Opinion ID: 1548590
Heading Depth: 3
Heading Rank: 3

Heading: Substantiality of the impairment

Text: Having found that the Act impairs the petitioners' contracts, we next consider whether the impairment is substantial. See Furlough, 135 N.H. at 633, 609 A.2d 1204. Although the United States Supreme Court has provided little specific guidance as to what constitutes a substantial contract impairment, Baltimore Tchrs. Un. v. Mayor, Etc. of Baltimore, 6 F.3d 1012, 1017 (4th Cir.1993), cert. denied, 510 U.S. 1141, 114 S.Ct. 1127, 127 L.Ed.2d 435 (1994), [t]otal destruction of contractual expectations is not necessary for a finding of substantial impairment, Energy Reserves Group, 459 U.S. at 411, 103 S.Ct. 697. The severity of an impairment of contractual obligations can be measured by the factors that reflect the high value the Framers placed on the protection of private contracts. Contracts enable individuals to order their personal and business affairs according to their particular needs and interests. Once arranged, those rights and obligations are binding under the law, and the parties are entitled to rely on them. Furlough, 135 N.H. at 633, 609 A.2d 1204 (quotation omitted). The degree of the Act's impairment of the contracts is particularly pertinent because [t]he severity of the impairment measures the height of the hurdle the state legislation must clear. Minimal alteration of contractual obligations may end the inquiry at its first stage. Severe impairment, on the other hand, will push the inquiry to a careful examination of the nature and purpose of the state legislation. Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 245, 98 S.Ct. 2716, 57 L.Ed.2d 727 (1978) (footnote omitted). We recognize that the determination of whether a contract impairment is substantial may be influenced by whether the contracting parties relied on the abridged contract right. [W]here the right abridged was one that induced the parties to contract in the first place, a court can assume the impairment to be substantial. Fraternal Order of Police, 645 F.Supp.2d at 510 (quotation omitted). The trial court found that [t]he JUA has offered an assessable and participating policy approved by the Commissioner since its inception with no hint in the record that anyone had ever intended otherwise. The State does not contest this ruling, nor does it contend that any factual dispute exists regarding the participating nature of the policies. Neither does the State assert on appeal that the policyholders did not rely on the participating nature of the policies. Thus, under the circumstances of this case, whether any particular policyholders relied upon the participating nature of the policies is not relevant to our analysis. In determining whether contract impairment is substantial, some courts look to whether the subject matter of the contract has been the focus of heavy state regulation. See, e.g., Energy Reserves Group, 459 U.S. at 413, 103 S.Ct. 697. If so, further regulation might be foreseeable and, thus, any change to the contract caused by such regulation would not necessarily constitute a substantial impairment. See, e.g., Mercado-Boneta v. Admin. del Fondo de Compensacion, 125 F.3d 9, 13-14 (1st Cir.1997). However, standing alone, a history of regulation is never a sufficient condition for rejecting a challenge based on the contracts clause. Chrysler Corp. v. Kolosso Sales, Inc., 148 F.3d 892, 895 (7th Cir.1998), cert. denied, 525 U.S. 1177, 119 S.Ct. 1113, 143 L.Ed.2d 109 (1999); see also Mercado-Boneta, 125 F.3d at 14 n. 7 (Contract Clause analysis would be enervated if the mere fact of regulation meant there was always foreseeability of more regulation and thus no substantial impairment.). The simple fact that insurance is a heavily regulated industry does not preclude a conclusion that the Act substantially impairs the policyholders' vested contract rights to share in the JUA earnings. The policyholders did not purchase[] into an enterprise already regulated in the particular to which [they] now object[]. Veix v. Sixth Ward Bldg. & Ln. Assn., 310 U.S. 32, 38, 60 S.Ct. 792, 84 L.Ed. 1061 (1940). The State cites no provision of the regulatory scheme in place prior to the passage of the Act that would suggest that private insureds should anticipate the transfer of monies retained by their insurer into the state's general fund. Neither the JUA policies, nor the insurance regulations incorporated in the policies, make reference to any governmental reservation of power to amend the rights and obligations established by the assessable and participating policies. On the contrary, the policyholders' contracts expressly entitle them to participate in the JUA's earnings, and the regulations incorporated into their contracts likewise leave no potential outlet for the accumulated funds other than application against future assessments, or distribution to the policyholders. Although insurance is a heavily regulated industry, the record does not reflect a basis in law for the policyholders to expect that the funds in which they have a beneficial interest would be transferred from the JUA into the general fund. In Furlough, we held that a legislative requirement that certain public employees be furloughed would constitute a substantial impairment because such a requirement impairs the very heart of an employment contract: the promise of certain work for certain income. Its impact would likely wreak havoc on the finances of many of the affected workers. . . . Furlough, 135 N.H. at 634, 609 A.2d 1204. We have also found substantial impairment of contract rights by the legislature's retroactive repeal of a statute permitting municipalities to contractually set alternatives to tax obligations where such action resulted in an additional tax burden of nearly $40,000 to a plaintiff. Lower Village Hydroelectric Assocs., 147 N.H. at 77, 782 A.2d 897; see also State v. Vashaw, 113 N.H. 636, 637-38, 312 A.2d 692 (1973) (The underlying policy of this prohibition is to prevent the legislature from interfering with the expectations of persons as to the legal significance of their actions taken prior to the enactment of a law.). Here, we conclude that the Act substantially impairs the policyholders' contract rights for at least two reasons. First, the Act effectively eliminates the participating character of the policies, thus changing the very nature of the contracts. The effect of the Act is to dramatically reduce, if not eliminate, the policyholders' rights to a fundamental contractual benefitsharing in any excess surplus funds created by their premium payments. Second, the Act divests the JUA board of its obligation to the policyholders to treat any excess surplus for their benefit, including protecting against insolvency. As the JUA advised the trial court, The JUA can only comfortably state today that it has earned a profit or lost money in 1986, 1987 and 1988. It is incumbent on the JUA to protect the policyholders in the interim to maintain adequate surplus and defend those claims that may yet arise by keeping funds available for those uncertainties, both legally and in terms of the market.. . . [The board maintains] this conservative sense of the need . . . to make sure that there are funds there available. . . that there are sufficient funds within our own capital to fulfill the purpose of the JUA. The trial court recognized the importance of a JUA surplus, including its impact on the policyholders, finding: The assessable nature of their policies and consistent regulations point to the present benefit provided by any excess surplus. The surplus guards against having insufficient assets to cover JUA obligations which would have to be covered by assessments against policyholders and members. Taking JUA funds would decrease investment earnings which are important to the JUA's ability to meet operating costs and malpractice claims. The retention of, and access to, large sums of capital is critical to the function of any insurance plan. As the United States Supreme Court has observed: These pension plans, like other forms of insurance, depend on the accumulation of large sums to cover contingencies. The amounts set aside are determined by a painstaking assessment of the insurer's likely liability. Risks that the insurer foresees will be included in the calculation of liability, and the rates or contributions charged will reflect that calculation. The occurrence of major unforeseen contingencies, however, jeopardizes the insurer's solvency and, ultimately, the insureds' benefits. Drastic changes in the legal rules governing pension and insurance funds, like other unforeseen events, can have this effect. Allied Structural Steel, 438 U.S. at 246-47, 98 S.Ct. 2716 (quotation and brackets omitted). We note that it is not clear that the $110 million in fact represents excess surplus. However, whether some or all of the $110 million constitutes excess surplus is not dispositive of our analysis. Rather, the substantial character of the impairment flows, in part, from the fact that the Act contravenes the JUA board's contractual responsibility to its policyholdersthat is, to determine whether any excess surplus should be applied against future assessments or distributed to the policyholders. In sum, we conclude that the Act substantially impairs the policyholders' contract rights because it effectively eliminates the participating character of the policies and divests the board of its obligation to treat any excess surplus funds for the policyholders' benefit.