On appeal from Department of Insurance.
J.h. Coleman, Dreier and Ashbey. The opinion of the court was delivered by J.h. Coleman, P.J.A.D.
These are three consolidated appeals challenging the methodology employed in N.J.A.C. 11:18-1 et seq. to finance a deficit incurred by a legislatively-created fund to pay certain medical malpractice claims. The regulations require certain licensed medical practitioners and health care facilities, namely physicians, podiatrists and hospitals, to pay surcharges on their medical malpractice liability insurance premiums to retire an approximate $65 million deficit.
The Medical Society of New Jersey (Medical Society) and eight individual doctors have filed an appeal under A-2225-89T5. Henry J. Mineur, M.D., four other physicians and the Medical Inter-Insurance Exchange of New Jersey (MIX) filed an appeal under A-2274-89T5. Both are direct appeals from the promulgation of N.J.A.C. 11:18-1 et seq. by the Commissioner of Insurance (Commissioner). The Medical Society has filed a second appeal, A-2492-89T5, from an order entered in the Law Division on December 18, 1989, dismissing a complaint which sought to compel the Commissioner to retire the deficit through other means. The surcharges became effective December
18, 1989, and all requests for a stay have been denied. We here hold that the regulations are valid.
These appeals require us to construe two legislative enactments which created two associations to deal with problems caused when property and liability insurance companies become insolvent or refuse to write medical malpractice liability insurance for some health care providers. We begin with the two statutes because the clearest indication of the legislative intent, which we must decipher, is the statutory language. Perez v. Pantasote, 95 N.J. 105, 114, 469 A.2d 22 (1984).
The first of such enactments is the New Jersey Property-Liability Insurance Guaranty Association Act, N.J.S.A. 17:30A-1 et seq. (Guaranty Act) (effective Apr. 11, 1974). The Guaranty Act was adopted to provide some protection to policyholders and claimants of policyholders of insurance companies which become insolvent. N.J.S.A. 17:30A-2a; Railroad Roofing & Bldg. Supply Co. v. Financial Fire & Cas. Co., 85 N.J. 384, 389, 427 A.2d 66 (1981); Sussman v. Ostroff, 232 N.J. Super. 306, 311, 556 A.2d 1301 (App.Div.), certif. denied 117 N.J. 143, 564 A.2d 865 (1989).
The Guaranty Act creates the Guaranty Association to implement the multiple purposes stated in N.J.S.A. 17:30A-2. All insurers in the State which write insurance to which the Guaranty Act applies are required to be members of the Guaranty Association as a condition of the insurers' authority to engage in the insurance business in the State. N.J.S.A. 17:30A-6. The operation of the Guaranty Association, "in respect of both administration and claims-payment, is financed by the Guaranty Fund," based on assessments of its members. Sussman v. Ostroff, supra, 232 N.J. Super. at 311, 556 A.2d 1301; N.J.S.A. 17:30A-8a(3). The amount of each assessment is based on the premium volume of each member insurer. The assessment, however, is recouped by the member insurer in the form of a
policy premium surcharge of one-half percent paid by each insured and is earmarked for the Guaranty Fund. See N.J.A.C. 11:1-6.1 which is based on N.J.S.A. 17:30A-16.
Less than two years later, the Legislature enacted the Medical Malpractice Liability Insurance Act, N.J.S.A. 17:30D-1 et seq., (Malpractice Act) (effective Jan. 30, 1976). The Malpractice Act was adopted to encourage voluntary insurers to write medical malpractice liability insurance in response to a crisis that had developed. Insurance companies were declining to readily provide malpractice coverage to licensed medical practitioners and health care facilities. It was anticipated that by providing reinsurance and requiring the carriers to provide coverage, the crisis would soon end.
In an attempt to achieve those objectives, the Malpractice Act created the Reinsurance Association, N.J.S.A. 17:30D-4, to provide reinsurance up to 100% to certain insurers. N.J.S.A. 17:30D-2a. Each member, namely every insurer authorized to write personal injury and property damage liability insurance on a direct basis in the State (except for workers' compensation), was compelled to provide coverage or lose its authority to operate in New Jersey. N.J.S.A. 17:30D-4. When it became apparent that many carriers were willing to withdraw from the State rather than write medical malpractice liability coverage, the Legislature authorized the Reinsurance Association to write medical malpractice coverage on a direct basis. L. 1978, c. 153, § 1; N.J.S.A. 17:30D-2; N.J.S.A. 17:30D-8b (effective Oct. 1, 1978).
The Malpractice Act also created the New Jersey Medical Malpractice Recovery Fund (Recovery Fund). N.J.S.A. 17:30D-9. The purpose of the Recovery Fund was "to provide a financial backup for the plan of operation of the" Reinsurance Association and was intended to "be used to reimburse the association for any deficit sustained in the operation of the association." Ibid. The regulations involved in these appeals
were promulgated to finance the Recovery Fund and to retire any deficit incurred by the Reinsurance Association.
Although the Reinsurance Association was created by the Legislature, it could not actually engage in operation until activated by the Commissioner based on a determination that medical malpractice liability insurance was "unavailable for any class of licensed medical practitioners or health care facility." N.J.S.A. 17:30D-2a.
The Commissioner first activated the Reinsurance Association on March 1, 1976, for hospitals. At about the same time, the Commissioner granted a license to the Hospital Association to operate the Health Care Insurance Exchange (Exchange) as an insurer of hospitals. The Reinsurance Association reinsured the Exchange until the Exchange was in a position to terminate the reinsurance agreement on February 1, 1982. By that time the Exchange had become financially secure enough voluntarily to assume coverage for hospitals.
On December 27, 1976, Federal Insurance Company (Federal), which provided medical malpractice insurance to allopathic and osteopathic physicians in the State, notified the Commissioner that it would not renew the policies insuring physicians and surgeons for professional liability after January 31, 1977. That prompted the Commissioner to activate the Reinsurance Association for allopathic and osteopathic physicians and surgeons effective February 1, 1977, and for podiatrists effective January 31, 1977.
In the meantime, the Medical Society's efforts to form MIX to replace Federal were successful. On December 24, 1977, the Commissioner granted MIX a license pursuant to N.J.S.A. 17:50-1 et seq. But the Commissioner did not deactivate the Reinsurance Association for physicians and surgeons after MIX became operational. The capital contribution required of the policyholders to satisfy N.J.S.A. 17:50-5, allegedly made the cost of obtaining coverage from MIX prohibitive for some. In addition, Federal became reinsured for 100% on physician's
coverage for policy limits of $1 million per claim with a maximum of $3 million for any year. Public Service Mutual became the insurer for podiatrists, which provided the same policy limits as did Federal. North River Insurance Company became the excess carrier with limits up to $5 million.
MIX could reject a doctor's request for coverage. It is estimated that between 1977 and 1982, MIX ousted between 70 to 75 physicians and rejected applications from another two dozen or so. There were some, according to the Commissioner, whose claims records were so bad that they simply did not apply to MIX. It seems fair to assume these doctors became insured by the Reinsurance Association.
The Reinsurance Association began writing primary and/or excess coverage in 1979. Between March 15, 1979, when it started to write on a direct basis, and December 31, 1982, the Reinsurance Association wrote approximately 3,300 direct policies for physicians plus another 700 excess policies. During 1979, the premiums for MIX policies were the same as for the Reinsurance Association policies; each issued "an occurrence" policy. Between late 1979 and the end of 1982, however, MIX's rates increased approximately 15.4% while the Reinsurance Association's rates increased by only 4%. The higher rates plus the required contribution to capital by policyholders made MIX's policies more expensive than those sold by the Reinsurance Association.
During 1980, the medical malpractice insurance market began to improve. The Exchange formed a subsidiary, Princeton Insurance Company (Princeton), to write coverage for physicians, surgeons and podiatrists. Within a short time, Princeton, which sold an "occurrence plus policy," became a competitive force. At about the same time, MIX raised its limits on available coverage. In early 1982 all of the Reinsurance Association's insureds switched to Princeton because the rates were cheaper. Shortly thereafter, the Commissioner determined that the Reinsurance Association had fulfilled its statutory function
and deactivated it on March 1, 1982, for podiatrists; on September 30, 1982, for primary coverage for physicians; and on December 31, 1982, for excess coverage for physicians.
Notwithstanding the fact that the Reinsurance Association was deactivated, it remains obligated on claims generated by coverage that it reinsured or wrote directly. A deficit in the operation of the Reinsurance Association was discovered, if not sooner, when the Reinsurance Association's consulting actuaries reported in March 1983 that as of December 31, 1982, an anticipated deficit of $31 million existed and would increase substantially if not addressed immediately. See N.J.S.A. 17:30D-9. When the year-end actuarial report for 1983 confirmed the existence of a deficit, the Reinsurance Association advised the Commissioner on April 2, 1984. The projected deficit prompted the Commissioner to appoint a task force to recommend an equitable method of funding the deficit.
A sixteen member task force was appointed by the Commissioner which consisted of five physicians insured by MIX, a physician and a podiatrist insured by the Reinsurance Association, one representative from Princeton, MIX, and the Reinsurance Association, an attorney with a nursing background, and five attorneys who represent medical malpractice plaintiffs. The task force recognized that it had to first decide who should pay the deficit and then decide how to structure payments.
On the who should pay question, a majority of the task force recommended that only the physicians and podiatrists who were insured and/or reinsured by the Reinsurance Association between 1977 and 1982 should pay the entire surcharge required to fund the deficit. A majority also recommended that the State should help fund the deficit by either requiring the State to pay the surcharge equivalent after five years, or by assessing homeowners and automobile policyholders through the property-casualty liability insurance companies, or transferring
all of the assets and liabilities in the Reinsurance Association to the Guaranty Association and requiring the Guaranty Association to pay all outstanding covered claims out of the Guaranty Fund. As to how to pay, the majority recommended that the surcharge be spread across a period of years and that it should vary by "class and by specialty" based on claims experience statewide.
On January 4, 1988, the Commissioner released his pre-proposal which imposed a 4% surcharge on all New Jersey physicians, chiropractors and podiatrists to retire the Reinsurance Association's deficit. After receiving public comments, the Commissioner issued proposed regulations which were published August 15, 1988, in the New Jersey Register. 20 N.J.R. 2010. The proposed regulations differed from the pre-proposal in that chiropractors were excluded from the list of persons to be surcharged and the surcharge rate was increased from 4% to 5%.
A public hearing on the proposed regulations was held on October 24, 1988, pursuant to the Administrative Procedure Act (APA), N.J.S.A. 52:14B-4(a)(3), before a hearing officer, Special Deputy Commissioner Holly C. Bakke. She issued her report on January 17, 1989, and recommended, among other things, that different rates should be set for the surcharges for the following three groups: (1) 5% for physicians, surgeons and podiatrists insured or reinsured by the Reinsurance Association; (2) 3.75% for hospitals insured or reinsured by the Reinsurance Association; and (3) 2.5% for all other physicians, surgeons, podiatrists and hospitals licensed in New Jersey.
The Commissioner accepted the hearing officer's recommendations and incorporated them into reproposed rules on June 19, 1989. 21 N.J.R. 1642(a). However, the Commissioner soon discovered several errors or ambiguities that needed to be corrected. Therefore, an amended regulation was published on September 5, 1989. 21 N.J.R. ...