Last April we reviewed the Hawai`i Intermediate Court of Appeals' (ICA) decision that the Insurance Commissioner's assessments against insurers were unconstitutional taxes. The Hawai`i Supreme Court recently affirmed in part, reversed in part. See Hawaii Insurers Council v. Lingle, 2008 Haw. LEXIS 287 (Haw. Dec. 18, 2008).
In 1999, the legislature created the Insurance Regulation Fund (IRF), directing the Commissioner to make assessments against insurers to assist in administering the insurance laws in Hawai`i. In 2002, the legislature authorized transfer of $2,000,000 out of the insurance special fund to the general fund. Eventually, $3.5 million was transferred to the general fund.
Insurers, including the Hawai`i Insurers Council (HIC), filed suit, arguing the transfers converted the assessments into an illegal and unconstitutional tax. The circuit court granted HIC's motion for summary judgment and the ICA affirmed.
The Supreme Court determined the assessments were not unconstitutional when they were initially imposed. The Court was guided by San Juan Cellular Tel. Co. v. Public Serv. Comm'n of Puerto Rico, 967 F.2d 683 (1st Cir. 1992) in determining the assessments were a regulatory fee. The funds transferred from the IRF were used to support the overhead provided by the Department of Commerce and Consumer Affairs (DCCA). The DCCA supplied the insurance division with personnel management services, processing of the division's expenditures, computer system support, and various administrative services. Therefore, the funds were not taxes under the San Juan Cellular test.
Nevertheless, the legislature's transfer of the IRF funds to the general fund was unconstitutional under the separation of powers. Once the funds were transferred to the general fund, they were available for general purposes instead of funding the needs of the insurance division. The legislature's transfer blurred the distinction between the executive power to assess regulatory fees and the legislative power to tax for general purposes. Therefore, the Supreme Court affirmed the ICA's decision that the legislature's transfer bills were unconstitutional. But it reversed the ICA's judgment that the assessments levied to provide overhead expenses for the DCCA represented unconstitutional taxes.
