Minnesota Surplus Lines: When to Use the E&S Market and How It Works

The excess and surplus lines market exists to insure risks that the admitted market will not write — and in Minnesota's current hard property insurance environment, that market is growing in practical importance for producers serving commercial accounts and high-risk residential properties. Understanding when the E&S market is appropriate, how surplus lines placement works procedurally, what the diligent search requirement demands, what disclosures must be made to the insured, and what the tax and filing obligations are separates producers who can serve their full book of business from those who must turn away clients whose risks fall outside admitted market appetite.

What the Surplus Lines Market Is

Admitted carriers hold a Minnesota certificate of authority issued by the Department of Commerce. They are subject to full Minnesota regulatory oversight — rate and form filing requirements, financial solvency standards, market conduct examination, and guaranty fund participation. When an admitted carrier becomes insolvent, the Minnesota Insurance Guaranty Association (P&C, Minn. Stat. §60C) or the Minnesota Life and Health Guaranty Association (Minn. Stat. §61B) steps in to pay covered claims up to statutory limits.

Non-admitted carriers — surplus lines insurers — do not hold a Minnesota certificate of authority. They are not subject to Minnesota's rate and form filing requirements — rates and forms of surplus lines companies are not required to be filed with the Minnesota Department of Commerce. Their policies are not covered by either Minnesota guaranty association. Non-admitted carrier policies issued to Minnesota insureds are not guaranteed by the state if the carrier becomes insolvent.

The trade-off: Non-admitted carriers have greater flexibility — they can write risks that admitted carriers decline, charge market rates without filing approval constraints, and use manuscript policy forms tailored to specific risk exposures. This flexibility comes at the cost of the regulatory protections that admitted market placement provides, which is why the surplus lines framework requires both a diligent search before placing with a non-admitted carrier and mandatory disclosure to the insured about the loss of guaranty fund protection.

The Statutory Framework

Minnesota's surplus lines law is codified primarily in Minn. Stat. §§60A.195 through 60A.209. Key provisions:

§60A.196 — Surplus Lines Brokers: Defines who may place surplus lines coverage and the licensing requirements for surplus lines brokers.

§60A.198 — Transaction of Nonadmitted Insurance: Establishes the conditions under which surplus lines placement is authorized — including the diligent search requirement and the financial standards non-admitted carriers must meet to be eligible for Minnesota surplus lines placement.

§60A.207 — Policies to Include Notice: Requires the specific mandatory disclosure language that must be stamped on every surplus lines policy delivered in Minnesota.

§60A.209 — Insurance Procured from Ineligible Insurers: Governs placement with non-admitted carriers that are not on the eligibility list — a category that requires additional disclosure and carries additional regulatory risk.

§60A.2085 — Surplus Lines Association: Establishes the Minnesota Surplus Lines Association (MNSLA) and the stamping requirement.

Chapter 297I — Insurance Taxes: Establishes the surplus lines premium tax framework administered by the Minnesota Department of Revenue.

Who Can Place Surplus Lines Coverage in Minnesota

The surplus lines broker license: Only a producer who holds a Minnesota surplus lines broker license may legally place coverage with a non-admitted carrier for a Minnesota-home-state insured. The surplus lines broker license is separate from the standard producer license and has a significantly higher application and renewal fee — $500 for both initial application and renewal, compared to $50 per line for a standard producer license.

The underlying producer license requirement: To obtain a surplus lines broker license, the applicant must hold an underlying standard producer license with the appropriate line of authority. A producer who holds only a Life license cannot obtain a surplus lines broker license for P&C placements — the surplus lines authority must correspond to the underlying licensed lines.

Not every producer needs a surplus lines license: A standard producer who encounters a risk that the admitted market will not write does not need their own surplus lines license. They can work through a wholesale broker who holds the surplus lines license. In this structure:

The retail producer identifies the risk and the admitted market declinations

The retail producer submits the risk to a surplus lines wholesaler (an MGA or wholesale broker with the surplus lines license)

The wholesaler places the coverage with the non-admitted carrier

The retail producer maintains the client relationship while the wholesaler handles the regulatory compliance

This wholesale market model allows retail producers to access E&S market capacity without individually holding surplus lines licenses, as long as they work through properly licensed wholesale intermediaries.

The Diligent Search Requirement

Before placing any coverage with a non-admitted carrier, the surplus lines broker must conduct a diligent search of the admitted market — making a genuine effort to place the risk with admitted carriers before resorting to the non-admitted market. The diligent search is not a formality — it is a substantive compliance requirement that must be documented.

What constitutes a diligent search: Minnesota requires that the surplus lines broker make a documented attempt to place the risk with admitted carriers before using the surplus lines market. There is no specific statutory number of declinations required — the standard is whether the search was genuine and reasonable given the nature of the risk.

Industry practice: In practice, most surplus lines compliance frameworks require documentation of declinations from three admitted carriers before surplus lines placement is acceptable. This three-declination practice aligns with general industry standards across most states that have diligent search requirements, though Minnesota's statute does not specify a precise number.

What the documentation must show:

The risk description submitted to admitted carriers

The names of the admitted carriers approached

The dates of the submissions

The declination responses — whether formal written declinations, verbal declinations documented in writing, or evidence that the admitted carrier does not write that class of business

When diligent search is not required: Minnesota, like many states following the Nonadmitted and Reinsurance Reform Act (NRRA) of 2010, exempts certain sophisticated commercial insureds from the diligent search requirement. Specifically, when the insured is an "exempt commercial purchaser" — a large, sophisticated commercial entity with significant insurance expertise — the diligent search may be waived if the insured affirmatively requests surplus lines placement. This exemption does not apply to personal lines risks or smaller commercial accounts.

Documenting the diligent search: The surplus lines broker must document the diligent search and retain that documentation. If the Department of Commerce investigates a surplus lines placement, the broker must be able to produce evidence that the admitted market was genuinely approached and declined the risk before the non-admitted placement was made.

Eligible vs. Ineligible Surplus Lines Insurers

Not all non-admitted carriers are equally positioned under Minnesota's surplus lines framework. The law distinguishes between eligible and ineligible surplus lines insurers.

Eligible surplus lines insurers: Non-admitted carriers that meet Minnesota's eligibility standards — minimum capital and surplus requirements, financial stability criteria, and either approval through the NAIC's Quarterly Listing of Alien Insurers (for foreign alien insurers) or specific Department of Commerce approval. Placement with eligible carriers is the standard surplus lines transaction.

The NAIC Quarterly Listing of Alien Insurers: The commissioner may not prohibit a surplus lines broker from placing nonadmitted insurance with, or procuring nonadmitted insurance from, an alien insurer that is included on the Quarterly Listing of Alien Insurers as maintained by the NAIC. This listing provides a standardized eligibility mechanism for foreign alien insurers operating in the U.S. surplus lines market.

Minnesota's eligibility list: Minnesota maintains its own eligibility list of approved non-admitted carriers. Carriers on this list have met Minnesota's specific requirements and are recognized as eligible for surplus lines placement without the additional regulatory scrutiny that applies to ineligible carriers.

Ineligible surplus lines insurers: Some surplus lines placements involve carriers that are neither on the NAIC alien insurers list nor on Minnesota's eligibility list. Placement with ineligible carriers is permitted under specific circumstances — when no eligible carrier will write the risk — but requires additional disclosure language on the policy and carries significantly greater regulatory risk for the placing broker.

The different disclosure requirements:

For eligible carriers, the required policy notice reads: "THIS INSURANCE IS ISSUED PURSUANT TO THE MINNESOTA SURPLUS LINES INSURANCE ACT. THE INSURER IS AN ELIGIBLE SURPLUS LINES INSURER BUT IS NOT OTHERWISE LICENSED BY THE STATE OF MINNESOTA. IN CASE OF INSOLVENCY, PAYMENT OF CLAIMS IS NOT GUARANTEED."

For ineligible carriers, the required notice reads: "THIS INSURANCE IS ISSUED PURSUANT TO THE MINNESOTA SURPLUS LINES INSURANCE ACT. THIS INSURANCE IS PLACED WITH AN INSURER THAT IS NOT LICENSED BY THE STATE NOR RECOGNIZED BY THE COMMISSIONER OF COMMERCE AS AN ELIGIBLE SURPLUS LINES INSURER. IN CASE OF INSOLVENCY RELATIVE TO THE TERMS OR CONDITIONS OF THE POLICY OR THE PRACTICES OF THE INSURER, THE COMMISSIONER OF COMMERCE WILL NOT BE ABLE TO ASSIST IN THE DISPUTE."

Both notices must be printed, typed, or stamped in red ink upon the face of the policy in not less than 10-point type and must not be covered or concealed in any manner.

The Disclosure Obligation to the Insured

Before placing coverage with an eligible surplus lines insurer, the surplus lines broker must make specific disclosures to the insured. These disclosures serve two purposes: they inform the insured of the material differences between admitted and non-admitted coverage, and they create a documented record that the insured made an informed decision to accept surplus lines placement.

Required pre-placement disclosures:

The insurer is not licensed by the State of Minnesota

The insurer is not subject to Minnesota's rate and form regulation

The policy is not covered by the Minnesota Insurance Guaranty Association — if the insurer becomes insolvent, claims are not guaranteed

The insured has a right to seek coverage in the admitted market if it becomes available

Why the guaranty fund disclosure is the most critical: The loss of guaranty association protection is the most consequential difference between admitted and non-admitted placement. For the standard admitted market placement, a Minnesota policyholder can rely on the guaranty fund as a backstop if their insurer fails. For a surplus lines placement, there is no backstop. A commercial insured whose surplus lines carrier becomes insolvent may find their claims unpaid and their coverage vanished. The producer who failed to disclose this risk has exposed themselves to professional liability.

Tax and Filing Obligations

The Surplus Lines Premium Tax

Minnesota imposes a 3% surplus lines premium tax on gross premiums less return premiums for surplus lines policies covering Minnesota home-state risks. This tax is paid to the Minnesota Department of Revenue.

Who pays the tax: The surplus lines broker is responsible for collecting and remitting the surplus lines premium tax. The tax is typically passed through to the insured as part of the total cost of the policy.

Filing: All surplus lines brokers must report the Non-Admitted Surplus Lines Insurance Premium Tax by filing Form IG260, Nonadmitted Insurance Premium Tax Return for Surplus Lines Brokers, semiannually with the Minnesota Department of Revenue. The reporting periods end June 30 and December 31.

Gross premiums defined: Gross premiums for nonadmitted insurance includes any payment made as consideration for an insurance contract for such insurance, including premium deposits, assessments, fees, and any other compensation given in consideration for a contract of insurance. Gross premiums does not include the stamping fee.

The Stamping Fee

The Minnesota Surplus Lines Association (MNSLA) charges a stamping fee of 0.04% of taxable premium, payable to the Association. The stamping fee is separate from the 3% surplus lines premium tax and is not included in the gross premium calculation for tax purposes.

The MNSLA stamping process: Surplus lines brokers must submit transaction data to the MNSLA stamping office before delivering the policy. Each submitted transaction receives a stamping number. The stamping process serves as the state's transaction tracking mechanism for surplus lines placements — it creates a record of every surplus lines policy written in Minnesota and allows the Department to monitor market activity and tax compliance.

Registration with MNSLA: To submit transactions to the MNSLA stamping office, surplus lines brokers must register as members of the association, confirm their surplus lines license number with the Department of Commerce, and create a login to the MNSLA online transaction system. Brokers who have not registered with MNSLA cannot legally complete the required stamping for Minnesota surplus lines placements.

When to Use the E&S Market: Common Risk Categories

Understanding when a risk should be routed to the surplus lines market requires knowing which types of risks routinely fall outside admitted market appetite in Minnesota.

Hard-to-place property — the hard market impact: Minnesota's hail-driven homeowners hard market has pushed certain residential risks into the E&S market. Homes with older roofs that admitted carriers refuse to write, properties in high-frequency hail corridors, and properties with prior hail claims that make them unattractive to standard carriers are increasingly presented to surplus lines markets. Producers who are seeing admitted carriers non-renew clients should be familiar with E&S market options for residential property.

High-value specialty commercial property: Large commercial properties with complex valuation issues, specialized construction, or unusual occupancy types that standard commercial property underwriters decline.

Vacant and unoccupied properties: Properties that are vacant during renovation, between tenants, or unoccupied for extended periods. Admitted carriers typically exclude or severely limit coverage for vacant properties — the E&S market offers vacancy coverage that the admitted market does not.

High-risk habitational: Apartment buildings and multi-family properties with adverse loss histories, deferred maintenance, or ownership structures that admitted carriers will not write.

Liquor liability and hospitality: Bars, nightclubs, and entertainment venues with high liquor service liability exposure that exceeds standard admitted market appetite.

Cannabis operations: Minnesota's legal cannabis market creates insurance needs — property, liability, product liability, and commercial auto — that many admitted carriers will not underwrite because cannabis remains federally controlled. The E&S market is the primary placement mechanism for cannabis-related risks.

Professional and management liability: Unusual professional liability risks, directors and officers coverage for closely held companies with adverse histories, and other management liability placements that exceed admitted carrier appetite.

Excess coverage: When an insured's risk requires limits above what admitted carriers will provide, the E&S market provides excess layers above the admitted primary policy.

Frequently Asked Questions

A commercial client's admitted carrier is non-renewing their property coverage due to hail claims history. The client cannot find admitted replacement coverage. What do I need to do before placing them in the surplus lines market?

You must conduct a diligent search of the admitted market before placing coverage with a non-admitted carrier. In practice this means documenting attempts to place the risk with multiple admitted carriers — the industry standard is three declinations, though Minnesota's statute does not specify a precise number. Document each submission to an admitted carrier, the date submitted, and the declination response. If the admitted carrier already providing the non-renewal notice constitutes one declination, document it explicitly in writing. Submit to at least two additional admitted carriers and document their responses. Once the diligent search is complete and documented, you can proceed with surplus lines placement. Disclose to the client that the surplus lines carrier is not licensed by Minnesota, that rates and forms are not filed with the Department, and that the policy is not covered by the Minnesota Insurance Guaranty Association. Ensure the required red-ink notice is on the policy face, submit the transaction to MNSLA for stamping, and collect and remit the 3% surplus lines premium tax.

My retail producer license does not include a surplus lines endorsement. A client needs E&S market placement. What are my options?

You have two options. First, you can work the account through a licensed surplus lines wholesaler — a managing general agent or wholesale broker who holds the Minnesota surplus lines license. You submit the risk to the wholesaler, the wholesaler conducts the diligent search and places coverage with the non-admitted carrier, and you maintain the client relationship. The wholesaler handles all compliance obligations — the diligent search documentation, the MNSLA stamping, the surplus lines premium tax — that require the surplus lines license. Second, if you anticipate regularly placing E&S business, you can obtain your own surplus lines broker license from the Department of Commerce by paying the $500 application fee and meeting the underlying license requirements. For occasional E&S placements, the wholesale model is typically more efficient than individually obtaining and maintaining the surplus lines license.

Does the no-guaranty-fund disclosure create a problem if the client later argues they did not understand it?

The disclosure creates a documented record of what was communicated, not a guarantee against client disputes. The best practice is to make the disclosure in writing — not just verbally — and obtain the client's acknowledgment before binding the surplus lines coverage. A written disclosure signed by the client that explicitly states the policy is not covered by the Minnesota Insurance Guaranty Association in the event of insurer insolvency protects the producer from a later claim that they did not adequately warn the client. The disclosure should also explain what the guaranty association would have provided in an admitted market placement — specifically, that claims would have been guaranteed up to the statutory limits — so the client understands what protection they are forgoing by accepting surplus lines placement.

Minnesota's surplus lines market provides essential capacity for risks the admitted market will not write — and in the current hard property market, that capacity is increasingly relevant to producers serving both commercial and residential accounts. The framework's requirements — diligent search documentation, mandatory disclosures, red-ink policy notices, MNSLA stamping, and surplus lines premium tax compliance — are manageable for producers who understand them, and consequential for producers who bypass them.

Visit JustInsurance to enroll today and complete your Minnesota prelicensing with a state-approved course covering every surplus lines provision tested on the PSI exam.