Allstate Ins. Co. v. State Bd. of Equalization

• Citation: 336 P.2d 961,169 Cal.App.2d 165
• Court: California Court of Appeals
• Decision Date: 26 March 1959
• Parties: ALLSTATE INSURANCE COMPANY, a corporation, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION of the State of California, Defendant and Appellant. Civ. 23353.

Page 961

336 P.2d 961

169 Cal.App.2d 165

ALLSTATE INSURANCE COMPANY, a corporation, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION of the State of California, Defendant and Appellant.

Civ. 23353.

District Court of Appeal, Second District, Division 3, California.

March 26, 1959.

As Modified on Denial of Rehearing April 21, 1959.

Hearing Denied May 20, 1959.

Edmund G. Brown and Stanley Mosk, Attys. Gen., and Harold B. Haas, Deputy Atty. Gen., for appellant.

Luckham & Grabow and Paul P. Selvin, Los Angeles, for respondent.

VALLEE, Justice.

Plaintiff brought this action to recover $9,355.07, comprising additional assessments levied by defendant against plaintiff in 1955. Plaintiff had judgment as prayed, with interest. Defendant appeals.

Plaintiff, an Illinois corporation, since prior to 1951 has been authorized to transact disability, liability, plate glass, common carrier liability, boiler and machinery, burglary, credit, sprinkler, and automobile insurance business within the state, and since January 1954 has also been authorized to transact fire, marine, team and vehicle, and miscellaneous insurance business within the state.

Plaintiff charged a stated premium, payable in advance, for a year of insurance. However, if the insured desired to pay the premium in installments he could do so by paying 40 per cent thereof plus what plaintiff designates as an 'installment payment fee' in advance, paying 30 per cent in three months and 30 per cent in six months from the inception date of coverage. Plaintiff paid the tax on the installment payments for the years 1951-1954. It did not pay any tax on the installment payment fees it collected for those years. In 1955 the board levied additional assessments covering the 'installment payment fees' collected by plaintiff in the years 1951-1954. Plaintiff paid the additional assessments under protest and brought this suit to recover them.

The amount of the 'installment payment fee' was determined by cost accounting and was imposed to cover additional bookkeeping expense, and the collection expense ensuing from the necessity of additional entries in the accounts and billings resulting from the exercise of the installment payment plan. An application for insurance contained a printed box in which the installment fee was set forth. Policies of insurance contained a space in which the 'Total Payment Fee' is stated and made a part of the payments to the company. ¹

The senior vice president of plaintiff testified: 'When the applicant has agreed, let us say, to buy coverages totaling $70 premium, the agent then says, 'And would you give me a check for the entire amount now?' And if the applicant says he cannot, then the agent explains that he can pay that premium on the installment plan for a small additional fee, and if the applicant agrees to that, he then multiplies the $70 by 40%, getting $28, and adds fifty cents [now $.75] thereto, and writes $28.50, as the down payment.' Referring to the 'installment payment fee,' he said: 'It is an additional operation that must be performed, and we can cost account that, and that is what we charge to the customer who elects to buy time.' At the expiration of a prior policy a notice of premium is sent to the policyholder. The notice quotes the 'Annual Premium in Full,' the single cash premium, and the company calculates 40 per cent of that amount and adds the installment fee of $.50 to it, showing the total of the two as the amount of the down payment if the customer wishes to use the installment payment plan.

The chief actuary of the department of insurance of California testified that life insurance companies on many policies allow the policyholder an option of either paying the premium annually in advance or on a 'fractional' basis such as monthly, quarterly, or semi annually. Such installment premiums are increased in amount over the pro rata proportion of the single annual premium by an additional charge based on a calculation of the additional collection expense and a loss of interest resulting from the installment payments. The additional charge is computed on a percentage basis. Periodic payments are more expensive to the companies. It is the custom and practice of the life insurance companies to report the full amount of these monthly, quarterly, or semi-annual premiums, which include the additional charge, for tax purposes. The premium in life insurance includes the actual mortality cost, a loading charge to cover the expense of doing business, and a profit to the company. The actuarial concepts of the chief actuary apply to all fields of insurance covered by the constitutional provision with respect to 'gross premiums.' See Mowbray-Blanchard, 'Insurance,' 4th ed., McGraw-Hill, 344; Michelbacher, 'Multiple-line Insurance,' McGraw-Hill, 74; Maclean, 'Life Insurance,' 5th ed., McGraw-Hill, 117.

The issue is: Are the installment payment fees received by plaintiff part of the 'gross premiums' within the meaning of section 14 4/5 of article XIII of the Constitution? Section 14 4/5 in pertinent part reads:

'In the case of an insurer not transacting title insurance in this State, the 'basis of the annual tax' is, in respect to each year, the amount of gross premiums, less return premiums, received in such year by such insurer upon its business done in this State.'

The constitutional provision applies equally to all insurance companies. Bankers' Life Co. v. Richardson, 192 Cal. 113, 122, 218 P. 586. It imposes the tax on 'gross premiums' from all insurance, whether life, fire, marine, or casualty, with the only exceptions being title insurance, reinsurance, and ocean marine insurance. Northwestern Mutual Life Ins. Co. v. Roberts, 177 Cal. 540, 542-543, 171 P. 313.

The determination of whether a particular payment is 'premium' is a question of law. 'Premium' in the law of insurance means the amount paid to the company for insurance. State Farm Mutual Automobile Ins. Co. v. Carpenter, 31 Cal.App.2d 178, 179-180, 87 P.2d 867. It has been defined as 'the sum which insured is required to pay.' 44 C.J.S. Insurance § 340, p. 1302.

The gross premium, or the amount charged in a contract of insurance, ordinarily includes two elements, that is, the net premium and the loading. The loading, or the amount arbitrarily added to the net premium, is intended to cover the expenses of the company. In a stock company it may also be a source of profit; and in a mutual company, a source from which dividends may be paid to the insured. Fox v. Mutual Benefit Life Insurance Co., 8 Cir., 107 F.2d 715, 717. Also see 2 Joyce, Insurance, 2d ed., 2171, § 1083.

One of the questions in Bankers' Life Co. v. Richardson, 192 Cal. 113, 218 P. 586, was whether assessments collected by the plaintiff, an assessment life company, from its members under its assessment contracts were included within 'gross premiums.' The court held such assessments were premiums within the meaning of section 14, now section 14 4/5, of article XIII of the Constitution, stating (192 Cal. at page 121, 218 P. at page 590):

'We think it is clear, therefore, that the first contention of the appellant must fall, and that the constitutional amendment should be construed as providing that it was a 'gross earnings tax' which the framers of the amendment intended, and which the people levied by the adoption of this amendment. To so hold, of course, implies that all earnings, either by way of premiums or assessments, must be included in the term 'gross premiums received upon its business done in this state.''

Also see Western Travelers Accident Ass'n of California v. Johnson, 14 Cal.App.2d 306, 309, 58 P.2d 206.

Equitable Life Assur. Soc. of United States v. Johnson, 53 Cal.App.2d 49, 127 P.2d 95, says it is clear that it was the intent of the constitutional provision to tax all receipts that could reasonably be classified as 'premiums.' The court held that 'gross premiums,' as used in the constitutional provision, includes the consideration paid for an annuity. The court stated (53 Cal.App.2d at page 59, 127 P.2d at page 100):

"The Institute of Actuaries' Text-Book defines Premium as follows: 'The sum, whether single or periodical, which is payable in consideration of a benefit, is usually called a premium.' This definition does not include the idea that the premium must be sufficient or at least equal to the present value of the benefit, nor indeed does that idea properly enter into the definition of the word. The distinction is all the more important as the actuary in his ordinary work is engaged in finding present values of sufficient premiums and thus always has the question of the sufficiency of a premium in view. It is beyond question, however, that a sum of money paid and received in consideration for an insurance, endowment or annuity is a premium whether it be sufficient or not from an actuarial standpoint. A very simple definition would seem to be: 'A premium is the price of an insurance, endowment or annuity."'

The agreement before the court in Industrial Indem. Exchange v. State Board of Equalization, 26 Cal.2d 772, 161 P.2d 222, provided that of 'savings' credited to the insured, the management of the company should receive a commission. The insurance company entered the savings in its books as a credit to the insured and deducted the entire amount of that credit from its taxable gross premiums. Instead of paying or allowing the full amount of the credit to the insured, it paid 5 per cent thereof to its attorney in fact pursuant to the terms of the agreement and paid 95 per cent of the credit to the insured. The court held that the 5 per cent commission to the attorney in fact, even though credited on the books to the insured, was an expense attributable to the insurance, a part of the price of the insurance, and a part of gross premiums subject to taxation.

In Groves v. City of Los Angeles, 40 Cal.2d 751, 256 P.2d 309, Groves was engaged in the...