Nonprofits’ Insurance Alliance of California v. United States

Insurance markets were subject to fluctuations. During so-called soft markets, rates were low enough that nonprofit organizations could purchase liability insurance from commercial insurers. During so-called hard markets, rates were often too high for nonprofits to afford commercial insurance, casting doubt on some nonprofits’ abilities to continue operating. California responded to these fluctuations by allowing nonprofits to form group-insurance collectives, which operated under more favorable regulatory regimes than ordinary insurance companies. A collection of health and human services tax-exempt charities created a group self-insurance organization called Nonprofits’ Insurance Alliance of California (alliance) (plaintiff). Alliance members paid a one-time subscription fee and regular premiums. The alliance also negotiated loans from charitable foundations to subsidize its reinsurance compliance costs under arguably more favorable terms than would have been available from commercial lenders. Over three years, the alliance’s rates granted its members subsidies of 53, 35, and 22 percent, respectively, relative to for-profit commercial insurers. The alliance applied to the Internal Revenue Service (IRS) (defendant) for tax-exempt status. The IRS denied the application. The alliance challenged the IRS’s determination by seeking a declaratory judgment in the Federal Court of Claims.