STEPHEN SILVERS v. STATE BOARD OF EQUALIZATION (2010)

C. The Illinois Commercial Decision

Consistent with their position in the trial court, S & G rely heavily on Illinois Commercial Men's Association v. State Board of Equalization, et al.  (1983) 34 Cal.3d 839 (ICMA ).   The ICMA decision does not impact the outcome of this case.

The plaintiffs in ICMA were unlicensed foreign insurers ⁵ who solicited business in California from outside the state and who used independent California contractors in connection with the administration of claims and other matters.  (ICMA, supra, at p. 843.)   These independent contractors were characterized by the Supreme Court as plaintiffs' agents.  (Id. at p. 849.)   The DOI concluded plaintiffs were “doing business” in California and, pursuant to the former version of Section 28, assessed a tax on premiums received for direct mail insurance sold to California residents.  (Ibid.)

The primary issue raised in ICMA was whether the Fourteenth Amendment of the United States Constitution allowed California to impose a tax on an unlicensed foreign corporation that conducts its business outside the state by mail.   (ICMA, supra, at pp. 844-850.)   The court found the following “significant”:  “[T]he investigation and settlement of claims is an integral and crucial aspect of the business of insurance.   Either or both of these functions were performed with respect to California policyholders by agents of plaintiffs residing in this state.”  (Ibid.) Thus, ICMA held California could impose such a tax due to the “extent of plaintiffs' activities in [California]” and “that plaintiffs received the benefit of [California's] laws through the protections afforded to their agents in California.”  (Id. at p. 850.)

The issue at hand is not whether California can impose a tax on surplus line policies.   Indeed, such a tax is specifically contemplated by statute.   The only potentially applicable aspect of ICMA is the secondary issue discussed therein, i.e., whether plaintiffs' could operate in California tax-free because they were not, as required by the California Constitution, “doing business” in California.   The Supreme Court resolved this issue by finding plaintiffs' activities in California came within the definition of “doing business” due to plaintiffs' “employment ․ of agents within California to perform important functions in connection with the administration of the policies it had issued to [California] residents.”  (ICMA, supra, at p. 852.)

It may be true that there is no meaningful distinction between the activities of the agents in ICMA and the stipulated fact that Lexington hired “licensed persons and at least 12 companies located and licensed in California to investigate and/or adjust claims on Lexington's behalf in California.”   However, the interplay of statutory schemes is in stark contrast.

There are two key distinctions between ICMA and the instant case.   First, the insurance companies in ICMA were not operating pursuant to a statutory scheme that permitted them, as unlicensed insurance companies, to issue policies.   Second, there was no statute in ICMA that suggested the issuance of policies was outside the scope of doing business in California.   Thus, the imposition of a constitutionally-based tax in ICMA did not result in the anomaly of imposing a “doing business tax” on an insurance company that is lawfully operating but, because it is unlicensed, is precluded from doing business in California.

Here there exists a specific statutory scheme governing the imposition of tax on premiums resulting from the precise type of policies issued by Lexington as well as statutory language suggesting not only that Lexington is precluded from doing business in California, but that the issuance of surplus line policies does not constitute business done in California.   The existence of a statutory scheme permitting and regulating the issuance of surplus line policies casts this case in an entirely different light from ICMA. Thus, ICMA does not require a finding that lawfully obtained surplus line premiums in California are subject to both a statutory tax and a Section 28 tax.

IV. DISPOSITION

The judgment is affirmed.   Respondents are to recover costs on appeal.

KUMAR, J.*

We concur:

TURNER, P. J.

KRIEGLER, J.

FOOTNOTES

FN5. A foreign insurance company is “not organized under the laws of [California], whether or not admitted.” (§ 27.).  FN5. A foreign insurance company is “not organized under the laws of [California], whether or not admitted.” (§ 27.)