A lawsuit has been filed by two CA taxpayers in the Superior Court of California against Lexington Insurance Company and other "John Doe" defendants to collect additional surplus lines taxes the insurer(s) allegedly did not pay on premiums collected in the state.

In Silvers & Gold vs. State Board of Equalization and Lexington Insurance Company, et al., a declaratory judgment action, the Plaintiffs allege that Lexington owes California more than $88 million in Section 28 taxes on more than $3.75 billion of premiums on insurance policies issued to California policyholders issued during the past five (5) calendar years. A copy of the Complaint can be downloaded by clicking here.

Lexington filed an objection to the action on the grounds that the sole cause of action fails for lack of legal capacity to sue and to state facts sufficient to constitute a cause of action.

The AAMGA joined with NAPSLO and the California Insurance Wholesalers Association (CIWA) and filed an amicus curiae brief with the Court, advising the allegations in the Complaint fundamentally misconceive the jurisdictional and structural differences between the admitted market and the surplus line market because:

• Section 28 premium tax applies only to "admitted insurers" doing business in California; and in
• Lexington is a surplus line or nonadmitted insurer that, by definition under California's surplus line laws, maintains no operations or other presence within the State, is not subject to California's insurance regulatory jurisdiction, and therefore is not "doing business" in California within the meaning of Section 28; and in
• Under California Insurance Code ("Cal. Ins. Code") § 1775.5, an "annual gross premium tax" (hereinafter, "surplus line tax") at the rate of 3.0 percent (3.0%) is assessed on licensed surplus line brokers for surplus line premium attributable to California risks that are placed with surplus line insurers such as Lexington.

A copy of the Amicus Brief submitted by AAMGA, NAPSLO and CIWA can be downloaded by clicking here.

On July 25, 2008 the Court held a Hearing in which the judge had many questions for the plaintiffs regarding the proposition that surplus lines premium should be taxed twice. He clearly had reservations about the merits of the plaintiffs' claim for declaratory relief but said he was not prepared to dismiss the complaint on the basis of the present demurrer. He also asked several times where the DOI stood on the issue, though the DOI is not a party.

The judge's stated basis for denial of the demurrers was that by law and for purposes of a demurrer, the allegations in the complaint must be accepted as true. Accordingly, the plaintiffs' "stated a claim" by alleging sufficient facts to support the existence of a controversy, which the court found sufficient to state a claim for declaratory relief. The defendants were ordered to file an answer within 15 days.

Next Steps...

Lexington is considering the following next steps.

• Possible litigation options include filing a writ with the court of appeal, persuading the Department of Insurance (DOI) to submit an amicus brief or declaration, filing an answer immediately followed by a motion for summary judgment (that could include a declaration from the DOI and/or expert testimony from a former DOI executive), or a motion for reconsideration.
• Lexington's attorney advised that the Attorney General's office felt that filing a writ with the court of appeal was futile.
• AAMGA counsel suggested that there might be a legislative option to clarify that the CA Legislature does not consider nonadmitted insurers to be "doing business" business in CA and that surplus line premium is subject only to surplus line premium tax.
• Although the CA Legislature typically will not consider legislation to address issues subject to pending litigation, the Silvers case might be an exception if the AG and DOI were in support of the legislation.

We will keep AAMGA members up to date with the developments in the action, and will continue to work with industry and trade representatives to educate the Court on the manner in which compliance with state tax authorities and statutes is undertaken.