Both the Nonadmitted Insurance Multi-State Agreement and the Surplus Lines Insurance Multistate Compliance Compact are designed to further compliance with the Nonadmitted and Reinsurance Reform Act. Mark R. Goodman, a partner with Freeborn & Peters L.L.P. in Chicago, outlines the pros and cons of each compact, and who the winners and losers under each one might be.

The Nonadmitted and Reinsurance Reform Act requires that only the home state of the insured can collect surplus lines premium taxes, and it permits states to enter into interstate agreements to allocate those taxes.

The compacts that have been set up for that purpose but are not yet operational are the Nonadmitted Insurance Multi-State Agreement and the Surplus Lines Insurance Multistate Compliance Compact. Some winners and losers are expected to emerge as the compacts are developed to allocate the premium taxes.

Perhaps the biggest winner will be the company selected to run the NIMA clearinghouse. This company will be paid a fee, stated as a percentage of the surplus lines premiums on multistate risks of the participating states, for operating the system. The fee ultimately will be borne by insureds.

While the kinds of multistate risks that would be subject to tax allocation may be only a percentage of the approximately $32 billion annual surplus lines premium in the U.S., the revenues for operating the tax clearinghouse may be substantial. It is unclear how the NIMA operating company's fees will compare to the cost of allocating taxes under the different mechanism put forth under SLIMPACT.

Under NIMA and SLIMPACT, other expected winners are states that, because of historical happenstance or their political and business climates, are not the home state of many large commercial insureds. These are the states that will be net-tax importers. In other words, the amount of tax allocated to those states based on in-state operations and properties of out-of-state insureds is expected to exceed the amount of surplus lines tax on in-state insureds that they allocate to other states.

The losers under NIMA and SLIMPACT will include states that are the home states of large commercial insureds that have significant surplus lines premiums. These are states that, because of history and their political and business climates, have tended to attract and keep corporate headquarters. These states will be net-tax exporters. In other words, the amount of surplus lines tax on in-state insureds that is allocated to other states is expected to exceed, and perhaps far exceed, the amount of tax on insurance for out-of-state insureds that would be allocated to these states.

Not surprisingly, almost all of the states that tend to attract and keep the most corporate headquarters have so far not jumped on either the NIMA or SLIMPACT bandwagons. States such as California, Illinois, New Jersey, New York, Ohio, Pennsylvania and Texas—which account for approximately 50% of the U.S. surplus line premium—do not seem terribly interested in either clearinghouse approach. Why would a legislator in one of these states approve an allocation scheme that would result in a net reduction in surplus lines tax revenues for his or her state? It is difficult to see how the state benefits from allocating to other states the surplus lines tax on large in-state insurance placements. No legislator wants to pass legislation that results in his or her state being a “loser,” particularly when it comes to tax revenues.

Other losers under NIMA include surplus lines brokers. Most brokers likely will be able to adjust to a NIMA allocation scheme, since with time, effort and money they should be able to provide the information and make the filings needed to make the NIMA allocation scheme work. Any such scheme, however, will be more complicated, more time-consuming and more costly than merely doing what the NRRA provides—paying the surplus line tax only to the home state of the insured. The view among most brokers is that NIMA probably will be more onerous on brokers than will SLIMPACT.

Finally, the biggest losers under NIMA—and the ones who tend to be forgotten in these discussions—will be the surplus lines insurance consumers. Insureds derive no benefit from the NIMA tax allocation scheme. Nevertheless, insureds will bear the financial cost of the contemplated tax clearinghouse (which may cost as much as .3% or more of surplus lines premiums on multistate placements, which will exceed the stamping fees of most of the existing surplus lines stamping offices).

Insureds also will bear the burden of having to provide to their brokers the information upon which the tax allocation will be made, based on whatever allocation factors that NIMA now, or in the future, decides are the appropriate factors for allocation.

Perhaps it is time for the interests of surplus lines insurance consumers to be brought into the discussion over NIMA.

Mark R. Goodman is a partner with Freeborn & Peters L.L.P. in Chicago. He can be reached at mgoodman@freebornpeters.com.