American Mfrs. Mut. Ins. Co. v. Commissioner of Ins.

• Decision Date: 05 January 1978
• Citation: 374 Mass. 181,372 N.E.2d 520
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 520

372 N.E.2d 520

374 Mass. 181

AMERICAN MANUFACTURERS MUTUAL INSURANCE COMPANY et al. v. COMMISSIONER OF INSURANCE.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued Oct. 7, 1977.

Decided Jan. 5, 1978.

Acheson H. Callaghan, Jr., Boston (Jeffrey Swope, Boston, with him), for plaintiffs.

S. Stephen Rosenfeld, Asst. Atty. Gen. (Mitchell J. Sikora, Jr. and Terry Jean Seligmann, Asst. Attys. Gen., with him), for defendant.

John G. Ryan, Hingham, for Metropolitan Property and Liability Ins. Co., intervener, submitted a brief.

Before HENNESSEY, C. J., and QUIRICO, KAPLAN and ABRAMS, JJ.

HENNESSEY, Chief Justice.

On July 21, 1977, the plaintiff motor vehicle insurance carriers filed a complaint in the Supreme Judicial Court for the county of Suffolk seeking declaratory and injunctive relief from the operation of St.1977, c. 365. The contested statute requires the plaintiffs, and all other insurers in Massachusetts, to rewrite certain automobile insurance contracts issued in 1977 retroactive to January 1, 1977, at reduced rates. The plaintiffs contend that the statute, in so far as it has retroactive effect, is unconstitutional. The plaintiffs' motion for a preliminary injunction was heard before a single justice on August 1, 1977, and was denied, with a brief memorandum of opinion, on August 3, 1977. Thereafter, a stipulation as to the facts was filed by the parties on September 16, 1977, and the single justice reserved and reported the case to the full court.

Chapter 365 contains three distinct rebate provisions. Section 4 requires a reduction in the premiums charged on policies reinsured in the Massachusetts Motor Vehicle Reinsurance Facility (the Facility rebate). Section 5, cl. 1, requires reductions in the premiums charged policyholders in Chelsea and Revere (the Chelsea-Revere rebate). Section 5, cl. 2, requires a reduction in the premium of any person whose premium increased more than 25% In 1977 (the 25% Cap).

Additionally, § 6 of c. 365 requires any policy affected by the act to be "amended by endorsement retroactively as of its effective date to the revised rates and premiums" required by the act. Sections 4 and 5 prohibit companies from making any other adjustment in the rates, and § 6 provides that "(a)ny premium loss suffered by an insurer as a result of its compliance with the provisions of this act shall not be used as a factor in calculating future motor vehicle insurance rates for said insurer."

The defendant Commissioner of Insurance (Commissioner) estimates that, as a result of the operation of c. 365, the total amount to be credited by all companies to policyholders is between $45,000,000 and $55,000,000. The plaintiff companies (who do not include "all companies") estimated that their 1977 premium revenues are $360,000,000 and that the approximate amount of premiums to be refunded under the act is $1,100,000 for Chelsea and Revere policyholders, $9,000,000 for the Facility insureds, and $6,200,000 for the 25% Cap. The plaintiffs thus argue, first, that c. 365 deprives the companies of "vested" property interests in premium rates in violation of the due process clauses of the Fourteenth Amendment and of arts. 1, 10 and 12 of the Declaration of Rights of the Massachusetts Constitution; second, that the statute impairs the obligation of contracts between company and policyholder in violation of art. 1, § 10, of the United States Constitution; and third, that the statute violates art. 7 of the Declaration of Rights by conferring special benefits on insured residents in certain cities and towns.

For the reasons discussed below, we conclude that c. 365 is "reasonable," since the Legislature could rationally have concluded that the competitive rate setting system under G.L. c. 175E had failed and had resulted in serious financial difficulties for many policyholders. Therefore, we hold that c. 365 is constitutional and order that a judgment to that effect be entered in the county court.

All parties agree that the purpose and effect of the challenged statute may best be viewed in the context of prior history of automobile insurance rate regulation in Massachusetts, and in light of the steps taken by insurance carriers to obtain approval of 1977 rates several months prior to the imposition of rebate requirements. We therefore summarize the pertinent facts. ¹

PRIOR HISTORY OF RATE REGULATION IN MASSACHUSETTS.

Until 1969, most automobile insurance rates were calculated and filed by insurers or rating bureaus and were allowed to go into effect immediately unless the Commissioner, after a hearing, disapproved. The Commissioner himself fixed rates only for certain basic compulsory and related coverages.

From 1969 to 1976, the Commissioner's authority to "fix and establish" rates for automobile insurance coverage was expanded, until by 1976 he set rates for nearly all types of automobile insurance coverage. In 1975, however, the Legislature decided on a very limited basis to permit companies again to file their own competitive rates for certain optional coverages, subject to stringent antitrust provisions and to the Commissioner's power to disapprove such rates after a hearing. These provisions were embodied in a new c. 175E, which was inserted in the General Laws, by St.1975, c. 707, § 6.

In 1976 the Legislature totally eliminated the system of commissioner-fixed rates and made all automobile insurance coverages subject to c. 175E's competitive premium rating system.

The statute did not, however, eliminate the Commissioner's role in the ratemaking process. All rates were required to be filed forty-five days before their effective date for review by the Commissioner. G.L. c. 175E, § 7. Further, pursuant to the legislative mandate that the rates were not to be either "excessive or inadequate" or "unfairly discriminatory," G.L. c. 175E, § 4, the Commissioner was empowered to take the following actions.

First, the Commissioner could at any time suspend the operation of competitive rating for any territory or for any class of insurance if, after a hearing, he found competition to be either (i) insufficient to assure that rates would not be excessive, or (ii) so conducted as to be destructive of competition or detrimental to the solvency of insurers. St.1976, c. 266, § 19, codified as G.L. c. 175E, § 5. In place of the defective rate, the Commissioner could fix and establish reasonable and nondiscriminatory premium charges using his traditional authority to do so under G.L. c. 175, § 113B, but without regard to the calendar dates in § 113B. St.1976, c. 266, § 19, codified as G.L. c. 175E, § 5. Second, and also at any time during the rate period, the Commissioner could determine by hearing that a premium rate violated competitive standards or public policy, disapprove the rate, and order a curative premium adjustment. St.1976, c. 266, § 19, codified as G.L. c. 175E, § 8.

The Commissioner undertook implementation of the competitive system pursuant to his statutory authority under c. 175E. During 1976, he drafted an entirely new policy form for all coverages. The Commissioner additionally established revised rating territories which were to be used by all companies as the basis for their computation of rates. ² Further, the Commissioner promulgated regulations governing the form and content of filings, and prescribing a formula for the calculation of territorial "relativities." ³

RATE FILINGS FOR THE 1977 CALENDAR YEAR.

Rate filings were submitted to the State Rating Bureau in November, 1976, by twenty-two large companies or company groups and by the Massachusetts Automobile Rating and Accident Prevention Bureau (Bureau) on behalf of eighty-nine small companies. After reviewing each case, the State Rating Bureau challenged filings of the Bureau and of eight individual insurance companies. Rates for these companies were reduced accordingly. Subsequently, all rates, either as originally made or as reduced, were allowed by the Commissioner to go into effect.

The State Rating Bureau also received a filing from the Massachusetts Motor Vehicle Reinsurance Facility (Facility), an organization created by G.L. c. 175, § 113H, for implementation of an assigned risk plan. The filing came under a new Facility Plan of Operation for 1977 (Plan), and proposed that (1) those insured under "company reinsured policies" ⁴ pay the voluntary market rates charged by their company; and that (2) those insured by the Facility under "servicing carrier policies" ⁵ pay rates at the 80th percentile of the voluntary market rates of all companies.

Under the 1977 Plan, the Facility Governing Committee authorized any broker or agent automatically to cede a policy to the Facility, to be carried by the Facility as a "servicing carrier policy." From experience under previous plans, the Commissioner assumed that within the competitive rating system, these "servicing carrier policies" written at 80th percentile rates would be used only as a market of last resort for undesirable new business. The effect of the 1977 Plan, however, was to increase greatly the number of servicing carrier policies, such that approximately 35% of the insurance market was placed in this category. The filing included no information concerning the number of insureds likely to fall into each of these two classes. The Commissioner permitted the Facility filing to become effective January 1, 1977.

The combined effect of the territorial reassignments, made by the Commissioner, the territorial relativities applied by the companies, and broad expansion by the Facility of servicing carrier policies written at the 80th percentile, resulted in rates which, to many policyholders, were unexpectedly and unprecedentedly high. Therefore, the impact of the 1977 premium charges spurred a variety of remedial efforts. The Division of Insurance, for example, conducted investigations into Facility cession practices and into the extent of competition in...