What happens to taxes owed if a surplus lines policy is canceled?

When a surplus lines policy is canceled, the appropriate handling of taxes owed is to prorate the surplus lines tax based on the return premium. This means that the tax liability is adjusted in proportion to the amount of the premium being returned to the insured.

In practice, if a policyholder cancels their surplus lines policy and is due a return premium, the taxes previously paid on the full premium may not be owed in full since the coverage is no longer in effect for the entire premium term. Instead, the taxation adjusts to reflect the actual amount of premium being kept by the insurer, thus ensuring that the insured only pays taxes on the portion of the premium that corresponds to the time the policy was active. This approach is both fair to the insured and aligns with regulatory practices regarding surplus lines policies.

This ensures compliance with state regulations and ensures that taxes are accurately levied based on the risk covered and time elapsed, preventing any overpayment on taxes due to policy cancellation.