What Brokers Need To Know

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

The  passage of Gramm-Leach-Bliley, which brought down the walls between financial institutions, changed all that and produced a complicated reporting and taxing structure for the surplus lines market.

Come July 21, the Nonadmitted and Reinsurance Reform Act, part of the Dodd-Frank Financial Reform Act, will take effect, aiming to simplify the surplus lines transaction for multistate risks. NRRA makes the insured's home state the only regulator of a surplus lines transaction.

With the help of the law firm Dewey & LeBoeuf, the Kansas City, Mo.-based National Association of Professional Surplus Lines Offices, Ltd., has posted an outline of the placement requirements within the home state of the insured for surplus lines brokers on the NAPSLO website. The outline, notes NAPSLO, is intended only as guidance and is not a substitute for legal or tax advice regarding specific issues.

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

That means brokers must:

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

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

Rules covering admitted business are not affected.

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

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

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

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

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

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

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

That also means complying with the tax payment and premium reporting requirements of the insured's home state, including determining if the home state has enacted a new multistate tax sharing system.

NAPSLO advises that brokers should consult with the association if the home state requests that brokers pay tax directly to other states or asks to provide a report on multistate risks more frequently than annually. More frequent reporting of this information is not permitted by the NRRA, said NAPSLO.