Article XIII, section 28 of the California Constitution imposes a tax on (1) gross premium, (2) received by (3) an insurer. The majority imposes this tax on (1) losses (2) paid to (3) doctors and hospitals and the like. What went wrong?
I might join the majority if there were any evidence that the Mini-Met plan is just a bookkeeping trick by which Metropolitan intercepts 90 percent of the premiums at the source and, instead of running the money through its own books, causes it to be paid out directly to cover losses which Metropolitan would inevitably have incurred under the preMini-Met arrangement. This kind of tax evasion could have been attempted by setting the trigger-point at an unrealistically low figure so that—barring a series of medical miracles—the actuarial possibility that the employers would actually save money by not having to disburse funds up to the trigger-point was nil. The fact—not mentioned in the majority opinion—is exactly the opposite: the record shows that in many months actual payments were well below the trigger-point and that in 32 out of 42. policy years examined the total payments did not reach the trigger-point.1 Thus it cannot be contended that all the Mini-Met rider achieved was a fictitious reclassification of the first 90 percent of premium income as a deductible loss. Rather, the effect of the rider was just what it purported to be: it *663converted the pre-1967 full coverage policy into a genuine policy of excess insurance—quite similar to the deductible collision coverage most of us cany on our automobiles. If a motorist carries $100 deductible collision coverage and pays out $85 for a minor repair, no one can rationally claim that he is paying a premium, rather than a loss.2
It is a safe guess that if Metropolitan and the employers had started to do business under the Mini-Met rider, the board would never have attempted the impossible: to convert excess insurance into full coverage. It is only because Metropolitan and the employers, for perfectly legitimate business reasons, changed plans in a way which resulted in considerable premium savings, that the board developed fancy theories to recoup its losses in tax revenue.3 Yet all the evidence is to the effect, and the trial court expressly found, that “Mini-Met was not developed as a tax avoidance device. It was an excess insurance arrangement developed to effect, and did effect, substantial and bona fide changes in the financial, economic, contractual and legal relationships among Metropolitan, the employers and the employees from those existing under a full coverage insurance policy.” The court further found that the impetus for the change from full coverage to Mini-Met came from the employers who “developed an increased awareness of the importance of ‘cash-flow’ management and investment of corporate funds.” Some employers even considered ‘shifting to non-insurance. It was only when faced with this loss of business that Metropolitan reluctantly started to offer the so-called “Met-Cat” plan, Mini-Met’s predecessor. The trial court therefore concluded, after reiterating that Mini-Met was “not a tax avoidance scheme lacking in substance,” that “it was ‘compelled by business realities’ and ‘imbued with tax-independent considerations.’” While the business considerations which caused a genuine economic demand for a type of excess insurance such as Mini-Met are fairly set forth in the majority opinion, their significance becomes quickly lost in what I respectfully submit to be an irrelevant detour into the law of agency.
*664The basic fallacy of the majority opinion is revealed at its outset. It says that “[bjecause we conclude that under the [Mini-Met] arrangement the employer is a mere agent of Metropolitan for collection of premiums, not an independent insurer,[4] we attribute the entire cost of the group plan to Metropolitan’s gross premiums . . . .” (Italics added; ante, p. 652.) In support of its agency theory, the majority relies heavily on Elfstrom v. New York Life Ins. Co. (1967) 67 Cal.2d 503 [63 Cal.Rptr. 35, 432 P.2d 731], a case which in my view is not even remotely in point. That case held only that when an employer erroneously extends coverage to an employee who is not eligible for insurance, the insurer is bound by the employer’s mistake because “the employer is the agent of the insurer in performing the duties of administering group insurance policies” vis-a-vis the insured employees. (Id., at p. 512; accord, Bass v. John Hancock Mut. Life Ins. Co. (1974) 10 Cal.3d 792, 797-798 [112 Cal.Rptr. 195, 518 P.2d 1147]; Bareno v. Employers Life Ins. Co. (1972) 7 Cal.3d 875, 883 [103 Cal.Rptr. 865, 500 P.2d 889]; Amberg v. Bankers Life Co. (1971) 3 Cal.3d 973, 979 [92 Cal.Rptr. 273, 479 P.2d 633].) Elfstrom did not purport to hold that an employer is the agent of an insurer—as a matter of law—Tor all purposes, and it certainly did not decide that payments made by an employer to its employees’ health providers from its own funds in payment of its own contractual obligations should invariably be treated as gross premiums of an insurer which receives a different premium for covering a different risk. To say, as the majority does, that the employers in this case somehow “administered” Metropolitan’s policy—á la Elfstrom —by paying pretrigger-point losses assumes the point to be proven: that these payments were not what they appeared to be, namely the employers’ own losses, but payments to satisfy an obligation which Metropolitan had assumed by receiving a premium therefor, namely the payment made by the employers. The self-levitating nature of this argument is evident.
In contrast to the majority’s conclusion, the trial court found that “in making the medical benefit payments for which it was obligated, the employer was acting as principal, for its own account, and not as agent of Metropolitan . . . .” The record not only justifies but compels that finding. As noted in the majority opinion two employers paid benefits below the trigger-point without any assistance by Metropolitan. Actually, out of a total of about $33 million of payments in issue, these two employers accounted for *665over $24 million—about 73 percent! How payments made by those two employers to satisfy their own obligations toward their own employees can be tortured into acts which “fall within the ambit of ‘administration’ of a group insurance policy” {ante, p. 659) is simply beyond me.
Legally the situation is no different as far as the other 13 companies are concerned. It will be recalled that they placed funds into accounts on which Metropolitan was permitted to draw in payment of claims below the trigger-point—payments for which the employers were responsible. Testimony at the trial described the arrangement as follows: “Generally a special bank account is set up where the employer wants the Metropolitan to provide the claim service on his liability, claim service being actually paying the claims . . . and he sets up a special bank account so that we can draw a draft on his account for the payment of his benefit, for the payment of his liability.” (Italics added.)5 Naturally, where the insurance company has excess exposure for which it receives a premium, the cost of providing this claim service for losses below the excess is calculated into the premium, but the tax on that premium which Metropolitan concededly “received,” is not at issue here. What the majority fails to explain is how Metropolitan’s furnishing this type of claim service for funds which it has not, and never will, receive, justifies treating all of these funds of the employer as gross premiums received by Metropolitan. In any event, as to these 13 employers, it is obviously Metropolitan who is administering the employers’ funds, and not—as the majority apparently claims—vice versa. I simply cannot understand how putting money into a bank account and watching it dwindle amounts to administering Metropolitan’s policy.6
Having satisfied itself that the employers were agents of Metropolitan, the majority faces its biggest challenge—“the issue whether the pretrigger-point claims payments, although financed by the employers, should be included within the total amount on which Metropolitan must pay a gross-premiums tax.” (Ante, p. 659.) It then analyzes several cases such as Groves v. City of Los Angeles (1953) 40 Cal.2d 751 [256 P.2d 309] to establish that the gross premium may include certain charges such as attorneys fees (Ind. Indem. Exchange v. State Bd. of Equalization (1945) 26 Cal.2d 772 [161 Cal.Rptr. 222]), commissions (Groves, supra), or an “installment payment fee.” (Allstate Ins. Co. v. State Board of Equal. *666(1959) 169 Cal.App.2d 165, 168 [336 P.2d 961].) Then, taking off from a statement in Allstate that premium rates are based on the expected losses (“pure premium”) and expenses (“loading”), the majority jumps to the untenable conclusion that “[u]nder the Mini-Met arrangement, the trigger-point amount is analogous to the net premium under a standard arrangement. ” (Ante, p. 660.) In other words, the premium which the employers do not pay is really part of the net premium received by Metropolitan! Obviously this argument too simply assumes the result it strives to reach: that the employers are insured up to the trigger-point and that when they pay a pretrigger-point loss, they are really paying a premium.7
Even so, the majority is not out of the woods. After all the taxable event is the receipt of premiums by Metropolitan—as is recognized at the outset of the opinion by the statement that the court reverses because “the employer is a mere agent of Metropolitan for the collection of premiums . . . .” (Ante, p. 652; italics added.) So far all we have seen the employer do is pay out losses—either on its own account, as the trial court found, or on behalf of Metropolitan, as the majority asserts. Not one penny of premiums has so far been collected for pretrigger-point “coverage.”
The majority gets over this final hurdle by holding that the premium is collected by the employers when they receive the labor of the insured employees. “The labor of the employees is the true source of the benefits . . . .” (Ante, p. 661.) The only trouble with that theory is that the tax claimed by the board has nothing to do with the value of the labor rendered by the insureds. To the contrary, the board asserts that the losses paid are the measure of the tax liability. Obviously when one deals with a medical benefit plan, these should be in inverse proportion to the value of the labor rendered.
It is therefore submitted that the board’s effort to transform an excess policy into one that provides full coverage will not stand up. It remains to dispose of a couple of points made by the majority to assert by implication that the “symbiotic” relationship between Metropolitan and the employers can somehow make the legal realities disappear.
First, there is the point that if the 13 employers who did avail themselves of Metropolitan’s claims service failed to provide sufficient funds for *667pretrigger-point losses, Metropolitan was nevertheless obligated to advance money to pay for the losses, subject to reimbursement by the employers—a clean debtor-creditor relationship which by no means turns Metropolitan from a creditor into an insurer. The fact that an employer may become insolvent and leave Metropolitan holding the bag is a normal risk of doing business which was, presumably, taken into account in calculating the “loading” portion of the premium for the excess coverage, on which Metropolitan concedes that it was properly taxed. In any event, the argument has no application to the two employers who handled their own claims and whose payments comprised about 73 -percent of the $33 million total.
Second, the majority points to the fact that Metropolitan “determined the amount of all benefits to be paid in satisfaction of employee claims, both above and below the trigger-point, with the obligation to defend and the right to settle suits contesting rejection of claims.” (Ante, p. 657.) There is, of course, nothing unusual in that kind of arrangement. Metropolitan’s obligations under it are simply part of the “administrative services” which it rendered to the employers; its rights derive from the fact that it is, after all, an excess insurer and has a vital interest in making certain that the excess risk it insured is not prematurely triggered by payment of unjustified, uninsured losses. Metropolitan’s primary power to determine the extent of pretrigger-point losses is obviously subject to a covenant of good faith and fair dealing. (See Kaiser Foundation Hospitals v. North Star Reinsurance Corp. (1979) 90 Cal.App.3d 786, 792-793 [153 Cal.Rptr. 678]; cf. Commercial Union Assurance Companies v. Safeway Stores, Inc. (1980) 26 Cal.3d 912, 921 [164 Cal.Rptr. 709, 610 P.2d 1038].)
I would affirm.
Reynoso, J., and Barry-Deal, J.,* concurred.
Respondent’s petition for a rehearing was denied November 29, 1982. Richardson, J., and Newman, J., did not participate therein.
The majority is therefore quite unjustified in saying that “[f]or the purpose of calculating the gross premiums tax, we can discover no reasoned basis for distinguishing between the situation here presented and the former arrangement between Metropolitan and the employers.” (Ante, p. 657.) Is there no reasoned basis for distinguishing between payment for the actual cost of a small loss and payment of a premium for an actuarially anticipated greater loss?
“ ‘Premium’ in the law of insurance means the amount paid to the company for insurance.” (Allstate Ins. Co. v. State Board of Equal. (1959) 169 Cal.App.2d 165, 168 [336 P.2d 961].) As a former Attorney General said of an insured’s payment of the deductible portion of a loss: “Obviously this is not the price of any insurance and is in no sense a ‘premium.’ ” (48 Ops.Cal.Atty.Gen. 49, 53 (1966).)
The New York authorities were more generous. Part of the record before us is a letter opinion from the New York Attorney General, dated December 27, 1966. In reply to a request for an opinion concerning the effect of Tax Law section 187 on what eventually became the Mini-Met rider, it said: “In my opinion, the amount of benefits paid out by employers to employees are in no sense a ‘premium’ received by the insurer and are therefore not taxable to the insurer under § 187.”
The majority seems to suggest that unless the employers are “insurers” for pretrigger-point losses, Metropolitan necessarily assumes that role. I disagree. The employers are simply fulfilling their contractual obligations toward their employees. If, in doing so, they run afoul of an unspecified part of the Insurance Code or some other law, that is another lawsuit. It certainly does not turn funds disbursed by them into premiums received by Metropolitan.
Testimony also revealed that employers who have no insurance at all can “rent” the claim service of an insurance company on an “ASO”—administrative services only —basis.
The curious thing about the majority opinion is that it reaches its conclusion that “the employers are to be treated as agents of Metropolitan as a matter of law” just a few lines after correctly pointing out that the “function of the employers under the Mini-Met arrangement was extremely limited; ...” (Ante, p. 659.)
What about the premium savings in the 32 policy years when losses did not reach the trigger-points? Presumably the employers owe these funds to Metropolitan and, to be consistent, the board should claim that they are gross receipts. One can only speculate why it lacked the requisite chutzpah.
Assigned by the Chairperson of the Judicial Council.