Once your business crosses state lines, your compliance responsibilities become a lot more complicated. Each state has its own laws, regulations, and procedures … not to mention its little quirks. Even understanding the terms (like foreign) used to refer to the status of a business entity in a given state can be confusing! So let’s go through some of the basics.
First, a business entity’s domicile state is where it filed its Articles of Incorporation (or Articles of Formation for LLCs and business types other than corporations) with the Secretary of State’s Office. Businesses often choose a particular state to be their domicile because it has an easier incorporation or formation process or because the state’s laws are more business-friendly. For example, many businesses choose to domicile in Delaware, regardless of where their business is physically located.
Consequently, all entities doing business in a state in which they are not domiciled are referred to as foreign corporations. Depending on state regulations and the entity’s business model, businesses may need to register with the Secretary of State’s Offices when they plan to do business in states beyond their domicile state. They may also need to register with the Departments of Revenue.
Domicile and foreign are terms used by the Secretary of State’s Offices and by state Departments of Revenue. Insurance departments, however, generally use the terms resident and non-resident. A business’ resident state is where it maintains its principal place of business. When it comes to individual producers, residency is determined by where they maintain their home address. Licensed individuals often must complete pre-licensing education, background checks, licensing exams, and continuing education in their resident states. Businesses also may face a more thorough review of their leadership and business structure and governance.
All other states are referred to as non-resident states. Thanks to reciprocity, mutual agreements between insurance regulators, DOIs in non-resident states generally honor exams and education completed in a producer’s resident state. That’s why individuals don’t have to take a licensing exam in each new state!
Home state is perhaps the most complicated term we’ll discuss today. This is because it has different meanings in different contexts. Some people use home state interchangeably with resident state.
Home state takes on a slightly different meaning when it comes to adjuster licensing, however. Some DOIs don’t require adjusters to be licensed. That’s fine if you only handle claims in that state; but when you move into other states that DO require adjuster licenses, things can get complicated. Fortunately, it’s possible to designate a home state. This designated home state license then serves as the foundation for non-resident licensing.
The term “home state” also has a special meaning when it comes to placing business in the non-admitted market … but that’s a topic for another article.
Talk the Talk
The ability to use insurance terms correctly makes all the difference in being taken seriously as an insurance professional. It can also help avoid confusion when communicating with regulators. Hopefully, the terms we’ve reviewed today will make it simpler to meet your compliance obligations.