State Farm Mut. Auto. Ins. Co. v. State

• Decision Date: 16 May 1991
• Citation: 124 N.J. 32,590 A.2d 191
• Court: New Jersey Supreme Court
• Parties: STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Plaintiff-Respondent and Cross-Appellant, and Allstate Insurance Company, Intervenor-Respondent and Cross-Appellant, and Liberty Mutual Insurance Company, Intervenor-Respondent and Cross-Appellant, v. The STATE of New Jersey; Samuel Fortunato, in his official capacity as Commissioner of Insurance of the State of New Jersey; Robert J. Del Tufo, in his official capacity as Attorney General of the State of New Jersey; Douglas Berman, in his official capacity as Treasurer of the State of New Jersey; and Benjamin J. Redmond, in his official capacity as the Acting Director of the Division of Taxation of the State of New Jersey, Defendants-Appellants and Cross-Respondents, and the Property Liability Insurance Guaranty Association, Defendant-Respondent.

Page 32

124 N.J. 32

590 A.2d 191

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY Plaintiff-Respondent and Cross-Appellant and Allstate Insurance Company, Intervenor-Respondent and Cross-Appellant and Liberty Mutual Insurance Company, Intervenor-Respondent and Cross-Appellant, v. The STATE of New Jersey; Samuel Fortunato, in his official capacity as Commissioner of Insurance of the State of New Jersey; Robert J. Del Tufo, in his official capacity as Attorney General of the State of New Jersey; Douglas Berman, in his official capacity as Treasurer of the State of New Jersey; and Benjamin J. Redmond, in his official capacity as the Acting Director of the Division of Taxation of the State of New Jersey, Defendants-Appellants and Cross-Respondents and the Property Liability Insurance Guaranty Association, Defendant-Respondent.

Supreme Court of New Jersey.

Argued Jan. 15, 1991.

Decided May 16, 1991.

Douglas S. Eakeley, Acting Atty. Gen., for defendants-appellants and cross-respondents State of N.J., Samuel Fortunato, Robert J. Del Tufo, Douglas Berman, and Benjamin J. Redmond (Douglas S. Eakeley, attorney, Jack M. Sabatino, Asst. Atty. Gen., of counsel, Joseph L. Yannotti, Lori L. Chewkanes, Sharon M. Hallanan, Stephen P. Tasy, Sarah T. Darrow, Bernard M. Flynn, Todd A. Widger, and John M. Armstrong, Deputy Attys. Gen., on the briefs).

Thomas P. Weidner, for plaintiff-respondent and cross-appellant State Farm Mut. Auto. Ins. Co. (Jamieson, Moore, Peskin & Spicer, Princeton, N.J., attorneys; Thomas P. Weidner, Deborah T. Poritz and Richard J. Wertheimer, a member of the District of Columbia bar, of counsel, Thomas P. Weidner, Deborah T. Poritz, Princeton, N.J., Richard J. Wertheimer, and Murray R. Garnick, Washington, D.C., a member of the District of Columbia bar, on the briefs).

Floyd Abrams, a member of the New York bar, for intervenor-respondent and cross-appellant Allstate Ins. Co. (Smith, Stratton, Wise, Heher & Brennan, attorneys; Floyd Abrams, William J. Brennan, III, and Wendy L. Mager, of counsel; Floyd Abrams and William J. Brennan, III, on the briefs).

J. Michael Riordan, for defendant-respondent Property, Liability Ins. Guar. Ass'n (Bressler, Amery & Ross, attorneys).

Elmer M. Matthews, for amicus curiae American Ins. Ass'n (Clapp & Eisenberg, attorneys; Elmer M. Matthews, Frederic S. Kessler, and Harvey C. Kaish, on the brief).

Stephen D. Cuyler submitted a letter memorandum on behalf of intervenor-respondent and cross-appellant Liberty Mut. Ins. Co. (Cuyler, Burk & Matthews, attorneys).

The opinion of the Court was delivered by

HANDLER, J.

This appeal arises from three actions filed by automobile insurance companies in the Superior Court, Chancery Division, all challenging the facial constitutionality of the Fair Automobile Insurance Reform Act of 1990, L. 1990, c. 8 (the Reform Act or the Act). State Farm Mutual Automobile Insurance Company (State Farm) and Liberty Mutual Insurance Company (Liberty Mutual) contend that certain surtaxes and assessments imposed by the Reform Act deny insurers any possibility of a reasonable rate of return and are a taking without just compensation and a violation of due process. Allstate Insurance Company (Allstate), as well as State Farm and Liberty Mutual, claims that the Act is an impairment of contracts because it compels insurers to pay the accumulated debt attributable to the State's prior system for insuring high-risk drivers. Other constitutional claims are that the Act is intentional punitive legislation against insurance companies; that the surtaxes and assessments exact an extraterritorial tax because a mutual insurer's New Jersey business will operate at a loss and revenues from operations in other states will subsidize New Jersey rates; that the Act's "producer assignment program" violates due process because it compels insurers either to accept liabilities they did not incur, or to forfeit their right to do business in New Jersey; and that the Act's requirements that rates in New Jersey be based on an insurer's nationwide profitability violate the Commerce Clause of the United States Constitution.

On May 8, 1990, State Farm filed its complaint in the Chancery Division, Mercer County. Allstate and Liberty Mutual began their challenges in federal rather than state court; however, both federal actions were dismissed on jurisdictional grounds. Allstate and Liberty Mutual then filed actions in the Chancery Division in July and November 1990, respectively.

In what has become the main action on appeal, State Farm Mutual Automobile Insurance Company v. State, State Farm moved for a preliminary injunction, requesting relief from payments to be made to the State under the Act. In deciding that motion, the court focused on the issues of impairment of contracts and taking without just compensation. The court determined that the two questions were interrelated, in that State Farm would have to prove it was precluded from earning a fair rate of return to show that its contractual expectations had been substantially impaired. The court concluded that the Act's provisions for collecting payments from insurers to cover obligations arising under the prior system of automobile insurance regulation is a valid regulatory scheme, as long as it does not result in losses that would be an unconstitutional taking or a violation of due process. Examining in detail the Reform Act's provisions for additional surtaxes and assessments on insurers, the court also determined that while the Act, on its face, prohibited any form of offsetting rate relief for the surtaxes, it did not necessarily prohibit rate relief for the assessments. The court ruled that State Farm was entitled to a hearing to determine whether it could obtain a fair rate of return through rate-increase applications notwithstanding the exclusion of the surtax from the expense base in a rate filing. The court also granted a preliminary injunction, authorizing State Farm to make its statutory payments into court rather than to the State.

The State immediately moved before the Appellate Division for leave to appeal and for a stay of the Chancery Division's preliminary injunction. The stay was granted and on the following day State Farm applied to this Court to vacate the Appellate Division's stay. That application was denied, leaving the stay in effect. In July, the Appellate Division granted the State's motion for leave to appeal. Thereafter Allstate, then proceeding in the Chancery Division after its federal court action had been dismissed, successfully moved before the Appellate Division to intervene in the State Farm appeal.

State Farm then filed a motion for direct certification, which this Court granted in November 1990. While that motion was pending, Liberty Mutual, which, like Allstate, had had its federal court complaint dismissed without prejudice, simultaneously filed a complaint in the Chancery Division and successfully moved before this Court to intervene in the State Farm appeal. Thus, the claims of the insurers are pursued here by plaintiff State Farm and intervenors Allstate and Liberty Mutual; in addition, the American Insurance Association has participated as an amicus throughout the State Farm litigation.

I.

For years, New Jersey's system of automobile insurance regulation, like those of many other states, has faced an intractable problem of providing coverage for high-risk drivers. Prior to 1983, drivers who could not obtain coverage directly from insurers in the voluntary market were insured through an Assigned Risk Plan ( N.J.S.A. 17:29D-1), under which the Commissioner of Insurance apportioned high-risk drivers among all auto insurers doing business in New Jersey. In 1983, the Automobile Full Insurance Availability Act, N.J.S.A. 17:30E-1 through -24, replaced the assigned-risk system with the New Jersey Automobile Full Insurance Underwriting Association, commonly known as the Joint Underwriting Association or JUA.

All insurers licensed to write automobile insurance in New Jersey were required to be members of the JUA. The objective of the new scheme 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. Originally, the JUA was governed by a board of directors, a majority of whom were representatives of insurers and insurance producers (i.e., agents and brokers). The board was to adopt a Plan of Operation to carry out the JUA's objectives. Even though the board had primary responsibility for management of the JUA, the Commissioner retained plenary powers to veto actions of the board or to countermand board decisions that might not be consonant with the State's regulatory scheme.

The JUA, a good deal more complex than the prior Assigned Risk Plan, worked as follows. Insurers (and subsequently certain qualified non-insurer entities) could apply to become "servicing carriers," which would bear administrative responsibility for collecting premiums, arranging coverage, and the like, and which would receive fees for such services from the JUA. However, the statute, the Plan of Operation, and the agreements between the JUA and servicing carriers all provided that claims and liabilities of the JUA would be borne by it independently; servicing carriers were to be insulated from such claims and liabilities. See, e.g., N.J.S.A. 17:30E-7(e); JUA Plan of Operation, dated January 23, 1989, Article V, Paragraph 3; Servicing Carrier Contract between JUA and State Farm, dated October 27, 1983, Article V, Section 5.2.

Because the JUA insured high-risk drivers but also required that their rates be the same as voluntary-market rates (see N.J.S.A. 17:30E-13), it was anticipated that premium revenues would not cover costs of claims against JUA policies. Therefore, in addition to normal premium income, the JUA was also given income from ...