Opinion ID: 1548590
Heading Depth: 3
Heading Rank: 2

Heading: Impairment of Contractual Relationship

Text: Next, we must determine whether the Act constitutes a change in law that impairs the contractual relationships between the policyholders and the JUA. We note that the trial court, after detailed analysis, concluded that the JUA is not a state entity. We need not, however, determine whether its conclusion was correct. Our examination of the policyholders' contract rights is not contingent upon the JUA's status as either a public or private entity, since Contract Clause protections apply in either case. See, e.g., In re Grand Jury Subpoena (Issued July 10, 2006), 155 N.H. at 564, 926 A.2d 280 (Generally, the State and Federal Contract Clauses prohibit the adoption of laws that would interfere with the contractual arrangements between private citizens. (quotation, ellipsis and brackets omitted)); Furlough, 135 N.H. at 635-36, 609 A.2d 1204 (holding that individuals' contracts with the State are protected under the Contract Clause); Eckles v. State of Oregon, 306 Or. 380, 760 P.2d 846, 853 (1988), appeal dismissed, 490 U.S. 1032, 109 S.Ct. 1928, 104 L.Ed.2d 400 (1989); Fraternal Order of Police v. Prince George's Cty., 645 F.Supp.2d 492, 508 (D.Md.2009) (the Contract Clause applies to private and public contracts alike). Generally, the construction of a written contract is a question of law for this court. Riblet Tramway Co. v. Stickney, 129 N.H. 140, 146, 523 A.2d 107 (1987) (quotations omitted). When interpreting contracts, the intent of the parties is determined based upon an objective reading of the agreement as a whole. Contractual language is construed according to its common meaning, and this court will give a contract the same meaning as would a reasonable person. Id. (citations omitted). In this case, the relevant language in each policy is clear and unambiguous. The title of each is either LIABILITY POLICY (Assessable and Participating), or GENERAL LIABILITY POLICY (Assessable and Participating). Each policyholder's right to participate in excess earnings is also explicitly set out in the body of the policy, which provides that each insured shall participate in the earnings of the [JUA], to such extent and upon such conditions as shall be determined by the board of directors of the [JUA] in accordance with law and as made applicable to this policy. We note that participating policies in other contexts have in common a policyholder's entitlement to share in the company's excess surplus. See, e.g., Prairie States Life Ins. Co. v. United States, 828 F.2d 1222, 1223 (8th Cir.1987) (Although taxpayer is a stock insurance company, it issues `participating' policies which, like the policies issued by mutual insurance companies, entitle the policyholders to participate in distributions from the annual divisible surplus of the company.); Ohio State Life Insurance Company v. Clark, 274 F.2d 771, 773 (6th Cir.), cert. denied, 363 U.S. 828, 80 S.Ct. 1599, 4 L.Ed.2d 1523 (1960) (Mutual plan policies are `participating' policies in that... such policies are entitled to share in the profits of the company to the extent that such profits are apportioned from time to time to the respective mutual plan policies by the company's Board of Directors.); Gulf Life Ins. Co. v. United States, 35 Fed.Cl. 12, 13 (1996), aff'd, 118 F.3d 1563 (Fed.Cir.1997) ([A] participating policy has a higher stated premium than the nonparticipating policy for the same insurance, but the policyholder expects to receive premium rebates in the form of policyholder dividends. These dividends are returned to policyholders based on the company's experience or the discretion of its management.). The policyholders' insurance contracts are, therefore, by both their titles and their content, assessable and participating, expressly obligating the policyholders to pay premium assessments in the event an underwriting deficit exists at the end of any fiscal year and, conversely, entitling the policyholders to participate in the earnings of the JUA. The nature of the policyholders' participation in JUA earnings is qualified by the phrase to such extent and upon such conditions as shall be determined by the board of directors of the [JUA] in accordance with law and as made applicable to this policy. The law that was in effect at the time the policies were issued, and that was incorporated into the policies by reference, includes the JUA regulations. Those regulations define the obligations of the contracting parties. See Worthen Co. v. Kavanaugh, 295 U.S. 56, 60, 55 S.Ct. 555, 79 L.Ed. 1298 (1935) (To know the obligation of a contract we look to the laws in force at its making.); Blaisdell, 290 U.S. at 429-30, 54 S.Ct. 231 ([T]he laws which subsist at the time and place of the making of a contract, and where it is to be performed, enter into and form a part of it, as if they were expressly referred to or incorporated in its terms. (quotation omitted)); Eckles, 760 P.2d at 858 n. 18 (No law can impair the obligation of future contracts because the laws in existence when a contract is formed define the obligation of that contract.). The regulations provide that, in the event of an excess surplus, the board shall authorize the application of such excess in one or both of the following ways: (1) Against and to reduce future assessments of the association; or (2) Distribute the excess to such health care providers covered by the association as is just and equitable. N.H. Admin. Rules, Ins 1703.07(d). These regulations, incorporated into the participating policies, provide no other alternative to the JUA board for disposition of any excess surplus JUA funds. We find that the language of the policies and regulations, taken together, confers upon the policyholders a vested contractual right in the treatment of any excess surplus. The policies entitle the policyholders to participate in the earnings of the [JUA] and the incorporated regulations mandate the board's application of excess funds in one or both of two specified ways: either against future assessments, or distribution to the policyholders. Under either option, the policyholders have a direct financial interest, and not a mere expectancy, in any excess surplus. Thus, the policyholders have a vested right not necessarily in the distribution of the funds, but in the treatment of the funds for their benefit. Importantly, the policyholders' vested rights are beneficial, rather than possessory. While a beneficial interest is defined as a right or expectancy in something (such as a trust or an estate), as opposed to legal title to that thing, Nordic Inn Condo. Owners' Assoc. v. Ventullo, 151 N.H. 571, 575-76, 864 A.2d 1079 (2004) (quotation, brackets and emphasis omitted), such interest may, nonetheless, constitute a vested property right, subject to protection, see, e.g., Ohio State Life Insurance Company, 274 F.2d at 777 (holding that policyholders had a vested contract right to the beneficial interest in the surplus of the issuing non-mutual insurance company); Chu, 569 N.Y.S.2d 364, 571 N.E.2d at 679 (finding a vested property right in the subject fund where the governing statute provided that the monies would either remain in the fund to accumulate interest or be distributed to the contributors). Here, the policyholders' interest in any JUA excess surplus is vested and not contingent: either they benefit from the surplus by its reinvestment for application against future assessments; or they benefit from the surplus by receipt of a dividend. The significance of the policyholders' beneficial, rather than possessory, rights is twofold. First, because the policyholders' vested rights are in the treatment of any surplus funds for their benefit, but not necessarily in the distribution of such funds, the JUA board and the commissioner have the ability to protect against any undermining of the private market that could potentially result from immediate distribution. See N.H. Admin. Rules, Ins 1702.04, 1703.11(a); RSA 404-C:2, II (2006). Second, because the beneficial rights in the treatment of any excess surplus are contract rights, those rights vested in the policyholders upon issuance of their policies under the regulatory plan in place at that time, and are not contingent upon the declaration of a dividend, as argued by the State. We draw support for our conclusion that the policyholders' beneficial contract rights are vested from the New York Court of Appeals' analysis in Methodist Hospital of Brooklyn v. State Insurance Fund, 64 N.Y.2d 365, 486 N.Y.S.2d 905, 476 N.E.2d 304 (1985), appeal denied, 474 U.S. 801, 106 S.Ct. 32, 88 L.Ed.2d 26 (1985), as contrasted to its analysis in Chu, 77 N.Y.2d 573, 569 N.Y.S.2d 364, 571 N.E.2d 672. In Methodist Hospital, the court upheld the transfer of $190 million from the state insurance fund to the state's general fund, concluding that, because the state alone was liable for the payment of claims upon that fund, because the policyholders had no responsibility to contribute to losses, and because the payment of dividends to policyholders was discretionary, the policyholders had no property or contract rights in the assets or earnings of the fund. Methodist Hosp., 486 N.Y.S.2d 905, 476 N.E.2d at 309-10; see also Chu, 569 N.Y.S.2d 364, 571 N.E.2d at 677. In Chu, however, where the legislation at issue diverted monies to the general fund in contravention of prior statutes which provided that income earned on new contributions to the fund would be either returned to the contributors or credited toward future contributions, id. at 675, the court found the newly enacted law constituted an unconstitutional taking of vested property rights. Id. at 679. The facts of this case distinguish it from Methodist Hospital and align it with Chu. Here, the JUA must satisfy claims out of its own assets and the State bears no liability for any deficit. N.H. Admin. Rules, Ins 1703.07(a). As the trial court found, All of the money in the JUA fund has come from assessments of members, premiums paid by policyholders, and investment earnings. The State did not financially contribute to the creation of the JUA and has not contributed any funds since that time. It noted that [i]f the JUA runs a deficit, as was the case in 1985, the members and policyholders are assessed to make it up. The State is not responsible for any JUA shortfalls and does not guarantee performance of JUA obligations. Further, the JUA regulations, rather than conferring discretion, mandate one or both of two options for application of any excess surplus, both of which inure to the policyholders' direct financial benefit. Compare N.H. Admin. Rules, Ins 1703.07(d), with Methodist Hosp., 486 N.Y.S.2d 905, 476 N.E.2d at 309. Thus, the plan here constitutes a nearly identical regulatory framework to that at issue in Chu. In re Certified Question, 447 Mich. 765, 527 N.W.2d 468, to which the State attempts to analogize this case, is not only distinguishable, but in fact supports our conclusion as to the policyholders' vested rights. In that case, the plaintiff-policyholders of the state accident fund alleged that they had a property right to income from the sale of the accident fund, and that an act transferring all of the consideration for the sale to the general fund was, therefore, unconstitutional. In re Certified Question, 527 N.W.2d at 470. The Supreme Court of Michigan upheld the constitutionality of the legislation. Id. The facts of Certified Question, however, are significantly different from the facts here. First, although the Certified Question plaintiffs also had contracts with the accident fund, they alleged impairment of an asserted contract with the state, relying upon a statute to establish the contract provisions. Id. at 473-74. Here, the policyholders' rights arise directly from their contracts with the JUA. Further, the Certified Question plaintiffs relied upon an alleged implied contract right to surplus, in the absence of any contractual language entitling them to such surplus. Id. at 476. Here, the policyholders' participating policies expressly provide that the policyholders shall participate in the earnings of the company as the board determines, and the board's discretion is limited by regulation. Most significantly, the Certified Question court held, Absent an explicit expression of the Legislature's intention that premiums collected and not used to pay liabilities either would earn interest or be refunded, we cannot read [the subject legislative provisions], either separately or together, as so promising. Id. at 477. In contrast, the plan before us provides such explicit regulatory expression. We are not persuaded by the State's argument that the policies did not create vested rights because they are subject to applicable law, which may be changed. The three cases on which the State relies in support of its position, Bowen v. Public Agencies Opposed to Social Security Entrapment, 477 U.S. 41, 106 S.Ct. 2390, 91 L.Ed.2d 35 (1986), Rhode Island Higher Education Assistance Authority v. Secretary, U.S. Department of Education, 929 F.2d 844 (1st Cir.1991), and Tancredi v. Metropolitan Life Insurance Company, 149 F.Supp.2d 80 (S.D.N.Y.2001), aff'd, 316 F.3d 308 (2d Cir.2003), are all distinguishable. Each involved constitutional, statutory, or contractual provisions explicitly providing that the regulatory scheme was subject to change. Bowen, 477 U.S. at 44, 106 S.Ct. 2390 (Congress expressly reserved to itself `[t]he right to alter, amend, or repeal any provision of 'the Act. 42 U.S.C. § 1304.); Rhode Island Higher Educ., 929 F.2d at 847 (the subject agreements each stated that the parties shall be bound by all changes in the Act or regulations in accordance with their respective effective dates); Tancredi, 149 F.Supp.2d at 88 ([T]he Constitution of the State of New York specifically reserves to the Legislature the right to alter laws under which corporations originally were formed and thus constitutes notice that corporate charters may be amended by statute). By contrast, the JUA policies provide: 8. Changes. Notice to any agent or knowledge possessed by any agent or by any other person shall not effect a waiver or a change in any part of this policy...; nor shall the terms of this policy be waived or changed, except by endorsement issued to form a part of this policy, signed by a duly authorized representative of the company. Nor do the regulations, incorporated into the policies, make reference to any governmental reservation of power to amend the obligations established by the plan or the policies. The State points to the provision in RSA chapter 400-A delegating to the commissioner the full power and authority to make, promulgate, amend and rescind reasonable rules and regulations for ... the administration or effectuation of any provision of the title governing insurance in general. RSA 400-A:15, I (2006). However, this legislative delegation of authority to the commissionerto make, amend and rescind insurance regulationsdoes not vitiate the binding nature of the regulations incorporated into the JUA policies, or constitute notice to the policyholders that their contracts with the JUA are subject to any law other than the law in effect at the time of the issuance of their policies. In Rhode Island Higher Education, the court explained the basis for its holding that a statute imposing conditions upon reimbursement to reserve funds did not constitute an unconstitutional taking: The public nature of the reserve funds themselves, coupled with the express contractual reservation of the power to amend the terms of the [federal student loan] program and the fact that the legislative changes involve a comprehensive federal/state social welfare program, forecloses a finding that the state agencies have obtained unalterable vested property rights to certain payments. Rhode Island Higher Educ., 929 F.2d at 851 (quotation and brackets omitted). By contrast, the JUA policies, including the incorporated regulations, contain no provision indicating that they are subject to amendment by the legislature. Further, the policyholders here are private parties and not state agencies. Moreover, the Act is not part of a comprehensive federal/state social welfare program; rather, it targets only one discrete fund for transfer to the general fund. We appreciate the generally broad powers of the legislature to change, modify and repeal existing law, and to enact new laws. Goldman, 151 N.H. at 773, 868 A.2d 278. However, in light of the constitutional prohibition against retrospective laws, such legislative power is not without restriction. Unless otherwise inhibited by either the State or Federal Constitutions, the Legislature may change existing laws, both statutory or common, at its pleasure, but in so doing, it may not deprive a person of a property right theretofore acquired under existing law. Those rights are designated as vested rights, and to be vested, a right must be more than a mere expectation based on an anticipation of the continuance of existing law; it must have become a title, legal or equitable, to the present or future enforcement of a demand, or a legal exemption from the demand of another. Id. at 774, 868 A.2d 278 (quotation omitted). This doctrine reflects the deeply rooted principles that persons should be able to rely on the law as it exists and plan their conduct accordingly and that the legal rights and obligations that attach to completed transactions should not be disturbed. Chu, 569 N.Y.S.2d 364, 571 N.E.2d at 678 (citation omitted). Therefore, we conclude that, contrary to the State's assertion, the provisions of the regulations in effect at the time of the issuance of the policyholders' policies, and incorporated into the obligations of those contracts, may not be changed retroactively unless such change survives constitutional scrutiny. Because the policyholders paid for and received participating policies, incorporating the regulations in effect at the time, their beneficial interest in the treatment of any JUA excess surplus vested upon the issuance of their policies. The Act, diverting $110 million of purportedly excess surplus, thus impairs their contracts with the JUA.