As the Nonadmitted and Reinsurance Reform Act (NRRA) takes center stage and continues toward its July 2011 deadline, looming questions continue to plague the Act's clarity.

The NRRA is intended to simplify the surplus lines agent's payment of premium taxes on multi-state risks by requiring that all premium tax due on surplus lines transactions that cross multiple state boundaries be paid only to the insured's “home state.” This provides agents and brokers with the ability to file multi-state policies with a singular entity as opposed to filing with each state of exposure separately.

It is now left up to the states to determine how, and on what basis, the premium taxes paid on those transactions will be allocated and distributed to each state.

Among many questions raised by the upcoming implementation of this legislation, one concern is the definition of the term “home state” as provided in Part I of the Act. Part I defines the “home state” as the state in which an insured maintains its principal place of business or the state of residence for an individual insured.

The Act's Part I further clarifies that, if 100 percent of the risk is located outside the “home state,” as defined above, jurisdiction for the collection of taxes would pass to the state in which the greatest percentage of the risk is located.

While the current language does provide a basic definition of an insured's “home state,” it does not provide for classification of the home state should 100 percent of a risk exist outside the insured's state of domicile with the risk being shared equally among two states.

Additionally, reinterpretations in Washington could further muddy the waters regarding how an insured's principal place of business is established.

On Feb. 23, 2010, the U.S. Supreme Court's opinion in Hertz v. Friend determined the “principal place of business” was established by using what the Court labeled as the “nerve center” test, which provided that the principal place of business was the place where a corporation's officers direct, control, and coordinate the corporation's activities.

Tick Tock

With the clock quickly ticking down to the 2011 deadline, these and many other questions are being left to the states to work through and to agree upon a plan of action. The National Association of Insurance Commissioners (NAIC) has developed a Surplus Lines Implementation Task Force composed of various state insurance commissioners to execute provisions outlined by the NRRA.

This task force will be working over the next several months to resolve what action needs to be taken, legislatively or otherwise, in order for states to enter into an allocation agreement; to further define language not specifically clarified in the NRRA; and to develop a mechanism for reporting multi-jurisdictional policies and their appropriate taxes to each allocation state.

Currently, the task force is focusing on what action states need to take in order to participate in an agreement that would provide a method of collection and allocation of taxes on a reciprocal basis to each of the participating states. The NAIC is set to hold its annual national meeting in late October; this issue, along with many other items relative to the NRRA, will be high on the agenda.

So what does this mean for Florida?

Currently, Florida law allows for participation in state-to-state tax sharing agreements, as demonstrated in its involvement in the International Fuel Tax Association (IFTA), which provides a cooperative agreement among the states to simplify the reporting of fuel used by interstate/inter-jurisdictional motor licensees. However, should the NAIC choose a formalized state-to-state compact as the solution, it will require a change to Florida's constitution to allow for its participation in any interstate compact that includes the authority to create statutory or regulatory requirements.

Florida's Stats

For states that choose not to be a part of an allocation model, they reserve the right to collect surplus lines taxes for the entire premium associated with the multi-state risk if they are determined to be the home state. As taken from the results of the Florida Surplus Lines Service Office's (FSLSO) annual customer satisfaction survey, 89 percent of Florida surplus lines agents noted that five percent or less of their surplus lines business transcended state borders through multi-state policy filings. Additionally, 64 percent of agent respondents provided that their multi-state business was limited to five or less states outside of Florida. Beyond Florida, the top five states for multi-state filings are California, Texas, New York, Pennsylvania and Georgia.

“It is no surprise to see such limited multi-state business among our agent population, as Florida is not a state that is heavily saturated in large, nationally dispersed companies,” commented FSLSO Executive Director Gary Pullen. “For our state, you will find that the majority of our multi-state surplus lines business is written on an independently procured basis.”

As noted in FSLSO's customer survey, Independently Procured Coverage (IPC) filers provided that 61 percent of their surplus lines policies with Florida exposure were multi-state policies. In 2009, the FSLSO processed 13,713 transactions relative to new and renewal policies bearing $492 million in premium attributed to IPC policies. Of those transactions, 25 percent harbored exposures in multiple states. Without an interstate allocation agreement, Florida could stand to lose more than $100 million in taxable premium.

While there is much to be decided over the course of the next several months, it will be of interest to all involved in the industry to see the final resolutions.

“What we know with certainty is that change is coming,” Pullen further noted. “What remains to be seen is the nature of that change.”

Ashlee Weber is the public information manager for the Florida Surplus Lines Service Office. She may be reached at 800-562-4496, ext. 109; www.fslso.com.

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The Nonadmitted and Reinsurance Reform Act: Approaching the Defining Moment

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