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:
- state the fee on the declarations page or elsewhere in the policy under California Insurance Code sections 381 and 383.5 or
- 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.