Opposition Brief — Allstate Insurance Co. v. Fortunato

Court, US. |

© | FILED

No. 91-983 | GAN 16 (382

In The

Supreme Court of the United States

October Term, 1991

as —

ALLSTATE INSURANCE COMPANY,

an Illinois Corporation,

Petitioner,

v.

SAMUEL F. FORTUNATO,

Commissioner of Insurance of The State of New Jersey,

Respondent.

¢

Petition For A Writ Of Certiorari To The

Appellate Division Of The Superior Court

Of The State Of New Jersey

+

RESPONDENT’S BRIEF AND APPENDIX

IN OPPOSITION TO PETITION FOR

A WRIT OF CERTIORARI

+

Ebwarkv J. DAuBER

Acting Attorney General of New Jersey

Attorney for Respondent

R.J. Hughes Justice Complex

CN 093

Trenton, New Jersey 08625

(609) 292-4965

JoserH L. YANNOTTI

Assistant Attorney General

Of Counsel

Susan L. REISNER

Deputy Attorney General

(Counsel of Record)

On the Brief

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

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COUNTERSTATEMENT OF THE

QUESTION PRESENTED

May a State, consistent with the Due Process Clause

of the Fourteenth Amendment, order an insurance com-

pany to take on new business at rates higher than its

current voluntary market rates, where a State appellate

court has found, on appeal of that order, that the com-

pany has not demonstrated that the higher State manda-

ted rates are confiscatory such that the company would

be entitled to an interim rate increase in advance of

implementation of the order?

ii

TABLE OF CONTENTS

Page

COUNTERSTATEMENT OF THE QUESTION PRE-

SENTED . «0 o054cbs see Eee e se es i

COUNTERSTATEMENT OF THE CASE............ 1

SUMMARY OF ARGUING econ ks acess ees: 7

ARGUMENT:

THE PETITION SHOULD BE DENIED BECAUSE

ALLSTATE FAILED IN THE STATE PROCEED-

INGS BELOW TO PRESENT A SUFFICIENT

FACTUAL BASIS FOR INTERIM RATE RELIEF

AND BECAUSE ALLSTATE HAS PRESENTED

NO MERITORIOUS CONSTITUTIONAL ARGU-

MENTS WHICH WOULD JUSTIFY REVIEW BY

THIS COURT. «0.05 <caey eee ees wen 8

CONCLUSION ... .....:5 sae eee eee 16

APPENDIX

Appendix 1... :..3<240de ese ee aes A-1l

Affidavit of Karen E. Mitchell

dated May 1, 1990

Appendix 2... . 2... ss.0deaenh ees A-8

Direct Pre-Filed Testimony of

Allan I. Schwartz (pp.1-4 only)

dated January 25, 1991

Appendix 3... ..<:s.20<sen ee ee ers A-16

Affidavit of Martin Rosenberg

dated February 22, 1991

iil

TABLE OF AUTHORITIES

Cases CITED

Banton v. Belt Line Ry. Corp., 268 U.S. 413 (1925) ...

Calfarm Ins. Co. v. Deukmejian, 771 P.2d 1247 (Cal.

Nv Cras TE Nes <u ys snlae ee acc eae a

California Auto Association v. Maloney, 341 U.S. 105

eee eae oe Panda nk oe ere yeh edee ys

Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989) ..

F.P.C. v. Hope Natural Gas Co., 320 U.S. 591 (1944) ....

First English Evangelical Lutheran Church v. Los

Angeles County, 482 U.S. 304 (1987) ............

Hutton Park Gardens v. Town Council, 68 N J. 543,

MC RUST ic ev eee ecco ceeucceue

In re Matter of Assignment of Exposures to Aetna

Casualty & Surety Co., Allstate insurance Co. and

Colonial Penn Insurance Co., 248 N.J. Super. 367,

oat Aca 631 (App. Div. 1991).................

Jersey Central Power & Light Co. v. F.E.R.C., 810 F.2d

Se BU ie cv ne rece eee e seen eae nee

Lac D’Amiante du Quebec v. American Home Assur.,

mon eae pone Gon Cir 1986) ..... oo ckest

MacDonald, Sommer & Frates v. County of Yolo, 477

NE ate yy yee oe eee ck

Pennell v. City of San Jose, 485 U.S. 1 (1988)......

Prendergast v. New York Telephone Co., 260 U.S. 43

at Ge ge neoy o Oh axe Sa oes

Prudential Insurance Co. v. Benjamin, 328 U.S. 408

ee i ae yi eee ee ek 6 aa is ak

Page

ead

iv

TABLE OF AUTHORITIES - Continued

Page

Public Util. Comm'n of Texas v. Pedernales Elec.

Coop, 678 S.W.2d 214 (Tex. Ct. App. 1984)......... 13

Smith v. Illinois Bell Co., 270 U.S. 587 (1926)......... 12

State Farm v. State of New Jersey, 124 N.J. 32, 590

pe RB.) Serer ree er rt rere rer 8

Williamson Planning Commission v. Hamilton Bank,

og Ee me Be) en Pony eer irre nee 13

Statutes CITED

Rw Wa rr Tot ere Pee ree 13

Stk. CP RR oso nhs s ag aed er eb ae ee eres 1]

Pe eas SPREAD 5 oe i nna cna tsewey anu eee aneun 11

oe ® Ser 2 3) a ae eer errr rr ay ae 2

fee Se eg ee ere er rer er rae 2

PR EARIE NOI ey se ve a cee eeu ny Nace ener en ees 2

NEGA, TED occ ce ocvccceccceccvveccucctvneues 2

WIGA, TOUB-TG, ©. ooo cece cv ver c ccc cceves 1, 3,4

ee Cae hs oa a cee ee ene v crete ere ye enaas 8

Pde SPU Naas docs ech cebveaneddssecdsesanee ht 1, 4

OE is 2 Sr re eee ne re ry |; a2

eh RS Ae errr 2

PAS Be 2 or rr rere rrr 13

15 U.S.C.A. §§1011-15 (1982)... 0.0 15

TABLE OF AUTHORITIES - Continued

REGULATION CITED

MIAL. TEE OR cca s scsi cteeeee

Laws CITED

L. 198 c 10. =... See

tL. 908. ¢. Oni howe

SULA. VIG 5 cxxeeverperse cee enere

Sa CLR: TOTES i csavcncceeee ae

Page

Lesceveevaes 3

COUNTERSTATEMENT OF THE CASE

Pursuant to a legislative directive to depopulate, or

downsize, the New Jersey Automobile Full Insurance

Underwriting Association (“JUA”) and the Market Transi-

tion Facility (“MTF”) in preparation for a new automobile

insurance assigned risk plan, the New Jersey Commis-

sioner of Insurance issued orders on January 24, 1991

assigning exposures (automobiles) to insurers, including

petitioner Allstate Insurance Company (“Allstate”), that

had not complied with their statutory obligations to

insure a certain number of risks in the voluntary market

(Pet. App. 1).* See N.J.S.A. 17:30E-14; 17:33B-11. Under

the statutory scheme, insurers are permitted to charge

these assigned insureds the higher rates applicable to

persons presently insured by tne MTF. The legislatively-

mandated depopulation assignments are an essential part

of the transition from the JUA, which had insured up to

50% of New Jersey’s drivers, to the new assigned risk

plan, which should provide insurance to only 10% of

New Jersey’s drivers. See N.J.S.A. 17:33B-11; 17:33B-12.

Petitioner Allstate, which did not write its statutorily

required share of former JUA insureds and so was

assigned exposures, challenged the depopulation pro-

gram as unconstitutional because, Allstate averred, under

no conceivable set of circumstances could it realize a just

and reasonable return. Allstate’s assertions are based on

predictions of higher risks and inadequate rates; how-

ever, the evidence presented below did not substantiate

* ,

Pet. App.” refers to Allstate’s appendix filed with the peti-

tion for a writ of certiorari.

these assumptions. The New Jersey Superior Court,

Appellate Division rejected these contentions and

affirmed the Commissioner’s orders (Pet. App. 2). The

Supreme Court of New Jersey denied Allstate’s petition

for certification (Pet. App. 3).

All New Jersey drivers are required to obtain auto-

mobile insurance as a condition of owning and operating

an automobile. N.J.S.A. 39:6A-1 et seq. Between 1970 and

1983, drivers who could not obtain insurance in the vol-

untary market were apportioned among all insurers

doing business in New Jersey, who were obligated to

extend coverage pursuant to an assigned risk plan. See

N.J.S.A. 17:29D-1. This system was changed in 1983, when

the Legislature created the New Jersey Automobile Full

Insurance Underwriting Association (“JUA”) to provide

such drivers with insurance coverage at statutorily-set

rates. See N.J.S.A. 17:30E-1 et seq.

The JUA operated through servicing carriers which

undertook the administrative responsibility of providing

coverage and adjusting claims. N.J.S.A. 17:30E-7e. How-

ever, all claims and liabilities arising from IUA policies

were paid by the JUA and not by the servicing carriers.

Ibid. The JUA derived income from a number of sources

other than premium payments, including Department of

Motor Vehicle surcharges for certain violations, and

charges imposed, on a per vehicle basis, on all auto-

mobile insurance policies. N.J.S.A. 17:30E-8. Essentially,

because driving an automobile is a necessary part of life

in New Jersey, automobile insurance policies for drivers

who could not otherwise obtain insurance (and might

then drive uninsured) were subsidized by all drivers.

However, while the JUA was in existence more and

more persons were being refused coverage in the volun-

tary market, sometimes regardless of their driving

records, and by 1988 the JUA was providing insurance to

over 50% of New Jersey’s drivers.* The Legislature, rec-

ognizing that the burgeoning JUA was no longer serving

its purpose of providing coverage to only a limited

number of drivers, passed amendments to the automobile

insurance statutes to downsize, or depopulate, the JUA

over a period of time. L. 1988, c. 199, §25 (amending

N.].S.A. 17:30E-14). The Legislature thus established a

program to require insurers to write an increasing per-

centage of JUA insureds in the voluntary market pur-

suant to yearly quotas for the industry and apportioned

shares of that quota for each insurer authorized to con-

duct automobile insurance business in New Jersey. /bid.

The amendments provided that in the event the aggregate

industry depopulation quota for exposures (automobiles)

to be insured in the voluntary market is not met, the

Commissioner of Insurance would assign exposures from

the JUA to insurers that did not meet their apportionment

shares. Ibid.

New Jersey’s automobile insurance system was again

comprehensively revised on March 12, 1990 by the Fair

Automobile Insurance Reform Act, L. 1990, c. 8 (“FAIR

Act”). The FAIR Act eliminated the JUA, directing it not

* Under the IZA system, insurers had an incentive to write

only the cleanest risks voluntarily; any applicant without a

proven long-term clean record could be shifted to the JUA

since then the insurer would not be liable for any claims

arising under the policy.

to issue any policies after October 1, 1990, and created the

Market Transition Facility (“MTF”) to provide automobile

insurance to JUA insureds and persons unable to obtain

insurance in the voluntary market between October 1,

1990 and October 1, 1992.* After October 1, 1992, auto-

mobile insurance policies for persons unable to obtain

insurance in the voluntary market wil! be written by

insurers pursuant to an-assigned risk plan. FAIR Act, §24

(N.J.S.A. 17:33B-12). The FAIR Act also accelerated the

schedule for the depopulation of the JUA and MIF in

preparation for the assigned risk plan. FAIR Act, §§20, 88

(N.J.S.A. 17:30E-14; 17:33B-11). Pursuant to the acceler-

ated depopulation schedule, only 32% of exposures

would be covered by the JUA or MTF by October 1, 1990;

29% by April 1, 1991; 20% by October 1, 1991 and 10% by

April 1, 1992. Ibid. If the industry quota is not met, the

statutes direct the Commissioner to assign exposures to

-asurers that had not met their apportionment shares.

Ibid.

The October 1, 1990 industry quota was not met. In

accordance with N.J.S.A. 17:30E-14 the Commissioner

issued orders on January 24, 1991 assigning exposures to

the 44 insurers that did not meet their apportionment

shares, including petitioner Allstate (Pet. App. 1).

Twenty-four insurers, including several large companies,

had met their shares and were not assigned exposures

* The MTF, an unincorporated association of insurers autho-

rized to conduct automobile business in New Jersey, is oper-

ated by the Commissioner of Insurance in consultation with an

Advisory Board, comprised of various industry representa-

tives. FAIR Act, §88 (N.J.S.A. 17:33B-11).

(CPa77).* Attached to the orders was the Mandatory

Depopulation Assignment Plan, which set forth the man-

ner in which assignments were made. The Plan provided

that JUA/MTF insureds who reside in the areas in the

State that are most underrepresented in the voluntary

market would be assigned first, until the percentage of

JUA/MTF insureds in those areas is brought up to the

level of the industry quota (i.e., 32% for October 1, 1990

quota) (CPa8). The Plan further provided that the

insurers offer assignees one-year policies (CPa28).

Finally, and most significantly, section 89 of the FAIR

Act (N.J.S.A. 17:33B-12) permits these insurers that did

not meet their apportionment shares to charge assigned

insureds MTF rates, which are generally higher than the

insurer’s Own voluntary market non-standard or stan-

dard rate.

Allstate, which did not meet its apportionment share,

appealed the Commissioner’s January 24, 1991 orders

assigning it exposures (CPa72). The appeal was acceler-

ated by the Appellate Division, and the depopulation

program was stayed. Ibid. Prior to oral argument before

* Ra refers to respondent’s Appellate Division appendix; Rra

refers to respondent’s Appellate Division reply appendix; ALb

refers to the brief filed by petitioner Allstate in the Supreme

Court of New Jersey. Additional citations are to briefs and

appendices filed by co-petitioners in the Supreme Court’ of

New Jersey. These materials are part of the record below¢

although the co-petitioners did not file petitions with this

Court. AEb refers to petitioner Aetna’s brief; AEa refers to

petitioner Aetna’s appendix; CPb refers to petitioner Colonial

Penn’s brief and CPa refers to petitioner Colonial Penn's

appendix.

the Appellate Division, the Commissioner amended the

Depopulation Plan so that persons with nine or more

points (i.e, moving vehicle violations and other infrac-

tions) would remain in the MTF; only those persons with

fewer than eight points would be assigned to and covered

by insurers. The amendments, transmitted to insurers

after oral argument, provided that insurers screen

assigned insureds and return to the MTF all assignees

that are “ineligible” as defined in N.J.A.C. 11:3-34.1 et seq.

See CPa32.

Before the Appellate Division rendered its decision,

the Commissioner approved an 18.6% overall average

rate increase for MTF insureds (Ra19). Thereafter, follow-

ing a separate appeal by Allstate concerning the ade-

quacy of this rate increase, the Commissioner’s staff filed

for an additional 15% rate increase, which the Commis-

sioner implemented. (Pet. at 17).

On May 20, 1991 the Appellate Division affirmed the

Commissioner’s January 24, 1991 depopulation orders

(Pet. App. 2). The Appellate Division rejected Allstate’s

takings arguments, holding that Allstate had not proven

that MTF rates would be facially inadequate to cover the

costs of insuring assigned drivers. In fact, the record

before the Court contained submissions from both the

Insurance Department Staff and the Public Advocate

Division of Rate Counsel which indicated that Allstate's

existing rates were too high and should be reduced. (R.

App. 1, 2, and 3). The Appellate Division further held

that the Commissioner’s decisions to assign insureds

from underrepresented territories first, and to require

one-year policies be issued, were reasonable. Finally, the

Appellate Division invalidated the part of the program

that required insurers to do business with the assigned

insureds’ producers.” Allstate filed a petition for certifica-

tion to the Supreme Court of New Jersey, which was

denied on September 18, 1991 (Pet. App. 3). Allstate’s

petition to this Court for a writ of certiorari followed.

S

SUMMARY OF ARGUMENT

Allstate’s petition requests this Court to intervene in

an essentially fact-based dispute over its entitlement to

interim rate relief. The petition should be denied because

the proceedings below are being properly handled by the

Insurance Commissioner and the State’s courts, in accor-

dance with well established constitutional principles

enunciated by this Court. Allstate failed, on the evidence

submitted, to establish to the satisfaction of the Commis-

sioner or the Appellate Division that the MTF rates,

which are higher than Allstate’s own rates, will be confis-

catory. Moreover, Allstate’s claim of an absolute right to

protection against any possible financial loss due to rate

lag is without merit. For these reasons, Allstate’s facial

challenge to the depopulation order at issue here was

properly rejected by the State court below. Since Allstate

raises no valid or significant constitutional objections to

the ruling below, the petition for a writ of certiorari

should be denied.

* On December 31, 1991, the Commissioner issued a revised

order to Allstate which changed this aspect of the program.

ARGUMENT

THE PETITION SHOULD BE DENIED BECAUSE

ALLSTATE FAILED IN THE STATE PROCEEDINGS

BELOW TO PRESENT A SUFFICIENT FACTUAL

BASIS FOR INTERIM RATE RELIEF AND BECAUSE

ALLSTATE HAS PRESENTED NO MERITORIOUS

CONSTITUTIONAL ARGUMENTS WHICH WOULD

JUSTIFY REVIEW BY THIS COURT.

Upon review of its petition for a writ of certiorari, it

is clear that Allstate has presented no questions which

require review by this Court. It is clearly established by

this Court, and well recognized in New Jersey law and

New Jersey court decisions, that a rate regulated entity

such as a public utility or insurance company has a

constitutional right to earn a reasonable rate of return on

its investments. Duquesne Light Co. v. Barasch, 488 U.S. 299

(1989); N.J.S.A. 17:33B-2g; State Farm v. State of New Jersey,

124 N.J. 32, 590 A.2d 191 (1991). This principle was recog-

nized by the Appellate Division below. In re Matter of

Assignment of Exposures to Aetna Casualty & Surety Co.,

Allstate Insurance Co. and Colonial Penn Insurance Co., 248

N.J. Super. 367, 591 A.2d 631 (App. Div. 1991) (Pet. App.

2). This is not a case in which a state’s appellate courts

have adopted an erroneous rule of law which requires

correction by this Court. Sup.Ct.R. 10.1(c). Compare First

English Evangelical Lutheran Church v. Los Angeles County,

482 U.S. 304 (1987). Rather, this case represents a cogent,

well-reasoned application by the New Jersey Superior

Court, Appellate Division, of settled principles of law ina

case in which there are hotly contested factual issues and

in which the insurer here simply failed to establish as a

matter of fact that it was entitled to interim rate relief.

Having failed to convince the State court below, on

the factual record, of its right to interim relief, petitioner

Allstate now nevertheless claims that it was denied an

appropriate judicial process for judging its request for

rate relief (Petition at 28) or, in the alternative, that the

State may not impose the depopulation plan at issue here

without first holding a plenary hearing on the rate impact

of the plan on the subject insurance companies. Taken to

its logical extension, Allstate’s position is that it has an

absolute constitutional right to protection against regula-

tory lag, and that a state therefore may not impose any

regulatory requirements on insurance companies (or by

implication, utilities either) without first holding a pro-

ceeding to determine the rate impact on the reguiated

entities and adjusting their rates prospectively to ensure

their absolute protection against any financial loss

resulting from the proposed new regulatory requirement.

Allstate’s contentions are totally lacking in merit.

In fact, as the Appellate Division’s decision below

clearly indicates, Allstate has already had an opportunity

for judicial review of its claim for interim rate relief.

Neither the Insurance Commissioner nor the Court, how-

ever, have found Allstate's factual claims persuasive

enough to justify such relief.* Therefore, even by the

* It must be remembered that granting interim rate increases to

insurance companies in a state such as New Jersey where all

drivers are required to have insurance, places an immediate

and substantial financial burden on that company’s customers

without giving them the benefit of a full adjudication of the

merits of the company’s claim for rate relief. Consequently, any

claim for interim rate relief based on a company’s asserted

(Continued on following page)

10

standards Allstate suggests in its own petition, 1.e., those _

applicable to motions for preliminary injunctive relief,

(Petition at 28 n.25), it would not be constitutionally

entitled to relief here.

Indeed, as the Appellate Division noted below,

The record before us is full of significant and

irreconcilable factual differences. The insurers

offer complex financial analyses and the assur-

ance of their actuaries and executives that they

are losing millions of dollars on their current

New Jersey business. They say the near future

promises even greater losses with or without

their assigned JUA/MTF business, that the

Commissioner is dragging his feet in consider-

ing their rate filings, and that forcing more busi-

ness on them at insufficient rates is confiscatory.

The Commissioner offers equally complex anal-

yses and the assurance of his actuaries that the

- insurers are really doing just fine, and that their

complaints are baseless. [Pet. App. 2 at 62].

The record supports this view. Ranged against Allstate’s

dire predictions of financial loss are expert testimony

from both the Commissioner’s staff and the State Public

(Continued from previous page)

right to an absolute guarantee against any possible financial

loss due to regulatory lag, must be weighed against the finan-

cial burden that its request will place upon thousands of ordi-

nary citizens who may already be struggling to pay existing

rates. The fact that rates may be interim, and hence subject to

eventual refund, does not necessarily mitigate the temporary

financial hardship which a rate increase, which later proves to

be unjustified, immediately places upon the company’s

insureds.

-

11

Advocate Division of Rate Counsel (R. App. 1, 2 and 3)

showing that Allstate in fact is overearning and that its

rates should be decreased rather than increased.*

Moreover, Allstate has chosen in its brief to this

Court to bury in footnotes certain significant information

which undercuts its position. Not only will Allstate be

allowed to charge the new exposures the MTF rate, which

is higher than Allstate’s regular voluntary market rate,

but that MTF rate has already been raised twice, once

through an 18.6% increase in rates of poorer drivers and a

second 15% increase on rates paid by better drivers.

Moreover, New Jersey law allows all insurance com-

panies the benefit of annual “flex rate” increases which

may be instituted without a rate hearing. N.J.S.A.

17:29A-44(a), -44(f). These increases are based on a per-

centage of specified components of the Consumer Price

Index plus 3%, thus cushioning the companies against

losses due to regulatory lag. Allstate sheepishly admits

(Petition at 29 n.26) that it has taken three of these

increases since March 1989. Hence, unlike Prendergast v.

New York Telephone Co., 260 U.S. 43 (1923), in which there

was Clear proof of confiscatory rates, resulting from an

order to reduce rates, here there is simply an order by the

Insurance Commissioner to cover certain customers, as

* The Appellate Division specifically found that “the insurers

do not make a case of sufficient strength to justify our entering

an order freezing in place a currently disastrous insurance

industry situation until the insurers’ hyperbole can be tested

against the Commissioner’s incredulity. The resulting turmoil

in the State’s auto insurance industry would be intolerable.”

[Pet. App. 2 at 63]. :

ad

12

clearly authorized by California Auto Association v. Mal-

oney, 341 U.S. 105 (1951), and there is no proof of confis-

catory rates. Moreover, the company here is permitted to

charge the new customers a rate higher than its voluntary

rate. Compare Jersey Central Power & Light Co. v. F.E.R.C.,

810 F.2d 1168 (D.C. Cir. 1987) (company ordered to reduce

rates without hearing); Smith v. Illinois Bell Co., 270 U.S.

587 (1926) (delay of three years in ruling on rate petition

where no dispute that existing rates were confiscatory);

Banton v. Belt Line Ry. Corp., 268 U.S. 413 (1925) (company

denied rate increase for 8 years; no dispute that rates

were confiscatory). Clearly there was no due process or

other constitutional violation in the Commissioner’s

denial of interim relief in this case.

Finally, it should be noted that in separate pending

proceedings to increase Allstate’s voluntary market rates,

the Commissioner has denied Allstate’s requests for

interim relief, in part on the ground that the factual

submissions showed a hotly contested issue as to whether

Allstate actually needed a rate increase. (Pet. App. 16).

That ruling, which encompasses the issue of the Commis-

sioner’s power to issue interim relief under state law, is

currently pending before the Superior Court, Appellate

Division. To the extent that Allstate claims in fact that it

has been deprived of a just rate of return, this claim is not

ripe, because Allstate has not yet even extended coverage

to the insureds at issue here and because its current rate

increase petitions are still pending. See MacDonald, Som-

mer & Frates v. County of Yolo, 477 U.S. 340 (1986);

13

Williamson Planning Commission v. Hamilton Bank, 473 U.S.

172 (1985).*

Allstate’s second point concerning an absolute right

- to protection against regulatory lag is equally lacking in

merit. This Court has never held that there is a right to

protection against all monetary losses due to delay in the

regulatory process. Indeed in the First English Evangelical

Lutheran Church case, on which Allstate relies (Petition at

20), wherein this Court ruled that state regulation which

denies the use of property for a “considerable period of

years” could constitute a taking, this Court carefully dis-

tinguished “the quite different questions that would arise

in the case of normal delays in obtaining building per-

mits, changes in zoning ordinances, variances and the

like.” 482 U.S. at 321. Plainly, a certain degree of delay in

the rate-adjustment process is simply a “necessary inci-

dent of rate regulation” which is an element of the risk

associated with investment in a rate-regulated business.

See Public Util. Comm'n of Texas v. Pedernales Elec. Coop,

678 S.W.2d 214, 222 (Tex. Ct. App. 1984).

* Allstate’s rate hearings are being held before independent

administrative law judges, N.J.S.A. 52:14F-1 et seq. Allstate's

hearing on a petition to raise its voluntary rates has concluded

and the parties are awaiting the ALJ’s initial decision after

post-hearing submissions. The insurance statute, N.J.S.A.

17:29A-14c(1), establishes a strict time frame for the issuance of

the Commissioner’s final order following receipt of the initial

decision. A second hearing, on a petition to raise the rates to

pass through certain surtaxes and assessments, is still pending

before an ALJ. Allstate makes reference to this proceeding as

“mired in discovery” (Pet. at 13); such delay is due to Allstate’s

refusal to cooperate with discovery requests from the Insur-

ance Department's staff and Rate Counsel.

14

Indeed, it is well established that a regulation which

controls rates, and by logical extension, a scheme which

simply requires coverage of insureds at existing or higher

rates, will be invalidated “on its face only if its terms

preclude avoidance of confiscatory results.” Calfarm Ins.

Co. v. Deukmejian, 771 P.2d 1247, 1252 (Cal. 1989), citing

Pennell v. City of San Jose, 485 U.S. 1 (1988); Hutton Park

Gardens v. Town Council, 68 N.J. 543, 350 A.2d 1, 16 (1975).

As this Court clearly held in Maloney, supra, a state may

require an insurance company to cover customers that it

would rather not insure:

The problem is a local one on which views will

vary. We cannot say California went beyond

permissible limits when it made the liability

insurance business accept insurable risks which

circumstances barred from insurance and hence

from the highways. Appellant’s business may of

course be less prosperous as a result of the

regulation. That diminution in value, however,

has never mounted to the dignity of a taking in

the constitutional sense. [California Auto. Assoc.

v. Maloney, supra, 341 U.S. at 110-111].

Here, where Allstate has the option of charging these

customers a higher rate even than its voluntary market

rates, and where it has failed on the factual record to

establish to the satisfaction of state appellate courts its

need for interim rate relief, there is no constitutional

violation and no need for review by this Court.

Finally, there is no significance to Allstate’s claim

(Petition at 20-21), that certiorari should be granted to

resolve differences among state courts in dealing with

various types of rate requests. It is well established that

insurance regulation is uniquely a state concern, In fact,

15

Congress passed the McCarran-Ferguson Act, 15 U.S.C.A.

§§1011-15 (1982), to ensure that states would be able to

tailor their own individualized methods of regulating

insurance companies in their states. See Lac D’Amiante du

Quebec v. American Home Assur., 864 F.2d 1033, 1039 (3d

Cir. 1988), citing Prudential Insurance Co. v. Benjamin, 328

U.S. 408 (1946) (“Obviously Congress’ purpose was

broadly to give support to the existing and future state

systems for regulating and taxing the business of insur-

ance”). Given Congress’ intention that the states act as

“laboratories” in this regard, and this Court’s well estab-

lished rule that there is no one constitutionally required

method of rate regulation, Duquesne Light Co. v. Barasch,

supra; F.P.C. v. Hope Natural Gas Co., 320 U.S. 591 (1944), it

is not surprising that different states have reached differ-

ent conclusions as to their requirements for rate regula-

tion in their own jurisdictions. This result is not one of

constitutional magnitude, was plainly within the contem-

plation of Congress, and does not require intervention or

review by this Court. Sup.Ct.R. 10.1(b), (c).

In summary, it is clear that Allstate’s petition

requests this Court to intervene in an essentially fact-

based rate dispute which is being properly handled by

the Commissioner and the State’s courts, in accordance

with well established constitutional principles enunciated

by this Court in its decisions. The petition should there-

fore be denied.

16

CONCLUSION

The petition in this case presents no issues of consti-

tutional magnitude. Allstate has received judicial review

of its claim to interim rate relief and has been denied

such relief based upon the hotly contested factual record

in this case. Moreover, Allstate’s claim of an absolute

right to protection against any financial loss due to regu-

latory lag is completely lacking in merit. Its facial chal-

lenge to the depopulation order must fail given the lack

of conclusive factual proof that any such loss will occur.

For all of these reasons, the petition for a writ of cer-

tiorari in this case should be denied.

Respectfully submitted,

Ropert |. Det Turo

Attorney General of New Jersey

Attorney for Respondent

Samuel F. Fortunato,

Commissioner of Insurance of

the State of New Jersey

By: Susan L. Reisner

Deputy Attorney General

On the Brief

(Counsel of Record)

JosePpH L. YANNOTTI

Assistant Attorney General

Of Counsel

DATED: January 16, 1992

A-1

APPENDIX 1

DOUGLAS S. EAKELEY

Acting Attorney General of New Jersey

Attorney for State Defendants

R.J. Hughes Justice Complex

CN 112

Trenton, New Jersey 08625

By:

Joseph L. Yannotti

Deputy Attorney General!

(609) 292-1539

JY 4102

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW JERSEY

ALLSTATE INSURANCE

COMPANY,

(an Illinois Corporation),

Plaintiff,

V.

JAMES J. FLORIO, in his

official capacity as Governor

of the State of New Jersey

and in his individual

capacity; JASPER J. JACKSON,

in his official capacity

as Acting Commissioner of

Insurance of the State of

New Jersey; and ROBERT |

DEL TUFO, in his official

capacity as Attorney General

of the State of New Jersey,

Defendants

)

)

)

)

)

)

Honorable

John W.

Bissell

Civil Action

No. 90-1366

AFFIDAVIT

OF

KAREN E

MITCHELL

A-2

KAREN E. MITCHELL, of full age, being duly sworn,

according to law, upon her oath, says:

1. I am the Chief Examiner of the Department of

Insurance of the State of New Jersey, Division of Financial

Examinations. As such, I am responsible for examining

the financial health of insurance companies operating in

New Jersey. Part of that examination involves review of

the Annual Statements filed with the Department by each

company according to law. A review of a company’s

Annual Statement can reveal whether or not that com-

pany experienced an operating profit or loss during the

year reflected in the Annual Statement.

2. I make and submit this Affidavit in response to

Allstate’s allegations of unprofitability in its Complaint,

to the extent that the Court may deem it necessary to

consider Allstate’s factual contentions in disposing of the

motions pending before it.

3. I have reviewed the 1988 and 1989 Annual State-

ments of Allstate Insurance Company. Contrary to what

Allstate is alleging in this Complaint, it appears the com-

pany showed a profit on New Jersey private passenger

automobile business in both 1988 and 1989. I must cau-

tion this Court that, with the exception of the “State

Business Page” of the Annual Statement (page 14), no

financial data filed in Annual Statements deals speci-

fically and solely with the New Jersey part of a com-

pany’s business unless the company writes business only

in New Jersey. All Annual Statements reveal, on the State

Business Page, the amounts of gross premiums written

and earned, and total losses paid and incurred, in New

Jersey. All other information contained in Annual State-

ments, including expenses and investment income, are

reported as world-wide figures. Therefore, my analysis of

A-3

how well Allstate has performed on its private passenger

automobile business in New Jersey is based in part on the

actual figures on the State Business Page, and in part on

estimated figures provided in the A.M. Best Aggregates

and Averages Property and Casualty Manual. In making

my calculation, I have taken the actual reported direct

premiums earned from the State Business Page from Alls-

tate’s Annual Statements, and subtracted therefrom the

actual losses paid and incurred on New Jersey business. I

have further subtracted estimated loss adjustment and

other expenses derived from applying industry-wide

ratios as reported in A.M. Best to Allstate. Finally, |

added estimated investment income similarly computed

by applying A.M. Best ratios. My analysis is set forth in

Exhibit A. It reveals that Allstate, in 1989, reported

$233,264,423 in earned premiums on New Jersey Private

passenger automobile business, and $185,145,357 in

actual incurred losses.

4. The latter figure is an inflated calculation of

incurred losses. It is inflated because it fails to deduct

from those losses the amount of the incurred reimburse-

ment to Allstate from the Unsatisfied Claim and Judg-

ment Fund. Allstate, unlike most other companies,

reports its actual incurred losses as including all monies

advanced to claimants on behalf of the Unsatisfied Claim

and Judgment Fund. (“UCJF” or “the Fund”).

5. The Fund is organized by statute and its major

function is to bear the cost of any individual’s medical

expenses resulting from any one accident to the extent

those expenses exceed $75,000. In other words, that indi-

vidual’s own insurance carrier is responsible for the first

$75,000 in medical expenses, and then the Fund is respon-

sible. In practice the carriers continue to pay the insured’s

A-4

medical expenses even when they exceed $75,000, and

then the carriers are reimbursed by the Fund for the

amounts paid in excess of $75,000. Thus at any given

time, the books of a carrier in the auto insurance business

will reflect an amount due from the Fund.

6. As a result of that reimbursement procedure,

Allstate has set up its reported paid and incurred losses

as including all medical expenses paid to any individual

insured in excess of $75,000 without excluding the amount

reimbursed by the Fund. The Department is aware of this

practice, since it is made evident by Allstate’s inclusion,

on Schedule F of its Annual Statement, of over $111

million in money due to it from the Fund, as if the Fund

was a reinsurer. Nothing on Schedule F is factored into

reported paid and incurred losses on the State Business

Page. Therefore, we know that the amount of incurred

reimbursement from the Fund is not factored into All-

state’s reported losses. This is inappropriate as a measure

of determining whether a company made a profit. Clearly

the amount of incurred reimbursement must be factored

in order to arrive at a true picture of a company’s profits.

7. After factoring that UCJF reimbursement in, All-

state’s losses are reduced by over $24 million in 1989, and

also by over $24 million in 1988. After subtracting esti-

mated expenses and adding estimated investment

income, Allstate shows an apparent 1989 profit on its

private passenger automobile business of $8,823,392, and

an apparent 1988 profit of $8.795,496. This results from

only examining that one factor, treatment of Fund reim-

bursement. There are a multitude of other factors that,

once verified, can alter the company’s profit figure for

each year. For example, Allstate reports a premium

“ceded” to the Fund of over $26 million on Schedule F.

A-5

No other company reports any such figure, and, I do not

know the origin of that figure. The Fund obtains no

“premiums”, only “assessments,” and the assessments

are in no way as much as $26 million. Until that figure is

explained, my conclusion is a qualified one. The $26

million reported “ceded” premiums may have an impact

on Allstate’s profit or loss in 1989 and in 1988. In addi-

tion, each profit figure may be higher or lower depending

on how close the estimated expense and investment

income figures are to the actual numbers. The Court

should also be aware that these calculations do not

account for the effect of reinsurance, which could also

raise or lower the overall profit figure, depending on how

successful Allstate was in reinsuring its losses. The finan-

cial data needed in order to make that analysis is not

available, as mentioned above.

8. Finally, | note that my findings do not agree with

the figures noted for Allstate in the Department’s

November 1989 “Insurer Profitability Report.” The fig-

ures in that report were taken from insurance company

records without independent verification by the Depart-

ment. We now know that the figures contained therein

relating to individual carriers’ New Jersey performance

may be totally inaccurate, as they are with respect to

Allstate. Accordingly, the Department is working on

amending that report to reflect independent analysis.

/s/ Karen E. Mitchell

Karen E. Mitchell

Sworn to and Subscribed

before me this 16th day

of May, 1990.

/s/ Stephen P. Tasy

Attorney-At-Law

State of New Jersey

A-6

EXHIBIT A

1989

No Fault & Physical

Liability Damage Total

Premiums

Earned $147,660,175 $85,604,248 $233,264,423

*Losses

Incurred 113,289,653 47,213,633 160,503,286

LAE Incurred 19,491,143 6,762,736 ~ 26,253,879

Other

Underwriting

Expenses 35,528,925 18,532,481 54,061,406

Total

Expenses $168,309,721 72,508,849 240,818,570

Underwriting

Gain (Loss) (20,649,546) 13,095,399 (7,554,147)

Investment

Income 14,323,037 2,054,502 16,377,539

Net Gain

(Loss) (6,326,509) 15,149,901 8,823,392

* Reported losses incurred 137,931,724

UC] reimbursement 13,746,161

Ending Balance UC] 111,926,921

Beginning Balance 101,031,011

Total 113,289,653

(Incurred basis)

Premiums

Earned

*Losses

Incurred

LAE Incurred

Other

Underwriting

Expenses

Total

Expenses

Underwriting

Gain (Loss)

Investment

Income

Net Gain

(Loss)

A-7

No Fault & Physical

Liability Damage Total

$137,278,946 $97,942,581 $235,221,527

112,964,490 49,951,416 162,915,906

18,120,821 7,737,464 25,858,285

30,743,940 — 22,574,579 53,318,520

161,829,251 80,263,459 242,092,710

(24,550,305) 17,679,122 (6,871,183)

13,316,058 2,350,622 15,666,680

(11,234,247) 20,029,744 8,795,496

* Reported losses incurred $137,389,274

11,527,832

UC] reimbursement

Pending Balance UC]

Beginning Balance

88,134,059

$112,964,490

101,031,011

A-8

APPENDIX 2

STATE OF NEW JERSEY

DEPARTMENT OF INSURANCE

In The Matter of the Rate Application by Allstate

Insurance Company Dated October 15, 1990 Requesting

a +27.7% Increase in Private Passenger Automobile

Insurance Rates

OAL Docket No: INS 9536-90

NJDOI File No: 90-1320

Exhibit PT-1

Direct Pre-Filed Testimony and Exhibits of

Allan I. Schwartz

On Behalf of the

New Jersey Department of the Public Advocate

Division of Rate Counsel

January 25, 1991

In The Matter of the Rate Application by Allstate

Insurance Company Dated October 15, 1990 Requesting

a +27.7% Increase in Private Passenger Automobile

Insurance Rates

OAL Docket No: INS 9536-90: NJDOI File No: 90-1320

Direct Pre-Filed Testimony and Exhibits of Allan lI.

Schwartz On Behalf of the New Jersey Department of

the Public Advocate

Table of Contents

Item Description Pages

] Qualifications 1 2

II Summary 2- 4

Il] Overall Ratemaking Methodology 4- 9

IV Loss Development 9-12

V Trend Period/Effective Date 12 - 15

A-9

VI Annual Trend Factors 3 - 9

VII Impact of the FAIR Act 20 - 21

VIII Depopulation of JUA : 21 - 23

IX Underwriting Profit and Contingencies 23 - 27

X Additional Contingency Loading 27 - 29

XI Market Transition Facility 29 - 30

XII Private Passenger Automobile Profits 30 - 31

XIII CAS Ratemaking Principles 31 - 33

XIV Conclusion 33 - 34

Background of Allan I Schwartz Appendix A

Glossary of Insurance Terms Appendix B

In The Matter of the Rate Application by Allstate

Insurance Company Dated October 15, 1990 Requesting

a +27.7% Increase in Private Passenger Automobile

Insurance Rates

OAL Docket No: INS 9536-90: NJDOI File No: 90-1320

Direct Pre-Filed Testimony and Exhibits of Allan I.

Schwartz On Behalf of the New Jersey Department of

the Public Advocate

List of Exhibits

Exhibit

Number Description

1 Summary of Rate Level Changes

2 Derivation of Rate Level Changes

3 Comparison of Overall Rate Level Indica-

tions

4 Loss Development

5 Total Loss and Premium Trend Factors

6 Annual Loss Trend Factors

7 Fast Track Trend Data

A-10

8 FAIR Act Savings

9 Permissible Loss & Loss Expense Ratio

10 Underwriting Profit and Contingencies

11 Countrywide Residual Market Share

12 Data Bank Information on JUA Insureds

13 Allstate’s N.J. Private Passenger Auto Profits

STATE OF NEW JERSEY

DEPARTMENT OF INSURANCE

In the Matter of the Rate ) OAL Docket No:

Application by Allstate Insurance ) INS 9536-90

Company Dated October 15, 1990 ) .

Requesting a +27.7% Increase in) ac iinet ee

Private Passenger Automobile )

Insurance Rates )

Direct Pre-Filed Testimony of Allan I. Schwartz On

Behalf of the New Jersey Public Advocate

I - QUALIFICATIONS

1. Q. Please state your name and address?

A. My name is Allan I. Schwartz. My address is

4400 Route 9 South, Freehold, New Jersey.

2. Q. By whom are you employed and in what capac-

ity?

A. Iam President of AIS Risk Consultants, an actu-

arial consulting firm which I started in Novem-

ber 1984. In that capacity I have performed

A-11

consulting work for a variety of clients covering

a wide spectrum of actuarial projects.

What was your previous employment history?

From May 1988 to January 1990 I was Assistant

Comnnissioner with the New Jersey Department

of Insurance (NJDOI). In that position, I was

responsible for all property/liability filings,

excluding workers’ compensation, submitted to

the NJDOI in addition to other responsibilities.

From June 1986 until April 1988 I was Chief

Actuary for the North Carolina Department of

Insurance (NCDOI). I was responsible for all the

actuarial work at the NCDOI, both property /

liability and life / accident / health. From

August 1977 to November 1984 I worked for the

actuarial consulting firm of Woodward and Fon-

diller. My last position at that firm was Senior

Actuary. Prior to that, from March 1976 to

August 1977, | was employed by the National

Council on Compensation Insurance (NCCI).

While there, I worked on rate level analyses,

benefit factor evaluations, and special projects.

Before that, I attended college where | received

a B.S. degree in physics from Cooper Union.

Are you a member of any actuarial societies?

I am a Fellow of the Casualty Actuarial Society,

an Associate in the Society of Actuaries, a Mem-

ber of the American Academy of Actuaries, and

a Fellow of the Conference of Actuaries in Pub-

lic Practice. | have belonged to various regional

actuarial organizations and professional actu-

arial committees. In addition, I served on the

Property / Casualty and Life / Accident /

Health Actuarial Task Forces of the National

Association of Insurance Commissioners

A-12

(NAIC). I was also Chairperson of a sub-com-

mittee for the NAIC statistical task force. This

sub-committee developed the current NAIC

standard private passenger automobile statisti-

cal data reporting requirements.

Would you please describe some of your addi-

tional professional activities?

I have written several papers dealing with var-

ious aspects of actuarial work. These have

included topics on ratemaking, reserving, and

reinsurance. I have also presented lectures and

taught classes on these subjects. In addition, |

was editor of Fresh Air Magazine, a newsletter

published by Actuaries in Regulation. This is a

special interest group of the Casualty Actuarial

Society composed of actuaries who work for

State Insurance Departments.

Have you previously testified in regulatory pro-

ceedings regarding insurance rates

Yes. I have testified in property / liability insur-

ance ratemaking proceedings in Arkansas,

Maine, Massachusetts, North Carolina, Okla-

homa, Rhode Island, South Carolina, Texas and

Virginia. In addition, I have reviewed rate fil-

ings for the Insurance Departments in Delaware

and New Jersey, which were resolved without a

hearing.

Do you have a resume setting forth your profes-

sional background?

Yes. It is included as an Appendix A to this

testimony.

A-13

II - SUMMARY

Have you reviewed the rate filing by Allstate

Insurance Company (Allstate) dated October 15,

1990 requesting a +27.7% increase in private

passenger automobile insurance rates, the addi-

tional information supplied in response to data

requests, and other materials?

Yes. I have.

What issues did you analyze in your study?

There were seven main items that impacted the

overall premium level indication. These were

the (1) loss development factors, (2) length of

trend period / proposed effective date and

annual trend factors, (3) impact of the FAIR Act,

(4) consideration of the depopulation of the

New Jersey Automobile Full Insurance Under-

writing Association (NJAFIUA or JUA), (5)

underwriting profit and contingency factors, (6)

additional contingency loadings and (7) Market

Transition Facility (MTF) operating results. The

seven items and the impact they have on the

private passenger automobile rate level are set

forth in Exhibit AIS-3, Sheet 1. The differences

in the treatment of these items between myself

and Allstate is given descriptively in Exhibit

AIS-3, Sheets 2 & 3.

In addition, Allstate included consideration of

the premium surtax and Automobile Insurance

Guaranty Fund Loan Assessment in its filing. It

is my understanding that these issues are the

subject of a separate proceeding. I have there-

fore not included the impact of these items on

either the income or costs for Allstate.

10.

11.

A-14

Furthermore, I have included a discussion of

Allstate’s prior profitability for New Jersey pri-

. vate passenger automobile insurance and the

Casualty Actuarial Society’s Statement of Rate-

making Principles. While these items do not

impact the rate level directly, they do address

some of the issues included by Allstate in its

filing.

What was the result of your analysis?

That the proposed rate increase by Allstate of

+27.7% for private passenger automobile insur-

ance will lead to excessive rates.

My indications are for an overall rate decrease

of -11.4% for private passenger automobile

insurance. This would be split as -11.4% for

bodily injury (BI) liability, -22.2% for property

damage (PD) liability, +8.5% for personal injury

protection (PIP), +18.9% for uninsured motorists

(UM), -19.9% for collision and -24.9% for com-

prehensive. These values are displayed in

Exhibit AIS-1. The derivation of the rate level

changes are set forth in Exhibit AIS-2, Sheets 1

to 6.

The seven items where | differ from Allstate are

set forth in Exhibit AIS-3. The numeric values of

these variables, as well as the impact on the rate

level are set forth in Sheet 1. The differences are

given in a descriptive manner in Sheets 2 & 3.

Based upon your analysis, what is your recom-

mendation regarding the needed private pas-

senger automobile insurance rate level change

for Allstate?

I would recommend that the overall rate level

be decreased by -11.4% compared to the rates

currently in place. Within this overall value,

A-15

some coverages (i.e., PIP and UM) would have

the rates increase, while for other coverages

(i.e., BI and PD liability along with physical

damage - collision and comprehensive) rates

would decrease.

* * *

A-16

APPENDIX 3

DOUGLAS S. EAKELEY

Acting Attorney General of New Jersey

Attorney for Respondent

R.J. Hughes Justice Complex

CN 112

Trenton, New Jersey 08625

By: Donald M. Parisi

Deputy Attorney General

(609) 984-0183

SUPERIOR COURT OF

NEW JERSEY APPELLATE

DIVISION DOCKET NO. A-

IN THE MATTER OF

THE ASSIGNMENT OF

) Civil Action

)

EXPOSURES TO THE )

)

)

AFFIDAVIT OF

MARTIN ROSENBERG

AETNA CASUALTY AND

SURETY COMPANY

MARTIN ROSENBERG, of full age, being duly sworn

according to law, upon his oath deposes and says:

1. I am currently employed as an Assistant Com-

missioner, Property/Casualty Division, of the New Jersey

Department of Insurance. I was appointed to my present

position in 1990.

2. Since 1988 I have been responsible for supervis-

ing the units that analyze and approve/disapprove prop-

erty and casualty rate filings. This includes private

passenger automobile insurance.

3. Further details on my educational and employ-

ment history are listed on pages 1 and 2 of Exhibit A.

A-17

4. I have personally undertaken the review of Alls-

tate’s rate filing dated October 15, 1990. I am the sole

actuary within the Department responsible for this

review.

5. Attached as Exhibit A is my prefiled testimony in

the ongoing Allstate rate hearing which began on Febru-

ary 6, 1991 in the Office of Administrative Law.

6. Allstate requests an overall increase in private

passenger automobile insurance rates of 27.74% in its

October 15, 1990 filing.

7. I concluded from my review of Allstate’s filing

that the data provided by Allstate did not support the

request for an overall rate increase of 27.74%. Rather, |

concluded that the rate indication developed from the

data should be an overall decrease of 8.3% (see Exhibit

A).

8. As part of my analysis of the Allstate filing |

reviewed the effect of the “depopulation requirement” on

the indicated rate need of Allstate.

9. I have concluded that Allstate needs no rate

increase to compensate for the depopulation requirement.

I explain my analysis fully on pages 17-20 of Exhibit A.

10. Subsequent to the filing of my direct testimony,

Exhibit A, Liberty Mutual Insurance Company filed the

type of standard/non-standard rating plan described on

pages 17-19 of my testimony. This filing was made on

February 1, 1991 and approved by the Commissioner on

February 11, 1991.

A-18

11. Allstate has yet to file a standard/non-standard

rating plan.

/s/ M. Rosenberg

Martin Rosenberg

Sworn to and subscribed

before me this 22 day

of February, 1991.

/s/ Donald I. Bryan, Jr.

Donald I. Bryan, Jr.

An Attorney at Law of New Jersey.