Arizona Surplus Lines Insurance: Brokers, Fees, and Eligibility

Arizona surplus lines insurance is coverage placed with a non-admitted insurer — one not licensed by the Arizona Department of Insurance and Financial Institutions (DIFI) — when the standard market won’t write the risk. It exists for unusual, large, or hard-to-place exposures, and Arizona regulates it under A.R.S. Title 20, Article 5, with rules covering who can broker it, which insurers qualify, how premiums are taxed, and what protections you give up by buying outside the admitted market.

Because non-admitted carriers aren’t bound by Arizona’s rate and form filing rules, they can price and structure policies for risks admitted insurers avoid: niche professional liability, unusual commercial operations, properties with uncommon exposures. The flexibility is the point. So is the trade-off, which shows up most sharply if the insurer later becomes insolvent.

When a Risk Can Go to the Surplus Lines Market

A broker can’t send a risk to a non-admitted insurer just to find a cheaper premium or looser terms. Arizona requires that admitted coverage either be unavailable after a diligent effort or available only for part of the risk. A diligent effort means the broker actually sought coverage from at least three admitted Arizona insurers that write the kind of policy in question.¹

Placing surplus lines coverage to get a better price or more favorable terms when admitted coverage is available at a reasonable price is prohibited.¹

There’s one standing exception. If DIFI’s director decides that a particular type of coverage generally isn’t available from admitted insurers, the director can designate it a “recognized surplus line.” Coverage on that list can be placed directly with a non-admitted insurer, no three-rejection documentation required.²

Only a Licensed Surplus Lines Broker Can Place the Coverage

You can’t buy surplus lines coverage directly from a non-admitted insurer. Arizona law prohibits anyone from placing it without a surplus lines broker license from DIFI. An individual applicant must already be a resident property or casualty producer in Arizona and must pass a written exam on surplus lines law and broker duties.³

Business entities can hold the license too, but every office transacting surplus lines business must have at least one person who holds both a property or casualty producer license and the surplus lines broker license.³

The broker carries real responsibility in these deals. With the insurer sitting outside Arizona’s usual oversight, the broker is the gatekeeper verifying financial standards, completing the diligent search, and handling tax filings and reports to the state.

Which Non-Admitted Insurers Qualify

Not every non-admitted carrier can take Arizona surplus lines business. A.R.S. § 20-413 sets minimum financial standards by insurer type:

Foreign insurers (from another U.S. state) must hold capital and surplus equal to the greater of Arizona’s minimum requirements or $15 million, and must be authorized to write insurance in at least one other state.
Alien insurers (domiciled outside the U.S.) must hold at least $15 million in capital and surplus and maintain at least $2.5 million in assets within the United States. A broker can skip this requirement if the alien insurer appears on the NAIC Quarterly Listing of Alien Insurers.
Lloyd’s-type associations must maintain a U.S. trust fund of at least $100 million as security for American policyholders.
Insurance exchanges authorized in at least one state must hold minimum aggregate capital and surplus of $50 million, with each syndicate holding at least $5 million.

The thresholds are a financial floor, meant to give some assurance that the company behind the policy can actually pay claims.⁴

DIFI publishes a “List of Qualified Unauthorized Insurers” that brokers must consult before placing business. A broker cannot place a risk with any insurer that isn’t on that list, on the NAIC Quarterly Listing of Alien Insurers, or on Arizona’s list of domestic surplus lines insurers.⁵ If a broker shows you a quote from a carrier that isn’t on one of those lists, something is wrong.

What You Pay on Top of the Premium

Arizona charges a 3% tax on gross premiums for surplus lines policies covering Arizona risks. The broker collects it from you on top of the premium the insurer charges. The tax applies to the gross premium and any taxable policy fees, but not to the stamping fee or to premium returned on cancellation.⁶

The broker can’t absorb the tax or rebate any part of it back to you. If the policy ends early, the broker must return the tax on the unearned portion of the premium.

On top of the premium tax, the broker collects a stamping fee of 0.2% of gross premium that funds the Surplus Line Association of Arizona, the organization that processes surplus lines filings under contract with DIFI.⁶

Broker Service Fees

Brokers can charge a separate service fee for the work of placing the coverage. Under A.R.S. § 20-410, two conditions apply: the broker must disclose the specific fees and the services they cover before binding coverage, and you must agree to those fees in writing. The 3% premium tax also applies to any service fees you’re charged.⁷ If a fee shows up on an invoice you never signed off on, it isn’t a valid charge.

What You Give Up: No Guaranty Fund

The biggest risk of surplus lines coverage is insurer insolvency. Surplus lines insurers are excluded from the definition of “member insurer” under Arizona’s Property and Casualty Insurance Guaranty Fund. If a surplus lines carrier fails, there is no state-backed fund to step in and pay your claims.⁸

Every surplus lines policy delivered in Arizona must carry a prominently displayed notice in bold type warning of this gap. For policies from non-domestic surplus lines insurers, the notice states that the insurer doesn’t hold a DIFI certificate of authority and that policyholders won’t be eligible for guaranty fund protection if the insurer becomes insolvent. Domestic surplus lines insurers must include a similar warning, without the certificate-of-authority language.⁷

If you don’t see that notice on the policy, ask for it. Its absence is a red flag about the broker, not a reason to think the warning doesn’t apply.

Short of insolvency, the coverage itself is fully valid and enforceable. Arizona courts treat surplus lines contracts the same as admitted carrier policies for coverage disputes and claims.⁷

Multi-State Risks and the Home State Rule

If the risks you need to insure sit in several states, only one state collects the premium tax. The federal Nonadmitted and Reinsurance Reform Act of 2010 (NRRA) established that only the insured’s “home state” can require premium tax payments on surplus lines transactions. For a business, the home state is where you maintain your principal place of business. For an individual, it’s your state of principal residence.⁹

So if Arizona is your home state, Arizona collects the full 3% on a surplus lines policy no matter where the covered property or operations physically sit. Arizona’s broker licensing statute references the NRRA directly and requires DIFI to participate in the NAIC’s national producer database to implement it.³

1
Arizona Legislature. Arizona Code 20-407 – Surplus Lines; Brokers
2
Arizona Legislature. Arizona Code 20-409 – Recognized Surplus Lines
3
Arizona Legislature. Arizona Code 20-411 – Licensing of Surplus Lines Broker; Examination
4
Arizona Legislature. Arizona Code 20-413 – Placing of Surplus Lines Coverage; Endorsement by Broker
5
Arizona Department of Insurance and Financial Institutions. List of Qualified Unauthorized Insurers
6
Arizona Department of Insurance and Financial Institutions. Surplus Lines / Industrial Insured Premium Tax
7
Arizona Legislature. Arizona Code 20-410 – Validity of Surplus Lines Insurance; Disclosure; Policy Fees
8
Arizona Legislature. Arizona Code 20-661 – Definitions
9
Office of the Law Revision Counsel. 15 USC 8201 – Reporting, Payment, and Allocation of Premium Taxes