Principal Mut. Life Ins. Co. v. State, Div. of Ins. Dept. of Commerce and Economic Development

• Decision Date: 29 September 1989
• Docket Number: S-2518,Nos. S-2517,s. S-2517
• Citation: 780 P.2d 1023
• Parties: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, Appellant, Cross-Appellee, v. STATE of Alaska, DIVISION OF INSURANCE, DEPARTMENT OF COMMERCE AND ECONOMIC DEVELOPMENT, Appellee, Cross-Appellant.
• Court: Alaska Supreme Court

Page 1023

780 P.2d 1023

PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, Appellant, Cross-Appellee, v. STATE of Alaska, DIVISION OF INSURANCE, DEPARTMENT OF COMMERCE AND ECONOMIC DEVELOPMENT, Appellee Cross-Appellant.

Nos. S-2517, S-2518.

Supreme Court of Alaska.

Sept. 29, 1989.

Susan R. Pollard, William B. Rozell, Faulkner, Banfield, Doogan, & Holmes, Juneau, for appellant, cross-appellee.

Jeffrey W. Bush, Asst. Atty. Gen., Grace Berg Schaible, Atty. Gen., Juneau, for appellee, cross-appellant.

OPINION

Before MATTHEWS, C.J., and RABINOWITZ, BURKE, COMPTON and MOORE, JJ.

RABINOWITZ, Justice.

In 1957, the Alaska legislature amended its tax on insurance premiums to impose a tax rate on insurers based outside of Alaska (hereinafter "foreign insurers") double that imposed on Alaska-based insurers (hereinafter "domestic ¹ insurers"). ² Alaska's differential premium tax remained in effect from 1957 until its repeal in 1986. This repealed tax was codified in Alaska Statute 21.09.210(b):

Each insurer ... shall pay a tax on the total direct premium income ... for the insurance of property or risks resident or located in the state [subject to enumerated exceptions and deductions].... The tax ... is computed at the rate of

(1) for domestic companies, 1 1/2 per cent;

(2) for hospital and medical service corporations, 6 per cent of their gross premiums less claims paid;

(3) for companies other than domestic and hospital and medical service corporations, 3 per cent. ³

On October 23, 1981, ⁴ 11 foreign insurance companies, but not appellant, filed suit challenging the constitutionality of Alaska's differential premium tax. John Hancock et al. v. State, No. 1JU-81-1699 Civ. (Alaska Super., 1st Dist., Juneau, Oct. 23, 1981). Five more foreign insurance companies were added as plaintiffs in 1982. Similar suits were brought in other states, and on March 26, 1985, the United States Supreme Court decided the case of Metropolitan Life Insurance Co. v. Ward, 470 U.S. 869, 105 S.Ct. 1676, 84 L.Ed.2d 751 (1985) (Ward ), which involved a challenge to Alabama's differential premium tax law.

The Alaska legislature amended AS 21.09.210(b) during the next full legislative session to equalize the tax rate applicable to foreign and domestic insurers at 2.7 percent, retroactive to January 1, 1986 (i.e., for taxes due April 1, 1987). Ch. 118, § 1, SLA 1986. On July 21, 1986, 14 more foreign insurance companies were added as plaintiffs in the John Hancock suit. Other cases were also filed concerning the constitutionality of AS 21.09.210(b), including a 1986 suit by two foreign insurance companies. Northern Life Insurance Co. v. State, 1JU-86-786 Civ. Settlement was reached with all 32 companies, and the John Hancock and Northern Life cases were dismissed in November 1986. ⁵

On November 14, 1986, Principal Mutual Life Insurance Company ("Principal"), an Iowa corporation licensed by the Division of Insurance to do business in Alaska, filed with the Division a request for a refund of taxes paid under AS 21.09.210 in 1983, 1984, and 1985. The Division denied Principal's refund request. Principal requested a hearing before the Division on the denial, as authorized by AS 21.06.180. The Division, through the Department of Law, denied Principal's request. On February 27, 1987, Principal added a claim for a refund of premium taxes paid in the taxable years ending 1980, 1981, and 1982. The Division denied this refund request as well. Principal requests a total refund of $95,606 for taxes it alleged were overpaid for the tax years 1980-1985. ⁶

Principal appealed the Division's refund denial to the superior court, which agreed with Principal that AS 21.09.210(b)(3) was unconstitutional. Citing Ward, 470 U.S. 869, 105 S.Ct. 1676, 84 L.Ed.2d 751, and Metropolitan Life Insurance Co. v. Commissioner of Department of Insurance, 373 N.W.2d 399 (N.D.1985), the superior court concluded that AS 21.09.210(b)(3) violated the equal protection provisions of both the Alaska and the federal constitutions. The superior court refused, however, to grant Principal any refund. The court found the analysis of Commercial Fisheries Entry Commission v. Byayuk, 684 P.2d 114 (Alaska 1984), controlling on the question of whether Principal was entitled to retrospective relief.

The state has appealed the superior court's finding that AS 21.09.210 is unconstitutional. Principal has appealed the court's denial of any refund.

A. AS 21.09.210(b) IS UNCONSTITUTIONAL UNDER THE EQUAL PROTECTION PROVISIONS OF THE FEDERAL AND ALASKA CONSTITUTIONS.

We conclude that former AS 21.09.210(b) ⁷ violates the equal protection clauses of both the Alaska and the federal constitutions. Principal's main argument, which we find persuasive, is that AS 21.09.210(b) is unconstitutional because it imposes a higher tax on foreign insurance companies than on domestic insurance companies, a discrimination which lacks any legitimate state purpose.

Under federal equal protection analysis, the "imposition of more onerous taxes or other burdens on foreign corporations than those imposed on domestic corporations [is forbidden] unless the discrimination between foreign and domestic corporations bears a rational relation to a legitimate state purpose." Western & Southern Life Insurance Co. v. State Board of Equalization, 451 U.S. 648, 668, 101 S.Ct. 2070, 2083, 68 L.Ed.2d 514, 530 (1981) (Western & Southern ). What level of scrutiny such discrimination is subject to under Alaska equal protection analysis has not been decided by this court. ⁸ In any case, the minimum level of equal protection scrutiny in Alaska, also denominated a rational basis test, is more demanding than the federal rational basis test mandated by Western & Southern. ⁹

In Ward, the Supreme Court considered Alabama's differential premium tax statute, Ala.Code § 27-4-4 & -5 (1975). 470 U.S. 869, 105 S.Ct. 1676, 84 L.Ed.2d 751. The Court held that the two purposes of the statute advanced by the state, promoting the formation of new domestic insurance companies in Alabama and encouraging capital investment by insurance companies in Alabama, were not legitimate state purposes, but rather were "purely and completely discriminatory, designed only to favor domestic industry...." 470 U.S. at 878, 105 S.Ct. at 1681, 84 L.Ed.2d at 759.

The state denies that AS 21.09.210(b) reflects any intent "to penalize foreign, or reward domestic, insurers", and advances three state purposes it believes are legitimate:

1) The tax differential enables domestic insurers, burdened by Alaska's higher costs of doing business, to maintain competitive equality with foreign insurers.

2) The tax differential ensures a more stable insurance market in Alaska because domestic insurers cannot leave the state if they perceive the risks to be too high.

3) The tax differential increases the availability of insurance in Alaska because domestic insurers are more familiar with the state and will write coverage for risks which foreign companies will not insure.

We are not persuaded by the state's arguments. Even if we accept the legitimacy of these purposes, ¹⁰ there is no evidence whatsoever in the record to support the state's contention that they are advanced by the differential tax rates imposed by AS 21.09.210. ¹¹

The state's first argument fails to persuade us because the state has not presented any evidence supporting its claim that domestic insurers have a higher cost of doing business in Alaska than do foreign insurers. Moreover, even if such evidence were presented or judicially noticed, it is doubtful that any difference is simply the result of the insurer's decision to locate its home office in Alaska. It is reasonable to assume that foreign and domestic insurers operating in Alaska pay their Alaska agents and claims adjusters roughly equivalent salaries and commissions, and that their Alaska policyholders make equivalent numbers of claims. (Payment of claims is the largest cost of doing business.) The state has introduced no evidence indicating that foreign and domestic insurers insure different Alaska risk pools.

The only substantial business expense that may be significantly higher in Alaska than in Des Moines, Iowa, where Principal's home office is located, is administrative costs ("paperwork"). ¹² This argument becomes much less persuasive when we substitute Hartford-based Aetna or New York-based Metropolitan Life for Principal. However, there is nothing preventing an Alaska insurer from contracting out the bulk of its paperwork to a non-Alaska company or setting up an administrative center in a less expensive state.

Contrary to the state's second argument, there is no reason why domestic insurers cannot leave the state if they find the risks to be too high; Alaska-organized insurers are free to obtain licenses to do business in other states, just as foreign insurers are free to seek licenses to do business in Alaska.

Third, merely because an insurer is organized in Alaska does not necessarily mean that it is more familiar with the state than are foreign insurers (who may have operated in the state for much longer periods of time). ¹³ Even if we assume that domestic insurers are more familiar with Alaska's insurance environment than are foreign insurers, it does not logically follow that domestic insurers will write coverage for risks that foreign companies will not insure. Indeed, a domestic insurer's alleged greater familiarity with the state may cause it to avoid underwriting Alaska risks that foreign underwriters do underwrite. Nothing in Alaska's insurance laws compels domestic insurers to underwrite risks that foreign insurers are not required to underwrite.

The Michigan Court of Appeals reached the same conclusion in finding Michigan's differential tax statute unconstitutional:

We hold that, unlike in Ward, the purpose advanced by the state is legitimate (i.e., making insurance coverages available to residents), but the means chosen are not...