California Enacts Surplus Lines Legislation

California Gov. Jerry Brown has signed into law a bill that allows the state to keep 100% of taxes on premiums generated by surplus lines insurers domiciled in California. That move largely follows the approach other states have taken, but the California law doesn't address whether the state plans to join one of the two proposed frameworks for regulating interstate surplus lines sales.

A.B. 315, is designed to bring the state's surplus lines laws into accordance with the Dodd-Frank Act's Nonadmitted and Reinsurance Reform Act provision. Under that provision, only the policyholder's home state will have jurisdiction over surplus lines sales.

The question of how interstate surplus lines sales will be regulated has been complicated by the two competing compacts proposed by the National Conference of Insurance Legislators and the National Association of Insurance Commissioners, which differ on how premiums would be shared in multistate transactions. There is also a third option, in which a state can opt out of both proposals.

The NAIC-backed proposal, known as the Nonadmitted Insurance Multi-State Agreement, has been joined by five states so far, including Connecticut and Louisiana, which joined last week. The regulators from states that have signed onto NIMA have cited its flexibility as one of the chief attractions for joining it.

Connecticut Insurance Commissioner Thomas Leonardi said it allows states to build in systemic compliance with tax provisions of the NRRA right away (BestWire, July 14, 2011).

Critics of the other proposal, NCOIL's Surplus Lines Insurance Multi-State Compliance Compact, have said that version of an interstate compact has too rigid a framework and often comes into conflict with the constitutional provisions in place in some states. To date, SLIMPACT has nine member states.

California Insurance Commissioner Dave Jones has been among those who said California's constitution wouldn't allow for SLIMPACT to be enacted and has instead been an advocate for NIMA (BestWire, May 9, 2011).

But the relative rigidity of SLIMPACT is what ensures that it can be enforced should a conflict arise between two states, said Rick Masters, a Louisville, Ky.-based attorney who advises the Council of State Governments on surplus lines compact issues.

Because SLIMPACT is set up as a legal construct known as an interstate compact, there is a body of case law outlining how courts should address conflicts between two states. On the other hand, Masters said, NIMA is more of an agreement over how taxes should be imposed on surplus lines and doesn't address non-tax aspects of the surplus lines industry, Masters said.

"There are also questions over whether NIMA would really be binding states when concerning the appropriation of those taxes," Masters said.

The new law is also being scrutinized by the agent and broker community because it places additional reporting requirements on producers. In order to comply with the NRRA, A.B. 315 requires them to file paperwork with the state Department of Insurance listing an insured's home state, whether the insured qualifies as an exempt commercial purchaser and whether the risk is single state or multistate.

(By Jeff Jeffrey, Washington Correspondent: [email protected])