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

The surplus lines market — the excess and surplus (E&S) lines market — is the segment of the insurance industry that covers risks the admitted market will not. Every Property, Casualty, and Personal Lines producer in Tennessee will encounter risks that standard admitted carriers decline — whether because of underwriting characteristics, coverage limits, policy terms, or the sheer novelty of the exposure. Understanding when the E&S market is the right solution, what Tennessee's surplus lines framework requires before placing coverage there, and what obligations the producer and broker carry through the entire transaction is foundational commercial lines knowledge. This post covers the complete Tennessee surplus lines framework: the statutory basis, when surplus lines placement is legally permitted, who can place it, the diligent search requirement, the tax and compliance obligations, the mandatory disclosure stamping requirement, what risks cannot be placed in surplus lines, and how the NRRA simplifies multi-state placements.

The Statutory Foundation: TCA Title 56, Chapter 14

Tennessee's surplus lines framework is codified in TCA Title 56, Chapter 14 — the Tennessee Surplus Lines Insurance Act. The Act governs every aspect of how non-admitted insurance coverage is legally placed in Tennessee: who must be licensed to place it, what conditions must be satisfied before placement is permitted, what taxes apply, what disclosures must be made to insureds, and what records must be maintained.

The fundamental premise of surplus lines law: Tennessee law requires that insurance covering Tennessee risks be placed with admitted carriers — insurers who hold a Tennessee certificate of authority, are regulated by the TDCI, and participate in Tennessee's guaranty associations. Surplus lines law creates an exception to this requirement when admitted market coverage is genuinely unavailable for a specific risk. The exception is conditional — it applies only when proper process is followed.

The home state rule: Tennessee's surplus lines framework applies to surplus lines transactions where the insured's home state is Tennessee. For commercial insureds with multistate operations, the NRRA home state rule — discussed below — determines which state's surplus lines requirements govern.

Who Can Place Surplus Lines Coverage in Tennessee

The Licensed Surplus Lines Agent

In Tennessee, surplus lines coverage may only be placed by a producer who holds a specific surplus lines agent license — in addition to their standard producer license. A standard Tennessee Property and Casualty producer license does not authorize surplus lines placements. The surplus lines agent license is a distinct credential that must be separately obtained.

Surplus lines agent license: The surplus lines agent license authorizes the holder to place coverage with non-admitted insurers for risks that cannot be placed in the admitted market. The biennial renewal fee for the surplus lines agent license is $120 — double the standard major lines producer renewal fee of $60.

The producing broker's role: In many Tennessee surplus lines transactions, the placing structure involves two licensed professionals:

The producing broker (retail agent): The standard admitted-market producer who has the client relationship and identifies the need for surplus lines placement. The producing broker does not need a surplus lines license but works with a surplus lines agent to complete the placement.

The surplus lines agent (wholesale broker): The licensed surplus lines specialist who actually places the coverage with the non-admitted insurer. The surplus lines agent holds the surplus lines license and is responsible for compliance with Tennessee's surplus lines requirements — including the diligent search, the tax collection and remittance, and the mandatory disclosures.

Compliance responsibility: The surplus lines agent — not the producing broker — bears primary regulatory responsibility for compliance with Tennessee's surplus lines framework. The surplus lines agent's license is at risk for non-compliance.

When Surplus Lines Placement Is Permitted: The Eligible Risk

Tennessee's surplus lines framework is not a choice — it is a conditional permission. Coverage may be placed with a non-admitted insurer only when the admitted market is unavailable for the specific risk. This eligibility condition is what makes surplus lines placement permissible rather than a violation of Tennessee's requirement that carriers transacting insurance business in Tennessee be admitted.

What Makes a Risk Eligible for Surplus Lines

A risk is eligible for surplus lines placement when:

The risk has been declined by the admitted market: After a diligent search — a genuine, documented effort to place the coverage with admitted carriers — the risk cannot be placed in the admitted market on reasonable terms. Either admitted carriers have declined to write the risk entirely, or admitted market terms and conditions are so inadequate or restrictive as to be commercially unreasonable for the client's actual exposure.

The coverage type is not available in Tennessee's admitted market: Some coverage types — specialized professional liability, unique product liability structures, emerging risks like certain cyber exposures — may not be available from any Tennessee-admitted carrier. When admitted market capacity does not exist for a coverage type, surplus lines placement is appropriate without requiring declinations from each admitted carrier that simply does not write that coverage.

The insured requires coverage terms unavailable from admitted carriers: An insured may need policy terms — higher limits, broader coverage triggers, specific endorsements, multi-year coverage periods — that admitted carriers do not offer. When the specific terms required are genuinely unavailable in the admitted market, surplus lines placement is appropriate.

Ineligible Risks: What Cannot Be Placed in Surplus Lines

Tennessee law specifically prohibits surplus lines placement for certain categories of insurance. These ineligible coverages must be placed in the admitted market or not at all — surplus lines is not an option regardless of admitted market availability:

Primary personal auto: Standard private passenger auto liability cannot be placed in the surplus lines market. A client with significant prior claims history, SR-22 requirements, or other characteristics that make admitted market placement difficult must be placed with an admitted non-standard auto carrier — not in surplus lines.

Surety: Fidelity and surety bonds cannot be placed in the surplus lines market in Tennessee.

Workers' compensation — general: Standard workers' compensation coverage cannot be placed in the surplus lines market. Employers who cannot obtain voluntary market workers' compensation coverage are directed to Tennessee's assigned risk plan — the market of last resort within the admitted framework.

Excess workers' compensation — permitted: Excess workers' compensation coverage — policies that provide coverage above a high self-insured retention for large employers who self-insure their workers' compensation obligations — is an exception. Excess workers' compensation may be placed in the surplus lines market.

The Diligent Search Requirement

The diligent search is the procedural cornerstone of Tennessee's surplus lines framework. Before placing any risk in the surplus lines market, the surplus lines agent must conduct a genuine effort to place the coverage with admitted carriers. The diligent search is not a formality — it is a substantive compliance obligation that protects the statutory requirement that admitted market coverage be used when available.

What Constitutes a Diligent Search

A diligent search requires contacting Tennessee-admitted carriers who write the type of coverage needed and giving those carriers a genuine opportunity to provide a quote. The search must be:

Genuinely attempted: The surplus lines agent must actually seek quotes from admitted carriers — not perfunctorily contact carriers with an expectation of declination or without providing complete underwriting information.

Documented: Every declination must be documented and retained as evidence of compliance. Documentation of the diligent search includes the names of admitted carriers contacted, the dates of contact, the information provided to each carrier, and the outcome — whether the carrier declined, provided an unacceptable quote, or did not respond.

Retained for five years: Tennessee requires surplus lines agents to maintain complete records of each placement, including diligent search documentation, for a minimum of five years — available for regulatory examination on request.

The declination affidavit: Many states require a formal diligent search affidavit documenting the admitted market contacts and their outcomes. Tennessee does not use a dedicated stamping organization, which means the surplus lines agent's own documentation and records serve as the compliance evidence.

The Number of Required Declinations

Tennessee does not specify a precise number of admitted carrier declinations required to satisfy the diligent search. The standard is substantive — a genuine effort appropriate to the specific risk. For common risk types with multiple admitted market alternatives, contacting three or more admitted carriers that write the applicable coverage type is standard professional practice. For specialized or emerging risk types with limited admitted market participation, fewer declinations may be necessary because the admitted market capacity is narrow.

When Diligent Search Is Not Required

The exempt commercial purchaser: Tennessee has implemented the NRRA's exempt commercial purchaser provision at TCA §56-14-102(8). An exempt commercial purchaser — a sophisticated commercial entity meeting specific size and financial criteria — may access the surplus lines market without requiring the surplus lines agent to conduct a diligent search. The exempt commercial purchaser has voluntarily waived the admitted market requirement based on its sophistication and financial capacity.

Exempt commercial purchaser qualification criteria (meeting any one of the following):

Net worth exceeding $20 million

Annual gross revenues exceeding $50 million

Employs or retains a qualified risk manager who is responsible for purchasing insurance

Total insured value of property exceeding $40 million

Is a non-profit or public entity with a combined annual budget exceeding $30 million

The industrial insured exemption: Tennessee also maintains an industrial insured exemption for large commercial insurance buyers who negotiate directly with surplus lines insurers. Industrial insureds may procure coverage directly without going through the admitted market, though premium taxes still apply.

Eligible Surplus Lines Insurers: Who Tennessee Will Accept

Not every non-admitted insurer can write surplus lines coverage in Tennessee. The insurer must be eligible — meaning it meets Tennessee's financial standards for non-admitted insurers.

Foreign Eligible Surplus Lines Insurers

Foreign surplus lines insurers (those domiciled in another U.S. state) must appear on Tennessee's eligible surplus lines insurer list maintained by the TDCI. The TDCI's list is published at tn.gov/commerce/insurance/types-of-insurance-companies/surplus-lines. A surplus lines agent may only place coverage with a non-admitted insurer that appears on this eligibility list.

Capital and surplus minimum: Tennessee requires eligible surplus lines insurers to maintain capital and surplus of at least $15 million, except where the Commissioner makes an affirmative decision permitting a lower capitalized insurer for specific types of coverage.

Annual statement requirement: Foreign eligible surplus lines insurers must file annual statements with the TDCI. Late or incomplete filings are subject to a penalty of $100 per day.

Alien Eligible Surplus Lines Insurers

Alien surplus lines insurers (those domiciled outside the United States) are ineligible in Tennessee unless listed by the NAIC International Insurers Department (IID). The IID maintains a list of alien insurers that meet the NAIC's financial standards for non-U.S. insurers participating in the U.S. surplus lines market. Tennessee does not maintain a separate alien insurer eligibility list — the NAIC IID list is the controlling authority.

No Domestic Surplus Lines Formation

Tennessee does not allow the formation of domestic surplus lines insurers within the state. Every eligible surplus lines insurer operating in Tennessee is either a foreign (other U.S. state) or alien (non-U.S.) carrier — there are no Tennessee-domiciled surplus lines insurers.

The Surplus Lines Premium Tax

The Tax Rate

Tennessee imposes a gross premium tax on surplus lines insurance at a rate of 5% of gross premiums — calculated on the total premium charged, including endorsement premiums and policy fees where applicable. The 5% rate applies when Tennessee is the insured's home state.

Additionally: Tennessee's SLAS Clearinghouse transaction fee of 0.175% applies to eligible surplus lines transactions processed through the clearinghouse.

Collection and Remittance Obligations

The surplus lines agent collects the tax: The surplus lines agent is required to collect the premium tax from the insured at the time of delivering the cover note, certificate of insurance, policy, or other initial confirmation of insurance. The tax is not optional and not rebatable — the statute specifically prohibits the surplus lines agent from rebating any part of the tax.

Quarterly remittance: Tennessee's surplus lines premium tax is remitted quarterly:

On or before February 15 — for the quarter ending December 31

On or before May 15 — for the quarter ending March 31

On or before August 15 — for the quarter ending June 30

On or before November 15 — for the quarter ending September 30

The criminal penalty for non-remittance: A surplus lines agent who fails or refuses to pay over the surplus lines premium tax to the state, or who fraudulently withholds, appropriates, or uses the money belonging to the state, commits theft under Tennessee's criminal code — regardless of whether the surplus lines agent claims any interest in the money received. This criminal penalty provision is among the most serious compliance consequences in Tennessee insurance law.

The NRRA Home State Rule and Multi-State Placements

The Nonadmitted and Reinsurance Reform Act of 2010 (NRRA) fundamentally simplified surplus lines tax obligations for multi-state risks. Under the NRRA:

Only the home state collects surplus lines tax: For risks where the insured's home state is Tennessee, Tennessee collects 100% of the surplus lines tax at Tennessee's 5% rate — regardless of where the insured's exposures are located in other states. Tennessee surplus lines agents do not need to calculate, collect, or remit tax to other states for Tennessee home-state insureds.

Conversely: Tennessee surplus lines agents placing risks for insureds whose home state is another state must comply with that state's surplus lines requirements and tax rates — not Tennessee's.

The home state determination for commercial insureds: For commercial entities, the home state is the state where the insured maintains its principal place of business. For individuals, the home state is the state of the insured's principal residence. For multi-state commercial operations, the home state determination is critical — it determines which state's surplus lines framework and tax rate apply to the entire risk.

The Mandatory Disclosure Stamp

Tennessee law requires that every surplus lines insurance contract, certificate, cover note, or other confirmation of insurance bear the mandatory surplus lines disclosure stamp — either physically stamped, affixed, or printed on the document.

The Required Stamp Language

Under TCA §56-14-107, the required disclosure language is:

"This insurance contract is with an insurer not licensed to transact insurance in this state and is issued and delivered as a surplus line coverage pursuant to the Tennessee insurance statutes."

What the document must also show:

Description and location of the subject of the insurance

Coverage, conditions, and term of the insurance

The premium and rate charged

Premium taxes to be collected from the insured

Name and address of the insured and insurer

If the risk is shared among multiple insurers: the name, address, and proportion of the direct risk assumed by each insurer

Why the stamp matters: The mandatory disclosure stamp serves a dual function — it provides the insured with clear notice that their policy is with a non-admitted insurer (and therefore not covered by Tennessee's guaranty associations), and it creates a compliance record demonstrating that the required disclosure was made. A surplus lines placement completed without the required stamp violates TCA §56-14-107 regardless of whether all other compliance requirements were satisfied.

The Guaranty Fund Exclusion: The Most Critical Client Disclosure

The most consequential difference between admitted and surplus lines coverage from the insured's perspective is the guaranty association exclusion.

Tennessee's insurance guaranty associations — which protect policyholders when admitted carriers become insolvent — do not cover surplus lines policies. If a surplus lines insurer becomes insolvent and cannot pay claims, the insured has no guaranty fund backstop. The insured's recourse is through the insolvent insurer's liquidation proceedings — which typically produce partial recoveries at best.

The disclosure obligation: The surplus lines agent must inform the insured of the guaranty fund exclusion. This disclosure protects the insured's ability to make an informed decision about whether to accept surplus lines coverage or continue seeking admitted market placement. A client who accepts a surplus lines policy without understanding that guaranty protection does not apply has not given informed consent to the full terms of their coverage arrangement.

Practical risk management for the surplus lines agent: Working with surplus lines insurers that maintain strong financial ratings reduces — but does not eliminate — the insolvency risk that the guaranty exclusion creates. The TDCI's eligibility list requirements and the minimum capitalization standards are designed to screen out the weakest non-admitted insurers, but financial strength monitoring remains an ongoing obligation.

Record-Keeping Requirements

Tennessee surplus lines agents must maintain complete records of each surplus lines placement for a minimum of five years, available for TDCI examination on request. Required records include:

The complete diligent search documentation — carriers contacted, dates, information provided, outcomes

A copy of the policy, certificate, or cover note with the required stamp

The premium charged and tax calculation

Evidence of tax collection from the insured and remittance to the TDCI

Any correspondence with the placing insurer

If the risk involves an exempt commercial purchaser or industrial insured: documentation establishing that exemption

The Surplus Lines Information Portal (SLIP): As of 2025, the TDCI has implemented SLIP — the Surplus Lines Information Portal — through which non-admitted insurers must submit premium and policy data directly to the TDCI. Per Bulletin 25-01 issued February 2025, all non-admitted insurers are required to report data on policies effective January 1, 2024 and forward. This data allows the TDCI to reconcile premiums written by surplus lines insurers with premiums reported by surplus lines brokers — a compliance oversight mechanism that makes accurate record-keeping by both agents and insurers more important than before.

Common Tennessee Surplus Lines Scenarios

Understanding which risks commonly require surplus lines placement in Tennessee gives producers and commercial clients a practical framework for when to expect E&S market involvement.

Risks commonly placed in Tennessee's surplus lines market:

Excess professional liability: Technology E&O, media liability, directors and officers liability, and other professional liability lines where admitted market capacity is limited or where the insured's specific claims history or business characteristics make admitted market placement unavailable.

Cyber liability: Emerging risk types — particularly complex cyber liability for high-value targets in Tennessee's healthcare, entertainment, and logistics sectors — may exceed admitted market appetite or require policy structures the admitted market does not offer.

Vacant property: Admitted carriers universally restrict or exclude vacant property from standard commercial property coverage. Properties undergoing renovation, between tenants, or otherwise vacant for extended periods frequently require surplus lines placement.

High-value residential property: Luxury residential properties exceeding admitted market capacity or coverage limits, historic properties, and properties with unusual construction or features may require surplus lines residential coverage.

Specialty hospitality: Bars, nightclubs, and entertainment venues with high-risk liquor liability exposure — particularly in Nashville's entertainment corridor and Memphis's music district — frequently require surplus lines liquor liability placement when admitted market carriers decline based on venue type or operational characteristics.

Excess casualty: High limits of general liability and umbrella coverage beyond what admitted carriers offer through their standard programs for manufacturing, construction, and transportation risks.

Construction wrap-up programs: Owner-controlled insurance programs (OCIPs) and contractor-controlled insurance programs (CCIPs) for large construction projects frequently involve surplus lines components for the limits and coverage structures required.

Frequently Asked Questions

My commercial client needs workers' compensation coverage but the voluntary market has declined them because of their loss history. Can I place their workers' compensation in the surplus lines market?

No — standard workers' compensation is one of the specifically ineligible coverages under Tennessee's surplus lines framework. Workers' compensation cannot be placed in the surplus lines market regardless of the client's loss history or the voluntary market's declination. The appropriate pathway for a client declined in the voluntary workers' compensation market is Tennessee's assigned risk plan — the residual market mechanism operated through the Tennessee Compensation Rating Bureau. The assigned risk plan is required to accept all qualifying employers who cannot obtain voluntary market coverage, though at rates that reflect the elevated risk. Excess workers' compensation — coverage above a high self-insured retention for large employers who self-insure their primary workers' compensation obligation — is the one workers' compensation-related coverage that may be placed in the surplus lines market.

I completed what I believe is a diligent search — I contacted two admitted carriers and both declined. Is that sufficient for Tennessee surplus lines purposes?

Whether two declinations constitute a sufficient diligent search depends on the specific risk and the admitted market for that coverage type. Tennessee does not specify a minimum number of declinations — the standard is substantive compliance with the genuine effort requirement. For a common commercial risk type with multiple admitted market alternatives in Tennessee, two declinations may be insufficient if additional admitted carriers write that coverage type and could have provided quotes with complete underwriting information. For a specialized or emerging coverage type where admitted market capacity is genuinely limited — two or three admitted carriers constitute the entire Tennessee market for that coverage — two declinations may be entirely sufficient. Document every carrier contacted, the information provided, the date of contact, and the outcome. When in doubt, contact additional admitted carriers that write the applicable coverage type. The documentation of your search — not the number of declinations alone — is what establishes compliance if a question arises.

A client is asking why they have to pay an extra 5% on their surplus lines premium. How do I explain the surplus lines premium tax?

The surplus lines premium tax is a Tennessee state tax on insurance premiums paid to non-admitted carriers — insurers that are not licensed in Tennessee and therefore not subject to Tennessee's standard regulatory framework in the same way admitted carriers are. The 5% tax applies to the gross premium because the non-admitted carrier does not pay Tennessee state income or premium taxes in the way admitted carriers do. From a practical standpoint, the tax is a cost of accessing the non-admitted market — which is often the only available option for unique, high-risk, or high-limit risks that admitted carriers will not write. The full premium cost, including the 5% tax, represents what the client must pay to obtain coverage that is genuinely not available in the admitted market. A brief comparison to the alternative — no coverage at all — typically puts the tax into financial perspective for clients who find the additional cost objectionable.

Tennessee's surplus lines framework — built on the foundational requirement of admitted market primacy, conditional permission for non-admitted placement when the admitted market is genuinely unavailable, procedural compliance through the diligent search and mandatory disclosure stamping, financial accountability through the 5% premium tax and quarterly remittance obligations, and the critical client disclosure that guaranty protection does not apply — creates a structured but accessible pathway to the E&S market for Tennessee risks that need it. Producers who understand every element of this framework serve commercial clients with the sophistication that complex risk placement requires and maintain the compliance posture that Tennessee's surplus lines law demands.

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