The S.B. 3324 Self-Procurement Tax: No More “Home State” Advantage for Illinois Industrial Insureds?
Illinois Senate Bill 3324, an insurance bill that would impose a premium tax on Illinois companies obtaining unauthorized insurance, has passed the General Assembly and is awaiting Governor Quinn’s signature. If signed into law, the bill will have a significant negative impact on captive insurance and any other unadmitted insurance arrangements used by businesses with a home state of Illinois. Such companies will be taxed on 3.5 percent of their premiums paid on unadmitted policies effective January 1, 2015, and thereafter.
The Favorable Status Quo for Illinois “Industrial” Insureds under the Nonadmitted and Reinsurance Reform Act of 2010 (NRRA)
A state’s premium tax structure typically has three components:
A tax on the premiums received by insurers that are admitted to transact insurance and are regulated by the state;
A tax on the premiums received by surplus lines brokers (typically at a higher rate than the premium tax for admitted insurers); and
A tax on the premiums paid by insureds who obtain their own insurance from unauthorized insurers (sometimes called a self-procured insurance tax), often at the same rate as the surplus lines tax.
Until now, Illinois has not taxed self-procured insurance. Illinois traditionally has allowed “industrial insureds” – companies meeting certain thresholds of size and sophistication – to obtain coverage from non-admitted insurers without violating the prohibition against the unauthorized transaction of insurance in the state (see 215 ILCS 5/121-2 (prohibiting transacting insurance without a certificate of authority), 121-2.08 (excepting transactions with “industrial insureds” and defining the term)) and without the imposition of premium tax.
This exception became particularly beneficial to companies headquartered in Illinois after the enactment of the NRRA, which was part of the Dodd-Frank Act. See P.L. 111-203, tit. V, §§ 521-527, 124 Stat. 1589 (codified at 15 U.S.C. § 8201 et seq.). The NRRA provides that “[n]o State other than the home State of an insured may require any premium tax payment for nonadmitted insurance.” 15 U.S.C. § 8201(a). The “home state” is generally a company’s principal place of business. See 15 U.S.C. § 8206(6) (a detailed discussion of the definition of “home state” is beyond the scope of this post). With the enactment of the NRRA, companies having Illinois as their “home state” have experienced a significant savings: If they qualify as industrial insureds, they effectively can obtain unauthorized insurance coverage of their nationwide risks without paying any state premium tax, as Illinois doesn’t impose a premium tax and other states are precluded from collecting tax from non “home state” companies.
S.B. 3324 Would Impose a 3.5 percent Tax on Premiums Paid by Illinois Industrial Insureds
S.B. 3324 would end this happy state of affairs. It amends 215 ILCS 5/121-2.08 to require industrial insureds to pay tax at the 3.5 percent of premiums rate that is applicable to surplus lines transactions (imposed at 215 ILCS 5/445(3)(a)(ii)). The adverse impact of the tax could be significant, particularly for Illinois home state industrial insureds with captive insurance arrangements.
S.B. 3324 also requires an annual filing with the Surplus Line Association of Illinois. If it becomes law, S.B. 3324 will apply to contracts of insurance effective January 1, 2015, or later. Governor Quinn received the bill on June 19, 2014, and he has until August 14 to sign or veto the bill. If he takes no action, then the bill will become law without his signature.