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R.J. Gaydos Insurance Agency, Inc. v. National Consumer Insurance Company

June 12, 2000


Before Judges Baime, Brochin and Wecker.

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


Argued May 3, 2000

On appeal from Superior Court of New Jersey, Chancery Division, Union County.

The Fair Automobile Insurance Reform Act (N.J.S.A. 17:33B-1 to -64) (FAIRA) requires insurers to accept applications for automobile insurance submitted by all eligible persons, that is, those not falling within a statutorily defined poor risk category. N.J.S.A. 17:33B-15. The Act bars insurers from penalizing an agent by paying less than normal compensation because of the expected or actual loss experience produced by the agent's automobile insurance business or because of the geographic location of the business written by the agent. N.J.S.A. 17:33B-18b. At issue is whether these provisions preclude an insurer from terminating an agency relationship based upon the agent's volume of high loss ratio policies generated in an urban market.

R.J. Gaydos Insurance Agency, Inc. (Gaydos) brought this action in the Chancery Division contending that National Consumer Insurance Company (NCIC) breached an express contract and its implied covenant of good faith and fair dealing by wrongfully terminating its agency agreement. Gaydos contended that NCIC's termination of its agency relationship was based upon its generation of high loss ratio policies in an urban market and that the termination violated the "take all comers" requirement of FAIRA. Also named as defendants were the Robert Plan Corporation, a holding company and the ultimate parent of NCIC, the Robert Plan of New Jersey, its subsidiary, and Lion Insurance Company, NCIC's predecessor. Gaydos claimed that the Robert Plan defendants tortiously interfered with its contractual rights with NCIC. The Chancery Division granted defendants' motion for involuntary dismissal at the conclusion of Gaydos's case. Gaydos appealed. We remanded the matter for additional findings of fact. The Chancery Division found that NCIC's termination of Gaydos was designed to reduce the volume of its business losses in order to preserve its solvency and that neither Gaydos's actual or expected loss experience nor the geographic area in which it underwrote its business constituted a substantial motivating factor in the termination of its agency relationship. We now reverse and remand for further proceedings.


The setting is the perennially troubled New Jersey automobile insurance market. In a long line of decisions, we have described at length the problems besetting the automobile insurance industry. In re Producers Assignment Program, 261 N.J. Super. 292 (App. Div.), certif. denied, 133 N.J. 438-39 (1993); In re Aetna Cas. and Surety Co., 248 N.J. Super. 367 (App. Div.), certif. denied, 126 N.J. 385 (1991), cert. denied, 502 U.S. 1121, 112 S. Ct. 1244, 117 L.Ed.2d 476 (1992). See also In re Plan for Orderly Withdrawal, 129 N.J. 389 (1992), cert. denied, 506 U.S. 1086, 113 S. Ct. 1066, 122 L.Ed.2d 370 (1993); State Farm v. State, 124 N.J. 32 (1991); In re Comm'r of Insurance, 256 N.J. Super. 158 (App. Div. 1992), aff'd 132 N.J. 209 (1993); In re Private Passenger Auto Rate Rev., 256 N.J. Super. 46 (App. Div. 1992); In re Rate Filing By Market Transition Facility of New Jersey, 252 N.J. Super. 260 (App. Div. 1991), certif. denied, 127 N.J. 565 (1992); Allstate Ins. Co. v. Fortunato, 248 N.J. Super. 153 (App. Div. 1991). We need not cover ground so exhaustively explored in the cited cases. Instead, we recount the legislative highlights only insofar as they shed light on the issues before us.

We begin with the adoption of the assigned risk plan in 1970. That plan involved the forced distribution among insurers of applicants who were unable to procure coverage through ordinary means. N.J.S.A. 17:29D-1. Effective in 1973 was the New Jersey Automobile Reparation Reform Act (N.J.S.A. 39:6A-1 to-35), which made automobile insurance compulsory, created extensive no-fault benefits, and imposed a tort threshold.

In 1983, the Legislature adopted the New Jersey Automobile Full Insurance Availability Act (N.J.S.A. 17:30E-1 to -24). The Act's articulated objectives were to supplant the assigned risk system, "to assure to the New Jersey insurance consumer full access to automobile insurance through normal market outlets . . ., and to require that companies be made whole for losses in excess of regulated rates on all risks not voluntarily written . . . ." N.J.S.A. 17:30E-2. Unlike the assigned risk system, the new legislation contemplated coverage provided by JUA, at standard market rates, to risks rejected by the voluntary market. Servicing insurers were to issue policies in their own names, but the risks were to be borne by JUA. The servicing insurers would be paid fees for handling coverage, premiums and claims. JUA's inevitable underwriting losses would be funded by poor driver and accident surcharges imposed by the Division of Motor Vehicles and JUA, and the "residual market" equalization charge levied on almost all automobiles. N.J.S.A. 17:30E-8b.

The new scheme failed miserably. Insurers restricted their coverage to only the most favorable risks, leaving fully half of New Jersey's drivers to be covered through JUA at artificially low rates. JUA's financial integrity deteriorated rapidly, resulting in increasingly large charges imposed on all New Jersey drivers.

Curative amendments were adopted in 1988. We need not describe these changes in detail. Perhaps the most important aspect of the 1988 legislation was a plan for the downsizing, or depopulation, of JUA over a four year period to the end that it would serve only its original purpose of providing coverage for the least desirable risks. N.J.S.A. 17:30E-14. In annual increments, the voluntary market insurers were to increase the percentage of private passenger car exposures. Methods were prescribed for apportioning and assigning to voluntary market insurers the number of JUA insureds sufficient to satisfy any shortfall that occurred in the required annual increase in voluntarily written policies.

FAIRA was enacted on March 12, 1992. Its overall purpose is to ensure that all automobile owners in New Jersey, except those who meet statutorily defined objective criteria of poor risk, see N.J.S.A. 17:33B-13, are covered by the voluntary market. FAIRA created the Market Transition Facility as an interim mechanism to achieve a two-year, phased depopulation of JUA, and the transfer of JUA insureds to the voluntary market. N.J.S.A. 17:33B-11.

In order to assure that all eligible insureds have a viable conduit to the voluntary market, FAIRA established a producer assignment program. N.J.S.A. 17:33B-9. We have no occasion here to describe the intricacies of the program, which are examined in detail in In re Producer Assignment Program, 261 N.J. Super. at 298. The heart of the legislation is paragraph 6, which requires the Commissioner to establish a producer assignment program by October 1, 1991, that is, one full year prior to the final depopulation of the Market Transition Facility and the mandated assumption by the voluntary market of the obligation to insure all eligible persons. Ibid. We note that one of the criteria for producer assignment eligibility is that the producer must be located in and service a geographic area determined by the Commissioner "to lack sufficient representation for the placement of automobile insurance business in the voluntary market." N.J.S.A. 17:33B-9. We make special reference to this section because it evidences the Legislature's concern that agents be available to serve as conduits to the voluntary market for eligible persons in areas that have been historically under-represented because of poor loss experience. In any event, the manner in which JUA insureds were depopulated and distributed to insurers in the voluntary market is described in In re Aetna Cas. and Sur. Co., 248 N.J. Super. at 375-76, and, as we will note shortly, provides the factual backdrop for the formation of NCIC. FAIRA established the rule of "take all comers," which requires insurers to accept applications for automobile insurance submitted by all eligible persons - those not falling within the poor-risk category, N.J.S.A. 17:33B-15, and revived the pre-JUA system of an assigned risk plan to provide coverage for all ineligible persons. N.J.S.A. 17:33B-22. The "take all comers" section provides that "every insurer, either by one or more separate rating plans filed in accordance with . . . [N.J.S.A. 17:29A-45] . . . shall provide automobile insurance coverage for eligible persons." N.J.S.A. 17:33B-15a. N.J.S.A. 17:33B-15b states that "[n]o insurer shall refuse to insure, refuse to renew, or limit coverage available for automobile insurance to an eligible person who meets its underwriting rules as filed with and approved by the [C]commissioner [of Insurance]." These provisions are supplemented by N.J.S.A. 17:33B-18(b) which bars an insurer from "penaliz[ing] an agent by paying less than normal commissions or normal compensation or salary because of the expected or actual experience produced by the agent's automobile insurance business or because of the geographic location of automobile insurance business written by the agent." The "take all comers" rule has been described as the "centerpiece of the FAIRA scheme" because it makes available to eligible insureds the voluntary market which would otherwise be "inaccessible for an obvious panoply of demographic reasons." In re Producer Assignment Program, 261 N.J. Super. at 299.

The Legislature was undoubtedly aware that the "take all comers" sections could financially imperil insurers by requiring them to assume higher risks through the generation of high loss ratio policies. FAIRA thus provides for the suspension of an insurer's obligation to insure eligible persons if the insurer is "in an unsafe or unsound financial condition." N.J.S.A. 17:33B-19. FAIRA also empowers the Commissioner to suspend an insurer's assigned risk and assessment obligations on the same basis. Ibid. Under the Act, an insurer is deemed to be in an unsafe or unsound financial condition if it is found to "have a ratio of annual net premiums written to surplus as to policyholders" that threatens its financial health. N.J.S.A. 17:33B-19d. The suspension is automatic if the insurer requests it and "avers that there is an immediate need to cease issuance of policies" and provides "supporting documentation" pertaining to its "unsafe or unsound financial condition." N.J.S.A. 17:33B-19b. Upon his own motion or upon request by the insurer or any other interested party, the Commissioner may revoke the suspension "after providing an opportunity for a hearing." N.J.S.A. 17:33B-19c; see also In re Farmers' Mut. Fire Assur., 256 N.J. Super. 607 (App. Div. 1992) (FAIRA requires hearing on a petition for exemption, abatement or deferral of assessments).

Apart from these provisions, the principal method of assuring the financial integrity of insurers is rate relief. FAIRA provides specifically that "automobile insurers are entitled to earn an adequate rate of return through the ratemaking process." N.J.S.A. 17:33B-2g. The courts have "reaffirmed that overarching constitutional prescription with regard to all affected carriers." In re Farmers Mut. Fire Assur., 256 N.J. Super. at 611. For example, in State Farm Mutual Automobile Insurance Co. v. State, 124 N.J. 32, (1991), our Supreme Court observed that the Legislature's overall intent in enacting FAIRA was "to make certain that any lessening of insurers' profits [because of compliance with the statutory scheme] would not preclude a constitutionally adequate rate of return." Id. at 61; see also In re Comm'r of Insurance, 256 N.J. Super. 158 (App. Div. 1992) (upon a showing of a need to increase rates, Commissioner must grant increases and may not set deficit rates and rely on alternative sources of funding); In re American Reliance Ins., 251 N.J. Super. 541, 556 (App. Div. 1991) (under appropriate circumstances insurers may increase their rates based on FAIRA assessments). The Court stressed that the "Legislature deliberately left to the Commissioner of Insurance the determination of the precise constitutionally required rate of return, as being within the area of expertise entrusted to the Department of Insurance in its long exercise of the ratemaking function." State Farm Mutual Automobile Insurance Co. v. State, 124 N.J. at 61-62. While acknowledging "uncertainty about how the Act may be applied . . . in individual rate-increase determinations," the Court expressed its confidence that the Commissioner would "fulfill his duty under the statute to assure that insurers receive a constitutionally fair rate of return." Id. at 62-63.


We now examine the facts in light of this historical backdrop. As we have noted, FAIRA requires every insurer operating in New Jersey to absorb a "depopulation quota" of former JUA insureds. Robert Wallach, the Chairman and Chief Executive Officer of the Robert Plan, conceived the idea of creating an insurance pool to service and satisfy the depopulation quotas of seventeen member insurance companies. Lion Insurance Company was established to service the pool. As we understand it, Lion was to serve as the primary insurer and the seventeen member insurance companies were to reinsure the policies written. In 1992, NCIC was formed as Lion's successor.

We previously described the quota system under which insurers were to absorb JUA insureds. We also noted that FAIRA requires insurers to appoint agents in urban areas. Operating as the administrator of the pool, NCIC satisfied the appointment obligations of member insurers by naming large numbers of urban-based agents. The overwhelming majority of NCIC agents were located in urban territories.

As we noted earlier, the demographics of urban areas tend to generate high loss experience in the automobile industry. One of the mysteries of this case is why the Robert Plan believed a profit could be earned by pooling JUA depopulation quotas. One answer might be that the Robert Plan, through its other subsidiaries, provided services to NCIC in return for almost thirty percent of the written premiums on NCIC risks. Gaydos suggests in its brief that the Robert Plan was able to avoid the risk of losses by earning "guaranteed profits" through the servicing of NCIC's business. Another possible answer is that the Robert Plan anticipated rate relief by the Commissioner. On at least two occasions, NCIC sought a rate increase. These applications were denied by the Commissioner. Although NCIC requested the Commissioner to reconsider the applications, this request ultimately became moot for reasons which we will describe later in this opinion.

In any event, from its inception, NCIC incurred substantial losses. Because NCIC's insureds were concentrated in urban areas where loss experiences are historically high, NCIC's rate structure was wholly ...

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