Medical Malpractice Ins. Ass'n v. Superintendent of Ins. of State of N.Y.

• Decision Date: 15 December 1988
• Citation: 537 N.Y.S.2d 1,72 N.Y.2d 753,533 N.E.2d 1030
• Parties: , 533 N.E.2d 1030 In the Matter of MEDICAL MALPRACTICE INSURANCE ASSOCIATION, Respondent, v. SUPERINTENDENT OF INSURANCE OF THE STATE OF NEW YORK, Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 1

537 N.Y.S.2d 1

72 N.Y.2d 753, 533 N.E.2d 1030

In the Matter of MEDICAL MALPRACTICE INSURANCE ASSOCIATION, Respondent, v. SUPERINTENDENT OF INSURANCE OF THE STATE OF NEW YORK, Appellant.

Court of Appeals of New York.

Dec. 15, 1988.

Robert Abrams, Atty. Gen. (Richard G. Liskov, New York City, O. Peter Sherwood and Lawrence S. Kahn, of counsel), for appellant.

T. Richard Kennedy, Larry P. Schiffer and Michael A. Knoerzer, New York City, for respondent.

OPINION OF THE COURT

TITONE, Judge.

In response to the continuing upward spiral of medical malpractice liability insurance, the Legislature, in 1985 and again in 1986, passed substantive and procedural rules designed to restrain increases in medical and dental malpractice premiums (see, L.1985, ch. 294; L.1986, ch. 266). The underlying legislative concern was that increasing malpractice premiums threaten the public health by discouraging physicians from initiating or continuing the practice of medicine in New York. The legislative reforms have been challenged on many fronts (see, Medical Malpractice Ins. Assn. v. Cuomo, 138 A.D.2d 177, 531 N.Y.S.2d 231, lv. granted 143 A.D.2d 548, 538 N.Y.S.2d 888; Alliance of Am. Insurers v. Cuomo, 5th Cir., 854 F.2d 591). This article 78 proceeding involves one discrete aspect of the Medical Malpractice Reform Act of 1986 (L.1986, ch. 266).

Specifically, petitioner challenges the premium rates set by the respondent, Superintendent of Insurance, pursuant to section 40 of the temporary insurance rate-stabilization program (L.1986, ch. 266, § 40). The issue presented is whether the primary and excess premium rates established by the Superintendent pursuant to section 40 are inconsistent with other statutory requirements (see, Insurance Law §§ 5505, 2303) and thus arbitrary and capricious. We hold that the Superintendent's interpretation of section 40 was reasonable, that the rates set in reliance on this interpretation were not arbitrary or capricious, and that petitioner's alleged claim of confiscation does not lie. Accordingly, we reverse the order of the Appellate Division which affirmed the Supreme Court judgment annulling the Superintendent's determination, and reinstate that determination.

I.

Petitioner, the Medical Malpractice Insurance Association (MMIA), is a nonprofit unincorporated association which was created by the Legislature in 1975 in response to the withdrawal of many private insurance companies from the medical malpractice market in New York. MMIA was created for the express purpose of providing medical malpractice insurance, which is no longer readily available in the voluntary market (L.1975, ch. 109, § 17; see, Insurance Law § 5502 [c], [d] ). MMIA is required to provide primary medical malpractice insurance to physician applicants with policy limits of $1 million per claim, and an annual aggregate limit of $3 million (Insurance Law § 5502[e][1] ). In 1985, the Legislature mandated that MMIA provide excess coverage of at least $1 million per claim, and $3 million for all claims in any one policy year (L.1985, ch. 294, § 17). Since 1975, the Superintendent has set premium rates pursuant to provisions of the Insurance Law requiring the lowest possible rates consistent with the maintenance of MMIA's solvency, and the establishment of reasonab reserves and surpluses (Insurance Law § 5505[a], [b]; see also, Insurance Law § 2303).

From 1980 to 1985, MMIA's rate increased by over 200%. To alleviate this critical problem, in 1985 and 1986, the Legislature implemented various changes in the prosecution of medical malpractice liability cases (L.1985, ch. 294; L.1986, chs. 266, 682). Significant changes were made in payment of damages, attorneys' fees, pretrial discovery, and the application of joint and several liability for noneconomic losses (see generally, Note, New York's Medical Malpractice Insurance Crises--A New Direction for Reform, 14 Fordham Urban L.J. 773 [1986] ).

A hearing on the rates to be established for 1985-1986 was held before a Special Deputy Superintendent (SDS). Following extensive hearings, the SDS found that MMIA was entitled to an 86.7% increase in physician and surgeon rates. However, before recommendations could be implemented, the Governor signed the Medical Malpractice Reform Act of 1986 (L.1986, ch. 266). Pursuant to section 40 of this Act, the Superintendent was directed to establish rates for each policy year commencing July 1, 1985 through June 30, 1988. In addition, section 40 authorized the Superintendent, commencing July 1, 1989, to impose an annual surcharge of up to 8%, if needed, to satisfy any actuarially projected deficiency resulting from the rates that he had established for each of the 1985-1988 policy years (L.1986, ch. 266, § 40). Section 40 provides that the surcharges shall be deemed income earned for the purposes of Insurance Law § 2303 which requires that premium rates be calculated in such a way as to maintain solvency. ¹

Relying on section 40, the Superintendent promulgated the Sixth, Seventh, Eighth and Tenth Amendments to Regulation No. 101 (11 NYCRR 70.8) establishing primary and excess premium increases for 1985-1986, 1986-1987, and 1987-1988. The allowed increases have been established as follows: ²

The Superintendent has not yet established a surcharge rate, since, under section 40, such a determination can only be calculated after any deficiency arising from the prior years is determined. However, in order to facilitate the calculation of deficiencies arising from the three policy periods, and the corresponding future surcharge needed to offset the prior deficiencies, the Superintendent directed the establishment of segregated accounts for premium payments, reserves and investment income attributable to each of the policy periods. Critically, in setting these rates, the Superintendent concededly considered that a surcharge of up to 8% could be imposed in the future. Both parties agree that without this consideration of future surcharges, both the primary and the two excess layers of insurance are entirely inadequate to meet the statutory standards of solvency under the Insurance Law (see, Insurance Law §§ 5505, 2303).

MMIA brought the present article 78 proceeding to challenge the Superintendent's approach, contending that his interpretation of section 40 is unreasonable, and has resulted in rates which are not actuarially sound, self-supporting, based upon reasonable standards or consistent with statutory standards of solvency. MMIA also claims that the rates are confiscatory and will result in an unconstitutional taking of property in violation of the State and Federal Constitutions (U.S. Const. 5th, 14th Amends.; N.Y. Const., art. I, §§ 6, 7).

Implementation of the rates was stayed on August 12, 1986, and the parties agreed by stipulations to interim primary and excess rates for the 1985-1988 policy years pending exhaustion of all appeals in this proceeding. The issues raised in the proceeding were then submitted to a Referee, who agreed with the Superintendent that future surcharges should be considered in fixing present rates, and concluded that the Superintendent, in setting the 1985-1988 primary rates, properly relied upon actuarial figures derived, in part, from the original figures supplied by the SDS. However, concerning the excess rates, the Referee recommended a remand to the Superintendent for further explanation since he found the record before him to be insufficient.

Supreme Court rejected the Referee's report and set aside the determination of the Superintendent. The court disagreed with the Superintendent's interpretation of section 40, reasoning that the language directing insurers to establish segregated accounts for the 1985-1988 policy years expressed a "legislative hope that the rates to be set would be sufficient, under the existing circumstances of general uncertainty in the malpractice insurance field", without any surcharge at all (137 Misc.2d 785, 791, 520 N.Y.S.2d 501). The court ruled that future surcharges were not even to be considered by the Superintendent, "until his monitoring of the accounts toward the end of the 1985-1988 period established a necessity for that action" (id.). The Superintendent's interpretation was found to be at odds with the "self-supporting" requirement for rates contained in section 5505 (Insurance Law § 5505). The court also rejected the Referee's findings that the rates established would not impermissibly impair the solvency of MMIA, and questioned the constitutionality of section 40. Finally, the court gave short shrift to the Superintendent's actuarial calculations concerning future rate structure. The court simply classified the figures as "scenarios", and concluded they were insufficient. A divided Appellate Division affirmed on Supreme Court's opinion, the dissenting Justices agreeing with the Superintendent's interpretation of section 40, particularly in view of its provision treating surcharges as earned income for the purposes of section 2303 (see, Insurance Law § 2303 [requiring that all earned income be included in determining whether the rates comply with the statutory requirements of solvency] ). ³ 141 A.D.2d 475, 531 N.Y.S.2d 503.

II.

At issue in this appeal is whether the Superintendent's consideration of future surcharges in the fixing of present rates was consistent with section 40, and the statutory requirements of solvency set forth in sections 2303 and 5505 of the Insurance law. Section 5505(b) of the Insurance Law, which governs MMIA, provides in pertinent part: "All rates shall be on an actuarially sound basis, be calculated to be self-supporting, be based upon reasonable standards * * * The premiums shall be fixed at the lowest possible rates consistent with the maintenance of solvency of the association and of reasonable reserves and surplus therefor." Section 2303 provides that the "[r]ates shall not be * * * detrimental to the solvency of...