amicus curiae brief AAMGA by jnyjhtw

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									 1                    COURT OF APPEAL OF THE STATE OF CALIFORNIA
 2
                                  SECOND APPELLATE DISTRICT
 3
                                               DIVISION FIVE
 4

 5    STEPHEN F. SILVERS and STEVEN J.
      GOLD,
 6
                  Plaintiffs and Appellants,
 7
           vs.                                          2d Civil No. B221229
 8
      STATE BOARD OF EQUALIZATION;
 9    RAMON J. HIRSIG, as Executive Director
      of the State Board of Equalization;
10    LEXINGTON INSURANCE COMPANY,
      a Delaware corporation; and intervenor
11    STEVEN POIZNER, Insurance
      Commissioner of California
12
                  Defendants and Respondents
13

14                       Appeal from the Superior Court of Los Angeles County
                                 Hon. Holly E. Kendig, Judge Presiding
15                             Los Angeles County Case No. LC061368
16   ________________________________________________________________________________
17                      APPLICATION FOR LEAVE TO FILE
                 AMICUS CURIAE BRIEF AND AMICUS CURIAE BRIEF
18          OF AMERICAN ASSOCIATION OF MANAGING GENERAL AGENTS,
        NATIONAL ASSOCIATION OF PROFESSIONAL SURPLUS LINE OFFICES, AND
19        CALIFORNIA INSURANCE WHOLESALERS ASSOCIATION IN SUPPORT
                      OF LEXINGTON INSURANCE COMPANY
20
     ________________________________________________________________________________
21
                                   RICHARD A. BROWN, CSB 54901
22                                          97 6TH AVENUE
                                     SAN FRANCISCO, CA 94118
23                                    Telephone: (415) 752-2330
                                       Facsimile: (415) 655-1203
24                                  Email: RAB@InsuRegulatory.com
25     Attorney for Amici American Association of Managing General Agents, National Association of
            Professional Surplus Line Offices, and California Insurance Wholesalers Association
26

27

28

       AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT LEXINGTON INSURANCE CO.
                                  APPLICATION FOR LEAVE TO FILE
 1                                     AMICUS CURIAE BRIEF
 2          TO THE HONORABLE PRESIDING JUSTICE AND ASSOCIATE JUSTICES OF THE
 3   SECOND APPELLATE DISTRICT COURT OF APPEAL:
 4          Pursuant to Appellate Rule 8.200 (c), Amici the American Association of Managing General
 5   Agents (“AAMGA”), the National Association of Professional Surplus Lines Offices (“NAPSLO”),
 6   and the California Insurance Wholesaler’s Association (“CIWA”) (collectively, the “Surplus Line
 7   Market Amici”) respectfully request leave of the Court to file an amicus curiae brief in support of

 8   Respondent Lexington Insurance Company (“Lexington”) seeking affirmance of the trial court’s

 9   Final Statement of Decision dismissing Appellants’ complaint for declaratory relief and denying

10   their request for an award of attorneys’ fees under CCP §526a.

11          Each of Surplus Line Market Amici is a non-profit organization, all or many of whose

12   members are active participants in California’s surplus line market. Amici collectively represent the

13   interests of wholesale and retail agent-brokers; surplus line brokers licensed to place risks in the

14   surplus lines market; managing general agents (“MGAs”) providing underwriting, claims-handling

15   and a wide range of other services to their clients; and the vast majority of surplus line insurers with

16   whom surplus line brokers are authorized to place California surplus line risks.

17          As representatives of a broad cross-section of the surplus line market in California and

18   nationwide, Surplus Line Market Amici are concerned that Appellants contentions regarding

19   California’s premium tax and insurance regulatory systems greatly distort the facts and applicable

20   law.

21          Surplus Line Market Amici respectfully suggest that the explanation of California’s system

22   for taxing insurance premiums of admitted and surplus line insurers as set forth in the incorporated

23   amicus curiae brief included herewith would materially aid the Court in its decision in this case.

24          No party, their counsel, or third party authored the incorporated amicus brief in whole or in

25   part, or made a monetary contribution intended to fund preparation or submission of the incorporated

26   amicus brief.

27

28
                                         1
       AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT LEXINGTON INSURANCE CO.
                                     AMICUS CURIAE BRIEF IN SUPPORT OF
 1                                    LEXINGTON INSURANCE COMPANY
 2                                                              I.
 3                                                   INTRODUCTION
 4            Surplus Line Market Amici respectfully submit this amicus curiae brief in support of the
 5   Lexington Insurance Company seeking affirmance of the trial court’s judgment and Final Statement
 6   of Decision rejecting Appellants’ contention that Lexington is subject to premium tax under Section
 7   28 of Article XII of the California Constitution (“Section 28”).

 8            In their Opening Brief, Appellants Silvers & Gold (“Appellants”) urge reversal of the trial
 9   court’s considered decision that Respondent Lexington Insurance Company (“Lexington”) is not
10   “doing business” in California for purposes of the 2.35 % premium tax under Section 28. The court

11   below correctly determined that premium for policies Lexington issued to California insurance

12   buyers is subject to the 3% premium tax under California Insurance Code (“CIC”) §1775.5, not

13   2.35% Section 28 tax. It is undisputed that the State Treasury received every penny of §1775.5

14   premium tax attributable to Lexington’s insurance of California risks.

15            Premium tax is paid by the insurance buyer, collected at the point of sale by the admitted1

16   insurer or surplus line broker2, as the case may be, and remitted to the State, no different from sales

17   tax collected by Macy’s. Like retail sales, California taxes insurance premium once only. Neither

18   California nor any other state taxes insurance premium twice.

19                    Section 28 premium tax applies to admitted insurers, is included in their filed rates,

20                     collected from California consumers at the point of sale, and remitted by the admitted

21                     insurer to the State Board of Equalization (“SBE”).

22                    The §1775.5 premium tax applicable to surplus line premium is collected at the point

23                     of sale3, and remitted by the surplus line broker to the Insurance Commissioner, who

24
     1 “Admitted” means a person “entitled to transact insurance business in this State, having complied with the laws
25
     imposing condition precedent to transaction of such business.” CIC §24.
     2 “Surplus line broker” means a person licensed under Section 1765 and authorized to do business under Chapter 6
26
     (commencing with Section 1760) of Part 2 of Division 1. CIC § 47.
     3 For transactions between a wholesale broker and a retail producer, the premium tax is collected and remitted by the
27
     wholesale surplus line broker. For transactions between a retail surplus line broker and the insurance buyer, the premium
     tax is collected and remitted by the retail surplus line broker. In both cases, the premium tax ultimately is paid by the
28
     insurance buyer.
                                           2
         AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT LEXINGTON INSURANCE CO.
 1                  transfers the tax to the State Treasury.

 2          Appellants offer Illinois Commercial Men’s Assn v. State Bd. Of Equalization (1983) 34 Cal.
 3   3d 839 (“Illinois Commercial”) as their legal touchstone for decision. To the extent relevant here,
 4   Illinois Commercial belies Appellants’ position.

 5          The issue in Illinois Commercial was California’s constitutional authority to tax insurance
 6   premium, not how it chose to do so. As a matter of federal constitutional law, California easily
 7   could have left insurance premium untaxed entirely.

 8          In contrast with Lexington, the insurers in Illinois Commercial:
 9                        Engaged in mass-marketing directly to individual California consumers for
10                         life, health, and accident insurance products, without a Certificate of

11                         Authority (also referred to as a “license”) as required by CIC §24.

12                        Sought to “brand” themselves, gain consumer trust, and expand their

13                         California market share for life, health, and accident insurance products.

14                        Sought to avoid payment of any amount of premium tax; there was no issue of

15                         double taxation.

16          The Court in Illinois Commercial recognized that those insurers openly and actively

17   conducted an insurance business in California using a mail-order business model and independent

18   claims adjusters to service claims locally. The Court made no mention of California’s surplus line

19   laws or §1775.5 premium tax.

20          Lexington neither solicited, nor marketed, nor sold insurance directly to California insurance

21   buyers within the State.     Relevant to the insurance premium here at issue, Lexington dealt

22   exclusively with licensed surplus line brokers, not the insurance buyers themselves.

23          At bottom, the Illinois Commercial insurers clearly were conducting an insurance business in

24   California whereas Lexington clearly was not. Under California’s surplus line laws, Lexington’s use

25   of independent adjusters in California did not constitute “doing business” for Section 28 purposes.

26

27

28
                                         3
       AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT LEXINGTON INSURANCE CO.
 1                                                      II.

 2                           SURPLUS LINE MARKET AMICI’S INTEREST
 3           Each of Surplus Line Market Amici is a non-profit organization, all or many of whose
 4   members are active participants in California’s surplus line market. Amici collectively represent the
 5   interests of wholesale brokers and retail brokers; surplus line brokers licensed to place risks in the

 6   surplus lines market; and virtually all of the more significant surplus line insurers with which surplus
 7   line brokers are authorized to place California risks.

 8           As representatives of a broad cross-section of the surplus line market in California and
 9   throughout the country, Surplus Line Market Amici are concerned that the double taxation of
10   insurance premium that Appellants seek would substantially increase the cost of insurance for

11   California insurance buyers.

12           Under Appellants’ tortured thesis, California would be the only state that imposed a premium

13   tax directly on surplus line insurers in addition to taxing the premium itself. Such double taxation

14   would cause most, if not all, surplus line insurers of consequence to promptly cease accepting

15   California risks, thereby depriving core segments of California’s economic infrastructure of

16   critically-needed insurance as protection against risk exposures that would otherwise be left

17   uninsured.

18   A.      AAMGA

19           The AAMGA is an international trade association comprised of professional wholesale

20   property and casualty insurance agents and brokers, as well as insurers who entrust underwriting

21   authority to managing general agents. The Association represents over 500 members in the surplus

22   lines and admitted insurance marketplaces that serve thousands of retail agents across the United

23   States. AAMGA’s membership includes 35 member insurance agency and brokerage firms that are

24   located in California, as well as 34 other member non-resident insurance agencies and brokers

25   residing in states outside of California but also licensed for California business, and the vast majority

26   of the surplus line insurers with which California surplus lines agents and brokers are authorized to

27   place risks.,

28
                                            4
          AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT LEXINGTON INSURANCE CO.
 1   B.      NAPSLO

 2           NAPSLO is a national trade association representing the wholesale surplus lines segment of
 3   the property/casualty insurance industry. NAPSLO members include 190 wholesale insurance firms
 4   licensed as California surplus lines brokers, as well as the more significant surplus line insurers with

 5   which licensed California surplus line brokers are authorized to place risks.

 6   C.      CIWA
 7           CIWA is a trade association exclusively representing the wholesale insurance industry in
 8   California. The Association’s membership consists of some 100 California wholesale insurance
 9   brokerage firms who, along with 35 insurance company Associate Members, write a predominate

10   portion of the California risks placed in the wholesale surplus lines market.

11                                                         III.

12                                               ARGUMENT
             Appellants urged below that Lexington is subject to the 2.35 percent (2.35%) premium tax
13

14   under Section 28 and has failed to pay such tax for each of the past five or more calendar years.

15   Appellants also contended that the State Board of Equalization (“SBE”) and Ramon J. Hirsig, as

16   Executive Director of the SBE, unlawfully failed to assess that tax.
17
             The trial court correctly determined that Appellant’s contentions are without merit. Nothing
18
     has changed.
19
     A. No Different From Sales Tax
20
             California’s taxation of insurance premium is not complicated. Premium tax, like sales tax
21
22   for purchases at Macy’s, is collected at the point of sale and ultimately paid by the consumer.

23                 For policies issued by admitted insurers, the admitted insurer collects the Section 28
24                  premium tax (2.35%) from the consumer as an element of premium reflected in its
25
                    rate filings and remits the tax directly to the SBE. Personal lines insurance, such as
26
                    homeowners and private passenger auto, are good examples of Section 28 premium
27
                    tax reflected in the premium paid by the consumer.
28
                                            5
          AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT LEXINGTON INSURANCE CO.
                   For policies issued by surplus line insurers, the surplus line broker calculates the
 1

 2                  amount of the 3% premium tax under § 1775.5, collects it directly from the retail

 3                  producer or insurance buyer, and remits the tax to the Insurance Commissioner who,
 4                  in turn, transfers it to the State Treasury.
 5
                   If an insurance buyer purchases insurance pursuant to CIC § 1760(a) directly (i.e.,
 6
                    without involvement of a surplus line broker) from an insurer that does not hold a
 7
                    Certificate of Authority, the insurance buyer must pay the 3% premium tax directly to
 8

 9                  the Insurance Commissioner who then transfers it to the State Treasury.

10          Surplus line insurers serve a critical function by providing insurance protection for those

11   risks and lines of business that the admitted insurers are unable or unwilling to insure. Surplus line
12   insurers are, however, by definition domiciled in other states or countries. Accordingly, California,
13
     like all other states, determined that the most convenient and secure way to collect premium tax for
14
     surplus lines transactions was to require the regulated surplus line broker to collect and remit the
15
     premium tax. § 1775.5.
16

17   B. Terms of Art

18          The Appellants’ Opening Brief greatly distorts how insurance premiums are taxed in

19   California. A substantial amount of misdirection is reflected in Appellants’ inaccurate factual
20
     characterizations and out-of-context misuse of legal and industry terms of art such as “nonadmitted
21
     insurer,” “doing business” and “transact,” among others.
22
        1. Nonadmitted Insurer
23
            The term “nonadmitted insurer” means an insurer that does not hold a “Certificate Of
24

25   Authority” (or “license”) issued by the Insurance Commissioner.

26          Nonadmitted or unlicensed insurers fall into two distinct categories: (a) surplus line insurers
27   whose names appear on the Insurance Commissioner’s List of Eligible Surplus Line Insurers
28
                                         6
       AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT LEXINGTON INSURANCE CO.
     (“LESLI”) and (b) all other unlicensed insurers. Appellants appear to deliberately confuse the two
 1

 2   categories by using the term “nonadmitted” interchangeably and as completely synonymous with

 3   both categories.

 4          Surplus line insurers, although “nonadmitted,” are authorized under California’s surplus line
 5
     laws to insure California risks presented to them by licensed surplus lines brokers. Under the
 6
     surplus line laws, surplus line premium for California risks is taxed under CIC 1755.5, collected by
 7
     the surplus line broker at the point of sale, and remitted to the State.
 8
            All other unlicensed insurers are barred from the California market. If an unlicensed insurer
 9

10   solicits or sells insurance in California, it is in violation of CIC § 700 and subject to severe civil and

11   criminal penalties. If an unlicensed insurer solicits or sells insurance in California, it also is “doing
12   business” in the State and just as subject to Section 28 tax as any admitted insurer holding a
13
     Certificate of Authority.
14
            Appellants’ argument rests entirely on the patently false premise that because Lexington, as a
15
     surplus lines insurer, also is an “unlicensed” insurer and therefore it must be “doing business” within
16

17   the meaning of Section 28 on the same basis as the insurers in Illinois Commercial.

18          Appellants’ pivotal premise is false because Lexington complied with the surplus line laws

19   and premium tax on its California business was fully paid pursuant to CIC § 1755.5. The Illinois
20   Commercial insurers, in contrast, were scofflaws who conducted the indubitable equivalent of an
21
     admitted insurance business in California without obtaining a Certificate of Authority while failing
22
     to pay any amount of premium tax.
23
        2. Doing Business
24

25          The term “doing business” in the context of Fourteenth Amendment Due Process does not
26   necessarily mean the same as the term “doing business” is used in Section 28. The question whether
27   California could subject surplus line insurers to Section 28 premium tax under the Fourteenth
28   Amendment Due Process Clause of the Constitution is not before the Court. Rather, the question is
                                                   7
      AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT LEXINGTON INSURANCE CO.
 1   whether California chose to tax surplus lines premium differently from premium for admitted

 2   business.   The trial court correctly determined that the Legislature chose to tax surplus lines
 3   premium exclusively under §1775.5.

 4      3. Transact
 5          Appellants also incorrectly contend that “[d]oing business” for taxation is different from
 6   “transacting” for regulation.” Opening Brief p. 10. The term “transact” is defined in CIC §35:
 7                  “Transact” as applied to insurance includes any of the following:
 8                  (a) Solicitation.
 9                  (b) Negotiations preliminary to execution.
10                  (c) Execution of a contract of insurance.

11                  (d) Transaction of matters subsequent to execution of the contract and arising out of

12                      it.

13          Under California law, “transact” means direct interface with the consuming public, whether

14   by mail solicitation, People v. United National Life Insurance Company, et al, 66 Cal. 2d 577 at 593

15   (1967) (“United National”), via the internet, §702, or otherwise.

16          Any insurer that “transacts” insurance in California is “doing business” in this State as a

17   matter of law and is therefore subject to Section 28 premium tax.

18              Where a surplus line insurer accepts California risks from a licensed surplus line broker,

19               the premium is subject to the 3% tax under § 1755.5

20              Where an unlicensed insurer deals directly with the insurance buyer, the insurer is

21               unlawfully “doing business” in the State without a Certificate of Authority in violation of

22               CIC § 700. The insurer therefore is subject to Section 28 premium tax, no different from

23               a retail outlet located in California being subject to sales tax regardless of whether it is

24               registered with the Secretary of State. This is precisely the situation presented by the two

25               insurers in Illinois Commercial – both insurers were unlicensed and unlawfully dealing

26               directly with California’s consuming public.

27          Lexington did not solicit, negotiate, or execute contracts of insurance in California in

28   violation of CIC §700. Rather, Lexington insured California risks presented by licensed surplus line
                                         8
       AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT LEXINGTON INSURANCE CO.
 1   brokers pursuant to California’s surplus line laws, the surplus lines premium was taxed at the rate of

 2   3% percent under § 1775.5, collected at the point of sale by the surplus line broker, and remitted to
 3   the State.

 4   C. Regulatory Congruence
 5            It is not by coincidence that the insurance regulatory system is congruent with California’s
 6   premium tax system. Both focus on the point of transactional interface between a person or entity
 7   properly licensed by the Insurance Commissioner – a “licensee” -- and the consuming public.

 8            Anyone wishing to solicit, market, or sell insurance directly to the consuming public must
 9   first satisfy strict licensing requirements.
10            1. Admitted Market

11            Admitted insurers submit themselves to the full regulatory jurisdiction of the Insurance

12   Commissioner. Once “licensed” to “transact” insurance in California, the “admitted insurer” must

13   maintain adequate capital and surplus, comply with applicable rate and form requirements, undergo

14   periodic financial and market conduct examinations, and pay substantial assessments, among other

15   “costs” for the privilege of direct access to California insurance buyers. CIC § 700, et seq.

16            Admitted insurers are authorized to solicit and market directly to the consuming public via

17   radio and television commercials, mail solicitations, newspaper and magazine advertisements, and

18   other lawful sales solicitation and marketing methods. See, e.g., CIC §702

19            2. Surplus Lines Market

20            California regulates the surplus lines market by regulating surplus line brokers, as do all

21   other states. Surplus lines brokers are specially-licensed by the Insurance Commissioner. Only a

22   licensed surplus line broker may act for California insurance buyers whose risks require insurance in

23   the surplus lines market.

24            With one exception4 not relevant here, surplus lines brokers may place California risks only

25   with insurers who have satisfied extensive financial and other statutory criteria, and are approved by

26   the Insurance Commissioner for inclusion on the LESLI. CIC § 1765.1.

27   4 Under CIC § 1765.1(k), a surplus lines broker may seek approval from the Insurance Commissioner on a case-by-case
     basis to place a risk with nonadmitted insurers whose names do not appear on the LESLI when (a) the use of multiple
28
     insurers is necessary to obtain coverage for 100 percent of the risk and (b) at least 80 percent of the risk is placed with
                                           9
         AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT LEXINGTON INSURANCE CO.
 1           To obtain a surplus line broker license in California, the applicant must make written

 2   application to the Commissioner. The Commissioner may make such investigation of the applicant’s
 3   background and qualifications as he or she deems necessary. CIC §1666. The Commissioner may

 4   deny any application for a surplus line broker license if the applicant is not of good business

 5   reputation, is lacking in integrity, or has previously engaged in a fraudulent practice or act, or

 6   conducted any business in a dishonest manner, among other grounds. CIC §1668.
           Licensed surplus line brokers must satisfy mandated annual continuing education
 7

 8   requirements to maintain their licenses in good standing and to qualify for license renewal. CIC §

 9   1749, et seq.

10           3. Solicitation
11
             Whereas California consumers are bombarded daily with commercials and mail solicitations
12
     from Allstate, Nationwide, Geico, and countless other admitted insurers, surplus line insurers such as
13
     Lexington do not, and may not lawfully, engage in direct marketing to California consumers. CIC
14
     §703.1.
15

16   D. Illinois Commercial

17           In Illinois Commercial, the Supreme Court held that, under the Due Process Clause of the
18   Fourteenth Amendment, California constitutionally could tax insurance premiums for policies sold
19
     by mail to California residents by out-of-state insurers not licensed to transact insurance in the State.
20
             Without benefit of a Certificate of Authority, the Illinois Commercial insurers:
21
                          Actively and directly solicited California residents via mail and local
22

23                         advertisements for accident, health, and life insurance policies.

24                        Promoted and sought to establish their respective brands through mass marketing

25                         directly to California consumers.
26

27

28
     admitted insurers or insurance that appear on the LESLI.
                                          10
        AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT LEXINGTON INSURANCE CO.
                       Sought to create a commercial presence and image to expand their respective
 1

 2                      shares of the lucrative California market for accident, health, and life insurance.

 3          None of the mass-marketed Illinois Commercial insurance transactions involved anyone –
 4   agent, broker, or insurer – licensed to transact insurance in California. In terms of consumer
 5
     protection for California residents, the policies may as well have been sold by a sham offshore
 6
     insurance company with a mail-drop in the United States, no financial substance, and no plans to pay
 7
     any claims.
 8

 9          There is a world of difference between the California activities of the insurers in Illinois
10   Commercial and those of Lexington or other LESLI-listed insurers approved to accept California
11   risks. Lexington did not:
12                     Directly solicit California residents by mail, phone, internet, or otherwise
13                      regarding any type of insurance product.
14                     Promote or advertise in California to establish its brand with California insurance
15                      buyers.
16                     Seek to develop a direct relationship with California insurance buyers or maintain
17                      any type of public presence in California.
18          In short, Lexington did not seek to conduct an insurance business in California. It simply
19   served as one of hundreds of surplus lines markets available to clients of licensed surplus line
20   brokers for risks California’s admitted market was unwilling or unable to insure.
21   E. Surplus Line Laws
22          It is well-established that surplus line insurers may not insure California risks except through
23   a licensed surplus line broker, CIC §1761, or the rarity where a California resident obtains insurance
24   directly from an out-of-state insurer that does not hold a Certificate of Authority, CIC §1760(a).
25   Judicial and regulatory precedent leave no doubt that Lexington was not “doing business” in
26   California for purposes of Section 28 tax.
27

28
                                         11
       AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT LEXINGTON INSURANCE CO.
 1           In People v. United National Life Insurance Company, et al, 66 Cal. 2d 577 (1967), the

 2   Supreme Court held that out-of-state insurers that solicited and sold insurance to California residents
 3   were subject to regulation:

 4                   Applying due process criteria which give recognition to the substantial interest of the
                     regulating state in the insurance transactions involved, we are satisfied that in the
 5                   circumstances of the instant cases there are sufficient contacts with California to justify
                     regulation. The insureds are, of course, residents of California. The solicitation of insurance
 6                   actually takes place in California where the advertising material and other forms are received
                     by the individual addressees. Thus realistically viewed the insurer through the
 7
                     instrumentality of the mail is for all practical purposes soliciting insurance here as
 8                   manifestly as if it were to carry on such solicitation through representatives physically
                     present within this state.
 9
                                                                  ******
10
                     In short, these defendants have "'realistically entered the state looking for and obtaining
11                   business;” the main aspects of their insurance transactions are in this state; and to say that
                     they are not doing business here "is to completely ignore the facts of life and reality."
12
     66 Cal. 2d at 592-93 (Emphasis supplied, citations omitted.)
13
             In Mor-Ben Insurance Markets Corporation v. Department of Insurance, 179 Cal. App. 3d
14
     1233 (1986), the Court of Appeal upheld a Superior Court decision finding that a surplus line broker
15
     had exceeded its authority by acting as managing general agent for a Pakistani insurer that did not
16
     hold a Certificate of Authority:
17
                     Mor-Ben was [Pakistani insurer] Pioneer's sole agent in the United States with
18
                     authority from Pioneer to issue the classes of insurance Pioneer offered in the United
19                   States. Mor-Ben functioned as United States manager for Pioneer and for any type of
                     business Pioneer wanted to do in the United States. Mor-Ben did all accounting,
20                   handled all funds, transmitted and requested funds, assigned all claims, hired all
                     adjusters, retained all attorneys and settled claims. Petitioners transacted marine and
21                   fire and casualty insurance on Pioneer's behalf by issuing insurance to various
22                   insureds, charging and collecting premiums on such insurance, and adjusting, settling
                     and handling all claims against Pioneer arising under such policies. On this record
23                   the Department and the superior court reasonably found petitioners aided and abetted
                     Pioneer to transact insurance in California without a certificate of authority under
24                   section 700.
25
     179 Cal. App. 3d at 1238-39. (Italics supplied.)
26
             In August 1995, the Insurance Commissioner appointed a Task Force comprised of both CDI
27
     staff members and insurance industry representatives to “to review the CDI's administration of the
28
                                          12
        AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT LEXINGTON INSURANCE CO.
 1   applicable statutes and relevant court cases and its impact on current market practices in this

 2   segment of the industry with respect to surplus line brokers' transactions and affiliations with
 3   nonadmitted insurers.” CDI Bulletin 96-4, p. 1 (1996).5

 4           Although the regulatory “guidance” provided by Bulletin 96-4 does not have the force of
 5   law, it nonetheless evidences well-established and well-understood principles applicable to barring
 6   surplus line insurers from direct access to the California insurance market. Surplus line insurers:
 7                   May not mail advertisements or solicitation materials to insureds or prospective
 8                    insureds located in California.
 9                   May not advertise their products in publications targeted at the California consumer.
10                   May not maintain an office, employees, or agents in California.

11                   Must make all underwriting decisions outside of California.

12           The same principles apply equally today. Surplus line insurers may not transact insurance

13   California, directly or indirectly, except (a) through a licensed surplus line broker or (b) if a

14   California consumer independently (without surplus line broker involvement) purchases insurance

15   directly from an insurer that does not hold a Certificate of Authority. CIC §1765.1.

16   F. Conclusion

17           The premium tax event occurs at the point where a licensee – either an admitted insurer or a

18   licensed surplus line broker -- effects insurance. The licensee is responsible for collecting the tax

19   and remitting it to the State.6

20           An unlicensed insurer that solicits or sells to California’s consuming public is “doing

21   business” in the State, subject to Section 28 tax, and additionally subject to civil and criminal

22   penalties for violation of § 700.

23           Under California’s surplus line laws, Lexington, a LESLI-listed surplus line insurer, was not

24   “doing business” in the State and therefore not subject to Section 28 tax. Illinois Commercial

25

26   5 A copy of Bulletin 96-4 is attached for the Court’s convenience.
     6 Where a person or entity directly effects insurance with an unlicensed insurer under CIC § 1760(a), he, she, or it is
27
     individually responsible for payment of 3.0% premium tax, CIC §1760(b), just as each is individually responsible for
28   paying State income tax.

                                           13
         AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT LEXINGTON INSURANCE CO.
 1   provides no support for Appellants’ novel contention that Lexington was “doing business” under

 2   Section 28.
 3          Indeed, if there were a scintilla of merit to Appellant’s double-taxation fiction admitted
 4   insurers and admitted market trade organizations undoubtedly would have sought to intervene or
 5   submit amicus briefs in support to protect their own market position. Their absence in the trial court

 6   and before this Court is telling.
 7          Surplus Line Market Amici respectfully suggest that there is no merit whatsoever to
 8   Appellants arguments or their request for an award of attorneys’ fees under CCP 526a.
 9          The Final Statement of Decision of the trial court should be affirmed.
10
                                                  Respectfully submitted,
11

12                                                RICHARD A. BROWN (CSB 54901)
                                                  97-6th Avenue
13                                                San Francisco, CA 94118
                                                  Telephone: (415) 752-2330
14                                                Facsimile: (415) 622-1203
                                                  Email: RAB@InsuRegulatory.com
15

16                                                Attorney for Amici American Association of Managing
                                                  General Agents, National Association of Professional
17                                                Surplus Line Offices, and California Insurance
                                                  Wholesalers Association
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                                         14
       AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT LEXINGTON INSURANCE CO.

								
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