Hawaii Insurance Adjuster License Practice Exam

What is the binding authority of a Surplus Lines Broker?

1. A surplus broker can bind risks

2. A surplus broker has limited binding authority

3. A surplus broker cannot bind risks

4. A surplus broker can negotiate binding risks

The correct answer is: A surplus broker cannot bind risks

A surplus lines broker operates in a specialized area of the insurance market where they handle placements for risks that standard insurers are unwilling or unable to underwrite. Their primary function is to connect these risks with non-admitted insurers, which are not licensed in the state where the risk is located. The correct understanding of a surplus lines broker's binding authority is that they cannot bind risks. This means that while they have the ability to negotiate terms and facilitate insurance placements, they cannot finalize or obligate an insurer to provide coverage without explicit approval from the insurer. This is a crucial aspect of their role, ensuring that the terms of coverage are agreed upon and confirmed by the underwriter prior to a risk being officially insured. This restriction is in place to safeguard both the broker and the insured, as it requires a formal agreement before any coverage takes effect. Surplus lines brokers operate under specific regulations that dictate how they can interact with insurers and the types of risks they may handle, further emphasizing their non-binding role in these transactions.