Surplus lines insurance, sold by insurers not licensed in the state, is still regulated, and policyholders are required to pay premium taxes as well as various assessments. The allocation of taxes on multi-state risks is perhaps one of the most vexing problems faced by surplus lines insurers and their brokers. Varying regulatory requirements and differences in tax rates, combined with the difficulties of measuring multi-task risks, led to a call for federal intervention to develop uniform regulation. The call was answered with the passage of the Nonadmitted and Reinsurance Reform Act (NRRA). This law is of limited benefit to only a few Florida surplus lines agents and of no benefit at all to most. It further negates the regulatory control over the administration of tax collection and hinders the collection of assessments, both regular and emergency.
The NRRA has been considered by Congress for several years. This act was added as an amendment to the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) when it was considered on the House floor. H.R. 4173 passed the House on Dec. 11, 2009. The Restoring America's Financial Stability Act of 2010 (S. 3217) included nearly identical language as well. This legislation was reported by the Senate Committee on Banking, Housing, and Urban Affairs on April 15, 2010, and subsequently brought to the Senate floor for consideration. On May 20, 2010, the Senate finished consideration, inserting the amended text of S. 3217 into H.R. 4173 and passing the amended H.R. 4173. The NRRA language was included in the H.R. 4173 conference report, which was agreed to by the House on June 30, 2010, and by the Senate on July 15, 2010. President Barack Obama signed the legislation, now P.L. 111-203, on July 21, 2010.
The NRRA has the following key components:
o Prohibits any state other than the home state of an insured from requiring a premium tax payment for nonadmitted insurance. Authorizes states to establish procedures to allocate among themselves the premium taxes paid to an insured's home state. Declares that Congress intends that each state adopt nationwide uniform requirements, forms, and procedures, such as an interstate compact, that provide for the reporting, payment, collection, and allocation of premium taxes for nonadmitted insurance consistent with this Act. Allows an insured's home state to require surplus lines brokers and certain insureds to file annual tax allocation reports detailing the portion of the nonadmitted insurance premiums attributable to properties, risks, or exposures located in each state.
o Subjects nonadmitted insurance solely to the regulatory requirements of the insured's home state. Declares that only an insured's home state may require a surplus lines broker to be licensed to conduct nonadmitted insurance business with respect to such insured. Declares that state law, rule, or regulation that restricts the placement of workers' compensation insurance or excess insurance for self-funded workers' compensation plans with a nonadmitted insurer is not preempted.
o Prohibits a state from collecting fees relating to licensure of a surplus lines broker in the state unless it has a regulatory mechanism in effect for participation in the national insurance producer database of the National Association of Insurance Commissioners, or any other equivalent uniform national database.
o Prohibits a state from establishing eligibility criteria for nonadmitted insurers domiciled in a U.S. jurisdiction except in conformance with the Non-Admitted Insurance Model Act, unless the state has adopted nationwide uniform requirements, forms, and procedures developed in accordance with this Act that include alternative nationwide uniform eligibility requirements. Prohibits a state from prohibiting a surplus lines broker from placing nonadmitted insurance with, or procuring nonadmitted insurance from, a nonadmitted insurer domiciled outside the United States and listed on the NAIC International Insurers Department Quarterly Listing of Alien Insurers.
o Cites conditions with which a surplus lines broker seeking to procure or place nonadmitted insurance in a state for an exempt commercial purchaser must comply in order to win exemption from any state requirement to make a due diligence search to determine whether the full amount or type of insurance sought by such exempt commercial purchaser can be obtained from admitted insurers.
o Requires Comptroller General to study and report to Congress on the nonadmitted insurance market in order to determine the effect of this title upon the size and market share of the nonadmitted insurance market for providing coverage typically provided by the admitted insurance market. (Source: Congressional Research Service Summary: H.R. 4173 Dodd-Frank Wall Street Reform and Consumer Protection Act.)
The NRRA solves many of the problems facing surplus lines insurers, particularly the allocation of premium taxes between states, the requirement to make multiple form filings, and the requirement for the broker to be licensed in each state where the risks are located. Effective July 21, 2011, the tax on the risk will be paid to the insured's home state and the broker must only be licensed in the insured's home state. States must adopt uniform forms and a mechanism to allocate the premium taxes.
If the NRRA is to work as Congress intends, it is imperative for states to adopt an interstate compact. An interstate compact is a contract between two or more states creating an agreement on a particular policy issue, adopting a certain standard, or cooperating on regional matters. An interstate compact will allow states to maintain sovereignty.
The Excess Lines Association of New York, the National Association of Professional Surplus Lines Offices, Ltd., state stamping offices, and other organizations drafted a proposed interstate compact (SLIMPACT). SLIMPACT is designed to create a transparent efficient system via a clearinghouse that provides one-stop shopping where surplus lines brokers can calculate and allocate taxes for each state. The allocation will be based on fair, objective, uniform allocation formulas and each state will apply its own particular tax rate to the portion of risk allocated to it. Under SLIMPACT, a commission will be formed that will design, implement and oversee a data clearinghouse and its operations. Each state that adopts SLIMPACT will have an equal vote on the commission. States that do not adopt SLIMPACT may contract with the clearinghouse as nonvoting associate members to share data and services and to receive taxes.
If the states take no steps to address tax allocation in that timeframe, states stand to lose millions of dollars in tax revenues. Lack of state action or response to the NRAA will invite further intervention on the federal level, whether that intervention is undertaken by the newly created Federal Insurance Office or by Congress in the form of OFC legislation or mandatory federal insurance regulation.
Despite the perhaps well-intentioned efforts of those who endorsed the bill, it ultimately benefits national agencies and eliminates the need for local licensed agents. Without the adoption of an amorphous, unified interstate compact, the chief House sponsor stated that under the NRRA language, surplus lines premium taxes are to be paid only to the insured's "home state;" that the placement of all nonadmitted insurance, including surplus lines insurance, shall be subject solely to the statutory and regulatory requirements imposed by the insured's "home state;" and that Congress intends that the states adopt uniform requirements, forms and procedures regarding payment and allocation of surplus lines premium taxes. So unless all states adopt a uniform system, all taxes will get paid to the selected "home state" at that state's rate. Does this suggest forum shopping? As for assessments, it looks like the states will be on their own. As for our local surplus lines agents, it doesn't appear your services will be needed.
Douglas A. Mang is president and shareholder of the Mang Law Firm, P.A. He represents the Florida Surplus Lines Association as legislative and regulatory counsel. He has been active in the insurance arena for over 25 years, has served as general counsel for the State Treasurer and Insurance Commissioner of Florida, served on NAPSLO's legislative committee, and is a director of the Federation of Regulatory Counsel, a nationwide organization of attorneys who specialize in insurance regulatory matters. Richard J. Santurri is a shareholder of the Mang Law Firm, P.A. He formerly served as counsel to the Florida Department of Financial Services, Office of Insurance Regulation.
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