Surplus Lines & the Home State Rule

Elaine is a Marketing Associate at ReSource Pro Compliance

One of the things that makes the non-admitted market different from the standard market is the need to pay premium taxes and other fees on a policy-by-policy basis. But what happens when the risks covered by a policy are located in more than one state? Who gets the money then? That’s where the Home State Rule comes into play.

NRRA & the Home State Rule

In 2010, U.S. lawmakers passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which included insurance reform under Title V. Under the Non-Admitted and Reinsurance Reform Act (NRRA) Section 522, the laws and regulations for the insured’s home state govern the surplus lines policy transaction, and Section 521 states that only the home state may require premium tax payments for non-admitted insurance. Therefore, it is essential to correctly identify the home state for any given policy.

How It Works

Fortunately, there’s a relatively simple step-by-step process to determine a policy’s home state.

  • If the insured is an individual, the decision is fairly straightforward. The home state is where that individual maintains their principal residence.
  • If the insured is a business entity, things can be a little more complicated. If the policy covers a single entity, then the home state is where that entity maintains its primary place of business.
  • If the insured is a group of entities, use the home state of the entity which has the largest percentage of premium attributed to it.

There’s one more wrinkle, though. If none of the insured risk is located in the home state(s) of the insured(s), disregard the rules above. Instead, the home state is wherever the greatest percentage of taxable premium is allocated.

Savvy insureds and their brokers may even be able to structure risks and policies in order to take advantage of the most favorable tax rates. Hope this information helps you!

Looking for an easy way to compare states’ premium tax rates and other regulatory requirements? Ask about our Surplus Lines Calculator and Tax Tool (CATT).