Classify an Insurer: Ownership, Domicile and Authority

Who Owns an Insurer, Where It Was Formed, and Where It May Sell

Three Separate Questions

When you describe an insurance company, you are usually answering three separate questions. Each has its own vocabulary, and the answer to one does not answer the others.

• Who owns it? Stock or mutual.
• Where was it legally formed? Domestic, foreign or alien.
• What permission does it have in this state? Admitted or nonadmitted.

By the end of this lesson, you should be able to:

• Tell a stock insurer from a mutual insurer by who owns it.
• Classify an insurer as domestic, foreign or alien compared with a named state.
• Explain what admitted means, and how a nonadmitted insurer can still be used lawfully through surplus lines.
• Answer all three questions about one insurer without letting one answer stand in for another.

Before you start: an insurer is the company that issues a policy and promises to pay covered claims. A policyholder is the person or business that owns the policy. A shareholder (also called a stockholder) owns shares of a company, which are small pieces of ownership in it.

Question 1: Who Owns the Insurer?

A stock insurer is owned by its shareholders. A mutual insurer is owned by its policyholders.

Suppose you buy a car policy from a hypothetical stock company, Granite Insurance. You are its customer, not one of its owners. Its owners are whoever holds its shares. Now suppose you buy the same kind of policy from a hypothetical mutual company, Harbor Mutual. Buying the policy makes you one of its owners.

Now change one fact. You buy Granite shares but no Granite policy. You are now an owner but not a policyholder. In a stock company, owning and being insured are separate roles. In a mutual company, they are the same group of people.

Tempting mistakes: "Mutual" can sound public or official. A mutual insurer is a private company owned by its policyholders. It is not owned or backed by the government. Being a mutual also does not, by itself, promise policyholders any payment back.

Check 1: A bakery buys a liability policy from Lakeshore Insurance Company. Lakeshore is owned by investors who hold its stock, and its policyholders have no ownership share. Is Lakeshore stock or mutual? Does the bakery own part of Lakeshore?

Answer: Stock, and no

Lakeshore's owners are its stockholders, so it is a stock insurer. The bakery is a policyholder and customer, not an owner. Notice that the company's name did not settle the question. You classify an insurer by who owns it, not by what it is called.

Question 2: Where Was the Insurer Legally Formed?

An insurer's domicile is its legal home: the state or country under whose laws it was formed. Its domicile is not where its headquarters, branch offices or customers happen to be.

Domicile labels always depend on which state you are standing in:

• Domestic: the insurer was formed under this state's laws.
• Foreign: the insurer was formed under another U.S. state's laws.
• Alien: the insurer was formed under another country's laws.

Take a hypothetical company, Prairie Casualty, formed under Kansas law. In Kansas, Prairie is domestic. In Colorado, it is foreign. The company did not change. Only the state you are comparing it with changed.

Now change one fact. If Prairie had been formed under Canadian law instead, it would be alien in Kansas, in Colorado and in every other U.S. state.

What if Kansas-formed Prairie opens a large claims office in Denver? It is still foreign in Colorado. Opening an office does not change where the company was legally formed.

Tempting mistake: In everyday speech, "foreign" means another country. In insurance, foreign means another U.S. state. Alien is the word for another country.

Check 2: Coastline Insurance was formed under Georgia law. Its headquarters is in Florida, and most of its policyholders live in Alabama. Classify Coastline in Georgia, Florida and Alabama.

Answer: Domestic in Georgia; foreign in Florida and Alabama

Coastline was formed under Georgia law, so Georgia is its domicile. Florida and Alabama are other U.S. states, so Coastline is foreign in both. The headquarters location and where its customers live do not change its domicile.

Question 3: What Permission Does It Have in This State?

An admitted insurer, also called an authorized insurer, has the state's permission to do the relevant kind of insurance business in that state. Each state decides this for itself. A nonadmitted insurer lacks that ordinary admitted permission in that state.

Ownership and domicile do not prove permission. Being formed in Ohio says nothing about whether an insurer may sell in Michigan. A domestic insurer is not automatically licensed everywhere.

For example, suppose Northgate Casualty, a hypothetical stock insurer formed under Indiana law, has been admitted in Illinois to sell commercial auto insurance. In Illinois, Northgate is stock, foreign and admitted. "Foreign" describes where Northgate was formed. It does not mean Northgate is unauthorized.

Surplus Lines: Lawful Use of a Nonadmitted Insurer

Some risks are unusual. Suppose a new drone-delivery company has little loss history, and no admitted insurer in its state will offer the coverage it needs. That coverage might be placed with a nonadmitted insurer through the surplus lines market.

This works only under the state's rules. The insurer must meet the state's eligibility requirements. The placement must go through a licensed surplus lines broker, who is responsible for confirming eligibility and completing the required steps. The transaction is regulated, and a U.S.-domiciled surplus lines insurer is overseen by its home state. So nonadmitted does not mean illegal or unregulated. It also does not give anyone permission to sell freely.

Now change one fact. If a producer without a surplus lines license sold the same policy, the sale would not meet the licensing requirement. The fact that surplus lines exists does not make that sale lawful.

Protection difference: A state guaranty fund is a safety net, funded by admitted insurers, that pays certain claims if an admitted insurer becomes insolvent (unable to pay its obligations). Surplus lines policies generally lack this protection. Admitted status still does not guarantee every claim. Guaranty fund protection has eligibility rules and limits, and any insurer can deny a claim that the policy does not cover.

Check 3: A client says, "That insurer isn't admitted here, so any policy from it must be illegal." A licensed surplus lines broker has confirmed that the insurer is eligible under the state's rules. How do you respond, and what protection difference should the client understand?

Answer: It can be lawful, but it generally lacks guaranty fund protection

A nonadmitted insurer can be used lawfully through surplus lines when the state's eligibility and licensed-broker requirements are met. The client should understand, however, that surplus lines coverage generally lacks state guaranty fund protection if the insurer becomes insolvent.

Putting the Three Questions Together

Check 4: Maple Assurance is owned by its policyholders and was formed under Canadian law. It is not admitted in Texas. A licensed surplus lines broker places an unusual risk for a Texas business with Maple after confirming that Maple is eligible under Texas rules. Classify Maple in Texas on all three questions. Then name one thing you cannot conclude from these facts.

Answer: Mutual, alien, nonadmitted

• Ownership: mutual, because policyholders own it.
• Domicile: alien, because it was formed under another country's law.
• Authority: nonadmitted in Texas. This placement can still be lawful because the eligibility and licensed-broker requirements are met, but it generally lacks guaranty fund protection.

You cannot conclude that Maple is government-owned or that it pays dividends. If Maple later became admitted in Texas, only its authority would change. It would still be mutual and alien.

Recap

• Ownership: stock means shareholders own the insurer; mutual means policyholders own it.
• Domicile: the place where the insurer was legally formed, judged against a named state. Domestic means this state, foreign means another U.S. state, and alien means another country.
• Authority: admitted means the insurer has permission in this state. A nonadmitted insurer may still be used lawfully through surplus lines under eligibility and licensed-broker rules.
• Guaranty fund protection generally applies to admitted insurers, subject to eligibility and limits. It is generally not available for surplus lines.
• Answer each question separately. No one answer proves another.

Sources: NAIC Glossary of Insurance Terms · NAIC: Surplus Lines

Domicile source

Washington Legislature: domestic, foreign and alien insurer definitions