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In re Commissioner of Insurance''s March 24

Decided: May 1, 1992.


On appeal from the Department of Insurance.

R.s. Cohen, A.m. Stein and Kestin. The opinion of the court was delivered by R.s. Cohen, J.A.D.



These are appeals by some 20 companies that write most of the auto insurance in New Jersey. They challenge the validity of Order No. A92-158, issued by the Commissioner of Insurance on March 24, 1992 ("the Order"). The Order declines to implement an April 1, 1992 rate increase requested by the Market Transition Facility ("MTF") to meet a premium shortfall. It creates instead (by amendment of the MTF Plan of Operation) a program of "transitional assessments" against insurers which violated the law, in the Commissioner's view, by failing to write their shares of MTF depopulation business. The total amount to be assessed is some $169,000,000, of which $37,000,000 is to raise MTF revenues sufficiently to obviate the need for the April 1 rate rise, and $132,000,000 is to defray part of the MTF deficit accumulated between October 1, 1990 and April 1, 1992. The Commissioner says he plans to make calls for assessment payments in May or early June 1992.

The appellants moved for stays of the Order and for acceleration of their appeals. The need for a prompt decision was apparent to all parties. On April 10, without objection, we

ordered that briefs be exchanged on April 20*fn1 and that oral argument be heard on April 24. Even though implementation of the proposed assessments required amendment of the MTF Plan of Operation, the matter was treated as ripe and ready for adjudication. We were advised that the Commissioner would adopt the amendment before April 24, and indeed he did so. The issues relating to the validity of the amendment have been fully briefed, and all parties have treated them as an integral part of these appeals. Acceleration of the appeals made less urgent the insurers' motions for stays, and we denied them.

We now hold that the Order is invalid for two reasons. The first is that the Commissioner's determination that there is an MTF rate need of 12.6% requires him to raise rates. The law does not permit him to purposely set deficit rates and rely on the alternative funding source of a cash call to the voluntary market insurers. The second is that imposing transitional assessments on certain insurers on the thesis that they did not meet their depopulation apportionment shares is unauthorized by statute, either to prevent future deficits or to reduce past deficits. Accordingly, we order the Commissioner to implement forthwith the 12.6% MTF rate increase already found by him to be necessary.

In 1983,*fn2 the New Jersey Automobile Full Insurance Availability Act, N.J.S.A. 17:30E-1 et seq., created a residual auto

insurance market mechanism that came to be called JUA. Its function was to assure access to auto insurance at standard market rates to qualified persons who, for good reason or bad, were rejected by voluntary market insurers. In re Comm'r of Ins. Orders Regarding Rate Filing by Market Transition Facility, 252 N.J. Super. 260, 263-64, 599 A.2d 906 (1991), certif. denied, 127 N.J. 565, 606 A.2d 376 (1992) [hereinafter Market Transition Facility ]. JUA was not a success. It became the dumping ground for rejected drivers. Ultimately, half of New Jersey's auto policies were issued by JUA. Although many JUA insureds were perfectly good drivers, many of them lived in areas which the insurers believed created uncompensated extra risks.

JUA was instructed by the Legislature that created it to operate on a no profit, no loss basis. N.J.S.A. 17:30E-3 o ; N.J.S.A. 17:30E-8. Although it could not initially charge premiums which exceeded standard market rates,*fn3 the statute provided revenue supplements that were supposed to make up the difference. The principal supplement was the residual market equalization charges (RMECs). They were not assessed to insurance companies, but were added equally to the premiums on almost all insured automobiles, and transmitted to JUA by the insurers. The RMECs were to be periodically set by the Commissioner, N.J.S.A. 17:30E-8, at a level sufficient to "cause [JUA] to operate on a no profit, no loss basis." N.J.S.A. 17:30E-3 o ; see State Farm, supra, 124 N.J. at 41-42, 590 A.2d 191; Market Transition Facility, supra, 252 N.J. Super. at 264, 599 A.2d 906; Assignment of Exposures, supra, 248 N.J. Super. at 372-73, 591 A.2d 631.

JUA was not operated as the statute directed. Fingers have pointed everywhere: the RMECs were knowingly set too low; the servicing carriers overspent JUA money negligently and in their own interests; the voluntary market rejected all but the lowest-cost drivers. Whatever the true causes, JUA ran up some $3.3 billion in deficits not contemplated by the break-even statutory scheme. The result was the need for the assessments, surcharges, and other non-premium revenue supplements created by the Fair Automobile Insurance Reform Act of 1990 ("FAIR Act"), L. 1990, c. 8, N.J.S.A. 17:33B-1 et seq. See State Farm, supra, 124 N.J. at 42, 590 A.2d 191.

Even earlier, in 1988, it was clear to the Legislature that the bloated JUA had to be put on a crash diet. N.J.S.A. 17:30E-14 was amended to create a plan for the gradual depopulation of JUA over a period of four years beginning January 1, 1989. L. 1988, c. 119, § 25. From the then current coverage of 50% of the private passenger car market, JUA was to be downsized in yearly stages to cover 40%, 30%, 25%, and then 20% of the market. The final 20% were to be insured through JUA at self-sustaining, unsubsidized rates. The other side of the coin was to be an annual increase in the voluntary market to cover 60%, 70%, 75%, and finally 80% of the market. See Assignment of Exposures, supra, 248 N.J. Super. at 374, 591 A.2d 631.

The 1988 amendment to N.J.S.A. 17:30E-14 created a mechanism to downsize, or depopulate, JUA. It instructed the Commissioner to establish rules "to govern the voluntary writing" of JUA insureds by the voluntary market insurers. N.J.S.A. 17:30E-14a. Those rules were to include assignment of eligible insureds by JUA to member companies "pursuant to an equitable apportionment procedure established in the plan of operation." Id. Due consideration was to be given to the increase or decrease in voluntary market policies written by member companies since January 1, 1984. Id.

Then, according to 17:30E-14b, the Commissioner was to "establish" a first-year voluntary market quota of not less than

60% of all the insured passenger cars, and was to "prescribe" the number of voluntary market policies each member company was to write during that year. Similarly computed but increasing yearly quotas and apportionments were to follow. At the end of each year, the Commissioner was to direct JUA to "assign the balance of the exposures needed to meet the applicable quota to member companies in a manner consistent with the apportionment procedure." N.J.S.A. 17:30E-14c. Any member company that did not timely write its share of JUA depopulation business was to "be precluded from nonrenewing automobile policies pursuant to [ N.J.S.A. 17:29C-7.1] during the immediately following 12 month period." N.J.S.A. 17:30E-14h. The bracketed provision permits insurers to decline to renew up to 2% of their voluntary business each year.

The Commissioner was authorized to suspend or revoke the certificate of authority of any insurer who willfully failed to comply with the 1983 or 1988 legislation, and to fine any insurer who violated the Act or the plan of operation adopted pursuant to it, up to $10,000 for each violation. N.J.S.A. 17:30E-17a. In addition, the 1988 legislation also authorized the Commissioner to order the restitution to JUA of any financial loss due to any act or omission of any member company violating any statutory, contractual or plan of operation requirement. L. 1988, c. 156, § 11; see N.J.S.A. 17:30E-17.1.

Very little depopulation occurred pursuant to the 1988 legislation. The FAIR Act was approved and became effective on March 12, 1990. Its centerpiece was the abandonment of the JUA as a market mechanism,*fn4 and the creation of the MTF to write auto policies for two years, from October 1, 1990 through September 30, 1992, to depopulate at a rate substantially faster than the schedule established in 1988 for JUA, and to be completely out of business by October 1, 1993, N.J.S.A. 17:33B-11.

JUA depopulation was to take place so that no more than 32% of JUA exposures would enter MTF on October 1, 1990. N.J.S.A. 17:30E-14b(2); N.J.S.A. 17:33B-11c. By April 1, 1991, MTF was to insure no more than 29% of the private passenger market, and by October 1, 1991, no more than 20%. N.J.S.A. 17:33B-11c(5). By April 1, 1992, only 10% were to remain in MTF and on September 30, 1992, MTF was to stop covering the remaining exposures, and they were then to be relegated to an assigned risk pool. Id.; see Market Transition Facility, supra, 252 N.J. Super. at 265-66, 599 A.2d 906.

The FAIR Act's provisions creating MTF are almost all contained in N.J.S.A. 17:33B-11. MTF is to be "operated by the Commissioner of Insurance pursuant to the provisions of this section." N.J.S.A. 17:33B-11a. Every New Jersey auto insurer "shall be a member of the facility and shall share in its profits and losses as provided by the commissioner pursuant to the provisions of subsection d. of this section." Id. Subsection d provides:

The commissioner shall apportion any profits or losses of the facility among member companies based on each company's apportionment share as determined for purposes of depopulation pursuant to subsection a. of section 26 of P.L. 1983, c. 65 (C. 17:30E-14).

Subsection a of N.J.S.A. 17:30E-14 states:

Within 45 days of the effective date of this 1988 amendatory and supplementary act, the commissioner shall, in the plan of operation, establish procedures to govern the voluntary writing of applicants and [JUA] insureds without the utilization of the association. These procedures shall include criteria identifying drivers who should be eligible for coverage in the voluntary market. Applicants and association insureds meeting these criteria shall be subject to assignment by the [JUA] to member companies, pursuant to an equitable apportionment procedure established in the plan of operation. The procedure shall give due consideration to the increase or decrease in the volume of private passenger automobile non-fleet exposures voluntarily written by member companies in this State since January 1, 1984.

The JUA plan of operation contained a formula to measure each voluntary market insurer's depopulation share. The formula was designed to satisfy the demand of N.J.S.A. 17:30E-14a for "an equitable apportionment procedure . . . [which] shall give due consideration to the increase or decrease in the

volume of [auto insurance] voluntarily written by member companies in this State since January 1, 1984." In apportioning depopulation obligations based on voluntary market shares, the plan of operation used 1983 and 1988 shares, and weighed them equally. After adoption of the FAIR Act, the Commissioner employed a new formula for depopulation apportionment. He continued to use 1983 and 1988 to measure voluntary market shares, but weighted 1983 volume three times greater than 1988. The purpose was to discount recent reductions in voluntary business, the very business strategy that caused the bloat of JUA's book of business, and to rely more heavily on market shares in the year before JUA opened and gave insurers the opportunity to shift ...

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