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

• Decision Date: 19 January 1995
• Docket Number: No. 93-SC-919-DG,93-SC-919-DG
• Parties: Honorable Don W. STEPHENS, not individually but in his capacity as Commissioner, Kentucky Department of Insurance; Kentucky Department of Insurance; Kentucky Fair Plan; Kentucky Joint Reinsurance Association, Appellants, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY and Harold C. Sumner, Appellees.
• Court: United States State Supreme Court — District of Kentucky

Page 624

894 S.W.2d 624

Honorable Don W. STEPHENS, not individually but in his capacity as Commissioner, Kentucky Department of Insurance Kentucky Department of Insurance; Kentucky Fair Plan Kentucky Joint Reinsurance Association, Appellants, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY and Harold C Sumner, Appellees.

No. 93-SC-919-DG.

Supreme Court of Kentucky.

Jan. 19, 1995.

Rehearing Denied April 20, 1995.

Joseph L. Ardery, Jeffrey P. Stodghill, Brown, Todd & Heyburn, Louisville, Stephen Cox, Suetta W. Dickinson, Kentucky Dept. of Ins., Frankfort, for appellants.

Bruce F. Clark, Cheryl U. Lewis, Stites & Harbison, Frankfort, for appellees.

REYNOLDS, Justice.

At issue is the constitutionality of those amendments to the Kentucky FAIR (Fair Access to Insurance Requirements) Plan Statutes (KRS 304.35-010, et seq.) effected by House Bill 552 of the 1988 Kentucky General Assembly.

The insurance industry is a highly regulated one and operates within the framework of Kentucky's comprehensive, regulatory insurance code (KRS Chapter 304). It provides for three insurance residual market mechanisms. Of concern herein is the one designated as the FAIR Plan. It is mandated statutorily that insurers authorized to write property or casualty insurance on a direct basis in this state be a member of the FAIR Plan. Before the amendment, only insurers authorized to write property insurance, homeowner and farm owner policies were required to be members, as the Plan pertained only to property insurance coverage.

KRS 304.35-030(2) was amended to require the Insurance Commissioner, if he determined that a reasonable degree of competition failed to exist for any line of casualty or property insurance, to thereafter order the FAIR Plan's governing committee to provide a residual market for that line, unless an effective residual market mechanism was already functioning. Before the amendment, the FAIR Plan was statutorily empowered to provide residual markets only for property, homeowners and farm owners insurance.

The amendment of KRS 304.35-030(1) required any FAIR Plan losses to be covered by proportionate assessments against members as to each member's property and casualty premiums. Before the amendment, assessments were made in proportion with each member's property, homeowners and farm owners insurance premiums.

Before the amendment, the regulatory statutes provided for no surcharge, but, thereafter, if assessments were insufficient, the Insurance Commissioner was to order each FAIR Plan member to collect a $1.00 premium surcharge from the holder of each individual insurance policy during the subsequent twelve-month period. The effect of the amendment was to increase the number of lines of insurance for which the FAIR Plan could provide a residual market to support the operations of the existing and the future FAIR Plan.

The purpose of H.B. 552 was to allow the FAIR Plan's governing entity to expand FAIR Plan coverage to include other insurance lines when those lines of coverage encountered noncompetitive conditions in the market place. This amending legislation came in response to the reports arising from studies by a legislatively ordered Task Force. In order to accommodate such an expansion of the FAIR Plan, the amendment augmented the Plan's membership to include all property and casualty insurance companies. Additionally, the Plan was authorized to write casualty insurance as well as to continue to write property insurance.

State Farm Mutual objected to the funding provisions for the FAIR Plan because under the amendment, if losses accrue, then assessments are to be made against all members of the Plan. Stated otherwise, the assessment base is not now limited to property insurance or to those lines of insurance written by the expanded Plan. Rather, the base is expanded to include all net direct written premiums by any member of the Kentucky FAIR Plan. State Farm Mutual, questionably, maintains that its automobile lines of insurance are now exposed to 40-50% of the burdens and losses that the FAIR Plan may sustain by virtue of its great volume of automobile insurance.

State Farm Mutual, as an issuer of automobile liability coverage, is required by KRS 304.13-151(5) to be a member of another residual market mechanism (the Kentucky Automobile Insurance Plan). The trial court held, as did the Court of Appeals, the amendments to the FAIR Plan unconstitutional because they are violative of the conformity and rationality requirements embodied in the due process and equal protection provisions of both the state and federal constitutions.

State Farm Mutual's primary complaint is that H.B. 552 requires it to support a residual market mechanism, the FAIR Plan, in which none of its lines of insurance can participate. Therefore, since its automobile insurance lines support the residual market mechanism of KRS 304.13-151, the result is that State Farm's automobile lines of insurance support two residual market mechanisms.

While we discern that the Auto Plan, when considered with the FAIR Plan, presents little, if any, problem of unfairness, both the trial court and the Court of Appeals held otherwise. The Court of Appeals, citing the trial court, stated:

In this case, we hold that it is not fair and uniform to have automobile lines of insurance and automobile insureds support and subsidize property lines of insurance which participate in the FAIR Plan, when the lines of insurance written by State Farm Mutual must also support another residual market mechanism and stand no chance to benefit directly from the FAIR Plan.

Such comment errs because it distinctly fails to distinguish automobile liability coverage, automobile property coverage and automobile collision coverage. The Auto Plan writes absolutely no automobile property coverage and provides basic automobile liability coverage as required of all Kentucky vehicle owners. The cost of participation in the Auto Plan arises only from the automobile liability coverage based solely on the automobile liability premiums and not on a company's automobile property premiums.

The courts below have correctly noted the long-established principle that a strong presumption exists in favor of the statute's constitutionality. Lovelace v. Commonwealth, 285 Ky. 326, 147 S.W.2d 1029 (1941). Our courts are sensitive to the presumption of constitutionality, i.e., the rule that an act should be held valid unless it clearly offends the limitations and prohibitions of the Constitution. The one who questions the validity of an act bears the burden to sustain such contention. Manning v. Sims, 308 Ky. 587, 213 S.W.2d 577 (1948); Revenue Cabinet v. Estate of Marshall, Ky.App., 746 S.W.2d 408, 413 (1988). The appellant argues, with a degree of validity, that contrasting sales and use tax classifications have been legislatively enacted and upheld, which are not dissimilar to the two market mechanism plans referred to herein. Delta Air Lines, Inc. v. Commonwealth, Revenue Cabinet, Ky., 689 S.W.2d 14, 18 (1985). Certainly, the legislature has a great freedom of classification and the presumption of validity can be overcome by only the most explicit demonstration of hostility and oppressiveness against particular persons/classes. Madden v. Kentucky, 309 U.S. 83, 60 S.Ct. 406, 84 L.Ed. 590 (1940).

The state's inherent power to regulate insurance is broad. Hartford Live Stock Ins. Co. v. Gibson, 256 Ky. 338, 76 S.W.2d 17 (1934); Maryland Casualty Co. v. Baker, 304 Ky. 296, 200 S.W.2d 757, 761 (1947). This same principle pertaining to mandatory residual market mechanisms for automobile liability insurance was upheld in California State Automobile Ass'n. Inter-Insurance Bureau v. Maloney, 341 U.S. 105, 71 S.Ct. 601, 95 L.Ed. 788 (1951). Therein, legislative judgment deemed necessary to the public welfare was applicable when the business of insurance was involved, it being a business to which the government has long had a special relation.

House Bill 552 is violative of neither federal nor state equal protection standards. This is a highly economic regulation and the subject need not rise to the same level of scrutiny that is involved in freedoms guaranteed by the Bill of Rights. Dandridge v. Williams, 397 U.S. 471, 90 S.Ct. 1153, 25 L.Ed.2d 491 (1970), holds that in the area of economics, a state does not violate the equal protection clause merely because the classifications made by its laws are imperfect. The Constitution is not offended simply because the classification is not made with mathematical nicety or because in practice it results in some inequality. The Kentucky courts have generally enunciated the same standard when applying equal protection principles to matters of economic regulation. Chapman v. Eastern Coal Corporation, Ky., 519 S.W.2d 390 (1975), provides that in the areas of economic and social welfare a state does not violate the equal protection clause merely because the classifications made by its laws are imperfect. The uniformity principle is not violated nor is the equal protection of laws violated if there is a reasonable basis or rational justification. When the objective is legitimate and the classification is rationally related to that objective, it is not constitutionally arbitrary. In this case, the result is that H.B. 552 may be upheld over an equal protection argument when a party is caused to bear a different economic burden or enjoys a different economic benefit. We held in Waggoner v. Waggoner, Ky., 846 S.W.2d 704, 708 (1992):

Legislation will be upheld under equal protection principles of the federal and state constitutions if the law is rationally related to a legitimate objective. McGowan v. State of Maryland, 366 U.S. 420, 425-26, 81 S.Ct. 1101, 1104-05, 6 L.Ed.2d 393 (1961); Kentucky Ass'n of Chiropractors, Inc. v. Jefferson County Medical Society, Ky., 549 S.W.2d 817, 822 (1977). The constitutionality of a statute will be upheld if its...