Doing business in states other than your domicile and/or resident state greatly increases your regulatory obligations. Depending on the state and your business activities, you may need to obtain permission from regulators including insurance departments, Secretary of State Offices, and Departments of Revenue to transact business in a state. But this raises the question, What constitutes doing business?
For Licensing Purposes
In its Producer Licensing Model Act, the National Association of Insurance Commissioners (NAIC) identifies three activities that constitute doing business in the insurance industry and therefore require an individual or business entity to hold the appropriate license type and lines of authority:
- Soliciting – attempting to sell insurance or asking or urging a person to apply for a particular kind of insurance from a particular company
- Negotiating – conferring directly with or offering advice directly to a purchaser or prospective purchaser of a particular contract of insurance concerning any of the substantive benefits, terms or conditions of the contract, provided that the person engaged in that act either sells insurance or obtains insurance from insurers for purchasers
- Selling – exchanging a contract of insurance by any means, for money or its equivalent, on behalf of an insurance company
Most states incorporate this definition and similar wording into their laws and insurance codes.
In these days of online marketing, the soliciting clause can cause issues. Potential clients nationwide – or around the world, for that matter – can see your website and social media channels. So does just having a website mean you have to be licensed nationwide? The answer is, usually not. But if you are contacted by a potential client from a state where you or your agency doesn’t hold a license, you immediately need to redirect that prospect to someone who is licensed.
Additionally, some states require you to list the states where you are licensed on the homepage of your website. Personally, I think this is always a good idea, as is listing and defining the lines of authority you handle. After all, you don’t want to tie up your sales and support teams with calls that can’t become leads.
For Business Registration Purposes
As we here at ILSA like to remind our clients, getting licensed is only half of compliance. You may also need to register your agency with the Secretary of State before doing business in a non-domicile or foreign state. (Your domicile state is where your business filed its Articles of Incorporation/Formation with the Secretary of State’s Office. This can be different from your resident state.)
Unfortunately, there is not a comprehensive definition of “doing business” on the SOS/DOR side of things. Many states base their statutes and regulations on the American Bar Association’s Model Business Corporation Act. 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. Wolters Kluwer maintains an excellent resource, What Constitutes Doing Business, which brings the various states’ laws together in one place. The book is currently in its 18th Edition.
Any entity engaging in business activities in a foreign state should carefully review that state’s statutes and regulations to determine if registration with the Secretary of States’ Office is needed. Seeking advice from legal counsel with expertise in this area also can be very helpful.
Penalties for Non-Compliance
Engaging in soliciting, negotiating, or selling insurance products without the appropriate licenses can lead regulators to impose fees, fines, and administrative actions. Remember, submitting a license application isn’t enough! Don’t solicit, negotiate, or sell any insurance product until the state approves the application and issues an insurance license. After all, DOIs do sometimes reject applications.
Failing to comply with requirements to register your business with the SOS/DOR can jeopardize your standing in state courts and also can result in substantial financial penalties! Depending on the state, a separate registration with the Department of Revenue may also be required.
Additionally, once licenses and business registrations are in place, a variety of compliance tasks are needed to keep licenses and Certificates of Authority active and in good standing. These include license renewals, annual returns, and foreign corporation/franchise tax filings, among others.