The opinion of the court was delivered by: Stein, J.
ON APPEAL FROM Appellate Division, Superior Court
R.J. Gaydos Insurance Agency, Inc. v. National Consumer Insurance Company (A-53-00)
On appeal from and certification to the Superior Court, Appellate Division, whose opinion is reported at 331 N.J. Super. 458 (2000).
This appeal involves New Jersey's Fair Automobile Insurance Reform Act (FAIRA), N.J.S.A. 17:33B-1 to -63, a comprehensive legislative initiative that was enacted in 1990 to reform New Jersey's automobile insurance system. The questions presented in this appeal are whether plaintiff, R.J. Gaydos Insurance Agency, Inc. (Gaydos), has an implied private right of action under FAIRA to assert a claim against defendant, National Consumer Insurance Company (NCIC), and whether Gaydos can assert a common-law cause of action for breach of the implied duty of good faith and fair dealing when that claim is based solely on allegations that NCIC violated FAIRA.
The Appellate Division did not address whether FAIRA authorizes a private right of action by an insurance agent. Rather, a divided panel of the Appellate Division held that NCIC violated FAIRA because it terminated Gaydos based on its large volume of high loss ratio policies, in violation of N.J.S.A. 17:33B-15 and N.J.S.A. 17:33B-18b, and remanded to the Law Division to address Gaydos's tortious interference with contract and related claims. R.J. Gaydos Ins. Agency, Inc. v. National Consumer Ins. Co., 331 N.J. Super. 458, 475, 478 ( 2000). NCIC appeals to this Court as of right. R. 2:2-1(a)(2).
For decades the New Jersey Legislature has attempted to reform the State's automobile insurance system to provide coverage to high-risk drivers. Prior to 1983, those drivers who had been unable to procure insurance coverage in the voluntary market received coverage through an Assigned Risk Plan, N.J.S.A. 17:29D-1, pursuant to which the Commissioner apportioned high- risk drivers among all insurers doing business in New Jersey. Thereafter, in 1983 the Legislature adopted the New Jersey Automobile Full Insurance Availability Act, N.J.S.A. 17:30E-1 to -24, to replace the assigned risk system. That Act contemplated that motorists who were rejected by the voluntary market would receive coverage at standard market rates through the statutorily-created Joint Underwriting Association (JUA). When the JUA was operational, insurers could apply to become servicing carriers for the JUA and bear administrative responsibility for collecting premiums and arranging coverage. However, the agreements between the JUA and servicing carriers provided that the claims and liabilities of the JUA would be borne by the JUA independently, and the servicing carriers were to be insulated from such claims and liabilities. The primary objective of the JUA and the Act was "to create a more extensive system of allocating high-risk drivers to carriers, and through the JUA, to provide such drivers with coverage at rates equivalent to those charged in the voluntary market." State Farm Mut. Auto. Ins. Co. v. State, 124 N.J. 32, 41 (1991). We set forth the embattled history of the JUA in State Farm, supra, and we need not reiterate those facts here. See In re Commissioner of Insurance's March 24, 1992 Order, 132 N.J. 209, 212-13 (1993) (describing how JUA was more complex than Assigned Risk Plan). We note only that by 1990 the JUA had accumulated a financial deficit of over $3.3 billion in unpaid claims and other losses, and that the JUA was insuring over fifty percent of New Jersey's drivers. State Farm, supra, 124 N.J. at 42.
To repay the JUA's debt and replace the JUA system with a workable distribution of the automobile insurance market, the Legislature in 1990 enacted FAIRA to dismantle the JUA and return its automobile insurance business to the private marketplace. Because a primary objective of FAIRA was to transfer JUA insureds to private insurance companies, FAIRA required every insurer operating in New Jersey to absorb a certain quota of JUA policyholders in proportion to the size of their existing book of business or, in the alternative, to appoint agents in urban territories. Under FAIRA, the individual insurance companies were permitted to decide the manner and method by which they serviced their depopulation quotas.
In 1989, Robert Wallach, Chief Executive Officer of the Robert Plan Corporation (RPC), devised a plan to help insurance companies comply with that mandate. RPC enlisted seventeen independent insurance companies conducting business in New Jersey to form a pool, designated the New Jersey Voluntary Private Passenger Automobile Insurance Pool (Pool). NCIC was then created to write insurance policies for the Pool and act as the primary insurer of those policies, and the members of the Pool were required to reinsure those policies. RPC, as NCIC's holding company and ultimate parent, administered the Pool by providing underwriting, data processing, and claims handling services. By participating in the Pool, the insurance companies were told that the Department of Banking and Insurance (DOBI or Department) would give them credit for "1) their . . . [share] of the Fair Act depopulation quotas for their percentage of the Pool; 2) the demographic/geographic distribution of brokers and insureds involved/insured within the policy base; 3) a flow through of any Assigned Risk credits generated by [NCIC's] class/territorial writings; 4) credits applicable against their . . . obligations to contract with eligible producers whose sole or primary market is the JUA/MTF; and 5) any profits or losses generated by the Pool."
From its inception, NCIC incurred substantial losses. NCIC's "pure loss ratio," the percentage derived by dividing incurred losses, exclusive of operating costs, by premiums received, was over 100%. The following chart demonstrates those losses:
Year Losses Pure Loss Ratio
1994 $113,128,199 129.30%
By 1995, NCIC determined that for it to remain solvent the company needed to slow its volume of new business. To accomplish that goal, NCIC decided to terminate forty agents. The first twenty agents were scheduled to be terminated in May 1995, and an additional twenty agents were scheduled to be terminated in June 1995. Schumacher Associates was among those agents slated for termination. That agency was owned by Edward Schumacher who acquired the Gaydos agency in 1996. Schumacher did not institute a lawsuit or make any claim as a result of the termination that took effect on May 29, 1995.
Those agents slated for termination in 1995 did not have the worst loss ratios nor were they all located in urban territories. An auditor employed by the Robert Plan of New Jersey, a subsidiary of the RPC, testified that those terminations were based on a number of factors including an agent's loss ratio, an agent's performance of administrative duties, an agent's volume of business written, and the geographic location of an agent's business.
NCIC informed DOBI of its agent termination plans, and the Department requested that NCIC forego any terminations until the Department conducted an investigation to determine whether that action constituted a de facto withdrawal from the private passenger automobile insurance market, in violation of N.J.A.C. 11:2-29. NCIC cooperated with the DOBI and did not terminate any agents until the Department's investigation was complete. In the interim, NCIC met with DOBI officials and assured them that the company was not withdrawing from the State and that it intended to appoint additional agents in under-served areas. In May 1995, DOBI approved NCIC's terminations and stated that it did not "consider the termination of these producers as activity constituting a de facto withdrawal. This determination is based in part on representations by NCIC that there will be additional producers appointed in under-served areas."
In 1995, several insurance companies decided to leave the Pool. Responding to that development, NCIC devised a plan for "depooling" and moving forward as an independent insurance company. As part of the depooling process, NCIC gave departing Pool members two options. They either could accept their proportionate share of agents and insureds and write insurance policies for them directly, or they could pay NCIC to assume the risk of going forward as a stand-alone company with that member's proportionate share of insureds.
Prior to authorizing NCIC's depooling plan, however, DOBI required NCIC to submit a five-year business plan to explain how NCIC would function as a stand-alone company with a disproportionate share of urban-based insurance policies and agents. In January 1996, NCIC submitted to DOBI a six-page business plan summarizing how NCIC would reduce and stabilize its losses, and discussing how NCIC intended to operate as a profitable company. Among its list of proposed solutions, NCIC stated that it would not renew two percent of its policies each year, and not renew two existing policies for every new policy issued. In addition, NCIC would improve its claims handling procedures, and "would expect NCIC to be granted rate increases to the extent justified by these rate filings." Most significant to this appeal was NCIC's assumption that "[w]e expect termination of approximately 10 agents in 1996 and 1997, and 5-7 in each subsequent year with a corresponding reduction in new lines. The agent terminations are expected to result from the agents['] failure to comply with their agency agreements usually evidenced by lack of cooperation and poor quality service.*fn1 Overall, NCIC's business plan evidenced the company's belief that it had the potential to survive as an independent insurance company. For example, NCIC projected that, in its first year of operation, the company would write approximately $30 million in annualized premiums and that those policies would generate a capital surplus of $52 million. Effective August 1996, the DOBI approved NCIC's business plan and entered an order allowing NCIC to operate as an independent insurance company.
In less than one year as a stand-alone company, NCIC lost approximately sixty percent of its capital. NCIC attributed its losses to its agents writing a voluminous number of policies that exceeded NCIC's projections by approximately ten million dollars. According to NCIC, the company's dire financial situation required NCIC to implement its business plan to terminate ten agents in 1997. NCIC explained that the purpose of those terminations was to reduce NCIC's volume of new applications and to slow the company's losses. To select which agents to terminate, NCIC officials testified that the company considered whether the agents were likely to search out profitable business and be actively engaged in marketing, rather than just "taking all comers." Although NCIC acknowledged that it considered an agent's volume of applications, NCIC claimed that an agent's geographical area and loss ratio were not material factors in selecting agents for termination. However, a February 1997 memorandum written by Kenneth R. Corsun, Senior Vice President of NCIC, did not support that assertion. Corsun's memorandum reads in part as follows:
I believe the significant factors driving our results (and influencing the profiles) are the nature of the population and the conditions in the urban areas where we are disproportionately represented. People are poor, there are many new, inexperienced drivers, there is congestion – cars hit each other more frequently –- there is much crime –- thefts and vandalism –- and often rampant fraud. An accident is frequently viewed as a means of "getting even" with the system or the insurance company. The nature of the PIP coverage, in particular, drives many basically honest people to take advantage of the system.
Although we take steps to combat fraud . . . it may not be possible to move the loss ratio to profitability without more dramatic action. I believe our book needs to be balanced by writing heavily in non-urban areas, while trimming our writings in the urban areas. The trimming will be done by reducing our agency plant to the designated core agents. The move to more suburban areas will be done by selectively appointing professional, profitable agents in solidly middle class parts of the state. We can stay in the inner cities, but the book must be balanced. We cannot make a profit being predominantly in the urban areas. [(Emphasis added).]
In an April 1997 memorandum, Gary Ropiecki, Executive Vice President of RPC, echoed Corsun's concerns about "slow[ing] the volume of new writings in the territories in which we have significant penetration." To explain why NCIC was experiencing a deterioration in its underwriting performance and projecting a fifty percent reduction in its statutory surplus, Ropiecki observed:
The heart of the deterioration is the high concentration of business in territories where legislation and statutes cap the amount of premium an insurer can charge. As such, these territories historically are inadequately priced and produce industry wide poor results. In order to stop this significant capital drain, our business plan is to reduce our writings in capped territories[*fn2 ] and increase our writings in territories in uncapped territories. Until we improve our business mix between capped territories and others we will continue to incur a significant capital drain. Not taking immediate action will result in an unsafe and unsound financial course which can potentially only be cured with draconian regulatory measures. [(Emphasis added).]
On April 16, 1997, NCIC sent a notice of termination to Edward Schumacher, the owner of the Gaydos agency. Gaydos serviced territories in Clifton, Passaic, and Paterson and had been an NCIC agent since June 1996. NCIC stated in its brief supporting its petition for certification that Gaydos was selected for termination "[d]ue to its 600% increase in volume of new applications for insurance." NCIC explained that its termination of Gaydos was in accordance with NCIC's 1995 five- year business plan and Gaydos's agency agreement that said that either Gaydos or NCIC could terminate the ...