IN THE MATTER OF THE DEPARTMENT OF INSURANCE‘S ORDER NOS. A89-119 AND A90-125 AND THE ADOPTION OF N.J.A.C. 11:3-16A.
Argued May 4, 1992-Decided July 29, 1992.
609 A.2d 1236
Thomas P. Weidner argued the cause for respondent State Farm Mutual Auto Insurance Co. (Jamieson, Moore, Peskin & Spicer, attorneys; Thomas P. Weidner and Deborah T. Poritz, of counsel; Thomas P. Weidner, Deborah T. Poritz, and Arthur F. Herrmann, on the briefs).
The opinion of the Court was delivered by
O‘HERN, J.
The central issue in this appeal is whether the Legislature intended, through its “flex-rate” provisions, to allow insurers to implement, without prior approval, a minimum annual increase of three percent in private-passenger automobile-insurance rates as an incentive to the restructuring of the automobile-insurance market. The flex-rate provisions,
The interpretive issue is whether the proviso that allows the Commissioner to modify the Statewide average rate change whenever “either or both of the published [CPI] indices will produce rate levels which are excessive,”
I
For purposes of this appeal, we adopt generally the statement of the case as set forth in the State‘s petition for certification. At issue are administrative orders entered in 1989 and 1990 by the Commissioner that set forth the amounts by which private-passenger automobile insurers in the voluntary market may increase their rates under the flex-rate statute,
On May 12, 1989, the Commissioner issued Administrative Order A89-119, which prescribed the maximum flex-rate increases that could be implemented by insurers on or after July 1, 1989. In that Order, the Commissioner noted two categories
With respect to physical-damage coverage, the Commissioner noted that all insurers use vehicle series/symbol group rating systems, and that most insurers also use model/year rating systems when calculating physical-damage premiums. Such rating systems, according to the Commissioner, provide built-in increases to physical-damage premiums each year. Were the insurers permitted flex-rate increases in physical-damage coverage, those who use vehicle series/symbol group rating systems alone or along with model/year systems would have rates that are excessive.
Taking those factors into consideration, the Commissioner prescribed the following maximum flex rates for 1989:
| (1) Personal Injury Protection | 9.8% |
| (2) Bodily Injury (verbal threshold) | 4.9% |
| (3) Bodily Injury (zero threshold) | 9.8% |
| (4) Property Damage | 9.8% |
| (5) Physical Damage (with model/year ratings) | 0.0% |
| (6) Physical Damage (without model/year ratings) | 2.6% |
State Farm Mutual Automobile Insurance Company and State Farm Fire and Casualty Company (State Farm) filed a notice of
Hence, on February 15, 1990, the Commissioner responded by adopting flex-rate regulations that set forth his methodology and reasoning. See
The Commissioner promulgated a second Administrative Order, A90-125, on May 24, 1990, which established the following maximum flex rates for 1990:
| (1) Personal Injury Protection | 11% |
| (2) Bodily Injury (verbal threshold) | 5.5% |
| (3) Bodily Injury (zero threshold) | 11% |
| (4) Property Damage | 11% |
| (5) Physical Damage (with model/year ratings) | 0.0% |
| (6) Physical Damage (without model/year ratings) | 1% |
Because loss-trend data continued to show that losses on verbal-threshold policies were one-half as great as losses on zero-threshold policies, the Commissioner had set the maximum flex
State Farm presented three arguments before the Appellate Division: (1) that the Commissioner is authorized by statute to establish only two flex rates: one for personal-injury protection, residual bodily-injury and property-damage coverage, and one for physical-damage coverage; (2) that the Commissioner does not have the authority to modify the flex rate below three percentage points; and (3) that the Commissioner‘s 1989 and 1990 flex-rate orders are “devoid of any factual basis.”
The Appellate Division, in an unreported per curiam opinion, sustained the Commissioner‘s use of six different categories of flex-rate increases, as set forth in
We granted the Commissioner‘s petition for certification, 127 N.J. 565, 606 A.2d 376 (1992),1 and now affirm in part and reverse in part.
II
To put the issues in perspective, we must first step back to get a broad view of the status of automobile-insurance reform in New Jersey. For that purpose, we generally draw on portions of our recent decision in State Farm Mutual Automobile Insurance Co. v. State, 124 N.J. 32, 590 A.2d 191 (1991), and the observations contained in the Commissioner‘s March 24, 1992 Decision and Order concerning rate filing by the Market Transition Facility of New Jersey.
Since 1972, our State has required that New Jersey automobile owners purchase automobile-liability insurance coverage to protect the public from the personal and financial injury that may result from operation of their vehicles.
When the Legislature enacted compulsory automobile insurance in 1972, New Jersey established an Assigned Risk Plan,
Thus, automobile-insurance reform had become an increasingly-important item on the legislative agenda. Reducing the portion of the market insured by the JUA, or the “depopulation” of the residual market, had been identified by the Legislature as a crucial step toward stabilizing the automobile-insurance market. Those legislative concerns resulted in the enact-
On September 8, 1988, Governor Thomas H. Kean signed the Automobile Insurance Reform proposal, whose major provisions included the creation of a no-fault verbal-threshold option, a mandated decrease in the JUA population over four years, increased rates in the JUA, and the creation of flex rating. In his message to the Legislature with respect to the Reform Act, Governor Kean stated that
[a]utomobile insurance has been a top priority of mine for years. It is a subject which, although endlessly debated, has eluded resolution. The recommendations which follow are the product of lengthy negotiations between the leadership of the Senate and the Assembly. These negotiations resulted in a compromise agreement between the parties on all the important issues. [Governor‘s Reconsideration and Recommendation Statement, Senate No. 2637, L. 1988, c. 119 (emphasis added).]
The Governor stated further that he was pleased that an agreement could be reached with regard to JUA reform, noting that the bill had provided for depopulation of the JUA over a four-year period. The Governor emphasized that
[t]he bill * * * gives the [insurance] industry rate flexibility as an incentive to depopulate the JUA and as a mechanism to promote competition in the industry. The bill is tied to a tough Excess Profits Law * * *; this [Excess Profits Law] will ensure that the industry does not abuse this rate-making flexibility and that any rate increase is justified. [Ibid. (emphasis added).]
The Reform Act authorized the Commissioner to establish mandatory depopulation quotas in an attempt to reduce the number of drivers insured by the State. Combined with the plans for depopulation of the JUA was the enactment of the optional verbal-threshold provision,
The flex-rate system was enacted to serve three purposes: (1) to accomplish the depopulation of the JUA; (2) to encourage competition within the insurance industry; and (3) to address the needs of the private-passenger automobile voluntary market. L. 1988, c. 119, § 29, 1988 N.J. Sess. Law Serv. at 658
The FAIR Act of 1990 went beyond the 1988 Reform Act in several respects. L. 1990, c. 8. (codified at
It has become increasingly obvious to the Legislature and the public that * * * one of the principal goals * * * has not been attained: economy. Not only has the cost of the insurance product itself escalated, but the subsidies that most drivers contribute to support the financially-troubled New Jersey Automobile Full Insurance Underwriting Association have made the system a burden, rather than a benefit, to the citizens of the State. [
N.J.S.A. 17:33B-2d .]
Thus, the primary goals of that Act were (1) to lower insurance premiums for most New Jersey drivers, (2) to depopulate the JUA by reintegrating insureds into the voluntary market, and (3) to develop a funding mechanism to pay the more than $3.3 billion JUA debt. State Farm, supra, 124 N.J. at 42, 590 A.2d 191. In essence, the Act proposed to phase-out the JUA by the creation of a Market Transition Facility that would transform the New Jersey automobile-insurance residual market into a (revived) Assigned Risk Plan. The FAIR Act contemplates that the residual market will include no more than ten percent of the total personal-automobile insurance market.
III
With that background, we turn to the specific provisions of the amended legislation.
17:29A-44. Maximum rates
a. Beginning July 1, 1989, a filer may charge rates for private passenger automobile insurance in the voluntary market which are not in excess of the following:
(1) For private passenger automobile personal injury protection coverage, residual bodily injury and property damage insurance, the maximum permissible annual rate increase applicable to each rate level utilized by an insurer in the voluntary market pursuant to section 6 of P.L.1988, c. 156 (C.17:29A-45) shall be a Statewide average rate change of not more than the last published increase in the medical care services components of the national Consumer Price Index, all urban consumers, U.S. city average, plus three percentage points.
(2) For private passenger automobile physical damage coverage, the maximum permissible annual rate increase applicable to each rate level utilized by an insurer in the voluntary market pursuant to section 6 of P.L.1988, c. 156 (C.17:29A-45) shall be a Statewide average rate change of not more than the last published increase in the automobile maintenance and repair components of the national Consumer Price Index, U.S. city average, plus three percentage points.
b. For the purposes of this section, “Statewide average rate change” means the total Statewide premium for all coverages combined at the rates in effect at the time of the filing for each rate level.
c. Any change in excess of the rate changes permitted by paragraphs (1) and (2) of subsection a. shall be subject to the provisions of P.L.1944, c. 27 (C.17:29A-1 et seq.).
d. If, at any time, the commissioner believes that an increase in either or both of the published indices will produce rate levels which are excessive, he may modify the Statewide average rate change which may be used pursuant to this section.
Those flex-rate increases are expressly exempt from the statutory provisions governing formal rate-increase applications, which require the Commissioner‘s prior approval. See
The State argues that the Appellate Division thus erroneously reasoned that the Commissioner could modify only one component of the composite Statewide average rate change. In the State‘s view, the plain language of
The Legislature wants to see if the market will work. If, as the State argues, the use of flex rates will inevitably produce excessive profits for the industry, by definition the industry should start competing within itself. Insurers that are making a profit without the three-percent increase might believe that they can gather a more significant portion of the market in that way. If market forces do not work, the Commissioner has the power to act.
In addition, we must confront the fact that the State has placed significant emphasis on the availability of flex rating to sustain the FAIR Act. In State Farm, supra, 124 N.J. 32, 590 A.2d 191, we reviewed the constitutional validity of that legislation. We noted there that the State confronts the problem of how to pay off the JUA‘s prior accumulated debt of over $3.3 billion. Id. at 43, 590 A.2d 191. That Act imposed surtaxes and assessments on insurers’ premiums. Because the FAIR Act directed the Commissioner to take such action as he deemed necessary to ensure that policyholders did not pay for either the surtaxes or assessments, we had to consider whether the Act facially precluded insurers from earning a fair rate of return. In arguing for an integrated view of automobile-insurance reform, the State pointed out that “carriers can increase their income through available ‘flex-rate’ increases, which permit insurers to raise rates by amounts related to increases in certain components of the Consumer Price Index without prior regulatory approval.” State Farm, supra, 124 N.J. at 55, 590 A.2d 191.
Even within
To repeat, were we remitted only to the language of
[i]n construing a statute the court‘s primary task is to “effectuate the legislative intent in light of the language used and the objectives sought to be achieved.” Merin v. Maglaki, 126 N.J. 430, 435 [599 A.2d 1256] (1992) (quoting State v. Maguire, 84 N.J. 508, 514 [423 A.2d 294] (1980). “[T]he Court fulfills its role by construing a statute in a fashion consistent with the statutory context in which it appears.” Waterfront Comm‘n v. Mercedes-Benz, 99 N.J. 402, 414 [493 A.2d 504] (1985). In construing legislation “every effort should be made to harmonize the law relating to the same subject matter.” Superior Air Prods. Co. v. NL Indus., 216 N.J. Super. 46, 63-64 [522 A.2d 1025] (App.Div.1987). [Id. at 227, 607 A.2d at 1286.]
As in Donnelley, the State‘s interpretation of the flex-rate provisions is “inconsistent not only with the Legislature‘s intent ‘but also with the entire statutory scheme of which it is part.’ ” Ibid. (quoting Kimmelman v. Henkels & McCoy, 108 N.J. 123, 129, 527 A.2d 1368 (1987)).
Just as we did not read the ban on passthroughs of surtaxes and assessments in a vacuum in State Farm, supra, 124 N.J. at 61-62, 590 A.2d 191, here we may not read the flex-rate provisions in a vacuum. Here, as there, we read the automobile-insurance-industry regulation in its entirety, and we believe that in order to achieve its legislative purposes the Legislature would have intended a minimum degree of flexibility, set at three percent, to encourage depopulation of the JUA and to foster competition in the automobile-insurance industry. Ordinarily, we would be inclined, as is our dissenting member, Justice Handler, to give deference “to the expertise of the Commissioner and his staff,” post at 389, 609 A.2d at 1248, in administering the complexities and intricacies of insurance regulation. We cannot effectively do that here without retracing the steps already taken under an interpretation of the Act that
IV
The remaining issue concerns whether the Commissioner‘s procedure for adopting the administrative orders establishing the maximum flex rates complied with the statutory requirements of the APA. The Appellate Division held that the Commissioner‘s orders were invalid because they had failed to adhere to the notice and comment procedures of the APA,
Resolution of this issue thus turns on whether the Commissioner‘s flex-rate orders are “rules” as contemplated by the APA.
“Administrative rule” or “rule,” when not otherwise modified, means each agency statement of general applicability and continuing effect that implements or interprets law or policy, or describes the organization, procedure or practice requirements of any agency. The term includes the amendment or repeal of any rule, but does not include: (1) statements concerning the internal management or discipline of any agency; (2) intraagency and interagency statements; and (3) agency decisions and findings in contested cases.
This Court‘s decision in Metromedia, Inc. v. Director, Division of Taxation, 97 N.J. 313, 478 A.2d 742 (1984), delineates the appropriate test to be applied when determining whether an
[A]n agency determination must be considered an administrative rule when all or most of the relevant features of the administrative rules are present and preponderate in favor of the rule-making process. Such a conclusion would be warranted if it appears that the agency determination, in many or most of the following circumstances, (1) is intended to have wide coverage encompassing a large segment of the regulated or general public, rather than an individual or a narrow select group; (2) is intended to be applied generally and uniformly to all similarly situated persons; (3) is designed to operate only in future cases, that is, prospectively; (4) prescribes a legal standard or directive that is not otherwise expressly provided by or clearly and obviously inferable from the enabling statutory authorization; (5) reflects an administrative policy that (i) was not previously expressed in any official and explicit agency determination, adjudication or rule, or (ii) constitutes a material and significant change from a clear, past agency position on the identical subject matter; and (6) reflects a decision on administrative regulatory policy in the nature of the interpretation of law or general policy. [Id. at 331-32, 478 A.2d 742.]
All of those factors need not be present for an agency determination to constitute rulemaking, and are to be balanced according to weight, not number. In re Solid Waste Util. Customer Lists, 106 N.J. 508, 518, 524 A.2d 386 (1987).
The Commissioner does not deny that the first three Metromedia factors are implicated here, but argues that the orders “do no more than implement” the flex-rate regulation.
We agree with the Commissioner that once the validity of the underlying regulations has been established, annual orders, such as the second Administrative Order, A90-125, essentially calculate the flex rate by applying the standards set forth in the regulations. Thus, such an order does not “prescribe[] a legal standard or directive that is not otherwise expressly
Not every action of an agency, including informal action, need then be subject to the formal notice and comment requirements of
However, the fact that that agency action is not subject to the strict requirements of
We are satisfied that the standard of review adopted by the Appellate Division, i.e., that the orders be supported by substantial evidence, is consistent with our prior rulings. The Commissioner‘s action here consists not of an entirely discretionary action with respect to the allocation of resources as in Dougherty v. Department of Human Services, 91 N.J. 1, 7, 449 A.2d 1235 (1982), but rather of the application of facts to the law. The Commissioner‘s action seems more closely analogous to quasi-legislative determinations similar to rate-making. In re 1976 Hosp. Reimbursement Rate for William B. Kessler Memorial Hosp., 78 N.J. 564, 577, 397 A.2d 656 (1979) (Handler, J., concurring) (“There should be applied the time-tested precepts of judicial review of administrative action, that agency action proceed upon an evidential foundation and that the grounds of decision be fully revealed.“). One of the core values of judicial review of administrative action is the furtherance of accountability. Thus, an agency is never free to act on undisclosed evidence that parties have had no opportunity to rebut. Brotherhood of R.R. Trainmen v. Palmer, 47 N.J. 482, 487, 221 A.2d 721 (1966); see also Riverside Gen. Hosp. v. New Jersey Hosp. Rate Setting Comm‘n, 98 N.J. 458, 468, 487 A.2d 714 (1985) (“agency must set forth basic findings of fact supported by the evidence and supporting the ultimate conclusions and final determination so that the parties and any reviewing tribunal will know the basis on which the final decision was reached“).
The Appellate Division was concerned that the only sources of support for the orders, in effect, were the 1989 and 1990 orders themselves and the documents relating to
In the present posture of the case, the only prudent course, then, is to affirm the Commissioner‘s 1989 and 1990 orders except to the extent that they would disallow the three-percent flex-rate increase. We specifically decline to address any retroactive or cumulative effect of such a ruling. At a minimum, the Commissioner should first be allowed to address that issue in the regulatory context. Neither he nor the Public Advocate should be deprived of the opportunity to challenge any rate changes implemented pursuant to flex rating either under
The judgment of the Appellate Division is affirmed in part and reversed in part. The 1989 and 1990 flex-rate orders are upheld except to the extent that they withhold the statutory three-percent flex-rate increase.
HANDLER, J., dissenting.
The central issue in this appeal focuses on the scope of the authority of the Commissioner of the Department of Insurance to modify the statutory flex-rate formula for determining premium-rate increases that insurance carriers can obtain without prior departmental approval. The flex-rate formula is prescribed by
The critical statutory text that deals expressly with the Commissioner‘s power to modify the formula does not confine that authority to the CPI component of the formula.
That the terms of the statute do not restrict departmental change of the flex-rate formula to the CPI component or insulate the flat-percentage component of the formula from any change is rather clear. What may be changed is the “statewide average rate.” The Court reaches its conclusion that any change must be limited to the CPI component not so much from the language of the statute as from its perception of the statute‘s legislative history and its understanding of the legislative purpose. Ante at 378, 609 A.2d at 1243.
The history of this statutory provision is relatively scant. One sentence in the legislative material surrounding the passage of
To explain that the Commissioner can modify the statewide average rate only by changing the CPI component of the formula the Court hypothesizes a legislative history that suggests that the flex-rates are virtually an absolute right and therefore not subject to any modification. The Commissioner‘s position, says the Court,
fails to take into account the goals that the Legislature had intended to achieve when enacting the flex-rate provisions. As noted, flex-rating is part of a broad mosaic of continual change in the automobile-insurance rating systems. We cannot help but believe that to return, in essence, to a system of pre-filing will undermine those incentives to depopulate the JUA and the efforts to promote competition in the industry. [Ante at 377, 609 A.2d at 1242.]
The Court acknowledges that excessive rates may occur if no modification of the three percent is permitted. Indeed, it seems to recognize that “the use of flex rate will inevitably produce excessive profits for the industry.” Id. at 377, 609 A.2d at 1242. It nevertheless insists that even though the statute addresses that contingency by empowering the Commissioner to modify the “statewide average rate,” that authority itself does not extend to the CPI component and therefore cannot be used to countermand excessiveness resulting from the flex rate. It concludes, wishfully but somewhat inconsistently, that
In my opinion, an unconstrained reading of the statute, a reasonable interpretation of its legislative history, and a broad understanding of its purposes confirm the correctness of the State‘s position. The legislation, when proposed, was discussed at some length before the Senate Labor, Industry and Professions Committee. If one of the Legislature‘s goals in enacting that bill was to set a minimum three-percent flex-rate increase, or to place the three-percent increase beyond the reach of the Commissioner‘s ability to modify under
Comments in the legislative history concerning limiting the Commissioner‘s discretion appear to relate more to the determination to eliminate the Commissioner‘s discretion in setting the initial maximum flex-rate increase than to his ability to modify it below three percent to prevent excessively high rates. Indeed, during the entire hearing only one reference to the reason for setting the flex rate at three percentage points over the CPI surfaced. That reference was made by Commissioner Merin, who stated that the flex rate was set at three percentage points above the relevant CPI components because the drafters felt that the three percent would offset “the tendency of the factors involved in auto insurance to outpace the CPI.” Testimony of Commissioner Merin, Public Hearing at 17. That testimony would seem to indicate that the three percent was not intended to be separate from the Consumer Price Index, but rather was intended to assure that the flex-rate increases would more effectively match the true increase in the cost of doing business.
It does not follow that when the flex-rate increases exceed the true increases in the cost of doing business and, in fact result in excessive rates, they would be immune from adjustment.
The Court, I submit, fails to appreciate that whether the automatic rate based on the three-percent standard is an excessive one is a highly technical matter calling for the application of the Commissioner‘s special expertise. We have explained the complexities and intricacies of the Reform Act, which provides the context for the Commissioner‘s authority to modify the flex rate. See State Farm, supra, 124 N.J. 32, 590 A.2d 191 (1991). The statutory scheme assures the Commissioner broad powers to achieve the competing goals of the Reform Act. Ibid.; see In re Twin City Fire Ins. Co., 129 N.J. 389, 609 A.2d 1248 (1992). The statute, in my opinion,
I would reverse the judgment below.
For affirmance in part; for reversal in part-Chief Justice WILENTZ, and Justices CLIFFORD, POLLOCK, O‘HERN, GARIBALDI and STEIN-6.
For reversal-Justice HANDLER-1.