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In re Commissioner of Insurance''s Decision on Liberty Mutual Fire Insurance Company''s N.J.A.C. 11 3-16 Rate Filing

Decided: July 26, 1993.


On appeal from Administrative Ruling by Commissioner of Insurance.

King, Brody and Landau. The opinion of the court was delivered by Landau, J.A.D.


[266 NJSuper Page 459] Appellant, Liberty Mutual Fire Insurance Company (Liberty Mutual) appeals from denial by the New Jersey Commissioner of Insurance (Commissioner) of its N.J.A.C. 11:3-16.11 "pass-through" automobile insurance rate filing in which it sought recoupment of 1990 and 1991 payments of surtaxes and assessments

imposed by the Fair Automobile Insurance Reform Act (FAIRA). A principal argument made by Liberty Mutual is that the Commissioner's refusal to apply N.J.A.C. 11:3-11.16 retroactively constituted an unconstitutional application of FAIRA, by foreclosing it from demonstrating inability to earn an "adequate rate of return" as a result of the payments of the 1990 and 1991 surtaxes and assessments. We agree and conclude that the Commissioner's blanket denial of any pass-through relief must be reversed.

FAIRA imposed surtaxes and assessments upon New Jersey insurers (and others)*fn1 to satisfy obligations of over three billion dollars accumulated by the Joint Underwriting Association (JUA). A three-year 5% surtax on all taxable premiums for voluntary automobile insurance policies (N.J.S.A. 17:33B-49) was enacted, together with a proportional annual assessment against auto insurers and other property and casualty insurers sufficient to enable the New Jersey Property-Liability Insurance Guarantee Association to make annual loans of $160 million to the New Jersey Automobile Guaranty Fund. N.J.S.A. 17:30A-8(a)(9) and (10).

Pursuant to this statutory scheme, various Liberty Mutual affiliates paid approximately $21 million in surtaxes and assessments during 1990 and 1991. Approximately $8 million in payments were made prior to the Commissioner's promulgation of emergency regulations in November, 1990 which provided a method for consideration and possible recoupment of the surtaxes and assessments in a rate filing application. See 22 N.J.R. 3790.

Relying in part on N.J.S.A. 17:33B-2(g) and the existence of the emergency regulations now formally codified as N.J.A.C. 11:3-16.11, the Supreme Court ruled in May, 1991 that FAIRA did not facially violate the New Jersey or United States Constitutions. State Farm v. State, 124 N.J. 32, 590 A.2d 191 (1991).

On November 26, 1991, Liberty Mutual made its "prior approval" filing*fn2 with the Commissioner, seeking an overall passenger auto rate increase of 11.4%. This rate increase request was denied by the Commissioner on December 20, 1991. The decision was not appealed.

On December 30, 1991, Liberty Mutual filed its "pass-through"*fn3 rate request for approval pursuant to N.J.A.C. 11:3-16.11 seeking to revise its private passenger automobile rates to cover $21,347,380 in 1990 and 1991 surtaxes and assessments imposed pursuant to N.J.S.A. 17:30A-8(a) and N.J.S.A. 17:33B-49.

On March 5, 1992 the Department of Insurance denied recovery, stating:

(1) We cannot approve the recoupment of past surtaxes and assessments from future policyholders -- ratemaking is prospective only.

(2) You have not provided rate indications due to the requested pass through by coverage according to the Department's private passenger auto filing regulations N.J.A.C. 11:3-16.

(3) We cannot approve a pass through to private passenger auto policyholders of assessments on other lines of business. It is not clear from your filing if you are attempting to do this.

(4) In his letter to you dated December 20, 1991, Samuel E. Sackey, Actuarial Analyst with our Department denied your request for a prior approval rate increase for private passenger auto. He indicated in his denial letter that his average overall rate indications were -7.7% on a total limits basis and -14.9% on a basic limits basis. It is our determination that Mr. Sackey's indicated redundancy in your current private passenger auto rate will absorb the surtax and assessments which will be payable prospectively allowing your company to make an adequate future rate of return consistent with the Clifford Formula.*fn4

Liberty Mutual filed a direct appeal to this Court on April 23, 1992 challenging the denials in paragraphs 1 and 3 of the Commissioner's March 5, 1992 decision letter.

On appeal, Liberty Mutual argues that: (1) the prospective application of N.J.A.C. 11:3-16.11 deprived it from demonstrating inability to realize its legislative and constitutional rights to receive an adequate rate of return after payment of the 1990 and 1991 assessments and surtaxes; (2) the Commissioner must consider the cost of assessments imposed by N.J.S.A. 17:30A-8 upon all of its lines of business, when analyzing whether an insurer is able to earn a fair rate of return in its automobile business; and (3) FAIRA should be read to authorize assessments paid by other lines to be recouped only against automobile rates, where an insurer writes both non-auto and auto business.

The Commissioner contends that we need not address Liberty Mutual's arguments in that the unappealed disapproval of Liberty Mutual's "prior approval" filing precluded recoupment by way of the subsequent "pass-through" filing. He says that Liberty Mutual previously failed to establish any need for rate increases. The Commissioner also argues that the Department's prospective-only interpretation of N.J.A.C. 11:3-16.11 was warranted due to Liberty Mutual's delay in filing the "pass-through" application, and that the legislative scheme of FAIRA precludes passing on to an insurer's auto policy holders the cost of FAIRA assessments imposed on its non-auto lines.


The Fair Automobile Insurance Reform Act (FAIRA) was enacted effective May 12, 1990 to address the grave problems which arose out of New Jersey's 1988 JUA legislation. Its purpose was to facilitate an orderly phase out of JUA, and to restore private passenger automobile risks to the voluntary market through creation of a temporary Market Transition Facility (MTF).

In State Farm, supra, automobile insurers contested the constitutionality of the surtaxes and assessments imposed upon them under Sections 74 and 76 of FAIRA (see N.J.S.A. 17:30A-8(a)(9) & (10) and N.J.S.A. 17:33B-49), contending that the Act precluded insurers from passing along those obligatory expenses to their policyholders, thereby denying them a reasonable rate of return.

The Supreme Court determined that FAIRA gives the Commissioner power to provide a constitutionally adequate fair rate of return to insurers. Noting that the Commissioner had adopted regulations governing rate relief to offset surtaxes and assessments when such fair return had been denied, (now N.J.A.C. 11:3-16.11), the ...

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