Opinion ID: 2309224
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Heading: A. History and Overview of the Reform Act

Text: A basic familiarity with the events and circumstances that prompted passage of the Reform Act, as well as an appreciation of the Act's anticipated impact on the private-passenger automobile-insurance market, are essential prerequisites to an informed evaluation of the validity of the Commissioner's order. The Act's background and objectives are described comprehensively in State Farm Mutual Automobile Insurance Co. v. State, 124 N.J. 32, 590 A. 2d 191 (1991), in which this Court sustained the constitutionality of the Reform Act against a facial challenge. We revisited the subject in In re Department of Insurance's Order Nos. A-89-119 and A-90-125, 129 N.J. 365, 371-374, 609 A. 2d 1236 (1992), also filed today. Rather than summarize the critical developments that led to the Reform Act, we draw on Justice Handler's careful explanation in our State Farm opinion: For years, New Jersey's system of automobile insurance regulation, like those of many other states, has faced an intractable problem of providing coverage for high-risk drivers. Prior to 1983, drivers who could not obtain coverage directly from insurers in the voluntary market were insured through an Assigned Risk Plan ( N.J.S.A. 17:29D-1), under which the Commissioner of Insurance apportioned high-risk drivers among all auto insurers doing business in New Jersey. In 1983, the Automobile Full Insurance Availability Act, N.J.S.A. 17:30E-1 through -24, replaced the assigned-risk system with the New Jersey Automobile Full Insurance Underwriting Association, commonly known as the Joint Underwriting Association or JUA. All insurers licensed to write automobile insurance in New Jersey were required to be members of the JUA. The objective of the new scheme 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.   . The JUA, a good deal more complex than the prior Assigned Risk Plan, worked as follows. Insurers (and subsequently certain qualified non-insurer entities) could apply to become servicing carriers, which would bear administrative responsibility for collecting premiums, arranging coverage, and the like, and which would receive fees for such services from the JUA. However, the statute, the Plan of Operation, and the agreements between the JUA and servicing carriers all provided that claims and liabilities of the JUA would be borne by it independently; servicing carriers were to be insulated from such claims and liabilities. Because the JUA insured high-risk drivers but also required that their rates be the same as voluntary-market rates (see N.J.S.A. 17:30E-13), it was anticipated that premium revenues would not cover costs of claims against JUA policies. Therefore, in addition to normal premium income, the JUA was also given income from Department of Motor Vehicle surcharges for moving violations and drunken driving convictions, policy flat charges, and residual market equalization charges, or RMECs, to be added to policy rates for voluntary-market insureds. N.J.S.A. 17:30E-8. Thus, the JUA was a system in which the insurance costs of high-risk drivers were subsidized by the imposition of fees on segments of the general population of motorists. The JUA was supposed to be operated on a no-profit, no-loss basis, with RMECs increased or decreased as needed to accomplish that result. However one may view the objectives of the JUA, the system did not achieve its goals. More and more drivers became unable to procure voluntary-market coverage, until by 1988 over 50% of New Jersey drivers had to be insured through the JUA. Claims against JUA insureds were sizeable and greatly exceeded the JUA's available income. Despite the imposition of substantial RMECs from 1988 through 1990, the JUA nonetheless accumulated a deficit of over $3.3 billion in unpaid claims and other losses. Automobile insurance reform, including the reduction of the cost of insurance, and particularly some plan for eliminating the unwieldy JUA, repaying its debt, and replacing it with a more workable distribution of the automobile insurance market, became a priority for the Legislature and the executive branch in 1990. By March of that year the Reform Act had been adopted. The principal goals of the Act were to reduce insurance costs for most New Jersey drivers, to depopulate the JUA by switching insureds to the voluntary market, and to create a funding mechanism to pay off the JUA debt. To these ends, the Act provided that the JUA would cease writing or renewing policies as of October 1, 1990. The depopulation of the JUA would be accomplished by classifying insured drivers into three categories: (1) high-risk drivers in the (revived) Assigned Risk Plan (10% of the market); (2) non-standard risk drivers, who would be insured by private insurers directly, but who could be charged rates up to 135% of those of standard risks (15% of the market); and (3) standard-risk, voluntary-market insureds covered at prevailing rates (the remaining 75% of the market). Presumably, the higher rates now to be charged high-risk and non-standard risk drivers should bring the premium income on such coverage in line with actual costs, and this coverage would no longer be subsidized. There remains, however, the problem of how to pay off the JUA's prior accumulated debt of over $3.3 billion; this, too, is addressed by the Reform Act. The Act creates the New Jersey Automobile Insurance Guaranty Fund (Auto Fund), a separate fund within the State Treasury, to collect and disburse the various payments designed to pay off the JUA debt. Reform Act, Section 23; N.J.S.A. 17:33B-5. The Act assigns to the Auto Fund certain sources of income that under the prior scheme went to the JUA, e.g., surcharges for driving violations and drunken driving convictions. It also creates new sources of revenue for the Auto Fund, e.g., fees on lawyers, doctors, and auto body repair businesses, higher automobile registration fees, and, most significant in the context of this litigation, the imposition of additional assessments and surtaxes on insurers. The assessments imposed on insurance carriers are collected through the Property Liability Insurance Guaranty Association (PLIGA). Reform Act, Section 74, N.J.S.A. 17:30A-8a(9). PLIGA was created in 1974 to impose assessments on New Jersey property-casualty insurers to pay claims against carriers that had become insolvent. ( L. 1974, c. 17; N.J.S.A. 17:30A-1 through 17:30A-20). The Reform Act requires PLIGA to make additional assessments to be applied exclusively to the JUA debt. These assessments, denominated by the Act as loans, are paid into the Auto Fund. N.J.S.A. 17:30A-8a(10). They are to be set at rates designed to net $160 million per year for eight years (1990 through 1997); for 1990, the assessments represented 2.7% of net premiums of the property-casualty insurers. Section 75 of the Reform Act, N.J.S.A. 17:30A-16, addresses recoupment from policyholders of PLIGA assessments both for insolvencies and for the JUA bailout. Insurers have always been permitted to pass through the insolvency assessments to policyholders. The insolvency passthrough originally was accomplished by rate increases, but in 1979 the method was changed to direct surcharges on policy premiums. The surcharges for insolvency assessments continue to be authorized under the Reform Act. N.J.S.A. 17:30A-16a. However, the Act expressly prohibits such surcharges to recover the new assessments for the JUA bailout. Section 75b states: No member insurer shall impose a surcharge on the premiums of any policy to recoup assessments paid pursuant to [the provision requiring assessments to be loaned to the Auto Fund]. [ N.J.S.A. 17:30A-16b.] In addition to the new assessments, the Reform Act, Section 76, imposes a special surtax on insurers to go toward the JUA bailout. N.J.S.A. 17:33B-49. This surtax is a greater amount, 5% of net premiums, but is imposed for a shorter period (only three years, 1990, 1991 and 1992), than the assessments. The additional surtax is designed to net a total of $300,000,000 over the three-year period into the Auto Fund. Reform Act, Section 77, N.J.S.A. 17:33B-50. Because the objective is to secure $300 million in net proceeds, the 5% surtax rate can be adjusted, depending upon the amount of insurers' net premiums. The 5% rate cannot be exceeded, and it is theoretically possible that the Director of Taxation could lower the rate; but such a lowering could occur only if automobile insurance net premiums increased significantly, a highly unlikely event given both the supposed premium-reducing effects of the Act and current market conditions. The Reform Act, Section 78, addresses the question of whether the additional surtaxes can be charged to consumers: The Commissioner of Insurance shall take such action as is necessary to ensure that private passenger automobile insurance policyholders shall not pay for the surtax imposed pursuant to section 76. [ N.J.S.A. 17:33B-51.] [124 N.J. at 40-45, 590 A. 2d 191 (citations omitted).] In State Farm, the insurers had argued that those provisions of the Reform Act that prohibited the passthrough to policyholders of the assessments and surcharges imposed by the Act to pay off the JUA's $3.3 billion indebtedness would necessarily cause the insurers to operate at a loss and thus be deprived of a constitutionally-adequate rate of return. We noted, however, that Section 2g of the Act, N.J.S.A. 17:33B-2g, which had been added by an amendment introduced when the Reform Act was before the Assembly Appropriations Committee, specifically provided that insurers `are entitled to earn an adequate rate of return' through the ratemaking process. 124 N.J. at 57-58, 590 A. 2d 191. We also observed that emergency regulations adopted by the Commissioner while the State Farm litigation was pending established a new procedure to afford rate relief to insurers that could demonstrate that payment of the surtaxes and assessments had denied them a fair rate of return. Id. at 59-61, 590 A. 2d 191. Hence, we rejected the facial challenge to the constitutionality of the Reform Act because we were satisfied that the regulatory provisions for rate relief and the legislative assurance of a fair rate of return demonstrated that the passthrough prohibitions of Sections 75 and 78 of the Act do not necessarily preclude all insurers from earning a fair rate of return. Id. at 61-62, 590 A. 2d 191. We also note in passing our recent interpretation of the statutory flex-rateincrease provisions, N.J.S.A. 17:29A-44, which allow insurers to raise rates without prior regulatory approval. We held that the Commissioner's statutory authority to modify the statewide average rate change does not authorize any reduction in the three-percentage-point rate increase authorized by statute. Department of Ins.'s Order Nos. A-89-119 and A-90-125, supra, 129 N.J. at 367, 609 A. 2d 1236.