Excess Line Tax Allocation

The federal Nonadmitted and Reinsurance Reform Act (NRRA) significantly changed the law regarding excess line insurance placements with an effective date on and after July 21, 2011.

For risks incepting on or after July 21, 2011, the NRRA prohibits any state, other than the “home state of the insured,” from requiring a premium tax payment for excess line insurance policies. Accordingly, where New York is the “home state of the insured” under an excess line insurance policy with an effective date on and after July 21, 2011, 100% of all written premium is subject to taxation, even when the policy covers risks or property located in other states as well.  There is one exception that permits taxation of less than 100% of the written premium.

When New York is the “home state of the insured” on an excess line policy with an effective date on and after July 21, 2011, and where the policy covers risks or property located both in the United States and outside the United States, only that portion of the premium attributable to the risks or property located in the United States is subject to taxation. An excess line broker should utilize the premium tax allocation rules and schedule contained in Appendix 5 of Regulation 41 when determining the premium attributable to the United States risks or property.

For the most part, determining the “home state” for regulation and taxation purposes is easy.  However, please be aware of the following unique issues which can impact the obligation to pay excess line tax:

1)    TAXATION OF PURCHASING GROUPS

Insurance Law §2101(x)(3) defines the “insured’s home state” for a “group policy,” which is applicable to “purchasing groups” as follows:

• When the group policyholder pays 100% of the premium from its own funds, then the “insured’s home state” is considered the principal place of business of the group policyholder. [This may be the case with many “employer sponsored group excess policies”].

• When the group policyholder does not pay 100% of the premium from its own funds [PG risks], then the “insured’s home state” is that of each group member.

Simply stated, excess line brokers must file affidavits and related individual certificates of insurance for each individual New York “home stated” member of the PG and pay premium taxes only to New York for New York “home stated” PG members. However, only one set of declinations and one master affidavit is required for each purchasing group.

2)    TAX EXEMPTION FOR TANGIBLE PROPERTY LOCATED COMPLETELY OUTSIDE OF NEW YORK

Pursuant to Insurance Law §2117 (b)(2), if 100% of a “tangible” property risk is located outside of New York, it is exempt from New York excess line tax. However, the Department of Financial Services’ OGC has opined that certain insurance coverages that insure “intangible” property interests do not come under the exemption from the excess line law and taxation for property permanently situated outside of the state. That exemption applies only to “tangible” property interests according to OGC Opinion of 03-01-37. Therefore, intangible property risks such as political risk insurance and trade credit insurance (OGC Opinion of 05-10-22) are subject to the excess line tax when New York is the “home state of the insured.”

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ELANY DISCLAIMER:
This is not intended to be nor should it be construed as legal advice. Consult with your own legal counsel.
Last Reviewed/Revised: October 13, 2020