The term certificate of authority actually has several different meanings in insurance compliance. Today, however, I’m talking about the COA issued by a foreign state’s Secretary of State’s Office that documents its approval for an entity to transact business in the state.
Hey, Nobody Said Anything About a COA!
One of the most common questions we hear is, “Register my insurance business with the Secretary of State? What’s that about? Nobody at the insurance department said anything about that!” It’s true that the DOI may not mention the need to obtain a Certificate of Authority. This is because only a handful of states require a COA as a prerequisite for agency licensing.
That means that in the majority of states, licensing and business registration are entirely separate processes. Since the insurance department usually isn’t responsible for business registrations, they may not provide information about them on its website or during calls. Be careful, though. Just because a state’s DOI doesn’t mention the need for a business registration doesn’t mean it’s not required. Also, depending on how a state sets up tax accounts, you may also need to complete a separate registration with the Department of Revenue.
Domicile vs. Foreign States
Securing permission to transact business in your domicile state usually occurs at the point of business formation. It’s likely that in-house or contracted counsel takes care of this task. But once the agency moves out to other, foreign, states the agency – or its Compliance Coordinator – needs to handle it.
Whether you need to register in a foreign state depends on whether you meet the definition of doing business in the state. Most states base their definitions on either the Model Business Corporation Act (MBCA) or the Revised Model Act. The American Bar Association maintains both of these model laws to provide uniform definitions and best practices for a number of key business functions.
But as with so many aspects of regulatory compliance, the devil is in the details. Which activities rise to the level of doing business varies from state to state. That’s why it’s always a great idea to consult with legal counsel before starting the business registration process. You’ll want to choose an attorney familiar with both your business model and the state’s laws to answer this question for you.
Are You SURE I Need to Register?
If you’re supposed to register and don’t, legally your business doesn’t exist. That can become a real problem, especially if you become involved in a lawsuit in the state. Some states may allow you to bring your suit after you obtain a remedial registration. But in many states, if you’re not registered at the time of the event that led to the suit, you’re just out of luck.
So if it’s that important, why wouldn’t everyone register their businesses? We’ve already talked about the most common reason. Lots of people simply aren’t even aware of the need to register, especially if they’re new to non-resident licensing. They haven’t yet hit one of the states where the Department of Insurance requires a Certificate of Authority as part of the agency licensing process.
Another big concern is cost. Admittedly, registering your agency can significantly increase the cost of nationwide compliance. Most states charge a fee to apply for a COA. You may also need to complete Initial Returns, Initial Corporate Tax Filings, and Newspaper Publications as part of the registration process. Then once you register, you’ll need to complete Annual Returns and Foreign Corporate Tax Filings in most states each year. All these costs are something you need to be aware of and prepare for … before you register.
Some clients are willing to gamble on not getting caught doing business without a Certificate of Authority to avoid these extra expenses. But remember, if you meet a state’s definition of “doing business in” and don’t have an appropriate registration, they can assess penalties and require remedial filings going back to the first date that your agency transacted business in their state. Often, these fees and penalties easily outweigh the costs of securing and maintaining the registrations in the first place.
It’s Your Decision
Obviously, it’s always your choice whether or not to register your business. But you need to make an informed choice. No one wants to complete unnecessary compliance steps. (Hey, we all enjoy our work, but not that much!) Still, here at ILSA, we’ve had too many people come to us for help in catching up with corporate compliance to not share our concerns with you.