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In re American Reliance Insurance Co.

Decided: October 24, 1991.


On appeal from State of New Jersey, Department of Insurance.

Antell, Baime and Thomas. The opinion of the court was delivered by Baime, J.A.D.


Appellants are small, New Jersey domiciled property and casualty mutual insurance companies which do virtually all of their business in this State. With the exception of American Reliance Casualty Company, appellants are not authorized to write automobile insurance and none of them participated as servicing carriers for the New Jersey Full Insurance Underwriting Association (JUA). In this appeal, they challenge the facial constitutionality of the Fair Automobile Insurance Reform Act of 1990 (FAIR Act) (N.J.S.A. 17:33B-1 to -63), contending that the statutory scheme violates their right to equal protection and due process, effects a confiscatory taking of their property, and impermissibly impairs existing contractual rights and obligations. Appellants also assert that the Commissioner of Insurance violated the Administrative Procedure Act (N.J.S.A. 52:14B-1 to -15) by promulgating agency rules without

adhering to statutory requirements. We find no merit in the contentions advanced.


A brief description of the evolution of automobile insurance regulation in New Jersey is necessary for a complete understanding of the issues presented. A far more extensive exposition of this history appears in our Supreme Court's recent opinion in State Farm v. State, 124 N.J. 32, 590 A.2d 191 (1991). We need not retread upon ground so exhaustively covered there except as it relates to the arguments advanced by appellants in this appeal.

For many years, New Jersey has endeavored to provide motorists with an "equitable, efficient and economical" program to indemnify owners and operators for injuries and damages sustained in their operation. N.J.S.A. 17:33B-2b. One of the more intractable problems has been the difficulty of providing coverage for high-risk drivers. Prior efforts to combat this problem have not been successful. In 1983, for example, the Legislature determined that the Assigned Risk Plan (N.J.S.A. 17:29D-1), under which the Commissioner apportioned high-risk drivers among all automobile insurers doing business in New Jersey, was not economical or efficient. Under the Automobile Full Insurance Availability Act (N.J.S.A. 17:30E-1 to -24), the assigned risk system was abandoned and replaced by the JUA. The objective of the new scheme "was to create a more extensive system of allocating high-risk drivers to carriers, and through the JUA, to provide such [individuals] with coverage at rates equivalent to those charged in the voluntary market." State Farm v. State, 124 N.J. at 32, 590 A.2d 191. Unfortunately, the JUA plan did not achieve its objectives. Among other failures, the JUA accumulated a deficit of over $3.3 billion in unpaid claims and other losses.

The FAIR Act is the Legislature's most recent effort to resolve these problems. We have no occasion to describe the

newly adopted procedures designed to "depopulate" the JUA and provide economical coverage to "standard" and "non-standard" risk drivers. We are concerned here with the FAIR Act's provisions designed to create a funding mechanism to pay off the JUA's debt. The FAIR Act created the New Jersey Automobile Insurance Guaranty Fund (Auto Fund) to collect and disburse various payments to relieve the JUA deficit. N.J.S.A. 17:33B-5. Certain types of income which formerly went to the JUA are assigned to the Auto Fund. Ibid. In addition, new sources of funding were created, including revenues attributable to a surtax upon automobile insurance premiums, N.J.S.A. 17:33B-49, fees on lawyers, doctors, and auto body repair businesses, N.J.S.A. 17:33B-58 to -63, and most significant in the context of this appeal, the imposition of assessments on many types of insurers, N.J.S.A. 17:30A-8a(9) and -8a(10).

The assessments imposed on insurance carriers are collected through the Property Liability Insurance Guaranty Association (PLIGA). N.J.S.A. 17:30A-8a(8). These assessments are measured by the proportion that the net direct written New Jersey premiums of the insurer for the preceding calendar year bear to the net direct written New Jersey premiums of all PLIGA members. PLIGA was initially created in 1974 to impose assessments on New Jersey property-casualty insurers to pay claims against carriers that had become insolvent (N.J.S.A. 17:30A-1 to -20), but under the FAIR Act it has the additional duty of imposing and collecting the newly created assessments on its members. These additional assessments are to be applied exclusively to the JUA debt. The FAIR Act denominates these assessments as "loans" and requires that they be paid into the Auto Fund. N.J.S.A. 17:30A-8a(10). We briefly digress to note that all PLIGA members are obliged to pay these assessments, whether or not they previously participated in the JUA system.

Several sections of the FAIR Act deal with the problem of attempts to recoup assessments and surcharges from policyholders. In the past, PLIGA members were generally permitted

to pass through insolvency assessments to their insured. Although originally these "pass throughs" took the form of rate increases, in 1979 the method was changed to direct surcharges on policy premiums. Surcharges for insolvency assessments are permitted by the FAIR Act. N.J.S.A. 17:30A-16a. However, the FAIR Act specifically prohibits dollar-for-dollar "pass throughs" of the newly created surtaxes and assessments. N.J.S.A. 17:30A-16b provides:

No member insurer shall impose a surcharge on the premiums of any policy to recoup assessments paid pursuant to [the provisions requiring assessments to be loaned to the Auto fund.]

Bolstering this prohibition is N.J.S.A. 17:33B-51, which states:

[t]he Commissioner of Insurance shall take such action as is necessary to ensure that private passenger automobile insurance policyholders shall not pay for the surtax imposed pursuant to [ N.J.S.A. 17:33B-49].

In several sections, the FAIR Act empowers the Commissioner to exempt, abate or defer premium surcharges and PLIGA assessments. In particular, if an insurer is at risk because of an "unsafe or unsound financial condition," the Commissioner may suspend (1) its obligation to accept what would be its allocation of assigned risks, N.J.S.A. 17:33B-23 and -24, (2) its obligation to issue or renew automobile policies, N.J.S.A. 17:33B-27, and (3) its obligation to pay the premium surtax, N.J.S.A. 17:33B-52 and -53. Obviously, these statutory "safety valves" afford relief only to automobile insurers. However, in addition to these ameliorative sections, N.J.S.A. 17:33B-55 and -56 allow the Commissioner to suspend the obligation to pay PLIGA assessments. These latter sections apply to all insurers who are PLIGA members, not merely automobile insurers. Both with respect to surcharges and PLIGA assessments, separate sections either mandate abatement or deferment, N.J.S.A. 17:33B-52 and N.J.S.A. 17:33B-55, or confer substantial discretion on the Commissioner to ...

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