One year ago, Congress passed and President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), a sweeping financial services restructuring and reform package that responded to the global financial crisis of recent years. Buried within the 800+ pages of the bill were a series of potentially significant surplus lines insurance reforms that take effect today. Agents and brokers who operate within the nonadmitted insurance arena should familiarize themselves with these provisions and perhaps alter existing business practices where appropriate.
One of the traditional criticisms of surplus lines regulation is that the analysis and decisions of the most appropriate and relevant regulators are too often replicated, second-guessed and even contradicted by officials in other jurisdictions. The surplus lines reforms contained in Dodd-Frank attempt to eliminate much of this unnecessary duplication and redundancy by embracing a single state regulatory approach. The federal law requires other jurisdictions to respect the requirements and conclusions of the insured’s home state and specifically provides that “the placement of nonadmitted insurance shall be subject to the statutory and regulatory requirements solely of the insured’s home state.”
Dodd-Frank clearly specifies that any person placing a surplus lines policy need only comply with the placement requirements that exist in the “home state” of the insured. This means, for example, that only the surplus lines licensing, diligent search, disclosure, eligibility and all similar placement requirements of the home state should apply.
Brokers will want to determine the jurisdiction that qualifies as the home state—a term that is defined within Dodd-Frank—in any particular transaction in order to achieve compliance with the appropriate laws and requirements. In most instances, the home state will be where an entity maintains its principal place of business or where an individual principally resides.
The reforms also address and streamline state diligent search requirements. The diligent search laws of the insured’s home state will continue to apply in many instances, but Dodd-Frank eliminates the need to perform the search if the insured qualifies as an “exempt commercial purchaser” and certain other conditions are met. Specifically, surplus lines brokers will no longer be required to satisfy state due diligence search requirements for transactions involving an “exempt commercial purchaser” if (1) the broker discloses to the buyer that the desired insurance coverage “may or may not be available from the admitted market that may provide greater protection with more regulatory oversight” and (2) the purchaser subsequently requests in writing that the broker access the nonadmitted market. A detailed definition of “exempt commercial purchaser” is contained in the law.
The reforms also address the collection and distribution of surplus lines premium taxes and attempt to simplify what has often been a confusing and complex challenge for surplus lines brokers. Dodd-Frank addresses this problem by again embracing single state regulation and permitting only the home state of the insured to require the payment of premium taxes in connection with a surplus lines transaction or direct nonadmitted placement. The statute leaves no ambiguity about the intended goal and provides that “[n]o state other than the home state of an insured may require any premium tax payment for nonadmitted insurance.” In order to ensure proper compliance, surplus lines practitioners will need to review the tax payment and reporting rules of the home state regulator.
The vast majority of surplus lines transactions are single state placements, so the new Dodd-Frank tax provisions will only affect multi-jurisdiction transactions. Dodd-Frank acknowledges that states may enter into interstate compacts or agreements in order to allocate premium taxes for multistate surplus lines risks, but participation in such a system is not required by the law. Two interstate alternatives—the Nonadmitted Insurance Multistate Agreement (NIMA) and the Surplus Lines Insurance Multistate Compliance Compact (SLIMPACT) —are under development, but neither is operational at this time. So far, six states have expressed a desire to participate in the NIMA system (although no tax payment clearinghouse has been established), and nine states have enacted the necessary statutes to join SLIMPACT (although that interstate compact will not be fully operational before January 2013).
The implementation of these nationwide surplus lines reform measures may create confusion and raise questions for agents and brokers in the short term, but they will hopefully simplify regulation and institute greater interstate consistency over time. In order to better understand these reforms, surplus lines practitioners are encouraged to review the relevant provisions and definitions contained in Dodd-Frank (available here).
In addition, many state insurance departments have or will soon issue bulletins and other guidance regarding the implementation of these new surplus lines reforms. The National Association of Insurance Commissioners has also developed a model bulletin to assist regulators with their state-specific information, and a copy of that document is available here.
Wes Bissett (wes.bissett@iiaba.net) is the Big “I” senior counsel, government affairs.
