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Silvers v. State Board of Equalization

September 30, 2010


APPEAL from a judgment of the Superior Court of Los Angeles County, Holly E. Kendig, Judge. Affirmed. (Los Angeles County Super. Ct. No. BC388468).

The opinion of the court was delivered by: Kumar, J.*fn6



Two categories of insurance carriers provide property and casualty insurance in California: insurers licensed by the Department of Insurance (DOI) and "surplus line insurers." Licensed insurers, also known as "admitted insurers," have a presence in California, have full access to the insurance market, and are statutorily "entitled to transact insurance business" in California (§ 24).*fn1 On the other hand, surplus line insurers, a subset of the "nonadmitted" insurance market, are not licensed by California and have no presence in California. Although a surplus line insurer is generally precluded from transacting insurance business in California, the company may issue policies to California residents when: (a) the insurance to be provided is statutorily sanctioned as appropriate for surplus line insurers; (b) the coverage sought to be provided (e.g., amusement parks, movie/entertainment ventures) is not available from an admitted insurer; and (c) the Insurance Commissioner has determined that the company is of satisfactory financial stability and reputation to protect the public interest. (See §§ 1763, 1765.1)

The issue presented is whether surplus line insurance premiums are subject to being twice taxed - first with a statutorily-based 3 percent surplus line premium tax to be paid by brokers or the insured (if the policy is obtained without the assistance of a broker) and, second, with a 2.35 percent premium tax imposed on the nonadmitted insurance company for "doing business in" California under article XIII, section 28 of the California Constitution (Section 28).

We affirm the judgment because, following a court trial, the trial court correctly ruled that surplus line insurance premiums are not subject to this double tax. It is undisputed that the surplus line premium is subject to a 3 percent tax. But, the policy premium is not subject to an additional Section 28 tax because the nonadmitted insurance company issuing the insurance policy is prohibited from "doing business" in California. It would be anomalous to sanction a nonadmitted insurance company's conduct as lawfully providing surplus line insurance and yet impose, on that company, a Section 28 premium tax for "doing business" in this state - i.e., an unlawful act.


Pursuant to Code of Civil Procedure section 526a,*fn2 appellants Stephen F. Silvers and Steven Gold (S&G) filed a complaint for declaratory relief against respondents the State Board of Equalization (SBE) and its executive director as well as Lexington Insurance Company (Lexington). The complaint alleged Lexington had failed to pay Section 28 taxes and sought a declaration that the SBE was obligated to collect those taxes. Respondent California Insurance Commissioner Steve Poizner (Commissioner) filed a complaint intervening in the action.

A court trial was conducted. The material facts are undisputed and, given the issue on appeal, can be briefly stated. Lexington, an insurer not licensed in California, issued policies in California as permitted by California's surplus line insurer laws. As a surplus line insurer, Lexington was not permitted to have offices, agents or employees in California and was required to conduct all of its activity outside of California. Although Lexington did not pay Section 28 premium taxes over a period of 10 years, neither the SBE nor the DOI proposed deficiency assessments for the missing taxes because both entities took the position that tax obligations related to the premiums were covered by existing laws that imposed a 3 percent premium tax on the brokers responsible for the insurance contracts or on the policy holders if no brokers were used.*fn3

The trial court ruled the Section 28 tax applied only to insurance premiums collected by admitted insurers. Thus, as a surplus line insurer, Lexington was not required to pay the tax. Judgment was entered in favor of respondents.


A. Standard of Review

We review the trial court's ruling de novo because the case concerns the application of constitutional and statutory provisions to undisputed facts. (Chen v. Franchise Tax Board (1998) 75 Cal.App.4th 1110, 1114; Diamond ...

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