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

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

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

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

The definitions and responsibility of payment of surplus lines taxes to the home state of the insured is "reasonably straightforward," explained Mr. Stephan. What is complicated is the tax distribution, and with that, uniformity in regulation.

Richard Bouhan, executive director for Kansas City, Mo.-based NAPSLO, said the law intentionally left it up to the states to figure out how they would go about collecting the surplus lines taxes on multistate risks and distributing the taxes among themselves. One concern, however, is that without a uniform plan in place among the states, there could be endless data calls from state officials, defeating part of the purpose behind passing the law.

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

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

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

Under NRRA, surplus lines taxes are paid to the insurer's home state. Distribution of those taxes is then up to the individual states to share proportionally.

The industry developed SLIMPACT, Surplus Lines Insurance Multistate Interstate Compliance Compact, an agreement between states that would promote uniformity of regulation and sharing of taxes. This proposal has garnered the support of several state legislative associations including the National Conference of Insurance Legislators.

However, in December, the National Association of Insurance Commissioners decided it would recommend a different path to its state legislators and adopted something else. That proposal is the Nonadmitted Insurance Multistate Agreement (NIMA), which allows states to collect their share of taxes on insured's surplus lines policies. However, admitted Louisiana Insurance Commissioner James J. Donelon, who was chair of the NAIC's Surplus Lines Implementation Task Force at the time, NIMA is not a broad regulatory compact and only addresses the collection of taxes.

Currently, the states appear to be at odds over what is to be implemented and how to go about doing it.

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 legislation to update their laws and meet the requirements of NRRA. Others have drafted legislation that would permit the state's insurance commissioner to enter into compacts with other states over the collection of taxes and regulation.

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

"Our understanding is that you have to legislate a compact, not just 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 the July deadline pass NIMA, the fear is that it could be "more burdensome 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 into a compact; other states introduced SLIMPACT; others have not dealt with it at all. That is more difficult to deal with."

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

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

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

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

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

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

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

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

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