In the 1980s, states began to require surplus lines producers toallocate taxes to the various states where risks were written. Thiswas not much of a problem at the time because there weren't manyinterstate transactions.

The  passage of Gramm-Leach-Bliley, which brought downthe walls between financial institutions, changed all that andproduced a complicated reporting and taxing structure for thesurplus lines market.

Come July 21, the Nonadmitted and Reinsurance Reform Act, partof the Dodd-Frank Financial Reform Act, will take effect, aiming tosimplify the surplus lines transaction for multistate risks. NRRAmakes the insured's home state the only regulator of a surpluslines transaction.

With the help of the law firm Dewey & LeBoeuf, the KansasCity, Mo.-based National Association of Professional Surplus LinesOffices, Ltd., has posted an outline of the placement requirements withinthe home state of the insured for surplus lines brokers on theNAPSLO website. The outline, notes NAPSLO, is intended only asguidance and is not a substitute for legal or tax advice regardingspecific issues.

The outline says brokers placing surplus lines business mustcomply only with the placement requirements of the home state.

That means brokers must:

• Be licensed in the insured's home state for surpluslines in that state.

NAPSLO and Dewey & LeBoeuf recommend obtaining legal adviseregarding resident and non-resident licenses.

Rules covering admitted business are not affected.

• Comply with the placement requirements of theinsured's home state.

• Ensure that a diligent search has been conducted incompliance with the rules of the insured's home state for placementof coverage.

• Provide any disclosure or disclaimer required by theinsured's home state.

• Place surplus lines insurance with insurers that areeligible in the insured's home state.

• Satisfy a broker's general liability standards fordetermining that insurers are financially sound.

• Comply with all other placement requirements of theinsured's home state, such as any regulation of policy fees orsurplus lines broker premium trust accounts.

• As of July 21, surplus lines brokers must paypremium tax only to the insured's home state.

That also means complying with the tax payment and premiumreporting requirements of the insured's home state, includingdetermining if the home state has enacted a new multistate taxsharing system.

NAPSLO advises that brokers should consult with the associationif the home state requests that brokers pay tax directly to otherstates or asks to provide a report on multistate risks morefrequently than annually. More frequent reporting of thisinformation is not permitted by the NRRA, said NAPSLO.