Allocating a Multistate Trucking Premium
A Shreveport surplus lines broker writes a commercial excess liability policy for a trucking company with terminals in Louisiana, Texas, and Mississippi. The annual premium is $90,000. The broker's placement file allocates exposure by miles: Louisiana 40%, Texas 35%, Mississippi 25%. The broker also charges a $2,500 policy fee and a $1,200 inspection fee; the policy declares the inspection fee as part of the premium, while the policy fee is retained by the broker. The broker reports the entire $90,000 as Louisiana premium and pays Louisiana surplus lines tax on it. The Department audits the account. The broker also did not keep declination letters for the account because the insured is a large trucking company with $60 million in gross revenues and 900 employees; the broker assumed no diligent effort was needed.
1. Compute the correct Louisiana taxable premium and surplus lines tax. Treat the inspection fee as premium and the policy fee as a bona fide broker fee.
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The Louisiana share of the $90,000 premium is 40% x $90,000 = $36,000. The $1,200 inspection fee is declared part of the premium, so it follows the same allocation: 40% x $1,200 = $480. Louisiana taxable premium is therefore $36,000 + $480 = $36,480. The Louisiana surplus lines tax at 4.85% is $36,480 x 0.0485 = $1,769.28. The $2,500 policy fee is retained by the broker and, if it is a bona fide fee separately disclosed to the insured, is not premium and is not included in the surplus lines premium tax base. If the Department later treats the policy fee as premium, the Louisiana share would be 40% x $2,500 = $1,000, and the additional tax would be $1,000 x 0.0485 = $48.50. The broker paid $90,000 x 0.0485 = $4,365, so it overpaid Louisiana by $2,595.72 on the facts given.
2. Explain the multistate allocation rule and the filing and recordkeeping consequences of the broker's error.
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Surplus lines premium tax is allocated to the states where the risk is located, not simply to the broker's home state. For a multistate risk, the broker must use a reasonable allocation method, here miles, and report the Louisiana portion to Louisiana and the other portions to Texas and Mississippi under their rules. Reporting the full $90,000 to Louisiana overstates Louisiana tax and may understate the other states' tax. The broker should correct the annual statement, claim or apply the overpayment under Department procedures, and pay the other states. The file should retain the allocation worksheet, policy declarations, premium invoice, fee disclosure, and tax reconciliation. The broker should also confirm the Louisiana filing deadline and use the corrected figures on the annual surplus lines statement rather than waiting for the audit to force the change.
3. Did the insured's size eliminate the diligent effort requirement? What should the broker have documented?
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Size alone does not let the broker assume that no diligent effort is required. Louisiana may recognize an exempt commercial purchaser or similar exception if the insured meets specific statutory criteria and the broker obtains the required written disclosure or confirmation, but the broker must verify and document that status in the file. The broker cannot rely on gross revenues and employee count in isolation, and it cannot skip the file documentation entirely. If the exemption applies, the file should contain the insured's written confirmation, the broker's eligibility determination, and the disclosure required for the exemption. If the exemption does not apply, the broker should have documented authorized-market declinations or refusals just as in any other surplus lines placement. The audit finding is not merely a missing letter; it is a failure to support the legal basis for bypassing the authorized market.