Evanston Ins. Co., Inc. v. Merin
| Decision Date | 19 November 1984 |
| Docket Number | Civ. A. No. 84-3743. |
| Citation | 598 F. Supp. 1290 |
| Parties | EVANSTON INSURANCE COMPANY, INC., Appalachian Insurance Co., Risk & Insurance Management Society, and Donald A. Brody, Plaintiffs, v. Kenneth D. MERIN, New Jersey Property-Liability Insurance Guaranty Association, and Thomas H. Kean, Defendants. |
| Court | U.S. District Court — District of New Jersey |
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Holzapfel, Perkins & Killy, William R. Holzapfel, Cranford, N.J., LeBoeuf, Lamb, Leiby & MacRae, Cecilia Kempler, New York City, for plaintiffs.
Irwin I. Kimmelman, Atty. Gen. of N.J., John J. Hayden, Deputy Atty. Gen., Trenton, N.J., for defendants Thomas H. Kean and Kenneth D. Merin.
Stryker, Tams & Dill, Richard R. Spencer, Jr., and William Heller, Newark, N.J., for defendant New Jersey Property-Liability Insurance Guaranty Association.
Kroll, Pomerantz & Cameron, Sol Kroll, New York City, Haskins, Hack, Piro & O'Day, John C. Lane, West Orange, N.J., for amicus curiae The Institute of London Underwriters.
The plaintiffs in this matter challenge the right of the State of New Jersey to impose fees upon them for issuing coverage insuring persons or property within the state. Primarily plaintiffs contest the constitutionality of the statute here in question on the ground that surplus lines insurance companies do not, indeed are not permitted to, do business in this state. All business of this nature must be conducted through authorized surplus lines brokers, and plaintiffs contend that they have no presence in this state which properly subjects them to the fees being exacted by the state.
It is undisputed that the subject legislation was enacted as the result of the insolvency of a surplus lines carrier. In order to protect against such a reoccurrence the challenged legislation was enacted so as to provide a ready reserve fund to meet such a contingency.
The state has a substantial interest in protecting its citizens who have obtained insurance on risks within its borders from defaults by insurers outside of its borders. A common fund is an accepted and established means of affording such protection.
All of the characteristics relied upon by plaintiffs to refute the reach of the State of New Jersey over their activities is overcome by the simple fact that they are engaged in insuring persons and property within the state through in-state agents, seek and obtain eligibility to issue such coverage, and are compensated for such insurance by persons and companies within the state. Notwithstanding the limitations and restrictions imposed upon their activities, the state in the interest of its citizens may impose reasonable conditions upon such companies in order to protect those who utilize their services. They derive an obvious benefit from the placement of such insurance. They may avoid their contribution by foregoing that benefit. On the other hand, they cannot accept the benefit without satisfying the reasonable and justifiable conditions imposed upon them.
For the reasons hereinafter set forth, the court finds the statute to be constitutional.
On February 14, 1984, Ambassador Insurance Company, a "surplus lines" insurer incorporated in Vermont, was declared insolvent by an Arizona state court. Aff. of Cecilia Kempler, ¶ 31. On March 30, 1984, the Commissioner of Banking and Insurance in Vermont applied to a Vermont Superior Court for an order declaring Ambassador insolvent and directing the Commissioner to liquidate the business. Defendant's Brief at 9. Over three thousand claims involving policyholders and claimants in the State of New Jersey remained outstanding, with a total value of 10 to 12 million dollars—far exceeding the company's assets. Statement accompanying New Jersey Surplus Lines Insurance Guaranty Fund Act, Exhibit C to Kempler Aff. Affected policyholders "ran the gamut from individual homeowners, to small retail establishments to several hundred governmental entities, including municipal police departments, housing authorities, and improvement authorities." Id.
To meet this crisis, the State of New Jersey enacted the New Jersey Surplus Lines Insurance Guaranty Act, 1984 N.J. Laws, ch. 101, on July 27, 1984. The Act was designed to "provide a mechanism for the payment of covered claims under certain insurance policies issued by eligible surplus lines insurers; to avoid excessive delays in the payment of the covered claims against insolvent eligible nonadmitted insurers; and to avoid financial loss to claimants or policyholders because of the insolvency of an eligible nonadmitted insurer." Section 2. The Act created the New Jersey Surplus Lines Insurance Guaranty Fund to pay the covered claims of "surplus lines" policyholders whose insurers became insolvent and to recover amounts paid to the extent possible from the estates of insolvent insurers. The Act also requires contributions to the Fund from other currently "eligible", "surplus lines" insurers, which are deemed members of the Fund.
Plaintiffs in this action, two "surplus lines" insurers and two asserted representatives of New Jersey insureds, challenge the constitutionality of the Act. Because the court finds the Act a reasonable exercise of the state's legitimate legislative power, the court deems the Act constitutional in all respects.
New Jersey, in common with all other states, has developed a comprehensive regulatory scheme governing the issuance of insurance and the operation of insurance companies in the state. New Jersey's insurance law differentiates between two broad categories of insurers: "admitted" or "authorized" insurers, on one hand, and "surplus lines" insurers on the other. "Authorized" and "admitted" insurers are domestic and foreign insurers, respectively, which have qualified to transact insurance business directly with prospective insureds in the State of New Jersey. See N.J.Stat. Ann. 17:17-1, et seq., 17:32-1, et seq. These extensively regulated insurers provide coverage for the bulk of insurance risks in the state. Indeed, New Jersey forbids the representatives of any insurer other than an admitted or authorized insurer to transact insurance business in the state. N.J.Stat.Ann. 17:22-6.37.
One exception to this prohibition permits the placing of "surplus lines" coverages with designated "surplus lines" insurers. "Surplus lines" insurers are by definition foreign insurers, not authorized to do business in the state directly, which nevertheless have been declared eligible to receive New Jersey insurance business through specially licensed "surplus lines" agents. It is these insurers which are the regulatory subject of the challenged Act.
According to New Jersey's surplus lines law, a New Jersey insurance risk may be "exported" to one of these surplus lines insurers only upon a showing that the coverage requested is not procurable from an admitted or authorized insurer after "diligent effort." N.J.Stat.Ann. 17:22-6.43. The risks are then "exported" by surplus lines agents, who are specially licensed by the state to handle surplus lines coverages. N.J.Stat.Ann. 17:22-6.42, 6.55. These surplus lines agents are not employees of the surplus lines insurers. N.J.Stat.Ann. 17:22-6.41. Yet, they are the exclusive conduit through which surplus lines insurers may seek eligibility to receive "exported" coverages as an initial matter. N.J. Stat.Ann. 17:22-6.45(a) (). An insurer's eligibility to receive these coverages is determined based on the prospective surplus lines insurer's apparent financial condition and trustworthiness, as well as on the sponsorship of a surplus lines agent. N.J.Stat.Ann. 17:22-6.45.
Once an insurer is declared "eligible," the insurer is entered onto a periodically published list of eligible surplus lines insurers, known as the "white list," from which surplus lines agents may draw to place coverages. See N.J.Stat.Ann. 17:22-6.45. In the placement process, surplus lines agents negotiate all coverages on behalf of the insurer with prospective insureds or their brokers. Where the surplus lines agent has been granted binding authority by an insurer, see N.J.Stat.Ann. 17:22-6.42, the agent may bind coverage immediately upon payment of the premium; otherwise, the agent seeks approval of the coverage from the insurer, and transmits that approval to the insured. The agent is charged with supplying evidence of coverage to the insured, see N.J.Stat.Ann. 17:22-6.50, and with filing a copy of the policy issued with the Commissioner. N.J.Stat. Ann. 17:22-6.51. The insurer is deemed to have received a premium once it has been received by the agent. N.J.Stat.Ann. 17:22-6.54. Taxes on the coverages are either collected by the agent or paid directly by the insured. N.J.Stat.Ann. 17:22-6.59, 6.64.
New Jersey does not purport to prohibit surplus lines insurers from dealing directly with New Jersey residents who leave the state to seek these insurers out. Within its own borders, however, the state restricts surplus lines insurers from receiving any insurance business without the aid and sponsorship of surplus lines agents and prohibits any direct contact with prospective New Jersey insureds. Despite this restriction, eligible insurers receive millions of dollars of net direct written premiums each year.
This special restriction on the manner in which surplus lines insurers may receive business in New Jersey corresponds to their relatively greater freedom from state regulation, as compared to admitted and authorized insurers. For example, surplus lines insurers need only establish the "appearance" of sound financial status in order to obtain eligibility to receive in-state business; the Commissioner of Insurance is not charged with investigating the actual financial condition of a prospective...
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