Appeals Court Rules Against State of Hawaii

An appeals court has ruled that the fees the state of Hawaii charged insurance companies were unconstitutional and amounted to an illegal tax.

That’s because the assessments were in excess of the “cost of the services rendered” and used to cover unrelated expenses, according to a ruling by the state Intermediate Court of Appeals.

The money was supposed to go into the state’s compliance resolution fund in the state Insurance Division. Instead, some of it was diverted to the state general fund.

“It appears a substantial amount of the assessments went to … covering the general overhead of not only the Insurance Division, but the Department of Commerce and Consumer Affairs and the Budget and Finance Department,” the court noted.

Senate President Colleen Hanabusa said the decision raises concerns about other moneys collected from assessments or user fees and set aside for a particular purpose.

She said legislators dip into such funds to meet other expenses, and the recent ruling could limit their ability to do that.

“This decision will have major consequences,” said Hanabusa, D-Nanakuli-Makua.

The court said if the state had returned the excess money it charged insurance companies, it would have been in a better position to argue the assessments were valid taxes.

The ruling stems from a 2000 lawsuit filed against the state by the Hawaii Insurers Council, which protested when it was charged $2 million to pay for the state-run Insurance Regulation Fund.

State Insurance Commissioner J.P. Schmidt said the court’s ruling was “clearly wrongly decided.”

“If I am not able to assess insurance companies, the Insurance Division will run out of money in January,” he said.

But Rep. Bob Herkes, D-Volcano-Kainaliu, questioned the division’s use of the funds.

“If they are to assess fees, it should be for what it costs to operate the department,” said Herkes, chairman of the House Consumer Protection Committee.