The Nonadmitted & Reinsurance Reform Act (NRRA) defines home state as the place where the insured maintains its “principal place of business” (PPB), or the “principal residence" if the insured is an individual. If there is no insured risk in the PPB, then home state changes to the state that has the largest percentage of insured risk.

It is important to remember that the home state is determined on a transaction by transaction basis. If there is an insured exposure in the company’s PPB, then the PPB will be the home state. Bear in mind that for U.S. domiciles the insured’s PPB will be the home state even when only a fraction of the insured risk is in that state.

A scenario could arise on some placements, such as pollution liability insurance, which are specific to a location and may insure no risks in the company’s PPB. As discussed, the home state for such a transaction will be the location with the largest percentage of insured risk. When Marsh places a client's surplus lines insurance, we work with the client to determine if “home state” for that transaction is other than its declared PPB.

The NRRA does not define how to determine a company’s PPB. Likewise, some states have implemented the NRRA without defining PPB. Other states have adopted the PPB definition used in the Nonadmitted Insurance Multistate Agreement (NIMA), which reads, in part, as follows:

• The state where the insured maintains its headquarters and where the insured’s high-level officers direct, control, and coordinate its business activities.

Nonadmitted Insurance Multistate Agreement Definition of 'PPB'

The NIMA definition of PPB is derived from the test the U.S. Supreme Court recently used to determine the PPB in Hertz Corp. v. Melinda Friend, et al., 130 S.Ct. 1181 (2010). The Hertz court referred to the PPB test as the “nerve center” approach, the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. In practice it should be the place where the corporation maintains its headquarters, so long as the headquarters is the actual center of direction, control, and coordination, i.e., the “nerve center,” and not simply an office where the corporation holds its board meetings.

Some companies may have very diversified corporate structures and may find it difficult to apply the “nerve center” test. Certain states, like California, have legislation that accounts for these types of companies by including the additional NIMA definition of PPB that states “if the insured’s high-level officers direct, control, and coordinate the business activities in more than one state, the state in which the greatest percentage of the insured’s taxable premium for that insurance contract is allocated” is the home state. This test could lead to multiple home states on a single transaction. For instance, if a company that is directed from two states has a predominance of its D&O premium allocated to State A, but its EPLI premium is more heavily weighted toward State B, then both states could technically claim to be the home state.

Nonadmitted Insurance Multistate Agreement Definition of 'PPB'

Where there are multiple insureds under one policy, then the “affiliated group” rule is used to determine the home state. As you will see, that is not so easy where there is a complex corporate structure and the insured exposures span several states. Consider the following hypothetical corporation that seeks property coverage for the holding company and its three subsidiaries:

• Mardi Hospitality Group (MHG) is a holding company for several hospitality chains that operate under different names and corporate structures, including Mardi Inns, Inc., Mardi Hotels Inc., and Mardi Residences Inc. MHG’s principal place of business is in Connecticut.
• Mardi Inns Inc. consists of 300 units with locations in all fifty states, is headquartered in Illinois and has its own management.
• Mardi Luxury Hotels Inc. is a chain of 75 luxury hotels located in major U.S. cities in forty states headquartered in Maryland and has its own management.
• Mardi Residences Inc. is a chain of 25 residence-inn type facilities located in 10 states, is headquartered in New York and has its own management.

The NRRA defines an “affiliate” as “any entity that controls, is controlled by, or is under common control with the insured.” An “affiliated group” is defined as “any group of entities that are all affiliated.” MHG’s broker must apply the rules of an affiliated group to this surplus lines property placement.

Since more than one insured from the MHG affiliated group will be a named insured on this surplus lines policy, then the home state will be the state of the principal place of business of the affiliate with the largest percentage of premium attributed to it under the insurance policy. Mardi Luxury Hotels has the largest percentage of premium attributed to it, but none of its property exposures are located its principal place of business state of Maryland. Under the NRRA, if 100 percent of the insured risk is outside the principal place of business state, then the home state is the state where the greatest percentage of the insured’s taxable premium is allocated. Mardi Luxury Hotels operates four hotels in California, which account for the largest share of its premium allocation. So, in this example, California is the home state for the MHG placement, even though none of the four corporate entities insured under the contract have their principal place of business in California.

Marsh will work with clients on each surplus lines transaction to help them determine home state.

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