Since we live in a country named the United States of America, you’d think the states would generally find a unity of purpose, and depart from petty infighting; you’d be wrong.
Individual state insurance commissioners join together for the common good in the National Association of Insurance Commissioners (NAIC) to craft model regulations and find points of unity. Yet, at the state department of insurance level, they set policies designed to push against other states and enforce punitive fees based on a producer’s borders of origin.
Today we’ll explore this phenomenon of state retaliation. Keep in mind, this is a point-in-time look, and we won’t get into the “who started it,” and we’re not your lawyers or your compliance officers, so be sure you do your own research and due diligence.
1. What is subject to state retaliation?
Most states reserve the right to charge retaliatory fees, taxes, and licensing costs to any non-resident producers or foreign insurers that are domiciled in a state with higher fees, taxes, or licensing costs.
Let’s look at what this means in practicality: South Dakota charges new resident insurance producers $25 for a license, and new non-resident insurance producers $30. Massachusetts charges $225 for new resident insurance producers, and $225 for new non-resident insurance producers. If you’re a South Dakota resident, you pay $25 in your state, and then $225 in Massachusetts to get your non-resident license. But if you’re a Massachusetts resident, since Massachusetts is billing South Dakota residents so much to get licensed, you’ll pay $225 to get your Massachusetts resident license, and then potentially have to pay $225 to South Dakota to get a non-resident license there if the state enforces its retaliation law.
States often grant exemptions for non-resident companies that hold a certain percent of their assets in the non-resident state, or that have maintained a business in the non-resident state for a certain period of time. But these exemptions have many nuances and vary state to state.
2. How do states calculate retaliation?
State retaliatory fees are typically calculated based on either an aggregate calculation or an itemized basis.
Most states’ laws are based on an aggregate assessment. The state, say, Kansas, will tally the total fees, taxes, and charges assessed by another state, say, Montana, on Kansas insurance businesses. Then Kansas will compare the Montana total charges to what Kansas charged a similarly sized Montana insurer. If the Montana charges to a Kansas insurer are comparable to Kansas’ charges of a Montana insurer, then great. It’s a wash. But if Montana charged the Kansas businesses more, then Kansas will assess a retaliatory tax for the difference on the Montana business.
However, states can also take an “itemized” approach – instead of calculating fees and retaliation based on an annual summary, they calculate retaliation throughout the year. For instance, New Hampshire and North Dakota explicitly state in their retaliatory laws that they may charge itemized retaliation fees.
“Whenever other states charge North Dakota insurers, fines, penalties, taxes or deposits higher than North Dakota would charge similar insurers, retaliation will result on an item-by-item basis,” the North Dakota law states.
3. Which states have insurance retaliation fees?
Better to ask which states don’t have state retaliation fees. In law, all states except Hawaii have some kind of state insurance retaliation fee.
Unsurprisingly, not all states are exceptionally forward about imposing their retaliation; many states don’t take a particularly systematic approach to enforcing it, but 49 of the 50 (plus D.C. and Puerto Rico!) have a statute protecting the state’s right to charge a tax or fee in retaliation for another state’s higher taxes and fees.
4. How are retaliatory fees even LEGAL?
Most interstate trade deals and how they’re taxed and regulated are subject to Congress. However, thanks to the McCarran-Ferguson Act and several court cases, the federal government largely has to butt out of insurance.
Truly, if you’re interested in reading through the litigious history of retaliatory fees, check out the Case Law summaries beginning on page 758 of the NAIC’s Retaliatory Fee Part I here. If you’d like the succinct version, though, suffice it to say that, within reason, and with some limitations, states are allowed to levy fees and fines and such based on this interstate grudge match because no federal regulations standardize the industry.
5. What is the result of retaliatory fees?
Retaliatory fees complicate working across state borders for producers, agencies, carriers, and MGAs. For companies and producers with resident status in states that have higher taxes, fees, and charges, itemized retaliatory fees can really add up. This has a discouraging effect on transacting business beyond one’s resident state.
Perhaps retaliatory fees have a dampening effect on state DOI’s appetites for increased taxes and fees – perhaps DOIs are cautious of increasing fees for non-residents because they know their residents will suffer in kind. Yet, some states offset the retaliatory fees their resident insurance businesses and producers pay elsewhere by giving them a tax rebate on their resident state taxes. Ultimately, this suggests that retaliatory fees are a closed loop headache for everyone involved.
The reality is that, while states are within their rights to retaliate with punitive fees and taxes against other states that charge high fees and taxes, the net result is an environment that makes it difficult to predict business expenses with any accuracy. State appointment fees, licensing fees, business taxes, surplus stamp taxes, and numerous other insurance expenses may come with an additional price, depending on the state.
AgentSync can’t affect state taxes or fees. But for carriers, agencies, and MGAs dedicated to doing business better, AgentSync’s solutions can help streamline compliance for growth and make at least some of your business more predictable. See how.