Submitted September 18, 2019
appeal from the Tax Court of New Jersey, Docket No.
013502-2016, whose opinion is reported at 30 N.J. Tax 479
(Tax Ct. 2018).
Law Group, LLC, attorneys for appellant (Margaret C. Wilson
and Beth F. Bressler, on the briefs).
S. Grewal, Attorney General, attorney for respondents
(Melissa H. Raksa, Assistant Attorney General, of counsel;
William B. Puskas, Jr., Deputy Attorney General, on the
Judges Fuentes, Haas and Mayer.
appeal, we address the issue of whether, following the
Legislature's 2011 amendment of N.J.S.A. 17:22-6.64,
plaintiff Johnson & Johnson (J&J) was required to pay
an insurance premium tax (IPT) based upon all the risks it
insured throughout the United States or based upon only those
risks localized in New Jersey. Because both before and after
the 2011 amendment, N.J.S.A. 17:22-6.64 provided that IPT was
to be calculated at the rate of "5% of the gross amount
of such premium" paid for insurance procured "upon
a subject of insurance resident, located or to be performed
within [New Jersey], " we conclude that J&J's
IPT obligation should have continued to be based solely upon
the risks it insured that were located within New Jersey,
rather than upon the total United States premium for the
applicable coverage policies. Accordingly, we reverse the Tax
Court's contrary interpretation of the statute which is
at odds with the plain language of N.J.S.A. 17:22-6.64, and
remand for further proceedings.
facts underlying the dispute between the parties are fully
set forth in the Tax Court's decision, Johnson &
Johnson v. Director, Div. of Taxation, 30 N.J. Tax 479,
485-91 (Tax Ct. 2018), and are not in dispute. J&J is a
New Jersey corporation headquartered in New Brunswick that
engages in a global pharmaceutical, medical device, and
consumer health care business. Id. at 485.
1970, plaintiff formed Middlesex Assurance Company Limited
(Middlesex Assurance) to secure broader coverage and lower
the costs and fees associated with its substantial global
insurance needs. Id. at 485-86. Incorporated in
Bermuda and subsequently re-domiciled in Vermont, Middlesex
Assurance provides insurance coverage only to J&J and
J&J's risks in the United States. Ibid.
Middlesex Assurance can only conduct business in Vermont and
exclusively sells insurance coverage to J&J's
corporate risk management group. Id. at 486.
Headquartered in New Brunswick, J&J's corporate risk
management group is responsible for placing and servicing the
vast insurance programs that cover J&J, its subsidiaries,
and its affiliates. Ibid.
insurance perspective, Middlesex Assurance is a
"single-parent" or "pure" captive
insurance company. Ibid. A captive insurance company
is one that insures the liabilities of its owner, who is
typically its only shareholder and insured. Black's
Law Dictionary 926 (10th ed. 2010). A single parent or a
"pure" captive insurance company "insure[s]
only the risk of its parent." Captive Insurance
visited September 18, 2019).
consequences that flow from this classification form the
basis of the parties' dispute in the present appeal.
Specifically, this dispute arises as a result of statutory
amendments our State's Legislature enacted in response to
the Nonadmitted and Reinsurance Reform Act (NRRA), 15 U.S.C.
§ 8201 to § 8206. In relevant part, the NRRA
specified rules for the reporting, payment, and allocation of
IPT for nonadmitted insurance. 15 U.S.C. § 8201(a).
of background, there are two different insurances markets:
admitted and nonadmitted insurance or, as they are known in
New Jersey, authorized and unauthorized. Johnson &
Johnson, 30 N.J. Tax. at 495. An "authorized
insurer" is one who has a license to transact business
within a particular state whereas an "unauthorized
insurer" is one who does not. See 2 Julie Mix
McPeak, New Appleman on Insurance Law Library
Edition §§ 9.06, 9.09. Although an
unauthorized insurer does not have a license to transact
business in a given state, citizens have a constitutional
right to purchase insurance from the company of their
choosing. See Allgeyer v. Louisiana, 165 U.S. 578,
588 (1897). Therefore, unauthorized insurance companies can
still issue insurance policies to residents of states in
which they are not licensed under certain circumstances.
See, e.g. N.J.S.A. 17:22-6.42, -6.64.
Jersey, there are two main types of unauthorized insurance
markets: the surplus lines market and the self-procured
market. See N.J.S.A. 17:22-6.64. As the Tax Court
correctly stated in this case, these two markets "are
separate and distinct from each other." Johnson
& Johnson, 30 N.J. Tax at 502.
lines insurance involves New Jersey risks which insurance
companies authorized or admitted to do business in this State
have refused to cover by reason of the nature of the
risk." Railroad Roofing & Bldg. Supply Co. v.
Fin. Fire & Cas. Co., 85 N.J. 384, 389 (1981). The
surplus lines market involves insurance obtained from a
surplus line agent who is licensed to place coverage from a
surplus lines insurer. N.J.S.A. 17:22-6.41, -6.42, -6.45. It
is regulated by the Surplus Lines Law, N.J.S.A. 17:22-6.40 to
-6.67. That statutory scheme defines a surplus lines agent as
"an individual licensed as a surplus lines insurance
producer with surplus lines authority . . . to handle the
placement of insurance coverages on behalf of unauthorized
insurers." N.J.S.A. 17:22-6.41(a) (citation omitted). A
surplus lines insurer is "an unauthorized insurer in
which an insurance coverage is placed or may be placed under
[the] surplus lines law." N.J.S.A. 17:22-6.41(b). The
Surplus Lines Law outlines specific requirements for
eligibility as a surplus lines insurer, and explicitly does
not apply to "insurance coverages which are
[self-procured] as provided in [N.J.S.A. 17:22-6.64]."
self-procured insurance market consists of unauthorized
insurers directly providing coverage to the insured. N.J.S.A.
17:22-6.64. Put differently, this insurance is
"independently procured" and obtained without the
assistance of a surplus lines agent. N.J.S.A. 17:22-6.40,
-6.64. By definition then, insurance that is independently or
self-procured cannot be a surplus lines policy since
"such coverage . . . must be so placed through a
licensed New Jersey surplus lines agent." N.J.S.A.
Tax Court properly recognized, "[c]aptive insurance . .
. is a part of the self-procured insurance market."
Johnson & Johnson, 30 N.J. at 501. While an
insured may presumably use a captive insurance company to
independently procure surplus lines coverage through a
surplus lines agent that did not occur in the present case.
Instead, J&J used Middlesex Assurance for routine
insurance coverage that included but was not limited to,
"Worker Compensation, Automobile Liability, General
Liability, Product Liability, Excess Product Liability,
Executive Protection, Property, and Casualty coverages."
Id. at 485. None of the coverage that J&J
procured can be characterized as surplus lines insurance.
taxation of surplus lines insurance and self-procured
insurance coverages are also separate and distinct. Prior to
2011, the year in which the NRRA went into effect, New Jersey
collected IPT on all unauthorized insurance covering New
Jersey risks. Surplus lines insurance was taxed under the
authority of N.J.S.A. 17:22-6.59 (2010). That statute
required the insurance agent to "collect from the
insured" a "tax of 5% of all gross premiums"
charged by the insurer, and to remit this amount to the
State. Ibid. The statute further stated: "If a
surplus lines policy covers risks or exposures only partially
in this State, the tax payable shall be computed on the
portion of the premium which is properly allocable to the
risks or exposures located in this State."
other hand, the tax on insurance coverage that an insured
independently procures from a captive insurer located outside
the State is handled differently. This is so because, as the
Tax Court properly found, "the New Jersey Legislature
specifically and unambiguously determined that the
self-procurement statute [N.J.S.A. 17:22-6.64] was
not subject to the Surplus Lines Law."
Johnson & Johnson, 30 N.J. Tax at 501. Indeed,
N.J.S.A. 17:22-6.40 specifically states that the Surplus
Lines Law does not apply "to insurance coverages which
are independently procured as provided in" N.J.S.A.
17:22-6.64, which governs the taxation of the premiums paid
for these coverages. N.J.S.A. 17:22-6.40.
to the 2011 amendments at issue here, N.J.S.A. 17:22-6.64
(2010) required the insured to directly pay a 5% tax (the
IPT) on the gross premiums it paid to procure "excess
loss, catastrophe or other insurance" with an
unauthorized captive insurer. Johnson & Johnson,
30 N.J. Tax at 501. This tax had to be paid only if the
insurance provided coverage "upon a subject of insurance
resident, located or to be performed with this State, other
than insurance procured through a surplus lines agent
pursuant to" N.J.S.A. 17:22-6.59. N.J.S.A. 17:22-6.64
From 1960 until 2011, the premium receipts tax [paid by
insurance agents under N.J.S.A. 17:22-6.59 for surplus lines
insurance coverage] and the self-procurement tax [paid by the
insured under N.J.S.A. 17:22-6.64 for coverage obtained from
an unauthorized captive insurer] were calculated based on an
allocation of the insured's risks within the state. If an
insured had risks outside of New Jersey, the tax only applied
to that portion of the premium allocable to the risks in ...