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Leader's Edge


My Surplus Line

Love Me because I'm just not going away.

By  Joel Wood

Compliance lawyers in every Council member firm have a stack like the one Marsh’s Roger Smith sent me. It’s a copy of the surplus lines premium tax filings for a single multi-state client. It runs hundreds of pages. The state of Kentucky alone, which has municipal tax codes, accounted for more than 50 pages of separate filings, some of them for a couple of bucks in taxes. It is insanity.

It’s not just the redundancy. The filings are complicated by a complete lack of uniformity in state filing dates and coverage periods. “The largest cluster of dates with the same date/same time period of activity is eight states,” Smith says. “Filing deadlines and timelines vary widely. Examples include 30 days from effective date of coverage, 45 days from effective date, and 120 days from effective date, last business day of month, 20 days after end of month, 25 days after end of quarter, semi-annual, 1/31 and 3/1. States use different forms, and some states enable electronic filing of taxes.”

Even with recent improvements by some states, barriers remain.

The problem becomes maddening when brokers allocate multi-state risks so that tax filings correspond with exposures in each state, while insurers often report all the exposure incorrectly to the home state. Naturally, the home state then demands 100% of the tax, resulting in nasty and unnecessary conflicts among brokers, carriers and insurance departments.

The diligent-search requirements, licensure, and insurer eligibility issues multiply the headaches. On many occasions, I have opined on The Council’s efforts, initiated eight years ago, to correct the morass of conflicting surplus lines laws through enactment of the Nonadmitted and Reinsurance Reform Act. We’ve gathered a lot of support from stakeholders and members of Congress. The House of Representatives, first under Republican control and now under Democratic leadership, has three times approved the legislation, most recently in September under the stewardship of Financial Services Committee Chairman Barney Frank, D-Mass. (Bill authors Dennis Moore of Kansas and Scott Garrett of New Jersey deserve kudos for their determination, as does Insurance Subcommittee Chairman Paul Kanjorski, D-Pa., and ranking Republican Spencer Bachus of Alabama.) The votes each time have been unanimous. But as former Rep. Mike Oxley, R-Ohio, used to joke, “Democrats are the opposition; the Senate is the enemy.”

It’s not that we haven’t garnered support in the Senate; it’s that the requisite oxygen hasn’t existed to get the bill across the finish line. Several things are different this go-around:

n The legislation has strong sponsors, led by Sen. Evan Bayh, D-Ind., in the Senate Banking Committee. Chairman Chris Dodd, D-Conn., publicly signaled his support for the measure, and we are hoping he will include the legislation in broader financial services restructuring.

n The Banking Committee in the Senate is a different creature than many other committees there; it has not been highly partisan. Sen. Richard Shelby, R-Ala., has been vocal about the need for more aggressive federal insurance regulatory intervention. That doesn’t make him a sure bet, and he is by nature extremely conservative and cautious. He’ll want the issue to be aired fully, but his posture is a good one, from The Council’s perspective.

n Even the National Association of Insurance Commissioners has been helpful rather than an obstacle to the enactment of the surplus lines legislation. That’s due to the aggressive efforts of Louisiana Commissioner Jim Donelon and Illinois Insurance Director Mike McRaith. They still don’t like some aspects of the bill, but their position has been constructive. Historically they were the “just say no” crowd.

n Unlike past years, regulatory reform is an imperative in the aftermath of the financial meltdown. Clearly, it will be a top priority of the administration and congressional leaders when health reform is finished. The opportunity to sweep in the surplus lines provisions in a broader reform effort is undeniable.

n Finally, it appears that we have at long last broken free of the “incremental versus comprehensive” reform debate, where major national carriers worried that passage of a discreet surplus lines bill would take the steam out of broader reform efforts. Smaller players worried it was the “camel’s nose” of unnecessary federal usurpation of state control. After years of lobbying, legislators are coming to understand that—even if they enact an ideal optional federal charter—these multi-state surplus lines problems will remain.

Maybe the third time’s the charm. My opinion is that it must be. In the years I’ve been in Washington, I’ve seen two models of lobbyists, both of which can be successful. The first are lobbyists who get the legislators to love them so much that they see the wisdom of proposed legislation. The second kind, more rare, are those who are so annoying that policymakers give them something to make them go away. I’ll strive to be the former, but I’m willing to be the latter. We have to get this legislation signed into law in this session of Congress. The status quo is madness.

Wood is The Council’s SVP of Government Affairs.

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