Arizona Surplus Lines Insurance: Brokers, Taxes, and Eligibility

Arizona surplus lines insurance is coverage placed with an insurer that isn’t licensed by the Arizona Department of Insurance and Financial Institutions (DIFI), used when the standard admitted market won’t write the risk. It’s governed by A.R.S. Title 20, Article 5, which controls who can broker the coverage, which insurers qualify, how premiums are taxed, and what protections the policyholder gives up by leaving the admitted market.

What Surplus Lines Insurance Is

Admitted carriers are licensed by DIFI and must file their rates and forms with the state. Non-admitted (surplus lines) carriers aren’t bound by those filings, so they can price and structure policies for risks the standard market avoids: niche professional liability, unusual commercial operations, properties with exposures a mainstream insurer won’t touch.

The exchange runs both ways. You get access to coverage you couldn’t otherwise buy. You lose the state’s usual rate oversight and, critically, the guaranty fund backstop if the insurer fails. Surplus lines contracts themselves are fully valid and enforceable in Arizona courts, and are treated the same as admitted policies for coverage disputes and claims.¹

When You Can Buy Surplus Lines Coverage

A broker can’t send you to the surplus lines market just because a non-admitted insurer offers a better price. Under A.R.S. § 20-407, the coverage must either be unavailable after a diligent effort in the admitted market, or admitted insurers must be willing to cover only part of the risk. A “diligent effort” means the broker sought insurance from at least three admitted Arizona insurers that write the type of coverage in question.²

The statute expressly bars placing a risk with a non-admitted insurer purely for a cheaper premium or more favorable terms. If admitted coverage exists at a reasonable price, the surplus lines market is closed for that risk.²

The Recognized Surplus Lines List

There’s one significant exception. If the DIFI director determines that a type of coverage generally isn’t available from admitted carriers, the director can designate it a “recognized surplus line.” Coverage on that list can go directly to a non-admitted insurer with no need to document rejections from admitted carriers first.³

Only a Licensed Surplus Lines Broker Can Place the Coverage

Arizona law prohibits anyone from placing surplus lines coverage without a surplus lines broker license issued by the DIFI director. An individual applicant must already hold a resident property or casualty producer license in Arizona and must pass a written exam on surplus lines law and broker responsibilities.⁴

Business entities can also be licensed, but only if they hold the underlying producer license. Every office that transacts surplus lines business must include at least one individual with both a property or casualty producer license and a surplus lines broker license.⁴

Because the insurer sits outside normal DIFI oversight, the broker is the gatekeeper: verifying the insurer’s financial standing, completing the diligent search, and handling every tax filing and regulatory report tied to the policy.

Which Insurers Qualify

Not every non-admitted carrier can write Arizona surplus lines business. A.R.S. § 20-413 sets minimum financial standards that depend on the insurer’s type:

Foreign insurers (from another U.S. state) must hold capital and surplus equal to the greater of Arizona’s minimum requirements or $15 million, and must be authorized in at least one other state.
Alien insurers (domiciled outside the U.S.) must hold at least $15 million in capital and surplus and maintain at least $2.5 million in U.S. assets. The requirement can be skipped if the insurer appears on the NAIC Quarterly Listing of Alien Insurers.
Lloyd’s-type associations must maintain a U.S. trust fund of at least $100 million as security for American policyholders.
Insurance exchanges authorized in at least one state must hold aggregate capital and surplus of $50 million, with each syndicate holding at least $5 million.

⁵

DIFI publishes a “List of Qualified Unauthorized Insurers,” and brokers must consult it before placing coverage. Business can only go to insurers on that list, on the NAIC Quarterly Listing of Alien Insurers, or on Arizona’s list of domestic surplus lines insurers.⁶

Arizona also permits a domestic insurer with at least $15 million in capital and surplus to apply for designation as a domestic surplus lines insurer under A.R.S. § 20-407.01. Once designated with the director’s written approval, that carrier is treated as unauthorized for surplus lines purposes and writes through brokers under the same placement rules as any other non-admitted insurer.⁷

Taxes and Fees on Top of Premium

Arizona imposes a 3% tax on gross premiums for surplus lines policies covering Arizona risks. The broker collects it from you on top of the premium the insurer charges, and it applies to any taxable policy fees as well. It does not apply to the stamping fee or to premiums returned for cancellation.⁸

Brokers cannot absorb the tax or rebate any part of it back to you. If a policy is canceled early, the broker must return the tax on the unearned portion of the premium.

A separate stamping fee of 0.2% of gross premium funds the Surplus Line Association of Arizona and is paid to the SLA rather than DIFI.

Brokers can also charge a service fee for placing the coverage under A.R.S. § 20-410, but only if the specific fees and the services they pay for are disclosed to you before binding and you agree to them in writing. The 3% premium tax applies to those service fees as well.¹

No Guaranty Fund Protection

This is the trade-off worth understanding before you sign. Surplus lines insurers are excluded from the definition of “member insurer” under Arizona’s Property and Casualty Insurance Guaranty Fund. If a surplus lines carrier becomes insolvent, no state-backed fund steps in to pay your claims.⁹

Arizona requires every surplus lines policy delivered to you to carry a prominently displayed notice in bold type warning of this gap. For policies from non-domestic surplus lines insurers, the notice states that the insurer does not hold a certificate of authority from the DIFI director and that policyholders will not be eligible for guaranty fund protection if the insurer becomes insolvent. Domestic surplus lines insurers must include a similar warning without the certificate-of-authority language.¹

The financial standards on qualifying insurers exist precisely because that backstop is missing. They give some assurance that the company behind the policy can pay claims, but they don’t replace the guaranty fund.

Multi-State Risks and the Home-State Rule

Arizona’s rules sit inside the federal framework of the Nonadmitted and Reinsurance Reform Act of 2010 (NRRA). Under the NRRA, only the insured’s “home state” can require premium tax payments on a surplus lines transaction. For a business, home state means the principal place of business. For an individual, it’s the state of principal residence.¹⁰

If Arizona is your home state, Arizona collects the full 3% premium tax on the policy regardless of where the covered risks are physically located. Before the NRRA, a policy touching several states could trigger tax in each one; that is no longer the case. Arizona’s broker licensing statute explicitly references the NRRA and requires the director to participate in the NAIC’s national producer database to implement it.⁴

The NRRA also allows states to enter compacts to allocate premium tax revenue. Arizona’s filing statute contains a separate quarterly reporting schedule for multistate transactions when a clearinghouse compact is in operation.¹¹

1
Arizona Legislature. Arizona Code 20-410 – Validity of Surplus Lines Insurance; Disclosure; Policy Fees
2
Arizona Legislature. Arizona Code 20-407 – Surplus Lines; Brokers
3
Arizona Legislature. Arizona Code 20-409 – Recognized Surplus Lines
4
Arizona Legislature. Arizona Code 20-411 – Licensing of Surplus Lines Broker; Examination
5
Arizona Legislature. Arizona Code 20-413 – Placing of Surplus Lines Coverage; Endorsement by Broker
6
Arizona Department of Insurance and Financial Institutions. List of Qualified Unauthorized Insurers
7
Arizona Legislature. Arizona Code 20-407.01 – Designation as a Domestic Surplus Lines Insurer; Requirements; Scope of Business Activity Permitted
8
Arizona Department of Insurance and Financial Institutions. Surplus Lines / Industrial Insured Premium Tax
9
Arizona Legislature. Arizona Code 20-661 – Definitions
10
Office of the Law Revision Counsel. 15 USC 8201 – Reporting, Payment, and Allocation of Premium Taxes
11
Arizona Legislature. Arizona Code 20-415 – Tax Report; Filing