Any article addressing the implementation of the reforms to federal surplus lines insurance laws enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is likely stale by the time of publication. While the states continue to take various measures to bring their laws into compliance, those measures have been inconsistent, at best. As the National Conference of Insurance Legislatures (NCOIL), the National Association of Insurance Commissioners (NAIC) and the states continue to address the implementation of Dodd-Frank's Non-Admitted and Reinsurance Reform Act of 2010 (NRRA) and to wrestle with numerous issues related to those reforms, only New Jersey faces the additional question of the NRRA's potential impact on its Surplus Lines Insurance Guaranty Fund.
New Jersey's Surplus Lines Insurance Guaranty Fund1
Because of the threat posed by the insolvency of Ambassador Insurance Company of Vermont, in 1984, New Jersey enacted the Surplus Lines Insurance Guaranty Fund Act (Act), establishing a Guaranty Fund (Fund) to provide protections for the policyholders and claimants of insolvent surplus lines insurers.2 The Fund has been and remains the only guaranty fund in the nation covering surplus lines risks. As a result of several amendments to the Act since its adoption in 1984, the Fund's protections have been limited since 2002 to policies covering medical malpractice liability risks and owner-occupied dwellings of four units or less.
In order to secure the monies necessary to meet the Fund's obligations, the Act imposes policyholder surcharges on surplus lines premiums and a $25,000 non-refundable assessment on surplus lines insurers, payable as a condition of eligibility to accept surplus lines risks in New Jersey. The NRRA, which became effective July 21, 2011, potentially impacts New Jersey's Fund in two ways.
First, under the NRRA, New Jersey may regulate and collect premium taxes only if the surplus line insured's "home state" is New Jersey, or if the state has adopted nationwide, uniform requirements, forms and procedures that provide for the reporting, payment, collection and allocation of premium taxes for non-admitted insurance.
Second, under the NRRA, New Jersey may impose eligibility requirements upon non-admitted, U.S. insurers in conformance with the requirements and criteria set forth in the NAIC Non-admitted Insurance Model Act (Model Act) and may impose additional eligibility requirements if it has adopted nationwide uniform requirements, forms and procedures that include alternative nationwide uniform eligibility requirements.
The New Jersey Legislature passed Senate Bill 2930, effective July 21, 2011, and the New Jersey Commissioner of Banking and Insurance (Commissioner) issued Bulletin No. 11-11, dated July 13, 2011, implementing the NRRA in New Jersey. However, the potential issues arising from the obligations imposed on surplus lines insurers with regard to the Fund have not been addressed directly by either the Legislature or the Commissioner.
The NRRA's "Home State" Rule
Chief among the NRRA's primary goals are the simplification of the payment of premium taxes on multi-state risks and the establishment of a more uniform and efficient system to address multi-state surplus lines transactions. In order to achieve these goals, the placement of non- admitted and surplus lines insurance is now subject to the requirements of the insured's "home state." Thus, permitted regulation primarily depends upon the location of the surplus lines insured's "home state," which is defined under the NRRA (and adopted by the New Jersey Legislature) as the location where: (i) ...the insured maintains its principal place of business or, in the case of an individual, the individual's principal residence; or (ii) if 100 percent of the insured risk is located out of the State...the State to which the greatest percentage of the insured's taxable premium for that insurance contract is allocated.3
The regulations implementing New Jersey's Surplus Lines Act define "located in New Jersey" similarly, as a "physical presence in or headquartered in the State of New Jersey."4
For purposes of the Surplus Lines Insurance Guaranty Fund, the NRRA's restrictions on how a state may regulate non-admitted and surplus lines insurance may affect New Jersey's ability to require premium tax payments for non-admitted insurance and to impose additional eligibility requirements on insurers seeking to write non-admitted insurance, impacting the monies available to the Fund to pay the covered claims of insolvent surplus lines insureds.
May the State Impose Policyholder Surcharges For the Benefit of the Fund?
Under the NRRA, no state, other than the home state of an insured, may require any premium tax payment for non-admitted insurance. "Premium tax" is broadly defined thereunder as: any tax, fee, assessment, or other charge imposed by a government entity directly or indirectly based on any payment made as consideration for an insurance contract for such insurance, including premium deposits, assessments, registration fees, and other compensation given in consideration for a contract of insurance.5
Whether the NRRA limits New Jersey's ability to impose surcharges on surplus lines insureds for the Fund first depends upon whether they constitute premium taxes under the statute, i.e., are the surcharges "fees" imposed by the government for a contract of insurance?
With respect to the surcharges, New Jersey's Surplus Lines Insurance Guaranty Fund Act provides as follows: [a] surcharge on the policy premium, as determined by the commissioner, shall be levied and collected on any surplus lines coverage issued or renewed on or after the effective date of this amendatory act. The surcharge shall be collected by the surplus lines agent at the time of delivery of the cover note, certificate of insurance, policy or other initial confirmation of insurance. No premium receipts tax, commissions or assessments shall be levied or collected on the surcharge. The surplus lines agent shall forward to the fund the amount of the surcharge on a quarterly payment basis. Each member insurer and surplus lines agent shall be notified of the policy surcharge not later than 10 days before it is due. The amount of the surcharge may be, from time to time, adjusted, terminated or reinstated by the commissioner, as he may deem necessary to meet the current and projected obligations and expenses of the fund, except that in no case shall the surcharge in any year exceed 4% of the policy premium.6
In the past, such surcharges have been imposed by Order of the Commissioner in the amount of 4% of the gross premium on all surplus lines policies written or renewed by an eligible surplus lines insurer. Based upon the monies available in the Fund for existing and future eligible surplus lines insurer insolvencies, the Commissioner suspended the surcharges, subject to reinstatement, if necessary, for all policies and endorsements issued or renewed on or after August 1, 1993. They have not been reinstated since that time. Nonetheless, they are a charge which may be imposed by a "government entity," upon necessity.
For Dodd-Frank purposes, the surcharges also must be based upon "consideration for a contract of insurance," in order to be deemed to be a "premium tax."7 New Jersey's surplus lines surcharges are to be collected by the surplus lines agent at the time of delivery of a policy and apply on a per-policy basis as a percentage of premium. They are based on "consideration for the policy," i.e., premium. Accordingly, they fall squarely within the purview of the NRRA and arguably may be imposed only if New Jersey is the home state of the surplus lines insured, or where the state enters into a compact or otherwise establishes procedures allocating taxes paid to the home state.
Given that New Jersey is the only state with a Surplus Lines Insurance Guaranty Fund, it is unlikely that any NCOIL or NAIC initiative will address this particular issue. However, existing New Jersey regulations have long required the allocation of such surcharges pursuant to a schedule adopted by the Commissioner which, on its face, may satisfy the NRRA. 8 Under the regulation, the surplus lines agent or insured is required to determine both the premium and surcharge allocable to risks or exposures located in New Jersey, pursuant to the criteria for the allocation of multi-state risks by insurance classification, i.e., property or liability insurance, set forth therein. The NRRA also mandates an analysis as to which state constitutes the principal place of business: If a business is located 100% outside of New Jersey, then the analysis looks to where the greatest percentage of the insured's taxable premium for that insurance contract is allocated.
In any event, because the Fund's coverage obligations have been restricted to claims arising out of medical malpractice liability insurance and property insurance covering owner-occupied dwellings of less than four dwelling units, in most cases, New Jersey will be the insured's home state. Where it is not, the surcharge can be allocated pursuant to regulation. This approach should meet the requirements of the NRRA.
Is the $25,000 Assessment Imposed Also Permissible Under the NRRA?
The Fund is further supported by a one-time, $25,000 assessment imposed by New Jersey upon surplus lines insurers as a condition of eligibility to export coverages to New Jersey.9 This assessment is not tied to any particular surplus lines policy, is not levied based upon consideration for an insurance contract for surplus lines or independently procured coverage, and does not fall within the definition of a premium tax under the NRAA. Rather, the assessment is a one-time, non-refundable pre-payment to support the Fund and constitutes an eligibility requirement under New Jersey statute and regulation.10 The question of the $25,000 assessment as an acceptable eligibility requirement under the NRRA may be the subject of future debate.11
In creating uniform standards for surplus lines eligibility, Dodd-Frank precludes a state from imposing eligibility requirements on, or otherwise establishing eligibility criteria for, non-admitted insurers domiciled in a United States jurisdiction, except in conformance with such requirements and criteria set forth in the Model Act, unless the state has adopted nationwide uniform requirements, forms and procedures.12 Whether Dodd- Frank preempts assessments for the Fund is dependent upon whether the assessments constitute an additional eligibility criterion which has a direct and substantial effect on Congress' purpose in enacting the NRRA.13 Moreover, state law will not be preempted if it involves an area of law that is deeply rooted in local interests, or is traditionally regulated by the states.14
The $25,000 assessment is imposed on surplus lines insurers in order to operate the Fund, a private, non-profit, unincorporated legal entity created by the New Jersey Legislature for the protection of its citizens.15 Its broad public purpose, embodied in the statute, is to provide "valuable benefits by covering claims of certain claimants against insolvent property and casualty insurers selling insurance in New Jersey as surplus lines." 16 In adopting the Act, the Legislature declared that it is "good public policy to maintain surplus lines insurance guaranty benefits for certain lines of insurance in the future."17
The regulation of insurer solvency has long been a function of the states, and state regulation governing the insurance guaranty fund system has been largely untouched by the NRRA. The assessments are authorized by the Legislature in order to meet the obligations and expenses of the Fund, and the Act can be viewed simply as establishing a pre-insolvency guaranty fund assessment system.
Clearly, New Jersey's Surplus Lines Insurance Guaranty Fund is not preempted by the NRRA. However, given the singular nature of New Jersey's statutory scheme, which serves a broad public purpose, the ultimate resolution of whether and to what extent the funding mechanisms established to support the Fund are permissible is open.
While the NRRA does not directly preempt pre-insolvency assessments for the benefit of the Fund for New Jersey's surplus lines insureds, it does preempt the collection of premium taxes, except by the insured's home state, or pursuant to the terms of an allocation methodology. Whether the NRRA pre-empts New Jersey's imposition of pre-insolvency assessments for the placement of non-admitted insurance is arguable. These questions will, no doubt, be addressed as the implementation of the NRRA continues.