RJ Gaydos Ins. Agency v. NAT. CONSUMER INS. CO.

• Decision Date: 28 June 2001
• Citation: 168 N.J. 255,773 A.2d 1132
• Parties: R.J. GAYDOS INSURANCE AGENCY, INC., t/a Schumacher Associates, Plaintiff-Respondent, v. NATIONAL CONSUMER INSURANCE COMPANY, The Robert Plan Corporation, The Robert Plan of New Jersey and Lion Insurance Company, Defendants-Appellants, and John DOES 1-200, Defendants.
• Court: New Jersey Supreme Court

773 A.2d 1132

168 N.J. 255

R.J. GAYDOS INSURANCE AGENCY, INC., t/a Schumacher Associates, Plaintiff-Respondent, v. NATIONAL CONSUMER INSURANCE COMPANY, The Robert Plan Corporation, The Robert Plan of New Jersey and Lion Insurance Company, Defendants-Appellants, and John DOES 1-200, Defendants.

Supreme Court of New Jersey.

Argued March 27, 2001.

Decided June 28, 2001.

Alan E. Kraus, for appellants (Riker, Danzig, Scherer, Hyland & Perretti, Morristown, attorneys; Mr. Kraus, Robert J. Schoenberg and R.N. Tendai Richards, on the briefs).

Richard A. Grodeck, Roseland, for respondent (Feldman Grodeck, attorneys).

Raymond R. Chance, III, Deputy Attorney General, for amicus curiae Commissioner of Banking and Insurance (John J. Farmer, Jr., Attorney General of New Jersey, attorney; Michael J. Haas, Assistant Attorney General, of counsel; Mr. Chance and Thalia P. Cosmos, Deputy Attorney General on the brief).

Thomas P. Weidner, Princeton, submitted a brief on behalf of amicus curiae Insurance Council of New Jersey (Windels, Marx, Lane & Mittendorf, New Brunswick, attorneys; Mr. Weidner and David F. Swerdlow, Princeton, on the brief).

Susan Stryker submitted a brief on behalf of amici curiae American Insurance Association and National Association of Independent Insurers (Sterns & Weinroth, Trenton, attorneys; Ms. Stryker and Mitchell A. Livingston, on the brief). The opinion of the Court was delivered by STEIN, J.

This appeal involves New Jersey's Fair Automobile Insurance Reform Act (FAIRA), N.J.S.A. 17:33B-1 to -63, a comprehensive legislative initiative that was enacted in 1990 to reform New Jersey's automobile insurance system. The questions presented in this appeal are whether plaintiff, R.J. Gaydos Insurance Agency, Inc. (Gaydos), has an implied private right of action under FAIRA to assert a claim against defendant, National Consumer Insurance Company (NCIC), and whether Gaydos can assert a common-law cause of action for breach of the implied duty of good faith and fair dealing when that claim is based solely on allegations that NCIC violated FAIRA.

The Appellate Division did not address whether FAIRA authorizes a private right of action by an insurance agent. Rather, a divided panel of the Appellate Division held that NCIC violated FAIRA because it terminated Gaydos based on its large volume of high loss ratio policies, in violation of N.J.S.A. 17:33B-15 and N.J.S.A. 17:33B-18b, and remanded to the Law Division to address Gaydos's tortious interference with contract and related claims. R.J. Gaydos Ins. Agency, Inc. v. National Consumer Ins. Co., 331 N.J.Super. 458, 475, 478, 752 A.2d 356 (2000). NCIC appeals to this Court as of right. R. 2:2-1(a)(2).

I

For decades the New Jersey Legislature has attempted to reform the State's automobile insurance system to provide coverage to high-risk drivers. Prior to 1983, those drivers who had been unable to procure insurance coverage in the voluntary market received coverage through an Assigned Risk Plan, N.J.S.A. 17:29D-1, pursuant to which the Commissioner apportioned high-risk drivers among all insurers doing business in New Jersey. Thereafter, in 1983 the Legislature adopted the New Jersey Automobile Full Insurance Availability Act, N.J.S.A. 17:30E-1 to -24, to replace the assigned risk system. That Act contemplated that motorists who were rejected by the voluntary market would receive coverage at standard market rates through the statutorily-created Joint Underwriting Association (JUA). When the JUA was operational, insurers could apply to become servicing carriers for the JUA and bear administrative responsibility for collecting premiums and arranging coverage. However, the agreements between the JUA and servicing carriers provided that the claims and liabilities of the JUA would be borne by the JUA independently, and the servicing carriers were to be insulated from such claims and liabilities. The primary objective of the JUA and the Act was "to create a more extensive system of allocating high-risk drivers to carriers, and through the JUA, to provide such drivers with coverage at rates equivalent to those charged in the voluntary market." State Farm Mut. Auto. Ins. Co. v. State, 124 N.J. 32, 41, 590 A.2d 191 (1991). We set forth the embattled history of the JUA in State Farm, supra, and we need not reiterate those facts here. See In re Commissioner of Insurance's March 24, 1992 Order, 132 N.J. 209, 212-13, 624 A.2d 565 (1993) (describing how JUA was more complex than Assigned Risk Plan). We note only that by 1990 the JUA had accumulated a financial deficit of over $3.3 billion in unpaid claims and other losses, and that the JUA was insuring over fifty percent of New Jersey's drivers. State Farm, supra, 124 N.J. at 42, 590 A.2d 191.

To repay the JUA's debt and replace the JUA system with a workable distribution of the automobile insurance market, the Legislature in 1990 enacted FAIRA to dismantle the JUA and return its automobile insurance business to the private marketplace. Because a primary objective of FAIRA was to transfer JUA insureds to private insurance companies, FAIRA required every insurer operating in New Jersey to absorb a certain quota of JUA policyholders in proportion to the size of their existing book of business or, in the alternative, to appoint agents in urban territories. Under FAIRA, the individual insurance companies were permitted to decide the manner and method by which they serviced their depopulation quotas.

In 1989, Robert Wallach, Chief Executive Officer of the Robert Plan Corporation (RPC), devised a plan to help insurance companies comply with that mandate. RPC enlisted seventeen independent insurance companies conducting business in New Jersey to form a pool, designated the New Jersey Voluntary Private Passenger Automobile Insurance Pool (Pool). NCIC was then created to write insurance policies for the Pool and act as the primary insurer of those policies, and the members of the Pool were required to reinsure those policies. RPC, as NCIC's holding company and ultimate parent, administered the Pool by providing underwriting, data processing, and claims handling services. By participating in the Pool, the insurance companies were told that the Department of Banking and Insurance (DOBI or Department) would give them credit for "1) their ... [share] of the Fair Act depopulation quotas for their percentage of the Pool; 2) the demographic/geographic distribution of brokers and insureds involved/insured within the policy base; 3) a flow through of any Assigned Risk credits generated by [NCIC's] class/territorial writings; 4) credits applicable against their ... obligations to contract with eligible producers whose sole or primary market is the JUA/MTF; and 5) any profits or losses generated by the Pool."

From its inception, NCIC incurred substantial losses. NCIC's "pure loss ratio," the percentage derived by dividing incurred losses, exclusive of operating costs, by premiums received, was over 100%. The following chart demonstrates those losses:

Year Losses Pure Loss Ratio 1992 $61,932,432 118.90% 1993 $89,095,412 116.60% 1994 $113,128,199 129.30% 1995 $88,638,450 136.90% 1996 $57,009,126 134.00%

By 1995, NCIC determined that for it to remain solvent the company needed to slow its volume of new business. To accomplish that goal, NCIC decided to terminate forty agents. The first twenty agents were scheduled to be terminated in May 1995, and an additional twenty agents were scheduled to be terminated in June 1995. Schumacher Associates was among those agents slated for termination. That agency was owned by Edward Schumacher who acquired the Gaydos agency in 1996. Schumacher did not institute a lawsuit or make any claim as a result of the termination that took effect on May 29, 1995.

Those agents slated for termination in 1995 did not have the worst loss ratios nor were they all located in urban territories. An auditor employed by the Robert Plan of New Jersey, a subsidiary of the RPC, testified that those terminations were based on a number of factors including an agent's loss ratio, an agent's performance of administrative duties, an agent's volume of business written, and the geographic location of an agent's business.

NCIC informed DOBI of its agent termination plans, and the Department requested that NCIC forego any terminations until the Department conducted an investigation to determine whether that action constituted a de facto withdrawal from the private passenger automobile insurance market, in violation of N.J.A.C. 11:2-29. NCIC cooperated with the DOBI and did not terminate any agents until the Department's investigation was complete. In the interim, NCIC met with DOBI officials and assured them that the company was not withdrawing from the State and that it intended to appoint additional agents in under-served areas. In May 1995, DOBI approved NCIC's terminations and stated that it did not "consider the termination of these producers as activity constituting a de facto withdrawal. This determination is based in part on representations by NCIC that there will be additional producers appointed in underserved areas."

In 1995, several insurance companies decided to leave the Pool. Responding to that development, NCIC devised a plan for "depooling" and moving forward as an independent insurance company. As part of the depooling process, NCIC gave departing Pool members two options. They either could accept their proportionate share of agents and insureds and write insurance policies for them directly, or they could pay NCIC to assume the risk of going forward as a stand-alone company with that member's proportionate share of insureds.

Prior to authorizing NCIC's depooling plan, however, DOBI required NCIC to submit a five-year business plan to explain how NCIC would function as a stand-alone company with a disproportionate share of urban-based insurance policies and agents. In January 1996, NCIC submitted...