O'hern, Chief Justice Wilentz and Justices Handler, Pollock, Garibaldi, and Stein join in this opinion. Justice Clifford did not participate.
The opinion of the court was delivered by
This appeal concerns the plan of operation created by the Fair Automobile Insurance Reform Act of 1990, N.J.S.A. 17:33B-1 to -63 (the Fair Act, FAIRA, or the Act). The Fair Act created the Market Transition Facility (MTF or the facility) as an agency to provide automobile-insurance coverage to high-risk drivers during a two-year phaseout of the Joint Underwriting Association (JUA), which had been created by the New Jersey Automobile Full Insurance Availability Act, L. 1983, c. 65 (C.17:30E-4) (the JUA Act). The specific issue is the validity of the Commissioner of Insurance's March 24, 1992 Order (the Order or the March 24 order), imposing "transitional assessments" of $169 million on insurance companies for their asserted failure to meet the Act's "depopulation" quotas established to transfer drivers from the MTF into the private insurance market.
In State Farm Mutual Automobile Insurance Co. v. State, 124 N.J. 32, 590 A.2d 191,, (1991), we considered the background to the Fair Act and upheld its essential features against a facial attack of unconstitutionality. The primary focus of that litigation was the imposition of additional assessments and surtaxes on insurance companies to pay off the JUA's accumulated debt of over $3.3 billion. This case concerns the accumulated debt of the MTF, the successor to the JUA. We hold that the Commissioner of Insurance (the Commissioner) lacked the authority to impose the transitional assessments either as a regulatory adjustment or revenue-raiser under FAIRA, and that in the procedural context of this case the assessments are not sustainable as a penalty or enforcement measure.
We retrace briefly the background set forth in State Farm. New Jersey's system of automobile-insurance regulation has faced "an intractable problem of providing coverage for high-risk drivers." 124 N.J. at 40. The objective of the JUA was "to provide such drivers with coverage at rates equivalent to those charged in the voluntary market." Id. at 41. The JUA was a more complex system than the prior Assigned Risk Plan, pursuant to which the Commissioner had apportioned high-risk drivers among all auto insurers doing business in New Jersey. Id. at 40-41.
A board of directors, primarily comprised of insurance-company representatives and insurance producers, originally governed the JUA. The board's task was to adopt a Plan of Operation to carry out the JUA's objectives. Id. at 41. Insurance companies (and subsequently certain non-insurer entities) could apply to become "servicing carriers" that would bear "administrative responsibility for collecting premiums, arranging coverage, and the like, and which would receive fees for such services from the JUA." Ibid.
Because the JUA insured high-risk drivers but required their rates to be the same as voluntary-market rates, premium revenues were not expected to cover the costs of claims against JUA policies. Department of Motor Vehicles surcharges for moving violations and drunk-driving convictions, flat charges, and residual market-equalization charges (RMECs) imposed on automobile-insurance policyholders supplemented the JUA's premium income. Id. at 41-42. "Thus, the JUA was a system in which the insurance costs of high-risk drivers were subsidized by the imposition of fees on segments of the general population of motorists." Id. at 42. In theory, the JUA would operate on a no-profit, no-loss basis, with RMECs adjusted up or down as needed in the voluntary market to accomplish that goal. Ibid.
The JUA did not achieve its goals. A growing number of drivers were unable to obtain voluntary-market coverage, until by 1988 "over 50% of New Jersey's drivers had to be insured through the JUA." Ibid. In 1988, the Legislature amended various statutes to address the deteriorating condition of the automobile-insurance industry. L. 1988, c. 119 (the 1988 Reform Act). That act undertook to reform the JUA but not to eliminate it. Salient features of the 1988 Reform Act were an optional verbal threshold for tort actions, flex-rating for insurers, a reconstituted board of JUA directors, and a program to audit the JUA servicing carriers to find, recover, and penalize any overcharges made by them to the JUA. For our purposes, the most significant feature of the 1988 Reform Act was the planned depopulation of the JUA, leaving only the least-desirable risks for it to cover, which would be charged self-sustaining, unsubsidized rates. In re Assignment of Exposures, 248 N.J. Super. 367, 373-74 (App. Div.) (referring to L. 1988, c. 119, § 26; N.J.S.A. 17:30E-14), certif. denied, 126 N.J. 385 (1991), cert. denied, U.S.,112 S. Ct. 1244, 117 L. Ed. 2d 476 (1992). The plan was to cut the JUA coverage over four years to no more than 40% of the total market in the first year, 30% of the market within the following year, 25% within the next year, and, finally, 20% of the total market at the end of the four-year period. L. 1988, c. 119, § 26. Despite the imposition of substantial flat charges and RMECs from 1988 through 1990, the JUA continued to operate at a deficit. State Farm, supra, 124 N.J. at 42.
Automobile-insurance reform had been a central issue in the 1989 gubernatorial campaign. One of the first initiatives of Governor Florio's new administration in 1990 was the plan of automobile-insurance reform that became the Fair Act, which was signed into law on March 12, 1990. A brief description of the Act follows.
The principal goals of the Act were to reduce insurance costs for most New Jersey drivers, to depopulate the JUA by switching insureds to the voluntary markets and to create a funding mechanism to pay off the JUA debt. To these ends, the Act provided that the JUA would cease writing or renewing policies as of October 1, 1990. The "depopulation" of the JUA would be accomplished by classifying insured drivers into three categories: (1) high-risk drivers in the (revived) Assigned Risk Plan (10% of the market); (2) "non-standard" risk drivers, who would be insured by private insurers directly, but who could be charged rates up to 135% of those standard risks (15% of the market); and (3) standard-risk, voluntary-market insureds covered at prevailing rates (the remaining 75% of the market).
We presumed that the higher rates charged drivers in the first two categories "should bring the premium income on such coverage in line with actual costs, and this coverage would no longer be subsidized." Id. at 43. The Act required the companies to "take all comers" who were "good drivers" as of April 1, 1992. Assembly Appropriations Committee Statement, Assembly No. 1, L. 1990, c. 8, at 2, 8 (Committee Statement, A. 1).
FAIRA accelerated the depopulation of the JUA. It required the Commissioner, within thirty days of its effective date, to establish a new depopulation quota to take effect immediately to reduce the JUA pool to 32% of the market on or before October 1, 1990, the date of the planned abolition of the JUA. On that date, FAIRA, in effect, transferred the pool's coverage to the MTF but provided that by April 1, 1991, no more than 29% of the exposures (that is, the drivers to be insured) would be written by the MTF and the JUA combined; by October 1, 1991, no more than 20% by the MTF alone; on or after April 1, 1992, no more than 10% by the MTF; and on and after October 1, 1992, 0% of the exposures. N.J.S.A. 17:33B-11.c.(5). The Act required the Commissioner to establish those quotas for exposures in a manner consistent with the market-share apportionment procedure established under the JUA's original operating code. In addition, the Act provided:
In the event that any of the quotas established pursuant to this paragraph have not been met by the end of the applicable period, the commissioner shall direct the facility to assign the balance of exposures needed to meet the applicable quota to member companies pursuant to the apportionment procedure.
The Nature of the Market Transition Facility
The Market Transition Facility is quite unlike the JUA. The JUA was initially operated by industry representatives. Neither the insurers that acted as servicing carriers nor automobile insurers as a group were liable for the losses paid on policies issued by the JUA.
On the other hand, the Commissioner operates the MTF. Furthermore, "every insurer authorized to transact automobile insurance in this State 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 [concerning apportionment]." N.J.S.A. 17:33B-11.a. The Act required the Commissioner to appoint an advisory board of industry representatives. However, the Commissioner clearly was the chief executive of the MTF. In re May 10, 1991 Orders, 252 N.J. Super. 260, 275, 599 A.2d 906 (App. Div. 1991), certif. denied, 127 N.J. 565 (1992).
Under the Act, the MTF was to issue automobile-insurance policies for a two-year period, ending September 30, 1992. The MTF could not issue or renew any policies on or after October 1, 1992. N.J.S.A. 17:33B-11.c. The Commissioner was to promulgate a "plan of operation" in consultation with the advisory board to provide (1) the applicable levels of coverage available through the facility; (2) the premiums; which should be based primarily on the JUA rates; (3) the procedures for changing rates; (4) for the issuance of policies through servicing carriers, employing the A staff at the discretion of the Commissioner; (5) the procedures for depopulation of the facility with a goal of 0% population at the end of the two-year period; and, among other things, "such other provisions as are deemed necessary for the operation of the facility." N.J.S.A. 17:33B-11.c.(1)-(9).
Several Appellate Division opinions track the MTF's troubled operating history. Among the issues decided in those opinions are: should the Commissioner have increased rates substantially on October 1, 1990, despite the Fair Act's requirement that the MTF initially use the JUA rates, which, even with RMECs, had created significant deficits? In re May 10, 1991 Orders, supra, 252 N.J. Super. 260; does the Commissioner have the authority to assign a producer's (either an agent or a broker) entire book of business to an insurer in fulfilling the insurer's quota obligations? In re Assignment of Exposures, supra, 248 N.J. Super. 367; what procedures should the Commissioner employ in setting rates under the MTF? In re May 10, 1991 Orders, supra; what authority did the Commissioner have to assign the producers to private carriers? In re July 2, 1992 Order, 261 N.J. Super. 292, (App. Div. 1993). The two-year life span of the MTF was nearly consumed before all of the issues of its operation had been resolved.
A. The Background to the March 24, 1992, Order
To facilitate an understanding of this case, we set forth a limited chronology of some of the events that led to the Order under review. We intend nothing more than a sketch of those proceedings and express no view on their effect on any later proceedings involving the MTF.
* March 12, 1990 - The Fair Act becomes law.
* May 15, 1990 - The Commissioner assigns to the companies their initial shares of depopulation quotas. He warns the companies that "any member company that has not written its apportionment share shall be precluded from nonrenewing policies for a 12-month period in accordance with N.J.S.A. 17:29C-7.1, as amended"; that quarterly reports of exposures written would be required; and that "any member company which fails to comply with the provision ...