[1993/oagheade.htm]

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