Florida's legislative session has brought a barrage of bills that include serious reform and change for much of Florida's insurance industry. Clipping closely at the heels of the 2011 session is the deadline for the Non-Admitted and Reinsurance Reform Act (NRRA), which brings change for Florida's surplus lines marketplace with regard to tax allocation, surplus lines insurer eligibility requirements, and more.

The NRRA was signed into law by President Barack Obama on July 21, 2010, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The bill, which includes language to standardize the reporting, allocation and payment of non-admitted insurance premium tax on multi-state risks, is set to take effect July 21.

The NRRA grants the insured's home state exclusive authority to regulate and tax surplus lines insurance that includes multi-jurisdictional boundaries. Additionally, the NRRA bill provides states the ability to enter into an agreement to collect and share premium taxes for these multi-state risks.

This provision sets the stage for what has become perhaps the legislation's greatest challenge as states are empowered to facilitate and enter into a compact or agreement for the purposes of creating national or uniform standards regarding the collection, allocation and distribution of taxes among the states involved in multi-state surplus lines risks. States that fail to adopt some means of tax allocation system will be subject to a single state taxation that allows the home state to then retain 100 percent of the tax on the gross premium effective July 21. Competing Proposals
In response to this provision, the National Association of Insurance Commissioners (NAIC) has worked to develop a tax-sharing model that would streamline the allocation of surplus lines premium taxes with multi-state exposures. Currently, two interstate tax sharing agreements have been proposed and remain under consideration: the Surplus Lines Insurance Multi-State Compliance Compact (now known as SLIMPACT-LITE) and the Non-Admitted Insurance Multi-State Agreement (NIMA).

The NAIC has endorsed NIMA. NIMA provides that each participating state agrees to implement nationwide uniform requirements, forms and procedures that facilitate the reporting, payment and allocation of premium taxes for non-admitted insurance insuring multi-state risks.

Under NIMA, the home state of the insured controls the regulation and taxation of surplus lines insurance. It is contemplated that a clearinghouse would act on behalf of each participating state in the assessment and collection of premium taxes in accordance with the laws of the insured's home state. The rate of tax to be collected would be determined by the laws of the home state as required by the NRRA and a single payment to the home state would be made through the clearinghouse.

The responsibility for providing the clearinghouse with the information regarding the premium tax rate to be charged would also remain with each participating state. Premium taxes are defined by the NRRA to include any tax, fee, assessment, or other charge imposed by a governmental entity directly or indirectly. This information could be provided to brokers before policy data is submitted and the rate could be calculated by the clearinghouse, relieving the broker of this responsibility.

While NIMA has been criticized by some industry groups for its lack of guidance on eligibility standards, it provides the most transparent approach to the tax sharing provision outlined by the NRRA as it includes specific premium allocation formulas, detailed data elements, and the process for which taxes would be collected and allocated among participating states. By empowering participating states to continue to tax multi-state exposures based only on the portion of premium allocated to exposures in that state with their own individual tax rates, NIMA eliminates any financial incentives to venue shop and escape taxes. Florida's Proposed Bills
As a means to legislatively address the provisions of the NRRA, HB 1227 was filed with the Florida House of Representatives on Friday, March 4, 2011.

Likewise, the companion bill introduced by the Florida Senate was filed as SB 1816. The bill authorizes the Florida Department of Financial Services and the Office of Insurance Regulation to enter into a multi-state agreement for the collection of non-admitted insurance taxes and allows the state to collect surplus lines taxes, fees and assessments on the gross premium.

In addition, HB 1227 aligns the filing deadline for surplus lines agents' quarterly report affidavit with the payment of all surplus lines taxes, fees and assessments. The filing of the surplus lines agent affidavit and payment of taxes, service fees and assessments would be made on or before the 45th day following each calendar quarter if HB 1227/SB 1816 is passed, which coincides with the payment schedule set forth in the NIMA. Service fees for Florida surplus lines agents, which are currently invoiced monthly, would be invoiced quarterly along with the taxes and assessments under this new legislation. Lastly, HB 1227/SB 1816 amends the payment schedule for Independently Procured Coverage policies to quarterly, as well.

So what should surplus lines agents expect? Regardless of which approach states take, the provisions outlined by the NRRA will go into effect on July 21. As such, surplus lines agents should note that the NRRA includes ramifications that may mean changes to filing procedures, accounting protocols, agency management systems and additional staff training.

Agents who write multi-state risks and their support staff will need to become familiar with the NRRA's definition of "home state" and how to properly identify it. Under the NRRA, only the home state has the right to tax or regulate the placement of a surplus lines policy. Agents will need to verify that their existing procedures are sufficient to ensure the proper identification of the home state and compliance with home state rules and regulations (i.e., disclosure wording, forms, filing procedures, and the like). Making Adjustments
Agents may need to make modifications to their existing systems and procedures so that the proper allocations of surplus lines premium taxes are in place. When the switch is flipped on July 21, payment of surplus lines premium taxes on multi-state exposures will go to the home state and the home state only. Recouping taxes paid to the wrong state could prove difficult.

Additionally, agents will need a firm understanding of the provisions that define an Exempt Commercial Purchaser as they will be exempt from the diligent effort search requirements under the NRRA, abiding by certain stipulations.

These include: 1) the agent has disclosed to the buyer that such insurance may be available from the admitted market, which may offer greater protection and regulatory oversight; and 2) the agent receives a written request from the insurance buyer to procure the coverage from the non-admitted market.

Lastly, agents will need to become familiar with insurer eligibility requirements established by the NRRA as they may differ from those instituted through individual state eligibility lists.

Foreign non-admitted insurers (i.e., domiciled in the U.S. but outside the home state) may accept surplus lines business if they meet the capital and surplus requirements outlined by the Non-Admitted Insurance Model Act.

With regard to alien surplus lines insurers (those domiciled outside the U.S.), the NRRA prohibits states from barring surplus lines brokers from placing coverage with non-admitted alien carriers if they are listed on the NAIC's Quarterly List of Alien Non-admitted Insurers (the "IID List"). When placing coverage with a carrier not found on the state's eligibility list, surplus lines agents should perform due diligence in familiarizing themselves with the financial conditions of those insurers.

As the clock ticks toward the July 21 deadline, there is still much to accomplish on Florida's home front and for states nationwide. With competing factors such as health care and property and financial reform at the top of many legislative agendas, the implementation of necessary legislative and regulatory changes in response to the NRRA may prove challenging.

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