Laws and Regulations - 2011 Legislation

Last Update: May 2011

California Legislature

As the date of federal preemption of non-conforming state surplus line insurance law nears, it appears the implementation of the Nonadmitted and Reinsurance Reform Act of 2010 (the "NRRA"), a subchapter of the larger financial services reform legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act, remains the hot topic of the day.

Brokers should be aware that significant and fast-moving efforts to implement the NRRA are currently underway in California and other states in advance of the July 21, 2011 effective date of the NRRA and are advised to check the surplus line laws and regulations of each state in which they do business to ensure full compliance.

California Implementation Effort - AB 315 Assembly Bill 315 ("AB 315")

Assembly Bill 315 ("AB 315"), introduced on February 9, 2011 and amended on April 7, 2011, conforms California surplus line insurance regulatory and tax laws to the NRRA. Because AB 315 is still working its way through the legislature, its final language is not yet set, but it contains the following key provisions.

Premium Tax
Because NRRA allows only the home state of the insured to impose a tax on nonadmitted insurance, AB 315 amends current surplus line and independent procurement tax provisions, which require a tax only on the portion of the premium allocated to risks located in California, to require a tax on the entire premium, regardless of where the risk is located, when California is the home state of the insured.

Insurer Eligibility
AB 315 conforms the insurer eligibility requirement to that provided in the NRRA: (1) license in the domiciliary jurisdiction and $45,000,000 in minimum capital and surplus for foreign nonadmitted insurers; and (2) listing on the Quarterly Listing of Alien Insurers maintained by the International Insurers Department of the NAIC for alien nonadmitted insurers. To do this, AB 315 repeals current insurance code section 1765.1, which prohibits surplus line brokers from making placements with nonadmitted insurers not on the California Department of Insurance (the "Department") List of Eligible Surplus Line Insurers ("LESLI") and replaces it with a provision reflecting the NRRA eligibility standards.

List of Approved Surplus Line Insurer
AB 315 adds a new section authorizing surplus line brokers to make placements with nonadmitted insurers listed on the Insurance Department’s List of Approved Surplus Line Insurers ("LASLI"), which is a voluntary list of acceptable insurers. The requirements for qualification are substantially similar to those for the current LESLI list.

Other States' NRRA Implementation Efforts
At the time of writing, we are aware of at least 42 other states that have taken steps to implement the NRRA. At least fourteen of those states have passed legislation conforming their surplus line laws to the NRRA. Set forth below is a short summary of what each of the fourteen states have enacted.

Arizona: generally authorizes the director to enter into a compact or agreement. The director may enter into an agreement "if, after a hearing…it is determined that entering into a compact or multistate agreement is in the best interests of [Arizona]." In determining whether entering into a compact or multistate agreement is in the best interests of Arizona, the following factors must be considered: (1) The impact on the state’s gross receipt of premium taxes, if any; (2) The regulatory burden and costs placed on insurance companies, surplus lines brokers and insurance agents doing business in Arizona; (3) The cost impact on insureds resulting from any regulatory requirements attributable to a compact or multistate agreement, if any; and (4) Other factors as may be raised by the director or any other interested party.

Arkansas: generally authorizes the commissioner to enter into a tax sharing agreement or compact with other states. If approved by the interim Senate Insurance Committee and the interim House Insurance and Commerce Committee, the agreement or compact will have the same effect as enacted legislation.

Idaho: does not include a provision authorizing the adoption of a tax sharing agreement or compact, but does provide for a tax on 100% of the premium when Idaho is the home state of the insured.

Kentucky: has adopted SLIMPACT and authorizes the Compact Commission to adopt rules on tax allocation, reporting, collection and distribution of taxes to other states. The Compact Commission may also adopt uniform insurer eligibility requirements.

Mississippi: generally authorizes the insurance commissioner to enter into a tax sharing agreement or compact and would require a broker to calculate the tax based on the tax rate of each state participating in the agreement or compact. The commissioner may also enter into an agreement providing for uniform insurer eligibility requirement.

New Mexico: has adopted SLIMPACT and authorizes the Compact Commission to adopt rules on tax allocation, reporting, collection and distribution of taxes to other states. The Compact Commission may also adopt uniform insurer eligibility requirements.

New York: does not include a provision authorizing the adoption of a tax sharing agreement or compact, but does provide for a tax on 100% of the premium when New York is the home state of the insured.

Ohio: requires the superintendent to conduct a fiscal analysis of the impact of entering into a tax sharing agreement or compact and authorizes the superintendent to enter into SLIMPACT if doing so is advantageous to the state. If it is in Ohio’s best financial interest, the superintendent is required to request the general assembly to authorize the superintendent to enter into a different tax sharing agreement or compact.

South Dakota: authorizes the director to enter into a tax sharing agreement, which could include NIMA.

Utah: authorizes the commissioner to enter into a tax sharing agreement including participating in a clearinghouse and adopting an allocation schedule. Brokers are required to pay taxes based on the tax rates of each state where there are exposures on a multi-state risk, regardless of whether the state participates in a tax sharing agreement with Utah.

Virginia: does not include a provision authorizing the adoption of a tax sharing agreement or compact. Virginia currently does not have a diligent search requirement, and as such, the NRRA implementing legislation does not incorporate exempt commercial purchaser concept from the NRRA.

Washington: does not include a provision authorizing the adoption of a tax sharing agreement or compact, but does provide for a tax on 100% of the premium when Washington is the home state of the insured.

West Virginia: authorizes the commissioner to participate in NIMA and share taxes with other participating states through a clearinghouse established by NIMA.

Wyoming: authorizes the commissioner to participate in a tax sharing system, which may also include uniform insurer eligibility requirements. The new law does not incorporate the NRRA’s insurer eligibility requirements or the exempt commercial purchaser exemption provided in the NRRA.

Of the more than 20 other states that have NRRA implementing legislation pending in the legislature, nine states have provisions authorizing a state regulator to adopt SLIMPACT sponsored by NCOIL, while seven states have endorsed NIMA sponsored by the NAIC. At least ten states have provisions generally authorizing the adoption of a tax sharing agreement or compact, and at least five states do not address any such agreement or compact.

It is anticipated that most of the states will have enacted some form of NRRA implementing legislation by July 21, 2011. Surplus line brokers are therefore advised to review the surplus line laws and regulations of each state in which they do business prior to making any placements to ensure full compliance.