Although it did not address insurance coverage, the Hawaii Intermediate Court of Appeals (ICA) issued an important decision regarding the state’s regulation of the insurance industry in Hawaii Insurers Council v. Lingle, et al, No. 27840 (Haw. Ct. App. April 14, 2008).
The Insurance Regulation Fund (IRF) was established by the legislature in 1999, allowing the Hawaii Insurance Commissioner to assess amounts against insurers for payment into the IRF. The assessments were designed to support the operations of the Insurance Division and to enable the Insurance Commissioner to administer the insurance laws in the state. The statute further provided that excess contributions to the IRF be returned to the insurers.
When an excess existed in the IRF in 2002, the legislature authorized transfer of $2,000,000 from the IRF to the General Fund. The Hawaii Insurers Council (HIC) sued the State, contending the transfer of assessments to the General Fund violated the Hawaii and United States Constitutions because the assessments were unconstitutional taxes. The circuit court agreed and granted HIC’s motion for summary judgment.
The ICA affirmed. The Hawaii Constitution prohibited agencies of the executive branch from taxation functions. The court then analyzed whether the assessment was truly a tax or just an assessment. The ICA utilized a three part test from State v. Medeiros, 89 Hawaii 361, 367, 973 P.2d 736, 742 (1999) to determine whether the charge: (1) applies to the direct beneficiary of a particular service, (2) is allocated directly to defraying the costs of providing the service, and (3) is reasonably proportionate to the benefit received.
The assessments failed the first prong of the Medeiros test. The regulation of the insurance industry benefited the public-at large, not the insurers who paid the assessments. The assessments also failed the second and third prongs. Assessment funds transferred from the IRF to the General Fund were not allocated directly to defraying the costs of providing services to the insurers. Nor were they reasonably proportionate to benefits received by the insurers. Had the assessments borne a reasonable relationship to the cost of the services rendered by the Insurance Division, there would not have been millions of dollars in excess assessments available for transfer to the General Fund.
Further, the assessments violated the separation of powers doctrine because they were invalid taxes assessed by the executive branch.
The ICA’s decision will be a blow to the State because it could affect more that $1 billion in funds collected from insurers.
