Florida Surplus Lines Service Office National Clearinghouse Committee Reviews Options In Creating NIMA Technical Support Subsidiary

 

The Florida Surplus Lines Service Office (“FSLSO”) held a National Clearinghouse Committee (“Committee”) meeting yesterday, August 4, 2011, to continue discussing its role in the operation of the Nonadmitted Insurance Multi-State Agreement (“NIMA”) Clearinghouse (“Clearinghouse”).

The Clearinghouse will collect premium taxes and distribute them to participating states pursuant to the surplus lines reform provisions of the Nonadmitted and Reinsurance Reform Act (“NRRA”), part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

At a previous Committee meeting on July 21, members discussed the possibility of creating a wholly-owned, for-profit subsidiary for the provision of technical support services to the Clearinghouse, in partnership with the National Association of Insurance Commissioners (“NAIC”), which would be responsible for operational and administrative support.

An update was provided on the July 27 FSLSO Board of Governors meeting, specifically in regard to a review of provisions of the Florida Constitution relating to “ownership by an agency” and various related issues in the case of Jackson Shaw v. Jacksonville Aviation Authority.

It was explained that given the nature of the Florida Constitution, the holdings in Jackson Shaw, and several Florida Supreme Court cases and attorney generals’ opinions, the notion of the FSLSO forming a for-profit subsidiary in partnership with the NAIC is “ill-advised at best,” because it appears to be prohibited. 

The review of these items has been completed and shared with the Florida Office of Insurance Regulation (“OIR”). 

Notwithstanding, other options remain for the FSLSO, since this conclusion does not preclude the FSLSO from moving forward in its discussions with the OIR, which will assist in finding a format in which the FSLSO’s system can be utilized.

Georgie Barrett, FSLSO’s Deputy Director of Operations, said that the FSLSO is scheduled to present its platform via Webinar to the NIMA member states on August 12.

OIR attorney Dennis Threadgill said that, after reviewing the corporate structuring issues, the OIR agrees the potential for litigation exists if the FSLSO were to set up a for-profit subsidiary.  He encouraged the FSLSO to proceed with its Webinar presentation, and said that other options might exist to assist the Clearinghouse without risking the loss of the FSLSO’s tax-exempt status.

Suggesting that the August 12 presentation should be made to Surplus Lines Insurance Multistate Compliance Compact (“SLIMPACT”) member states in the future, one Committee member commented that the NRRA legislation has presented the opportunity to fulfill a longtime goal of the Board, which is to market FSLSO’s technology to other states. 

A motion was made and carried for the Committee to endorse the marketing of the FSLSO technological program as the platform for NIMA and SLIMPACT, and to encourage FSLSO staff to present the technology to members of both NIMA and SLIMPACT.

Led by the FSLSO external auditor, discussion took place on issues pertaining to the FSLSO’s tax-exempt status, and that, under Section 115 of the IRS Code, the gross income of entities such as the FSLSO is not taxable if it is from an activity or exercise pertaining to a governmental function, with the benefit accruing to the state.

It was explained that to be deemed as tax-exempt , the activities of 501(c)(6) organizations must serve to improve the conditions of one or more lines of business. 

Because the marketing, licensing and servicing of the FSLSO software to other states might initially not appear to benefit the State of Florida, tax liability issues involving unrelated business income (“UBI”) can arise if income is deemed to be unrelated to a 501(c)(6) organization’s exempt purpose, it was explained.   Tax-exempt status can be jeopardized if UBI exceeds a certain percentage of the organization’s gross revenue.

But, if use of the FSLSO software platform by other states allows the surplus tax allocation and distribution process to be more efficient, it could be deemed as beneficial to Florida from the standpoint of enabling the State to receive its share of the tax.

A Committee member mentioned the possibility of the FSLSO protecting its tax-exempt status by putting caps on both the NIMA licensing and consulting agreements, so that the gross income limits on UBI would never be exceeded in any one year.

With no further business, the meeting was adjourned.

 

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

 

 

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