State-Based Surplus Lines Insurance Reform Faces Uncertain Future

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law ("the Act"). Incorporated into the Act is language mandating sweeping reform in the excess and surplus lines insurance industry. Dubbed the "Nonadmitted and Reinsurance Reform Act" (NRRA), the primary purpose of the NRRA is to facilitate the collection and allocation of premium taxes for nonadmitted insurance carriers among the states.

In other words, Congress ambitiously set out to require each state to "adopt nationwide uniform requirements, forms, and procedures, such as an interstate compact, that provide for the reporting, payment, and allocation of premium taxes for nonadmitted insurance. . . ."¹

Of particular importance to the states, as of July 21, 2011, when most of NRRA's provisions took effect, only the home state of the insured is authorized to tax a surplus lines transaction.² As such, absent an agreement to the contrary, the states will not be able to allocate tax revenue according to where the risk is actually insured. In addition, outside of the implications on premium tax collection, unless a state has adopted nationwide requirements and procedures, a state may only impose eligibility requirements on nonadmitted insurers domiciled in a United States jurisdiction in conformance with the Non-Admitted Insurance Model Act.³ Assuming the nationwide agreements currently under consideration (NIMA & SLIMPACT) loosen eligibility requirements, this could present a particularly difficult problem for states on the outside looking in.

While Congress intended to create a more navigable environment, the differing political and financial landscapes of the states have spawned two different models for the implementation of the NRRA: the Nonadmitted Insurance Multi-State Agreement ("NIMA"), and the Surplus Lines Insurance Multi-State Compliance Agreement ("SLIMPACT").

Under NIMA, member states are provided with a uniform procedure for the collection and allocation of surplus lines premium taxes where a policy covers risk in more than one state. In addition, NIMA provides a fairly expansive "exposure allocation methodology" for the allocation of premium taxes amongst the states. NIMA's proposed legislation is consistent with the NRRA and has been adopted by eleven states.

While similar in overall effect, SLIMPACT is the second and arguably more complex of the proposed allocation mechanisms. SLIMPACT attempts to streamline regulatory requirements by providing a uniform tax allocation formula and a clearinghouse to facilitate the reporting of all premium taxes. In addition, SLIMPACT calls for increased cooperation between member states to encourage the sharing of implementation-related resources. To date, SLIMPACT has been adopted by nine states and requires a minimum of ten members in order to go into effect.

As differences exist between NIMA and SLIMPACT, there is presently the prospect of two independent agreements operating in an already complicated environment. Moreover, at least a few states have taken no legislative action whatsoever related to the NRRA requirements. Given that the states are well beyond the July 21, 2011, deadline mandated under the NRRA, the coming months are certain to prove interesting for both the states who have elected membership under an agreement and those that have not. In order to help sort out some of the confusion, below is a summary of recent state action in each of Dickinson Wright's respective jurisdictions:

Arizona

• On April 8, 2011, Arizona enacted legislation providing the state's insurance director with authorization to "enter into a compact or multistate agreement . . . if, after a hearing conducted pursuant to section 20-161, it is determined that entering into a compact or multistate agreement is in the best interests of [the] state."⁴ The statute provides a variety of factors to be considered in the "best interest" analysis.⁵
• As of the date of this publication, Arizona has yet to take additional action pursuant to the aforementioned directive.

District of Columbia

• The federal government has yet to take action specific to the District of Columbia with regard to the implementation of the NRRA or the ratification of a multistate agreement.

Michigan

• To date, Michigan has taken no legislative action relating to the NRRA mandate. According to the state's Office of Financial and Insurance Regulation ("OFIR"), however, proposed legislation has been drafted and is currently being discussed with lawmakers in the House and Senate. OFIR's website notes that "[t]he laws and regulations of Michigan will continue to apply to premium reporting and premium tax due on multi-state placements until July 21, 2011. It is the intent of the Office of Financial and Insurance Regulation to post additional information on its website if and when Michigan begins participating in a multistate clearinghouse or tax sharing arrangement."⁶

Nevada

• On July 13, 2011, the Nevada legislature authorized the Commissioner of Insurance to enter into a multi-state agreement to preserve the ability of the state to collect premium tax on multi-state risks.⁷ Acting pursuant to that authority, on July 13, 2011, the Commissioner, in concert with the National Association of Insurance Commissioners ("NAIC") opted to ratify the NIMA agreement. Nevada is one of twelve states to adopt the NIMA agreement.

Tennessee

• Tennessee is one of a select number of states which has actually incorporated one of the multistate compacts into its statutory code. On June 11, 2011, Tennessee became the ninth state to adopt the SLIMPACT agreement. Interestingly, within Tennessee's SLIMPACT legislation it provides for the prospect of the compact never reaching fruition: "[i]n the event this [SLIMPACT] compact fails to become effective as described in article XIII by February 28, 2012, the state is authorized to enter into a cooperative agreement, compact, or reciprocal agreement with another state or states. . . . " In other words, should SLIMPACT fail to attract a tenth state party (as required under the terms of the compact in order to become effective), Tennessee would be within its rights to withdraw at that time.
• In addition, under Tennessee's SLIMPACT legislation, the state would retain any premium tax allocated to a state that is not a party to the SLIMPACT agreement. Furthermore, the bill also provides that Tennessee's surplus lines law would apply only to surplus lines transactions where Tennessee is the insured's home state.

Footnotes

1. 15 U.S.C. § 8201(b)(4) (emphasis added).

2 Id. at § 8201(a).

3 Id. at § 8204(1).

4 Ariz. Rev. Stat. § 20-416.01(A).

5 Id.

6 Office of Financial and Insurance Regulation, Nonadmitted and Reinsurance Reform Act of 2010 FAQs, available at, http://www. michigan.gov/lara/0,4601,7-154-10555_13648-260773--,00.html

7 S.B. 289, 76th Leg., (NV. 2011).

8 Tenn. Code. Ann. § 56-14-201 (Lexis 2011).

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