By Tracy Williams, Sidley Austin LLP and Karin Landry, Spring Consulting Group

Since the enactment of the Nonadmitted and Reinsurance Reform Act (the “NRRA”) as part of the Dodd- Frank Act, captive owners and advisors around the country have been engaged in discussion and debate over the impact of the NRRA on the state tax profile of captive insurance arrangements. Although it is not clear today whether the NRRA even applies to captive arrangements, captive owners and advisers would nonetheless be well advised to review their existing structure and policies and consider whether certain state tax risks can be minimized or eliminated.

Background – Pre-NRRA Law

States impose different premium taxes on insurance arrangements depending on the nature of the arrangement. Licensed or authorized insurance companies are generally subject to premium taxes on premiums written in a state at an average rate of approximately 2%. Insurance placed with a surplus lines company by an authorized broker is typically subject to a surplus lines tax imposed on the broker (which the broker collects from the insured). Finally, many state laws impose “self-procurement” taxes on an insured that purchases insurance from a nonadmitted insurance company. Surplus lines and self-procurement tax rates are generally higher than premium tax rates. Prior to the developments described in this article, state self-procurement taxes were generally imposed on the portion of the premium paid for an insurance contract that is allocable to risk physically located in nthe taxing state.

For example, a captive domiciled in Vermont issues insurance to a company with its corporate headquarters in Maryland, where 10% of the risk is located. In the past, premiums totaling $250,000 paid to the captive would have 10% of the risk ($25,000) taxed in Maryland along with the Vermont captive tax. Under NRRA, the company would have to pay tax on 100% of the risk in Maryland, as well as, the previous tax paid in Vermont.

The below example is based off of $5,000,000 in premiums.

Dodd-Frank Act

Although many state laws purport to  impose self-procurement taxes on insureds that purchase insurance from a captive insurer, in practice, insureds actually pay self-procurement taxes in a small number of states, often only in the state of the insured’s corporate headquarters. Insureds have taken the position that it would violate the Due Process Clause of the US Constitution to impose tax on the insured where the transaction to purchase insurance did not take place within the taxing state, based on the Todd Shipyards case.

In Todd Shipyards, the Supreme Court held that Texas violated the Due Process Clause by imposing its self procurement tax on an insurance transaction where the only connection between the transaction and the State of Texas was the location of the insured risk.

There is some disagreement about whether Todd Shipyards has continuing vitality. In cases decided after Todd Shipyards, state courts have consistently limited the holding of Todd Shipyards to cases that are factually similar.

Additionally, when the Supreme Court revisited the standard for finding that a state has jurisdiction over a taxpayer in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), it held that a taxpayer has sufficient nexus with a state when its activities are “purposefully directed toward residents of another State.” Under this standard, physical presence in a state is no longer the deciding factor in determining whether a taxpayer has nexus with a state.

Accordingly, when the issue arises, states generally take the position that a self-procurement tax may be imposed even where no part of the insurance transaction took place within the state, and that Todd Shipyards is no longer good law. If this position were correct, even prior to the developments described in this article insureds could be subject to self-procurement taxes in all states in which risks insured under the contract are located.


One of the NRRA’s intents was to simplify state regulation and taxation of nonadmitted and surplus lines insurance by preempting any state except the “home state” of an insured from imposing premium tax. Specifically, the NRRA provides that “[n]o State other than the home State of an insured may require any premium tax payment for nonadmitted insurance.”

Nonadmitted insurance is defined as “any property and casualty insurance permitted to be placed directly or through a surplus lines broker with a nonadmitted insurer eligible to accept such insurance.”

In addition to the preemption rule, the NRRA authorizes (but does not require) the states to enter a compact to implement the Act. Currently, there are two competing compacts: the National Association of Insurance Commissioners supports the Nonadmitted Insurance Multi-State Agreement (“NIMA”), whereas the National Conference of Insurance Legislators supports the Surplus Lines Insurance Multistate Compliance Compact (“SLIMPACT”). Neither compact is yet effective, as neither has reached the required number of participating states.

A few large and significant states, including New York and California, have refused to join any compact and intend to impose and collect tax on 100% of premium paid by insureds.

Dodd-Frank Act

Importantly, some states that have taken action have also amended their taxing statutes to remove the pre-existing “allocation” language; under pre-NRRA laws the states imposed tax only on the portion of premium paid allocable to risk in the state, but under the post-NRRA laws, the states generally impose tax on  100% of the premium paid, regardless of whether the risks are located in the state.

How the NRRA Affects Captive Insurance Arrangements

At least one advisor has concluded that the NRRA does not apply to captive insurance arrangements, and the Vermont Captive Insurance Association, the Captive Insurance Companies Association and the National Risk Retention have endorsed this conclusion. If the NRRA does not apply to captive insurance arrangements, the preemption rule would not be available to an insured that purchases insurance from a captive.

For example, if an insured’s “home state” is Texas and the insured pays premium of $100 to purchase insurance from its Vermont captive insurer, at this time Texas law imposes self-procurement tax on the full $100 of premium (Texas may later join a compact or similar arrangement, however). In the absence of the preemption rule, other states might seek to impose tax on premium paid by the insured as well, and the insured risks paying tax in multiple states.

In addition, the Texas tax alone is likely a significant increase in tax compared to the pre-NRRA law, such that captive owners and advisors may wish to consider restructuring their insurance arrangements.

What Should You Do?

In order to err on the side of caution, captive insurers should answer two broad questions:

  • Do you think the NRRA applies to captives?
  • What are the tax consequences either way?

If the NRRA does apply, it will preempt states other than the insured’s “home state” from imposing tax on premium paid to a captive insurance company. If the NRRA does not apply, insureds should nonetheless examine the law of each relevant state to determine how any changes enacted after the NRRA affect captive insurance arrangements.

Captive insurers should review the actual legislation rather than relying on general information that summarizes the legislation, as certain of the state legislative changes affect self-procurement taxes and surplus lines taxes differently.

In order to be prepared for various outcomes, captive owners should:

  • Determine which state or states would qualify as their home state(s)
  • Review the statutes, regulations and bulletins in each relevant state to determine how each states laws will apply to captive insurance arrangements
  • Review the potential implications assuming both that the NRRA applies to captive insurance arrangements and that it does not

Review potential solutions, such as:

  • Redomiciling
  • Use of trusts
  • Use of fronting arrangements
  • Restructuring insurance policies or captive arrangement to achieve a better result


1Effective July 11, 2011.

2A 1962 US Supreme Court case, State Board of Insurance v. Todd Shipyards Corp., 370 U.S. 451 (1962).

3White Paper Discussing The Nonadmitted and Reinsurance Reform Act of 2010 and Its Potential Application to Captive Insurance to the Vermont Captive Insurance Association, James T. McIntyre and Adam Maarec, (October 6, 2011)

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Karin Landry

Karin Landry

Managing Partner at Spring Consulting Group, LLC
Karin Landry, ACI, CLTC, GBA is the Managing Partner for Spring Consulting Group. Karin has over 25 years of experience in the insurance, health care, risk financing, retirement and benefits industries. She is an internationally recognized leader in captive insurance strategy, benefits and financing. She is Past-Chairman of the Board of The Captive Insurance Company Association and a member of the ERISA Industry Committee and was recently appointed to the Board of Directors for Fallon Community Health Plan. She is also a Professor of Employee Benefits and member of the finance committee for the International Center of Captive Insurance Education part of the University of Vermont. Karin’s expertise around benefits allowed her to co-author a white paper for Business Insurance Magazine titled “Captives for Benefits: How to Use a Captive to Save Money and Enhance Benefits Coverage”, which is currently a top seller. Both Vermont and the US Virgin Islands asked Karin for input and guidance with their recent legislative changes. Prior to joining Spring, Karin was President of Watson Wyatt Insurance & Financial Services in the United States and Head of the Health & Welfare division for the eastern region.