What is the potential consequence for an insured if a surplus lines insurer becomes insolvent?

When an insured obtains a policy from a surplus lines insurer, that insurer is typically not backed by the state's guaranty fund. This means that if the surplus lines insurer becomes insolvent, the insured will not have recourse to state-sponsored guaranty funds that would usually compensate policyholders in the event of a traditional insurer's insolvency. The purpose of state guaranty funds is to protect consumers who purchase insurance from licensed insurers within the state, but surplus lines insurers operate outside of this regulatory framework. As such, an insured who relies on a surplus lines insurer could face significant financial loss if that insurer fails.

The other options misinterpret how insolvency and state protections work with surplus lines coverage. Full compensation from the state isn’t guaranteed since surplus lines are not part of the state’s guaranty system. Policy invalidation upon insolvency is not automatic; the policy may still have value or remain in force despite the insurer's issues. Lastly, transferring to a traditional insurer is not straightforward and is not a built-in right upon insolvency; it would depend on the individual circumstances and the insurer's underwriting policies. Therefore, the insured's lack of access to state guaranty funds is indeed the most accurate consequence related to the insolvency of a surplus lines