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

State: new-jersey

Issuer: New Jersey Supreme Court

Document:

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized). STEIN, J., writing for a unanimous Court. This appeal concerns the New Jersey Fair Automobile Insurance Reform Act (FAIRA), N.J.S.A. 17:33B-1 to -63, enacted in 1990 to reform and repair the State's troubled automobile insurance system by repaying the substantial debt of the Joint Underwriting Association (JUA) and replacing the JUA with a workable distribution of the automobile insurance market. The JUA was created in 1983 to provide automobile insurance to drivers rejected by the voluntary insurance market. The specific questions presented in this appeal are whether R.J. Gaydos Insurance Agency, Inc. (Gaydos) has an implied right of action under FAIRA to assert a claim against National Consumer Insurance Company (NCIC), and whether Gaydos can assert a common-law cause of action for breach of the implied duty of good faith and fair dealing when that claim is based solely on allegations that NCIC violated FAIRA. In 1989, to help insurance companies comply with FAIRA's mandate, the New Jersey Voluntary Private Passenger Automobile Insurance Pool (Pool) was formed. NCIC was then created to write insurance policies for the Pool and act as the primary insurer of those policies. By 1995, NCIC had incurred significant losses and determined that in order to remain solvent, it needed to slow its volume of new business. To meet that goal, NCIC decided to terminate forty agents; the first twenty agents were scheduled to be terminated in May 1995, and the second twenty were scheduled to be terminated in June 1995. Schumacher Associates was among those scheduled to be terminated in June 1995. That agency was owned by Edward Schumacher who acquired Gaydos in 1996. After its own investigation, the Department of Banking and Insurance (DOBI) approved in May 1995 NCIC's termination plan. In 1995, several insurance companies decided to leave the Pool. In response, NCIC devised a plan for depooling and moving forward as an independent insurance company. Prior to authorizing NCIC's depooling plan, DOBI required that NCIC submit a five-year business plan to explain how it would function as a stand-alone company with a disproportionate share of urban-based insurance policies and agents. NCIC provided such a plan that, among other things, relied on the expectation that terminations would result from agents' failure to comply with their agency agreements usually evidenced by a lack of cooperation or poor quality of service. The plan was approved by DOBI to be effective August 1996. In less than a year as an independent company, NCIC was in dire financial straits, requiring that it implement its business plan to terminate ten agents in 1997 in order to reduce the volume of new applications and slow the company's losses. NCIC claimed that in making its determination of which agents to terminate, it did consider the agent's volume of applications but did not consider as material factors the agent's geographical area or loss ratio. Internal memoranda did not support that assertion. On April 6, 1997, NCIC sent a notice of termination to Schumacher, the owner of Gaydos. NCIC stated that Gaydos's termination was due to the 600% increase in its volume of new applications. On receiving notice, Schumacher did not file a complaint with DOBI. Shortly thereafter, NCIC asked that DOBI suspend the obligation to take all comers pursuant to a provision in FAIRA that prohibits insurers from denying or limiting coverage to otherwise eligible insureds. A rate increase previously requested by NCIC had not been acted on by DOBI and NCIC claimed that the suspension of the take all comers provision was necessary for it to remain solvent. DOBI denied the request in February 1998. Thereafter, NCIC requested that DOBI approve its withdrawal from the State because of the lack of any kind of financial relief. In June 1998, procedures were put in place for NCIC to cease its operations in the State. In June 1997, Gaydos filed in the Chancery Division a complaint against NCIC alleging, among other things, tortious interference with contract and breach of the implied obligation of fair dealing because NCIC wrongly terminated its agency agreement with Gaydos in violation of FAIRA. Gaydos sought an injunction against the termination because Gaydos wrote only NCIC policies and would be forced out of business. The trial court granted Gaydos's motion and preliminarily enjoined NCIC from terminating Gaydos's agency agreement. After a four-day trial, the trial court granted NCIC's motion for an involuntary dismissal, finding NCIC's termination to be fair and reasonable. On appeal, the Appellate Division remanded the matter back to the trial court for additional fact-finding. In December 1999, the trial court reaffirmed its decision that NCIC was not substantially motivated by loss ratio or geographic location when it decided to terminate Gaydos. On appeal, a divided panel of the Appellate Division reversed, holding that NCIC violated FAIRA because it terminated its agency relationship with Gaydos because that agency generated a high volume of high loss ratio policies. The court remanded the matter back to the Law Division for trial. NCIC appeals as of right based on the dissent in the Appellate Division. HELD: FAIRA does not confer a private right of action to Gaydos to pursue its FAIRA allegations against NCIC. However, Gaydos can assert a common-law claim that NCIC breached the implied duty of good faith and fair dealing when NCIC terminated its agency agreement with Gaydos. 1. This appeal focuses on FAIRA's take all comers provision as well as the provision that prohibits insurers from reducing an agent's compensation and commissions based on the geographic location of an agent's business. The Legislature empowered the Commissioner of DOBI to enforce FAIRA's provisions and penalize those who violate the Act. There are statutory penalties as well as potential monetary penalties and reimbursement for costs of investigation and prosecution. (Pp. 17-22) 2. To determine if a statute confers an implied private right of action, courts consider whether: 1) plaintiff is a member of a class for whose special benefit the statute was enacted; 2) there is any evidence that the Legislature intended to create a private right of action under the statute; and 3) it is consistent with the underlying purpose of the legislative scheme to infer the existence of such a remedy. New Jersey courts have generally declined to infer a private cause of action in statutes where the statutory scheme contains civil penalty provisions; this applies in the context of insurance statutes where there is no discernable legislative intent to authorize a private cause of action in a statutory scheme that already contains civil penalty provisions. (Pp. 22-30) 3. The implied duty of good faith and fair dealing is inherent in a contract even if a contract implicates a statute that does not confer a private right of action. (Pp. 30-34) 4. FAIRA does not provide a private right of action for an agent to pursue a claim that it was wrongly terminated as a result of an insurer's alleged FAIRA violations. First, insurance agents are not members of the class for whose special benefit FAIRA was enacted. The legislative history is clear that the goal of FAIRA was to benefit insureds, not insurance agents. The primary purpose of the take all comers provision is to assure that all eligible drivers have access to car insurance; it was not adopted to protect insurance producers. Moreover, the Legislature did not intend to confer a private right of action to the insurance agent. Rather, enforcement of FAIRA's provisions is vested with the Commissioner. Lastly, such a right is inconsistent with the underlying purpose of the Act and could undermine the State's ability to properly regulate automobile insurance. (Pp. 35-38) 5. Although the contract between Gaydos and NCIC permitted either party to terminate the contract on ninety-days notice, there nevertheless exists an implied obligation to perform in good faith. In view of the strong legislative expression obligating agents to provide automobile insurance coverage to all eligible persons, and prohibiting diminution of the agents' compensation because their policies prove to be unprofitable, to permit agents to be subject to termination because of their compliance with FAIRA would be contrary to the Legislature's intent. DOBI is the appropriate entity to enforce FAIRA's provisions and to determine how they should operate in the context of other statutory schemes regulating the automobile industry. Thus, on remand, the Law Division should transfer this matter to DOBI to determine whether NCIC violated FAIRA when it terminated Gaydos in 1997. Because the Court is unpersuaded that DOBI performed a complete investigation of this issue, DOBI is cautioned not to rely on previous findings but to consider the matter anew. (Pp. 38-43) JUSTICES COLEMAN, LONG, VERNIERO, and ZAZALLI join in JUSTICE STEIN'S OPINION. CHIEF JUSTICE PORITZ and JUSTICE LAVECCHIA did not participate. R.J. GAYDOS INSURANCE AGENCY, INC., t/a SCHUMACHER ASSOCIATES, Plaintiff-Respondent, v. NATIONAL CONSUMER INSURANCE COMPANY, THE ROBERT PLAN CORPORATION, THE ROBERT PLAN OF NEW JERSEY and LION INSURANCE COMPANY, Defendants-Appellants, and JOHN DOES 1-200, Defendants. Argued March 27, 2001 -- Decided June 28, 2001 On appeal from and certification to the Superior Court, Appellate Division, whose opinion is reported at 331 N.J. Super. 458 (2000). Alan E. Kraus argued the cause for appellants (Riker, Danzig, Scherer, Hyland & Perretti, attorneys; Mr. Kraus, Robert J. Schoenberg and R.N. Tendai Richards, on the briefs). Richard A. Grodeck argued the cause for respondent (Feldman Grodeck, attorneys). Thomas P. Weidner submitted a brief on behalf of amicus curiae Insurance Council of New Jersey (Windels, Marx, Lane & Mittendorf, attorneys; Mr. Weidner and David F. Swerdlow, on the brief). Susan Stryker submitted a brief on behalf of amici curiae American Insurance Association and National Association of Independent Insurers (Sterns & Weinroth, attorneys; Ms. Stryker and Mitchell A. Livingston, on the brief). The opinion of the Court was delivered by STEIN, J. This appeal involves New Jersey's Fair Automobile Insurance Reform Act (FAIRA), N.J.S.A. 17:33B-1 to -63, a comprehensive legislative initiative that was enacted in 1990 to reform New Jersey's automobile insurance system. The questions presented in this appeal are whether plaintiff, R.J. Gaydos Insurance Agency, Inc. (Gaydos), has an implied private right of action under FAIRA to assert a claim against defendant, National Consumer Insurance Company (NCIC), and whether Gaydos can assert a common-law cause of action for breach of the implied duty of good faith and fair dealing when that claim is based solely on allegations that NCIC violated FAIRA. The Appellate Division did not address whether FAIRA authorizes a private right of action by an insurance agent. Rather, a divided panel of the Appellate Division held that NCIC violated FAIRA because it terminated Gaydos based on its large volume of high loss ratio policies, in violation of N.J.S.A. 17:33B-15 and N.J.S.A. 17:33B-18b, and remanded to the Law Division to address Gaydos's tortious interference with contract and related claims. R.J. Gaydos Ins. Agency, Inc. v. National Consumer Ins. Co., 331 N.J. Super 458, 475, 478 ( 2000). NCIC appeals to this Court as of right. R. 2:2-1(a)(2). For decades the New Jersey Legislature has attempted to reform the State's automobile insurance system to provide coverage to high-risk drivers. Prior to 1983, those drivers who had been unable to procure insurance coverage in the voluntary market received coverage through an Assigned Risk Plan, N.J.S.A. 17:29D-1, pursuant to which the Commissioner apportioned high- risk drivers among all insurers doing business in New Jersey. Thereafter, in 1983 the Legislature adopted the New Jersey Automobile Full Insurance Availability Act, N.J.S.A. 17:30E-1 to -24, to replace the assigned risk system. That Act contemplated that motorists who were rejected by the voluntary market would receive coverage at standard market rates through the statutorily-created Joint Underwriting Association (JUA). When the JUA was operational, insurers could apply to become servicing carriers for the JUA and bear administrative responsibility for collecting premiums and arranging coverage. However, the agreements between the JUA and servicing carriers provided that the claims and liabilities of the JUA would be borne by the JUA independently, and the servicing carriers were to be insulated from such claims and liabilities. The primary objective of the JUA and the Act was to create a more extensive system of allocating high-risk drivers to carriers, and through the JUA, to provide such drivers with coverage at rates equivalent to those charged in the voluntary market. State Farm Mut. Auto. Ins. Co. v. State, 124 N.J. 32, 41 (1991). We set forth the embattled history of the JUA in State Farm, supra, and we need not reiterate those facts here. See In re Commissioner of Insurance's March 24, 1992 Order, 132 N.J. 209, 212-13 (1993) (describing how JUA was more complex than Assigned Risk Plan). We note only that by 1990 the JUA had accumulated a financial deficit of over $3.3 billion in unpaid claims and other losses, and that the JUA was insuring over fifty percent of New Jersey's drivers. State Farm, supra, 124 N.J. at 42. To repay the JUA's debt and replace the JUA system with a workable distribution of the automobile insurance market, the Legislature in 1990 enacted FAIRA to dismantle the JUA and return its automobile insurance business to the private marketplace. Because a primary objective of FAIRA was to transfer JUA insureds to private insurance companies, FAIRA required every insurer operating in New Jersey to absorb a certain quota of JUA policyholders in proportion to the size of their existing book of business or, in the alternative, to appoint agents in urban territories. Under FAIRA, the individual insurance companies were permitted to decide the manner and method by which they serviced their depopulation quotas. In 1989, Robert Wallach, Chief Executive Officer of the Robert Plan Corporation (RPC), devised a plan to help insurance companies comply with that mandate. RPC enlisted seventeen independent insurance companies conducting business in New Jersey to form a pool, designated the New Jersey Voluntary Private Passenger Automobile Insurance Pool (Pool). NCIC was then created to write insurance policies for the Pool and act as the primary insurer of those policies, and the members of the Pool were required to reinsure those policies. RPC, as NCIC's holding company and ultimate parent, administered the Pool by providing underwriting, data processing, and claims handling services. By participating in the Pool, the insurance companies were told that the Department of Banking and Insurance (DOBI or Department) would give them credit for 1) their . . . [share] of the Fair Act depopulation quotas for their percentage of the Pool; 2) the demographic/geographic distribution of brokers and insureds involved/insured within the policy base; 3) a flow through of any Assigned Risk credits generated by [NCIC's] class/territorial writings; 4) credits applicable against their . . . obligations to contract with eligible producers whose sole or primary market is the JUA/MTF; and 5) any profits or losses generated by the Pool. From its inception, NCIC incurred substantial losses. NCIC's pure loss ratio, the percentage derived by dividing incurred losses, exclusive of operating costs, by premiums received, was over 100%. The following chart demonstrates those losses: Year Losses Pure Loss Ratio Regardless of whether FAIRA confers an implied private right of action, Gaydos argues that it has a common-law cause of action because NCIC breached the implied common-law duty of good faith and fair dealing when it refused to take all comers, in violation of N.J.S.A. 17:33B-15, and when it penalized Gaydos because of the geographic location from which its automobile insurance policies originated, in violation of N.J.S.A. 17:33B- 18b. As a general rule, we have recognized that every contract in New Jersey contains an implied covenant of good faith and fair dealing. See Wilson v. Amerada Hess Corp., No. A-86, 2 001 WL 664234, at *3 (N.J. June 14, 2001); Sons of Thunder v. Borden, Inc., 148 N.J. 396, 420 (1997); Pickett v. Lloyd's, 131 N.J. 457, 467 (1993); Onderdonk v. Presbyterian Homes, 85 N.J. 171, 182 (1981); Bak-A-Lum Corp. v. Alcoa Bldg. Prods., Inc., 69 N.J. 123, 129-30 (1976); Association Group Life, Inc. v. Catholic War Veterans, 61 N.J. 150, 153 (1972); Palisades Properties, Inc. v. Brunetti, 44 N.J. 117, 130 (1965). See Restatement (Second) of Contracts 205 (stating [e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement ). In some cases where the parties have reached an agreement, the implied obligation of good faith provides the necessary consideration for the agreement. 2 Corbin on Contracts 5.27 (1995). In addition, a court may impose such a condition on grounds of fairness and justice. Where fairness and justice require, even though the parties to a contract have not expressed an intention in specific language, the courts may impose a constructive condition to accomplish such result when it is apparent that it is necessarily involved in the contractual relationship. Palisades Properties, supra, 44 N.J. at 130. Furthermore, implied covenants and terms of a contract are as effective components of the agreement as those expressed. Aronsohn v. Mandara, 98 N.J. 92, 100 (1984). Our Court has determined that the implied duty of good faith and fair dealing means that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the full fruits of the contract; in other words, in every contract there exists an implied covenant of good faith and fair dealing. Association Group Life, supra, 61 N.J. at 153. See 13 Williston on Contracts 38:15 (4th ed. 2000) (stating that an implied covenant of good faith and fair dealing means that neither party will do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract ). The Restatement explains further that [g]ood faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party. Restatement (Second) of Contracts 205, comment a (1981). See Wilson, supra, 2 001 WL 664234 at *4-7 (discussing implied covenant of good faith and fair dealing in various contexts and noting that its meaning has been the subject of considerable analysis ). The implied duty of good faith and fair dealing is inherent in a contract even if a contract implicates a statute that does not confer a private right of action. In Pickett v. Lloyd's, 131 N.J. 457, 467 (1993), the Court considered whether an insurance carrier's failure to pay collision damage benefits to an insured could be a basis of an action for damages. In deciding if an insurance carrier had a duty to exercise good faith in processing the insured's claims, the Court looked to the Insurance Trade Practices Act, N.J.S.A. 17:29B-1 to -14, that prohibits unfair trade practices by insurance companies. Based on its review of that statute, the Court acknowledged that it did not provide for a private cause of action or any other remedy not contained in the Act. Nonetheless, the Court concluded: Although the regulatory framework does not create a private cause of action, it does declare state policy and we do not think that finding a cause of action for the breach of the duty of good faith and fair dealing would conflict with that policy. As modified, we affirm the judgment of the Appellate Division and remand the matter to the Law Division for further action consistent with this opinion. JUSTICES COLEMAN, LONG, VERNIERO, and ZAZZALI join in JUSTICE STEIN's opinion. CHIEF JUSTICE PORITZ and JUSTICE LaVECCHIA did not participate. NO. A-53 R.J. GAYDOS INSURANCE AGENCY, INC., t/a SCHUMACHER ASSOCIATES, Plaintiff-Respondent, v. NATIONAL CONSUMER INSURANCE COMPANY, THE ROBERT PLAN CORPORATION, THE ROBERT PLAN OF NEW JERSEY and LION INSURANCE COMPANY, Defendants-Appellants. DECIDED June 28, 2000 Justice Stein