Did a California city, county, or regional transit authority owe nonadmitted insurance tax when it directly bought coverage from a nonadmitted insurer?

Plain-English summary

Legal Ruling 1996-2 held that a California governmental or quasi-governmental entity owed nonadmitted insurance tax when it directly negotiated and obtained insurance from a nonadmitted insurer.

The examples were a county or incorporated city buying liability coverage and a regional transit authority organized by local governments doing the same. Each chose direct placement rather than using a surplus line broker.

FTB reasoned that an entity relying on the Insurance Code's definition of "person" to obtain the right to buy nonadmitted insurance also had to be treated as a person for the linked tax obligation.

The two situations

City or county

A California county or incorporated city planned to negotiate its own liability policy with an insurer outside California's admitted-insurer regulatory system.

Regional transit authority

A transit authority created by local governments planned the same direct placement for liability coverage.

The ruling reached the same tax result for both.

Why governmental status did not prevent the tax

Before a 1993 amendment, Insurance Code section 1760 allowed a California "citizen" to negotiate insurance with a nonadmitted insurer. The amendment expanded the provision to "any person."

The Insurance Code defined person to include an association, organization, partnership, business trust, or corporation. A government or quasi-government entity had to fit one of those categories—such as an organization, association, or municipal corporation—to use the direct-placement authority.

Section 1760(b) then required every person effecting that insurance to pay the tax under the Nonadmitted Insurance Tax Law.

Harmonizing the two codes

Revenue and Taxation Code section 13203 used overlapping categories in its definition of person, including corporation, association, and organization.

The direct-placement authorization and tax provisions were enacted together, cross-referenced one another, and formed one statutory scheme. FTB therefore read them consistently: the entity could not be a person for the right to buy the policy but not a person for the accompanying tax.

The historical tax

The ruling quoted Revenue and Taxation Code section 13210(a) as imposing a 3% tax on gross premiums paid or payable for covered contracts taking effect or renewed on or after January 1, 1994.

FTB also said the tax helped equalize competition between admitted and nonadmitted insurers. Exempting governmental direct purchasers would give nonadmitted insurers an economic advantage over admitted insurers.

The holding

A governmental or quasi-governmental entity that directly effected insurance with a nonadmitted insurer was liable for the tax imposed by Part 7.5 of Division 2 of the Revenue and Taxation Code.

What this means for you

Cities, counties, and public authorities

Governmental status did not create an exemption under the ruling. If the entity directly used the nonadmitted-insurer authorization, it also assumed the linked tax obligation.

Public-sector risk managers

Identify who legally effects the insurance. The ruling's facts involved direct placement by the public entity and expressly contrasted that approach with using a surplus line broker, without deciding the brokered procedure.

Accountants and tax professionals

Confirm the current premium-tax rate, return responsibility, timing, and any modern exemptions. The 3% rate and statutory text summarized here are from 1996.

Common questions

Q: Did a city or county owe the tax?

A: Yes when it directly negotiated and effected the nonadmitted insurance described in the ruling.

Q: Did the regional transit authority owe the tax?

A: Yes. FTB treated the quasi-governmental entity the same way.

Q: Why was the entity considered a person?

A: It had to fall within the Insurance Code's person definition to obtain direct-placement authority, and the linked tax law used overlapping categories.

Q: What rate did the ruling quote?

A: 3% of gross premiums for the covered historical contracts.

Q: Did the ruling decide the procedure when a surplus line broker secured the policy?

A: No. The facts stated that the entities would place the coverage directly instead.

Citations and references

• Cal. Rev. & Tax. Code §§ 13201-13222, including §§ 13203(a) and 13210(a)
• Cal. Ins. Code §§ 19 and 1760
• Cal. Gov. Code § 241
• 1993 SB 625, Stats. 1993, ch. 1142
• Rodriguez v. Superior Court (1993) 14 Cal.App.4th 1260
• O'Brien v. Dudenhoeffer (1993) 16 Cal.App.4th 327

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 1996-2

Original ruling text

Home

Legal ruling 1996-2

June 11, 1996

Subject: Application of Nonadmitted Insurance Tax Law to Governmental and Quasi-Govermental Entities

Issue

Is a governmental entity or quasi-governmental entity which effects insurance with a nonadmitted insurer liable for the tax imposed by Part 7.5 of Division 2 of the Revenue and Taxation Code (the Nonadmitted Insurance Tax Law)?

Facts

Situation 1. A county or an incorporated city in the state of California (a "governmental entity") is considering directly placing insurance orders for liability protection with an insurance provider that lacks sufficient nexus with California to be subject to the California Department of Insurance's regulatory oversight ("nonadmitted insurance company"), rather than utilizing a surplus line broker to secure insurance coverage. The governmental entity will negotiate and effect the liability insurance on its own behalf with the nonadmitted insurer.

Situation 2. A quasi-governmental entity which is a regional transit authority organized by local governments is considering directly placing insurance orders for liability protection with a nonadmitted insurance company, rather than utilizing a surplus line broker to secure insurance coverage. The quasi-governmental entity will negotiate and effect the liability insurance on its own behalf with the nonadmitted insurer.

Law and Analysis

Insurance Code ("Ins. Code") § 1760 provides in full:

(a) Any person may negotiate and effect insurance to protect himself, herself, or itself against loss, damage, or liability with any nonadmitted insurer.

(b)Every person that effects insurance governed by this chapter shall pay the tax imposed by Part 7.5 (commencing with Section 13201) of Division 2 of the Revenue and Taxation Code.

Ins. Code § 19 states:

"Person" means any person, association, organization, partnership, business trust, or corporation.

Until its amendment in 1993 (Stats. 1993, c. 1142 (SB 625)), Ins. Code § 1760 read in full:

Any citizen of this State may negotiate and effect insurance on his own property with any nonadmitted insurer.

Government Code § 241 declares that :

The citizens of the State are:

(a) All persons born in the State and residing within it, except the children of transient aliens and of alien public ministers and consuls.

(b) All persons born out of the State who are citizens of the United States and residing within the State."

Revenue & Taxation Code ("Rev. & Tax. Code") § 13210(a) provides generally:

For gross premiums paid or to be paid on insurance contracts that take effect or are renewed on or after January 1, 1994, every person who effects insurance governed by Chapter 6 (commencing with Section 1760) of Part 2 of Division 1 of the Insurance Code shall pay a gross premium tax of 3 percent for the use of the state . . . ."

Rev. & Tax. Code § 13203(a) provides in pertinent part:

For purposes of this part (Part 7.5):

(a) "Person" means an individual, bank, corporation, partnership, limited liability company, society, association, organization, joint stock company, estate, or trust . . . ."

The 1993 changes to Ins. Code § 1760 enlarged the population of insureds who could contract with nonadmitted insurers for insurance coverage. Rather than limiting insurance coverage and negotiation to individuals, Ins. Code § 1760 was amended to allow additional parties, such as corporate entities, to directly place insurance with nonadmitted insurers.

A governmental entity or quasi-governmental entity cannot, by definition, be a citizen of this State. Its ability to effect insurance with a nonadmitted insurer, pursuant to the authorization set forth in Ins. Code § 1760, is contingent upon its classification as a person for purposes of Ins. Code § 1760, although no judicial opinion has confirmed this principle. In order to directly effect insurance with a nonadmitted insurer, a governmental entity or quasi-governmental entity must be classified as one or more of the following terms: an association, organization, partnership, business trust, or corporation. While a governmental entity might, for example, be more properly classified as an association, municipal corporation, or organization, depending upon particular facts and circumstances, it must ultimately fall within the definition of a "person" to have the right to effect and negotiate insurance with a nonadmitted insurer.

In conjunction with the expansion of persons who could negotiate with a nonadmitted insurer was the imposition of tax on those same persons effecting insurance with a nonadmitted insurer. Ins. Code § 1760(b) provides that "[e]very person that effects insurance governed by this chapter [i.e. insurance effected with a nonadmitted insurer] shall pay the tax imposed by Part 7.5 . . . of the Revenue and Taxation Code [the Nonadmitted Insurance Tax Law]." (Emphasis and bracketed items added.).

Any entity or party relying on the Insurance Code's definition of person for the right to effect insurance with a nonadmitted insurer under Ins. Code § 1760(a) necessarily must use that same definition of person with respect to liability for the Nonadmitted Insurance Tax under Ins. Code § 1760(b) in order to give that statute a reasonable and consistent interpretation. Statutes should be interpreted comprehensively, and each part or section should be construed with the statute's general purpose and intent to produce a harmonious whole. Rodriguez v. Superior Ct. (1993) 14 Cal.App. 4th 1260.

In addition to the imposition of the Nonadmitted Insurance Tax Law provided by Ins. Code § 1760(b), Rev. & Tax. Code § 13210(a), as set forth above, confirms that persons effecting insurance with nonadmitted insurers are subject to the Nonadmitted Insurance Tax Law, commencing with Rev. & Tax. Code § 13201. Rev. & Tax. Code § 13203, in defining the term "person" for purposes of Part 7.5 of the Revenue and Taxation Code, incorporates all of the terms found in Ins. Code § 19, including association, corporation, and organization. As the Nonadmitted Insurance Tax Law, as set forth in Part 7.5 of the Revenue and Taxation Code, was enacted in the same bill (SB 625) giving rise to the changes to Ins. Code § 1760, and the relevant Insurance Code and Revenue and Taxation Code sections cross-reference one another, it is proper to read the provisions of SB 625 together when determining application of the Nonadmitted Insurance Tax. A statute must be construed in the context of the entire statutory scheme of which it is a part, in order to achieve harmony among its parts. This principle applies even though the two provisions are in separate codes. O'Brien v. Dudenhoeffer (1993) 16 Cal.App.4th 327.

As the definition of "person" for purposes of Part 7.5 of the Revenue and Taxation Code shares the same terms found in Ins. Code § 1760, based on the interrelationship between the two provisions and their joint enactment, it is appropriate to harmonize their application. As a governmental entity or quasi-governmental entity would necessarily fall within the Insurance Code's definition of person in order to effect its own insurance with a nonadmitted insurer, and would then be subject to the Nonadmitted Insurance Tax, as set forth in Ins. Code § 1760(b), a governmental entity or quasi-governmental entity must also be considered a person for purposes of Part 7.5 of the Revenue and Taxation Code in order to reconcile the application of the tax provided in Ins. Code § 1760(b).

In addition, imposition of the Nonadmitted Insurance Tax Law was brought about in part to equalize the competitive advantage between admitted insurers and nonadmitted insurers. To further the policy of fair competition between admitted and nonadmitted insurers, it is appropriate to consider a governmental entity or quasi-governmental entity a person for purposes of the Nonadmitted Insurance Tax Law in order to prevent nonadmitted insurers from securing an economic advantage over admitted insurers.

Holding

A governmental entity or quasi-governmental entity effecting insurance with a nonadmitted insurer is liable for the tax imposed by Part 7.5 (commencing with Section 13201) of Division 2 of the Revenue and Taxation Code.

Drafting Information

The principal author of this legal ruling is David Gemmingen of the Franchise Tax Board’s Legal Branch. For further information regarding this legal ruling, contact Mr. Gemmingen at the Franchise Tax Board, Legal Branch, P.O. Box 1720, Rancho Cordova, CA 95741-1720. 916-845-3480.

Last updated: 09/24/2025