Last year, after Congress finally passed surplus linesmodernization provisions incorporated in the Dodd-Frank Wall StreetReform Act, many surplus lines brokers thought life would geteasier—at least in terms of filing taxes and regulation.

Life and politics, however, have a way of turning what seemssimple into a complex act of wills, especially when competinginterests seem to align themselves at cross purposes.

That appears to be the case withDodd-Frank's surplus lines provisions, often collectively referredto as the Nonadmitted and Reinsurance Reform Act, which is set tobecome law come July 21.

"The federal law is what the federal law is, and a lot of thatis not that complicated," said Steve Stephan, director ofgovernment relations for the National Association of ProfessionalSurplus Lines Offices, Ltd.

The definitions and responsibility of payment of surplus linestaxes to the home state of the insured is "reasonablystraightforward," explained Mr. Stephan. What is complicated is thetax distribution, and with that, uniformity in regulation.

Richard Bouhan, executive director for Kansas City, Mo.-basedNAPSLO, said the law intentionally left it up to the states tofigure out how they would go about collecting the surplus linestaxes on multistate risks and distributing the taxes amongthemselves. One concern, however, is that without a uniform plan inplace among the states, there could be endless data calls fromstate officials, defeating part of the purpose behind passing thelaw.

"Then uniformity is lost," Mr. Bouhan said.

"It's a mess," remarked Bernd G. Heinze, executive director ofthe American Association of Managing General Agents, based in Kingof Prussia, Pa.

The surplus lines industry for decades sought to eliminate thecomplex filing issues that developed over time and started bringingthe problems to the attention of federal lawmakers in the middle ofthe last decade. After years of effort, the result was passage ofNRRA last year.

Under NRRA, surplus lines taxes are paid to the insurer's homestate. Distribution of those taxes is then up to the individualstates to share proportionally.

The industry developed SLIMPACT, Surplus Lines InsuranceMultistate Interstate Compliance Compact, an agreement betweenstates that would promote uniformity of regulation and sharing oftaxes. This proposal has garnered the support of several statelegislative associations including the National Conference ofInsurance Legislators.

However, in December, the National Associationof Insurance Commissioners decided it would recommend a differentpath to its state legislators and adopted something else. Thatproposal is the Nonadmitted Insurance Multistate Agreement (NIMA),which allows states to collect their share of taxes on insured'ssurplus lines policies. However, admitted Louisiana InsuranceCommissioner James J. Donelon, who was chair of the NAIC's SurplusLines Implementation Task Force at the time, NIMA is not a broadregulatory compact and only addresses the collection of taxes.

Currently, the states appear to be atodds over what is to be implemented and how to go about doingit.

According to a state-by-state status site set up by NAPSLO, as of Feb. 14,2011, 30 states and U.S. territories had not introduced legislationto update their laws and meet the requirements of NRRA. Others havedrafted legislation that would permit the state's insurancecommissioner to enter into compacts with other states over thecollection of taxes and regulation.

The problem with this move, surplus lines association executivessay, is that it does not pass constitutional muster.

"Our understanding is that you have to legislate a compact, notjust join one," observed Mr. Bouhan.

"Any compact needs approval by the state legislature," said Mr.Heinze.

On the other hand, if state legislatures between now and theJuly deadline pass NIMA, the fear is that it could be "moreburdensome than what currently exists," he said.

"The tax allocation question is all over the map," noted Mr.Stephan. "In some states the commissioner is allowed to enter intoa compact; other states introduced SLIMPACT; others have not dealtwith it at all. That is more difficult to deal with."

The executives point out that many state legislatures will bemeeting later this year and will have a few months to get somethingdone. Some will probably not finish in time.

"We're optimistic that all 50 states will get somewhere, butsome will not get done in time," said Mr. Bouhan.

"I don't know if by July 21 all of the states or a majority willhave had the time to consider the bills in committee, amend themand flow [them] through the legislature," said Mr. Heinze.

An alternative on the table is to extend the deadline forimplementation for another year. It has slim hope of passage,despite the support of a number of state legislativeassociations.

"If Congress declines, at least we asked," said Mr. Heinze.

However, a state's inaction does not necessarily put a surpluslines broker in a quandary, and inaction on the state level may bethe best remedy at the moment.

The law outlines what action the broker should take if thatstate has failed to put laws in place. Essentially, the broker mustdetermine the home state of the insured's principal place ofbusiness and pay tax to that state.

"We really don't think it will be that traumatic in the longrun," said Mr. Bouhan.