SB2315

SECTION 1. The legislature finds that reciprocal insurers are insurers or insurance companies as set forth in section 431:1-202, Hawaii Revised Statutes. Unlike stock or mutual insurers that are incorporated entities, a reciprocal insurer is an unincorporated association of individuals, partnerships, or corporations, which are called "subscribers," who act and exchange insurance contracts through an attorney-in-fact common to all subscribers.

Accordingly, 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.

All authorized insurers, are subject to the insurance premium tax, which is imposed upon them in lieu of the general excise and net income tax on the gross premiums received by such insurers, pursuant to article 7 of chapter 431, Hawaii Revised Statutes. For many years, insurance companies have been exempt from paying general excise tax on gross premiums. This exemption was enacted by the legislature in Act 141, Session Laws of Hawaii 1935, and subsequently codified as section 237‑23(a)(4), Hawaii Revised Statutes.

Act 286, Session Laws of Hawaii 1991, modified the general excise tax exemption for insurance companies in section 237‑29.7, Hawaii Revised Statutes, to specify that while the gross income or gross proceeds of insurance companies authorized to do business under chapter 431, Hawaii Revised Statutes, are exempt from the general excise tax, this exemption does not apply to gross income or gross proceeds from real property rentals.

While chapter 431, Hawaii Revised Statutes, specifically defines "insurer" in section 431:1-202, Hawaii Revised Statutes, there is no definition of "insurance company" or "insurance companies" anywhere in chapter 431, Hawaii Revised Statutes. While "insurers" and "insurance companies" may refer to the same thing, "insurers" and not "insurance companies" are authorized to do business under chapter 431, Hawaii Revised Statutes. The legislature finds that the ambiguous use of the term "insurance companies" in section 237-29.7, Hawaii Revised Statutes, should be corrected to accurately reflect application to "an insurer" or "insurers" as defined in chapter 431, Hawaii Revised Statutes.

Existing law has been interpreted so that the gross income or gross proceeds earned by a reciprocal insurer's attorney-in-fact for services rendered on behalf of a reciprocal insurer are subject to the general excise tax because the attorney-in-fact is not expressly defined as being part of a reciprocal insurer under section 237-29.7, Hawaii Revised Statutes. That definition has resulted in double taxation and the unfair treatment of reciprocal insurers and their attorneys-in-fact, who unlike their stock or mutual insurer counterparts, are not exempt from the general excise tax, which in turn may ultimately affect the premium rates paid by subscribers who are insured by the reciprocal insurer.

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

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

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

(3) Makes other amendments for purposes of clarity and consistency.

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; 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 singularly as an 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 or 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:	_____________________________

THE SENATE	S.B. NO.	2315
TWENTY-FOURTH LEGISLATURE, 2008
STATE OF HAWAII