American Ins. Ass'n v. Lewis

• Decision Date: 08 July 1980
• Citation: 409 N.E.2d 828,50 N.Y.2d 617,431 N.Y.S.2d 350
• Parties: , 409 N.E.2d 828 AMERICAN INSURANCE ASSOCIATION et al., Appellants, v. Albert B. LEWIS, as Superintendent of Insurance of the State of New York, Respondent.
• Court: New York Court of Appeals Court of Appeals

Page 350

431 N.Y.S.2d 350

50 N.Y.2d 617, 409 N.E.2d 828

AMERICAN INSURANCE ASSOCIATION et al., Appellants, v.Albert B. LEWIS, as Superintendent of Insurance of the State of New York, Respondent.

Court of Appeals of New York.

July 8, 1980.

Robert S. Smith and Earl H. Doppelt, New York City, for appellants.

Robert Abrams, Atty. Gen. (Arnold D. Fleischer, Asst. Atty. Gen., Shirley Adelson Siegel, Sol. Gen., Peter Bienstock and Myrna M. Martinez, New York City, of counsel), for respondent.

OPINION OF THE COURT

FUCHSBERG, Judge.

On this appeal, here directly pursuant to CPLR 5601(subd. (b), par. 2), we are called upon to determine whether subdivision 1 of section 654 of our Insurance Law, in imposing a so-called "capping" impost based on the total net worth of property and casualty insurance corporations, offends the due process clauses of our Federal and State Constitutions.The appellants are seven large foreign corporations who write such insurance in the various States, including New York.

The challenged provision is an amendment to a statutory scheme under which the Insurance Law creates a joint underwriting group, the New York Property Insurance Underwriting Association, for the purpose of making fire and extended coverage ¹ available to persons who otherwise would be unable to obtain adequate protection in the private insurance market.(SeeBrueckner v. Superintendent of Ins. of State of N. Y., 39 A.D.2d 383, 385, 333 N.Y.S.2d 908, affd.33 N.Y.2d 663, 348 N.Y.S.2d 981, 303 N.E.2d 706;N.Y.Legis.Ann., 1968, pp. 313, 461.)As a condition to transacting business in the State every insurer authorized to write policies in this field is required to join the association.The pool they finance operates under the name Fair Access to Insurance Requirements or, as more popularly referred to in the industry, under the acronym FAIR.In essence, as the plan was set up under the original legislation in 1968, its members were to share in FAIR's profits and losses in the proportion that each one's net direct premiums on policies written in New York bore to the aggregate net direct premiums written in this State (Insurance Law, § 651, subd. 7;§ 654, subd. 1).

However, by a 1971amendment to subdivision 1 of section 654, the change that is at the heart of this appeal was wrought.While the proportional form of financing of FAIR was continued, each insurer's liability for losses sustained by the program was maximized at 1% of the insurer's "surplus to policyholders", which, for all practical purposes, may be equated with net worth.²Since, so long as the contributions of all the participating insurers remained strictly proportional, this limitation could be expected to leave a deficit, the amended statute compelled those insurers whose contributions had not yet reached the 1% "cap" to shoulder the additional cost on a proportional basis.³

This, of course, introduced a means test.Unlike the basic assessment computed on each insurer's pro rata premium writing, the "capping" provision made larger companies, i. e., those having a greater net worth, pay more.As the Superintendent of Insurance readily concedes, the legislative intent animating the "capping" provision was solely one to protect small, local insurance companies from suffering the risk of having to share, as they formerly had, in increasingly large losses.

As the financial impact of the "capping" provision began to be felt, the plaintiffs brought this suit to declare the "capping" provision unconstitutional and to enjoin its enforcement.In quest of this relief, they relied on three theories, each pleaded in a separate cause of action.The first, grounded on due process, specifically alleged that the effect of the "cap" was to impose a tax on property beyond the jurisdiction of New York.The second put forth the claim that due process also was implicated by what it characterized as the irrational, arbitrary and confiscatory nature of the statute.Finally, plaintiffs charged that, by reason of irrational discrimination against insurance companies similarly situated, there had been a denial of equal protection.As the litigation progressed, the parties cross-moved for summary judgment, plaintiffs on the first cause of action alone and the superintendent for dismissal of the entire complaint.Special Term, in granting the cross motion, briefly noted that the plaintiffs had failed to overcome the presumption of constitutionality and that the "capping" provision was "not a tax but a proper exercise of regulatory authority over the insurance industry".For the ensuing reasons, we now reverse, concluding that summary judgment should have been granted on plaintiffs' first cause of action.⁴

Preliminarily, we address the superintendent's contention that the "capping" provision is nothing more than an incident of the police power to regulate the insurance industry (seeHealth Ins. Assn. of Amer. v. Harnett, 44 N.Y.2d 302, 306, 405 N.Y.S.2d 634, 376 N.E.2d 1280) and that its effect is not to levy a tax but merely to impose charges in the nature of license fees as a condition of doing business in the State.The exaction cannot be a tax, the defendant asserts, because the generation of revenue is not its primary purpose.

But, in so saying, the superintendent makes no mention of the fact that a license fee must be reasonably related to the cost of a licensing program (seeSuffolk County Bldrs. Assn. v. County of Suffolk, 46 N.Y.2d 613, 619, 415 N.Y.S.2d 821, 389 N.E.2d 133).This omission appears to be unavoidable.For, the "capping" funds bear not even a rough correlation to the expense to which the State is put in administering its licensing procedures or to the benefits those who make the payments receive, but are applied to the substantive funding of the FAIR plan.Moreover, the plan owes its existence to a felt need to provide the assurance that the designated coverage will continue to be available to all members of the general public who resort to the pool.It is significant too that the obligation to make the "capping" payments was not imposed by an administrative agency charged with regulating licensees, but by the Legislature, the body vested with the power to tax.

Nor is the exaction any less a general revenue-raising measure because it is allocable to a particular project and its amount dependent on the size of the subsidy necessary to sustain the financial soundness of the project it supports.When all is said and done, it is a compulsory contribution for the purpose of defraying the cost of government (Matter of Hanson v. Griffiths, 204 Misc. 736, 738, 124 N.Y.S.2d 473, affd.283 App.Div. 662, 127 N.Y.S.2d 819;Houck v. Little Riv. Dist., 239 U.S. 254, 265, 36 S.Ct. 58, 61, 60 L.Ed. 266).

Almost needless to add, particularly in the context of a due process attack on a money-producing measure, to allow how it is labeled to determine whether it is a tax or a fee would be to let form obscure substance (seeWisconsin v. J. C. Penney Co.311 U.S. 435, 443, 61 S.Ct. 246, 249, 85 L.Ed. 267).Thus, an employer's contribution to an unemployment insurance fund, though otherwise denominated, was held to be a tax (seeChamberlin, Inc. v. Andrews, 271 N.Y. 1, 2 N.E.2d 22;Great Lakes Co. v. Huffman, 319 U.S. 293, 63 S.Ct. 1070, 87 L.Ed. 1407).And, more closely gaited to the mandatory payments in the present case, a "fee" for the privilege of doing local business, when levied on a stated percentage of a corporation's capital stock, also was deemed a tax (Western Union Tel. Co. v. Kansas, 216 U.S. 1, 30 S.Ct. 190, 54 L.Ed. 355).

Turning then to the constitutional claim, it is fundamental to due process jurisprudence that the taxing power of a State may not extend to tangible or intangible property having no connection or relationship to the taxing State (Louisville & Jeffersonville Ferry Co. v. Kentucky, 188 U.S. 385, 398, 23 S.Ct. 463, 467, 47 L.Ed. 513;seeMatter of Eastman Kodak Co. v. State Tax Comm., 33 A.D.2d 298, 303, 307 N.Y.S.2d 69, affd.30 N.Y.2d 558, 330 N.Y.S.2d 617, 281 N.E.2d 559).In other words, the due process clause operates to restrain the State from "fixing its tax talons on extraterritorial values"(Hartman, State Taxation of Interstate Commerce: A Survey and an Appraisal, 46 Va.L.Rev. 1051, 1059).To avoid this effect, when a State does venture to apply such a tax, it must be one that, in operation, bears some relation to the protections, opportunities and benefits which the State affords the taxpayer.Our initial inquiry, directed to ascertaining whether such a nexus exists, therefore must be "whether the state has given anything for which it can ask return"(emphasis mine;Wisconsin v. J. C. Penney Co., 311 U.S. 435, 444, 61 S.Ct. 246, 249, 85 L.Ed. 267, supra;Norfolk & Western Ry. Co. v. Tax Comm., 390 U.S. 317, 325, 88 S.Ct. 995, 1000, 19 L.Ed.2d 1201, seeTribe, American Constitutional Law, p. 353).For this purpose, it is generally enough if an out-of-State corporation avails itself of the privilege of transacting business within the State(Exxon Corp. v. Department of Revenue of Wis., 447 U.S. 207, ----, 100 S.Ct. 2109, 2118, 65 L.Ed.2d 66).

Since this threshold presents no obstacle here, we move on to the next hurdle.At that point, due process poses the further question whether the application of the tax, in this instance to the net worth of foreign insurers doing business here, may be said to be rationally related to property values connected with the taxing State (seeMoorman Mfg. Co. v. Bair, 437 U.S. 267, 273, 98 S.Ct. 2340, 2344, 57 L.Ed.2d 197).⁵This standard is not satisfied by the excellence of the goals for which the moneys are raised nor, as here, the simple logic of the means chosen to obtain them.Even the clearest intent that those affected be treated equitably will not do.The test is purely pragmatic.It demands fairness, not so much in form as in fact.Precision may not be possible, and in the end if...