What is one major risk associated with relying solely on surplus lines for insurance needs?

Relying solely on surplus lines for insurance needs presents a significant risk concerning the lack of guarantee fund backing in the event of insurer insolvency. Surplus lines insurance is typically obtained from unlicensed insurers or those that do not have a traditional license to operate in a specific state. Unlike standard insurers that are part of state guarantee funds—designed to protect policyholders in cases of insurer bankruptcy—surplus lines insurers are usually not required to participate in these funds. This means if a surplus lines insurer fails, policyholders have no safety net to recover any claims or premiums lost.

This risk underscores the importance of understanding the financial stability and reliability of surplus lines carriers. While they can provide coverage for risks that standard insurers may not address, the trade-off involves more exposure to potential insolvency issues without the protective measures offered by regulated insurance companies.