Episode: Direct Procurement
Hosts: John Emmanuel and Zachary Lerner
Aired: February 10, 2026
Zachary Lerner (00:16):
Hi, I’m Zach Lerner. I’m here with my partner, John Emmanuel. And today we’re going to talk about what’s commonly referred to as the “third rail of insurance” — direct procurement, also known as independent procurement. I’ll kick it over to John to discuss some of its nuances.
John Emmanuel (00:30):
So direct procurement, as Zach says, is another method of the way insurance can be accessed through an unauthorized insurance company. And it’s actually based in constitutional law, a case called Todd Shipyards from 1962. Basically, it allows the insured to leave his home state and go to a location where the actual insurer is authorized to procure that insurance. And the state where that insured is located or the risk is located does not regulate that transaction.
There are nuances and requirements and restrictions. For example, you can’t use a broker. No broker can be involved. And that all activities, or principally all activities, must occur outside of the state of domicile of the insured. There’s one issue that’s very important though: the home state where the insured is located can actually and does tax that placement.
Zachary Lerner (01:22):
Right. And we very often get questions about, okay, well, can a broker really be involved at all? Some states have guidance on this. And New York says, well, broker can’t be involved at least as a broker, right? So they say, for example, you can be involved as a consultant if you’re licensed as an insurance consultant. You can’t do any of those three magic words — sale, solicitation, or negotiation of insurance.
A common theme we see sometimes is using the Bermuda markets or other non-U.S. markets to satisfy high excess layer coverages that can’t be obtained in the admitted or the surplus lines market. And we understand that position. It could be difficult to obtain coverage in those situations. Unfortunately, unless a state law provides to the contrary, you’re still prohibited from using a non-eligible, unauthorized insurer, unless you permissibly place that coverage through the tenets of direct procurement.
In addition, sometimes we see the utilization of an attorney-in-fact model in direct procurement markets. There, the theory goes, you would appoint an attorney in fact in the jurisdiction where that insurance company is authorized to act on behalf of the insured. This is a topic of debate in the insurance industry regarding whether it actually complies with the tenets of direct procurement or if it’s really just the same as appointing a local broker. So you have to really pay attention to what that attorney-in-fact form says so that you’re not actually engaging in any transaction of insurance in that insured’s home state.
John Emmanuel (02:43):
And Zach, in addition to the payment of taxes in the home state, one thing to consider is the coverage that’s being written. For example, financial guarantee isn’t allowed to be written in the admitted market or not admitted market in some jurisdictions. Just because it’s being directly procured doesn’t automatically mean you can then place it in that market. So something to consider.
Zachary Lerner (03:02):
Thanks, John. Well, thank you for your time today and we’ll be talking to you soon.
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