. Examples include:
- Retail Stores: Standard retail operations typically have predictable risks that fall within the comfort zone of admitted insurers.
- Professional Services: Businesses like law firms, accounting practices, and consulting agencies often find suitable policies through admitted carriers due to their relatively low-risk nature.
- Restaurants and Hospitality: While these industries do face their share of risks, the majority of their insurance needs can be met by admitted insurers.
For these businesses, the benefits of working with admitted insurance companies, such as regulatory protection and financial stability through state guaranty funds, make them an attractive choice.
Finding the Right Fit
Ultimately, the nature of your business plays a crucial role in determining whether an admitted or non-admitted policy is suitable. High-risk or specialized businesses may need the customization and flexibility of non-admitted insurers, while more traditional operations can often rely on the standardized protections of admitted policies.
Understanding your business’s specific needs and risks will help you navigate the options and choose the most appropriate insurance coverage. Whether you end up with an admitted or non-admitted insurer, ensuring your business is adequately protected should always be the priority.
Conclusion
Understanding the difference between admitted and non-admitted insurance companies helps you make an informed decision about your coverage. Remember, while admitted insurers offer more regulatory protection and financial stability, non-admitted insurers can provide more customized and flexible options. Evaluate your personal needs and risk tolerance to choose the right type of insurer for you.
Call Huff Insurance Today!
Our experienced team members at Huff Insurance can walk you through the differences between admitted vs. non-admitted insurance options. Our team has access to dozens of admitted insurance carriers as well as brokers that give them access to hundreds of non-admitted insurance options. This allows them the flexibility to find the right insurance coverage for your specific needs.
Call us today at 410-647-1111.
Why Huff Insurance?
Huff Insurance is a local, family-owned and operated independent insurance agency located in Pasadena, MD. Proudly serving our community since 1960, we are dedicated to providing customized insurance protection plans for individuals, families, and businesses.
