National Association of Insurance Commissioners Surplus Lines Implementation Task Force Adopts Nonadmitted Insurance Multistate Agreement; Delaware Alternate Proposal Fails

 

With a looming implementation deadline for the Non-admitted and Reinsurance Reform Act (“NRRA”) of 2010, the National Association of Insurance Commissioners (“NAIC”) Surplus Lines Implementation Task Force  (“Task Force”) approved the “concept” of the Nonadmitted Insurance Multistate Agreement (“NIMA”) during a December 1, 2010 teleconference. 

Representatives from the states of Delaware and Virginia abstained from the vote after an earlier motion to adopt the State of Delaware’s newly submitted alternate proposal failed by a vote of 8 to 3.

NIMA’s approval came under the condition that the Task Force would revisit the NIMA “concept,” subject to both technical and substantive amendments to be considered during a follow-up call scheduled for December 8, 2010 at 3:30 p.m. (ET). 

The meeting discussion preceding the vote began with a representative from the Council of Insurance Agents and Brokers expressing dissatisfaction with NIMA’s definition of “home state.”  It was agreed that this definition and the proposed allocation formula would ideally need to be revisited after NIMA’s implementation goes into effect.

A representative from the National Association of Professional Surplus Lines Offices agreed, saying that the casualty allocation system for small brokers could become more difficult than the existing system.

The issue of having at least 30 data requirements to be input for every policy, together with the corresponding regulatory “nuances” from all 50 states concerned the Task Force members.  A meeting participant said that either the Surplus Lines Insurance Multi-State Compliance Compact (“SLIMPACT”) or NIMA would require this type of data input from brokers.

“No agreement is meaningful unless adopted by a substantial number of the states,” one of the Task Force members said.   “The (National Conference of Insurance Legislators) has adopted a more comprehensive approach.  The landscape has shifted since NIMA was originally conceived.”

After its “concept” approval of NIMA, the Task Force discussed some of the NRRA-related implementation issues as outlined by the NAIC’s Legal Department, which cautions that states should also consider the extent to which they need to amend their laws to allow for full participation in NIMA and otherwise conform to the NRRA.

Complete meeting materials are attached for review.

 

NAIC Legal Department:   NIMA May Require Statutory Changes

The NAIC’s Legal Department issued a memorandum on NIMA, in which it advises that states should conduct a thorough review of their surplus lines laws in the event there are state-specific issues that need to be addressed in relation to NIMA participation and NRRA implementation. 

Because participation in NIMA requires states to share tax revenues they are authorized to collect under the NRRA as the home state on a nonadmitted insurance placement, states will likely require statutory authorization to enter into, and participate fully in NIMA.

States may consider codifying NIMA’s ultimate definition of “home state” to help to ensure they are operating from a mutual understanding of which state will be the “home state” for a nonadmitted insurance placement.  This would reduce the potential for conflicts among states as to which jurisdiction is the home state in a transaction.

Statutory authorization may be needed to collect and disburse taxes based on a single home state rate, as well as the rates of other states.  States may need to consider whether additional sections of law requiring the payment of taxes should be similarly modified.

These modifications would be intended to:

• Provide for the payment of surplus lines taxes on 100 percent of the gross premiums of a surplus lines policy;
• Compute the sum of taxes to be paid based on a formula that incorporates the home state’s tax rate, as well as the tax rates of other states where a portion of the risk or exposure on the policy is located;
• Authorize participation in the clearinghouse established by NIMA for the purpose of collecting, allocating and disbursing taxes to other participating states; and
• Provide for the reversion to the home state of any taxes that otherwise would be allocated to a state that does not participate in NIMA.

Participation in NIMA would require the state to establish a single rate applicable to all lines of nonadmitted insurance and encompassing all applicable taxes, fees and assessments. The purpose of this requirement would not be to impose or require new taxes, but to ensure that the person submitting relevant transaction information will benefit from the ease of applying a single rate to risk located in a state.

According to the NAIC memorandum, states participating in NIMA likely will need to establish the rate of taxation through which the state can be “made whole” in moving from a system of differing rates across lines of business and differing levels of state and local assessments.  It is not clear whether states presently have the authority to combine existing taxes, fees and assessments into a single rate applicable to that state

There may be some states for which adoption of a common allocation schedule is subject to legislative approval or administrative procedures.  Moreover, Section 5.F.(4) of the NAIC’s Nonadmitted Insurance Model Act currently presumes that a state receives only those taxes attributable to risk located in that state and that the allocation schedules attached to the model regulation will be utilized.

While NIMA is focused on preserving the existing system of premium tax allocation, the NRRA makes other changes affecting surplus lines regulation. Similar to issues associated with premium tax allocation, the NRRA establishes certain regulatory requirements that will apply to surplus lines insurance and will go into effect regardless of whether states take uniform nationwide action.

The NAIC recommends that states should review the following areas of their surplus lines laws in order to determine whether to amend such laws to be consistent with the NRRA:  (In the event states choose not to amend their statutes, inconsistent state laws may be subject to preemption pursuant to the NRRA.)

1. Regulatory authority

The NRRA establishes the principle of home state deference with respect to surplus lines regulation and taxation.  While the NRRA permits states to agree on a nationwide system for premium tax allocation and otherwise work together to achieve uniformity in certain areas, Section 522 enshrines home state deference into federal law. Pursuant to Section 522(a), the placement of business “shall be subject to the statutory and regulatory requirements solely of the insured’s home State.”  Additionally, Section 522(c) provides that, with respect to certain provisions of the NRRA, state laws or measures that “appl[y] or purport to apply to nonadmitted insurance sold to, solicited by or negotiated with an insured whose home State is another State shall be preempted with respect to such application.”

The Nonadmitted Insurance Model Act does not include a general section on the scope of the law. For those states where the surplus lines law includes a statement of the law’s scope, states may consider modifying their statute to clarify that such law will only apply to those placements of nonadmitted insurance where that state is the home state of the insured.  Concurrent enactment of NIMA’s definition of “home state” may further assist in providing nationwide clarity about the determination of an insured’s home state on a given placement.

 

2.  Insurer eligibility requirements

Without the establishment of uniform nationwide nonadmitted insurer eligibility requirements, Section 524(1) of the NRRA requires states to adhere to Sections 5.A.(2) and 5.C.(2)(a) of the NAIC Nonadmitted Insurance Model Act relating to eligibility requirements for nonadmitted insurers domiciled in other U.S. jurisdictions. Section 524(2) prevents states from prohibiting surplus lines brokers from placing business with non-U.S. carriers included on the NAIC’s Quarterly Listing of Alien Insurers.  Therefore, state requirements that differ from the limitations of the NRRA may be subject to preemption.  In the absence of amending state law to enact presently-undeveloped uniform nationwide requirements or choosing not to enforce requirements that would be subject to preemption, states may consider amending the appropriate statutes or regulations to conform to Section 524 of the NRRA.

 

3.  National insurer producer database

Section 523 of the NRRA provides that participation in the national insurance producer database of the NAIC for the licensure of surplus lines brokers and renewal of their licenses will be required to collect licensing fees for surplus lines brokers as of July 21, 2012.  The National Insurance Producer Registry presently serves as such a database.

 

4. Home state broker licensing requirements

Section 522(b) of the NRRA provides that only the insured’s home state may require a surplus lines broker to be licensed to sell, solicit or negotiate nonadmitted insurance with respect to that insured. This paragraph does affect the requirement that states extend reciprocity to non-resident surplus lines brokers pursuant to the National Association of Registered Agents and Brokers’ provisions of the Gramm-Leach-Bliley Act. Section 522(b), however, will affect requirements that a broker be licensed in every state where a portion of the risk is located in a multi-state placement.  Accordingly, states may consider amending provisions in their surplus lines laws to clarify that licensure is required only where the state is the home state of the insured.

 

5. Exempt commercial purchasers

Section 525 of the NRRA provides that surplus lines brokers seeking to procure or place nonadmitted insurance on behalf of an “exempt commercial purchaser” are not required to satisfy any diligent search requirements where certain conditions are present. Section 527(5) defines those “exempt commercial purchasers” to which this provision would apply. Section 5.A.(3) of NIMA includes a requirement that a diligent search of admitted carriers be performed. State laws vary with respect to establishing the requirement of the diligent search and any required number of declinations before the coverage may be placed with a nonadmitted insurer. Therefore, states seeking to conform their diligent search laws to NRRA’s exempt commercial purchaser provision will need to tailor relevant statutory language to the specific provisions in their surplus lines law.

 

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

 

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