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BALLESTEROS v. NEW JERSEY PROP. LIAB. INS. GUAR. A

February 5, 1982

Margarita BALLESTEROS, Plaintiff,
v.
NEW JERSEY PROPERTY LIABILITY INSURANCE GUARANTY ASSOCIATION, Defendant



The opinion of the court was delivered by: SAROKIN

On January 5, 1979, Margarita Ballesteros was shot in the foot and injured while in La Vaca Loca Tavern in Elizabeth, New Jersey. The tavern was owned by Jose Gonzales and insured by the Long Island Insurance Company. The insurance policy, issued by the company through its authorized agent in New Jersey, became effective on March 17, 1978, and was due to expire on March 17, 1979. The policy provided that before it could be terminated, the insurance company was required to give at least ten days' written notice of cancellation to the named insured.

During the term of the policy, the Long Island Insurance Company suffered severe financial difficulties and, on November 13, 1978, the Supreme Court of the State of New York ordered the New York Superintendent of Insurance to take possession of the assets of the company and to rehabilitate it pursuant to Article XVI of the New York Insurance Law. The order also terminated, as of December 13, 1978, all policies issued by the company to policyholders outside of the State of New York. Acting under the authority granted by the order, the Superintendent of Insurance issued Notices of Cancellation which terminated, effective December 13, 1978, all policies embraced by the court order. The notices of cancellation were dated November 13, 1978, and were allegedly mailed by the New York Insurance Department on December 4, 1978. Jose Gonzales, the named insured, denies seeing the notice until one and a half months after the incident of January 5, 1979.

 In May 1979, plaintiff filed a complaint against Mr. Gonzales alleging negligence. Mr. Gonzales defaulted and judgment in the amount of $ 131,657.00 together with $ 39.20 in costs was awarded to plaintiff. Plaintiff then instituted this action against the New Jersey Guaranty Association, claiming that the Association was liable on the claim that Mr. Gonzales had against the now defunct Long Island Insurance Company. The Association denied liability and alleged that Mr. Gonzales' policy was terminated by the New York court's order of rehabilitation and that, therefore, Mr. Gonzales did not have a "covered claim" against the insurer within the meaning of the New Jersey Property Liability Insurance Guaranty Act.

 DISCUSSION OF THE LAW

 The New Jersey Property Liability Insurance Guaranty Act was adopted in New Jersey in 1974 as a mechanism to protect this state's policyholders and claimants from the "devastating financial effects consequent upon an insurer's insolvency." Railroad Roofing & Building Supply Co. v. Financial Fire & Casualty Co., 171 N.J.Super. 375, 379, 409 A.2d 300 (App.Div.1979) reversed on other grounds, 85 N.J. 384, 427 A.2d 66 (1981). The Act implements its purposes through the establishment of a Guaranty Association, which is obligated to pay "covered claims" against an insolvent insurer incurred prior to or 30 days after the determination of insolvency. N.J.Stat.Ann. § 17:30A-8(a)(1). A "covered claim" is one arising out of and within the insurance coverage. N.J.Stat.Ann. § 17:30A-5(d). At the center of the controversy in this matter is whether the insured had a "covered claim" within the meaning of the Guaranty Act. The answer to this question requires an analysis of the Uniform Insurers Liquidation Act and the constitutional validity of the New York court's order.

 The Uniform Insurers Liquidation Act has been adopted by both New Jersey and New York. N.J.Stat.Ann. § 17B:32-1, et seq.; N.Y. Insurance Law § 517, et seq. (McKinney). The Act provides for a uniform, orderly and equitable method of making and processing claims against defunct insurers and provides for a fair procedure to distribute the assets of defunct insurers. Vlasaty v. Avco Rent-A-Car System, Inc., 60 Misc.2d 928, 304 N.Y.S.2d 118, 120 (Sup.Ct.1969).

 In New York, the Superintendent of Insurance commences suit under the Act by making application to the Supreme Court "in the judicial district in which the principal office of the insurer involved is located." N.Y. Insurance Law § 526 (McKinney). Here, application for rehabilitation of the Long Island Insurance Company was made to the First Judicial District in New York State instead of the Second Judicial District, where the insurance company was located. Plaintiff therefore contends that the order issued by the court terminating the policies of out-of-state insureds was void because the court lacked subject matter jurisdiction. Plaintiff's argument, however, fails to distinguish venue from subject matter jurisdiction. Under the New York State Constitution, the Supreme Court is a court of general jurisdiction. N.Y.Const. art. 6 § 7. Unlike venue, which may be waived and does not relate to the power of the court to hear the case, see Agchem Service Corp. v. J. K. Hurd & Son, 75 Misc.2d 926, 349 N.Y.S.2d 936 (N.Y.Cty.Ct.1973), this broad jurisdiction of the court may neither be limited nor qualified by the state legislature. People v. Darling, 50 App.Div.2d 1038, 377 N.Y.S.2d 718, 720 (1975). If plaintiff's interpretation of Section 526 of the Insurance Law were correct, then the statute would unconstitutionally qualify the Supreme Court's power by establishing geographic boundaries on the power of a branch of the court to hear a case. To avoid such a result, this court finds that Section 526 relates only to venue and does not detract from the court's broad jurisdiction. Therefore, because the court had the power to issue the rehabilitation order, plaintiff's argument that the order is void for jurisdictional reasons, must be rejected.

 Plaintiff also contends, however, that even if the order were rendered by a court with jurisdiction over the subject matter, the order could have no extraterritorial effect because the New York court did not have in personam jurisdiction over Jose Gonzales, the named insured. This argument misconceives the nature of the rehabilitation action. A rehabilitation proceeding is an in rem action in which the state court generally has exclusive control over the assets of the impaired insurance company. Mathias v. Lennon, 474 F. Supp. 949, 957 (S.D.N.Y.1979).

 The need for giving one state exclusive jurisdiction over delinquency proceedings has long been recognized in the courts:

 
Experience has demonstrated that, in order to secure an economical, efficient, and orderly liquidation and distribution of the assets of an insolvent corporation for the benefit of all creditors and stockholders, it is essential that the title, custody, and control of the assets be intrusted to a single management under the supervision of one court. Hence other courts, except when called upon by the court of primary jurisdiction for assistance, are excluded from participation. This should be particularly true as to proceedings for the liquidation of insolvent insurance companies, for the reasons adverted to by Mr. Justice Cardozo in Clark v. Williard, 292 U.S. 112 (54 S. Ct. 615, 78 L. Ed. 1160). Motlow v. Southern Holding & Securities Corp., 95 F.2d 721, 725-26 (8th Cir.), cert. denied, 305 U.S. 609 (59 S. Ct. 68, 83 L. Ed. 388) (1938).

 When the New Jersey legislature adopted the Uniform Insurers Liquidation Act, it specifically recognized the benefits of centralizing the management over delinquency proceedings in the courts of one state. The Act provides that claims of New Jersey residents against out-of-state insurers must be filed in the state where delinquency proceedings are instituted unless an ancillary receiver has been appointed in New Jersey. N.J.Stat.Ann. § 17B:32-19(a). The Act also provides that where ancillary proceedings have not been commenced in New Jersey, controverted claims are governed by the laws of the foreign state. Thus, not only was the New York court's order consistent with due process, but the proceedings from which the order arose have the sanction of New Jersey law. Therefore, because the New York court properly had jurisdiction and control over the assets, it had the authority to terminate the subject policies, notwithstanding that the effect of the termination order was to cancel insurance contracts made between the company and its non-resident policyholders.

 Plaintiff also contends that the due process rights of the insured were violated because the insurer failed to notify the insured of the institution of the rehabilitation proceedings. Plaintiff's argument, again, however, misconceives the nature of the rehabilitation proceeding, which is designed to immediately preserve the assets of an impaired company. Section 526 of the New York Insurance Law specifically provides that after the Superintendent commences the action, a hearing shall be held "without delay." At the hearing, the court must fashion relief in accordance with the "interests of policyholders, creditors, stockholders," and other members of the public. N.Y. Insurance Law § 526 (McKinney). If notice were required to be issued to all policyholders, and all policyholders had a right to participate in the hearing, the attendant delay would defeat the policyholders' interest in preventing the dissipation of the company's assets. Because the interests of policyholders are represented by the Superintendent and protected by the state court, due process is not violated by the failure to give notice of the rehabilitation proceedings to the policyholders. See Pastor v. National Republic Bank of Chicago, 76 Ill.2d 139, 28 Ill.Dec. 535, 390 N.E.2d 894, 899 (Ill.1979).

 The court also finds without merit plaintiff's argument that the New York court's cancellation of all policies held by nonresidents of the state violated the equal protection rights of the insured and the constitutional prohibition against the impairment of contracts. *fn1" The Equal Protection Clause is not violated merely because the state has made distinctions between groups. See Railway Express Agency, Inc. v. New York, 336 U.S. 106, 110, 69 S. Ct. 463, 465, 93 L. Ed. 533 (1949). In the area of economics and social welfare, classifications are allowable so long as they are rationally related to a legitimate state purpose. See Dandridge v. Williams, 397 U.S. 471, 485, 90 S. Ct. 1153, 1161, 25 L. Ed. 2d 491 (1970). Merely because the classification distinguishes residents from nonresidents does not require application of a stricter test. Ward v. Board of Examiners of Engineers, Architects and Surveyors of the Commonwealth of Puerto Rico, 409 F. Supp. 1258, 1259 (D.P.R.1976), affirmed, 429 U.S. 801, 97 S. Ct. 37, 50 L. Ed. 2d 64 (1977). Here, the New York court, acting in the interests of the policyholders and the public, determined that in order to successfully rehabilitate the company, it was necessary to cancel the policies held by non-resident insureds. The court's action had a rational basis. The court was attempting to restrict the business of the company and ease the costs of administration by requiring that the company do its business locally. Because the New York court's order was a rational attempt to reduce the potential liabilities of the company and to reduce administrative expenses, this court finds that the equal protection rights of the insured were not violated. See Mathias v. Lennon, 474 F. Supp. 949, 957 (S.D.N.Y.1979).

 Plaintiff also contends that the New York court's cancellation of the policies of out-of-state insureds violated the constitutional prohibition against the impairment of contractual obligations. U.S.Const. art. 1 § 10, cl. 1. The prohibition against impairment of contractual obligations affords no protection against judicial action, it merely protects against the enactment of legislation which interferes with existing contract rights. Barrows v. Jackson, 346 U.S. 249, 260, 73 S. Ct. 1031, 1037, 97 L. Ed. 1586 (1953). Here, not only was the contract formed after the legislation was ...


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