California - California Court: Don't Tax Surplus Lines as Admitted Insurers Surplus lines insurers should remain exempt from a 2.35% tax paid by admitted insurers, a California Court of Appeal ruled

The second appellate district court ruled in favor of Lexington Insurance and the state Board of Equalization in upholding a lower court decision. A premium tax of 3% assessed on brokers, or policyholders when no brokers are involved, applies to policies written by both admitted and nonadmitted insurers. But a 2.35% premium tax -- known as a Section 28 tax for the portion of the state constitution it falls under -- imposed on admitted insurance companies for doing business in the state has not applied to surplus lines insurers.

Plaintiffs and appellants Stephen Silvers and Steven Gold sued Lexington Insurance Co. and the state board, claiming they should have been subject to the 2.35% tax. Lexington owed the state $88 million in unpaid taxes, they claimed. But the court found the company was acting legally, as it met the test of not "doing business" in California by having no office space or employees 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," the unanimous court ruled.

Attempts to reach Lexington, the Board of Equalization and plaintiffs' attorneys were unsuccessful.

California Gov. Arnold Schwarzenegger recently signed legislation tripling the state's minimums for nonadmitted insurers' capital and surplus to $45 million (BestWire, Sept. 2, 2010).

Lexington, a subsidiary of American International Group's Chartis arm, currently has a Best's Financial Strength Rating of A (Excellent).

Shares of AIG (NYSE: AIG) were trading on the morning of Oct. 6 at $40.11, up 0.43% from the previous close.