Was interstate railroad insurance exempt from Kentucky's unauthorized-insurer premium tax?

Plain-English summary

In 1993, Kentucky's Attorney General said insurance on interstate railroad operations and related property could be exempt from both the surplus-lines tax and the unauthorized-insurer premium tax. The Surplus Lines Law excluded that railroad coverage when placed by a licensed agent or broker. The separate unauthorized-insurer tax excluded premiums on lawfully procured surplus-lines insurance. The AG reasoned that the first exclusion did not change the coverage's surplus-lines character.

The second exemption depended on lawful procurement. Under the opinion's reading, railroad coverage obtained from an unauthorized insurer counted as surplus lines only if it could not be procured from an authorized insurer. The opinion did not say every railroad policy was exempt regardless of how or why it was placed.

Currency note

This opinion was issued in 1993. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Historical summary

Interstate railroad insurance buyers

The AG described an exemption from the Surplus Lines Law for coverage of interstate railroad operations and the property used in those operations, if placed through a licensed agent or surplus-lines broker. For the separate unauthorized-insurer tax, the opinion required the transaction to be lawfully procured as surplus lines.

Surplus-lines brokers and insurers

The opinion defined surplus lines by the unavailability of the requested coverage from authorized insurers. It said an unauthorized insurer could not lawfully provide the railroad coverage merely because the Surplus Lines Law excluded it; the coverage first had to be unavailable from authorized insurers.

Insurance and revenue officials

The AG treated the two tax exemptions as connected but distinct. Lawfully obtained surplus-lines railroad coverage was exempt from the unauthorized-insurer tax even though the railroad exclusion meant it was not taxed under the Surplus Lines Law.

Common questions

Was all interstate railroad insurance free of the unauthorized-insurer tax?

The AG did not say that. Its answer applied when the coverage was lawfully procured from an unauthorized insurer as surplus lines, which meant the coverage could not be obtained from an authorized insurer.

Did the railroad exclusion from the Surplus Lines Law make the policy stop being surplus lines?

No. The AG said exclusion from that law did not by itself change the insurance's character. Its surplus-lines character depended on the unavailability of coverage from authorized insurers.

Could a railroad choose an unauthorized insurer just for better price or terms?

The opinion described the statutory surplus-lines conditions as barring procurement from an unauthorized insurer merely for an advantage in price or contract terms. It also said the separate unauthorized-insurer provisions limited when such coverage could be placed.

Which taxes did the opinion distinguish?

It discussed the premium tax paid by licensed surplus-lines brokers under KRS 304.10-180 and the unauthorized-insurer premium tax under KRS 304.11-050(1). The railroad exclusion concerned the former; the lawful-surplus-lines exemption concerned the latter.

Background and statutory framework

Revenue and insurance officials asked about railroad coverage placed by Kentucky agents or brokers. KRS 304.10-020(3) excluded specified interstate railroad insurance from the Surplus Lines Law. KRS 304.11-050(1) exempted premiums on lawfully procured surplus-lines insurance from the unauthorized-insurer tax. The AG read KRS 304.10-040 and KRS 304.11-030(1) together to conclude that coverage lawfully placed with an unauthorized insurer remained surplus lines when an authorized insurer could not provide it.

Citations and references

• KRS 304.10-020(3): railroad exclusion from the Surplus Lines Law.
• KRS 304.10-040: conditions and definition discussed for surplus lines.
• KRS 304.11-030(1): lawful procurement from unauthorized insurers.
• KRS 304.11-050(1): separate unauthorized-insurer tax exemption.

Source

• Landing page: https://www.ag.ky.gov/Resources/Opinions/Opinions/OAG93-077.htm

Original opinion text

OAG 93-77

November 3, 1993

Debra H. Eucker

Division of Legal Services

Revenue Cabinet

P.O. Box 423

Frankfort, Kentucky 40602

Steve Cox

Deputy General Counsel

Department of Insurance

P.O. Box 517

Frankfort, Kentucky 40602

Dear Ms. Eucker and Mr. Cox:

You have presented the following question to the Attorney General:

Is insurance, which is placed by licensed agents or surplus lines brokers of this state on operations of railroads engaged in transportation in interstate commerce and their property used in such operations, subject to the unauthorized insurer's tax in KRS 304.11-050(1)?

As we understand the situation, this question is tangentially related to a case under consideration at the Board of Tax Appeals. Although this question is not directly at issue in the case, the Board is withholding action until our opinion is provided. Apparently, whether our opinion affects the case depends, at least in the view of the Board, on the outcome of the opinion. Therefore, we do not consider this question as one that is the subject of current or anticipated litigation; if it were, we would be unable to answer it. 40 KAR 1:020.

The question before us involves two insurance taxes. The first appears in the Surplus Lines Law, KRS 304.10-020 to 210. The tax is paid by licensed surplus lines brokers at the rate of three percent of the premiums of “surplus lines insurance subject to tax.” KRS 304.10-180. The phrase “subject to tax” apparently refers to the fact that the Surplus Lines Law completely exempts four categories of insurance, one of which is insurance on the operations and property of railroads engaged in interstate commerce. KRS 304.10-020(3).

The other tax is the unauthorized insurer tax, which like the surplus lines tax is based on premiums. KRS 304.11-050(1). Exempt from that tax are “premiums on lawfully procured surplus lines insurance.” The question that you ask is whether surplus lines insurance written on interstate railroads is exempt from both taxes or just the surplus lines tax.

It is our opinion that surplus lines insurance does not lose its character as such simply because it is exempted from the Surplus Lines Law. Therefore the insurance in question is exempt from both the surplus lines tax and the unauthorized insurers tax.

Surplus lines insurance provides a way to accommodate purchasers who require insurance that is not sold in this state. As a general rule, one may obtain insurance only from an “authorized insurer,” a term that refers to a party who holds a certificate of authority issued by the commissioner of insurance. KRS 304.1-100. If there are no authorized insurers who provide the kind of insurance that the purchaser requires, the Surplus Lines Law allows the purchase of the insurance from an unauthorized insurer. This may occur if the following conditions are met: the insurance must be obtained through a licensed surplus lines broker; the insurance must not be procurable from an authorized insurer; and the insurance may not be obtained for the purpose of obtaining an advantage in price or contract terms. KRS 304.10-040.

The Surplus Lines Law does not apply to “insurance on operations of railroads engaged in transportation in interstate commerce and their property used in such operations,” provided the insurance is obtained through a licensed agent or surplus lines broker. KRS 304.10-020. Although insurance thus obtained is not subject to the Surplus Lines Law, it nevertheless falls within the definition of surplus lines as expressed in KRS 304.10-040:

If certain insurance coverages cannot be procured from authorized insurers such coverages hereinafter designated “surplus lines,” may be procured from unauthorized insurers . . . .

We have been unable to locate any other definition of “surplus lines.” Although the term is in general use within the insurance industry, it exists only because of specific statutory authorization and therefore the specific language of the statute governs its construction. Plainly, surplus lines insurance is insurance that cannot be procured from authorized insurers. Therefore, insurance on the operations and property of railroads engaged in interstate commerce will be surplus lines insurance, and therefore exempt from the unauthorized insurers tax, only if it cannot be procured from an authorized insurer.

While this construction might appear to present grave administrative problems in enforcing the unauthorized insurers tax, since the applicability of the tax depends on whether the insurance in question could have been obtained from an authorized insurer, the provisions of KRS 304.11-030(1) remedy the situation by forbidding the procuring of insurance from an unauthorized insurer except in “the lawful transaction of surplus lines insurance.” (There are several additional exceptions that are not relevant here.) In other words, it is forbidden to procure railroad insurance of the kind in question from an unauthorized insurer unless the insurance is unavailable from any authorized insurer. This means that if the insurance in question is lawfully obtained from an unauthorized insurer, then the insurance meets the definition of surplus lines insurance and is exempt from the unauthorized insurers tax.

To paraphrase this analysis, the fact that the insurance in question is not subject to the Surplus Lines Law does not mean that it can lawfully be obtained at the purchaser's whim from either authorized or unauthorized insurers. Subtitle 11 of the Insurance Code works in conjunction with the Surplus Lines Law to prevent unauthorized insurers from selling such insurance if it can be procured from authorized insurers.

It is therefore the opinion of the Attorney General that insurance transactions exempted from the Surplus Lines Law by KRS 304.10-020 constitute surplus lines insurance if the insurance is lawfully procured from an unauthorized insurer. If this condition is met, then the transactions are exempt from the unauthorized insurers tax.

Sincerely,

Chris Gorman

Attorney General

Ross T. Carter

Assistant Attorney General