5.1 The Diligent-Effort Requirement: Authorized-Market Search, Excess-Only Placement, and Documentation
Key Takeaways
- Under TIC § 981.004(a), surplus lines insurance may be provided only if the full amount cannot be obtained, after a diligent effort, from an insurer authorized to write and actually writing that kind and class of insurance in Texas, the placement is made through a surplus lines agent, and the insurer is eligible.
- Under TIC § 981.004(b), a surplus lines insurer may write only the amount that exceeds what authorized insurers will write, and the agent's annual report must demonstrate that only excess amounts were placed (TIC § 981.216).
- Texas law does not define 'diligent effort' or require a specific number of declinations, and Texas does not publish an export list; the test is whether the coverage was genuinely unobtainable from authorized insurers writing that class.
- A lower surplus lines price never justifies export: if an authorized insurer will write the full amount, the coverage is obtainable in the admitted market unless a § 981.004 exception applies.
- A surplus lines contract remains valid unless there is a material and intentional violation of Chapter 981 or 225, and even then the insured may enforce its rights under the contract (TIC § 981.005).
5.1 The Diligent-Effort Requirement: Authorized-Market Search, Excess-Only Placement, and Documentation
Texas treats surplus lines insurance as a supplement to the admitted market, not a substitute for it. Chapter 981 states its purposes plainly: to provide orderly access to eligible surplus lines insurers, to maintain fair and honest markets, to protect state revenues, and to protect authorized insurers, which must meet strict regulatory and tax standards, from unfair competition by unauthorized insurers (TIC § 981.001). The diligent-effort rule enforces that balance. The exam tests it constantly.
1. The Three Conditions of TIC § 981.004(a)
An eligible surplus lines insurer may provide surplus lines insurance only if all three conditions are met:
| Condition | Statutory Text (paraphrased) | Practical Meaning |
|---|---|---|
| 1. Unavailability | The full amount of required insurance cannot be obtained, after a diligent effort, from an insurer authorized to write and actually writing that kind and class of insurance in Texas | Try the admitted market first, using carriers that really write the class |
| 2. Licensed placement | The insurance is placed through a surplus lines agent | Only a Texas-licensed surplus lines agent may place it |
| 3. Eligible insurer | The insurer meets Subchapter B or B-1 eligibility as of inception and each annual anniversary | Check eligibility on every new and renewal placement |
The Excess-Only Rule (TIC § 981.004(b))
A surplus lines insurer may provide coverage only in the amount that exceeds the amount obtainable from authorized insurers. If an admitted carrier will write $5 million of a $15 million property schedule, the surplus lines market may write only the remaining $10 million. The surplus lines agent's annual report to TDI, due before March 1, must demonstrate that the amount placed with each eligible insurer was only the amount exceeding what authorized insurers would provide (TIC § 981.216).
2. What "Diligent Effort" Means in Texas
- No statutory definition, no magic number. Texas law does not define "diligent effort" and does not require a set number of declinations. The Stamping Office tells brokers exactly that, and it adds that a diligent effort must be made in every situation unless an exception applies. Texas also does not publish an "export list" of pre-approved surplus lines classes, as some other states do.
- The legal test is unavailability. The question is whether the full amount of the required coverage could be obtained from authorized insurers that are authorized to write and actually writing that kind and class of insurance in Texas.
- Ask the right markets. Approaching insurers that do not write the class, such as a personal auto insurer for a refinery's liability, does not show that the coverage is unavailable. A search limited to insurers the agent knows will decline is not diligent.
- Who does the work. The retail agent, who has the admitted-market appointments, usually conducts the search. The surplus lines agent, who must stand behind the placement, should obtain and keep the documentation. A surplus lines agent may not shift its responsibilities to an unlicensed person (28 TAC § 15.102(d)).
Good Documentation Practice
Although no form is mandated, a defensible file shows:
- Each authorized insurer approached, and why it writes that class in Texas;
- The date of each submission and response;
- The reason for each declination or partial offer (class not written, capacity, loss history, coverage restriction); and
- Any partial admitted offer, with the amount, to support the excess-only calculation.
The contract file must include all correspondence relating to the coverage (28 TAC § 15.110) and must be kept for five years after the contract expires or terminates (28 TAC § 15.108(b)). By statute the records must also be open to TDI examination without notice until at least the third anniversary of expiration or cancellation (TIC § 981.215(b)).
3. Price Is Not Unavailability
Exam Warning: A lower surplus lines price is never a reason to export a risk. If an authorized insurer will write the full amount, the coverage is obtainable in the admitted market and § 981.004(a)(1) is not satisfied, however attractive the surplus lines quote.
Scenario: A Fort Worth machine shop needs $2,000,000 of general liability. Two admitted insurers decline because of metal-stamping exposure, but a third admitted insurer that writes the class offers the full $2,000,000 for $28,000. A surplus lines insurer offers $19,000.
- Result: The coverage is obtainable from an authorized insurer. The agent must place it in the admitted market. Exporting it to save the insured $9,000 violates § 981.004(a)(1).
- Contrast: If the third admitted insurer would write only $1,000,000, the surplus lines insurer could write the remaining $1,000,000 excess under § 981.004(b).
4. Exceptions (Preview of Section 5.2)
The unavailability and excess-only rules do not apply to:
- Exempt commercial purchasers that receive the required disclosure and request surplus lines coverage in writing (§ 981.004(c));
- Industrial insureds meeting the disclosure, A.M. Best A- rating, and written-request conditions (§ 981.004(d));
- Flood coverage written by an eligible surplus lines insurer rated A- or better by A.M. Best (§ 981.004(e)); and
- Listed commercial lines under §§ 2251.0031 and 2301.0031 (§ 981.004(g)).
In addition, TWIA's availability does not preclude surplus lines windstorm and hail coverage (§ 981.004(f)).
5. Consequences of a Noncompliant Placement
- Contract validity: Unless there is a material and intentional violation of Chapter 981 or 225, a surplus lines contract is valid and enforceable and is recognized like a comparable admitted contract. Even when there is such a violation, the insured may still enforce its rights under the contract (TIC § 981.005).
- Sanctions: Chapter 82 sanctions apply to a surplus lines agent or eligible insurer that violates Chapter 981, Chapter 225, or a related rule or order (TIC § 981.006). Sanctions include license revocation, suspension for up to one year, cease and desist orders, restitution, and administrative penalties of up to $25,000 per violation (TIC §§ 82.051-.053, 84.022).
A retail agent in San Antonio receives quotes for a warehouse's property coverage. An authorized insurer that writes the class offers the full limits for $45,000. An eligible surplus lines insurer offers identical limits for $32,000. No TIC § 981.004 exception applies. What must happen?
An authorized insurer that writes the class will provide $5,000,000 of a hotel's $15,000,000 property schedule but no more. No exception applies. How much may an eligible surplus lines insurer write?
A new surplus lines agent asks how many admitted-market declinations Texas law requires before a risk may be exported. Which answer is accurate?
A surplus lines agent materially and intentionally violated Chapter 981 when placing a policy, and the insured later suffers a covered loss. Under TIC § 981.005, what happens to the insured's rights?