Ruling 95-13, Insurance Premiums Tax / Gross Direct Premiums
FACTS:
A health insurance company ("the Insurer"), which is a domestic insurance company, as defined in Conn. Gen. Stat. §12-201, intends to enter into a new type of contract with employers. Under such a contract, the Insurer will, with respect to claims incurred up to a predetermined annual liability limit ("the liability limit"), perform, for an administrative fee, employee health benefit claims processing and other administrative services as an agent for and on behalf of the employer. The liability limit is set at 110% (or more) of the actuarially determined expected claims.
The employer is solely liable for all claims below the liability limit and must establish and fund a claims payment account from which the Insurer may draw funds to cover claims paid on behalf of the employer. The Insurer is obligated to pay such claims only to the extent that the employer has sufficient funds in its claims payment account to cover the payment of such claims. The Insurer is not liable to health care providers or to employees of the employer for payment of any claims up to the liability limit even if the employer fails to pay those claims. The employer is solely liable to health care providers or to its employees for payment of such claims (endnote 1).
The Insurer assumes sole liability for payment of any claims in excess of the liability limit and has no right to reimbursement for payment of such claims. The Insurer concedes that the premium that it receives from the employer for undertaking this obligation is included in its gross direct premiums, as defined in Conn. Gen. Stat. § 12-201, and is subject to the tax on net direct premiums that is imposed by Conn. Gen. Stat. § 12-202. The employer has no liability to others for payment of claims in excess of the liability limit.
ISSUE:
Where an employer is solely liable to its employees and to health care providers for the payment of employee health benefit claims but, under a contract with an insurance company, those claims are to be paid by the insurance company solely from funds that are provided in advance by the employer, whether those payments, and the administrative fees charged by the insurance company to the employer for employee health benefits claims processing, are gross direct premiums, as defined in Conn. Gen. Stat. § 12-201, that are received by the insurance company.
DISCUSSION:
Conn. Gen. Stat. § 12-202 imposes on domestic insurance companies "a tax on the total net direct premiums received by such company ... from policies written on property or risks located or resident in this state...." (endnote 2) '''[N]et direct premiums' means gross direct premiums less the following items: (1) Returned premiums, including cancellations, and (2) dividends paid to policyholders on direct business, not including any dividends paid on account of the ownership of stock.'' Conn. Gen. Stat. § 12-201. '''[G]ross direct premiums' means all receipts of premiums from policyholders and applicants for policies, whether received in the form of money or other valuable consideration, but excluding annuity premiums and considerations and premiums received for reinsurances assumed from other insurance companies ....'' Id.
While the Connecticut courts have not had occasion to construe these provisions of chapter 207, they must "be construed according to the commonly approved usage of the language ..." Conn. Gen. Stat. § 1-1(a). "Premium" means "the consideration paid in money or otherwise for a contract of insurance ..." Webster's Third New International Dictionary 1789 (1981). '''Insurance' means any agreement to pay a sum of money, provide services or any other thing of value on the happening of a particular event or contingency or to provide indemnify for loss in respect to a specified subject by specified perils in return for a consideration. In any contract of insurance, an insured shall have an interest which is subject to a risk of loss through destruction or impairment of that interest, which risk is assumed by the insurer and such assumption shall be part of a general scheme to distribute losses among a large group of persons bearing similar risks in return for a ratable contribution or other consideration." Conn. Gen. Stat. § 38a-1(10) (endnote 3).
With respect to claims below the liability limit, the Insurer is not required to indemnify the employer for employee claims. As the employer is solely liable for all claims below the liability limit and must establish and fund a claims payment account from which the Insurer may draw funds to cover claims paid on behalf of the employer, the Insurer has assumed no risk and is obligated to pay such claims only to the extent that the employer has sufficient funds in its claims payment account to cover the payment of such claims by the Insurer. Again, the Insurer is not liable to health care providers or to employees of the employer for payment of any claims up to the liability limit even if the employer fails to pay those claims. The employer is solely liable to health care providers or to its employees for payment of such claims.
This issue has also been addressed by the California courts. The State of California, like most states, imposes a tax on insurance premiums. While there is no evidence, as was the case in Connecticut Assn. of Clinical Laboratories v. Connecticut Blue Cross, Inc., 31 Conn. Supp. 110 (1973), that the General Assembly copied language from another jurisdiction (or from California, in particular), "other similar acts, because they are in pari materia, are interpretively helpful ...." Connecticut Humane Society v. Freedom of Information Comm'n, 218 Conn. 757, 760 n.3 (1991) (citing 2A Sutherland, Statutory Construction §§51.06 and 52.03 (4th ed)). "Where a meaning of a statute is in doubt, reference to legislation in other states and jurisdictions which pertains to the same subject matter, persons, things, or relations, may be a helpful source of interpretive guidance." 2B Sutherland, Statutory Construction (Singer 5th ed.) § 52.03 (endnote 4).
The California tax is imposed on insurance companies and is measured by "the amount of gross premiums, less return premiums, received in such year by such insurer upon its business done in this state, other than premiums received for reinsurance ...." Cal. Const. art. XIII, §28(b) and (c); Cal. Rev. & Tax. §§ 12201 and 12221. In a case involving an arrangement almost identical to the arrangement between the Insurer and the employer that is described in this Ruling, the California Court of Appeal for the First Appellate District concluded that payment of claims by the insurer from funds that were provided by the employer was not taxable as gross premiums received by the insurer. Ætna Life Insurance Co. v. State Board of Equalization, 11 Cal. App. 4th 1207, 1213, 15 Cal. Rptr. 2d 26, 30 (1992). The California Court of Appeal for the Third Appellate District came to the same conclusion in Prudential Insurance Co. of America v. State Board of Equalization, 21 Cal. App. 4th 458, 26 Cal. Rptr. 2d 287 (1993). (endnote 5)
RULING:
Where an employer is solely liable to its employees and to health care providers for the payment of employee health benefit claims but, under a contract with an insurance company, those claims are to be paid by the insurance company solely from funds that are provided in advance by the employer, those payments, and the administrative fees charged by the insurance company to the employer for employee health benefits claims processing, are not gross direct premiums, as defined in Conn. Gen. Stat. §12-201, that are received by the insurance company.
Endnotes:
1. The Insurer offers optional protection against large claims that are incurred by any particular employee of the employer. The Insurer assumes sole liability for payment of any claims in excess of a predetermined annual liability limit per employee ("employee liability limit") and has no right to reimbursement for payment of such claims. The Insurer concedes that the premium that it receives from the employer for undertaking this obligation is included in its gross direct premiums, as defined in Conn. Gen. Stat. § 12-201, and is subject to the tax on net direct premiums that is imposed by Conn. Gen. Stat. § 12-202. The employer has no liability to others for payment of claims in excess of the employee liability limit.
2. Conn. Gen. Stat. §12-210 imposes the same tax on insurance companies other than domestic insurance companies.
3. This definition, while applying to the use of the term "insurance" in Title 38a of the Connecticut General Statutes, is particularly significant in that Title 38a pertains to insurance and in that it is in accord with the definition of the same term in Webster's Third New International Dictionary 1172 (1981) ("coverage by contract whereby for a stipulated consideration one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril").
4. This principle, like the principle (here inapplicable) that "a latent ambiguity must ordinarily be resolved in favor of the taxpayer ... because the issue remains the imposition of tax liability rather than entitlement to an exemption or a deduction," Texaco, Inc. v. Groppo, 215 Conn. 134, 141, 574 A.2d 1293 (1990), is one of many--none of which is applied to the exclusion of others--that are followed by the Connecticut courts in construing tax statutes. See, e.g., AirKaman, Inc. v. Groppo, 221 Conn. 751, 607 A.2d 410 (1992), Texaco Refining & Marketing Co. v. Commissioner, 202 Conn. 583, 522 A.2d 771 (1987).
5.These decisions carefully distinguish the facts and holding in Metropolitan Life Insurance Co. v. State Board of Equalization, 32 Cal. 3d 649, 652 P.2d 426, 186 Cal. Rptr. 578 (1982). That is not to say, however, that, were the facts substantially the same as, and not materially different from, those involved in Metropolitan Life Insurance Co., the Department would interpret Conn. Gen. Stat. § 12-201 in the same manner in which the California Supreme Court interpreted Cal. Const. art. XIII, §28 and Cal. Rev. & Tax. §§12201 and 12221.
LEGAL DIVISION
December 28, 1995