Date:May 29, 2012
To:All Agents Licensed for Surplus Lines Insurance
From:Theodore K. Nickel, Commissioner of Insurance
Subject:Surplus Lines Insurance Requirements Under Wisconsin Act 224

In July of 2011, the federal Nonadmitted and Reinsurance Reform Act (NRRA) went into effect. This law altered the way states regulate surplus lines insurance. Wisconsin has enacted Act 224 (effective April 20, 2012) which brought the state into compliance with NRRA. Act 224 can be viewed at: https://docs.legis.wisconsin.gov/2011/related/acts/224.pdf (opens in new window).

The current statutes with these changes incorporated can be viewed at: http://docs.legis.wisconsin.gov/statutes/statutes/618.pdf (opens in new window).

This bulletin will summarize the main changes made by Act 224, but you should review the actual statutes as amended and consult with your legal counsel if you have questions regarding your particular situation. If an existing rule provision conflicts with the new statutory changes, the new statutory changes will control. The existing rules (ss. Ins 6.17, 6.18 and 6.19, Wis. Adm. Code) can be viewed at: http://docs.legis.wisconsin.gov/code/admin_code/ins/6.pdf (opens in new window).

Act 224 defines terms in the Wisconsin Statutes to follow the definitions in NRRA and the other states that modified their laws to be compliant. These terms should be reviewed to understand differences made in the new regulations. Wisconsin is not joining a compact or surplus lines tax-sharing arrangement but will be collecting 100% of the surplus lines premium tax where Wisconsin is the home state of the surplus lines insured.

The Insured's "Home State" for Purposes of a Particular Placement

The biggest change made by NRRA is that only one state, the "Home State of the insured" is permitted to regulate the placement of any surplus lines policy or directly placed policy. (See s. 618.40 (4), Wis. Stat.)

Wisconsin is the insured's Home State if the insured maintains its principal place of business here or, in the case of an individual, the individual's principal residence is here. If Wisconsin is considered the insured's Home State, only Wisconsin's requirements regarding the placement of surplus lines business will apply. However, if 100% of the insured risk is located outside of Wisconsin, then the insured's Home State is the state to which the greatest percentage of the insured's taxable premium for that insurance contract is allocated.

If more than one insured from an affiliate group are named insureds on a single nonadmitted insurance placement, Wisconsin will be considered the Home State for that placement if Wisconsin is the Home State of the member of the affiliated group that has the largest percentage of premium attributed to it under such insurance contract.

Surplus Lines Agent Licensing

The surplus lines agent on each surplus lines account must have the appropriate license in the "Home State of the insured" for each state where a placement is made. In Wisconsin, that license is a "surplus lines agent license." The application procedures and fees remain the same as before this change.

Surplus Lines Tax Calculations

Wisconsin taxes 100% of each surplus line policy's written premium when Wisconsin is the "Home State of the insured." The tax rate is 3% of the entire premium, fees or other consideration received for a policy for all unauthorized insurance. The 3% rate now applies to ocean marine insurance from an unauthorized insurer.

All policies with an effective date prior to January 1, 2012, and premiums collected prior to January 1, 2012, will continue to be subject to existing tax allocation rules on written premiums, additional premiums and return premiums. All policies effective on and after January 1, 2012, or premiums collected after January 1, 2012, will be taxed at 100% of all the premium and other consideration collected at the 3% rate when Wisconsin is the Home State even when the policy insures risk exposures in other states as well.

Taxes will be paid in the same manner as currently required with all taxes from calendar year 2012 due on March 1, 2013, using the same form. (See s. Ins 6.17 (5), Wis. Adm. Code)

Surplus Lines Forms with Arbitration Clauses

Sections 23 and 24 of Act 224 codify the Office of the Commissioner of Insurance's (OCI's) past practice that surplus lines policies do not have to be filed even if there is an arbitration clause in the policy. This change reverses the holding of the Gillen case (Edward I Gillen Co. v. Insurance Co of the State of Pa 747 F. Supp. 2d 1058; 2010 US Dist. LEXIS 119202).

In the Gillen case, the Federal District Court in the Eastern District of Wisconsin held that s. 631.20 (form filing) and s. 631.85 (arbitration clause approval required) applied to a surplus lines policy. This change would clarify that surplus lines policy arbitration clauses do not require OCI approval.

Questions about surplus lines insurance and tax calculations can be e-mailed to:

Yvonne Sherry
Bureau of Financial Analysis and Examinations
Yvonne.Sherry@wisconsin.gov

Questions concerning surplus lines agent licensing can be e-mailed to the OCI Agent Licensing Section at:

OCIAgentLicensing@wisconsin.gov