Title Insurance. Co. v. State Board of Equalization

We granted review to decide whether title insurers may be taxed on claims paid by underwritten title companies pursuant to underwriting agreements between the two. We conclude that they may not be so taxed. Additionally, we find that the State Board of Equalization failed to properly raise the defense that the title insurers should have been taxed on the total premiums paid by the insureds to the underwritten title companies. Therefore, we do not reach the premiums issue. Accordingly, we reverse the judgment of the Court of Appeal.

*720 I. Stipulated Facts

These consolidated actions are for refunds of taxes levied against title insurers. The refund actions were submitted for decision on the basis of a written stipulation of facts. We summarize the stipulated facts below.

Plaintiffs are seven corporations licensed to do business in California as title insurers. The insurers issue all or some of their title policies through underwritten title companies (sometimes referred to hereafter as title companies). Pursuant to a written underwriting agreement with the title insurer, to which those seeking title insurance are not a party, the underwritten title company conducts a…

The question presented in this case is whether a title insurance company (insurer) that issues a policy of title insurance receives taxable income when an underwritten title company with which the insurer has a separate contractual arrangement pays a claim against the insurer by a policyholder on behalf of the insurer, or compensates the insurer for a claim that the insurer has paid. Looking beyond form to substance, I would hold that under these circumstances the insurer has received income, and is therefore subject to taxation under the California Constitution. Accordingly, I respectfully dissent.

Background

The seven plaintiff insurers each issue policies through underwritten title companies that act as their agents. The relationships between the insurers *734 and the title companies are set forth in separate underwriting agreements that are concededly not policies of insurance. Under these agreements, the title companies conduct title searches, prepare title reports, issue the title insurance policies to the policyholders using forms prepared by the insurers, determine the premiums from schedules supplied by the insurers, and collect premiums. The underwriting agreements…

We granted review to decide whether title insurers may be taxed on claims paid by underwritten title companies pursuant to underwriting agreements between the two. We conclude that they may not be so taxed. Additionally, we find that the State Board of Equalization failed to properly raise the defense that the title insurers should have been taxed on the total premiums paid by the insureds to the underwritten title companies. Therefore, we do not reach the premiums issue. Accordingly, we reverse the judgment of the Court of Appeal.

These consolidated actions are for refunds of taxes levied against title insurers. The refund actions were submitted for decision on the basis of a written stipulation of facts. We summarize the stipulated facts below.

Plaintiffs are seven corporations licensed to do business in California as title insurers. The insurers issue all or some of their title policies through underwritten title companies (sometimes referred to hereafter as title companies). Pursuant to a written underwriting agreement with the title insurer, to which those seeking title insurance are not a party, the underwritten title company conducts a title search…