California Surplus Lines Bill signed Into Law

By Andrea Wells  Insurance Journal

California passed legislation this week that will allow the state to implement provisions in a new federal surplus lines insurance law.

The federal Nonadmitted and Reinsurance Reform Act of 2010 (NRRA), which becomes effective on July 21, 2011, requires states to make changes in their laws involving surplus lines taxes.

Assembly Bill 315 was signed by Gov. Jerry Brown last Friday. The new law is the California Department of Insurance’s proposal to implement the NRRA, and was supported in large part by the surplus lines industry.

Under AB 315, only the “insured’s home state” may tax surplus lines premium and regulate surplus lines transactions. Surplus line brokers in California will now be responsible for determining “whether an applicant for nonadmitted insurance is a California home state insured.”

Surplus lines brokers must consider whether the insured’s principal place of business resides in California, and may rely on information provided by the insured to determine the home state provision. However, if none of the insured “risk” is located in the state where the insured maintains its principal place of business, the home state can be determined based on the state in which the insured has the greatest percentage of taxable surplus lines premium.

The new law also states that surplus lines brokers must now maintain documentation showing how they determined the insured’s home state. It also requires brokers to maintain records on how they determined whether a commercial purchaser or commercial insured is exempt from the diligent search requirement, and where allocation of premium to the states is required, brokers must maintain data as necessary to make that allocation.

Under the new law, California state tax applies to 100 percent of surplus lines premium and the stamping fee applies to the full premium. However, California has yet to join with other states on any tax allocation agreement.

The state’s insurance commissioner may exempt surplus lines brokers from burdensome multi-state allocation data in the March 1 tax filing but brokers may be required to report such data.

The new law also changes existing insurer eligibility requirements for California home state placements to conform with NRRA. All surplus line insurers listed on the LESLI (List of Eligible Surplus Line Insurers) are automatically grandfathered as of July 21, 2011, on LASLI (List of Approved Surplus Line Insurers) through expiration of all policies in effect as of July 21, 2011. Brokers who wish to use an ineligible company will either need to file on behalf of the company or have the non-admitted insurer file directly with the department of insurance.

AB 315 allows for a transition period as well. Surplus lines policies issued or renewed prior to July 21, 2011, will be governed through expiration, including endorsements and cancellations, by the law in effect prior to July 21, 2011. The transition rule expires Oct. 18, 2012.