In the presidential candidate debates earlier this year, not moderator asked, "If elected, will you repeal or strengthen the NRRA?" If the question had been asked, it might have elicited a confused, "The what?" or perhaps an impassioned defense of gun owners' rights.
The Nonadmitted and Reinsurance Reform Act (NRRA), which took effect July 21, 2011, is an attempt to resolve interstate squabbles over insurance premium taxes charged on surplus line and direct placements. NRRA created a national definition of an insured's home state and allocated those tax revenues to that state, unless the involved states had joined a multi-state compact providing otherwise. NRRA also sought to create a more predictable system of determining a surplus line carrier's eligibility, again keyed to the home state's requirements, subject to some restrictions. It is an important part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), which has been called the most comprehensive piece of financial industry reform legislation since the Glass-Steagall Act.
Uncertainties about NRRA pose risks
The ability to anticipate future events is generally thought to be a good thing in insurance, in the macro scale of things, though the industry's bread and butter is the unpredictability of those events occurring to a specific policyholder. That's the risk-spreading bargain. But when uncertainty arises in the process of placing insurance, that's bad news for everyone. It hurts the consumer by creating delays in the system and potentially restricting access to some markets. It hurts the brokers, both producers and wholesalers, by adding more frictional costs to a placement (clerical burdens such as multiple reporting to different state regulators), and possible claims when things fall through the cracks. It hurts the surplus line regulators who, in the absence of a multi-state compact, need to address these issues ad hoc. For example:
- NRRA requires states to recognize alien carriers that are on the quarterly list published by the International Insurers Dept. of the NAIC. However, some state insurance regulators and lawmakers have failed to accept alien insurers that are on the NAIC's quarterly listing and/or licensed surplus line brokers from the insured's home state.
- The states have failed to reach agreement on either of two competing premium tax compacts that have been proposed since the enactment of the NRRA: the Nonadmitted Insurance Multistate Agreement (NIMA), the compact preferred by some state regulators, and the Surplus Lines Insurance Multistate Compliance Compact (SLIMPACT), a proposal supported by the National Assn. of Professional Surplus Lines Offices, Ltd. (NAPSLO) and others. NIMA has been adopted in Colorado, Florida, Louisiana, South Dakota, Wyoming, and the Commonwealth of Puerto Rico, but NIMA, like SLIMPACT, will not take effect anywhere until at least ten states adopt it. SLIMPACT has been adopted by nine states—Alabama, Indiana, Kansas, Kentucky, New Mexico, North Dakota, Rhode Island, Tennessee and Vermont.
- Some states are requiring non-admitted carriers to maintain higher capital and surplus requirements—or add more reporting requirements—than exist under the NRRA, including such major states as California, Indiana, Michigan, New York, Pennsylvania, Texas and Virginia. Could surplus line brokers face penalties, from fines to suspension of licensing, for following the letter of the NRRA law, but not following inconsistent state laws?
Ironically, the NRRA, a law designed to simplify nonadmitted placements, may be having the opposite effect.
Certificates of Insurance
Insurance regulators and producers have become increasingly concerned about the issuance of certificates of insurance. While certificates are expressly only “evidence” of insurance, and do not modify the terms of the policy, they are often the only written confiirmation that a third party (someone other than the insured) received a certificate that confirms that coverage has been placed, or that the third party is an additional insured on the original insured’s coverage. Certificates are often delivered directly to third parties.
Some states have enacted laws that require certificate of insurance forms to be filed with and approved by the state insurance department unless the form is a standardized form, as are those provided by the Assn. for Cooperative Operations Research and Development (ACORD). Some of these laws specifically include surplus lines insurance, surplus lines insurers and/or surplus lines brokers, and require a surplus lines insurer and/or broker to obtain the department’s approval of any certificate of insurance form it might use. Many commercial insureds, such as construction subcontractors, are contractually obligated to provide certificates of insurance to the other contracting parties.
Certificates of insurance are a concern for brokers across the country, especially those dealing with multi-state risks and surplus line placements. For example, if the named insured is based in Illinois and the other contracting party is based in Texas, may the surplus line broker and the producing broker comply only with Illinois’ laws regarding certificates, or must they also comply with Texas’s law?
Texas is one of the states that require that nonstandard certificates of insurance be filed for approval prior to use by surplus line brokers and carriers. Texas Senate Bill 425, effective for certificates of insurance issued on and after Jan. 1, 2012, provides that an insurer or agent may not issue a certificate of insurance unless the form of the certificate has been filed with and approved by the Texas Dept. of Insurance or is a standard form deemed approved by the department. Surplus lines brokers and insurers are expressly included in the provisions of the bill. Further, no certificate can be issued if it alters, amends or extends the coverage or terms and conditions provided by the insurance policy referenced on the certificate. A person may not require a broker or insurer to issue any other document or record in addition to, or in lieu of, a certificate of insurance.
The Texas Commissioner of Insurance may take various actions against a broker or insurer who violates the certificate of insurance requirements, and if the violation is willful, the Commissioner may also impose a civil penalty. There are similar laws in, among other states, Georgia, Idaho, Louisiana, Maryland, Missouri, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Virginia and Washington.
In a policy paper adopted in June 2012, “NAPSLO Policy Regarding Certificates of Insurance Requirements for Surplus Lines Brokers,” NAPSLO opposes provisions in laws or regulations that would require surplus line brokers or surplus lines companies to issue standard or state-approved certificate of insurance forms. Thus far, NAPSLO’s position has not convinced the states listed above to roll back their laws and regulations that impose special filing requirements on certificate forms.
The law has not yet caught up with the pragmatic reality that certificates of insurance are necessary in many areas of interstate commerce, and that contract terms that require such certificates are often not written with the laws of the 50 states in mind. This area is ripe for action to bring about uniformity. Is such action on the horizon?
E&O or FIO?
The Dodd-Frank Act created a Federal Insurance Office (FIO) to take a larger federal role in coordinating insurance industry regulation. The FIO has broadly stated powers, but is not, in its present form, a super-regulator. Although the FIO’s director may declare a state law to be inconsistent with NRRA, that determination is reviewable in court. By analogy, just as “Obamacare,” as we are now permitted by its author to call it, does not create a single-payor health care system and relies instead on health insurance exchanges to be run by the states starting in 2014, the FIO and NRRA both look to the states to fill the primary role of insurance and insurance broker licensing and regulation. The states face a Dec. 14, 2012, deadline to declare whether they plan to create such exchanges. South Carolina, an early declarant, opted out.
The early indications were that the FIO was unlikely to assume, or request the authority to assume, a more active role in surplus line placements. According to a Dec. 9, 2011, U.S. Dept. of the Treasury press release summarizing the FIO's first public conference on insurance regulation, Deputy Treasury Secretary Neil Wolin reaffirmed the central place of state regulators in overseeing the insurance industry. Wolin and FIO Director Michael McRaith, a former insurance director in Illinois, stated that they support the state regulatory system. However, the following month McRaith postponed the release of a report on the modernization of insurance regulation, a report that the NRRA required him to deliver on Jan. 21, 2012, citing the potential political ramifications of releasing the report during the presidential election cycle.
Director McRaith’s political instincts appear to have been correct in that insurance regulation never became a political football during the campaign. With the election over, his report could be released any day, though the president will not have been technically reelected until after the Electoral College meets on Dec. 17, 2012, and a Joint Session of Congress meets on Jan. 6, 2013, to officially tally the electoral votes.
Once the political dust has settled, we can hope for action by the FIO or by Congress, spurred on by NAPSLO and other industry organizations and leaders, to clear the thicket of underbrush that still frustrates the placement of insurance for multi-state risks.
For now, the gaps in NRRA and the inconsistencies in state laws leave surplus line brokers and state insurance regulators not knowing the rules of the road. Roads that lack posted speed limits or other safety signs are accidents waiting to happen. Absent new rules harmonizing states’ regulations in the above areas, the confused status quo will continue, inevitably leading to court challenges, which are neither the most efficient nor the most uniform way to fulfill the NRAA’s goal of making the U.S. market a more even playing field.