A case that potentially could jeopardize more than $1 billion of state special- and revolving-fund financing will be heard by the Hawai'i Supreme Court.

The court earlier this week scheduled oral arguments next month in a case filed by the Hawaii Insurers Council against the state.

The insurers filed the lawsuit in 2002, claiming the regulatory fees they were asked to pay amounted to an unconstitutional tax for several reasons, including the collection of more money than was needed.

About $3.5 million of this excess was transferred by the Legislature to the state's general fund instead of being refunded to the companies.

The insurers have already prevailed in state Circuit Court and the state Intermediate Court of Appeals. While deciding in the insurers' favor, at least one judge voiced concerns over the ruling's possible effect on other specially funded programs. Judge Corrine Watanabe noted earlier this decade the state had more than 200 special and revolving funds with cash balances of about $1.19 billion.

Watanabe's opinion said it is possible that other state funds with assessments might not qualify as having valid fees.

State Insurance Commissioner J.P. Schmidt said the hearing will allow the state to argue that the fees charged to insurers helps pay for regulation of the business, which in turn boosts public confidence in insurance products and the industry. He said there is a long history of states using fees to pay for regulation.

"Regulatory fees indirectly benefit those that pay it," Schmidt said. He said he hopes the Supreme Court clarifies case law that was used by lower courts in making their decisions, thus paving the way for continued use of the fee.

He said the case law in question, a state Supreme Court decision known as State v. Medeiros, didn't delve into the nature of regulatory fees far enough and, as a result, the lower courts concluded the fees being charged to insurers were a type of tax.

"Clearly, I don't believe the Supreme Court (in Medeiros) intended to say the state of Hawai'i can't have the same type of fees that every other state in the union has," Schmidt said.

The fees help pay for operation of Schmidt's office, which has an annual budget of about $9 million and employs 76 workers who provide analyses of insurance filings, perform research into the claims paying of insurers, and help regulate healthcare insurance fees.

He said this year it looks as if he'll need to ask insurers to fund about half of his office's budget this year.

Watanabe's opinion noted under the Medeiros case the entire assessment imposed on insurers is invalid, not just the portion that was transferred by the Legislature to the state's general fund.