On appeal from the adoption of a regulation by the Commissioner of Insurance.
Morton I. Greenberg, Long and Havey. The opinion of the court was delivered by Morton I. Greenberg, P.J.A.D.
[208 NJSuper Page 186] These matters come on before this court on consolidated appeals from the adoption of an administrative rule, N.J.A.C. 11:1-20, by the commissioner of insurance ("commissioner") on an emergency and then normal rule-making basis under the Administrative Procedure Act, N.J.S.A. 52:14B-1 et seq. The rule was designed to curb what the commissioner conceived as abuses by insurance companies, including midterm policy cancellations, blanket nonrenewals, cancellations of entire lines of insurance and midterm premium increases without adequate reasons or notice to the insureds. There were two separate appeals filed as appellants, the American Insurance Association,
National Association of Independent Insurers and Alliance of American Insurers, appealed from both the emergency and normal adoption of the rule. Appellants seek a judgment invalidating the rule. In general they contend that the rule is arbitrary, capricious and unreasonable, impairs vested contract rights, was adopted without statutory authority, is inconsistent with New Jersey insurance laws, is ultra vires, was adopted in violation of the Administrative Procedure Act, is unconstitutionally vague and unconstitutionally takes property without due process of law.
The case was triggered on September 16, 1985 when the commissioner with the approval of the governor pursuant to a certificate of emergency adopted N.J.A.C. 11:1-20 to be effective September 17, 1985. At that time the Governor certified there was an emergency necessitating adoption of the rule on an emergency basis. See N.J.S.A. 52:14B-4(c). His certification was accompanied by a statement of imminent peril issued by the commissioner. On October 25, 1985 appellants appealed from the commissioner's action in adopting the rule. They immediately moved for a stay of the implementation of the rule but their application was denied by this court and the Supreme Court.
The rule as adopted on September 16, 1985 would, unless readopted, have expired on November 16, 1985. See Ibid. However on November 16, 1985 it was readopted pursuant to normal Administrative Procedure Act requirements. See N.J.S.A. 52:14B-4(a). At that time the section defining the rule's scope was amended on an emergency basis to exclude certain special types of policies as well as policies written by surplus-lines insurers. Immediately after the readoption of the rule appellants again appealed and again unsuccessfully sought a stay of the effectiveness of the rule. Accordingly the rule has been in effect and thus the parties have had experience in implementing it.
We set forth the facts from the extensive record in the case. In his certificate the Governor expressed concern regarding the number of consumers' and agents' complaints of insurers' midterm cancellations of property or casualty insurance policies, blanket nonrenewals, cancellation of entire lines of insurance and midterm premium increases. He pointed out that these practices had an adverse impact on the insurance-buying public and "assail the very fabric of this State's economic system." Because of the confusion in the marketplace and the undue economic hardship brought about by these problems the Governor determined that immediate action was necessary to ensure that New Jersey insurance consumers received fair and equitable treatment consistent with law.
In the commissioner's statement of imminent peril she noted the increasing influx of consumers' and agents' complaints received by her department regarding "indiscriminate cancellation, nonrenewal, premium increase and underwriting practices of commercial insurers." She indicated that carriers had suffered increasing underwriting losses and had previously underpriced insurance. She further stated that reinsurers were withdrawing from the United States market and insurers were finding themselves in a "capacity crunch," leaving major manufacturing and service industries unable to purchase insurance protection at any price from any company. The commissioner pointed out that "[m]unicipalities, environmental concerns, product manufacturers, medical professionals, transit authorities, nurse-midwives and day-care centers" were among the hardest hit enterprises as they were faced with exorbitant rates, refusals by insurers to renew coverage and termination of coverage. She noted that some insurance consumers including day-care centers, municipalities, transit authorities and truck and bus operators had suffered 2,000% rate increases in the past year.
Though acknowledging that the property and casualty insurance industry had suffered losses over the past seven years so that more disciplined underwriting and better rate structures
were required, the commissioner saw no justification for the practices adopted by insurers in terminating coverage prior to the expiration dates of policies and increasing rates and reducing coverage in midterm. She further noted that the industry had made financial gains as a result of good investments and she pointed out that insurers had a low tax burden and had ample resources available to meet all contingencies.
The commissioner considered these conditions as requiring her to adopt emergency procedures to restrict midterm cancellations and midterm price increases, to prohibit block cancellations and nonrenewals and to require timely notice of nonrenewal and cancellation in property and casualty commercial lines. Noting that "[s]ociety cannot function properly when its commerce is so disrupted," the commissioner asserted that her statutory responsibilities required her to "take aggressive action to protect the interests of policy holders and the State, to the extent that insurance companies provide reasonable, equitable and fair treatment to the insuring public." In the notice publishing the text of the rule the commissioner indicated that although N.J.A.C. 11:1-20 was adopted on an emergency basis, the rule was being proposed for readoption in compliance with the normal rule making requirements of the Administrative Procedure Act, N.J.S.A. 52:14B-1 et seq.
N.J.A.C. 11:1-20 is divided into seven sections. In general it requires approval by the commissioner of the reasons for an insurer to cancel a policy during its term or to fail to renew it. In addition, it forbids midterm premium increases and block cancellations and restricts nonrenewal of entire lines of insurance.
N.J.A.C. 11:1-20.1 establishes the scope of the regulation and indicates it applies to all property and casualty/liability insurance policies except workers' compensation insurance and accident and health insurance. However, when the rule was readopted, this section was amended on an emergency basis to
exclude policies written by surplus-lines insurers and certain special risks.
N.J.A.C. 11:1-20.2 sets out a procedure for an insurer to obtain the commissioner's approval for the reason or standard for nonrenewals and cancellations of policies. It requires that the reason or standard for the proposed termination be submitted to the commissioner for approval at least 90 days prior to the expiration date of a policy. The commissioner reviews the submission to determine compliance with applicable statutes or regulations and must approve or disapprove the reason or standard in writing within 30 days and advise the insurer of her decision. Of course this provision does not require that each termination of a policy be approved. Thus if the underwriting standard has previously been approved it may be used without further approval as a basis for termination of coverage.
N.J.A.C. 11:1-20.3 establishes the requisites for cancellation or policy nonrenewal, adopts a schedule for notice of cancellation and nonrenewal and provides that each notice must indicate the reason for the termination. Unless the cancellation is based upon either the existence of a moral hazard or the nonpayment of premium, the notice must also indicate that the commissioner has approved the basis for termination. Subsection (a) provides that "[e]ach renewal shall offer coverage at least as favorable to the insured as the expiring policy and at the same limits and terms, subject to changes approved by the Commissioner that had become effective since the commencement of the current policy period." Subsection (e) requires that the notice inform the insured of the right to contest the cancellation or nonrenewal by filing a written complaint with the department. Subsection (c) defines moral hazard as either the risk, danger or probability that the insured will destroy the insured property or permit it to be destroyed for the purpose of collecting the insurance proceeds, or the substantial risk, danger or probability that the personal habits of the insured may increase the possibility of loss or liability for which an insurer will be held responsible. It also provides that any change in the circumstances
of an insured that will increase the probability of either destruction, loss or liability can also ...