Alaska Air Opposes Washington State Fines for Its Captive Coverages

Alaska Air Group Inc. is opposing Washington State Insurance Department's move to impose significant financial fines for not paying premium taxes on coverage its captive insurer provides to Alaska Air subsidiaries operating in Washington.

In all, Washington State is seeking $2.5 million from the Alaska Air captive, Hawaii-domiciled ASA Assurance Inc. That assessment includes $1.8 million in unpaid premium taxes, $228,354 in interest, $364,698 in penalties, and a $100,000 fine, according to a spokeswoman with the Washington State Office of the Insurance Commissioner (OIC).

"By transacting insurance in Washington State without holding a certificate of authority, issuing unauthorized insurance to Washington insureds without having it placed through a licensed surplus line broker, and failing to timely remit a 2 percent premium tax to the state of Washington for insurance on risks or exposures located in Washington State, ASA Assurance, Inc. violated" Washington State law, according to an order issued by Washington Insurance Commissioner Mike Kreidler.

Late last month, Alaska Air filed a request for a hearing, which will be held September 30 before Julia Eisentrout, an administrative law judge at the OIC, on the proposed assessment. In its request, Alaska Air noted that it set up ASA Assurance in 2016. In 2017, Alaska Air began transferring workers compensation liabilities from its subsidiaries to the captive.

In its request for a hearing, Alaska Air noted that the Washington OIC is authorized to regulate insurers that "solicit Washington customers to purchase insurance policies. But the OIC has neither the authority nor any legitimate interest in regulating Washington companies that insure their own risks. Alaska Air Group's use of a pure captive insurer like ASA is not a mechanism for risk sharing, as the risk is ultimately retained by the insured."

In addition, Alaska Air said that the US Supreme Court has ruled that states do not have the power to tax insurance or reinsurance contacts "entered into outside its jurisdiction."

If the OIC has authority to tax premiums paid to the captive, "it must apportion its tax to exclude premiums related to risks outside the state of Washington," Alaska Air said in its filing.