The Supreme Court's decision in Heublein has a dual significance here. First, it upheld a state tax on a corporation whose salient connections with the taxing state were remarkably similar to those of the plaintiffs here to the State of New Jersey. Second, it did so even though the nature of the corporation's connection with the state was solely a product of state regulation.
Like the State of South Carolina in Heublein, New Jersey has required surplus lines insurers to channel their business in the state through designated local agents whose function, in part, is to satisfy the state's regulatory requirements. Surplus lines agents perform a number of services for surplus lines insurers which are required by the New Jersey regulatory scheme as a condition upon the insurers' receipt of in-state New Jersey business. As an initial matter, surplus lines agents must sponsor the applications of surplus lines insurers for eligibility to receive in-state New Jersey business. Thereafter, the surplus lines agent handles the affidavits required for a risk to be declared exportable, provides evidence of coverage to the insured and to the Commissioner, and files a copy of the issued policy with the Commissioner. The agent also performs such non-regulatory functions on behalf of surplus lines insurers as directing prospective insureds to specific insurers named on the white list, and negotiating coverages with the insured. While the agent is not an employee or general agent of the insurer, he or she performs a sufficient number of agency functions in furtherance of the insurers' operations within the regulatory scheme to elevate the surplus lines insurer over the threshold of susceptibility to state taxation.
The rationale behind the "in-state agent" test of a state's power to tax a foreign corporation is that an agent acting within a state takes advantage of the "benefits which [the state] has conferred by the fact of being an orderly, civilized society." J.C. Penney, 311 U.S. at 444. Because the state has provided this benefit, it has the power to tax. Heublein stands for the proposition that a state may, pursuant to a valid regulatory scheme, require a foreign corporation to take advantage of the state's benefits, if the corporation is to receive any business from the state at all, and may levy a tax against the corporation because of the benefits provided. In its regulatory scheme, New Jersey has required that any foreign insurer seeking to receive in-state surplus lines business must do so through the mechanism of surplus lines agents. Because these agents, in their operations, take advantage of benefits conferred by the state, the state may tax the insurers which have sought their services.
This conclusion is in complete harmony with the principles of fundamental fairness invoked by plaintiffs. The plaintiffs have voluntarily and actively sought to receive business in New Jersey. They have not only applied to the state for eligibility status, but have sought out surplus lines agents to sponsor them. Unlike the defendants in World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 62 L. Ed. 2d 490, 100 S. Ct. 559 (1980) and Kulko v. Superior Court of Calif, 436 U.S. 84, 56 L. Ed. 2d 132, 98 S. Ct. 1690 (1978), cited by plaintiffs, the plaintiffs have purposefully sought out benefits from the State of New Jersey -- namely, the ability to receive business through the mechanism of surplus lines agents. There would be no unfairness in taxing them for those benefits purposefully sought.
2. Rational Relation to Intrastate Value
Even if the plaintiffs have a sufficient minimal connection to the state to justify imposition of a tax, any tax levied would have to bear a "rational relationship . . . [to] the intrastate values of the enterprise." Container Corp., 103 S. Ct. at 29-40. In other words, the state "may not tax value earned outside its borders." ASARCO Inc. v. Idaho State Tax Comm'n, 458 U.S. 307, 315, 73 L. Ed. 2d 787, 102 S. Ct. 3103 (1982). Thus, a corporation may not be taxed even by a state in which it is licensed to do business on income that bears no relationship to values of the corporation in the state. See, e.g., Connecticut General Life Insurance Co. v. Johnson, 303 U.S. 77, 82 L. Ed. 673, 58 S. Ct. 436 (1938) (State of California could not tax Connecticut corporation on basis of premiums earned under reinsurance contracts executed in Connecticut which happened to reinsure other insurance companies against losses on California policies). American Oil Co. v. Neill, 380 U.S. 451, 14 L. Ed. 2d 1, 85 S. Ct. 1130 (1965) (mere fact that Utah oil company had a licensed dealer in Idaho did not justify Idaho excise tax on shipment of oil delivered f.o.b. Salt Lake City pursuant to contract made with government agency in Seattle).
Plaintiffs suggest that the premiums they receive on New Jersey surplus lines policies are not values earned in the state because their business is assertedly conducted out-of-state. Plaintiff's Mem. at 25. This suggestion need not detain the court, however. Plaintiffs receive premiums from New Jersey residents pursuant to insurance contracts negotiated in New Jersey and entered into between the resident and the insurer. The coverages plaintiffs provide are not delivered "free on board" the insurers' out-of-state offices, as plaintiffs seem to suggest. Nor do the plaintiffs have any separate contract with their surplus lines agents akin to a reinsurance contract; their contracts are with the resident insureds, and they insure risks located in New Jersey. The net direct written premiums upon which the assessment is based are thus obviously rationally related to an intrastate "value": the risk covered. In any event, states may constitutionally tax premiums paid on insurance policies insuring risks located within the state even when the policy was written outside of the state where it appears that the risks may require adjustment and the future activities of agents in the state. Compania de Tobaco v. Collector, 275 U.S. 87, 98, 72 L. Ed. 177, 48 S. Ct. 100 (1927), cited in Connecticut General, 303 U.S. at 82. See also Howell v. Rosecliff Realty, 52 N.J. 313, 245 A.2d 318 (1968) (New Jersey could tax premiums paid on policy issued out-of-state absent explicit provision that policy would be performed out-of-state). The tax may be measured by the premiums collected, "including those mailed to the home office without the state." Connecticut General, at 82, citing Equitable Life Insurance Society v. Pennsylvania, 238 U.S. 143, 59 L. Ed. 1239, 35 S. Ct. 829 (1914).
Likewise, the one-time initial $25,000 contribution required under the Act rationally relates to an intrastate value, namely, the privilege of continued surplus lines eligibility. In light of the regulatory power delegated to the states under the McCarran Act, there is no question that New Jersey could prohibit an insurer from receiving in-state New Jersey business altogether. It follows that New Jersey may exact payment for the privilege of doing what it has the power to forbid. See Atlantic & Pacific Tea Co. v. Grosjean, 301 U.S. 412, 426, 81 L. Ed. 1193, 57 S. Ct. 772 (1937) ("Whatever a state may forbid or regulate it may permit upon condition that a fee be paid in return for the privilege"). Moreover, the state is free to select its own measure for the value of the privilege extended. Atlantic Refining Co. v. Virginia, 302 U.S. 22, 26-27, 82 L. Ed. 24, 58 S. Ct. 75 (1937). State privilege taxes are not unconstitutional when imposed as a one-time initial fee upon corporations seeking in-state business when the corporations have not already acquired substantial property in-state, or made other expenditures relating to the business taxed. Id. at 32-33.
In sum, there would be no due process violation had New Jersey imposed a tax on the plaintiffs in equivalent dimension to the assessments provided for under the Act. Where, as here, the state is not seeking "to export any duty toward its treasury," Aldens v. Packel, 524 F.2d at 44, but only attempting to protect New Jersey residents from the insolvency of the surplus lines insurers who profit from them, its regulatory solution is not subject to the special due process scrutiny of a tax assessment. Id. Given that the Act survives the heightened due process scrutiny applicable to tax statutes, it is clearly constitutionally sound on this ground.
b. Unconstitutional Delegation
In addition to attacking the Act generally as a violation of substantive due process, the plaintiffs challenge the Act as an unconstitutional delegation of authority to the Association to manage the Surplus Lines Insurance Guaranty Fund. Plaintiffs' objection appears to have two facets: first, according to plaintiffs, the New Jersey State Legislature's delegation of administrative authority to the Association constitutes an unconstitutional delegation of "legislative" authority to a private association; second, plaintiffs contend, the Act offends due process because of an inherent conflict of interest in the Association's management of a Fund to which only surplus lines insurers contribute.
The state defendants contend that plaintiffs' first objection to the delegation of "legislative" authority to the Association is solely a matter of state law and, as such, is not within this court's power to remedy. Indeed, it is true that the state legislature's choice of how to delegate its power in light of the New Jersey State Constitution is, as the state defendants contend, a matter of state law, absent any independent violation of the United States Constitution. Highland Dairy Farms v. Agnew, 300 U.S. 608, 612, 81 L. Ed. 835, 57 S. Ct. 549 (1937) ("How power shall be distributed by a state among its governmental organs is commonly, if not always, a question for the state itself"). Moreover, as the state defendants point out, this court has no authority to order injunctive or declaratory relief against state officers solely on the grounds of state law. Pennhurst State School v. Halderman, 465 U.S. 89, 104 S. Ct. 900, 79 L. Ed. 2d 67 (1984) (Eleventh amendment bars federal courts from ordering state officials to conform their conduct to state law).
Nevertheless, the Act's delegation of authority to the Association raises at least the possibility of a violation of the federal Constitution independent of any violation of New Jersey's Constitution. The delegation by a state legislature of unchecked legislative power to a private entity can amount to a violation of the due process and equal protection clauses of the fourteenth amendment. Prudential Prop. & Casualty Co. v. Ins. Comm'n, 534 F. Supp. 571 (D.S.C. 1982), aff'd, 699 F.2d 690 (4th Cir. 1983); see also L. Tribe, American Constitutional Law, 290-91 (1978) (delegation of legislative power to private parties is disfavored). A delegation of management authority is not unconstitutional where the exercise of authority is subject to governmental oversight, however. Prudential Prop., 534 F. Supp. 571, 580 (delegation of regulatory authority to private Reinsurance Facility not unconstitutional where Governing Board of facility is subordinate to state Insurance Commissioner); First Jersey Securities, Inc. v. Bergen, 605 F.2d 690, 697 (3d Cir. 1979) (delegation of disciplinary authority to Nat'l Association of Sec. Dealers not unconstitutional where exercise of authority subject to Securities & Exchange Comm'n oversight).
In this case, the Insurance Commissioner is given sufficient supervisory control over the Association's activities to relieve any constitutional infirmity. Under the Act, the Association is authorized to "exercise all of the powers vested in the fund under this Act, and such other powers as may be necessary or appropriate to the fulfilling of its responsibilities under this act." Section 4. At all times, however, the Fund "shall be subject to the examination and regulation by the Commissioner." The Association's Plan of Operation is also subject to the Commissioner's approval. N.J. Stat. Ann. 17:30A-9.
Moreover, the powers delegated to the Fund under the Act are peculiarly non-legislative, as distinct from those powers the Act reserved to the Commissioner. In general, the Fund is delegated the power to investigate and adjust, or contest, claims; to pay administrative expenses; and to contract as required to carry out the Act. In short, it is delegated responsibilities which are very much within the province of an insurer's usual activities, that is, responsibilities within the special expertise of Association members. At the same time, these duties all relate to the assessment and disposition of individual claims, rather than to the promulgation of general rules. The Commissioner alone is responsible for: (1) adjusting payments overall for covered claims based on monies in the Fund, § 5(a)(1); (2) determining the amount of money to be refunded to member insurers when assessments exceed the needs of the Fund, § 5(b)(4); (3) determining the amount to be assessed in addition to the initial $25,000 contribution, and adjusting the amount of that assessment, § 6(a)(2); (4) approving any payment schedule for monies borrowed from the Property Liability Insurance Guaranty Fund, § 6(b). Delegating quasi-adjudicative authority over individual claims to private parties is not unconstitutional per se. Cf. Schweiker v. McClure, 456 U.S. 188, 72 L. Ed. 2d 1, 102 S. Ct. 1665 (1982) (delegation to private insurance carriers of administrative authority over payment of Medicare claims out of Government Trust Fund monies, including authority to review and pay or oppose claims, and to conduct hearings, not violation of claimants' due process rights). If the delegation of authority to adjust claims to a private party does not offend the claimant's rights, surely it does not offend the rights of the plaintiffs.
The real thrust of plaintiffs' objection to the Association's role with regard to the Fund is not based on the Association's private character, however. Plaintiffs do not suggest that the Association's management of its own monies under the Property Liability Insurance Guaranty Fund Act is improper. Indeed, they propose as a solution to their objection that another private group, surplus lines insurers, be vested with management authority over the Fund. Although their objection is couched in terms emphasizing the privateness of the Association, the heart of their concern is rather a perceived conflict of interest between the Association and surplus lines insurers.
The court, however, perceives no such conflict. The mere fact that members of the Association are involved in the insurance industry does not make the delegation of authority to them a denial of due process. See Republic Industries v. Teamsters Joint Council, 718 F.2d 628, 640 (4th Cir. 1983) (no per se denial of due process on ground that trustees of Pension Benefit Guaranty Corp., charged with determination of employer's "withdrawal liability" under Multiemployer Pension Plan Act of 1980, were chosen by entities with an interest in the fund managed by the Corporation). Indeed, to bar potential trustees automatically from the management of a fund in the industry in which they are participants would "deny the fund valuable expertise." Id. Neither do philosophical differences alone create a constitutionally offensive conflict of interest. Rather, only some tangible adversity of interests, such as a "personal financial stake in the matter in controversy," Gibson v. Berryhill, 411 U.S. 564, 571, 36 L. Ed. 2d 488, 93 S. Ct. 1689 (1973), will reach the level of a redressable conflict of interest.
The plaintiffs concede, however, that Association members are not in direct competition with surplus lines insurers. Letter from Cecilia Kempler, 11/5/84, at 3. They cite only an historical hostility on the part of admitted insurers toward surplus lines insurers as grounds for invalidating the Act. Id. This asserted hostility is simply not sufficient, by itself, to warrant overturning the New Jersey Legislature's choice of claims managers under the Act.
First of all, the Association is "[a] fiduciary and [is] required to act as such." Republic Industries, 718 F.2d at 640; see also Textile Workers Pension v. Std Dye & Finishing, 725 F.2d 843, 855 (2d Cir. 1984) (where trustees of fund were required by law to serve the fund impartially, i.e., "without regard to whether they were appointed by labor or management . . ." there was no "unfairness" in the legislature's decision to delegate discretionary responsibility to trustees and to treat their determination as presumptively correct). Moreover, this court can find no provision in the Act which would allow Association members to take advantage of their position to the detriment of surplus lines insurers, even if they had the desire to do so. The Commissioner alone is vested with all power to determine assessments, as described above. The Commissioner alone has authority to impose sanctions on individual surplus lines insurers for non-compliance with the Act. §§ 7, 11. The Association's only real authority is in the processing of claims, and even that is subject to the Commissioner's oversight. Given the fact that any shortfall in Fund monies is to be made up out of the Association's own monies, moreover, it is difficult to see what incentive the Association could have ever to abuse its authority by, for instance, overevaluating claims.
In determining that the Fund should be managed by the Association, the New Jersey Legislature no doubt considered the Association's expertise, its record in handling monies under the Property Liability Insurance Guaranty Act, and its relative availability to handle such duties within the state. Plaintiffs have articulated no concrete adversity of interest between the Association and surplus lines insurers which poses the potential for disrupting the fair operation of the Fund and overriding these legislative considerations. Defendants claim, therefore, that there is no conflict of interest of constitutional proportions in the Act's delegation of administrative responsibility to the Association as a matter of law. This court agrees. While it might have been wiser of the Legislature to include surplus lines insurers as managers of the Fund, there is no constitutional infirmity in its decision not to do so. Because the powers of the Association under the Act are a matter of statutory construction, not a question of fact, summary judgment in favor of the defendants on this point is appropriate.
c. Equal Protection
The amicus has raised an additional challenge to the Act's treatment of surplus lines insurers vis a vis admitted insurers on equal protection grounds. It claims that the Act is invidiously discriminatory against surplus lines insurers in two ways. First, the Act requires an initial $25,000 contribution as a condition of continued surplus lines eligibility, whereas admitted and authorized insurers are required to pay only a nominal license fee as a condition of doing business in the state, and are subject to more substantial assessments only in the event that an admitted or authorized insurer should become insolvent. Second, the Insurance law permits admitted and authorized insurers to impose policy surcharges on their insureds to recoup the amount of the assessment, whereas the Act provides no such recoupment mechanism for surplus lines insurers.
The equal protection clause proscribes the differential classification of individuals similarly situated unless the classification bears a rational relationship to a legitimate state interest, assuming no fundamental right or suspect classification is involved. San Antonio Ind. Sch. Dist. v. Rodriguez, 411 U.S. 1, 17, 36 L. Ed. 2d 16, 93 S. Ct. 1278, reh. denied, 411 U.S. 959, 93 S. Ct. 1919, 36 L. Ed. 2d 418 (1973). Since the privilege of engaging in business in a state is not a fundamental right, differential assessments which are a precondition to the grant of such a privilege need only bear a rational relation to a legitimate state interest. Cf. Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 359, 35 L. Ed. 2d 351, 93 S. Ct. 1001 (1973) ("Where taxation is concerned and no specific federal right, apart from equal protection, is imperiled, the states have large leeway in making classifications and drawing lines which in their judgment produce reasonable systems of taxation"). The equal protection clause "imposes no iron rule of equality, prohibiting the flexibility and variety that are appropriate to reasonable schemes of taxation. The state may impose different specific taxes upon different trades and professions and may vary the rate of excise on various products. It is not required to resort to close distinctions or to maintain a precise, scientific uniformity with reference to composition, use or value." Allied Stores of Ohio v. Bowers, 358 U.S. 522, 526-27, 3 L. Ed. 2d 480, 79 S. Ct. 437 (1959). Although the assessments at issue here are not a tax, they are governed by a like standard under the equal protection clause.
The state defendants present a plausible, legitimate state interest to which the one-time contribution requirement is rationally related. Since the immediate impetus behind the Act was to minimize the impact of Ambassador's impending financial collapse, the Legislature might well have determined that the Fund would require a quick infusion of monies from surplus lines insurers in order to meet the demand for payment on claims by Ambassador insureds. Over the long term, the Legislature could well have decided that the small surplus lines market would not be able adequately to meet the sudden demands of an insurer's insolvency with only post hoc assessments based on premium writings, but would require some base fund to draw upon. A legislative decision to establish a different contribution mechanism for the surplus lines fund than for the Association in light of these concerns would not be invidiously discriminatory or arbitrary, but rationally related to a legitimate state goal.
Moreover, the absence of a recoupment mechanism for surplus lines insurers makes eminent sense, given the absence of regulation on the upper limits of surplus lines premium rates. It is likewise not discriminatory. Because admitted and authorized insurers must seek approval for proposed rates and must not vary their rates once approved, N.J. Stat. Ann. 17:29A-7, 15, the only means by which they are able to recoup an assessment is by imposing a premium surcharge. Surplus lines insurers, with no equivalent rate rigidity, may simply raise their rates if they seek to recoup a contribution to the Fund. Neither the absence of an explicit recoupment mechanism, nor the requirement of an initial contribution thus discriminates unconstitutionally against surplus lines insurers.
d. Contract Clause and Retroactivity
The amicus challenges the Act as a retrospective deprivation of vested rights. Plaintiffs claim it is a retrospective impairment of contract. The court agrees with the state defendants, however, that this legislation is not retrospective at all.
A piece of legislation is retroactive if its effect is "to impose a new duty or liability based on past acts." Turner v. Elkhorn Mining Co., 428 U.S. 1, 16, 49 L. Ed. 2d 752, 96 S. Ct. 2882 (1976). See, e.g., Pension Benefit Guaranty Corp. v. Oregon-Washington Carpenters Employees Pension Trust Fund, 464 U.S. 912, 104 S. Ct. 271, 78 L. Ed. 2d 253 (1984) (statute requiring employers who had withdrawn from Multiemployer Pension Fund in past to pay withdrawal liability fee). Such is not the case here. The "duty or liability" of surplus lines insurers to make the required contributions to the Fund is not based on the insurers' past participation in the surplus lines market, but on their continued participation. Insurers are free to withdraw from eligibility status and escape the assessments altogether. Indeed, the plaintiffs have conceded as much in their moving papers: "Surplus lines insurers should know before they accept risks exported to them whether they must choose to pay assessments or refuse to insure New Jersey risks." Plaintiffs' Mem. at 15. Only the measure of the required assessment is reflective of past participation in the surplus lines market, not the fact of the assessment. Because the Act calls for assessments based on continued eligibility status, rather than on past receipt of New Jersey business, it does not retrospectively disturb any vested rights, contrary to the amicus ' claim.
Moreover, the Act has not "operated as a substantial impairment of a contractual relationship," Energy Reserves Group v. Kansas Power & Light, 459 U.S. 400, 411, 74 L. Ed. 2d 569, 103 S. Ct. 697 (quoting cases), the threshold requirement for a contract clause violation. Surplus lines insurers had no "contract" with New Jersey to continue to receive in-state New Jersey business. Their eligibility status was not a "contract" right. Neither is there an impairment of these insurers' 1983 insurance contracts with New Jersey insureds because the legislation does not affect those contracts; it regulates only plaintiffs' continued eligibility to receive New Jersey business in the future. Plaintiffs' and amicus ' contract and retrospective deprivation claims are thus unfounded.
e. Taking Without Just Compensation
The final count in the complaint is that the borrowing provisions in the Act which authorize the Association to apply its own monies to the payment of claims against the surplus lines fund amounts to a taking of plaintiff Brody's property without just compensation. Plaintiff objects to the borrowing provision on the ground that it might leave his own potential claim unsecured, and that it provides for repayment to the Association at only a six percent annual rate of interest. Although the court has determined that plaintiff Brody, as an admitted insurer, has standing to challenge the Act's borrowing provision, the court concludes that this provision does not constitute a taking of plaintiff Brody's property. Brody's interest in the security and level of Association monies does not constitute "property" within the meaning of the fifth amendment's just compensation clause.
"Property" within the meaning of the just compensation clause is "the group of rights inhering in the citizen's relation to [a] physical thing." United States v. General Motors Corp., 323 U.S. 373, 378, 89 L. Ed. 311, 65 S. Ct. 357 (1945). It presupposes "the presence of a legally enforceable and recognizable interest in distinct property." Peick v. Pension Benefit Guaranty Corp., 724 F.2d 1247, 1275 (7th Cir. 1983). "Property" under the just compensation clause must consist of more than a mere contractual expectation. Id.
Plaintiff Brody's interest in Association monies does not rise even to that level, however. An insured's coverage under the Property Liability Insurance Guaranty Act is independent of, and not in proportion to, the insured's "contributions" to the Association through surcharges on his or her premiums. Coverage under the PLIG Act is a non-contractual benefit akin to the benefits provided in the federal Social Security Act. Such benefits enjoy no "constitutionally protected status," Weinberger v. Salfi, 422 U.S. 749 (1975); see also Flemming v. Nestor, 363 U.S. 603, 611, 4 L. Ed. 2d 1435, 80 S. Ct. 1367 (1960), as against the regulatory power of the government. While Brody may be entitled to procedural due process in the determination of his statutory eligibility to payment on a covered claim, cf. Goldberg v. Kelly, 397 U.S. 254, 25 L. Ed. 2d 287, 90 S. Ct. 1011 (1970), he has no vested right in coverage which would preclude the state from altering his eligibility. A fortiori, he has no immediate recognizable interest in distinct, identifiable monies held by the Association which might constitute "property" within the just compensation clause.
The Surplus Lines Insurance Guaranty Fund Act is an important piece of remedial legislation designed to meet the crisis facing the state as a result of Ambassador's insolvency. The court finds no constitutional infirmity in the Act, and accordingly grants the defendants' motion for summary judgment.