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By DAN REYNOLDS, senior editor of Risk & Insurance®

The recent troubles of a Long Island, N.Y.-based insurance agency provide ample evidence of the pain agents and brokers can feel in trying to navigate complex, excess-lines premium-tax payments.

The settlement called for the firm to pay more than $3.4 million by the end of 2012 to New York state for nonpayment of premium taxes for the placement of excess-lines policies for religious organizations with Lloyd's of London.

The agency mistakenly believed that the placements for the organizations, which included some faith-based universities, didn't require it or the insureds to pay premium taxes.

"They honestly thought that this was a legitimate way for them to place the policies ... since they were not-for-profits and they would not be required to pay the taxes," said David Neustadt, a spokesman for the state insurance department.

William Waldorf, a principal with Waldorf & Associates, could not be reached for comment.

Following a New York Post story about the settlement, Lloyd's released a statement assuring the insureds that the there was nothing wrong with the policies and that they were still in force.

"Lloyd's would like to make it clear that, although it has not been the subject of any enforcement action involving nonpayment of tax, any coverage arranged by Waldorf & Associates and placed with Lloyd's underwriters in relation to this matter has been unaffected," the statement read in part.

NOT ISOLATED INCIDENT

But the problems the Long Island-based agency has experienced are not happening in isolation.

For example, Alexis Lambert, a spokeswoman for the Division of Agents and Agency Services within the state of Florida's Department of Financial Services, said the division has received five cases of nonpayment of excess-lines premium-tax payment in the past two years.

And no wonder. Traditionally, excess-lines premiums taxes have been an administrative headache. Excess-lines brokers placing policies for multistate risks had to pay premium taxes per each state's individual regulatory regime.

According to the National Association of Surplus Lines Offices, brokers now spend millions of dollars a year in "frictional costs" associated with figuring out which excess-lines premium taxes to pay.

HELP ON THE WAY

Help--of a kind--is on the way.

The Nonadmitted Reinsurance Reform Act, part of the Dodd-Frank financial services reform, goes into effect on July 21, and it should simplify the excess-lines premium-tax issue for insurance agents and brokers. Under the reforms, the insured's home state will be the sole regulatory overseer for excess-lines placements.

"The magic of the Nonadmitted Reinsurance Reform Act (NRRA) is that, instead of 55 jurisdictions, you just have to satisfy one set of rules for any transaction--that is the state in which the insured is principally located," said Scott Sinder, a partner and chairman of the government affairs public policy practice for Washington, D.C.-based law firm of Steptoe & Johnson.

Sinder is also outside general counsel for The Council of Insurance Agents & Brokers, which is pushing to create interstate compacts for standardizing excess-lines regulations.

According to Sinder, 13 states have passed legislation that would allow entry into some form of a compact, one that might share premium taxes based on the percentage of risk housed in the state, for example.

Another 11 states have passed legislation that would let them join the compacts in the future. For now, though, those 11 states don't have to share excess-lines premium taxes paid by excess-lines brokers on their resident insureds, a stance that they are within their legal rights to take.

A majority, 26 states, have so far taken no legislative action in advance of the July 21 date when the NRRA becomes effective.

"We're still waiting to see how they are going to deal with this," Sinder said.

June 14, 2011

Copyright 2011© LRP Publications