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American Employers'' Insurance Co. v. Commissioner of Insurance

Decided: October 23, 1989.

AMERICAN EMPLOYERS' INSURANCE COMPANY, THE EMPLOYERS' FIRE INSURANCE COMPANY, AND THE NORTHERN ASSURANCE COMPANY OF AMERICA, APPELLANTS,
v.
COMMISSIONER OF INSURANCE, DEPARTMENT OF INSURANCE, STATE OF NEW JERSEY, RESPONDENT. IN THE MATTER OF DETERMINATION OF EXCESS PROFITS AS TO AMERICAN MANUFACTURERS MUTUAL INSURANCE COMPANY AND AMERICAN PROTECTION INSURANCE COMPANY. WEST AMERICAN INSURANCE COMPANY AND THE OHIO CASUALTY GROUP OF INSURANCE COMPANIES, APPELLANTS, V. DEPARTMENT OF INSURANCE, STATE OF NEW JERSEY, RESPONDENT



On appeal from determinations of the Commissioner of Insurance, Department of Insurance, State of New Jersey.

Pressler, Long and Landau. The opinion of the court was delivered by Landau, J.A.D.

Landau

[236 NJSuper Page 429] These are three separately docketed appeals by the insurance companies footnoted below*fn1 (Insurers) from final determinations made in 1988 by the New Jersey Commissioner of Insurance

(Commissioner) which directed each individual insurer to return excess profits to policyholders pursuant to N.J.S.A. 17:29A-5.4 for the years 1985 through 1987.

We consolidated these appeals for opinion because they raised the common argument that the Commissioner violated the New Jersey Administrative Procedure Act (N.J.S.A. 52:14B-1 to 52:14B-15) by changing the method of evaluating excess profits from one which aggregated combined data and experience of a commonly owned group of insurers, to one which required calculation of the data for each affiliated insurer separately. The effect of the change was to negate the offset of poor financial results of one affiliate against the profits of another when calculating, under N.J.S.A. 17:29A-5.2 and 17:29A-5.3, the amount of excess profits to be redistributed to policyholders as required by N.J.S.A. 17:29A-5.4.

The applicable statutory excess profits scheme for private passenger automobile insurance companies was enacted as Chapter 357 of the Laws of 1983, codified as N.J.S.A. 17:29A-5.2 to 17:29A-5.5. The introductory statement to the legislation reads:

This bill requires private passenger automobile insurers to file with the Department of Insurance annual financial disclosure statements containing detailed information on the financial results of their operations in New Jersey.

This bill also establishes statutory standards for reporting and determining excess profits earned by insurers on private passenger automobile insurance in New Jersey, and for refunding any excess profits to policyholders.

Companies with less than 0.5% of the New Jersey private passenger automobile market are exempt from the financial disclosure provisions of this bill but not from the excess profits requirements.

This bill is modeled after the financial disclosure and excessive profits laws of the State of Florida.

L. 1983, c. 357, Introductory Statement.

The text of the statute is annexed as Appendix A hereto. An implementing regulation was made effective April 7, 1986 as N.J.A.C. 11:3-20.1. That regulation is annexed as Appendix B hereto.

In 1988, the Legislature repealed N.J.S.A. 17:29A-5.2 to 17:29A-5.5, and substituted N.J.S.A. 17:29A-5.6 to 17:29A-5.16 as an excess profits statute for private passenger automobile insurance carriers. N.J.S.A. 17:29A-5.7, which is part of that act, provides that:

A separate profits report shall be filed for each insurer and each insurer in an insurance holding company system. Each insurance holding company system shall file a separate combined profits report for all insurers in its system. The excess profits computation for an insurance holding company system shall be performed on its combined profits report, except that the commissioner may order an adjustment in the combined profits report if in his judgment, upon examining each insurer's profits report in the insurance holding company system, one or more of the insurers in that system are excessively subsidizing other insurers in that system.

On May 15, 1989, regulations were adopted, codified under the same section numbers as the 1986 regulations, i.e., N.J.A.C. 11:3-20.1 to .10. These regulations are consistent with the policy of the 1988 legislation as to excess profits reporting. N.J.S.A. 17:29A-5.9 sets the due date for the first profits report required by the 1988 Act as July 1, 1989.

Thus, the consolidated matters before us affect only reporting and excess profits assessment in 1988, the limited period between the change in policy as to excess profit calculations of group affiliated insurers and adoption of the 1988 statute.

It is not disputed that in 1986 and 1987 the Commissioner evaluated excess profits on an insurer-group basis. As noted, the 1986 version of N.J.A.C. 11:3-20.1 to .10 expressly set forth that reporting methodology. Moreover, the Department of Insurance prescribed reporting forms which recognized the group-wide data submissions.

On May 27, 1988, without prior notice, the Commissioner ordered that the reporting for excess profit purposes must henceforth be filed only on an individual insurer basis. When assessments of excess profits were later made on that basis as well, these appeals followed.

We reverse because we agree that modification of the previous administrative policy on excess profits, a policy consistent

with the reporting regulations, should have been effected through the rule-making procedures of N.J.S.A. 52:14B-1 to 52:14B-15. N.J.S.A. 52:14B-2(e) provides:

"Administrative rule" or "rule," when not otherwise modified, means each agency statement of general applicability and continuing effect that implements or interprets law or policy, or describes the organization, procedure or practice requirements of any agency. The term includes the amendment or repeal of any rule, but does not include: (1) statements concerning the internal management or discipline of any agency; (2) intraagency and interagency statements; and (3) agency decisions and findings in contested cases.

The term "insurer" was not specifically defined in the 1983 legislation, but was defined in the 1986 implementing regulations and forms to include a group of affiliated insurers. See Appendix B, N.J.A.C. 11:3-20.3, .4. Several years of established policy and practice confirmed departmental acceptance that the method of computing excess profits would parallel the method established for reporting the data used for the computation.

Rule making is necessary when "many or most" of the following criteria are present in an agency action which:

(1) is intended to have wide coverage encompassing a large segment of the regulated or general public, rather than an individual or a narrow select group; (2) is intended to be applied generally and uniformly to all similarly situated persons; (3) is designed to operate only in future cases, that is, prospectively; (4) prescribes a legal standard or directive that is not otherwise expressly provided by or clearly and obviously inferable from the enabling statutory authorization; (5) reflects an administrative policy that (i) was not previously expressed in any official and explicit agency determination, adjudication or rule, or (ii) constitutes a material and significant change from a clear, past agency position on the identical subject matter; and (6) reflects a decision on administrative regulatory policy in the nature of the interpretation of law or general policy. These relevant factors can, either singly or in combination, determine in a given case whether the essential agency action must be rendered through rule-making or adjudication.

Metromedia, Inc. v. Director, Div. of Taxation, 97 N.J. 313, 331-32 (1984).

Here, all six Metromedia factors are present. Most significant of these is the undisputedly "material and significant change" from the Department's clear past position.

The core of the Commissioner's response to the argument that formal rule-making procedures were here required is a contention that N.J.S.A. 17:29A-5.4 unambiguously requires that each insurer which transacts private passenger automobile insurance in this State must establish a plan for redistribution of excess profits. The Commissioner reasons that because L.1983, c. 357 was enacted as a supplement to L.1944, c. 27 (N.J.S.A. 17:29A-1 to 17:29A-5), the N.J.S.A. 17:29A-1(g) definition of "insurer" is applicable.*fn2 Accordingly, it is argued, the 1988 Departmental order which required filings on an individual insurer basis, and the later determination of excess profits on that basis, was not a rule-making interpretation, but merely a straight forward implementation of the unambiguous statutory definition of "insurer."

Had the 1988 order and rulings under review reflected the Department's consistent interpretation of the 1983 legislation since its enactment, a court might well affirm the 1988 order and rulings as reasonable without the necessity for further regulation. We recognize that groups of sister companies are not authorized as groups to do insurance business in New Jersey. Nonetheless, the 1986 filing regulations, and the excess profit policy respecting groups which consistently followed those regulations, did not unreasonably interpret the existing excess profit legislation, particularly as the expressed intention of the 1983 Act was to follow the path earlier blazed by the State of Florida. Florida's law utilizes group-based data and excess profit determinations.*fn3

As the 1986 regulations, and the parallel departmental policy respecting excess profit calculations on a group basis were not invalid per se, we hold that modification thereof should have

been effected in accordance with N.J.S.A. 52:14B-4 to 52:14B-4.9, and the teachings of Metromedia.

We add our recognition that a historic and primary function of state insurance regulation is to protect consumers by monitoring the solvency of companies whose ability to carry out their contracts is critical to the financial security of victims covered thereunder. The Legislature has wisely added to this regulatory function a dimension of consumer protection against unreasonable profits by private passenger automobile insurance carriers. When the "rules," written or unwritten, governing excess profits determination are to be changed, a wise accommodation of these two functions requires that the industry be apprised of this in time to adjust underwriting and other legitimate management practices accordingly. Further, it is important that the public and the industry should be noticed so that they may bring to the regulators' attention views as to the probable consequences of a material change.

In the present cases, the effect of the 1988 order will be to require certain insurance companies within a group to refund to their insureds large amounts of "excess profits" earned in years when the Departmental policy was different. Affiliated companies in the same group will then swallow large losses generated during those years. We do not presume to evaluate the consequences or authenticity of those losses. It is clear to us, however, that, absent reliance on the earlier policy, some things would have been done differently in the years retroactively affected, and that there must now be some material consequences to insurers and the public as a result of the changed policy.

Compliance with the Administrative Procedure Act and the Metromedia standards is not only a matter of fairness, but a means of informing regulators of possibly unanticipated dimensions of a contemplated rule. Here, for example, hearings on the new rule might well have presented the Commissioner with issues such as impact on solvency of given insurance companies

and impact on market availability of voluntary private insurance, to be considered with the benefits of returning excess premiums to insureds of profitable companies.

We reverse and remand for recalculation of excess profits under the 1988 order, consistent with the methods employed in the two prior years.

APPENDIX A

17:29A-5.2. Report on financial information

a. An insurer transacting private passenger automobile insurance business in this State, shall annually file, on or before July 1 of each year, separate financial information with the commissioner required pursuant to paragraphs (1) through (10) of this subsection for the following categories of private passenger automobile coverages: bodily injury liability; property damage liability; uninsured motorist and underinsured motorist; personal injury protection benefits; comprehensive; collision. The information shall be on direct insurance writings in this State, and shall represent total limits data. The information required pursuant to paragraphs (1) through (10) shall be for each of the latest three calendar-accident years and for all three years combined, with an evaluation date of March 31 of the reporting year.

The financial information shall include:

(1) Premiums earned;

(2) Policyholder dividends incurred;

(3) Expenses for acquisition and general expenses;

(4) Expenses for agents' commissions, taxes, licenses and fees;

(5) Profit and contingency factors as utilized in the insurer's automobile rate filings for the applicable years;

(6) Losses paid;

(7) Losses unpaid stated at the final settlement value;

(8) Loss adjustment expenses paid; and

(9) Loss adjustment expenses unpaid stated at the final settlement value;

(10) Actuarial gain or loss, equal to the difference between paragraph (1) and the sum of paragraphs (2) through (9), inclusive.

b. Each insurer subject to the provisions of subsection a. which has an actuarial gain as set forth in paragraph (10) of subsection a. for all coverages combined and all years combined shall also file with the commissioner the following information for direct private passenger

automobile insurance business transacted in this State, to be reported on a calendar year basis not later than April 15 of the following year:

(1) Direct premiums written;

(2) Direct premiums earned;

(3) Loss reserves for all known claims for the beginning and end of the year;

(4) Reserves for losses incurred but not reported for the beginning and end of the year;

(5) Incurred allocated loss adjustment expenses;

(6) Incurred unallocated loss adjustment expenses;

(7) Direct losses paid;

(8) Underwriting income or loss;

(9) Commissions and brokerage fees;

(10) Taxes, licenses, and fees;

(11) Other acquisition costs;

(12) General expenses;

(13) Policyholder dividends; and

(14) Net investment gain or loss and other income gain or loss allocated pro rata by earned premium to New Jersey business utilizing the investment allocation formula contained in the National Association of Insurance Commissioners' Profitability Report by line by state.

Any insurer which does not write at least 0.5% of the New Jersey private passenger automobile market, based on direct premiums written, shall not have to file any report required by this section, other than a report indicating its percentage of the market share. That percentage shall be calculated by dividing the insurer's current premiums written in this State by the preceding year's total premiums written by all those insurers.

A summary of the information provided pursuant to this section shall be provided in the commissioner's annual report.

The financial information required by this act shall be filed on July 1 next following the operative date of this act for the preceding calendar year.

"Private passenger automobile" means an automobile as defined in section 2 of P.L.1972, c. 70 (C. 39:6A-2).

L.1983, c. 357, § 1, eff. Oct. 4, 1983, operative Jan. 1, 1984.

Introductory Statement

Assembly, No. 3820 -- L.1983, c. 357

This bill requires private passenger automobile insurers to file with the Department of Insurance annual financial disclosure statements containing detailed information on the financial results of their operations in New Jersey.

This bill also establishes statutory standards for reporting and determining excess profits earned by insurers on private passenger automobile insurance in New Jersey, and for refunding any excess profits to policyholders.

Companies with less than 0.5% of the New Jersey private passenger automobile market are exempt from the financial disclosure provisions of this bill but not from the excess profits requirements.

This bill is modeled after the financial disclosure and excessive profits laws of the State of Florida.

Historical Note

Section 5 of L.1983, c. 357, Title of Act:

approved Oct. 4, 1983, provides:

An Act concerning financial

disclosure and excess profits by

"This act shall take effect automobile insurers, and supplementing

immediately but remain inoperative P.L.1944, c. 27. (C. 17:29A-1 et

until January 1, 1984." seq.). L.1983, c. 357.

Library References

Appleman, Insurance Law and Practice, § 10432.

17:29A-5.3. Excess profits; calculation of gain or loss; reporting

Excess profits shall exist if the combined underwriting gain for the three most recent calendar-accident years of an insurer transacting automobile insurance in this State is greater than the insurer's anticipated underwriting profit, plus 5% of earned premiums for those calendar-accident years. An insurer's underwriting gain or loss for each calendar-accident year shall be computed by subtracting the sum of the accident year incurred losses and loss adjustment expenses as of March 31 of the following year, developed to an ultimate basis, plus the administrative and selling expenses incurred in, and policyholder dividends applicable to the calendar year, from the calendar year earned premium. Any refund or renewal credit made pursuant to this section shall be deemed a policyholder dividend applicable to the year in which it is incurred, for purposes of reporting under this section for subsequent years.

Anticipated underwriting profit shall be computed by multiplying the earned premiums applicable to each rate filing of the insurer in effect during the three-year period by the percentage factor included in the rate filing for profit and contingencies, which factor shall be determined with due recognition to investment income from funds generated by New Jersey business. Separate calculations need not be made for consecutive rate filings containing the same percentage factor for profits and contingencies.

Excess profits reporting shall be made to the commissioner, on forms prescribed by the commissioner, not later than July 1 of each year.

The first calculation and reporting of excess profits data shall begin with the third year for which financial reports are filed in accordance with section 1 of this act.*fn4

L.1983, c. 357, § 2, eff. Oct. 4, 1983, operative Jan. 1, 1984.

Historical Note

Statement: Introductory statement to Assembly, No. 3820 -- L.1983, c. 357, see § 17:29A-5.2.

APPENDIX B

SUBCHAPTER 20. REPORTING FINANCIAL DISCLOSURE AND EXCESS PROFIT REPORTS

Authority

N.J.S.A. 17:1-8.1, 17:1C-6(e); 17:29A-5.2 through 17:29A-5.5.

Source and Effective Date.

R.1986 d.111, effective April ...


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