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In re The Reorganization of the Medical Inter-Insurance Exchange of New Jersey

February 14, 2000


Before Judges Kleiner, P.G. Levy and Carchman.

The opinion of the court was delivered by: Carchman, J.A.D.


Argued November 10, 1999

On appeal from the Department of Banking and Insurance.

In response to the increasing burden imposed on the medical profession by high malpractice insurance premiums, respondent Medical Inter-Insurance Exchange of New Jersey (MIIX) was established in 1977 as a reciprocal insurance exchange to provide medical malpractice liability and related lines of insurance. In 1997, in an effort to "enhance its strategic and financial flexibility" and to provide its members with marketable stock and, in some cases, cash, MIIX's Board of Governors sought to reorganize MIIX from a reciprocal insurer to a stock insurer. Unlike other jurisdictions, New Jersey does not presently provide a statutory mechanism for a direct conversion, so MIIX sought to accomplish its corporate objectives consistent with presently existing statutory authority. MIIX conceived of a plan to a) create a new stock insurance company and a holding company; b) essentially transfer the assets and liabilities of the present company to the new company; c) acquire, for consideration, subsidiary companies; d) allocate and distribute common stock and cash to current and recent former MIIX members; and thereafter, e) dissolve the reciprocal company. All of these proposed steps would be consistent with and designed to conform to existing statutory authority and subject MIIX to the regulatory oversight and approval of the Commissioner of Banking and Insurance.

In March 1998, Elizabeth Randall, the then Commissioner of the New Jersey Department of Banking and Insurance ("Commissioner" or "Department") conditionally approved a Plan of Reorganization (Plan) authorizing MIIX's dissolution and reorganization as a stock insurance company. New Jersey State Medical Underwriters, Inc. (Medical Underwriters), a wholly owned subsidiary of intervenor, the Medical Society of New Jersey (MSNJ), contracted to act as attorney-in-fact and manage MIIX's operations.

Appellants, Allen B. Gold, Robert A. Goldstone, and Morton J. Seligman, three MIIX-insured doctors, challenge the reorganization and conversion arguing that the Plan approval should be set aside for three reasons:

(1) the Department erred because the approval was unauthorized by statute, the wrong standards were applied, and no evidence supported the conclusion that the stock allocation was fair and equitable; (2) the Department violated the Administrative Procedure Act (APA) and constitutional due process requirements by providing inadequate notice; and (3) there was insufficient evidence to support the agreed-upon payment to MSNJ for Medical Underwriters. In addition to their legal arguments, appellants assert that equity requires that current, long-term subscribers receive stock distributions in proportion to their total contributions to MIIX's surplus and reserves, not in proportion to the net premiums paid during the last three years. They also express concern that the reorganization will result in higher malpractice premiums in the future.

We reject their contentions and affirm.


The issues in this appeal arise in the following factual and procedural context. MIIX was established in 1977 under the auspices of MSNJ as a reciprocal insurance exchange authorized by N.J.S.A. 17:50-1 to -19. Many initial subscribers, sometimes referred to as founders, including appellants, made interest-free loans (since repaid) during MIIX's startup period. At the time this proceeding commenced, MIIX subscribers numbered approximately 12,000 members.

In October 1997, MIIX's Board of Governors (Board) sought approval from the Commissioner to convert to a stock insurance company. As we have noted, no statute expressly authorized such conversion or required the Commissioner's approval. However, statutory authority exists for the formation of stock ownership insurance companies, N.J.S.A. 17:17-1 to -20, which, when such entity is created, requires certification by the Commissioner. N.J.S.A. 17:17-10.

MIIX filed the Plan with the Department on October 16, 1997. On October 24, 1997, MIIX sent a letter to its members informing them that on October 15, 1997, the Board had approved a plan to reorganize from a reciprocal insurance exchange to a stock company. It advised that the plan provided for MIIX to acquire Medical Underwriters, then owned by MSNJ, and set forth reasons in support of the change.

The letter continued:

The next step in advancing the plan will involve approval by the Commissioner of the New Jersey Department of Banking and Insurance in the coming months. We anticipate this will include a public hearing conducted by the Commissioner, and the date will be communicated to you. Following the Commissioner's approval, MIIX members will receive the information they need to vote on the plan sometime in the first half of 1998.

Finally, the letter provided a telephone contact to respond to subscriber's questions.

On December 1, 1997, a summary of the Plan and notice of hearing to be held on December 22, 1997, were published in the New Jersey Register, and a copy of the notice and Plan summary was thereafter forwarded to the members by letter dated December 12, 1997.

According to the summary, the Plan's intent was "to create in MIIX Insurance Company a successor to MIIX that is virtually identical to MIIX except for its form (i.e., stock insurer rather than reciprocal)." The principal purposes of reorganization were to "enhance [MIIX's] strategic and financial flexibility" and to provide distributees with stock of the MIIX Group, Inc. (the new holding company that would own MIIX), or cash. After the new MIIX had assumed the business, assets and liabilities of the current MIIX and the holding company had acquired Medical Underwriters and its subsidiaries, the reciprocal exchange would be dissolved.

Of particular interest to the Commissioner and concern to appellants was the use of a three-year look-back period for stock distribution. Under the terms of the Plan, stock would be allocated to distributees (those who were members during a three-year look-back period before the Plan adoption on October 15, 1997) based on the MIIX direct premium earned, less any return premium, attributable to each member over the look-back period.

Gold and Goldstone objected in separate letters to Assistant Banking and Insurance Commissioner Donald Bryan dated December 18 and 19, 1997. Gold argued that conversion was unnecessary and likely to lead to higher premiums; that it would benefit the Board more than the members; and that the short notice gave the appearance of impropriety. Goldstone also asserted that the notice was inadequate, and argued that the distribution scheme penalized long-term members like him who had paid full premiums for many years but had paid less during the Plan's proposed three-year look-back period because they were semi-retired. At the hearing held on December 22, 1997, with Bryan presiding as hearing officer, Daniel Goldberg, then president and chief executive officer of Medical Underwriters, described the Plan and explained that the primary reason for the change was management's belief that in the long term, the only capital source available, retained surplus, would be insufficient to allow necessary growth.

As explained by Kenneth Koreyva, vice-president and chief financial officer of Medical Underwriters, the acquisition value of Medical Underwriters, $11 million in stock and $100,000 in cash, was based on a valuation by investment bankers Salomon Brothers, Inc. (Salomon Brothers). Salomon Brothers provided an opinion that the consideration to be received by the distributees was fair to them as a group from a financial point of view. Salomon Brothers also opined that the consideration to be paid to acquire Medical Underwriters was fair to MIIX from a financial point of view. MIIX rules and regulations provided that the Plan was subject to the approval of at least two-thirds of the votes of the members voting in person or by proxy at a special meeting. (The Plan was subsequently approved by the membership on March 17, 1999.)

Koreyva suggested that the three-year look-back period to determine distributees was fair and reasonable and represented a compromise between distribution only to current members, which was potentially unfair, and distribution to all current and former members who might have contributed to surplus over the life of the enterprise, which was a practical impossibility. Various of the members had died or retired since MIIX was established and determination of their various interests would be problematic. The three-year look-back period also conformed to the majority rule applied in other jurisdictions to analogous conversions.

Neither Gold, nor Goldstone nor any other members of the public presented comments at the hearing. The record was held open for written comments through the end of December. After the record was closed, appellants' counsel wrote a series of letters to the Department in opposition to the Plan. The correspondence was not considered.

Bryan, as hearing officer, found that the Plan accorded with MIIX's rules of governance and satisfactorily addressed the Department's regulatory concerns for the protection of policyholders and the market. He noted that in the absence of a codified statutory procedure for the Department's review, the Department had chosen to follow the rulemaking process set forth in N.J.S.A. 52:14B-4. The Department's analysis included information from its records such as the formation filing, present rating systems and previously filed periodic financial reports.

The hearing officer found that MIIX's stated reasons for the conversion (primarily, better access to capital markets for growth) were important for the long-term viability of the enterprise. He concluded that the Plan adequately protected policyholders and claimants because the new MIIX would assume MIIX's liabilities and receive assets sufficient to support them and that the members would be treated fairly when the exchange was dissolved. MIIX Group stock would be distributed to them based on a three-year look-back, and the surviving entity would be entirely owned and controlled by present and recent former members, except for the portion of stock issued to MSNJ in exchange for the assets of Medical Underwriters. He ...

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