One of the major differences between the admitted and non-admitted (or surplus lines market) is that brokers are responsible for calculating and paying the premium taxes on the policies they write. While using the correct tax rate is essential, it’s also critical to understand which fees assessed by the carrier or broker are subject to premium tax. This can get complicated because (wouldn’t you guess it) insurance regulations vary from one state to another.
It isn’t practical to address every state’s rules in a short article like this one. However, understanding the basic concepts involved can help brokers know what questions to ask.
Types of Fees
Before diving into which fees are and aren’t taxable, let’s review some of the types of fees brokers may see. States sometimes use slightly different terms for the same concept. Be sure you use the correct terminology for the state where you are filing.
- Policy fee – a fee charged by a carrier to cover costs involved with preparing and issuing an insurance contract
- Broker fee – monies charged by a surplus lines broker to reimburse them for time spent placing and negotiating terms for insurance coverage AND any amount above and beyond these costs assessed to generate a profit
- Agency fee – monies paid to a retail/producing agent by an insured as compensation for professional services such as determining the nature and scope of the risk, completing the diligent effort search, collecting and forwarding monies to the state, etc.
- Inspection fee – a fee charged to reimburse a broker (or a qualified sub-contractor) for inspecting a property to assess value and potential risks
- Underwriting fee – a fee charged by a carrier to reimburse for research time and other expenses involved in underwriting an insurance policy
- Stamping fee – a service charge assessed by a state’s stamping office for reviewing and approving a surplus line policy and/or tax filing
- Fire Marshal tax/fee – a tax amount or fee assessed by the state Fire Marshal’s Office on surplus lines contracts involving property coverage
Taxable Versus Non-Taxable Fees
As you can see from the charts below, most state regulators include policy, underwriting, and broker fees in the total taxable amount. It’s essential to understand each state’s specific definition of each fee type.
Again, it’s important to remember that rules change. Be sure to verify the taxable status for a particular fee before preparing your policy filing or tax report. This is especially important for states where you don’t transact business on a regular basis. Remember that some jurisdictions may impose additional taxes on certain types of policies. For example, 8% of states assess a specific tax on fire premium. Regulators may also assess state-specific surcharges on premium amounts.
In some states, surplus lines brokers are not allowed to collect any type of service fee, inspection fee, or any other fee not specifically charged by the carrier. If assessing such a charge, the broker must also maintain documentation that confirms that the service was provided. For example, a broker charging an inspection fee would need to provide an inspection report. In the event of an audit by a state regulator, such documentation justifies charging the fee.
There are also jurisdictions that limit fee amounts. Sometimes this cap is a specific dollar amount, while other regulators simply state that the amount must be “reasonable.”
Finally, some states allow surplus lines brokers to charge a fee for their services instead of receiving a sales commission. The broker cannot collect both a fee and a commission for the same transaction, however.
What to Do If You Make a Mistake
No matter how careful we are, there’s always the chance of making a mistake. The important thing is to have a robust process in place to catch any errors as quickly as possible. That way the broker(age) can take appropriate action before penalties accrue. Don’t count on regulators to double-check your calculations promptly. Depending on the volume of filings received, it may be a while before authorities are able to review a filing or report in detail.
Including non-taxable fees in your calculations means you wind up paying more premium tax than you need to. Many states allow brokers to amend a filing if they discover an error. The time involved to process such refund requests can vary greatly, however, depending on how busy regulators are. Additionally, some jurisdictions don’t issue refund payments. Instead, they provide credits that brokers can apply to future filings.
While erring on the side of paying too much is inconvenient, it doesn’t trigger penalties and administrative actions. Leaving a taxable fee out of your calculations means underpaying the premium tax. Typically, the licensee responsible needs to submit an amended filing or report and pay the additional premium tax – plus any fees or interest due. The strictest states may reject the filing/report entirely. If the regulatory deadline passes meanwhile, licensees can find themselves subject to all the penalties for a missed filing.
Tips for Avoiding Errors
A robust internal process for preparing, reviewing, and submitting regulatory filings can reduce the chances of making mistakes – or at least help catch them before they cause too much harm. These three tips are a great way to start:
Don’t wait until a regulatory deadline is fast approaching to prepare any required submissions. No one does their best work when they’re rushing. Additionally, last-minute filing reduces the time available to respond to any discrepancies a stamping office or other regulator may identify.
For those states that require a tax report rather than “paying-as-you-go,” collect the information needed as policies are bound. If regulators make report forms available, enter the information there. Otherwise, create a spreadsheet to store the data.
Always check with state authorities to be sure you are following the appropriate procedures and using the correct forms. Also, some states require amended submissions and late filings to use rates and forms applicable when payment was originally due.
Also, don’t assume that what’s allowable in one state is okay in another. Even adjacent states can have very different regulations.
Show your work.
Even if regulators don’t require brokers to itemize their tax calculations and/or provide an itemized accounting to policyholders, it’s a great idea to keep a detailed breakdown of premiums and all applicable fees in a brokerage’s internal system. Indicate which are included in the premium tax calculation. Doing so not only encourages filers to pay attention to details; it can also make it easier to locate other affected submissions if it turns out that a broker has misunderstood or misapplied state rules.
Remember, regulators want you to “get it right,” so never be afraid to contact them with any questions you may have about surplus lines compliance procedures. You can also contact ILSA’s team of surplus lines experts at firstname.lastname@example.org.
And to find the most current requirements for all U.S. jurisdictions in one place, try CATT, ILSA’s Surplus Lines Calculator and Tax Tool. The premium version of this best-in-class online tool is available at no cost to all ILSA’s surplus lines clients via the Surplus Lines Industry Connection (SLIC) portal.