Opinion ID: 1205077
Heading Depth: 1
Heading Rank: 3

Heading: Are the title companies' payments to the insurers to compensate the insurers for claims the insurers have paid income to the insurers?

Text: The first question is whether the payments made by the title companies to the insurers to compensate the insurers are income to the insurers. In my view, when an insurer receives a payment from a title company, the insurer has received income within the meaning of the broad statutory concept all income. The insurers in their briefs treat the underlying transactions as if they were of labyrinthine complexity. They are not. What happens is this: A policyholder makes a claim under a title insurance policy. The insurer pays the claim. The title company then compensates the insurer for the total amount the insurer has just paid to the policyholder, up to the limit specified in the contract between the title company and the policyholder. There is no difference between payment or compensation received by an insurer when a title company pays it money under a contract and payment or compensation received by any business under a contract with any other business. Both are income. The payment the insurer receives is not a gift. It is consideration for services rendered. The insurer has provided a service to the title company  it has made insurance for the title company's title services available, and the title company benefits from this because it is then able to sell its services (searching title, etc.) in a package with insurance to the customer, who is the policyholder. In return for this service that the insurer provides to the title company, the title company assumes certain obligations. Among them is the obligation to compensate insurers for the claims insurers pay. In any other business context, there would be no question that payment for services rendered is included within gross income. Indeed, under 26 United States Code section 61(a)(2), gross income derived from business is specifically included within gross income, which, as noted, is itself within all income. The insurers contend that they receive no income when the title companies pay them for claims the insurers have paid. This contention might have merit if the insurers could somehow demonstrate that even though they had been paid, they received no accession to wealth. But they cannot do so. The Board of Equalization correctly points out in its brief that, as far as the record in this litigation shows, when an insurer pays a claim and then receives money from a title company, the money it receives is completely unrestricted. From the insurer's point of view, all dealings with the insurance policy are over when it pays the claim. The later payment from the title company to the insurer is made under a separate business contract between the insurer and the title company, and the payment received makes the insurer that much wealthier than it would have been had the payment never been made. The payment may be used for salaries to executives or dividends to shareholders, or for any other legal purpose. The insurer has complete dominion over such funds. It defies logic to suggest that when an insurer receives money from a title company with which it has a business relationship, its wealth is not thereby increased. Several of the plaintiff insurers suggest that the funds they receive from the title companies when they have paid claims are not income because those funds offset the claims the insurers have paid out to the policyholders. This argument, however, confuses the concept of income with that of profit. Profit is, of course, what remains after the expenses of doing business are deducted from the funds an enterprise receives. (See Nofziger v. Holman (1964) 61 Cal.2d 526, 528 [39 Cal. Rptr. 384, 393 P.2d 696].) California law distinguishes between income and profit in the taxation of insurers. For example, ocean marine insurers are not taxed on all income, as are title insurers; instead, they are taxed on their underwriting profit (Cal. Const., art. XIII, § 28, subd. (g)), which is measured in part by deducting losses paid out in claims (Rev. & Tax. Code, § 12073). If the drafters of section 28 intended that title insurers could deduct losses paid out in claims from the amount on which they were taxed, article XIII, section 28 would have used the concept of profit rather than the broad phrase all income in defining the sums on which title insurers are taxed. Therefore, as a matter of economic reality, when an insurer receives money from a title company under a contractual arrangement requiring the title company to compensate the insurer for claims the insurer has paid, the insurer receives income. Under article XIII, section 28 of the California Constitution, that income is taxable at a rate of 2.35 percent per year.