Arbella Mut. Ins. v. Commissioner of Ins.

• Citation: 921 N.E.2d 537,456 Mass. 66
• Decision Date: 16 February 2010
• Docket Number: SJC-10511
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: ARBELLA MUTUAL INSURANCE COMPANY & another<SMALL><SUP>1</SUP></SMALL> v. COMMISSIONER OF INSURANCE.

921 N.E.2d 537

456 Mass. 66

ARBELLA MUTUAL INSURANCE COMPANY & another¹ v. COMMISSIONER OF INSURANCE.

SJC-10511

Supreme Judicial Court of Massachusetts, Suffolk.

Argued October 8, 2009.

Decided February 16, 2010.

Roberta R. Fitzpatrick (Laurence A. Schoen, Boston, with her) for Arbella Mutual Insurance Company.

Dean Richlin, Boston (Pat A. Cerundolo with him) for Massachusetts Association of Insurance Agents.

Thomas A. Barnico, Assistant Attorney General (Elisabeth Ann Ditomassi with him) for Commissioner of Insurance.

Peter S. Rice & Robert M. Shaw, Boston, for Safety Insurance Company, amicus curiae, submitted a brief.

Present: MARSHALL, C.J., IRELAND, SPINA, COWIN, CORDY, BOTSFORD, & GANTS, JJ.

CORDY, J.

Pursuant to G.L. c. 175, § 113H (E), plaintiffs Arbella Mutual Insurance Company (Arbella) and Massachusetts Association of Insurance Agents² (MAIA) challenge several rules promulgated by the Commissioner of Insurance (commissioner). The rules relate to the administration of the Massachusetts Automobile Insurance Plan (MAIP), the system by which high-risk drivers in Massachusetts obtain private automobile insurance policies. The parties filed cross motions for judgment on the pleadings and on the administrative record, and a judge in the Superior Court reported the case without decision. We granted the plaintiffs' application for direct appellate review. We now uphold the decision of the commissioner to promulgate MAIP Rule 30.A (Count I), regulating the allocation of policies issued to high-risk drivers to newly writing companies; MAIP Rule 36 (Count II), regulating the assignment of policies issued to high-risk drivers by one insurer to another; and MAIP Rule 30.C (Count III), regulating the payment of insurance commissions to independent insurance agents after an insurer chooses to insure a high-risk driver outside MAIP.³

1. Background.⁴ Massachusetts requires all drivers to obtain automobile insurance. G.L. c. 90, § 34J. However, some drivers are unable to do so in the voluntary market because insurers view them as a high risk. Thus, Massachusetts law requires the commissioner and a governing committee made up of insurance industry representatives (CAR governing committee) to promulgate and administer a system through which high-risk drivers can obtain insurance. See G.L. c. 175, § 113H. See also Commerce Ins. Co. v. Commissioner of Ins., 447 Mass. 478, 479, 852 N.E.2d 1061 (2006) (Commerce). The market for such policies is variously described as "residual," "involuntary," or "high-risk," and we use the phrases interchangeably. An insurance policy assigned for coverage through this market is called an "assigned risk policy."

Statutory law requires the creation of a residual market system, but it does not specify the exact form that it must take. See G.L. c. 175, § 113H; Commerce, supra at 482, 852 N.E.2d 1061. One of the central features of any such plan is how the losses arising from policies issued to high-risk drivers are shared among insurers. Beginning in 1973, Massachusetts operated under a "reinsurance pool" in which insurers agreed to write policies for high-risk drivers on request, but would then cede the premiums, losses, and expenses generated by that risk to a central pool. This was known as the Massachusetts Motor Vehicle Reinsurance Facility. See CAR Reform: Shaping the Residual Market for the 1990's, at 19 (Sept 1989). Losses arising from the pool were shared among all insurers based on their respective share of the voluntary private automobile insurance market. See id. See also Commerce, supra at 482, 485, 852 N.E.2d 1061. In 1983, the Legislature amended the underlying statute, G.L. c. 175, § 113H, to give more flexibility to the commissioner and the CAR governing committee in designing the residual market system. See St.1983, c. 241, § 17. See Commerce, supra at 485-486, 852 N.E.2d 1061. That led to the creation of a new reinsurance facility, the Commonwealth Automobile Reinsurers (CAR). See Commerce, supra at 482, 852 N.E.2d 1061. Under CAR, insurers continued to cede to a central pool the premiums, losses, and expenses from policies issued to high-risk drivers. Id.

In 2004, the commissioner approved a major overhaul to this system, ordering a transition from a reinsurance pool to an "assigned risk plan."⁵ Id. at 479, 852 N.E.2d 1061. Under an assigned risk plan, an insurer is assigned policies issued to high-risk drivers in proportion to the insurer's voluntary market share. The insurer assigned to service such a policy must absorb the losses from that policy itself; there is no central pool to which to cede the policy. Id. at 482, 852 N.E.2d 1061. The assigned risk plan adopted by the commissioner is known as MAIP.⁶

We upheld the commissioner's authority to transition to MAIP in the Commerce case, after several insurance companies, including Arbella, contested her decision. The present controversy concerns several of the rules adopted to facilitate the operation of MAIP.⁷ a. Challenge by MAIA to MAIP Rule 30.C. On September 19, 2007, the CAR governing committee voted to amend MAIP Rule 30.C. That rule establishes a process by which an insurer may opt to insure an assigned risk on a voluntary basis by moving it from its involuntary MAIP portfolio to its voluntary portfolio. The CAR governing committee's proposed amendment to the rule would have required insurers who opt to insure an assigned risk voluntarily to continue to pay a commission to the agent who submitted the application to MAIP. On October 19, 2007, the commissioner disapproved the proposed amendment and scheduled a hearing regarding her decision. On January 2, 2008, after the hearing, the commissioner issued a decision and order regarding the amendment, essentially adopting it with a "sunset" date of April 1, 2011, at which time insurers would no longer have to pay commissions on assigned risks they opt to insure voluntarily.

MAIA challenges MAIP Rule 30.C, as adopted by the commissioner, on the grounds that it violates two statutory provisions. First, MAIA objects to the rule insofar as it terminates in 2011 an insurer's obligation to pay a commission to the agent designated by the policyholder as the policyholder's representative. MAIA argues that G.L. c. 175, § 113I, requires that a commission continue to be paid. Second, MAIA contends that the rule violates G.L. c. 175, § 162F, because it allows insurers to use insurance policy data to solicit voluntary renewals. MAIA asserts that § 162F vests ownership and an exclusive right to use that information in agents, not insurers.

b. Challenge by Arbella to MAIP Rules 30.A and 36. On November 15, 2007, the CAR governing committee voted to amend MAIP Rule 22 and MAIP Rule 29 to add a definition of a "newly writing company," that is, a new entrant to the Massachusetts insurance market. The amendments would have caused such companies to begin receiving assigned risks immediately on their entry into the insurance market. The CAR governing committee submitted the proposed amendments to the commissioner for approval on January 31, 2008. In response, on February 6, 2008, the commissioner disapproved the proposed amendments and, pursuant to her authority under Article X of the CAR Plan of Operation, promulgated emergency rules to amend MAIP Rules 21 through 24, and MAIP Rules 26 through 38. A hearing was held on April 10, 2008, and on May 6, 2008, the commissioner approved and adopted those rules.⁸

Arbella challenges MAIP Rule 30.A, which delays the allocation of assigned risks to newly writing companies for a period of two years after their entry into the Massachusetts insurance market. Arbella argues that the commissioner exceeded her authority under G.L. c. 175, § 113H (A), by establishing a residual market system that does not include newly writing companies for two years. Alternatively, Arbella argues that even if MAIP Rule 30.A does not offend the substantive provisions of G.L. c. 175, § 113H (A), the rule should still be invalidated because the commissioner's decision promulgating it was arbitrary and capricious. Finally, Arbella contends that the commissioner did not follow the proper procedure when she disapproved the CAR governing committee's proposed amendments to MAIP Rule 22 and MAIP Rule 29 and, thus, that the proposed amendments effectively were promulgated.

Arbella also challenges MAIP Rule 36, which regulates agreements between insurers known as limited assignment distribution agreements (LADAs). A LADA is an agreement by which one insurer assigns for servicing all of its assigned risk policies under MAIP to another insurer for a fee. Arbella argues that MAIP Rule 36 harms consumers because high-risk drivers whose policies are assigned under a LADA will face higher rates from the assignee insurer than they would from the assignor insurer. This harm, Arbella asserts, is in direct violation of G.L. c. 175, § 113H (D), fifth par. (the so-called Lane-Bolling Amendment).⁹ Arbella also complains that large insurers such as itself are treated differently from smaller insurers.

2. Discussion. Any ruling, order, or decision of the commissioner is subject to review pursuant to G.L. c. 175, § 113H. See G.L. c. 175, § 113H (E), eleventh par.; Trust Ins. Co. v. Commissioner of Ins. (No. 1), 48 Mass.App.Ct. 617, 625, 724 N.E.2d 710 (2000). We begin by considering Arbella's challenge to MAIP Rule 30.A, including whether the commissioner provided adequate notice when she disapproved rules proposed by the CAR governing committee. We then turn to MAIP Rule 36. Finally, we consider MAIA's challenge to MAIP Rule 30.C.

a. MAIP Rule 30.A: allocation of assigned risks to newly writing companies. i. The commissioner's authority under G.L. c. 175, § 113H. It is undisputed that under MAIP Rule 30.A, as promulgated by the commissioner, newly writing companies are not assigned to service policies issued to high-risk drivers until such companies have been active in...