Hawaii Insurers Council v. Lingle

• Decision Date: 18 December 2008
• Docket Number: No. 27840.,27840.
• Citation: 120 Haw. 51,201 P.3d 564
• Parties: HAWAII INSURERS COUNCIL, Plaintiff-Appellee, v. Linda LINGLE, Governor, State Of Hawai`i; Georgina K. Kawamura, Director of Finance, Department of Budget and Finance; Lawrence M. Reifurth, Director, Department of Commerce and Consumer Affairs; J.P. Schmidt, Insurance Commissioner, Insurance Division, Department of Commerce and Consumer Affairs, Defendants-Appellants.
• Court: Hawaii Supreme Court

201 P.3d 564

120 Haw. 51

HAWAII INSURERS COUNCIL, Plaintiff-Appellee, v. Linda LINGLE, Governor, State Of Hawai`i; Georgina K. Kawamura, Director of Finance, Department of Budget and Finance; Lawrence M. Reifurth, Director, Department of Commerce and Consumer Affairs; J.P. Schmidt, Insurance Commissioner, Insurance Division, Department of Commerce and Consumer Affairs, Defendants-Appellants.

No. 27840.

Supreme Court of Hawai`i.

December 18, 2008.

Lisa Woods Munger (Gary M. Slovin and Donna H. Kalama with her on the briefs), Honolulu, for the plaintiff-appellee-respondent Hawaii Insurers Council.

Mark J. Bennett (Kimberly Tsumoto Guidry, Honolulu, and James F. Nagle with him on the briefs), for the defendants-appellants-petitioners Linda Lingle, Georgina K. Kawamura, Lawrence M. Reifurth, and J.P. Schmidt.

MOON, C.J., LEVINSON, NAKAYAMA, ACOBA, and DUFFY, JJ.

Opinion of the Court by LEVINSON, J.

We accepted the application for a writ of certiorari filed by the defendants-appellants-petitioners Linda Lingle, Governor, State of Hawai`i, Georgina K. Kawamura, Director of Finance, Department of Budget and Finance (DBF), Lawrence M. Reifurth, Director, Department of Commerce and Consumer Affairs (DCCA), and J.P. Schmidt, Insurance Commissioner, Insurance Division, DCCA (collectively, the State) in order to review the published opinion of the Intermediate Court of Appeals (ICA) in Hawaii Insurers Council v. Lingle, 117 Hawai`i 454, 184 P.3d 769 (2008). The ICA affirmed the final judgment of the first circuit court, the Honorable Karen S.S. Ahn presiding, in favor of the plaintiff-appellee-respondent Hawaii Insurers Council (HIC) and against the State. Id. at 463, 184 P.3d at 778. In its application, the State asks whether the ICA erred in concluding that the regulatory assessments imposed by the insurance commissioner pursuant to Hawai`i Revised Statutes (HRS) § 431:2-215 (Supp.1999) were unconstitutional taxes and whether the circuit court had subject-matter jurisdiction over this matter.

For the reasons that follow, we hold that the insurance commissioner's assessments were not unconstitutional when they were initially imposed, see infra sections III.A and B, but that the legislature's transfer of $3,500,000.00 of those funds into the general fund was unconstitutional under the separation of powers doctrine, see infra section III.A. We further hold that the circuit court had subject-matter jurisdiction over this case. See infra section III.C. We therefore affirm the ICA's May 5, 2008 judgment in part, reverse it in part, and remand this matter to the circuit court for further proceedings consistent with this opinion.

I. BACKGROUND

A. Factual Background

The DCCA is an executive agency of the State of Hawai`i. HRS § 26-4(5) (Supp. 1999). Its departments include an insurance division, HRS § 431:2-101 (1993), which is supervised and controlled by the insurance commissioner, HRS § 431:2-102 (1993 & Supp.2000). In 1999, the DCCA became financially self-sufficient. Its operations were no longer funded by the legislature's general fund, but instead by the persons and entities who were regulated by the DCCA or who received services from the DCCA. To that end, the legislature established the Insurance Regulation Fund (IRF). HRS § 431:2-215(a).¹ "All assessments, fees, fines, penalties and reimbursements collected by or on behalf of the insurance division under [HRS] title 24," subject to certain exceptions, were to "be deposited into the [IRF]." Id.

The insurance commissioner was directed to make assessments against insurers, with criteria for assessments to be established by rules he or she promulgated. HRS § 431:2-215(d)(1).² The assessments had to bear a reasonable relationship to the costs of regulating the line or type of insurance, including any administrative costs of the insurance division. HRS § 431:2-215(d)(3). The monies in the IRF were to be used by the insurance commissioner to carry out his or her duties and obligations under the insurance code. HRS § 431:2-215(a). For example, the insurance division prosecuted fraud committed against insurers. Of paramount importance for present purposes, the funds in the IRF were not allowed to revert to the general fund. HRS § 431:2-215(c).

The insurance commissioner collected assessments from insurers proportionate to each insurer's "line or type of insurance." Hawai`i Administrative Rules § 16-175.3 (2002). This figure was based on the insurer's market share percentage and pro rata share of the other insurance division costs. Id. The insurance commissioner calculated the total assessments for a given fiscal year by starting with the insurance division's operating cash requirements for the fiscal year. The commissioner would then project revenues, other than IRF assessments, for the year and deduct the revenues from the cash requirements. The resulting difference was the amount that the insurance commissioner would assess insurers for the IRF. In other words, the IRF assessments were calculated as follows: projected budget — projected non-IRF assessment revenues = IRF assessments. The insurance division's projected budget included the division's overhead expenses. In fiscal year 2000-2001, the insurance commissioner began to calculate the division's cash requirements to include an expense that represented a percentage of the DCCA's overhead, including charges for the director's office, the administrative services office, the hearings office, and/or information services. HRS § 431:2-215(b). The DCCA provided the insurance division with, inter alia, personnel management services, review and processing of the insurance division's expenditures, the preparation of its annual operating budget, a forum for contested case hearings, computer system support, and various administrative services. The insurance division provided the DCCA with $4,335,792.00 between July 2, 2001 and December 17, 2004. In fiscal year 2003-2004, the commissioner began to allocate five percent of the revenues collected by the division to overhead expenses of the DBF. HRS §§ 431:2-215(b) and 36-27 (Supp.2003). In return, the DBF provided the insurance division with, inter alia, oversight of budget preparation and execution, determination of budgetary requirements and expenditures, management of employee benefit programs, management of public debt, and treasury programs. The insurance division provided the DBF with $376,360.00 between October 1, 2003 and December 31, 2004.

In addition to overhead expenses, the insurance division's annual budget included amounts intended to create a reserve of surplus funds in order to ensure the availability of monies to fund the insurance division. The reserve was also intended to provide the flexibility necessary to handle unplanned insurance rehabilitations and insolvencies that typically required the insurance division immediately to expend funds for the protection of policyholders. For a period of time, the reserve was set at double the budgeted cost of regulating the insurance industry or two times the total expenditures. For fiscal year 2002-2003, the reserve margin was decreased to one and one-half years of expenditures. In 2003, after the present action was filed, the target for the reserve margin was decreased to fifty or seventy-five percent of the insurance division budget. Throughout this fluctuation in the reserve margin, the margin was not subjected to the rulemaking process.

Prior to the present lawsuit, insurers, including HIC's members, were never informed of the insurance division's reserve objective and had no knowledge that their assessments were increased to effectuate this reserve objective. Since the IRF was established in 1999, HIC's members have paid the various fees and assessments imposed by the insurance commissioner. HIC's members' assessments have constituted roughly twenty to twenty-five percent of the total assessments levied by the insurance commissioner. In addition to receiving funds from assessments, the IRF was funded by monies transferred from defunct funds that were repealed when the IRF was established.

In 2002, the legislature merged the IRF into the compliance resolution fund (CRF). 2002 Haw. Sess. L. Act 39, §§ 1, 5, 22 at 111-12, 115-16, 119 (codified at HRS §§ 26-9 (Supp.2002) and 431:2-215 (Supp.2002)). As a result, monies that would previously have been deposited into the IRF were instead deposited into an insurance sub-account of the CRF. See HRS § 431:2-215(d)(2); see also Sen. Stand. Comm. Rep. No. 2547, in 2002 Senate Journal, at 1255. Also in 2002, the legislature determined that the IRF contained at least $4,000,000.00 in excess of the requirements of the fund. 2002 Haw. Sess. L. Act 178, § 40 at 793. In an effort to balance the state's budget, the legislature directed the transfer of these excess monies to the general fund through H.B. 2827. Conf. Comm. Rep. No. 160, in 2002 House Journal, at 1830, and in 2002 Senate Journal, at 1024; 2002 Haw. Sess. L. Act 178, § 40 at 793. The governor line-item vetoed portions of H.B. 2827, the result of which was that $2,000,000.00, rather than $4,000,000.00, was authorized to be transferred from the IRF to the general fund. Gov. Msg. No. 258, Statement of Objections to H.B. No. 2827, in 2002 House Journal, at 1115; 2002 Haw. Sess. L. Act 178, § 40 at 793, 796 n. 2. This was the first time that the legislature had transferred any funds out of the insurance special fund and into the general fund. The division did not foresee the transfer. On or about December 1, 2002, the insurance commissioner transferred $2,000,000.00 from the IRF or the CRF to the general fund. In 2003, the legislature determined that the CRF contained $15,000,000.00 in excess of its requirements and authorized an additional transfer of monies from the CRF to the general fund. 2003 Haw. Sess. Laws Act 178, §§ 28, 66 at 407, 412. The director of finance transferred $1,500,000.00 from the...