Surplus Lines Law In Effect; Taxes Up in Air

The implementation deadline for the Non-admitted and Reinsurance Reform Act arrived on July 21. States have been scrambling over the past year to update their surplus lines laws to comply with NRRA requirements and to figure out how to share premiums taxes, while agents and brokers have been preparing for processing surplus lines accounts after that trigger date.

The NRRA mandates that beginning July 21, 2011 the insured’s home state will be the only state with jurisdiction over multi-state surplus lines transactions and the only state that can require the broker to pay a premium tax. The law also implements criteria that exempt larger commercial purchasers from the diligent search requirement.

Overall, 43 states passed legislation in the last year to be in compliance with the NRRA. Of the 43 states, three states (Delaware, Oregon and New Jersey) have approved legislation but the governors have not taken action on the bills. Three states (Iowa, Illinois and Colorado) adjourned without taking action and four states (Michigan, Wisconsin, Massachusetts and South Carolina) and the District of Columbia have not passed any NRRA legislation.

Phil Ballinger, executive director of the Texas Surplus Lines Stamping Office, says his office has tried to update agents on what to do post-July 21. Despite these efforts, confusion remains, he says. “[F]rankly we are not able to tell them what to do in much detail because it’s such a moving target.”

That moving target depends on whether and when states will support a single agreement to handle the allocation of surplus line premium taxes.

As of the July 21 deadline, no single compact or tax sharing agreement was in place. But two proposals – Surplus Lines Insurance Multi-State Compliance Compact (SLIMPACT) legislation, supported by the National Conference of Insurance Legislators, and another supported by the National Association of Insurance Commissioners called the Non-admitted Insurance Multi-State Agreement (NIMA) – are creating confusion for agents and brokers when it comes to NRRA compliance.

Ten states and one territory (Connecticut, Florida, Hawaii, Mississippi, Nebraska, Nevada, Puerto Rico, Louisiana, South Dakota, Utah and Wyoming) have signed an agreement to be part of the NIMA and nine states have passed SLIMPACT.

According to Ballinger, agents are facing difficulty right now programming their systems for tax and policy reporting because of the differences in NIMA and SLIMPACT.

“So much for simplicity and uniformity,” he says. “If you write a multi-state risk, the home state will determine how you report the premium. But if that home state has elected to join SLIMPACT, but two other states have elected to join NIMA that are on the same risk, it starts becoming something that is almost impossible to program.”

Richard Bouhan, executive director of the National Association of Surplus Lines Offices, believes the transition will be smoother than some anticipate because most risks are not multi-state. “Some 90 to 95 percent of surplus lines risks probably are single state risks and are not going to change” under NRRA, he says.

Richard Brown, a San Francisco attorney, advises agents and brokers to understand their own state’s NRRA legislation, and that of any state in which they write multi-state risks. “Familiarize yourself with the state legislations,” Brown says. “Get your hands on your own state’s legislation. Download that thing and flip through it; you are looking for the four issues: home state, exempt commercial purchaser, data reporting and insurer eligibility.”

It’s most important that brokers understand their state’s definition of home state. “Somebody has to verify the home state, the principal place of business,” Brown says. He advises wholesale brokers to push that responsibility onto the retail agent as much as possible. “The definition of home state, that’s where everybody gets hung up.”