Report Title:

Reciprocal Insurers; Taxes

Description:

Provides that a reciprocal insurer and its attorney-in-fact are considered a single entity for general excise tax purposes.

HOUSE OF REPRESENTATIVES	H.B. NO.	2248
TWENTY-FOURTH LEGISLATURE, 2008
STATE OF HAWAII

A BILL FOR AN ACT

relating to Insurance.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1.  The legislature finds that section 237-29.7, Hawaii Revised Statutes, exempts "insurance companies" from paying general excise tax on gross premiums.  However, the term "insurance companies" is not defined in this section or in chapter 431, Hawaii Revised Statutes, which governs the regulation of insurance.  Instead, chapter 431 applies to "insurers" and provides that "insurer" means "every person engaged in the business of making contracts of insurance and includes reciprocal or interinsurance exchanges".

     Reciprocal insurers, unlike stock or mutual insurers which are incorporated entities, are unincorporated associations of individuals, partnerships, or corporations which are called "subscribers".  These subscribers act and exchange insurance contracts through an attorney-in-fact common to all such subscribers.

     Section 431:3-108, Hawaii Revised Statutes, defines a reciprocal insurer as "an unincorporated aggregation of subscribers operating individually and collectively through an attorney-in-fact common to all such persons to provide reciprocal insurance among themselves."  As a result, a reciprocal insurer cannot conduct the business of insurance in Hawaii without its attorney-in-fact.  Since the reciprocal insurer cannot accomplish anything without its designated attorney-in-fact, a reciprocal insurer and its attorney-in-fact are virtually indistinguishable.

     However, the general excise tax law has been interpreted to apply the tax to the gross income or gross proceeds earned by a reciprocal insurer's attorney-in-fact for services rendered on behalf of a reciprocal insurer.  The basis for this interpretation is that section 237-29.7, Hawaii Revised Statutes, does not expressly define the reciprocal insurer's attorney-in-fact as being part of a reciprocal insurer.

     This interpretation has resulted in double taxation and the unfair treatment of reciprocal insurers and their attorneys-in-fact, who unlike their incorporated stock or mutual insurer counterparts, are not exempt from the general excise tax.  This double taxation, in turn, ultimately affects the premium rates paid by subscribers who are insureds of the reciprocal insurer.

     The purpose of this Act is to recognize a reciprocal insurer and its attorney-in-fact as a single entity that is not subject to double taxation under Hawaii law.  Specifically, this Act:

     (1)  Ensures that a reciprocal insurer and its attorney-in-fact shall be considered a single entity for tax purposes; and

     (2)  Clarifies that the general excise tax exemption applies not to "insurance companies," but to "insurers" authorized to do business under chapter 431, Hawaii Revised Statutes.

     SECTION 2.  Section 237-29.7, Hawaii Revised Statutes, is amended to read as follows:

     "[[]§237-29.7[]]  Exemption of [insurance companies.] insurers. This chapter shall not apply to the gross income or gross proceeds of [insurance companies] insurers authorized to do business under chapter 431; except this exemption shall not apply to any gross income or gross proceeds received after December 31, 1991, as rents from investments in real property in this [State;] state; provided that gross income or gross proceeds from investments in real property received by [insurance companies] insurers after December 31, 1991, under written contracts entered into before January 1, 1992, that do not provide for the passing on of taxes or tax increases shall not be taxed until the contracts are renegotiated, renewed, or extended.

For purposes of this section, a reciprocal insurer and its attorney-in-fact shall be considered a single insurer."

     SECTION 3.  Section 431:1-202, Hawaii Revised Statutes, is amended to read as follows:

     "§431:1-202  Insurer defined.  Insurer means every person engaged in the business of making contracts of insurance and includes reciprocal insurers or interinsurance exchanges."

     SECTION 4.  Section 431:3-108, Hawaii Revised Statutes, is amended to read as follows:

     "§431:3-108  Reciprocal insurer.  [A] Reciprocal, or reciprocal insurer means an unincorporated aggregation of subscribers operating individually and collectively through an attorney-in-fact common to all such persons to provide reciprocal insurance among themselves."

     SECTION 5.  Statutory material to be repealed is bracketed and stricken.  New statutory material is underscored.

     SECTION 6.  This Act shall take effect on July 1, 2008.

INTRODUCED BY:

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