Hearing Date Set for Alaska Air Surrounding Captive Insurance Policies

An administrative law judge at the Washington State Office of the Insurance Commissioner (OIC) has set a date for the next hearing on the challenge by Alaska Air Group, Inc., of the Washington State Insurance Department's attempt to impose hefty financial fines on the airline for not paying premium taxes on coverage its captive insurer provides to Alaska Air subsidiaries operating in Washington.

Julia Eisentrout, an administrative law judge at Washington's OIC, set hearing dates of July 13–17, 2020, and, if necessary, July 20–24 on the Alaska Air case.

This follows a preliminary hearing held last month before Judge Eisentrout.

The litigation follows Washington State's move to collect $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 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.

That action led Alaska Air to seek a preliminary hearing, which was held September 30, 2019, before Judge Eisentrout.

In that 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.

Alaska Air also said 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.

The issues to be discussed at the July 20 hearing include whether Alaska Air's captive "acted as [an] insurer and has been transacting insurance in Washington State without authorization from OIC as required," Judge Eisenhart wrote.

ASA Assurance, in turn, can raise arguments against fines and taxes that were outlined in its request for a hearing, Judge Eisenhart added.