On certification to the Superior Court, Appellate Division.
O'hern, Wilentz, Clifford, Pollock, Garibaldi, Stein, Handler
The opinion of the court was delivered by
The central issue in this appeal is whether the Legislature intended, through its "flex-rate" provisions, to allow insurers to implement, without prior approval, a minimum annual increase of three percent in private-passenger automobile-insurance rates as an incentive to the restructuring of the automobile-insurance market. The flex-rate provisions, N.J.S.A. 17:29A-44, set a statutory cap on the "Statewide average rate change," beyond which rates cannot automatically increase without prior approval from the Commissioner of Insurance (the Commissioner). The shorthand version of that law is that insurers may increase insurance rates not more than the last published increase in the relevant national Consumer Price Index (CPI), plus three percentage points.
The interpretive issue is whether the proviso that allows the Commissioner to modify the Statewide average rate change whenever "either or both of the published [CPI] indices will produce rate levels which are excessive," N.J.S.A. 17:29A-44d, allows the Commissioner to modify, as well, the three percentage-point rate increase. Were the flex-rate provisions read in isolation, we could well agree with the Commissioner that the statute might allow suspension of the three percentage points. However, when the statute is read in conjunction with the related changes in the private-passenger automobile-insurance industry, i.e., the optional verbal threshold, mandatory depopulation of the assigned-risk pool, and the subsequent reliance on the flex-rate provisions to sustain the constitutionality of the Fair Automobile Insurance Reform Act, L. 1990, c. 8 (the FAIR Act), the totality compels the Conclusion that the three-percent flex-rate increase is an integral part of the comprehensive automobile-insurance reform that cannot be modified by the Commissioner.
For purposes of this appeal, we adopt generally the statement of the case as set forth in the State's petition for certification. At issue are administrative orders entered in 1989 and 1990 by the Commissioner that set forth the amounts by which private-passenger automobile insurers in the voluntary market may increase their rates under the flex-rate statute, N.J.S.A. 17:29A-44.
On May 12, 1989, the Commissioner issued Administrative Order A89-119, which prescribed the maximum flex-rate increases that could be implemented by insurers on or after July 1, 1989. In that Order, the Commissioner noted two categories of coverage -- bodily injury and physical damage -- for which the implementation of flex-rate increases would result in excessive rates. With respect to bodily-injury coverage, the Commissioner noted that under N.J.S.A. 39:6A-8 insureds have the option to choose one of two types of coverage. Insureds may elect to pay a lower premium for a policy with a verbal threshold that restricts the ability to sue for non-economic loss, or they may select a more costly, zero-threshold policy that allows an unrestricted right to sue for non-economic losses. See N.J.S.A. 39:6A-8. The Commissioner believed that if insurers were permitted to implement a flex-rate increase for bodily-injury coverage with both verbal and zero thresholds, the increases would result in excessive rates.
With respect to physical-damage coverage, the Commissioner noted that all insurers use vehicle series/symbol group rating systems, and that most insurers also use model/year rating systems when calculating physical-damage premiums. Such rating systems, according to the Commissioner, provide built-in increases to physical-damage premiums each year. Were the insurers permitted flex-rate increases in physical-damage coverage, those who use vehicle series/symbol group rating systems alone or along with model/year systems would have rates that are excessive.
Taking those factors into consideration, the Commissioner prescribed the following maximum flex rates for 1989:
(1) Personal Injury Protection 9.8%
(2) Bodily Injury (verbal threshold) 4.9%
(3) Bodily Injury (zero threshold) 9.8%
(5) Physical Damage (with model/year ratings) 0.0%
(6) Physical Damage (without model/year ratings) 2.6%
State Farm Mutual Automobile Insurance Company and State Farm Fire and Casualty Company (State Farm) filed a notice of appeal that challenged the Commissioner's 1989 order, and included among its challenges the fact that the Commissioner lacked adequate regulations to prescribe the methodology for determining permissible flex-rate increases.
Hence, on February 15, 1990, the Commissioner responded by adopting flex-rate regulations that set forth his methodology and reasoning. See N.J.A.C. 11:3-16A.1 to -16A.4 as adopted and published at 22 N.J.R. 963 (eff. Mar. 19, 1990). The Commissioner reasoned that because the verbal threshold had been entirely new to New Jersey, the relative flex rates for bodily-injury coverage may be based on trends in other states. The regulations also described the Commissioner's theory on modification of the flex rate for physical-damage coverage. The Commissioner stated that because existing approved rates allow for changes to reflect the model/year differential, insurers have automatically built-in increases in the physical-damage component of their rates. Thus, according to the Commissioner, to allow the additional annual three-percent increase would result in excessive rates. State Farm filed an amended notice of appeal on March 30, 1990, incorporating a challenge to those flex-rate regulations.
The Commissioner promulgated a second Administrative Order, A90-125, on May 24, 1990, which established the following maximum flex rates for 1990:
(1) Personal Injury Protection 11%
(2) Bodily Injury (verbal threshold) 5.5%
(3) Bodily Injury (zero threshold) 11%
(5) Physical Damage (with model/year ratings) 0.0%
(6) Physical Damage (without model/year ratings) 1%
Because loss-trend data continued to show that losses on verbal-threshold policies were one-half as great as losses on zero-threshold policies, the Commissioner had set the maximum flex rate for bodily-injury (verbal threshold) coverage (5.5%) at one-half of the maximum flex rate for bodily injury (zero threshold) coverage (11%). The Commissioner did not increase the maximum flex rate for physical-damage coverage (with model/year ratings), and set the maximum flex rates for physical-damage coverage (without model/year ratings) at 1% because he had found that the built-in premium increases for physical-damage coverage provided adequate protection against inflation for 1990. State Farm filed a second amended notice of appeal on June 26, 1990, challenging as well the Commissioner's 1990 flex-rate order.
State Farm presented three arguments before the Appellate Division: (1) that the Commissioner is authorized by statute to establish only two flex rates: one for personal-injury protection, residual bodily-injury and property-damage coverage, and one for physical-damage coverage; (2) that the Commissioner does not have the authority to modify the flex rate below three percentage points; and (3) that the Commissioner's 1989 and 1990 flex-rate orders are "devoid of any factual basis."
The Appellate Division, in an unreported per curiam opinion, sustained the Commissioner's use of six different categories of flex-rate increases, as set forth in N.J.A.C. 11:3-16A.4, but held that the Commissioner lacked the power to reduce the maximum flex rate below three percentage points. The court reasoned that although the Commissioner had the authority to modify the Statewide average rate change, the statute limited his actions to modify increases in the "published indices" that would produce excessive rate levels. The court interpreted the statutory language to permit the Commissioner to reduce only the CPI portion of the flex rate, and not the additional three percentage points. The Appellate Division concluded that to allow the Commissioner to reduce the flex rates below three percent would circumvent the statute's clear language and would, in effect, "penalize insurance companies for the results of inflation."
The court ruled further that the administrative orders setting the flex rates for 1989 and 1990 were unenforceable in their entirety because they had not been supported by substantial evidence and had not been adopted in accordance with the notice and comment procedures required by the Administrative Procedure Act, N.J.S.A. 52:14B-1 to -15 (APA). The court therefore remanded the 1989 and 1990 flex-rate orders to the Commissioner to follow the notice and comment procedures required by the APA.
We granted the Commissioner's petition for certification, N.J. (1992),*fn1 and now affirm in ...