California Surplus Lines Bill Signed Into Law

Gov. Jerry Brown has signed legislation (Assembly Bill 315) that brings California in line with provisions in the new federal surplus lines insurance law, the Non-admitted and Reinsurance Reform Act of 2010 (NRRA), which became effective on July 21.

Under AB 315, only the “insured’s home state” may tax surplus lines premium and regulate surplus lines transactions. Surplus line brokers in California will now be responsible for determining whether an applicant for nonadmitted insurance is a California home state insured.

Surplus lines brokers must consider whether the insured’s principal place of business resides in California, and may rely on information provided by the insured to determine the home state provision. However, if none of the insured “risk” is located in the state where the insured maintains its principal place of business, the home state can be determined based on the state in which the insured has the greatest percentage of taxable surplus lines premium.

Surplus lines brokers must now maintain documentation showing how they determined the insured’s home state and any tax allocation, as well as how they determined whether a large commercial insured is exempt from the diligent search requirement.

Under the new law, California state tax applies to 100 percent of surplus lines premium and the stamping fee applies to the full premium. However, California has yet to join with other states on any tax allocation agreement.

The new law also changes existing insurer eligibility requirements for California home state placements. All surplus line insurers listed on the LESLI (List of Eligible Surplus Line Insurers) are automatically grandfathered on LASLI (List of Approved Surplus Line Insurers) through expiration of all policies in effect as of July 21, 2011. Brokers who wish to use an ineligible company will need to either file on behalf of the company or have the nonadmitted insurer file directly with the department of insurance.

AB 315 allows for a transition period as well. Surplus lines policies issued or renewed prior to July 21, 2011, will be governed by the law in effect prior to July 21. The transition rule expires Oct. 18, 2012.