Court Opinion

ID: 9614895
Source: CourtListenerOpinion
Date Created: 2023-08-22 04:29:31.820167+00
Date Added: 2024-06-11T18:03:40.281290
License: Public Domain

EUBANK, Judge
(dissenting).
I dissent. It is my opinion that the Arizona Insurance Guaranty Association Act, A.R.S. § 20-661 to § 20-675, as added by the Laws of 1970, Chapter 78, is unconstitutional under several provisions of the Arizona Constitution: (1) Article 4, Part 2, Section 19, Clause 13 which prohibits the legislature from enacting a special law granting to any corporation or association a “special or exclusive privileges, immunities or franchises”; (2) Article 14, Section 2 which requires that corporations be created under general law and not special law; (3) Article 2, Section 13 which requires that all corporations, other than municipal, have equal privileges or immunities; (4) Article 9, Section 1 which prohibits the surrender, suspension or contracting of the power of taxation; (5) Article 9, Section 7 which prohibits the state from loaning its credit in aid of, or making any donation or grant by subsidy or otherwise, to a corporation or association. In addition, the Act constitutes an unlawful delegation of legislative power and is void for that reason. Article 3 and Article 4, Part 1, Section 1. Finally, it violates Article 4, Part 2, Section 13 which requires that the subject of an Act be expressed in its title.
The legislature has created a “non-profit association”, known as the Arizona Insurance Guaranty Association, whose Charter and Articles consist of statutes (A.R.S. § 20-661 to § 20-675) and a “plan of operation” (A.R.S. § 20-665) drawn up by its members, which mandatorally consist of all general insurance companies doing business in Arizona, i. e., regulated by the state, and which plan is approved by the Director of Insurance. The business of the association is conducted by a “board of directors” in whom the “powers” of the association are vested. The board of directors consists of from five to nine representatives of the member insurance companies selected by the companies and approved by the Director. The purpose of the act is:
“. . . to provide a mechanism for the payment of covered claims under certain insurance policies to avoid excessive delay in payment and to avoid financial loss to claimants or policyholders because of the insolvency of an insurer, *463to assist in the detection and prevention of insurer insolvencies, and to provide an association to assess the cost of such protection among insurers.” (Laws 1970, Ch. 78, § 1).
The funds required for this purpose are provided for by granting the Board of Directors the power to “assess member insurers separately” for all of the expenses of the association and all claims arising from the insolvency of an insurance company.
A.R.S. § 20-664(B) empowers the association to:
“1. Appear in, defend, and appeal any action on a claim brought against the association.
2. Employ or retain such persons as are necessary to handle claims and perform other duties of the association.
3. Borrow funds necessary to effect the intent of this article in accord with the plan of operation.
4. Sue or be sued.
5. Negotiate and become a party to such contracts as are necessary to carry out the intent of this article.
6. Perform such other acts as are necessary or proper to effectuate the intent of this article.
7. Refund to the member insurers in proportion to the contribution of each member insurer to that account that amount by which the assets of the account exceed the liabilities, if, at the end of any calendar year, the board of directors finds that the assets of the association in any account exceed the liabilities of that account as estimated by the board of directors for the coming year.”
While A.R.S. § 20-665(C) requires that the “plan of operation” shall:
“1. Establish the procedures whereby all the powers and duties of the association pursuant to § 20-664 will be performed.
2. Establish procedures for handling assets of the association.
3. Establish the amount and method of reimbursing members of the board of directors under § 20-663.
4. Establish procedures by which claims may be filed with the association and establish acceptable forms of proof of covered claims. Notice of claims to the receiver or liquidator of the insolvent insurer shall be deemed notice to the association or its agent and a list of such claims shall be periodically submitted to the association or similar organization in another state by the receiver or liquidator.
5. Establish regular places and times for meetings of the board of directors.
6. Establish procedures for records to be kept of all financial transactions of the association, its agents, and the board of directors.
7. Provide that any member insurer aggrieved by any final action or decision of the association may appeal to the director within thirty days after the action or decision.
8. Establish the procedures whereby selections for the board of directors will be submitted to the director.
9. Contain additional provisions necessary or proper for the execution of the powers and duties of the association.”
In addition, A.R.S. § 20-664(A) authorizes the association to:
“4. Investigate claims brought against the association and adjust, compromise, settle, and pay covered claims to the extent of the association’s obligation and deny all other claims.
5. Notify such persons as the director directs pursuant to paragraph 1 of subsection A of § 20-666.
6. Handle claims through its employees or through one or more insurers or other persons designated as servicing facilities. Designation of a servicing facility is subject to the approval of the director, but such designation may be declined by a member insurer.
*4647. Reimburse each servicing facility for obligations of the association paid by the facility and for expenses incurred by the facility while handling claims on behalf of the association and shall pay the other expenses of the association authorized pursuant to this article.”
Further, the association is “exempt from payment of all fees and all taxes levied by this state or any of its subdivisions,” A.R. S. § 20-671. (Emphasis added); and immunity from suit is granted everyone involved in the business of the association. (A.R.S. § 20-673).
The State Insurance Director, who is charged with the regulation of the insurance business in Arizona, has only a nominal role in the association with very little voice in its operation. After the directors are appointed and the plan of operation approved by the director, his duties consist of approving the appointment of new directors, when a vacancy occurs, and the duties required by A.R.S. § 20-666, as follows:
“A. . . .
1. Notify the association of the existence of an insolvent insurer not later than three days after he receives notice of the determination of the insolvency.
2. Upon request of the board of directors, provide the association with a statement of the net direct written premiums of each member insurer.
B. The director may:
1. Require that the association notify the insureds of the insolvent insurer and any other interested parties of the determination of insolvency and of their rights under this article. Such notification shall be by mail at their last known address, where available, but if sufficient information for notification by mail is not available, notice by publication in a newspaper of general circulation shall be sufficient.
2. Suspend or revoke, after notice and hearing, the certificate of authority to transact insurance in this state of any member insurer which fails to pay an assessment when due or fails to comply
with the plan of operation. As an alternative, the director may levy a fine on any member insurer which fails to pay an assessment when due. Such fine shall not exceed five per cent of the unpaid assessment per month, except that no fine shall be less than one hundred dollars per month.
3. Revoke the designation of any servicing facility if he finds claims are being handled unsatisfactorily.
C. Any final action or order of the director under this article shall be subject to review as provided in article 2, chapter 1, title 20.”
The Act provides for no other state executive branch control. For example, the association is not subject to state "budgetary or fiscal controls; it is not subject to audit by the Auditor General; its rules and regulations do not have to be reviewed at a public hearing and then filed with the Secretary of State; it does not have to comply with the Administration Procedure Act or the Public Meeting Act; its officers and employees are not public officers or public employees and do not come under the extensive body of law providing for their protection and the protection of the public. In short, the association has the best of both worlds — it is a “non-profit association”, operating under a special state charter with a “built-in” membership, performing a state function with funds collected under state law, and performed without regard to the restraints imposed on state agencies by law.
In my opinion, you cannot read Chapter 78, Laws of 1970, without concluding that the legislature intended and did create a very special corporation indeed! What other non-profit corporation or association has the statutory attributes and special advantages heretofore noted; what other non-profit corporation or association could enter competition in the market place with the Arizona Insurance Guaranty Association?
Another way to illustrate the unconstitutionality or “special nature” of this type of *465association is to look at Title 32, A.R.S., and visualize the same organization created by Chapter 78, extended to each of the state agencies listed therein. For example, Realtors and the Real Estate Recovery Fund (A.R.S. § 32-2101 et seq.) ; Funeral Directors (A.R.S. § 32-1301 et seq.) ; Contractors (A.R.S. § 32-1101 et seq.) etc. If the various constitutional limitations on the power of the legislature, referred to above, don’t apply to the association in question, then when would they ever apply; if they don’t apply here they are meaningless and legislature is free, like Congress under its broad grant of powers under the United States Constitution to create special “public” corporations, to create special corporations for any public purpose.
The only reported cases involving the appellee that I am aware of are Arizona Insurance Guaranty Association v. Humphrey, 109 Ariz. 284, 508 P.2d 1146 (1973), Cooper Claims Service, Inc. v. Arizona Insurance Guaranty Association, 22 Ariz. App. 156, 524 P.2d 1329 (1974), and Treffenger v. Arizona Insurance Guaranty Association, 22 Ariz.App. 153, 524 P.2d 1326 (1974), wherein the constitutionality of the association’s structure was not raised. The only question raised in Humphrey was: “Does the Arizona Insurance Guaranty Act, § 20-661 et seq., A.R.S. give the association the right to recover unearned commissions from agents of an insolvent insurance company in those cases wherein the unearned premiums have been paid by the association to the insurers ?” The Supreme Court answered the question in the negative, holding that the Director of Insurance was entitled to the unearned premiums. In reaching this conclusion the court described the association as follows:
“. . . The legislation gave the association the power to assess and receive funds from insurance companies doing business in the State of Arizona, and to reimburse members of the public who would be injured by virtue of the insolvency of insurance companies doing business in this State. The purpose of
the act as stated in Art. 6 of Title 20, Insurance, is as follows:
‘The purpose of this act is to provide a mechanism for the payment of covered claims under certain insurance policies to avoid excessive delay in payment and to avoid financial loss to claimants or policyholders because of the insolvency of an insurer, to assist in the detection and prevention of insurer insolvencies, and to provide an association to assess the cost of such protection among insurers.’
§ 20-664, subsec. A, par. 2 provides: ‘A. The association shall:
2. Be deemed the insurer to the extent of its obligation on the covered claims and to such extent shall have all rights, duties, and obligations of the insolvent insurer as if the insurer had not become insolvent.’
§ 20-661, subsec. 3 reads as follows:
‘ “Covered claim” means an unpaid claim, including one for unearned premium, which arises out of and is within the coverage of an insurance policy to which this article applies * * * ’
It is not questioned that the plaintiff, Arizona Insurance Guaranty Association, is liable under this statute to the varied insureds of Liberty Universal Insurance Company for the full value of the unearned premiums due to the insureds, as this would be an obligation arising out of and ‘within the coverage’ of the insurance policy issued by the. insolvent company.
It is the contention of the Arizona Insurance Guaranty Association, however, that since it is required to pay to the insureds the unearned premiums that it is entitled to the unearned commissions on said unearned premiums.” (109 Ariz. at 285, 286, 508 P.2d at 1147, 1148)
The Supreme Court recognized that Chapter 78, Laws of 1970, imposed liability *466on the association, but the fact that it also imposes liability on the “member insurer”, by assessment, in the proportion that the net direct written premiums of the member insurer for the past year bears to the net direct written premiums of all member insurers for the past year, was not raised or discussed. (A.R.S. § 20-664(A)3). This power in the association is similar to that granted to the State Compensation Fund under A.R.S. § 23-983. In the latter instance, however, state fiscal controls and audit are provided for and the executive branch of government is utilized to implement the public purpose. Cooper Claims Service dealt only with the recovery of independent adjusters’ fees from the association, while Treffenger held that the association was not liable under the provisions of a particular insurance policy.
This logically leads to the objection that the assessment power of the association represents a delegation by the legislature of the power to impose a premium tax. This simply cannot be done under our law. Cf. Home Builders Association of Central Arizona, Inc. v. Riddel, 109 Ariz. 404, 510 P.2d 376 (1973). A reading of A.R.S. § 20-664(A)3 shows that the association assesses a premium tax (a transaction privilege tax) on each member insurer on the basis of claims and expenses, and that upon non-payment the member insurer may be barred from transacting insurance business in the State of Arizona. See A.R.S. § 20-666 (B) 2. In addition, if the assessment would cause the member insurer’s financial statement to reflect amounts of capital or surplus below the minimum amounts required for a certificate of authority by any jurisdiction in which the member insurer is authorized to transact business, “the association may exempt or defer, in whole or in part, the assessment of any member insurer”, A.R.S. § 20-664(A)3. This obviously favors weak members over strong members and would place an unequal burden on them. In this regard the “classification” of the tax is constitutionally questionable. Cf. Apache County v. Atchison, Topeka & Santa Fe Railway Co., 106 Ariz. 356, 476 P.2d 657 (1970).
Another disability is the title to Chapter 78, Laws of 1970, which gave no hint to a legislator that he was creating a non-profit association and clothing it with all of the powers referred to above. The title reads:
“Relating to insurance; Establishing a plan for the payment of claims under certain insurance policies to avoid excessive delay in payment and financial loss to claimants or policyholders because of insolvency of insurer; Providing a method of detection and prevention of insurer insolvencies; Amending Title 20, Chapter 3, Arizona Revised Statutes, by adding Article 6; Amending Sections 20-230 and 20-443, Arizona Revised Statutes, and amending Title 20, Chapter 3, Article 4, Arizona Revised Statutes, by adding Section 20-646.”
Article 4, Part 2, § 13 of the Arizona Constitution provides:
‘•‘Every Act shall embrace but one subject and matters properly connected therewith, which subject shall be expressed in the title; but if any subject shall be embraced in an Act which shall not be expressed in the title, such Act shall be void only as to so much thereof as shall not be embraced in the title.”
I believe that the title would have been sufficient if administration of the Act had been vested in the State Insurance Director. However, such was not the case. Instead, a new special agency was created by Chapter 78 to perform a valid state function and this creature of statute was the “subject” of the Act. The title merely states the purpose of the Act, and is therefore defective. Compare the title upheld in Board of Regents v. Sullivan, infra.
Finally, Board of Regents v. Sullivan, 45 Ariz. 245, 42 P.2d 619 (1935) is not authority for approval of the special corporate form of the association. The justification for upholding the Educational Institutions Act of 1934 in Sullivan is Article *46711, Section 2 of the Arizona Constitution, which specifically requires the legislature to create such agencies by law.
For the foregoing reasons, and those stated in appellant’s brief, I must dissent.