The fundamental reason is that the author of the contract feels there is a greater likelihood that the insurance obligations will be achieved if the contractor’s insurance is underwritten by an “admitted” insurer. The California Department of Insurance (CDI) has a stringent process for licensing insurers to sell policies in California. Admitted (licensed) insurers must meet capitalization requirements and their policy forms and rates are scrutinized and approved by the CDI. The insurance carrier must adhere to their filed rates and forms for all policies and prohibited from deviation or modification unless requested changes have been approved by the Department. The effect of this process is to protect policyholders and others, who depend on the availability of insurance protection, from policy form variations and rate discrimination. Also, “admitted” insurers policies are required to participate in the California Insurance Guarantee Association (CIGA) which pays outstanding claims up to $500,000 in the event the insurer is financially unable to pay.
“Non-admitted” insurers are authorized by the CDI to sell insurance policies in the state and if they demonstrate financial stability, reputation, and integrity. They are not required to submit policy forms and rates for review and approval by the CDI. Insurance policies underwritten by “non-admitted” insurers are not subject to CIGA and the policy premium is subject to 3.2% taxes and fees. The CDI also requires policyholders to sign a disclosure which confirms that they are aware the coverage is being placed with a “non-admitted insurer; there is limited CDI oversight; and to self-assess the insurer offered.
From the perspective of an insurance certificate holder, accepting a non-admitted insurer to meet contractual insurance requirements is less desirable and increases the risk that the policy includes terms and/or conditions which limit expected coverage. An insurer’s financial capability is a critical concern for both policyholders and certificate holders. Every insurer (“admitted” and “non-admitted”) is rated by AM Best Company and assuming the insurer’s current rating meets the contract requirement, financial security should not be an issue. It is possible that through discussion with the client/public entity’s insurance professional, the “admitted” requirement will be waived.
Comments By: Ken Wittman
Senior Vice President, Dealey Renton and Associates