Amicus Curiae Brief — Allstate Insurance Co. v. Fortunato

~

as No. 91-983

= &

= tg In The

’ 3s Supreme Court of the United States

.? = October Term, 1991

7

ALLSTATE INSURANCE COMPANY,

an Illinois Corporation,

Petitioner,

V.

SAMUEL F. FORTUNATO,

Commissioner of Insurance of

The State of New Jersey,

Respondent.

.

On Petition For A Writ Of Certiorari To The

Appellate Division Of The Superior Court

Of The State Of New Jersey

°

MOTION FOR LEAVE TO FILE AND BRIEF AMICI

CURIAE OF THE NATIONAL ASSOCIATION OF

INDEPENDENT INSURERS, THE ASSOCIATION OF

CALIFORNIA INSURANCE COMPANIES, THE

INSURANCE FEDERATION OF MINNESOTA, THE

INSURANCE FEDERATION OF PENNSYLVANIA,

INC., AND THE WISCONSIN INSURANCE

ALLIANCE IN SUPPORT OF PETITIONER

¢

CHARLES PLATTO

(Counsel of Record)

W. E. Wrirttincton IV

DIANE RUNYAN Bectt

TEACHOUT, BROooKs &

McNALLy

23 Mechanic Street

Norwich, VT 05055

(802) 649-1200

Attorneys for Amici Curiae

(Additional Counsel Listed On Inside Cover)

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

OR CALL COLLECT (402) 342-2831

Of Counsel:

Patrick J. McNALLy

MOoNnIKA LUSSNIG

Eric LOEWE

National Association of

Independent Insurers

2600 River Road

Des Plains, IL 60018

(708) 297-7800

THomas ACEITUNO

Association of California

Insurance Companies

915 L Street, Suite 1160

Sacramento, CA 95814

(916) 442-4581

Ropert D. JOHNSON

Insurance Federation of Minnesota

750 Norwest Center

55 Fifth Street East

St. Paul, MN 55101

(612) 292-1099

SAMUEL R. MARSHALL

The Insurance Federation

of Pennsylvania, Inc.

The Robert Morris Building

Suite 1100

17th & Arch Streets

Philadelphia, PA 19103

(215) 665-0500

Eric ENGLUND

Wisconsin Insurance Alliance

121 East Wilson Street

Madison, WI 53703-3422

(608) 255-1749

No. 91-983

¢

In The

Supreme Court of the United States

October Term, 1991

4

ALLSTATE INSURANCE COMPANY,

an Illinois Corporation,

Petitioner,

SAMUEL F. FORTUNATO,

Commissioner of Insurance of

The State of New Jersey,

Respondent.

e

On Petition For A Writ Of Certiorari To The

Appellate Division Of The Superior Court

Of The State Of New Jersey

e

MOTION FOR LEAVE TO FILE BRIEF AMICI CURIAE

Pursuant to Rule 37.4 of the Rules of this Court, The

National Association of Independent Insurers (“NAII”),

The Association of California Insurance Companies, The

Insurance Federation of Minnesota, The Insurance Feder-

ation of Pennsylvania, Inc., and The Wisconsin Insurance

Alliance hereby respectfully move for leave to file the

attached brief amici curiae in support of petitioner Allstate

Insurance Company. The consents of the petitioner and of

respondents Aetna Casualty & Surety Company and

il

Colonial Penn Insurance Company have been obtained.

The New Jersey Attorney General has withheld consent.

Movants are respectively a national and state insur-

ance trade associations representing insurers throughout

the United States.! The member companies of movants

write a significant percentage of the automobile insur-

ance policies issued annually in the United States. Thus,

movants are vitally interested in the issue presented in

this case —- whether a satisfactory mechanism for interim

relief and judicial review is afforded under a state statute

regulating automobile insurance rates so as to protect

fundamental constitutional rights and avoid the imposi-

tion of confiscatory rates.

In its brief, petitioner addresses the laws of the State

of New Jersey and the direct impact of those laws and the

decision below on petitioner. Movants seek to present this

Court with a broad view of automobile insurance, state

insurance regulation, and the impact of regulations and

decisions such as the one at issue on the insurance indus-

try and the nation as a whole. In addition, movants set

forth in the attached brief decisions of state courts of last

resort and federal courts which are in conflict with the

decision below. Movants believe that the attached brief

will assist the Court in understanding the importance of

the issue presented in this case to the insurance industry

' Petitioner Allstate Insurance Company is a member com-

pany of all amici except The Wisconsin Insurance Alliance.

ili

at large, and the necessity for action by this Court to

address the significant constitutional issues raised herein.

WHEREFORE, amici curiae respectfully request that

their motion for leave to file an amici curiae brief in

‘ support of petitioner be granted.

: Dated: Norwich, Vermont

January 17, 1992

Respectfully submitted,

CHARLES PLATTO

(Counsel of Record)

W. E. Wuittincton IV

DIANE RUNYAN BeEcH

TEACHOUT, Brooks &

McNALLy

23 Mechanic Street

Norwich, VT 05055

(802) 649-1200

Attorneys for Amici Curiae

(Additional Counsel Listed On Next Page)

iv

Of Counsel:

Patrick J. McNALLy

Monika LUSSNIG

Eric LOEWE

National Association of

Independent Insurers

2600 River Road

Des Plains, IL 60018

(708) 297-7800

THOMAS ACEITUNO

Association of California

Insurance Companies

915 L Street, Suite 1160

Sacramento, CA 95814

(916) 442-4581

Rosert D. JOHNSON

Insurance Federation of Minnesota

750 Norwest Center

55 Fifth Street East

St. Paul, MN 55101

(612) 292-1099

SAMUEL R. MARSHALL

The Insurance Federation

of Pennsylvania, Inc.

The Robert Morris Building

Suite 1100

17th & Arch Streets

Philadelphia, PA 19103

(215) 665-0500

Eric ENGLUND

Wisconsin Insurance Alliance

121 East Wilson Street

Madison, WI 53703-3422

(608) 255-1749

TABLE OF CONTENTS

Page

TABLE CP AUTRE aos et vec cccecespaensees vi

STATEMENT OF INTEREOL «2... 5 ccc cccevcccsccees 1

SUMMARY OF ARGUMENT........5cccccccccevees 1

PR) eee oh re rer rie oo 3

I The Importance of Insurance in General, and

Automobile Insurance in Particular.......... 3

II Insurance Crises of the 80’s and the 90’s.... 5

III Rate Regulation and Suppression of Auto

se | Bg ee ere eer rs ee 7

IV The Problem of the Unavailability of Interim

NN cc kc cba vs counbest cures exer ces 1]

V The Necessity For Review By the Supreme

| Err ere tre ree 15

vi

TABLE OF AUTHORITIES

Cases CITED

Allstate Ins. Co. v. Florio, Civil Action No. 90-1366

er kare a i aa eo eats

Calfarm Ins. Co. v. Deukmejian, 48 Cal.3d 805, 771

P.2d 1247, 258 Cal.Rptr. 161 (1989)............

California State Auto. Ass’n Inter-Ins. Bureau v. Mal-

ge Re) Serer reer eee

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

First English Evangelical Lutheran Church v. County

of Los Angeles, 482 U.S. 304 (1987) ............

FPC v. Hope Natural Gas Co., 320 U.S. 591 (1944) ....

Gentile v. Altermatt, 169 Conn. 267, 363 A.2d 1,

appeal dismissed, 423 U.S. 1041 (1976)..........

Guaranty Nat’! Ins. Co. v. Gates, 916 F.2d 508 (9th

Ce ick bse Sh bis ON dre a RNe hho ek tae 9,

Helmsley v. Borough of Fort Lee, 78 N.J. 200, 394

A.2d 65 (1978), appeal dismissed, 440 U.S. 978

og DAP ce tht ae aa, EN Seve ER AR eg

In Re Elizabethtown Water Co., 107 N.J. 440, 527

i I a hak cay f4ae ea entne sate

In Re Insurance Antitrust Litigation, 723 FSupp. 464

(N.D. Cal. 1989), rev’d and remanded, 938 F.2d

ek Re | SN Ae ea ee

In The Matter of The “Plan for Orderly Withdrawal

from New Jersey” of Twin City Fire Ins. Co., 248

N.J. Super. 616, 591 A.2d 1005 (App. Div. 1991)....

Page

Sor 9

passim

13, 14

10

vii

TABLE OF AUTHORITIES - Continued

Page

Keystone Ins. Co. v. Foster, 732 F.Supp. 36 (E.D. Pa.

NSPS Mi aA Se AS een Ay iy ganar gi ree 9

Liberty Mutual Ins. Co. v. Jackson, Civil Action No.

oo Ree OP ee eee eee 9

Montgomery v. Daniels, 38 N.Y.2d 41, 340 N.E.2d

oe Pe 7 Pe ne ae

Potomac Electric Power Co. v. Public Service Comm'n,

ee ee ee I OE oon do dees hace cence vesess 17

Prendergast v. New York Tel. Co., 262 U.S. 43 (1923)... . 16

State Farm Mutual Auto. Ins. Co. v. State, 124 N.J.

5a, FO A.2e VS C991)... ... 5.2.5... 3 9, 13, 1, 19

Tenaco Oil Co. v. Department of Consumer Affairs,

ope kB en ere 16

Travelers Indem. Co. v. Gillespie, 50 Cal.3d 82, 785

ye el, | eee y

United States v. South-Eastern Underwriters Ass'n,

SE a a rs nr ose 7

CONSTITUTIONAL PROVISIONS CITED

ee IE Sp ce ek beans ee 16

Le Gg MIE DREW i occ cenc ten tweverecseys Se

Statutes Citrv

15 U.S.C. § 1011 et seq., McCarran-Ferguson Act...... 7

ee ee eR | rare s

Conn. Gen. Stat. Ann. § 38-319 et seq. (1987)......... 7

viii

TABLE OF AUTHORITIES - Continued

Page

Conn. Gen. Stat. Ann. § 38-327 (1987)................ 7

Ill. Ann. Stat. ch. 95 1/2 para. 7-601 (1991) .......... 7

Mich. Comp. Laws Ann. § 500.3101 et seq. (1983)..... 7

Mich. Comp. Laws Ann. § 500.3301 et seq. (1983)..... 7

ee reer SIS A ieee eon aint an 8, 18

N.J. Fair Automobile Insurance Reform Act of 1990,

L.1990, c.8:

Section 2(g), N.J. Stat. Ann. 17:33B-2(g) ........... 11

Section 72, N.J. Stat. Ann. 17:33B-30 .............. 12

Section 76, N.J. Stat. Ann. 17:33B-49 ............... 8

Section 78, N.J. Stat. Ann. 17:33B-51 ............... 8

Section 88(c)(5), N.J. Stat. Ann. 17:33B-11(c)(5)...8, 12

N.Y. Ine. Law § 5101 ef seg. (1965)... 6.6 coc vecccess 7

75 Pa. Cons. Stat. § 1799.7(b) & (d) (Supp. 1991)..... 8

Rute Citep

SN SP I ino os ws ehh eee eo es 15

OtHER AUTHORITIES CITED

K. Abraham, Distributing Risk: Insurance Legal The-

OP OE FUE FOR IDI) ones ccc eicceecedenss: 4

K. Abraham, Insurance Law and Regulation (1988) ..... 8

Abraham, Making Sense of the Liability Insurance

Crist, @ Olio St. LJ. S09 C9GF) .. 0. icc cceieen 5

ix

TABLE OF AUTHORITIES - Continued

23 Executive Letter, Insurance Information Insti-

> a Se ee es eee

23 Executive Letter, Insurance Information Insti-

ee ee oon henewees sees

Gastel, Insolvencies/Guaranty Funds, Insurance

Information Institute (1992)...................

Gastel, Rate Regulation, Insurance Information

I tO hay AK Wael phar

Gillies, Managing the Market Regulating the Insur-

ance Industry, 18 Brief 16 (1988)...............

R. Keeton and A. Widiss, Insurance Law, A Guide to

Fundamental Principles, Legal Doctrines and Com-

NE PEE LEE ono ok ce cae ieee eee wenen

O. Kramer, Rate Suppression and Its Consequences

NU a can eae ula ies URae Deere eo MRI Se

Los Angeles Times, January 21, 1991, at D6, col. 1

New York Times, July 19, 1991, at Al, col. 1....

New York Times, March 28, 1986, at D16, col. 1.

New York Times, April 12, 1991, at Al, col. 6...

New York Times, Feb. 16, 1987, § 1, at 12, col. 3.

J. O'Connell, The Lawsuit Lottery, Only the Lawyers

Se No aon ee he eee Ge ee ee

Priest, The Current Insurance Crisis and Modern Tort

ve je Be) ia) 3s rrr

vec

TABLE OF AUTHORITIES - Continued

Page

Subcomm. on Oversight and Investigations of

Comm. on Energy and Commerce, 101st Cong.,

2d Sess., Report on Insurance Company Insol-

vencies Goma. Pring 1900)... .......ccccccccucces. 6

The Travelers Rides into the Storm, New York Times,

Dec. 2, 1990, § 6, NE Maven? Gt docs ache seve So 6

Trouble in Insurance City, Boston Globe, Nov. 6,

SE EMG a felon caeeveucdevsc cavcimereee rites 6

Two More Car Insurers to Quit State, Boston Globe,

CMOemOr BS, THM, OF SE. o-oo ke ki ccc cc nwcvecccres 9

Will Insurance Industry Go the Way of S & L's?,

Washington Post, July 1, 1990, at H1............... 6

STATEMENT OF INTEREST

The National Association of Independent Insurers

(“NAII”) is a national trade association representing the

interests of over 560 property and casualty insurance

companies. NAII member companies underwrite approx-

imately 36% of the private automobile insurance in the

United States. The Association of California Insurance

Companies, the Insurance Federation of Minnesota, the

Insurance Federation of Pennsylvania, Inc., and the Wis-

consin Insurance Alliance (“Wisconsin”) are state trade

associations representing the interests of member

insurers in their respective states. Allstate Insurance

Company (“Allstate”), the petitioner, is a member com-

pany of all amici except Wisconsin.

The amici have a vital interest in the rate regulation

of the automobile insurance industry by the states and

the need for a mechanism for interim rate relief and

judicial review to avoid the imposition of a confiscatory

rate structure.

SUMMARY OF ARGUMENT

The insurance industry in the United States is facing

a crisis. Insurers, experiencing increasing liabilities and

unable to earn a fair rate of return, have been forced to

withdraw from critical markets. Major insurer insolven-

cies have already been experienced and the threat of

mounting insurer insolvencies is looming on the horizon.

Congress and the state legislatures, as well as the state

courts, have been grappling with various aspects of the

problem. The crisis facing the insurance industry in gen-

eral and the auto insurance industry in particular poses a

difficult dilemma for government, the courts, industry

and our society as a whole. The solutions are not self

evident and they will take time and a great deal of effort

to formulate and implement.

Amici do not presume to ask this Court to resolve or

remedy this multi-faceted nationwide problem. But amici

do believe that this Court’s intervention is essential to

2

protect certain fundamental constitutional rights that are

being violated, and to ensure that the American system of

automobile insurance will not be destroyed, but will be

able to continue, while the broader solutions to the over-

all problem evolve.

The necessity of relief from this Court arises out of

efforts by state legislatures in recent years to implement a

variety of mechanisms to depress automobile insurance

rates, and in particular the sweeping legislation enacted

by the State of New Jersey in 1990 following the election

of Governor Jim Florio, entitled The Fair Automobile

Insurance Reform Act of 1990 (“FAIRA”).! The New Jer-

sey legislation required assumption of enormous debt by

insurers, elimination of various charges, and mandatory

coverages, while at the same time purporting to guaran-

tee to the insurers their constitutional right to an ade-

quate rate of return.

The validity of the statute and its implementation,

and the proposition that an adequate rate of return is in

fact feasible under the statute, have been subject to exten-

sive challenges, and numerous carriers have announced

their intention to withdraw from the state as a result of

the legislation. These challenges and withdrawals will be

addressed in complex judicial and administrative hear-

ings, which may take years to resolve. However, in the

interim, by virtue of the decision below, the carriers are

denied a viable mechanism for achieving an adequate

and equitable return, should their challenges be sus-

tained. Absent such a mechanism, any ultimate relief

would only be prospective, and therefore illusory as to

the periods that have passed, and the automobile insur-

ance system may be destroyed in the meantime.

As Justice Garibaldi of the New Jersey Supreme

Court observed in expressing her own doubts as to the

denial of an earlier “facial” challenge to FAIRA:

Neither the insurance company not this state’s

insurance market will be adequately protected

' The Statute is reproduced in Appendix 7 to the Petition.

3

by the pyrrhic discovery after it has ceased

doing business here (and perhaps elsewhere)

that it deserved a rate increase five years ago.?

Nevertheless, when faced with an “an applied” challenge

to FAIRA in the instant case, the New Jersey Court

refused to act.

Thus, the issue presented by this case is whether a

state can impose a regulatory system which is alleged to

be confiscatory, without providing a viable timely mecha-

nism for review, which will afford meaningful relief if the

system is determined to be confiscatory. Other decisions

in both federal and state courts have recognized the

inherent danger and risks of such legislation and have

taken steps to protect the carriers, the consumers and the

overall insurance system, while these issues are being

resolved. New Jersey statute and the decision of the New

Jersey Court afford no such protection. They should not

be permitted to stand.

It should be emphasized that the Petition challenges

the validity of the statute as applied. It is the contention

of the Petition that Allstate cannot be compelled by the

application of the statute to write new business without

first being afforded a viable mechanism to ensure ade-

quate rates. The issues raised by the Petition are thus ripe

for review by the Supreme Court.

ARGUMENT

I. The Importance of Insurance In General, and Auto-

mobile Insurance in Particular

As Professor (now Judge) Keeton has observed,

“{iJnsurance is an important, and perhaps essential,

aspect of the business and personal lives of the vast

majority of individuals living in the United States.”*

2 State Farm Mutual Auto. Ins. Co. v. State, 124 N.J. 32, 68,

590 A.2d 191, 210 (1991) (Garibaldi J., concurring).

3 R. Keeton and A. Widiss, Insurance Law, A Guide to Funda-

mental Principles, Legal Doctrines and Commercial Practices 1 (1988).

4

Billions of dollars of private and commercial insurance

coverage is written every year in the United States.‘

Insurance is a method of managing and allocating

risk by distributing it among large numbers of individ-

uals or enterprises.* The simple fact is that virtually every

aspect of business and personal life entails some measure

of the risk of injury or loss. Those risks are so significant

that without a means of protection against such risks we

could not function on an individual or societal basis.

Insurance provides the means of protection by allocation

of such risks, and insurance companies underwrite and

manage that allocation of risk.®

The automobile, and automobile insurance, have

played a particularly unique role in the development of

the United States in the twentieth century. From the days

of Henry Ford and the Model T, the automobile has been

and even today remains the symbol of the American

dream, the hallmark of American business and technol-

ogy. The vast majority of American adults own or drive

cars. The network of roads and highways crisscrossing

the nation is unequalled throughout the world.

Yet, with the great success of the automobile came

risks: risk of accident, risk of theft, risk of damage to the

auto, and risk of serious injury and death to drivers,

passengers and pedestrians. The American tort system,

for better or for worse, has provided a mechanism for

injured persons to recover for their injuries from auto

accidents, recoveries which would far exceed the abilities

to individuals or companies to pay on a persona! basis.

Automobile insurance has provided the means of com-

pensating for automobile damage and injury and has

4 Td.

> See K. Abraham, Distributing Risk: Insurance Legal The

ory and Public Policy 1-2 (1986).

& See generally id.

5

provided the means to tolerate the risks of the auto-

mobile, which is so important to our society. Thus, auto-

mobile insurance plays a critical role and function. If its

ability to function is threatened, our modern American

way of life is threatened.

II. Insurance Crises of the 80’s and the 90's

In the 1980’s the insurance industry and the public

faced a crisis of insurance availability. Insurance was

unavailable for many types of risks, inter alia, because

underwriting of the 70’s led to unanticipated losses, and

insurers were unwilling or unable to commit their

resources to underwriting similar risks in the early and

mid 1980’s.”? As a result, schools, day care centers, ect.

closed because insurance was unavailable.® This crisis

was precipitated by economic and market forces, and

towards the end of the 80’s was showing signs of amelio-

ration.?

However, the 90’s is seeing the beginnings of a crisis

of a different and much more ominous nature, the

7 See In Re Insurance Antitrust Litigation, 723 F. Supp. 464

(N.D. Cal. 1989), rev’d and remanded, 938 F.2d 919 (9th Cir.

1991); Priest, The Current Insurance Crisis and Modern Tort Law,

96 Yale L.J. 1521 (1987); Abraham, Making Sense of the Liability

Insurance Crisis, 48 Ohio St. L.J. 399 (1987).

8 See Priest, supra note 7, at 1521-22; Gillies, Managing the

Market Regulating the Insurance Business, 18 Brief 16 (1988)

(A.B.A. Tort and Ins. Prac. Sec.); New York Times, March 28,

1986, at D16, col.1 (Congress “swamped” with warnings that

small businesses are facing bankruptcy due to high cost and/

or unavailability of liability insurance).

9 See New York Times, Feb. 16, 1987 § 1, at 12, col. 3

(Liability insurance crisis easing, with insurance becoming

more available).

6

insolvency of major insurers and the forced withdrawal

of insurers from the market place.!°

This is due to many complex factors. Certainly, what

turned out to be imprudent investments in real estate and

junk bonds has been a contributing factor.''To some

extent, this can be remedied by future investments strate-

gies and controls.

However, what is of greater and perhaps the greatest

concern, and of particular relevance here, is the forced

withdrawal from the market place by insurers because

they are subjected to a rating structure which prevents

them from operating profitably, and indeed makes it

inevitable that they will lose money, and the failure of the

legislatures and the courts to provide adequate and

timely means of review and redress. A free market econ-

omy cannot survive in such an environment.

This has been of particular and growing concern in

the automobile insurance field.

10 In April of 1991, California regulators seized control of

Executive Life Insurance Company, the largest failure of an

insurer to date. New York Times, April 12, 1991, at Al, col. 6.

Also seized in 1991 were First Capital Life Insurance Company,

Monarch Life Insurance Company, and Mutual Benefit Life

Insurance Company. See New York Times, July 19, 1991, at Al,

col.1. See also Trouble in Insurance City, Boston Globe, Nov. 6,

1990, at 25p; The Travelers Rides into the Storm, New York Times,

Dec. 2, 1990, § 6, part 2, at 13; Will Insurance Industry Go the

Way of S & L’s?, Washington Post, July 1, 1990, at H1; Sub-

comm. on Oversight and Investigations of Comm. on Energy

and Commerce 101st Cong., 2d Sess., Keport on Insurance

Company Insolvencies (Comm. Print 1990) John D. Dingell,

Chairman). Figures on insolvencies of property and casualty

insurers compiled by the National Conference of Insurance

Guaranty Funds, the National Association of Insurance Com-

missioners, and A. M. Best Company for the years 1980-1991

are set forth in Gastel, Insolvencies/Guaranty Funds, Insurance

Information Institute (1992) (available on NEXIS).

11 Jd.

.

II]. Rate Regulation and Suppression of Auto Insurers

in the 90’s

Following the decision of this Court in United States

v. South-Eastern Underwriters Ass'n, 322 U.S. 533 (1944)

and the promulgation of the McCarran-Ferguson Act, 15

U.S.C. § 1011 et seq., the following year, regulation of

insurance was largely left to the states.

Automobile insurance has for at least two decades

been perhaps the most heavily regulated of all forms of

insurance by the states. This is due to the fact that the

vast majority of adult Americans drive cars and that there

is an inherent potential for serious accident and injury.

Mandatory auto insurance laws, no-fault laws, and

assigned risk plans implemented since the 1970’s repre-

sent attempts by the states to make available the neces-

sary coverages. !?

In addition to the laws designed to ensure coverage,

the states adopted a variety of approaches to regulate

insurance rates. Historically, these included competitive

systems where rates were set entirely by market forces,

12 Twenty-four states adopted no-fault laws between 1970

and 1975. J. O’Connell, The Lawsuit Lottery, Only the Lawyers

Win 158 (1979). Examples of no-fault statutes are N.Y. Ins. Law

§ 5101 et seq. (Consol. 1985); Mich. Comp. Laws Ann.

§ 500.3101 et seq. (West 1983); and Conn. Gen. Stat. Ann.

§ 38-319 et seq. (West 1987). For examples of mandatory insur-

ance laws, see Ill. Ann. Stat. ch. 95 1/2 para. 7-601 (Smith-Hurd

1991) and Conn. Gen. Stat. Ann. § 38-327 (West 1987). Cal. Ins.

Code § 11620 et seq. (West 1988) and Mich. Comp. Laws Ann.

§ 500.3301 et seq. (West 1983) are examples of assigned risk

statutes.

For cases upholding these kinds of laws, see Montgomery v.

Daniels, 38 N.Y.2d 41, 340 N.E.2d 444, 378 N.Y.S.2d 1 (1975)

(upholding constitutionality of New York no-fault law); Gentile v.

Altermatt, 169 Conn. 267, 363 A.2d 1, appeal dismissed, 423 U.S. 1041

(1976) (upholding Connecticut mandatory insurance law); Califor-

nia State Auto. Ass’n Inter-Ins. Bureau v. Maloney, 341 U.S. 105 (1951)

‘upholding California assigned risk statute).

8

with rates being filed with the state for information pur-

poses only, as well as the so-called “prior approval”

systems. However, even in the prior approval system,

rates would generally become effective if not disap-

proved within a limited period such as 90 days. Other

variations have included “file and use” and “flex” rating,

which provided for immediate and automatic rate

increases as needed.'?

Under all these rate regulation systems, rates were

set in what was essentially a free market system, subject

to appropriate review by the states. Mechanisms existed

for obtaining interim rate increases, and for expeditious

review of administration and judicial rating decisions. '4

However, beginning at the end of the 1980’s with

Proposition 103 in California, states through voter initia-

tives, political mandates or otherwise, took a new turn in

implementing rate suppression mechanisms. Thus, in

California under Proposition 103, an automatic 20%

reduction in rates was required. Cal. Ins. Code § 1861.01

(West 1988). Similarly, in Pennsylvania, 1990 rates were

rolled back to 1989 levels and frozen. 75 Pa. Cons. Stat.

§ 1799.7(b) & (d) (Supp. 1991). Nevada mandated a roll-

back of the 1989-90 rates to a level 15% below the rates in

effect on July 1, 1988. 1989 Nev. Stat. 784. In New Jersey

under FAIRA, a reduction in charges was mandated, as

was the absorption of an enormous debt from the Joint

Underwriting Association and the mandatory assumption

of coverages at reduced rates for thousands of drivers

previously uninsurable in the voluntary market.'”

13 For an explanation of historical rating systems, see Gas-

tel, Rate Regulation, Insurance Information Institute, (1991); K.

Abraham, Insurance Law and Regulation 104 (1988); see also O.

Kramer, Rate Suppression and its Consequences (1991).

14 Id.

15 See FAIRA §§ 76, 78, N.J. Stat. Ann. 17:33B-49, 33B-51;

FAIRA § 88 (c)(5), N.J. Stat. Ann. 17:33B-11(c)(5); additional

details of FAIRA are provided in the Petition.

9

These rates suppression statutes have been subject to

challenges on numerous grounds. See Calfarm Ins. Co. v.

Deukmejian, 48 Cal.3d 805, 771 P.2d 1247, 258 Cal. Rptr.

161 (1989) (holding on due process and taking grounds

that California statute prohibiting rate relief for first year

unless an insurer was in danger of insolvency, was

unconstitutional); Guaranty Nat'l Ins. Co. v. Gates, 916 F.2d

508 (9th Cir. 1990) (Nevada statute prohibiting inade-

quate rates nonetheless held unconstitutional because

statute defined inadequate as guaranteeing only a break

even return, not a constitutionally fair and reasonable

return); cf. Liberty Mutual Ins. Co. v. Jackson, Civ. Action

No. 90-961 (D.N.J. 1990); Allstate Ins. Co. v. Florio, Civ.

Action No. 90-1366 (D.N.J. 1990) (challenges to FAIRA on

impairment of contract and other grounds dismissed on

the basis of abstention and tax injunction statute); State

Farm Mutual Auto. Ins. Co. v. State, supra, 124 N.J. 32, 590

A.2d 191 (1991) (facial challenge to New Jersey statute

dismissed); Keystone Ins. Co. v. Foster, 732 F. Supp. 36

(E.D. Pa. 1990) (rate freeze statute held not unconstitu-

tional where rate relief was available in extraordinary

circumstances).

The promulgation of these statutes was met with

withdrawals of major carriers from critical markets.'©

‘© For example, Travelers has withdrawn from the Califor-

nia and Pennsylvania automobile insurance markets, and has

also stopped offering automobile insurance in nine other

states. Los Angeles Times, January 21, 1991, at D6, col. 1. See

Travelers Indem. Co. v. Gillespie, 50 Cal. 3d 82, 785 P.2d 500, 266

Cal. Rptr. 117 (1990). Aetna Life & Casualty has withdrawn

from Pennsylvania and South Carolina. 23 Executive Letter,

Insurance Information Institute Nos. 20, 21 (May 14, 21, 1990).

When Cigna Property and Casualty Company and St. Paul

Company withdrew from the Massachusetts automobile insur-

ance market, they followed twelve other insurers (including

Petitioner) that had either left the Massachusetts market or had

become insolvent since 1988. Two More Car Insurers to Quit

(Continued on following page)

10

Moreover, the withdrawals have escalated as carriers,

who attempted to comply with the new statutes and

regulations and at the same time earn an adequate rate of

return, found they were unable to do so. This is best

illustrated by the case of Allstate in New Jersey.'”

The benefits of the rate suppression statutes are pro-

ving dubious at best. A lengthy study published in

November 1991, by Orin Kramer, who previously headed

New York Governor Cuomo’s task force on the insurance

liability crisis, concluded:

The central fallacy underlying rate suppression

is the belief that it offers an economic free

lunch: that if insurers are coerced into provid-

ing lower rates than would exist in a competi-

tive pricing environment, other societal goals —

insurance availability, service levels, accident

protection, pricing equity and insurer solvency —

will not suffer. The study documents that rate

suppression buys short-term price relief to the

detriment of those other policy objectives.'®

In these circumstances, the ultimate outcome of the

litigations and the economic and social benefits of the

rate suppression statutes remain in serious doubt. While

this is a matter of great concern to the industry, we

recognize that these are issues which will be determined

Over time and in different forums.

The issue that is presented today, however, is

whether or not the statutes and their implementation

satisfy fundamental constitutional requirements.

(Continued from previous page)

State, Boston Globe, October 25, 1990, at 55p. A subsidiary of

Hartford Insurance Company and others petitioned to with-

draw from New Jersey upon promulgation of FAIRA. See In The

Matter of The “Plan For Orderly Withdrawal From New Jersey” of

Twin City Fire Ins. Co., 248 N.J. Super. 616, 591, A.2d 1005 (App.

Div. 1991).

17 See the Petition and the decision below.

18 O. Kramer, supra note 13, at ii.

11

As set forth above, in the Calfarm and Gates cases, the

California Supreme Court and the Court of Appeals for

the Ninth Circuit recognized that a rate suppression stat-

ute which was on its face confiscatory violates the Four-

teenth Amendment. Thus, provisions of the California

and Nevada statutes which permitted rate relief only in

the case of insolvency, or permitted at most break even

return, were found to be constitutionally impermissible. '?

The New Jersey statute, which was clearly drafted

with the California decision in mind, purported to over-

come this problem by providing on its face that the

insurers are entitled to earn an adequate rate of return.?°

However, where the New Jersey statute fails — and this is

a more subtle and sinister infringement on constitutional

guarantees — is that it does not provide adequate protec-

tion of the carriers’ constitutional rights in its mecha-

nisms for implementation. Thus, the statute as applied

does not meet fundamental constitutiona] requirements.

IV. The Problem of the Unavailability of Interim

Relief

In Calfarm, the California Supreme Court prudently

stated “we focus less on the rate specified in the statute

than on the ability of the seller to obtain relief if that rate

proves confiscatory.”2! Thus, the California Court recog-

nized that while it is not the role of the courts in the first

instance to determine the adequacy of the rates, it is the

role of the courts to ensure that a mechanism exists for

relief if the mandated rates are determined to be inade-

quate. The California Court went on to state “recognizing

that virtually any law which sets prices may prove confis-

catory in practice, courts have carefully scrutinized such

19 Calfarm, 48 Cal.3d at 821, 771 P.2d at 1255-56, 258 Cal.

Rptr. at 169; Gates, 916 F.2d at 510.

20 FAIRA §2(g), N.J. Stat. Ann. 17:33B-2(g).

21 Calfarm, 48 Cal.3d at 816, 771 P.2d at 1252, 258 Cal. Rptr.

at 166.

12

provisions [for rate adjustment] to ensure that the sellers

will have an adequate remedy for relief from confiscatory

rates.”22

The problem with the New Jersey legislation, and

with the decision of the New Jersey Court, is that while

the statute pays lip service to the constitutional require-

ment that the carriers must earn a fair and reasonable

return, it does not enable them to do so for the following

reasons:

1. The statute does not provide for and the New

Jersey courts have not permitted a satisfactory mecha-

nism for an interim challenge to the adequacy of the rates

set by the state administration agency or for judicial

review of any such challenge. Disputes as to the ade-

quacy of rates will thus take several years to resolve.

2. Inthe interim, carriers must take on thousands of

new customers, who did not previously qualify in the

voluntary market, at rates the carriers contend they have

demonstrated to be prima facie confiscatory.?°

3. Even if the carriers wish to seek to withdraw

from the market, as Allstate and others have been forced

to, the process takes several years and they must take on

new customers as well as continue with old customers at

the rates they believe to be confiscatory.?4

4. No mechanism exists under FAIRA to recover

losses for periods that have passed - which as set forth

in the Petition, may be enormous - if in the end it is

22 Id. at 817, 771 P.2d at 1253, 258 Cal. Rptr. at 167. The

Calfarm court also pointed out that “the terms ‘fair and reason-

able’ and ‘confiscatory’ are antonyms, not separate tests.” Id. at

816n.5, 771 P.2d at 1252n.5, 258 Cal. Rptr. at 166n.5 (citations

omitted).

23 FAIRA §88, N.J. Stat. Ann. 17:33B-11(c)(5).

24 FAIRA §72, N.J. Stat. Ann. 17:33B-30; see also footnote

16, supra.

~ 13

determined that the rates were not fair and reasonable

and were in fact confiscatory.5

Thus, despite the apparently benign language of the

New Jersey statute that purports to guarantee an ade-

quate rate of return, a structure has been set up under

which, even if the carriers ultimately demonstrate that

the rates are inadequate and confiscatory, they will be

denied any possibility of recovery.

The carriers are effectively denied their day in court.

Their property is being expropriated by the state without

a meaningful opportunity for constitutional review.

The carriers cannot continue to exist and to provide

the auto insurance that is vitally needed in this environ-

ment. Ironically, the very problem raised by the statute

and the decision below was foreseen by Justice Garibaldi

of the New Jersey Supreme Court in the decision rejecting

the “facial challenge”. to the constitutionality of the New

Jersey statute in the State Farm case. Justice Garibaldi

stated:

I concur in the Court’s opinion [upholding the

facial validity of the statute]. However, I write

separately to emphasize that this statute is still

susceptible to an as-applied challenge. I have

grave doubts about the ability of the Commis-

sioner of Insurance, under present regulations,

to guarantee insurance companies a constitu-

tionally-adequate rate of return. The present

rate-making structure is lengthy and complex;

the addition of the special separate-hearing pro-

cedure for rate relief will only add to existing

delay. Although the length of time before rate

relief is granted may not, alone, make the

scheme constitutionally defective, Helmsley v.

Borough of Fort Lee, 78 N.J. 200, 223, 394 A.2d 65

25 New Jersey law does not permit recovery of losses

resulting from inadequate rates through subsequent rate

increases. In Re Elizabethtown Water Co., 107 N.J. 440, 449-51,

527 A.2d 354, 359-60 (1987).

14

(1978), appeal dismissed, 440 U.S. 978, 99 S.Ct.

1782, 60 L.Ed.2d 237 (1979) the possibility for

relief from confiscatory rates must be realistic.

Id. at 226, 394 A.2d 65; See also Calfarm Ins. Co. v.

Deukmejian, 48 Cal.3d 805, 817, 771, P.2d 1247,

1258, 258 Cal.Rptr. 161, 167 (1989) (court may

strike down facially-valid law because pro-

cedures enacted under it “were so cumbersome

and time-consuming that [affected persons]

could not in reality obtain relief from confisca-

tory rates”).

* * *

Current economic conditions compound my

concerns. In the past, insurance companies, like

banks, were always considered financial bul-

warks. That is no longer true. See Crenshaw,

“Personal Finance: Finding The Best Life Insur-

ance; Buyers Must Consider Firm’s Solvency As

Well As Policy Cost,” Washington Post, Decem-

ber 16, 1990, at H9 (“in the current economic

uncertainty, the possibility [of an insurance

company becoming insolvent] can no longer be

overlooked”); Floyd, “Market Place: Failing

Insurers’ Bailout Cost Rises,” New York Times,

November 15, 1988, at D8 col. 3 (estimates of

costs of saving failing insurance companies have

soared from $82,000,000 in 1984 to $917,000,000

in 1987). Although the size of the accumulated

unpaid debt of the Joint Underwriting Associa-

tion is deplorable, the failure or withdrawal of

insurance companies providing coverage in this

state would prove even more damaging. There-

fore, it is imperative that insurance companies

actually receive a “fair and adequate rate of

return” within a reasonable period of time. Cf.

Helmsley, supra, 78 N.J. at 242, 394 A.2d 65

(holding that a more moderate regulatory

scheme, i.e. one that does not attempt to keep

investors’ returns at the constitutional mini-

mum, must be adopted where the governing

body is not prepared to support a sophisticated

15

administrative relief system providing for

prompt, fair and efficacious processes). Neither

the insurance company nor this state’s insurance

market will be adequately protected by the pyr-

rhic discovery after it has ceased doing business

here (and perhaps elsewhere) that it deserved a

rate increase five years ago.?6

Notwithstanding her stated concerns, Justice Gar-

ibaldi concurred in the dismissal of the “facial” challenge

in State Farm, so that the statute could be tested “as

applied.” The decision below provides the as applied

challenge that Justice Garibaldi foresaw, and its circum-

stance parrots the very concern expressed by Justice Gar-

ibaldi. Nevertheless, notwithstanding Justice Garibaldi’s

opinion in State Farm, when again faced with this issue in

the case of whether the statute as applied offered the

necessary constitutional protection, the New Jersey

Supreme Court declined review.

V. The Necessity For Review By the Supreme Court

The legislature and the courts of the State of New

Jersey — operating in a highly charged political atmos-

phere — are not prepared to address the constitutional

issues which have been raised. Their reticence to address

these constitutional issues has created a split of authority

between the courts and has exacerbated the insurance

crisis.27 Supreme Court review is particularly warranted

in these circumstances.

Rule 10.1 of this Court indicates that the Court will

particularly consider review of decisions on federal ques-

tions by state courts of last resort which conflict with

26 State Farm, 124 N.J. at 66-68, 590 A.2d at 209-210.

2? New Jersey seems content to ignore the mounting crisis,

perhaps under the theory that carriers will not be forced into

insolvency because they can offset their losses by charging

higher rates in other states. This is the very argument that was

rejected by the California court in Calfarm, 48 Cal.3d at 818-19,

771 P.2d at 1254, 258 Cal. Rptr. at 168.

16

decisions of other state courts of last resort or of federal

courts of appeal. Here, the decision by the New Jersey

Appellate Division (as adopted by the New Jersey

Supreme Court in denying certiorari and dismissing the

appeal) conflicts with the decisions of the California

Supreme Court and the Ninth Circuit Court of Appeal on

the question of whether interim relief must be afforded

where rate suppression is claimed to be “temporary.”

This Court should accept this cases to resolve this conflict

and protect important constitutional rights from being

impaired or lost.

It is beyond dispute that under the takings clause of

the 5th Amendment, where a state regulates an industry,

it must nevertheless allow the affected businesses to

obtain a “fair return” on their property in light of the

risks borne.?8 Typical of the language of the pertinent

cases is the requirement from Duquesne that courts scruti-

nize

what is a fair rate of return given the risks

under a particularly rate setting system

and ... the amount of capital upon which the

investors are entitled to earn that return.29

Moreover, even a temporary “taking” offends the 5th

Amendment.*° Accordingly, since the 5th Amendment

permits a “taking” only after due process of law, it will

permit rate suppression only if there is an adequate

mechanism to obtain relief from suppression which does

not allow a fair return.

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

Hope Natural Gas Co., 320 U.S. 591 (1944); Prendergast v. New

York Tel. Co., 262 U.S. 43 (1923); Tenaco Oil Co. v. Department of

Consumer Affairs, 876 F.2d 1013, 1029 (1st Cir. 1989).

29 Duquesne, 488 U.S. at 310.

30 First English Evangelical Lutheran Church v. County of Los

Angeles, 482 U.S. 304 (1987); Prendergast v. New York Tel. Co., 262

U.S. 43 (1923).

17

In cases of monopoly, it is sufficient to permit subse-

quent rate increases which will counterbalance the losses

incurred in the period of suppressed, below-fair

returns.*! However, where, as here, the adversely affected

business is not a monopoly and it is not permitted to

recoup its losses through future rate increases, the only

procedural safeguard is a prompt, meaningful hearing.

The California Supreme Court and the Ninth Circuit cases

have upheld this procedural safeguard, but the instant

decision of the New Jersey Appellate Division and

Supreme Court departs from the rule and requires correc-

tion by this Court.

In Calfarm, after reciting that regulated companies

have a right to obtain a reasonable return on their prop-

erty, the California Supreme Court stated that the key it

would focus on was “the ability of the [business] to

obtain relief if that rate proves confiscatory.”*? It held

that Proposition 103 failed to provide a satisfactory relief

mechanism because an insurer could seek relief under the

scheme only where it would become insolvent as a result

of the rates.33 However, in ruling against the insurance

commissioner,** the court also addressed, and squarely

rejected, the commissioner’s argument that the tempor-

ary character of the rollback obviated the constitutional

requirement of procedural due process:

We recognize that emergency situations

may require emergency measures... .

31 E.g., Potomac Electric Power Co. v. Public Service Comm'n,

380 A.2d 126 (D.C. 1977) (recoupment through future rate

increase).

32 48 Cal.3d at 816, 771 P.2d at 1252, 258 Cal. Rptr. at 166.

33 Id. at 821, 771 P.2d at 1255-56, 258 Cal. Rptr. at 169.

34 After severing the offending provision, the Court did

uphold the remainder of the statute as providing an adequate

mechanism for review — a timely mechanism which is not

available under the New Jersey statutory scheme.

18

To justify a measure which deprives persons

of a fair return, however, an emergency would

have to be a temporary situation of such enor-

mity that all individuals might reasonably be

required to make sacrifices for the common

weal. We do not believe that the circumstances

which inspired Proposition 103 meet this

requirement. . . . The asserted rise in insurance

rates, rendering insurance unavailable or

unaffordable to many, is not a temporary prob-

lem; it is a long term, chronic situation which

will not be solved by compelling insurers to sell

at less than a fair return for a year. Over the long

term the state must permit insurers a fair return; we

do not perceive any short term conditions that would

require depriving them of a fair return.

Thus the California Supreme Court interpreted the taking

clause as requiring a mechanism for addressing inade-

quate rates even in the short term.

The Ninth Circuit Court of Appeals reached the same

result in the Nevada case concerning 1989 Nev. Stat. 784,

which provided for a 15% rollback of auto insurance rates

and a freeze at the level.*¢ In a decision which carefully

paralleled and discussed Calfarm, the court invalidated

the Nevada statute as failing to guarantee the constitu-

tionally required “fair and reasonable return.”%” The

court cited with approval, and relied upon, the lengthy

passage from Calfarm quoted above which rejected the

purported justification of the lack of due process on the

ground it was merely “temporary.”

35 Id. at 820-21, 771 P.2d at 1255, 258 Cal. Rptr. at 169

(emphasis added).

36 Guaranty Nat'l Ins. Co. v. Gates, 916 F.2d 508 (9th Cir.

1990).

37 Id. at 515.

19

By contrast, the New Jersey Supreme Court first

rejected the “facial challenge” to FAIRA on the grounds

that adequate review could be obtained through the

administrative process,** but then inexplicably refused to

hear the instant case which brought before it the “as

applied” challenge when the administrative procedure

failed to provide meaningful and timely relief.

With the rulings of the New Jersey Appellate Divi-

sion and Supreme Court, there is now a direct conflict

with Calfarm and Gates. The decision below approves as

the ostensible due-process saving mechanism a process

which could take several years to reach a determination*’

and which gives neither interim nor retroactive relief if

the rates are shown by the lengthy process to be confisca-

tory. Thus it necessarily holds that the supposed tempor-

ary character - although lengthy - of the denial of due

process is permissible. This result is in conflict and is

incorrect.

Particularly as rate suppression statutes are mush-

rooming throughout the country, it is essential that the

constitutional invalidity of these provisions be subject to

proper scrutiny by the courts and that this scrutiny not be

avoided and frustrated due to the absence of mechanisms

for interim relief. The withdrawals and insolvencies that

will inevitably follow if the validity of rate suppression

statutes cannot be tested for years will have a devastating

impact on the automobile insurance industry and its abil-

ity to underwrite risks.

The New Jersey situation poses a clear cut example of

the abuse by a state of the rate regulation power. The

Supreme Court is the last hope of the insurance industry,

and the public it serves, to rectify this situation.

38 State Farm, 124 N.J. 32, 63, 590 A.2d 191, 207 (1991).

39 See Petition at 7; cf. Petition at 3-4n.5.

CONCLUSION

For the reasons set forth herein and in the Petition for

a Writ of Certiorari, the Petition should be granted.

Dated: Norwich, Vermont

January 17, 1992

Of Counsel:

Patrick J. McNALLy

Monika LussNIG

Eric LOEWE

National Association of

Independent Insurers

2600 River Road

Des Plains, IL 60018

(708) 297-7800

THOMAS ACEITUNO

Association of California

Insurance Companies

915 L Street, Suite 1160

Sacramento, CA

95814

(916) 442-4581

Rosert D. JOHNSON

Insurance Federation

of Minnesota

750 Norwest Center

55 Fifth Street East

St. Paul, MN 55101

(612) 292-1099

Respectfully submitted,

CHARLES PLATTO

(Counsel of Record)

W. E. Wuittincton IV

DIANE RUNYAN BECH

TEACHOUT, BRooxs &

McNALLy

23 Mechanic Street

Norwich, VT 05055

(802) 649-1200

Attorneys for Amici Curiae

SAMUEL R. MARSHALL

The Insurance Federation

of Pennsylvania, Inc.

The Robert Morris Building

Suite 1100

17th & Arch Streets

Philadelphia, PA

19103

(215) 665-0500

Eric ENGLUND

Wisconsin Insurance

Alliance

121 East Wilson Street

Madison, WI

53703-3422

(608) 255-1749