Earlier this week, California enacted Assembly Bill 315 which allows California to implement provisions of the federal Nonadmitted and Reinsurance Reform Act of 2010 (the “NRRA”).

The NRRA, which went into effect July 21, 2011, is targeted at creating more uniformity in the surplus lines by requiring that states make changes to their surplus lines laws on, among other things, the reporting, payment, collection or allocation of surplus line premium taxes. The NRRA is not implemented by a federal agency.  Instead, each state must interpret the NRRA and revise existing laws to comply with such act.

AB 315 authorizes California to impose a surplus lines premium tax of 100 percent of the surplus lines premium and calculate the stamping fee based on the full premium when a surplus lines broker determines that California is the home state of the insured. AB 315 does not address sharing premium taxes with other states and California has not yet entered into a tax allocation agreement with other states.

To comply with the NRRA, AB 315 also revises the existing insurer eligibility requirements for California surplus lines placements. Under the new law, there are “eligible” surplus lines insurers and “approved” surplus lines insurers.  “Eligible” surplus lines insurers are determined based on the NRRA criteria.  Specifically, eligible insurers are: (i) foreign nonadmitted insurers that satisfy California’s minimum capital and surplus requirement of $45 million; and (ii) alien nonadmitted insurers listed on the NAIC’s Quarterly List of Alien Insurers. Under AB 315, surplus lines insurers still need to file specified documents with the California Department of Insurance (e.g., certificate of capital and surplus, license, and certificate of good standing from the surplus line insurer’s domiciliary jurisdiction) to become eligible.

“Approved” surplus lines insurers are those insurers listed on the List of Approved Surplus Line Insurers ("LASLI") (f.k.a. List of Eligible Surplus Line Insurers ("LESLI")).  All surplus line insurers listed on the LESLI as of July 21, 2011 are automatically grandfathered on the LASLI through expiration of all policies in effect as of July 21, 2011.  To be “approved” for LASLI, the insurer must comply with all application requirements that were in effect to become eligible as a surplus lines insurer in California prior to the enactment of the NRRA and AB 315. Maintaining approval on LASLI is voluntary.

Furthermore, pursuant to AB 315, surplus lines policies issued or renewed prior to July 21, 2011 will be governed through expiration, including endorsements and cancellations, by the law in effect prior to July 21, 2011. The transition rule expires Oct. 18, 2012.

Click here to view a memorandum from the Surplus Lines Association of California on California’s  implementation of the NRRA.

As states continue to enact laws implementing the NRRA, the legality of the interpretation of the NRRA by the states remains an open issue.  Under the NRRA, a state may not “impose eligibility requirements on, or otherwise establish eligibility criteria for, nonadmitted insurers domiciled in a United States jurisdiction, except in conformance with such requirements and criteria in sections 5A(2) and 5C(3)(a) of the Nonadmitted Insurance Model Act, unless that state has adopted nationwide uniform requirements, forms, and procedures developed in accordance with [the interstate compact or other procedures] that include alternative nationwide uniform eligibility requirements.” (Emphasis added.)   Whether or not AB 315 satisfies such uniformity requirement may be a question resolved by the courts at a future time.