Foley & Lardner: Congress Imposes New Rules for Taxation and Regulation of Surplus Lines Insurers

Foley & Lardner LLP

By Mary Kay Martire, Partner, Foley & Lardner LLP

On July 21, 2011, a portion of the Dodd-Frank Act known as the Nonadmitted and Reinsurance Reform Act (15 U.S.C. § 8201, et seq.) (NRRA) took effect. NRRA is one example of the continuing trend of increased federal oversight over state regulation of the business of insurance.

NRRA was designed in relevant part to increase uniformity and certainty in the taxation and regulation of surplus lines brokers and insurers. Historically, states refused to license nonresident surplus line brokers. This led to a system in which brokers had to place their out-of-state nonadmitted risks through resident surplus line brokers. However, following the enactment of the Gramm-Leach-Bliley Act in 1999, most states amended their producer licensing laws to allow for reciprocal licensing of surplus lines brokers. The new state laws were criticized for adding increased complexity for brokers, who were required to comply with the differing license requirements of each state in which they qualified to do business. The new state laws also created complexity regarding the taxation and allocation of the premium tax paid by surplus lines insurers on multi-state surplus lines insurance.

NRRA seeks to simplify the taxation and regulation of multi-state surplus lines transactions by establishing a one-state compliance rule. To that end, NRRA provides that with limited exception, the placement of nonadmitted insurance is governed only by the laws and regulations of an insured's home state. 15 U.S.C. § 8202(a).

NRRA also provides that only a surplus line insurer's home state may impose a premium tax on nonadmitted insurance. 15 U.S.C. § 8201(a). States cannot allocate tax revenue between themselves unless they adopt an interstate compact or other uniform, national tax allocation procedure. Id.

NRRA controls the type of regulations that a state may impose on surplus lines brokers. Effective July 21, 2012, a state may not collect any licensing fees from surplus lines brokers unless the state has enacted laws or regulations that provide for the state's participation in a uniform national database for the licensing of surplus lines brokers. 15 U.S.C. § 8203. Moreover, states may not place eligibility requirements on domestic surplus lines insurers other than those set forth in the Non-Admitted Insurance Model Act and may not prohibit surplus lines brokers from contracting with alien insurers on the quarterly listing of alien insurers maintained by the National Association of Insurance Commissioners (NAIC). 15 U.S.C. § 8204.

Finally, NRRA provides relief from due diligence search requirements for brokers of large "exempt commercial purchasers." Brokers who provide certain representations to these purchasers need not comply with state requirements that the broker determine whether the insurance sought by the exempt commercial purchaser can be obtained from an admitted insurer. 15 U.S.C. §§ 8205, 8206.

NRRA preempts or supersedes portions of the excess and surplus lines laws as they exist today in most states. According to the National Conference of State Legislatures (NCSL), as of July 29, 2011, at least 44 states and Puerto Rico have introduced legislation to comply with NRRA and 41 have enacted surplus lines legislation. A list of state legislative efforts to comply with NRRA can be found at NCSL.org.

Two competing multi-state compacts have been developed to address the issue of interstate allocation of surplus lines premium tax. NCSL, the National Conference of Insurance Legislators (NCOIL), and the Council of State Governments (CSG) have endorsed an interstate compact known as SLIMPACT-Lite. According to NCSL, as of July 29, 2011, nine states have enacted legislation to join SLIMPACT-Lite. The NAIC has endorsed a different model agreement, known as the Nonadmitted Insurance Multi-State Agreement (NIMA). As of July 29, 2011, four states have enacted NIMA legislation and ten have signed an agreement to be part of NIMA.

Surplus lines insurers and brokers should watch this issue carefully, as states continue to enact amendatory legislation and progress is made toward the adoption of a single comprehensive system with respect to the interstate allocation of premium tax on surplus lines insurance.

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