What potential issue arises if a surplus lines insurer becomes insolvent?

The correct choice highlights a significant concern in the realm of surplus lines insurance. When a surplus lines insurer becomes insolvent, policyholders may face the risk of not receiving compensation for their claims. This situation arises because surplus lines insurance typically involves non-admitted insurers, which are not licensed to operate in the state. As a result, these policyholders are not afforded the same protections that admitted insurers offer, particularly in terms of state guarantee associations.

In many states, including Florida, guarantee funds are designed to provide a safety net for policyholders of licensed insurers who become insolvent. However, since surplus lines insurers do not participate in these funds, policyholders left without compensation following an insolvency event have little recourse. They may have paid premiums, but without a safety net, there is no guarantee that they will recover those funds or receive payment for their claims.

This scenario underscores the inherent risk that comes with choosing a surplus lines insurance policy, as these policies are often sought for coverage not available from standard insurers, but at the potential cost of limited protection in the event of insurer bankruptcy.