H.R. 2571, the Nonadmitted and Reinsurance Reform Act of 2009 (the “Act”), passed the House without amendment on September 9, 2009. H.R. 2571 is not the first surplus lines reform bill to see the light of the House floor. A similar version of the Act passed the House in both 2006 and 2007. While referred to the Senate in both 2006 and 2007, these bills never made it out of the Senate Banking Committee.
The outcome this Congress should be different. On November 10, 2009, the Chairman of the Senate Banking Committee, Chris Dodd, introduced the Act in its entirety into the Senate Bill entitled the Restoring Financial Stability Act of 2009. Placement in the Senate Banking Bill substantially increases the chances for passage of the Act in this Session and possibly without amendment.
The purpose of the Act is to streamline the payment of state surplus lines taxes and form filings, which is complicated by state premium allocation issues and a morass of individual state form and filing requirements. HR 2571 attempts to untangle the state regulatory web by prohibiting all states other than the home state of the insured from requiring the payment of the surplus lines premium tax or from regulating the placement of the surplus lines risk.
The Act addresses the problem of multi-state tax collection and allocation by permitting the broker to file the entire surplus lines premium tax with the insured’s home state and prohibiting other states from requiring collection of their allocated portion directly from the broker. The Act specifies that the states themselves should establish and adopt uniform requirements for the reporting, payment and allocation of surplus lines taxes. One method to achieve this goal would be through the adoption of an interstate compact which would adopt “nationwide uniform requirements”. In this manner, the legislation lifts the burden of state tax allocation from the broker and places it on the states, which then must seek collection of their tax through a state compact or clearinghouse.
The Act also resolves the difficulty of brokers attempting to comply with multi-state regulation of the sale of surplus lines insurance. Section 201 of the Act prohibits any state other than the insured’s home state from regulating the placement of non-admitted insurance, thus resolving the issue of filing broker affidavits and reports to multiple jurisdictions. Additionally, only the insured’s home state may require licensing of the surplus lines broker. The Act enforces these provisions by pre-emption of state laws which assert jurisdiction over non-domiciled risks.
The Act also provides a punitive measure for those states which refuse to participate in the national uniform licensing scheme or the NAIC’s National Insurance Producer Database (NIPR). States which have not yet passed legislation to participate in the NIPR within two years following the passage of the Act will be prohibited from collecting licensing fees for the licensing of surplus lines producers.
With the expected passage of the Act this Session, the NAIC Surplus Lines Tax Working Group is attempting to establish a multi-state reporting form in order to comply with the intentions of the Act and provide a method for allocation of the premium tax to the various states. The multi-state form, however, has been viewed by several industry groups at too cumbersome due to its attempt to squeeze all state requirements onto one reporting form. The National Association of Professional Surplus Lines Offices, Ltd. and several of the State Stamping Offices continue to request a solution through SLIMPACT, the Surplus Lines Insurance Multi-State Compliance Compact. SLIMPACT is an agreement (or compact) drafted by various state regulators, legislators, stamping offices, brokers and trade associations to set uniform standards among the compacting states for the collection and allocation of taxes as well as standardization of regulatory requirements. It would have to be adopted by passing legislation in each participating state.
Stacey D. Kalberman is Of Counsel in the firm’s Insurance and Reinsurance Practice. Stacey concentrates her practice in regulatory matters for alternative risk programs, including insurance captives, risk retention and purchasing groups. Stacey received her bachelor’s degree from George Washington University and her law degree from Emory University School of Law.