Calif. Deductibles Levy Confuses Insurers

The confusion stems from California's decision to treat workers comp policy deductibles as premium, and charge state tax on deductibles paid since 1997.

Mr. Whitman said a quirk in California law requires insurers to pay workers' comp benefits in their entirety directly to victims, and have company deductibles reimbursed to them. However, despite this process, "deductibles are not magically transformed into premiums," he noted.

Mr. Whitman said he is drafting a letter to California Insurance Commissioner Harry W. Low asking that more direction be given to insurers that have not been keeping track of the data involved and now face an April 1 filing deadline. He said the Alliance does not believe it will be possible for its membership to revise their returns in time.

"We need clarification on how we go about filing on April 1. Our insurers are in a quandary. They could file and pay the tax, pay under protest, but we don't know how to go about it," he said.

He added that the letter to Mr. Low would not deal with the Alliance's contention that the tax would be unprecedented. "The intent is not to get into the merits, but to figure how we move in the next four weeks," he said.

Mr. Whitman earlier denounced the California action, saying: "Every type of insurance typically has deductibles and premiums. There are long-established treatments of these in state laws that shouldn't be ignored simply because California is experiencing fiscal difficulties."

Mr. Low said the department had "itself acknowledged, workers' compensation insurance prices were already driven below cost to the point where some insurers have withdrawn from the state or restricted the writing of policies. This was happening even before last month's raising of workers' compensation benefit levels. This new tax decision will further burden a struggling system."

The Alliance said it is considering what actions its members might pursue, as well as options for the organization, "including formal regulatory protests and civil action."

California has permitted deductibles in workers' compensation policies since 1995. The Department of Insurance notified insurers on Feb. 25 that deductible amounts received from insured employers are now considered gross premiums and are subject to premium taxation during the tax year in which the amounts are paid. The notice said the department will assess taxes on deductibles paid since 1997.

"Essentially, the state is planning to collect a tax on phantom premium," Mr. Whitman said. "Because many of these policies are written on a per-event basis, it's possible for a company to reimburse its insurer for multiple claims during a year. Now, all reimbursements would be aggregated with the actual policy premium and the total taxed. This interpretation flies in the face of economic reality. The insurer merely applies these reimbursements against payments already made–there is no additional economic benefit."

The Alliance of American Insurers, based in Downers Grove, Ill., represents 326 property-casualty insurance companies.