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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 18 19 20 21 22 23 24 25 26 27 28 14 AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT LEXINGTON INSURANCE CO.
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