Gathering Places


Friday, January 25, 2002

Dissolving hurricane fund
would violate federal,
state constitutions

The Hawaii Hurricane Relief Fund should not be transferred to the state's general fund because the fund does not belong to the state of Hawaii.

Legislature 2002 Instead, the fund belongs to three parties: Those who purchased hurricane insurance; those who paid fees to record a mortgage; and insurance companies required to pay into the fund. Together, they own the fund and are the fund's beneficiaries.

The fund has a board of directors that is its trustee. As trustee, the board has several legal obligations to the beneficiaries, including the duty to protect the fund for the benefit of the beneficiaries.

Unfortunately, it appears that the board has breached its legal obligations. Under its plan of operation, the board is required to maintain records of the fund and to establish procedures to collect premiums and return unearned premiums where applicable.

Despite this requirement, the board, the insurance commissioner and the director of the Department of Commerce and Consumer Affairs have stated that the board has not kept a record of who purchased hurricane insurance, and does not know from whom it collected mortgage recordation fees.

Thus, the board has breached its duty to the beneficiaries and may be legally liable for this breach. The board's liability will increase dramatically if it allows the fund to be transferred to the state's general fund.

In addition, there are several constitutional issues triggered by the fund's governing statute, Hawaii Revised Statute Chapter 431P. The statute authorizes the board to transfer the fund, upon dissolution, to the general fund of the state of Hawaii, or to the insurance companies that paid into the fund. However, this violates the federal and state constitutions in several ways.

First, it denies the beneficiaries their right to due process. The board is not required to notify the beneficiaries in advance of the transfer. Nor are the beneficiaries entitled to a hearing to contest the transfer.

Second, transferring the fund is a "taking" of private property by the government for a public purpose. However, there is no provision to provide a means to fairly compensate the beneficiaries for that taking.

Third, the beneficiaries are denied the equal protection of the law. Transferring any portion of the fund to the insurance companies, and not to the entire group of beneficiaries, treats the insurers more favorably under the law. If the fund is transferred to the general fund, the beneficiaries are treated unfairly from the rest of the people of Hawaii who were not required to pay into the fund.

Finally, the statute violates the constitution of Hawaii because it delegates to the board the state's exclusive taxing power. Transferring any part of the fund to the general fund means that monies from the fund will be mixed with state tax revenues. Thus, the fund itself becomes a tax and the board is no longer a fiduciary protecting the interests of the beneficiaries, but an entity that taxes the beneficiaries instead.

So, transferring the fund to the state's general fund or to select beneficiaries would set off a host of legal issues that cannot be ignored. It appears that the board is already liable for failing to keep proper records of the fund's transactions with and between the beneficiaries.

Regrettably, it looks like Hawaii's taxpayers may once again be on the hook for yet another well-intended but mismanaged state-administered program.

Sen. Sam Slom and Rep. Joe Gomes are
Republican members of the Legislature.

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