Most NAPSLO members understand that their days of complying witha maze of conflicting state rules about diligent search efforts,taxation of multi-state risks and multiple licensing requirementsfor a single risk will be over on July 21, 2011.

Questions remain, however, about exactly what will happen whenSections 521 through 527 of the Dodd-Frank Wall Street Reform andConsumer Act take hold. What exactly do these sections related tononadmitted insurance say? What new rules will the E&S brokershave to follow?

NAPSLO Daily has compiled a list of frequently askedquestions and answers relating to these sections of the newlaw--sections commonly referred to as NRRA, or the Nonadmitted andReinsurance Reform Act (the name given to a version of these 10pages that repeatedly passed the House of Representatives in recentyears.) The following Q&A focuses on the first three sections,which directly impact brokers. For information on the effects ofthe law on E&S insurers and exempt commercial purchasers, referto the accompanying resource list.

What will NRRA mean for E&S brokers?
The principal reforms involve regulatory control and taxation ofmulti-state transactions--both of which will rest with the homestate of the insured under the new law. "In it's own way, it's afairly simple and blunt concept, [but] members struggle a littlebit to get their heads around the fact that things havechanged--and it's a fairly dramatic change, " said Hank Haldeman,co-chair of NAPSLO's legislative committee.

"What all this means is that [brokers] have to make adetermination of the home state, but beyond that compliance is mucheasier with the new set of rules," said Steve Stephan, NAPSLO'sdirector of government relations.

The new rules are:

• One tax filing/one tax rate per policy.
  On a multi-state E&S transaction, a broker will pay a singlepremium tax to the home state of insured only, according to Section521.

• One regulator per placement. E&S placementswill be regulated by solely by the home state, according to Section522.

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  NAPSLO believes this provision encompasses broker activitiessuch as conducting a diligent search of the admitted market beforeplacing a risk in the surplus lines market, filing an affidavit todemonstrate that a diligent search was done, and putting a surpluslines notice on the policy.

• One license. A broker will need only onesurplus producer's license to write a multi-state risk, accordingto Section 522.

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  In other words, to write a manufacturing plant in Missouri withadditional operations in the remaining 49 states, the E&Sbroker needs a Missouri E&S license only, not more than 100licenses as may now be the case (when 50 surplus lines licenses, 50property-casualty license and 35 entity licenses could berequired).

• License Registry. Section 523 describes anational producer registry for surplus lines that will furtheralleviate the licensing burden. States have two years to accomplishthe objective of setting up the database and passing laws toparticipate, but this issue was "front-and-center" at the summerNAIC meeting, NAPSLO reported.

Where is the home state?
NRRA defines thehome state as the "principal place of business" or "principalresidence" of the insured.

Mr. Stephan reported that the Supreme Court tackled the meaningof the language "principal place of business" in a February courtruling unrelated to NRRA. In Hertz vs. Friend, theorganization at the center of the case had 48 percent of itsbusiness in California, but a New Jersey headquarters. The HighCourt ruled that it would use the "nerve center test" to identifythe "principal place of business"--looking to the place wherehigh-level officers direct, control, coordinate corporateactivities.

Since Congress used exactly the same terminology--"principalplace of business" in NRRA months later, Mr. Stephan believesthere's a good chance that courts interpreting NRRA will apply thesame test.

As for "principal residence," numerous courts have interpretedthe term because it is also used in the bankruptcy and tax codes.Courts typically look at voting records, tax records, driver'slicenses, and physical occupancy.

What if 100 percent of the risk is outside the homestate?
The classic example involves insurance for a Florida condo owned bya New York snowbird. With a special exception to the home statedefinition, Congress decided that Florida should be the stateregulating and taxing that transaction. The exception language saysthat if a 100 percent of the risk is located out of the principalresidence, then the home state is the state where "the largestpercent of the taxable premium for that insurance contract isallocated."

What else does Section 521 say about premium taxpayments on E&S transactions for multi-staterisks?
An insured's home state may require E&Sbrokers to annually file tax allocation reports detailing theportion of premium attributable to exposures located within thestate.

"Congress intends that each state adopt nationwide uniformrequirements, forms, and procedures, such as an interstate compact,that provide for the reporting, collection and allocation ofpremium taxes for nonadmitted insurance."

The prospect of filing one annual tax allocation form contraststhe current regime where in many states--on a policy-by-policybasis--brokers have to allocate the taxes 30 days after the policyis written.

The prospect of uniformity expressed in the Congressional"statement of intent" of part (b)(4) of Section 521 is not areality yet, although state regulators are currently reviewingvarious ways to get to uniformity.

One proposal, developed and supported by 60 interested insuranceprofessionals back in 2007, including NAPSLO, is known as SLIMPACT,an acronym for Surplus Lines Insurance Multi-State InterstateCompliance compact. (Look for more on SLIMPACT in Wednesday'sedition.)

Explaining the language of Section 521 in simple terms, Mr.Stephan, speaking during an hour-and-a-half webinar repeatedly saidthat "the broker's only job is to pay the tax and to file anallocation report. Beyond that it becomes the states job to figureout how to get the taxes allocated."

Why did tax rules need to change?
In the1980s, the states started adopting allocation rules, but 11 statesnever did. The result was a confusing environment with many statesrequiring allocation, some collecting taxes on total grosspremiums, and a lack of clarity among the allocation states as towhether revenue, square footage, number of employees or some otherexposure measure should be used as a basis for allocation.

Can states other than the home state collect their taxrates on multi-state exposures?
Under the ruleseffective July 21, 2011, if there is no interstate compact, thenthe broker pays the tax rate at the home state, files a taxallocation form in that state if it's required, and that's it. Thebroker does not have to figure out applicable tax rates forportions of risk outside the home state.

Mr. Stephan noted that the SLIMPACT model for a compactenvisions a system in which a broker sits down at a web-basedsystem, keys in the risk characteristics, and the system shows howmuch tax needs to be collected on out-of-state portions ofrisk--tax revenues that will otherwise be lost to states beyond thehome state if no such uniform nationwide mechanism is devised.

Will states need to change their codes to reflect theNRRA?
It is very likely, Mr. Stephan believes. Whilenoting that some current state laws are vague, by his count only 11states now tax 100 percent of the gross premium, allowing them toallocate taxes on out-of-state exposures if some uniform mechanismis adopted as Congress intends.

That leaves 39 states that tax only the portion of premiumrelated to exposures in their states. If one of those 39 stateswere the home state, then "they would have nothing to allocate."Unless their laws are changed before the NRRA effective date, thebroker will comply with the home state law--collecting andremitting tax only on the portion of premium for a multi-state riskrelated to exposures residing in the home state. The states wouldhave to change their laws to enable them to allocate taxes back toother states.

Do agents still have to file for nonresident surpluslines licenses?
Yes. "If it is the insureds homestate, you have to have a nonresident license in that state toconduct an E&S brokerage business," explained Dan Maher,executive director of the Excess Lines Association of New York.

"What has really changed is that a broker only needs one licensefor any given risk" or policy, he said.

Mr. Maher gave two examples to clarify the response.

A New York-licensed E&S broker, placing a lot of residentrisks, and a few risks that are multi-state but the home state isin New York, would only need the New York license. If themulti-state risks have insureds that have principal places ofbusiness--home states--outside New York, then the broker needs alicense in each state where those insureds are home-stated.