Aetna Life Insurance v. State Board of Equalization

Appellant Aetna Life Insurance Company (Aetna) paid $18.4 million in disputed taxes and sued to recover this sum, plus interest. The trial court entered judgment for respondent State Board of Equalization (the Board), from which Aetna appeals, contending that it was unlawfully taxed on premiums it never received.

I. Facts

Aetna is a Connecticut corporation doing business in California. In the tax years 1980 through 1984, it paid $18.4 million in taxes, plus interest, on its “Split Funded Group Plan” (SFGP), which is a group health care plan. Under this plan, employee health care claims are paid from employers’ funds up to a set liability limit or trigger-point, beyond which Aetna becomes liable for payment of claims. While some insurers set the trigger-point at 100 percent of the actuarially expected level of claims, Aetna’s trigger-point was higher—from 107 percent to 115 percent of the expected level of claims. The employers—not Aetna—controlled the funds from which claims up to the trigger-point were paid. Aetna was responsible for all claims above the trigger-point.

The plan descriptions explained that Aetna was not obligated to pay claims up to the trigger-point…