State Farm Mutual Automobile Insurance Company v. New Jersey

High-risk drivers who cannot obtain car insurance through the voluntary market—the market private insurers voluntarily assume—form a residual market. In New Jersey prior to 1983, drivers in the residual market were insured though an assigned-risk plan. The Commissioner of Insurance apportioned these drivers to insurers doing business in the state. In 1983, New Jersey replaced that system with the Joint Underwriting Association (JUA). The goal was to both allocate high-risk drivers to insurers and to provide high-risk drivers with voluntary-market-equivalent rates. Shifting costs to the general driving public, the JUA was given income from (1) Department of Motor Vehicle surcharges for moving violations and drunken-driving convictions; (2) policy flat charges; and (3) residual market equalization charges (RMECs), which were added to policy rates for those in the private market. Over 50 percent of New Jersey drivers ended up being insured under the JUA. Although the JUA was supposed to be operated on a no-loss basis, even with substantial RMECs, it accumulated a deficit of over $3.3 billion in unpaid claims and other losses. To address these issues, New Jersey adopted the Fair Automobile Insurance Reform Act of 1990. The goals were to reduce insurance costs for most drivers, depopulate the JUA, and create a fund to pay off the JUA debt. The fund would receive income that formerly went to the JUA as well as create new sources of revenue including fees on lawyers, doctors, and auto-body-repair businesses, and higher vehicle-registration fees. The debt-repayment plan also included imposing new assessments and surtaxes on insurers. Section 75 of the act prevented insurers from imposing any surcharges on premiums to recoup these assessments. Section 78 similarly prohibited a separate surtax from being charged to consumers. The statute Section 2g, however, mandated that insurers were entitled “to earn an adequate rate of return through the ratemaking process.” The act also had many other safety-valve provisions that applied if an insurer were at risk of unsound financial conditions and were implemented by regulations allowing for rate relief. Insurers including State Farm Mutual Automobile Insurance Company (State Farm) (plaintiffs) challenged the facial constitutionality of the act. The insurers argued that New Jersey (defendant) violated the Fourteenth Amendment Due Process Clause, the Fifth Amendment Takings Clause, and analogous state-constitution provisions by depriving them of a constitutionally adequate rate of return. The superior court chancery division issued a preliminary injunction, which the appellate division stayed. State Farm filed a motion for direct certification, to the New Jersey Supreme Court, which was granted.