Florida Says Constitutional Issues May Preclude Joining National Surplus Lines Compact; NAIC Surplus Lines Reform Implementation Task Force Debates Guiding Principles, Merits of International Fuel Tax Agreement Versus SLIMPACT

 

Citing possible constitutional issues with compacting as the reason behind her statement that Florida would not join the proposed Surplus Lines Insurance Multi-State Compliance Compact (“SLIMPACT”), Florida Office of Insurance Regulation Deputy General Counsel Susan Dawson reviewed the State’s comments on draft Guiding Principles for surplus lines reform implementation during a September 13, 2010 National Association of Insurance Commissioners (“NAIC”) Surplus Lines Implementation Task Force (“Task Force”) meeting.  To view the Task Force’s September 13 agenda and meeting materials, click here.

To view the Guiding Principles and related comments, click on the hyperlinks below:

• Guiding Principles for Surplus Lines Reform Implementation
• Compilation of comments on Guiding Principles

Chaired by Louisiana Insurance Commissioner Jim Donelon, the executive-level Task Force was created at the NAIC’s recent 2010 National Summer meeting to develop and oversee implementation of state-based solutions addressing the surplus lines provisions in the Non-Admitted and Reinsurance Reform Act (“NRRA”), which is part of the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Specifically, Guiding Principle #1 suggests states should change their laws to adopt the NRRA’s definition of “home state” for purposes of non-admitted insurance transactions.  An entity’s home state would typically be its “principal place of business.”  Ms. Dawson cautioned that any state adopting this definition should be aware of the February 23, 2010 U.S. Supreme Court opinion in Hertz v. Friend, which determined that an entity’s “principal place of business” is established by using what the courts have labeled as the “nerve center” test.  The nerve center would be the place where the entity’s officers direct, control and coordinate corporate activities. 

“I just don’t know that we have time to adequately address the Hertz decision,” Commissioner Donelon said, explaining that he had delved into “tweaking” the “home state”  definition.  “I got good feedback on the impossibility of that being available to us.”

The NRRA’s definition of Home State is:

(6) HOME STATE.-
(A) IN GENERAL.-Except as provided in subparagraph
(B), the term ”home State” means, with respect to an insured-
(i) the State in which an insured maintains its
principal place of business or, in the case of an individual,
the individual’s principal residence; or
(ii) if 100 percent of the insured risk is located out
of the State referred to in clause (i), the State to which
the greatest percentage of the insured’s taxable premium
for that insurance contract is allocated.

Ms. Dawson also discussed Florida’s position on Guiding Principle #6, which provides that “States should determine the method by which they will participate in a nationwide solution: interstate compact or something else.   In the event there are states not desiring to compact, compacting states should determine if and how to allow participation by non-compacting states and non-compacting states should determine the authority required for their participation.”

Florida’s position on this concept is that an agreement or contract among the states commensurately effective in accomplishing the goal of premium tax collection and disbursement of any allocated shares of premium taxes to other states without the need for an “intricate” interstate compact.

In its written comments, Florida stated that an agreement or contract among the states would effectively accomplish the goals of premium tax collection and multi-state allocation without the need for an “intricate” interstate compact.  Florida also suggested a possible alternative solution to be an agreement similar to the International Fuel Tax Agreement (“IFTA”), under which states agreed to report interstate motor carrier fuel tax data.  

Florida’s statutory language for the IFTA states:  “The Department of Highway Safety and Motor Vehicles may enter into a cooperative reciprocal agreement, including, but not limited to, the international fuel-tax agreement, with another state or group of states for the administration of the tax imposed by this chapter.  An agreement, arrangement, declaration, or amendment is not effective until stated in writing and filed with the (Florida) Department of Highway Safety and Motor Vehicles.”

Ms. Dawson said that Florida would potentially support SLIMPACT ” . . . as long as (it) addresses the ministerial duties of collecting the (premium) tax, but if it’s more substantive in terms of authority, (Florida) may have constitutional issues.”

Later in the meeting, Commissioner Donelon explained that Florida’s constitutional issues relate to compacting, not tax collection, since Florida has the authority and capacity to collect taxes for other states.

After Ms. Dawson’s remarks, Commissioner Donelon asked Committee members, representatives and interested parties that had submitted comments to discuss their respective positions on whether SLIMPACT or IFTA were viable solutions to implement surplus lines reform.   The definition of “home state,” each state’s authority to collect fees and taxes for itself and other states, and each state’s authority to enter into a compact were reviewed .

Mississippi  

The Mississippi representative indicated that Mississippi is “definitely considering SLIMPACT” and is prepared to follow up with supporting legislative action.

New York

The New York representative said he did not believe the state’s equal protection laws would allow it to collect taxes at another state’s rate.  Thus, New York’s participation in a compact could be problematic. 

“I don’t see how we can establish different tax rates,” the New York representative insisted in response to a suggestion by Commissioner Donelon that the State could consider joining a compact for a limited purpose.

Texas

Texas Comptroller Gary Johnson spoke on behalf of the State of Texas and advocated the simplification of premium allocation, along with closing “tax loopholes” by enforcing minimum audit standards. 

Texas has been supportive of IFTA, in which 48 states already participate.  “This means they are collecting each other’s taxes already,” Mr. Johnson explained.   The amount of IFTA-related taxes allocated to a state is determined by how many miles a truck has traveled in that particular state.

Virginia

Advocating that brokers, rather than the states, should  input tax-related information, Virginia’s representative spoke favorably about joining the compact “as long as we can add value to use that system.”   Virginia would have to adopt a definition of “home state” and pass enabling legislation in order to facilitate membership in the compact. 

Washington

The State of Washington echoed others’ call for a uniform definition of “principal place of business,” along with the simplification of premium tax allocation.  Under Washington law, other states’ tax rates can be applied, but legislative intervention would nevertheless be needed for Washington to participate in the compact.

Other states and interested parties

In addition to those listed above, approximately 85 interested parties participated in the teleconference, including representatives from the following states:    Nebraska, Oregon, Ohio, Iowa, Michigan, Colorado, Missouri, Connecticut, California, Kansas, Montana, South Dakota and New Hampshire. 

The South Dakota representative said the state is in a situation similar to that of New York and Florida and asked whether the states could adopt a compact without delegating too much authority under it.

The Michigan representative agreed with New York and Florida’s position, saying “I don’t see how we can collect other states’ taxes.”   

Representatives from the National Conference of Insurance Legislators, American Association of Managing General Agents and the Council of Insurance Agents and Brokers all encouraged the use of SLIMPACT as a viable solution.

A representative of Marsh Inc. explained that his company’s principal concerns focus on how processing would take place on returned premiums and endorsements.  “Our clients are constantly buying and selling properties.  That results in returned premiums,” he said.   “We have over 22,000 software rules that operate our system and we would need a five to six-month lead time to put any new rules into effect.”

For Marsh, the possibility of processing an invoice in 20 different states would become an “incredibly complex challenge,” the Marsh representative explained, further specifying that creating and implementing a system whereby states would bill and collect annual taxes simultaneously would greatly facilitate administrative processing challenges.

National Association of Professional Surplus Lines Offices Director of Government Relations Steve Stephan, discussed the effective date of the NRRA’s surplus lines provisions and the various challenges presented by first crafting a compact and then inviting states to join, as compared with creating a consensus of states and then subsequently developing a compact.   He cautioned that, if problems result in the implementation of NRRA, then litigation can be expected that would include questions of whether a compact was properly adopted and whether there was a proper delegation of authority was incorporated.

“The drafters of NRRA chose to put a short period of time into the Act for us to comply or else lose authority and tax dollars,” Mr. Stephan said.   “We have heard from two large states that they don’t think they can do a compact that delegates jurisdiction over issues beyond tax allocation.”

Commissioner Donelon summarized the following areas of common agreement and other points where further discussion is required in order to develop the structure of a national solution to implement surplus lines reform as provided by the NRRA:

• The NRRA’s definition of “home state” must be adopted without latitude for alternate interpretations among states. In order to accomplish this, all states must codify and adopt a definition of “principle place of business.”
• States must enact legislation to provide for the collection of 100 percent of premium, rather than only the portion of the premium allocated to that state’s pro-rata.
• The fundamental question of taxation methodology must be determined. Other than New York, which maintains that only the rate of the home state can be collected, most other states can collect taxes according to each state’s separate rate.
• A uniform method of reporting must be adopted. Although a form has been developed to accomplish this, it may be fundamentally flawed as a solution to implement the NRRA.
• Solutions must incorporate independently-procured insurance and dispute resolution practices, as well as outreach to stamping offices and state agencies.

Written comments on the most recent draft of SLIMPACT, as well as the enabling legislation of IFTA will be accepted by the NAIC until Thursday, September 16.   The next Task Force call will be on Monday, September 20, 2010 at 2:30 p.m. (ET), during which written comments on utilizing elements of SLIMPACT, IFTA or a dual approach to implement the requirements of the NRRA will be discussed.

The most recent version of SLIMPACT and the federal statute related to IFTA are attached for review.  To view additional information on IFTA, go to: http://www.iftach.org/.  Written comments must be submitted to John Bauer (jbauer@naic.org). 

Interested Parties can pre-register for the call at the following Web page:  https://services.choruscall.com/client/naic/registration/.

 

Should you have any comments or questions, please contact Colodny Fass.