On appeal from the Department of Insurance.
Long, R.s. Cohen and Stern. The opinion of the court was delivered by Cohen, R.s., J.A.D.
[248 NJSuper Page 371] Aetna, Allstate and Colonial Penn are insurers doing auto insurance business in New Jersey. On January 24, 1991, the Commissioner of Insurance ordered each of them to issue auto policies, commencing April 1, 1991, to thousands of "exposures" (private passenger cars requiring insurance) then insured in the "residual" market through the Joint Underwriting Association. The order was in furtherance of the phasing-out or "depopulation" of JUA undertaken by the Commissioner pursuant to the Fair Automobile Insurance Reform Act of 1990 ("FAIR Act"). L. 1990, c. 8. The initial set of orders went to 44 insurers and required coverage of some 211,000 exposures. We stayed the effect of the depopulation orders pending the appeals, consolidated them, and accelerated briefing and argument.*fn1 We now
affirm the depopulation orders in part, but we invalidate them in part as unauthorized by the enabling legislation.
The setting is the perennially troubled New Jersey auto insurance market. The legislative highlights of the past twenty years start with the adoption in 1970 of the assigned risk plan, which authorized the forced distribution among insurers of auto insurance applicants who were unable to procure coverage "through ordinary methods." N.J.S.A. 17:29D-1. Effective on January 1, 1973, was the New Jersey Automobile Reparation Reform Act, N.J.S.A. 39:6A-1 et seq., which made auto insurance compulsory and created extensive no-fault benefits but imposed a tort suit threshold that barred very few tort suits. See also N.J.S.A. 39:6B-1.
In 1983 appeared the New Jersey Automobile Full Insurance Availability Act, N.J.S.A. 17:30E-1 et seq., whose purpose was to supplant the assigned risk system and "to assure to the New Jersey insurance consumer full access to automobile insurance through normal market outlets at standard market rates, . . . and to require that companies be made whole for losses in excess of regulated rates on all risks not voluntarily written . . . ." N.J.S.A. 17:30E-2. Unlike the assigned risk system, the new legislation contemplated coverage provided by JUA, at standard market rates, to risks rejected by the voluntary market. Although policies were to be issued in the names of servicing insurers, the risks would be borne by JUA, and servicing insurers would be paid fees for handling coverage, premiums and claims. JUA's underwriting losses, which were inevitable, would be made up from bad-driver and accident surcharges imposed by the Division of Motor Vehicles and JUA, and the "residual market equalization charge" ("RMEC"), which was to be levied equally on all autos insured in the
voluntary and residual markets except those with principal drivers aged 65 years or older. N.J.S.A. 17:30E-8b. See Senate Labor, Industry and Professions Committee Statement, Assembly, No. 1696- L. 1983, c. 65. The RMECs were to be sufficient to permit JUA to operate on a no-profit, no-loss basis. N.J.S.A. 17:30E-3 o.
In 1988, amendments to various statutes were made to correct deteriorating conditions in the auto insurance industry. Insurers were more and more restricting their voluntary coverage to the most favorable risks, leaving fully half of the State's drivers to be covered through JUA at artificially low rates. JUA was experiencing constantly worsening imbalances, and was kept afloat by increasingly large charges imposed on all New Jersey drivers. See Governor's Reconsideration and Recommendation Statement, Senate No. 2637- L. 1988, c. 119. Blame was variously assigned by various people. It was the overgenerous no-fault law. It was the refusal of the Commissioner of Insurance to permit insurers to earn an adequate rate of return on voluntary business. It was the refusal of insurers to provide coverage to urban drivers.
The new statutes introduced an optional verbal threshold for tort actions, N.J.S.A. 39:6A-8, 8.1; flex-rating for insurers, N.J.S.A. 17:29A-44; an insurers' excess profits law, N.J.S.A. 17:29A-5.6 et seq.; 10% annual increases in JUA rates for bad drivers for four years, N.J.S.A. 17:30E-13a through d, an authorization for deferral of JUA payments of bodily injury losses when JUA's income is insufficient to meet its obligations, N.J.S.A. 17:30E-8.1; an authorization for a multi-tier rating system in the voluntary market, including rates for good drivers and substandard risks, N.J.S.A. 17:29A-45; and a requirement for the audit of servicing carriers to find and recover overcharges resulting from their claims practices, and treble damages for wilful overcharges. N.J.S.A. 17:30E-17.1. See Senate Labor, Industry and Professions Committee Statement, Assembly No. 3702- L. 1988, c. 156.
Perhaps the most important aspect of the 1988 legislation was a scheme for the downsizing, or depopulation, of JUA over a four-year period, to the end that it would serve only its original purpose of providing insurance coverage for the least desirable risks. N.J.S.A. 17:30E-14. Those residual risks would be charged self-sustaining rates, which would not be subsidized by the voluntary market. The statute directed the Commissioner to establish procedures to govern the voluntary market's*fn2 writing of JUA insureds and applicants for insurance. In annual increments, the voluntary market insurers were to increase the percentage of private passenger car exposures they insured in the voluntary market from 50% to 60%, then 70%, 75% and 80%. Methods were prescribed for apportioning and assigning to voluntary market insurers the number of JUA insureds sufficient to make up any shortfall that occurred in the required annual increase in voluntarily written policies.
On March 12, 1990, the FAIR Act became law, effective immediately. It attacked most of the same problems to which the 1988 legislation was addressed. It did so, however, in a more urgent and drastic manner. One of the elements of the FAIR Act was the imposition on the voluntary market of surtaxes and assessments to satisfy the $3.3 billion of accumulated obligations of JUA.*fn3 Fees to be collected from doctors,
lawyers, and auto body shops were also devoted to the same purpose. N.J.S.A. 17:33B-58 to 63. Most importantly, the Legislature abandoned JUA as a continuing insurance market mechanism.
The function of JUA was turned over by the statute to the Market Transition Facility ("MTF"). MTF was expected to operate from October 1, 1990 to September 30, 1992, when it would go out of business. Premiums on policies issued by MTF were initially to be based on September 30, 1990 JUA rates. N.J.S.A. 17:33B-11. No RMECs, however, were to be charged after April 1, 1991. The loss of MTF support would have to be made up from other sources. MTF's profits and losses were to be apportioned among the auto insurers. N.J.S.A. 17:33B-11d. It was expected that JUA's business would already have decreased to 40% of the total private auto market under the 1988 legislation, and then to 32% soon after enactment of the 1990 FAIR Act. By April 1, 1991, only 29% of the market was to be covered by MTF; by October 1, 1991, 20%, and by April 1, 1992, 10%. MTF was to write no new business after October 1, 1992, after which exposures rejected by the voluntary market would be relegated to the assigned risk plan. N.J.S.A. 17:33B-11c(5); 17:29D-1.
It was pursuant to the 1990 FAIR Act that the Commissioner promulgated his January 24 depopulation orders. There were 44 orders issued, one to every insurer that failed to meet its share of the first stage of distribution of JUA insureds to the voluntary market. There were 24 other insurers that had already met their quotas, and therefore avoided the obligation to accept further exposures to satisfy the goal of reducing the portion of the auto insurance market covered by JUA/MTF. The appellants suspect that these 24 insurers made their quotas by "cherry-picking" the least-risk JUA/MTF insureds. That
may be so. If it is, the appellants had the same opportunity, and apparently chose not to utilize it.
The insurers raised various objections to the orders. Our approach to each of the issues presented by these appeals is governed by some basic principles. It is clear that the insurance industry is strongly affected with a public interest, and is therefore properly subject to comprehensive regulation to protect the public welfare. Sheeran v. Nationwide Mut. Ins. Co., 80 N.J. 548, 559, 404 A.2d 625 (1979). The Legislature has broad discretion in adopting police power regulations governing the insurance business to promote what the Legislature views as the public interest. This includes the power to compel insurers to cover people they would rather not insure. California State Auto. Ass'n Inter-Ins. Bur. v. Maloney, 341 U.S. 105, 71 S. Ct. 601, 95 L. Ed. 788 (1951). It also includes requiring insurers to renew policies they would like to drop. Sheeran, supra, 80 N.J. at 560, 404 A.2d 625. The State's broad regulatory powers must be exercised, however, so as to allow insurers a fair and reasonable return. Id.
Administrative actions, such as the Commissioner's depopulation orders, must be upheld unless they exceed his statutory authority, or are arbitrary, capricious or unreasonable. Henry v. Rahway State Prison, 81 N.J. 571, 579-580, 410 A.2d 686 (1980). The burden is on the objector to overcome the presumption that agency actions are valid and reasonable. Medical Soc'y of New Jersey v. New Jersey Dept. of Law and Public Safety, 120 N.J. 18, 25, 575 A.2d 1348 (1990). The Commissioner's expertise in the field of insurance must be given great weight. IFA Ins. Co. v. New Jersey Dept. of Ins., 195 N.J. Super. 200, 206-207, 478 A.2d 1203 (App.Div.), certif. denied, 99 N.J. 218, 491 A.2d 712 (1984).
The insurers' first objection was that the depopulation orders assigned JUA/MTF exposures that were not eligible
under the FAIR Act for assignment to the voluntary market. They argued that the depopulation orders made assignments of the entire books of business of producers*fn4 in particular territories without regard to the likelihood that the books contain individual risks so substandard that they must ultimately be in the 10% that will be relegated to the assigned risk pool after MTF completes its transitional function. The Commissioner conceded that he included such risks in his orders, but argued (a) that § 20 of the FAIR Act permitted him to determine that all drivers would be eligible, (b) that it was utterly impractical for him to weed out the worst risks, and (c) that assigning only good drivers and keeping the bad in MTF would be unfair to other MTF insureds and would improperly reward insurers who did not meet their voluntary depopulation quotas and therefore had to accept assignments.
N.J.S.A. 17:33B-13 contains a definition of "eligible person." In general, it is a person who has not given any of the seven listed indications of presenting an enhanced insurance risk, such as accidents, criminal convictions, and an accumulation of auto insurance eligibility points. However, the definition expressly applies only to a listed group of statutory provisions that deal with post-MTF eligibility for the voluntary market. FAIR Act § 20, N.J.S.A. 17:30E-14, is not one of those provisions. N.J.S.A. 17:30E-14 was a part of the 1988 legislation and survives as amended in 1990. N.J.S.A. 17:33B-13 was newly enacted in 1990. N.J.S.A. 17:30E-14 authorizes the Commissioner to develop "criteria identifying drivers who should be eligible for coverage in the voluntary market," and to make assignments of people meeting those criteria. The Commissioner argued in briefs before us that the N.J.S.A. 17:33B-13 definition does not control, and that it was permissible for him to exercise his judgment to determine that every person
insured by JUA/MTF was eligible for the voluntary market for the purpose of ...