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In re Plan for Orderly Withdrawal From New Jersey of Twin City Fire Insurance Co.

Decided: June 11, 1991.


On appeal from New Jersey Department of Insurance.

Brody, Gruccio and D'Annunzio. The opinion of the court was delivered by Brody, J.A.D.


The Legislature enacted the Fair Automobile Insurance Reform Act of 1990, L. 1990, c. 8 (Reform Act), to reduce the high cost of mandatory passenger automobile insurance. Among the strategies for accomplishing this goal, the Reform Act provides for phasing out what the Legislature identified as an unnecessary component of that high cost: maintaining the New Jersey Automobile Full Insurance Underwriting Association, commonly known as the Joint Underwriting Association or JUA. The JUA had been legislatively created with the expectation that it would be a fairer alternative to the assigned-risk plan that had provided insurance at higher premiums to drivers rejected by private passenger automobile insurers as bad risks. However, by the time the Reform Act was enacted in 1990, the JUA had amassed a debt of 3.3 billion dollars, despite subsidies derived from annual assessments on private passenger automobile insurance policies, and had accumulated a population of insureds numbering more than one-half of all New Jersey drivers.

The Reform Act provides for retiring the JUA debt by various means including assessing the New Jersey Property-Liability Guaranty Association 160 million dollars a year for seven years and imposing a 5% surtax on private passenger automobile insurance premiums, payable by the insurers, for three years. The Reform Act does not permit insurers to pass through to their policyholders the cost of either the assessments or the surtaxes.

The Reform Act also provides for replacing the JUA with the former assigned-risk plan for bad drivers, who will again pay

higher premiums but whose numbers are to be limited to no more than 10% of all New Jersey drivers. This depopulation of the JUA and cap on the number of assigned risk drivers is to be accomplished over a two-year period by requiring private passenger automobile insurers to lower their standards for writing policies in the voluntary market. For a full history of the JUA and a description of the statutory program for shifting the bulk of its drivers to the voluntary market see I/M/O Assignment of Exposures to the Aetna Casualty and Surety Company, 248 N.J. Super. 367, 372-375, 591 A.2d 631, 634-636 (App.Div.1991).

Some private passenger automobile insurers have sought to avoid the burdens of bailing out and depopulating the JUA by attacking the constitutionality of these statutory provisions and by attempting to withdraw from the New Jersey private passenger automobile insurance market. So far the Commissioner of Insurance has stymied insurers' attempts to withdraw from the market by invoking the provisions of Section 72 of the Reform Act, N.J.S.A. 17:33B-30 (hereafter Section 72), that are designed to discourage and delay withdrawal.

The Supreme Court has held that despite the statutory prohibition against passing through the cost of the assessments and surtaxes to their policyholders, insurers may nevertheless obtain relief in particular cases through the rate-making process in order to assure a constitutionally-required fair rate of return. State Farm Mutual Insurance Co. v. State, 124 N.J. 32, 590 A.2d 191 (1991). This appeal is concerned solely with the constitutionality of Section 72 and the lawfulness of the Commissioner's implementation of its provisions respecting Twin City Fire Insurance Company and its affiliates in the ITT Hartford Group holding company (referred to collectively as appellants), all of whom are foreign insurers authorized to write insurance in New Jersey by N.J.S.A. 17B:23-1. Appellants' arguments are supported and augmented by the arguments of amicus American Insurance Association. Except as noted, we will not distinguish between the arguments of appellants and amicus.

Twin City writes about 1% of all New Jersey private passenger automobile policies. It also writes commercial vehicle insurance in this State. Its Hartford affiliates write substantial amounts of other lines of casualty and liability insurance in this State. A week before the Reform Act was enacted on March 12, 1990, Twin City attempted to surrender to the Commissioner its license to write private passenger automobile insurance in New Jersey and sought permission to issue nonrenewal notices to its policyholders. The Commissioner, relying on the withdrawal provisions of Section 72, which include a provision rendering Section 72 retroactive to January 25, 1990, issued an order for orderly withdrawal containing several conditions that Twin City must meet before its withdrawal becomes effective.

Appellants object to four of the conditions, relevant portions of which appear in footnotes that follow. One condition requires Twin City to place its private passenger automobile policyholders with other insurers before issuing notices of nonrenewal. If Twin City is unsuccessful in making these placements within five years, it may then issue notices of nonrenewal. Its withdrawal from the market does not become effective until all its policies have expired.*fn1 A second condition simply makes it clear that Twin City, as a private passenger automobile insurer, must continue to comply with all insurance [248 NJSuper Page 623] laws, including the JUA bailout and depopulation provisions of the Reform Act, until its withdrawal becomes effective.*fn2 A third condition requires Twin City to stop writing commercial vehicle insurance.*fn3 The fourth condition requires all other members of the ITT Hartford Group to stop writing the lines of insurance that they sell in New Jersey.*fn4

The statutory authority for imposing these conditions is purportedly found in Section 72, which provides:

An insurance company of another state or foreign country authorized under chapter 32 of Title 17 of the Revised Statutes to transact insurance business in this State may surrender to the commissioner its certificate of authority and thereafter cease to transact insurance in this State, or discontinue the writing or renewal of one or more kinds of insurance specified in the certificate of authority, only after the submission of a plan which provides for an orderly withdrawal from the market and a minimization of the impact of the surrender or discontinuance on the public generally and on the company's policy holders in this State. The plan shall be approved by the commissioner before the withdrawal or discontinuance takes effect. In reviewing a plan for withdrawal under this section, the commissioner shall consider, and may require as a condition of approval, whether some or all other certificates of authority issued pursuant to chapter 17 or 32 of Title 17 of the Revised Statutes held by the company or by other companies in the same holding company as the company submitting the plan should be surrendered. The certificate of authority of the company shall be deemed to continue in effect until the provisions of the approved plan have been carried out. The provisions of this section shall apply to any request for withdrawal, surrender or discontinuance filed on or after January 25, 1990.

We reject appellants' arguments that Section 72 is unconstitutional, and, with one exception, its arguments that the Commissioner unlawfully implemented Section 72 in this case.


We turn first to the arguments that Section 72 is unconstitutional.

Before discussing each particular argument, we hold that the Section 72 provision that renders Twin City's affiliates subject to the Commissioner's order is not defective simply because the affiliates are separate corporate entities. Twin City has acknowledged that it and its affiliates are "under common management" of "the parent insurance company, Hartford Fire Insurance Company," which in turn is owned by the ITT Hartford Group. When considering whether the Legislature may constitutionally respond to a problem in the private passenger

automobile insurance market by limiting appellants' business in other lines, it is not legally significant that appellants chose to write those other lines through separate corporate entities having common owners rather than writing all their lines through one corporate entity.


Appellants' first argument is that by authorizing the Commissioner to bar Twin City and its affiliates from writing other lines of insurance as the price for permitting Twin City to withdraw from the private passenger automobile insurance market, Section 72 authorizes unconstitutional takings of property without just compensation. The Fifth Amendment of the United States Constitution and the New Jersey Constitution, N.J. Const. of 1947, art. I, para. 20, expressly provide that private property shall not be taken for public use without just compensation. "The protections afforded under both constitutions are coextensive." Littman v. Gimello, 115 N.J. 154, 161, 557 A.2d 314 (1989), cert. denied, U.S. , 110 S. Ct. 324, 107 L. Ed. 2d 314 (1989).

Applied to this case, the constitutional prohibition raises questions of whether appellants' licenses to write other lines of insurance are private property and whether requiring appellants to choose between surrendering those licenses and writing private passenger automobile insurance constitutes a taking. We need not decide whether appellants' licenses to write other insurance are private property protected by the taking clauses because the choice given appellants by Section 72 does not constitute a "taking."

The United States Supreme Court has identified the factors that must be considered to determine whether a governmental regulation limiting the use of private property so destroys its value as to constitute a taking. There was no taking when the City of New York, in order to preserve Grand Central Station as a landmark, prohibited its owners from topping it with a

high-rise office structure. Penn Central Transp. Co. v. New York City, 438 U.S. 104, 98 S. Ct. 2646, 57 L. Ed. 2d 631 (1978), reh'g denied 439 U.S. 883, 99 S. Ct. 226, 58 L. Ed. 2d 198 (1978). That opinion requires us to make "essentially ad hoc, factual inquiries" involving factors of "particular significance":

The economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations are, of course, relevant considerations. [Citation omitted.] So, too, is the character of the governmental action. A 'taking' may more readily be found when the interference with property can be characterized as a physical invasion by government [citation omitted] than when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good. [438 U.S. at 124, 98 S. Ct. at 2659.]

Accord Connolly v. Pension Benefit Guaranty Corp., 475 U.S. 211, 224-225, 106 S. Ct. 1018, 1025-1026, 89 L. Ed. 2d 166, 179 (1986) (sustaining federal government's authority to compel employers to make additional contributions to a federal fund guaranteeing payment of private pension funds).

We first examine the character of the governmental action. Requiring appellants to discontinue writing all other lines of insurance as the price for discontinuing to write private passenger automobile insurance cannot be characterized as a "physical invasion." Rather it is part of "a public program adjusting the benefits and burdens of economic life to promote the public good."*fn5 Thus, as was the case in Penn Central and Connolly, the action may not "readily be found" to be a taking.

Appellants rely on Nollan v. California Coastal Commission, 483 U.S. 825, 107 S. Ct. 3141, 97 L. Ed. 2d 677 (1987), where the Court found that there was a taking. The case is distinguishable because there the State's action was a physical invasion, the taking of a public easement over the owner's real property.*fn6 When the character of the governmental action "is a permanent physical occupation of property, our cases uniformly

have found a taking to the extent of the occupation, without regard to whether the action achieves an important public benefit or has only minimal economic impact on the owner." Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 434-435, 102 S. Ct. 3164, 3175, 73 L. Ed. 2d 868, 882 (1982) (New York City ordinance compelling landlords to allow cable T.V. hookups constitutes a physical invasion that was therefore a taking); Kaiser Aetna v. United States, 444 U.S. 164, 100 S. Ct. 383, 62 L. Ed. 2d 332 (1979) (government regulation compelling owner to allow public to use marina constitutes a physical invasion and was therefore a taking).

Appellants contend that the economic impact of having to give up writing other lines of insurance is the complete destruction of their other-lines business, which generated premiums of about 280 million dollars in 1989. We disagree. Section 72 does not require appellants to give up their other-lines business unless they choose to do so by voluntarily giving up their private passenger automobile line. Appellants' losses, if any, from choosing to continue to write private passenger automobile insurance, the choice Section 72 is designed to encourage, would be the reduction of profits that the JUA bailout and depopulation provisions of the Reform Act might cause. Such losses are not takings. The "loss of future profits -- unaccompanied by any physical property restriction -- provides a slender reed upon which to rest a takings claim." Andrus v. Allard, 444 U.S. 51, 66, 100 S. Ct. 318, 327, 62 L. Ed. 2d 210, 223 (1979).

Appellants also claim that Section 72 "has interfered with distinct investment-backed expectations," a kind of economic impact identified by Penn Central as evidence of a taking. Their argument, however, does not go beyond complaining of the loss of their other-lines business. Interference with distinct investment-backed expectations does not occur whenever there is a loss of expected profits. See State Farm Mutual, supra, 124 N.J. at 48-50, 590 A.2d 191, 199-200. It occurs only when the government has made a specific promise to induce investment

in an enterprise and then later, after investments have been made in reliance on that promise, the government reneges.

For instance, in Ruckelshaus v. Monsanto Co., 467 U.S. 986, 104 S. Ct. 2862, 81 L. Ed. 2d 815 (1984), federal law required Monsanto, a manufacturer of pesticides, to submit research data, developed at great expense, to a federal regulatory agency. The federal act contained assurances that data submitted after 1972 would not be disclosed to competitors. A 1978 amendment limited the period of nondisclosure to ten years. The Court found that government disclosures of data submitted from 1972 to 1978 defeated Monsanto's reasonable investment-backed expectations and therefore constituted a taking. 467 U.S. at 1013, 104 S. Ct. at 2878, 81 L. Ed. 2d at 839. However, the Court concluded ...

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