Installment Fees May Still be Considered Premium for Tax Purposes Despite Recent California Appellate Decision

A recent California appellate decision (In Re Insurance Installment Fee Cases, 211 Cal. App. 4th 1395) held that an installment fee – i.e, a fee charged to a policyholder who pays premium in installments under a payment plan separate from the policy – is not considered “premium.” 

The court found that the fee was consideration for a benefit separate from the insurance and paid under an agreement separate from the policy. As such, the insurer was not required to either:

  1. state the fee on the declarations page or elsewhere in the policy under California Insurance Code sections 381 and 383.5 or
  2. obtain approval of the fee from the California Insurance Commissioner in its rate filing under California Insurance Code section 1861.01 et seq.

However, insurers should be aware that the ruling in In Re Insurance Installment Fee Cases does not overrule or conflict with an existing line of California cases analyzing whether installment fees are part of “gross premium” for purposes of premium tax reporting and payment.

The premium tax cases suggest that installment fees collected by insurers are not gross premium if they represent the time value of money (e.g., interest that the insurer could collect by investing the premium rather than allowing the insured to pay later). However, fees intended to cover the insurer’s administrative costs (e.g., expenses of collecting multiple payments) may be includable as gross premium.

The In Re Insurance Installment Fee Cases court did not rely on the premium tax cases “because those cases and opinions … [are in] a different context than that presented by this case.”  We note that the different treatment of installment fees in different context is not without justification. In premium tax cases, the question is whether the fees constitute part of an insurer’s income. For purposes of policy and rate issues under the Insurance Code, however, the focus is instead on the bargain between the insurer and the policyholder.

Trial Court Abuses Its Discretion by Forcing Insurer to Bear the Cost of Giving Notice to Putative Class Members

In In re Insurance Installment Fee Cases, 2012 DJDAR 16696 (2012), the California Court of Appeal for the Fourth Appellate District decided an important class action cost recovery issue. The case arose in the insurance context.

A class action was filed against State Farm (“State Farm”) by a class representative. The representative pursued discovery seeking access to the class members’ personal and payment information, designed to identify which insureds might be eligible as plaintiffs in the class.  State Farm objected to the discovery requests. The plaintiff filed motions to compel the requested documents and the parties agreed to refer the dispute to a discovery referee. The discovery referee overruled State Farm’s objections. State Farm filed written objections to the referee’s recommendation which were subsequently overruled by the trial judge. The trial court also ordered State Farm to pay for and to mail out the notices regarding the discovery propounded by the plaintiffs. The merits of the litigation were subsequently decided in favor of State Farm.

State Farm filed a memorandum of costs after prevailing at the trial court level. In the cost memorandum State Farm sought to recover the $713,463 it incurred in sending out the notices to putative class members. The plaintiffs filed a motion to tax those costs. The trial court granted the motion to tax costs in its entirety.

The court of appeal reversed the trial court’s decision in part, and concluded the trial judge abused his discretion in taxing the costs relating to the mailing of the notices to putative class members. 

The court of appeal noted that certain cost items may be awarded in the trial court’s discretion if they are “reasonably necessary to the conduct of the litigation.” CCP § 1033.5(c)(2) and Seever v. Copley Press, 141 Cal. App. 4th 1550, 1558 (2006). 

However, when a party demands discovery involving significant “special attendant costs” beyond those typically involved in responding to routine discovery, the demanding party should bear those costs if the party is not successful in prevailing in the litigation. 

In reversing the trial court’s decision, the court of appeal reasoned that the costs State Farm incurred in providing the notice were “special attendant” costs beyond those involved in responding to routine discovery.

Originally posted to Barger & Wolen's Litigation Management & Attorney Fee Analysis blog.