Alaska Air Group Inc. is challenging Washington state Insurance Commissioner Mike Kreidler’s efforts to impose fines for unpaid premium taxes related to its captive as the airline faces the threatened imposition of $2.5 million in total costs.

Mr. Kreidler has been engaged in an initiative to allow captives that he believes have unlawfully insured any risk in the state in the past 15 years to pay a substantially reduced fine and premium tax penalty for self-reporting the activity.

The Seattle, Washington-based airline, which has a Hawaii-domiciled captive called ASA Assurance Inc., filed a demand for hearing with the insurance commissioner’s office on Aug. 30 regarding the commissioner’s expressed intent to impose premium taxes, fines and penalties on its captive and issue a cease-and-desist order. 

“We haven’t officially served ASA Assurance with an order, but we have been in conversations with them based on their self-reporting to us as a captive in January 2019,” a spokeswoman for the insurance commissioner said via email.

The breakdown is $1.8 million in unpaid premium taxes, $228,354 in interest, $364,698 in penalties and a $100,000 fine, according to the spokeswoman. 

Alaska Airlines created its captive in 2016 and transferred workers compensation liabilities from the balance sheets of its operating subsidiaries into the captive. In 2017, its subsidiaries moved legacy workers compensation liabilities to the captive via a loss portfolio transfer, with the captive reinsuring via transfer more than $26 million in potential liabilities from 2000 to 2016.

Alaska Airlines’ demand for a hearing raises four issues: whether the commissioner has the authority to regulate self insurance, whether ASA Assurance is engaged in the business of making contracts for insurance and therefore covered by the state’s insurance code’s definition of an insurer, whether ASA Assurance is within the scope of the commissioner’s authority under the McCarran-Ferguson Act, and whether the commissioner has the authority to impose premium taxes related to risks insured outside of the state.

The office of the insurance commissioner “is authorized to regulate insurance companies that solicit Washington customers to purchase insurance policies,” the airline stated in the demand for hearing. “But the OIC has neither authority to regulate 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.”

ASA is not engaged in the business of making contracts of insurance, the airline stated. “Its sole business is to insure Alaska Air Group and its subsidiaries. ASA is not, therefore, an ‘insurer’ under Washington law.”

In reference to the McCarran-Ferguson Act, which exempts the business of insurance from most federal regulation, the airline stated that any contracts of insurance issued by ASA were entered into outside of the state of Washington.

“That Alaska Air Group is domiciled in Washington does not disqualify it from the protection of the interstate commerce clause or of the Supreme Court holdings that the McCarran-Ferguson Act meant to preserve,” the airline stated.

If the insurance commissioner has any power to tax premiums paid to the captive, it must apportion its tax to exclude premiums related to risks located outside of the state of Washington, according to the airline.

Alaska Airlines did not immediately respond to a request for comment.

The self-reporting initiative, launched in December, followed a settlement with Microsoft Corp. over unpaid premium taxes for its out-of-state captive. In May 2018, Mr. Kreidler’s office issued a cease-and-desist order to Microsoft’s Arizona-based captive insurer and a notice that it intended to collect unpaid premium taxes. In August 2018, the Redmond, Washington-based software giant agreed to pay $573,905 in unpaid premium taxes and $302,915 in interest and penalties, and Mr. Kreidler rescinded the order to Microsoft’s captive Cypress Insurance Co. of Phoenix to stop transacting insurance without a license and pay tax on its written premiums.