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Court of Appeal, Second District, Division 4, California.

MERCURY CASUALTY CO., Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

Civ. 60829.

Decided: October 23, 1981

Ervin, Cohen & Jessup, W. Edgar Jessup, Jr., and Horace N. Freedman, Beverly Hills, for plaintiff and appellant. George Deukmejian, Atty. Gen., Edmond B. Mamer and Herbert A. Levin, Deputy Attys. Gen., for defendant and respondent.

Plaintiff appeals from an adverse judgment in an action involving the validity of a tax. We reverse.


Plaintiff is an insurance company, doing business in California, writing only so-called “casualty” insurance. As such, it is taxable by the State of California at a rate based on the “gross premiums” received by it from its business in this state. Plaintiff offers to prospective insureds the option of either paying, in advance, in cash, the annual premiums on policies written by it, or of paying part of such premiums in cash and partly by an installment note for the balance. In the latter case, the insured is charged an amount calculated to cover the increased overhead to plaintiff for handling the notes and collecting them, plus a sum equal to interest at the going rate on the principal of the notes.

Plaintiff treats the “service” charge as part of the premium and pays the “gross premium” tax there; it regards the interest charged as not being part of the premium and, in this litigation resists the board's position that it is included in the “gross premium” base. We agree with plaintiff.

The term “gross premium” has an accepted meaning in this area. It consists of two elements: (1) a sum calculated to provide the insurer with a reserve adequate to pay claims when and as they accrue (“net premium”); and (2) a sum (“the load”) calculated to cover the day-to-day operating costs of the insurer, including sales commissions. The sum of those elements form the “gross” premium on which the tax is based. Plaintiff has, correctly, treated the “service charge” on the notes as part of the “load” above referred to.

However, the state tax on insurers is limited to the tax on “gross premiums” (although all corporate income is taxable by the federal government). Thus it is admitted that any income to plaintiff from investments is not includable in the state's tax base. It follows that, in those cases where an insured pays the entire advance premium in cash, plaintiff could, and would, invest the “non-load” part of the premium and earn a nontaxable income therefrom. As the agreed facts in this case show, when the insured gives a note in part payment of the advance premium, plaintiff treats the face of that note as payment of the premium and pays a gross premium tax calculated on that credit. It is the position of plaintiff that, in computing the gross premium it has satisfied its full obligation by its treatment of the “service charge” and the face value of the note and that the interest it collects is no more than income from an investment i. e., a loan to the insured. We agree.

The case relied on by the trial court and the board is not helpful. In Allstate Ins. Co. v. State Board of Equal. (1959) 169 Cal.App.2d 165, 336 P.2d 961, the amount in issue was a flat fee imposed on each installment calculated on the additional bookkeeping involved in dealing with such installment payments. In other words, the case dealt only with the “load” portion of the insurer's charge, similar to the “service charge” in the case at bench. It did not deal with any “interest” charge on the delayed installments.


Plaintiff also contends that the board's position would result in a denial to it of equal protection, since the board does not treat as premium the interest charged by life insurance carriers on “policy loans” made to such insurance company's policy holders to pay annual premiums. Because we conclude, for the reasons above discussed, that the board's position here, considered on its own merits, is wrong, we need not, and do not, consider the equal protection argument.

The judgment is reversed.

KINGSLEY, Acting Presiding Justice.

WOODS and DELL,* JJ., concur.

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