INSIDE SALT
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
self-procured insurance
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Illinois Moves One Step Closer to Enacting Captive Reform

by and | Nov 21, 2018 | , ,

On November 14, the second day of its 2018 veto session, the Illinois Senate voted unanimously to override Governor Rauner’s amendatory veto of Senate Bill 1737 (Bill). As we have previously reported, the Bill is a proposed new law that would reform the Illinois Insurance Code’s regulatory framework for captive insurance companies and significantly drop the state’s current premium tax rate on self-procured insurance. The Illinois General Assembly passed the Bill on May 31, 2018, with bi-partisan support. The Illinois Department of Insurance, key industry groups and several large Illinois-based taxpayers also support the legislation.

If it becomes law, the Bill would create a much more favorable regulatory framework for Illinois captives, following the lead of multiple jurisdictions, including Vermont, Hawaii, South Carolina and the District of Columbia. (more…)



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Illinois Enacts Legislation Imposing a Self-Procurement Tax While Also Narrowing the Industrial Insured Exception for Transacting Nonadmitted Insurance

by and | Sep 11, 2014 | ,

Illinois will soon begin taxing self-procured insurance premiums for the first time, as required by Senate Bill 3324, now Public Act 98-0978 (the Act).  The Act, which was signed into law by Governor Quinn on August 15, was quietly ushered through the General Assembly as a supposed technical amendment. The Act is anything but—it substantively amends Illinois law to tax Illinois-based companies who self-procure insurance as though they were surplus lines brokers, imposing a 3.5 percent self-procurement tax, together with additional fees and charges.  In addition, the Act makes it harder for Illinois companies to self-insure by narrowing the definition of an “industrial insured” and increasing the qualification requirements for risk managers.  The new law applies to policies of insurance effective on or after January 1, 2015.

As we explained in a prior post, the Act hurts Illinois-headquartered businesses that manage risks using captive insurance arrangements. With the 2011 enactment of the Nonadmitted and Reinsurance Reform Act (NRRA), a company’s home state – typically its principal place of business – has exclusive authority to tax and regulate nonadmitted insurance. See 15 U.S.C. § 8201. For Illinois-headquartered businesses, this arrangement worked well because Illinois law previously allowed “industrial insureds” – companies meeting minimal size and sophistication requirements – to transact nonadmitted insurance without paying tax. An Illinois-headquartered company thus could obtain insurance from its captive domiciled overseas or in a captive-friendly U.S. state without paying any tax on its premiums.

The Act ends this business-friendly state of affairs. An industrial insured transacting nonadmitted insurance for a policy taking effect on or after January 1, 2015, will now have to withhold (or pay out-of-pocket if it does not withhold) a 3.5 percent premium tax on insurance contracts. Two additional charges increase the total effective rate to anywhere from 3.6 percent to 4.6 percent: a countersigning fee of 0.1 percent to support the Surplus Line Association of Illinois, and for certain lines of insurance, a fire marshal tax of anywhere from 0.01 percent to 1.00 percent of premium.

The Act also makes it more difficult for Illinois companies to self-insure by narrowing the definition of an “industrial insured,” where companies must qualify as an “industrial insured” in order to have the right to self-insure. Until now Illinois company could be an “industrial insured” if its annual premium for insurance of all risks except life and accident and health insurance exceeded $100,000 and it had either (a) at least 25 full-time employees, (b) more than $3 million of gross assets, or (c) gross revenues of more than $5 million. Under the Act, an industrial insured now must meet the requirements of an “exempt commercial purchaser” under 215 ILCS 5/445(1), which include having nationwide commercial property and casualty insurance premiums in excess of $100,000 annually and having either (a) net worth of more than $20 million, (b) more than $50 million of annual revenues, (c) more than 500 full time employees or more than 1,000 employees in an affiliated group, (d) a nonprofit [...]

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The S.B. 3324 Self-Procurement Tax: No More “Home State” Advantage for Illinois Industrial Insureds?

by | Jun 20, 2014 | ,

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:

  1. A tax on the premiums received by insurers that are admitted to transact insurance and are regulated by the state;
  2. A tax on the premiums received by surplus lines brokers (typically at a higher rate than the premium tax for admitted insurers); and
  3. 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 [...]

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