IN THE MATTER COMMISSIONER'S CALCULATION DIVISION OF INSURANCE FRAUD PREVENTION ASSESSMENTS

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-4385-02T3

A-3177-03T3

IN THE MATTER OF THE COMMISSIONER'S

CALCULATION OF THE DIVISION OF

INSURANCE FRAUD PREVENTION ASSESSMENTS

PURSUANT TO N.J.S.A. 17:33A-8

and

IN THE MATTER OF THE COMMISSIONER'S

CALCULATION OF THE FISCAL YEAR 2003

DIVISION OF INSURANCE FRAUD PREVENTION

ASSESSMENTS PURSUANT TO N.J.S.A. 17:33A-8

______________________________________________

 

Argued: November 14, 2005 - Decided May 15, 2006

Before Judges A. A. Rodr guez, C. S. Fisher and Yannotti.

On appeal from a final action of the Department of Banking and Insurance.

Mitchell A. Livingston argued the cause for appellants Security Life Insurance Company of Denver, Midwestern United Life Insurance Company, Equitable Life Insurance Company of Iowa, USG Annuity & Life Insurance Company, Golden American Life Insurance Company, ING Life Insurance & Annuity Company, Southland Life Insurance Company, ReliaStar Life Insurance Company, Northern Life Insurance Company, Security-Connecticut Life Insurance Company, ReliaStar Life Insurance Company of New York, ING Insurance Company of America and United Life & Annuity Insurance Company (Sterns & Weinroth, attorneys; Mr. Livingston, on the brief).

Eleanor Heck, Deputy Attorney General, argued the cause for respondents Department of Banking and Insurance and Commissioner of Banking and Insurance (Peter C. Harvey, Attorney General, attorney; Michael Haas, Assistant Attorney General, of counsel; Ms. Heck, on the brief).

PER CURIAM

Appellants are several insurance companies that challenge assessments by the New Jersey Department of Banking and Insurance (DOBI) for the years ending in June 2002 and 2003, pursuant to the Fraud Prevention Act (FPA), N.J.S.A. 17:33A-1 to -30. On motion by the DOBI, we consolidated these two appeals, which raise the same issue for each year (No. M479-04 (App. Div. October 13, 2004)). In a nutshell, appellants contend that they were overcharged due to a change in the method of computation of the FPA assessment. Appellants seek reversal of the assessments and a refund of the amounts overpaid. We agree and order a recalculation of the assessments for the years 2002 and 2003 and a refund of any amount overpaid.

The FPA permits the Commissioner to apportion expenses incurred by the State to fund its responsibilities pursuant to the FPA among every company writing the class of insurance described in Subtitle 3 of Title 17 and Subtitle 3 of Title 17B, "in the proportion that the net premiums received by each of them . . . bears to the sum total of all such net premiums received by all companies writing that insurance within the State." N.J.S.A. 17:33A-8g. The term "net premiums received" is defined in the Act as "gross premiums written, less return premiums thereon and dividends credited or paid to policy holders." Ibid.

Historically, the Commissioner has calculated the FPA based upon information contained in Schedule T of the companies' annual statements. Schedule T is a standard form used throughout the industry and adopted by the National Association of Insurance Commissioners (NAIC). Column 3 of Schedule T indicates the amount of "net premiums received."

Prior to January 1, 2001, the amounts reported in Column 3 of Schedule T reflected accurately "net premiums received." However, after January 1, 2001, the NAIC adopted a revised format for Schedule T. This format called for certain "deposit-type" funds, which were previously reported in Column 6 to be reported in column 3.

Apparently, through inadvertence of this reporting change, the Commissioner calculated the FPA assessments for the years 2002 and 2003 using the amounts stated in Column 3. Appellants challenged the FPA assessments for these years, arguing that the allocation is contrary to N.J.S.A. 17:33A-8g because the "deposit-type" funds paid by annuity holders are not "premiums." The Commissioner rejected these challenges. These appeals followed.

These deposit-type funds are monies deposited with annuity providers for contracts that have not been "annuitized." In other words, annuitized funds are those collected for an annuity contract prior to the time that the contract-holder exercises his/her right to receive a stream of payments. Therefore, prior to annuitization, these funds are more akin to investment funds than insurance premiums because they may be withdrawn by the contract-holder at any time. A deposit-type fund does not meet the definition of "net premiums received" upon which the SPA assessment is based.

Appellants contend that DOBI's inclusion of annuity deposit funds in the FPA assessment base as "new premiums received" is arbitrary and capricious and beyond its statutory authority and must be reversed. We agree. From our review of the FPA, we conclude that the assessments for the years 2002 and 2003 contravene N.J.S.A. 17:33A-8g because they are based in part on amounts that are not "premiums." Therefore, because the same appellants paid an assessment in excess of what the State was entitled to receive, they are entitled to a refund of any overpayment.

Our holding is buttressed by DOBI's subsequent rule making action on this issue. In 2004, the Commissioner adopted N.J.A.C. 11:2-43 (effective November 2004), allowing companies to deduct consideration derived from "deposit-type" annuities from the amount in Column 3 in order to determine the amount of the FPA assessment. Despite this corrective measure, the Commissioner has not ordered refunds for the FPA assessments for fiscal years 2002 and 2003. Instead, the regulation allows a credit against future assessments for the excess amounts paid in those years. N.J.A.C. 11:2-43.4. However, the credit must be taken over a period of three years, unless the Commissioner allows for a lesser period upon a showing of good cause. The regulation provides:

An insurer may file a certification with respect to its annuity business based on the amounts reported on its 2002 Schedule T to seek an adjustment in amounts previously paid. To the extent the certification demonstrates a change in the annuity premium amount to which the special purpose apportionment and the [FPA] assessment apply, the Department shall recalculate the insurer's special purpose apportionment and fraud assessment for that year. Any amounts that may be excluded pursuant to this subchapter shall be deducted from the insurer's premium on which future apportionments and assessments, as applicable, are based. The credit shall be taken over a period of not less than three years. Credit may be taken by an affiliate of the insurer. For good cause shown, the Commissioner may allow the credit to be taken over a period of less than three years. For purposes of this rule, good cause shown shall include, but not be limited to, where the amount of the credit is de minimis with respect to the insurer seeking the credit, where the insurer is or may be placed in a hazardous financial condition, or to preserve the assets of an insurer in rehabilitation, liquidation or administrative supervision.

[N.J.A.C. 11:2-43.4 (emphasis added).]

In the statement accompanying the rule change proposal, DOBI concedes that it would be "appropriate" to compute the 2002 and 2003 FPA assessments by excluding deposit-type consideration from the base amount. The statement reads in part:

The Department has received numerous inquiries as well as objections to inclusion of allocated deposit-type funds previously not subject to the apportionment or the assessment. In rendering a decision on one such objection to the special purpose apportionment on these grounds, the Commissioner, in Order No. A03-122, rejected the objecting companies' arguments solely on the basis that the Department had based its determination of the relevant apportionment on the companies' annuity considerations as reported in Column 3, Schedule T of the annual statement. The Department, however, has continued to evaluate this issue, and has determined that it is appropriate to permit companies transacting annuity business to exclude allocated deposit-type funds solely for purposes of determining the apportionment and the assessment.

[ 36 N.J.R. 2976(a) (emphasis added).]

Given our holding, we need not address appellants' other contention that, assuming, arguendo, that DOBI had statutory authority to include annuity deposit funds in the 2002 and 2003 FPA assessments, it could only have done so through the notice and hearing provisions of the New Jersey Administrative Procedures Act, N.J.S.A. 52:14B-1 to -24.

Accordingly, the FPA assessments issued to appellants for the years 2002 and 2003 are reversed and remanded for a new calculation in accordance with this opinion. If any appellant is still entitled to a refund the entire balance shall be paid no later than July 28, 2006. The provisions of N.J.A.C. 11:2-43.4 are not an appropriate means to address overpayments of the FPA assessments. An agency may not adopt a regulation that conflicts with the governing statute, or which falls to accomplish the statute's objectives. Commissioner v. Engle, 464 U.S. 206, 227, 104 S. Ct. 597, 609, 78 L. Ed. 2d 420, 436 (1984) (reversing the decision of the Commissioner of the Internal Revenue Service to disallow a permissive deduction based solely on the Commissioner's finding of insurmountable administrative problems in calculating the appropriate deduction). See also Smith v. Director, Div. of Taxation, 108 N.J. 19, 33 (1987); Sutkowski v. Director, Div. of Taxation, 312 N.J. Super. 465, 482 (App. Div. 1998). DOBI exceeded its statutory authority, albeit inadvertently, by collecting FPA assessments in excess of the amount authorized by the FPA. It is seeking to correct this mistake by spreading the refund process over three years. The only justification for this is convenience to the agency. However, we have held that "ease of administration is not an acceptable justification for a regulation where [it] conflicts with the governing statute." Id. at 482 (quoting Smith, supra, 108 N.J. at 33). Moreover, a credit towards future FPA assessments is not authorized by statute.

Reversed and remanded. We do not retain jurisdiction.

 

This order is the subject of another appeal that is decided by us today under Docket A-4803-02T5.

(continued)

(continued)

8

A-3177-03T3

May 15, 2006