The opinion of the court was delivered by: SAROKIN
The plaintiffs in this matter challenge the right of the State of New Jersey to impose fees upon them for issuing coverage insuring persons or property within the state. Primarily plaintiffs contest the constitutionality of the statute here in question on the ground that surplus lines insurance companies do not, indeed are not permitted to, do business in this state. All business of this nature must be conducted through authorized surplus lines brokers, and plaintiffs contend that they have no presence in this state which properly subjects them to the fees being exacted by the state.
It is undisputed that the subject legislation was enacted as the result of the insolvency of a surplus lines carrier. In order to protect against such a reoccurrence the challenged legislation was enacted so as to provide a ready reserve fund to meet such a contingency.
All of the characteristics relied upon by plaintiffs to refute the reach of the State of New Jersey over their activities is overcome by the simple fact that they are engaged in insuring persons and property within the state through in-state agents, seek and obtain eligibility to issue such coverage, and are compensated for such insurance by persons and companies within the state. Notwithstanding the limitations and restrictions imposed upon their activities, the state in the interest of its citizens may impose reasonable conditions upon such companies in order to protect those who utilize their services. They derive an obvious benefit from the placement of such insurance. They may avoid their contribution by foregoing that benefit. On the other hand, they cannot accept the benefit without satisfying the reasonable and justifiable conditions imposed upon them.
For the reasons hereinafter set forth, the court finds the statute to be constitutional.
On February 14, 1984, Ambassador Insurance Company, a "surplus lines" insurer incorporated in Vermont, was declared insolvent by an Arizona state court. Aff. of Cecilia Kempler, para. 31. On March 30, 1984, the Commissioner of Banking and Insurance in Vermont applied to a Vermont Superior Court for an order declaring Ambassador insolvent and directing the Commissioner to liquidate the business. Defendant's Brief at 9. Over three thousand claims involving policyholders and claimants in the State of New Jersey remained outstanding, with a total value of 10 to 12 million dollars -- far exceeding the company's assets. Statement accompanying New Jersey Surplus Lines Insurance Guaranty Fund Act, Exhibit C to Kempler Aff. Affected policyholders "[ran] the gamut from individual homeowners, to small retail establishments to several hundred governmental entities, including municipal police departments, housing authorities, and improvement authorities." Id.
To meet this crisis, the State of New Jersey enacted the New Jersey Surplus Lines Insurance Guaranty Act, 1984 N.J. Laws, ch. 101, on July 27, 1984. The Act was designed to "provide a mechanism for the payment of covered claims under certain insurance policies issued by eligible surplus lines insurers; to avoid excessive delays in the payment of the covered claims against insolvent eligible nonadmitted insurers; and to avoid financial loss to claimants or policyholders because of the insolvency of an eligible nonadmitted insurer." Section 2. The Act created the New Jersey Surplus Lines Insurance Guaranty Fund to pay the covered claims of "surplus lines" policyholders whose insurers became insolvent and to recover amounts paid to the extent possible from the estates of insolvent insurers. The Act also requires contributions to the Fund from other currently "eligible," "surplus lines" insurers, which are deemed members of the Fund.
Plaintiffs in this action, two "surplus lines" insurers and two asserted representatives of New Jersey insureds, challenge the constitutionality of the Act. Because the court finds the Act a reasonable exercise of the state's legitimate legislative power, the court deems the Act constitutional in all respects.
New Jersey, in common with all other states, has developed a comprehensive regulatory scheme governing the issuance of insurance and the operation of insurance companies in the state. New Jersey's insurance law differentiates between two broad categories of insurers: "admitted" or "authorized" insurers, on one hand, and "surplus lines" insurers on the other. "Authorized" and "admitted" insurers are domestic and foreign insurers, respectively, which have qualified to transact insurance business directly with prospective insureds in the State of New Jersey. See N.J. Stat. Ann. 17:17-1, et seq., 17:32-1, et seq. These extensively regulated insurers provide coverage for the bulk of insurance risks in the state. Indeed, New Jersey forbids the representatives of any insurer other than an admitted or authorized insurer to transact insurance business in the state. N.J. Stat. Ann. 17:22-6.37.
One exception to this prohibition permits the placing of "surplus lines" coverages with designated "surplus lines" insurers. "Surplus lines" insurers are by definition foreign insurers, not authorized to do business in the state directly, which nevertheless have been declared eligible to receive New Jersey insurance business through specially licensed "surplus lines" agents. It is these insurers which are the regulatory subject of the challenged Act.
According to New Jersey's surplus lines law, a New Jersey insurance risk may be "exported" to one of these surplus lines insurers only upon a showing that the coverage requested is not procurable from an admitted or authorized insurer after "diligent effort." N.J. Stat. Ann. 17:22-6.43. The risks are then "exported" by surplus lines agents, who are specially licensed by the state to handle surplus lines coverages. N.J. Stat. Ann. 17:22-6.42, 6.55. These surplus lines agents are not employees of the surplus lines insurers. N.J. Stat. Ann. 17:22-6.41. Yet, they are the exclusive conduit through which surplus lines insurers may seek eligibility to receive "exported" coverages as an initial matter. N.J. Stat. Ann. 17:22-6.45(a) ("eligibility of the insurer must be requested in writing by a licensed surplus lines agent"). An insurer's eligibility to receive these coverages is determined based on the prospective surplus lines insurer's apparent financial condition and trustworthiness, as well as on the sponsorship of a surplus lines agent. N.J. Stat. Ann. 17:22-6.45.
Once an insurer is declared "eligible," the insurer is entered onto a periodically published list of eligible surplus lines insurers, known as the "white list," from which surplus lines agents may draw to place coverages. See N.J. Stat. Ann. 17:22-6.45. In the placement process, surplus lines agents negotiate all coverages on behalf of the insurer with prospective insureds or their brokers. Where the surplus lines agent has been granted binding authority by an insurer, see N.J. Stat. Ann. 17:22-6.42, the agent may bind coverage immediately upon payment of the premium; otherwise, the agent seeks approval of the coverage from the insurer, and transmits that approval to the insured. The agent is charged with supplying evidence of coverage to the insured, see N.J. Stat. Ann. 17:22-6.50, and with filing a copy of the policy issued with the Commissioner. N.J. Stat. Ann. 17:22-6.51. The insurer is deemed to have received a premium once it has been received by the agent. N.J. Stat. Ann. 17:22-6.54. Taxes on the coverages are either collected by the agent or paid directly by the insured. N.J. Stat. Ann. 17:22-6.59, 6.64.
New Jersey does not purport to prohibit surplus lines insurers from dealing directly with New Jersey residents who leave the state to seek these insurers out. Within its own borders, however, the state restricts surplus lines insurers from receiving any insurance business without the aid and sponsorship of surplus lines agents and prohibits any direct contact with prospective New Jersey insureds. Despite this restriction, eligible insurers receive millions of dollars of net direct written premiums each year.
This special restriction on the manner in which surplus lines insurers may receive business in New Jersey corresponds to their relatively greater freedom from state regulation, as compared to admitted and authorized insurers. For example, surplus lines insurers need only establish the "appear[ance]" of sound financial status in order to obtain eligibility to receive in-state business; the Commissioner of Insurance is not charged with investigating the actual financial condition of a prospective surplus lines insurer. N.J. Stat. Ann. 17:22-6.45. In contrast, an admitted or authorized insurer is subject to thorough examination into its financial status "whenever [the commissioner] deems it expedient, . . . [and] at least once in five years." N.J. Stat. Ann. 17:29A-7. Admitted and authorized insurers must satisfy the Commissioner that they meet certain capital stock or asset minima prior to commencing business operations in New Jersey, see N.J. Stat. Ann. 17:17-6 -17:17-8, 17:32-2, while a prospective surplus lines insurer need only furnish a financial statement showing a minimum surplus as to policyholders. N.J. Stat. Ann. 17:22-6.45(c)-(d). Admitted and authorized insurers are required to obtain the Commissioner's approval for proposed rates and rating systems, N.J. Stat. Ann. 17:29A-7, and are forbidden to deviate from those rates once they are approved. N.J. Stat. Ann. 17:22-6.43. Surplus lines insurers, however, may charge any rate the market will bear, so long as it does not fall below the lowest rate offered by an admitted or authorized insurer. N.J. Stat. Ann. 17:22-6.43.
Surplus lines insurers are not entirely free of regulation, however. They are circumscribed in the form of policies they may issue, unless they receive approval from the Commissioner to issue a unique form of policy. N.J. Stat. Ann. 17:22-6.43. They are required to file financial statements with the Commissioner annually as a condition of continued eligibility, Aff. of Jerry Porcelli, para. 11 and Exhibit D, and to provide deposits or evidence of a trust fund for the benefit of policyholders and claimants. N.J. Stat. Ann. 17:22-6.45(d). In their initial eligibility applications, they are required to furnish information regarding their licensure in their domiciliary state or country, biographical sketches of officers and directors, certified copies of their charter and by-laws, and various financial statements. N.J. Stat. Ann. 17:22-6.45.
Because of the lesser degree of regulation to which surplus lines insurers are subject in general, they pose a greater potential danger to New Jersey residents. New Jersey's requirement that surplus lines insurers receive all business through surplus lines agents represents a compromise affording New Jersey residents the in-state availability of this coverage when needed, while at the same time protecting state residents from direct solicitation by these relatively unregulated insurers. Surplus lines insurers presumably opt for this status rather than seeking admitted status either because they prefer the lesser regulatory burdens, or because they cannot meet the requirements for admitted status.
The Ambassador fiasco raised a spectre that had not been addressed previously in the state's regulatory scheme, viz., the insolvency of a surplus lines insurer. The Surplus Lines Insurance Guaranty Fund Act at issue in this litigation was conceived to fill that regulatory gap. It was modelled in large part after the earlier Property Liability Insurance Guaranty Act, N.J. Stat. Ann. 17:30A-1 et seq., which has governed admitted and authorized insurers since 1974.
The Property Liability Insurance Guaranty (PLIG) Act established a Property Liability Insurance Guaranty Association ("Association") to investigate and pay claims of insureds whose insurers had become insolvent. Admitted and authorized insurers were deemed members of the Association as a condition of their continuing authorization to transact business directly with insureds in New Jersey. N.J. Stat. Ann. 17:30A-6. The PLIG Act provided for the development of a Plan of Operation and the selection of a Board of Directors to govern the handling of claims covered by the PLIG Act and the assessment of contributions. N.J. Stat. Ann. 17:30A-7-9. Assessments were to be made as required against each insurer in the proportion that that insurer's net direct written premium for the previous year bore to the equivalent figure for all members. N.J. Stat. Ann. 17:30A-8. Admitted and authorized insurers were permitted to recoup the amount of their contributions from insureds by collecting a premium surcharge according to rules adopted by the Commissioner. N.J. Stat. Ann. 17:30A-16. Claims of insureds were "covered" for the purpose of the PLIG Act even though the insured had not contributed to the Association by means of a surcharge, as long as the insurer was subject to the Act and the insured resided in the state at the time of the insured event or the property insured was permanently located in the state. N.J. Stat. Ann. 17:30A-5.
Drawing upon this model, the Surplus Lines Guaranty Act ("Act") creates a Fund to pay claims of insureds upon the insolvency of a surplus lines insurer. Surplus lines insurers are deemed members of the Fund as a condition of their continued eligibility to receive New Jersey business through in-state surplus lines agents. In contrast to the PLIG Act, however, the Act does not create an association of surplus lines insurers to manage the Fund. Instead, it appoints the Property Liability Insurance Guaranty Association to perform management duties, under the supervision of the Commissioner.
The Act provides for yearly assessments of Fund members, to be proportioned according to each member's previous year's net direct written premium from New Jersey business. Section (6)(a)(2). Yearly assessments are not to exceed four percent of that figure. Section (6)(a)(2). In the event that Fund monies fall short of the amount required to pay "covered claims," the Act authorizes the Fund to borrow up to $10,000,000 from the monies of the Association at an annual rate of six percent interest to apply toward the Fund's obligations. Section (6)(b). The Act calls for an initial contribution in the amount of four percent of 1983 net direct written premiums, and a one-time initial fee of $25,000 as a condition of continued surplus lines eligibility. Section (6)(a)(1) & (2). There is no explicit recoupment provision.
Disposition of monies contributed since the effective date of the Act was stayed by consent of the parties for sixty days in anticipation of the resolution of the constitutional questions raised by plaintiffs. Failure of a surplus lines insurer to make the required contributions under the Act while continuing to receive New Jersey business in-state would subject those aiding in the transactions in-state to criminal penalties. N.J. Stat. Ann. 17:22-6.37.
The plaintiffs are two surplus lines insurers, Evanston Insurance Company and Appalachian Insurance Company; a New Jersey resident, Mr. Donald Brody, insured by an authorized insurer; and the Risk and Insurance Management Society ("RIMS"), a non-profit organization which includes approximately eighty New Jersey commercial insureds among its members. RIMS purports to represent New Jersey surplus lines insureds. Kempler Aff., para. 6.
Plaintiffs challenge the Act on several grounds. First, Evanston and Appalachian claim that the Act violates their fifth and fourteenth amendment rights to due process on the ground that the Act seeks to regulate beyond the state's legitimate jurisdiction. Second, they claim that the delegation of Fund management responsibility to the Association is an unconstitutional delegation of legislative authority to private persons, as well as a violation of due process because of an asserted conflict of interests between Association members and surplus lines insurers. Lastly, Evanston and Appalachian challenge the initial assessment of four percent of each subject insurer's 1983 net direct written premium from New Jersey surplus lines business as a violation of the Contract Clause. Plaintiff Brody, for his part, contends that the Act's authorization of loans from the Association to the Fund at a six percent annual rate of interest amounts to an unconstitutional taking in violation of the fifth amendment. Plaintiff RIMS asserts that enforcement of the Act will result in increased insurance costs to surplus lines insureds and a withdrawal of surplus lines insurers from the New Jersey market. Together, the plaintiffs seek a declaration that the Act is unconstitutional, as well as an injunction preventing its enforcement.
Defendants are Kenneth Merin, New Jersey's Commissioner of Insurance, Thomas Kean, the Governor of New Jersey, and the Property Liability Insurance Guaranty Association. The state defendants contend that the Act is a proper exercise of New Jersey's legislative powers; that this court is barred by the eleventh amendment from granting relief to plaintiffs insofar as their claims are based on state law and that the delegation of management responsibility to the Association violates no federal constitutional provision because the delegation confers no legislative power; that the Act does not violate the Contract Clause, chiefly because the four percent assessment is not retrospective and therefore does not impair any contract; that the Act does not constitute an unconstitutional taking of property; and, finally, that this court does not have jurisdiction to entertain plaintiffs' challenge to the Act. The Association defends its role under the Act as purely ministerial. It emphasizes the ...