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Johnson v. Director, Division of Taxation

Superior Court of New Jersey, Appellate Division

September 25, 2019

JOHNSON & JOHNSON, Plaintiff-Appellant,
v.
DIRECTOR, DIVISION OF TAXATION, and COMMISSIONER, DEPARTMENT OF BANKING AND INSURANCE, Defendants-Respondents.

          Submitted September 18, 2019

          On 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).

          Wilson Law Group, LLC, attorneys for appellant (Margaret C. Wilson and Beth F. Bressler, on the briefs).

          Gurbir S. Grewal, Attorney General, attorney for respondents (Melissa H. Raksa, Assistant Attorney General, of counsel; William B. Puskas, Jr., Deputy Attorney General, on the brief).

          Before Judges Fuentes, Haas and Mayer.

          OPINION

          HAAS, J.A.D.

         In this 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.

         The 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.

         In 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.

         From an 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 Companies, https://www.naic.org/cipr_topics/topic_captives.htm (last visited September 18, 2019).

         The tax 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).

         By way 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.

         In New 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.

         "Surplus 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]." N.J.S.A. 17:22-6.40.

         The 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. 17:22-6.42.

         As the 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.

         The 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."

         On the 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.

         Prior 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 (2010).

To summarize:
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 ...

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