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Tuttle v. New Hampshire Medical Malpractice Joint Underwriting Association

January 28, 2010



The opinion of the court was delivered by: Conboy, J.

Argued: October 15, 2009

The State of New Hampshire, the Commissioner of Insurance, and the State Treasurer appeal an order of the Superior Court (McGuire, J.) declaring Laws 2009, 144:1 (the Act) unconstitutional. The Act requires the New Hampshire Medical Malpractice Joint Underwriting Association (JUA) to transfer a total of $110 million to the State's general fund during fiscal years 2009, 2010, and 2011. The trial court ruled that the Act constituted a taking without just compensation in violation of Part I, Article 12 of the State Constitution and the Fifth and Fourteenth Amendments to the Federal Constitution, and that it impaired the petitioners' contract rights in violation of Part I, Article 23 of the State Constitution and Article 1, Section 10 of the Federal Constitution. The trial court also decided that the State had no right to any "excess surplus" funds held by the JUA because the JUA is not a state agency. Because we find that the Act constitutes a retrospective law that results in impairment of contract rights in violation of the New Hampshire Constitution, we affirm.

I. Procedural History

In June 2009, the petitioners, present and past policyholders of the JUA, on their own behalf and on behalf of a purported class of policyholders, filed a petition for a writ of mandamus against the JUA, its board of directors, the New Hampshire Insurance Department (Department) and its commissioner, and for a writ of prohibition against the Department, the New Hampshire State Treasury (Treasury) and the State Treasurer. The petitioners alleged that, pursuant to their contracts with the JUA and certain administrative rules, they had a vested right in any excess surplus premiums collected by the JUA. The Act is based upon the State's assertion that the excess surplus held by the JUA amounted to $110 million.

The request for mandamus asked that the court compel the JUA "to evaluate its current surplus and determine what in its judgment should be declared earnings and returned to the [petitioners]." The request for a writ of prohibition asked that the court prohibit the Department and Treasury "from taking action in furtherance of [their] erroneous interpretation[s] of the insurance contract[s] and [New Hampshire Administrative Rule] Ins 1703.07(d)."

Also in June 2009, the petitioners, on their own behalf and on behalf of a purported class of policyholders, filed a petition for declaratory and injunctive relief against the State of New Hampshire. They asked the court to declare the Act unconstitutional because: (1) it was a retrospective law that substantially impaired their vested contract rights and, therefore, violated Part I, Article 23 of the State Constitution; (2) it constituted a "taking" of property and, thus, violated Part I, Article 12 of the State Constitution and the Fifth and Fourteenth Amendments to the Federal Constitution; (3) it impaired their contracts with the JUA and, thus, violated Article I, Section 10, Clause 1 of the Federal Constitution; and (4) it represented an unconstitutional tax in violation of Part II, Article 5 of the State Constitution. The trial court consolidated the cases.

The parties filed cross-motions for summary judgment. The State argued that the petitioners do not have vested property rights in any excess surplus funds held by the JUA, but have, at most, only an expectancy interest that is contingent upon actions by the JUA's board of directors. The State also asserted that any excess surplus funds belong to the State because the JUA is a state agency. After a hearing, the trial court ruled that the JUA is not a state agency, and that the Act violates both the State and Federal Constitutions because it constitutes a taking of property belonging to the petitioners, and because it impairs their contract rights. This appeal followed.

II. Facts

In 1975, the insurance commissioner determined that professional medical liability insurance was not readily available in the voluntary market, and that the public interest required such availability. See RSA 404-C:1 (2006). Accordingly, the commissioner adopted regulations creating the JUA to provide insurance coverage addressing the public need. See generally N.H. Admin. Rules, Ins 1700 et seq. The regulations also establish the plan of operation (the plan) for the JUA. See id. 1703. The plan has been in place, with some modifications, since 1975.

The JUA "was established to make available medical malpractice insurance for eligible risks." N.H. Admin. Rules, Ins 1701.01 (eff. Dec. 1, 2000, exp. Dec. 1, 2008). An "eligible risk" is "any health care provider operating legally in the state of New Hampshire," other than those who fail to timely pay premiums, have an outstanding judgment due for premiums, or who do not provide the information necessary to effect insurance coverage. N.H. Admin. Rules, Ins. 1703.01(e). Each eligible risk insured by the association must "receive the same level of service as is generally available in the voluntary market." Id. 1702.04. The petitioners, as healthcare providers and current and former JUA policyholders, are such eligible risks.

The JUA is governed by a board of directors. Id. 1703.04. The commissioner is required to "grant the board the authority to exercise all reasonable or necessary powers relating to the operation of the association." Id. 1703.04(l). The authority of the board includes the power to operate and manage JUA funds by investing premiums. Id. 1703.04(p). The actual insuring functions are carried out by a "servicing carrier" chosen by the commissioner from among member insurers or qualifying non-member insurers, and the board itself acts as a servicing carrier if, for any reason, the commissioner does not appoint one. Id. 1703.05(c), 1702.04. The JUA enters into contracts and conducts its business independently of the Governor and Council and of the commissioner. See id. 1703.04(o).

The plan requires all insurers authorized to write liability insurance in the state to be members of the JUA. Id. 1702.01; RSA 404-C:3. All member insurers are required to share in the JUA's premiums, expenses, servicing allowances and losses, based upon their portion of net direct premiums written in the state. Id. 1702.03(a).

The JUA's funding mechanism changed on January 1, 1986, in response to a finding by the commissioner that the JUA did not have sufficient assets to cover claims arising from policies written from 1975 to 1985. Compare id. 1703.07 with id. 1703.08. To cover the deficits incurred prior to 1986, a 15% surcharge was assessed on every medical malpractice liability insurance policy issued in the state beginning in 1986, and continuing until the commissioner should determine that a deficit no longer exists. Id. 1703.08(a), (b), (d). The JUA's reserves accrued, and policies issued, on and after January 1, 1986, are separately accounted for. Compare id. 1703.07 with id. 1703.08. The JUA reserves in question are funded by policy premiums and the interest earned thereon. See id. 1703.07(a), 1703.04(p). The State did not contribute funds to the JUA at the time of its creation, and has made no contributions to it at any other time. The State is not responsible for any JUA shortfalls, and does not guarantee performance of JUA obligations. Any deficits in the post-1985 fund are to be satisfied by assessments against the members, who are then to be reimbursed through assessments against policyholders and surcharges on subsequently sold policies. Id. 1703.07(f). The post-1985 JUA fund has not experienced a deficit and, therefore, no assessments or surcharges have been necessary.

In the event of fund excess, as is purportedly the case here, the plan provides as follows:

(c) If premiums written on association business exceed the amount necessary to pay losses and expenses, the board shall apply such excess to repay members for assessments previously levied, in proportion to the amount paid by each member.

(d) If premiums written on association business exceed the amount necessary to pay losses and expenses and to reimburse members for all assessments pursuant to Ins 1703.07(c), then with review and approval by the commissioner as being consistent with the purposes of this chapter, 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.

Id. 1703.07(c), (d) (emphasis added). The phrase "with review and approval by the commissioner as being consistent with the purposes of this chapter," was added in January 2009. Id. Also in January 2009, the regulations were amended to provide that "the [JUA] will promote the public interest in ensuring that consumers of health care services have adequate access to needed care." N.H. Admin. Rules, Ins. 1701.01.

The JUA issues individual policies to its policyholders. The policies are titled, "LIABILITY POLICY (Assessable and Participating)," or "GENERAL LIABILITY POLICY (Assessable and Participating)." Each policy provides that it "has been issued by the [JUA] under the New Hampshire Medical Malpractice Joint Underwriting Association Plan established pursuant to the Authority granted by RSA 404-C:1 and by RSA 400-A:15, and is subject to the provisions of the Plan." The policy provisions relating to assessments and dividends provide in full:

12. Assessable Policy Provision. This policy has been issued by the [JUA] under the New Hampshire Medical Malpractice Joint Underwriting Association Plan established pursuant to the Authority granted by RSA 404-C:1 and by RSA 400-A:15, and is subject to the provisions of the Plan. The Plan provides, and the named insured agrees, that in the event an underwriting deficit exists at the end of any fiscal year the Plan is in effect, the board of directors of the [JUA] may make a premium contingency assessment against all policyholders during such year, and the named insured shall pay to the [JUA] the named insured's part of the premium contingency assessment based upon the policy premium payment paid by the named insured to the [JUA] with respect to that year. The Plan further provides that the [JUA] shall cancel the policy of any policyholder who fails to pay the premium contingency assessment.

13. Participating Policy Provisions. The named 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, provided the named insured shall have complied with all the terms of this policy with respect to the payment of premium.

(Emphasis omitted.)

Since 1986, the JUA has sought to make three distributions of surplus to its policyholders. In 1999 and 2000, the board submitted proposals for distribution and received approval from the commissioner; distributions were then made. The board's 2001 application for a distribution, however, was denied. The board has not requested a distribution since that time.

In 2008 the JUA was one of the three largest writers of medical malpractice insurance in New Hampshire based on premiums written. It wrote approximately $8.8 million of the estimated $40 million in premiums written. Of approximately 11,000 health care providers in New Hampshire, the JUA insures about 900. It has accumulated assets of $152 million.

In March 2009, the Department prepared a report indicating that the JUA's 2008 year-end surplus "is expected to be in the range of $140 million to $145 million . . . [as] a result of very efficient operations, good claims management and sound investments over a number of years by the [JUA] board." The Department concluded that the "surplus significantly exceeds the amount of capital needed to support the [JUA]." The report stated that "[t]he Department has not engaged in any formal actuarial exercise in reaching this conclusion." The report was premised upon an estimate of "risk-based capital" that the Department commissioned on behalf of the JUA, which was submitted to the JUA with the following caveat:

It is [the actuarial firm's] understanding that [JUA] management will consider [these] findings for the purposes of evaluating the level of surplus required to support its ongoing operations of providing medical malpractice coverage in New Hampshire.

[The] report is not intended or necessarily suitable for any other purposes.

Under the heading "DISTRIBUTION AND USE," the risk-based capital estimate report reiterated, "[The actuarial firm has] prepared this report solely for [the JUA's] use as described . . . . It is neither intended nor necessarily suitable for any other purpose." The Department nevertheless relied upon the risk-based capital estimate and reported that it "believes that it would be reasonable to retain a surplus of $55 million to support the [JUA], allowing the remainder of the surplus to be transferred to the General Fund without placing the [JUA] under any significant financial risk." The JUA has not made its own determination as to what amount, if any, constitutes excess surplus.

On June 24, 2009, the legislature passed House Bill 2, which the Governor signed into law on June 30, 2009. The legislature found that "the funds held in surplus by the [JUA] in the Post-1985 Account are significantly in excess of the amount reasonably required to support its obligations as determined by the insurance commissioner," and concluded that "the purpose of promoting access to needed health care would be better served through a transfer of the excess surplus of the Post-1985 Account to the general fund." Laws 2009, 144:1, II. The Act accordingly provides:

Notwithstanding any other provision of law, the [JUA], by and through its board of directors, and any person having responsibility and authority for the custody or investment of the assets of the [JUA] are hereby authorized and directed to transfer no later than July 31, 2009 for the fiscal year ending June 30, 2009 the sum of $65,000,000, and by June 30, 2010 the additional sum of $22,500,000, and by June 30, 2011 the additional sum of $22,500,000 from the Post-1985 Account to the general fund. This sum shall be used for the purpose of supporting programs that promote access to needed health care for underserved persons.

Laws 2009, 144:1, I.

III. The Parties' Arguments

The State asserts that, under the circumstances of this case, we need not determine whether any JUA excess surplus funds belong to the State. Rather, it argues, we need only determine whether the petitioners have a "vested right" in such funds. It asserts that "[t]he nature of the JUA is properly considered only as it reflects on the question whether a person purchasing insurance from the JUA can reasonably claim to have a vested right in surplus protected against state action . . . ." Thus, the State argues that the Act does not constitute an unconstitutional "taking" under either the State or the Federal Constitution, since the petitioners do not have a vested property right in any JUA surplus under their policies, the regulations comprising the plan, or the statutes by whose authority the JUA was created. The State likewise contends that the Act does not violate the State constitutional proscription against retrospective laws or the Federal Contracts Clause because the petitioners do not have the prerequisite vested property right in any JUA surplus. Furthermore, it argues, even if the Act were a retrospective law, it would nonetheless be constitutionally permissible under the common-law balancing test requiring that the court examine whether the Act is reasonable and necessary to serve an important public purpose. The State also contests the petitioners' ability to assert claims derivatively on behalf of the JUA.

The petitioners counter that the Act constitutes a taking of property in which they have vested beneficial rights under the plain language of their policies and the regulations in place at the time their policies were purchased, in violation of both the State and Federal Constitutions. They maintain that the JUA is not a state entity and that its funds are private funds comprised of premiums paid and the interest accumulated thereon. They assert that the Act's interference with their contract rights violates the Federal Contract Clause and constitutes a retrospective law prohibited by Part I, Article 23 of the New Hampshire Constitution. Furthermore, they contend, the fact that the regulations comprising the plan may be altered by the legislature does not permit impairment of the beneficial interests that have already vested under their policies. The petitioners also assert that they may bring claims not only in their own right, but also derivatively on behalf of the JUA.

IV. Analysis

This controversy centers upon the tension between the constitutional proscription against governmental impairment of contract rights and the State's sovereign authority to safeguard the welfare of its citizens. See, e.g., Energy Reserves Group v. Kansas Power & Light, 459 U.S. 400, 410 (1983); United States Trust Co. v. New Jersey, 431 U.S. 1, 21 (1977). The relevant analytical framework for assessing a constitutional challenge to legislative action is well-established. "Whether or not a statute is constitutional is a question of law, which we review de novo." Akins v. Sec'y of State, 154 N.H. 67, 70 (2006). "The party challenging a statute's constitutionality bears the burden of proof." State v. Pierce, 152 N.H. 790, 791 (2005). "[T]he constitutionality of an act passed by the coordinate branch of the government is to be presumed." Opinion of the Justices, 118 N.H. 582, 584 (1978) (quotation omitted). "It will not be declared to be invalid except upon [i]nescapable grounds; and the operation under it of another department of the state government will not be interfered with until the matter has received full and deliberate consideration." Id. (quotation omitted); see also City of Claremont v. Truell, 126 N.H. 30, 39 (1985) ("A statute will not be construed to be unconstitutional where it is susceptible to a construction rendering it constitutional." (quotation omitted)).

"In this case, however, there is no question of statutory interpretation. The effects of the legislation are obvious and acknowledged. If those effects infringe on constitutionally protected rights, we cannot avoid our obligation to say so." Alliance of American Insurers v. Chu, 571 N.E.2d 672, 678 (N.Y. 1991) (citations omitted). We address the petitioners' claims first under the State Constitution, citing federal opinions for guidance only. See State v. Ball, 124 N.H. 226, 231-33 (1983).

Part I, Article 23 of the New Hampshire Constitution provides: "Retrospective laws are highly injurious, oppressive, and unjust. No such laws, therefore, should be made, either for the decision of civil causes, or the punishment of offenses." "Part I, Article 23 does not expressly reference existing contracts. However, we have held that its proscription duplicates the protections found in the contract clause of the United States Constitution." State v. Fournier, 158 N.H. 214, 221 (2009) (quotation omitted). "Although the New Hampshire [retrospective law] provision affords more protection than its federal counterpart, this court has relied on federal contract clause cases to resolve issues raised under part I, article 23 where contract impairment, and not simply retroactive application of a law, was alleged." In re Grand Jury Subpoena (Issued July 10, 2006), 155 N.H. 557, 564 (2007). "We therefore understand article I, section 10 [of the Federal Constitution] and part I, article 23 [of the State Constitution] to offer equivalent protections where a law impairs a contract, or where a law abrogates an earlier statute that is itself a contract," and will refer to their equivalent protections as the Federal and State Contract Clauses, respectively. Opinion of the Justices (Furlough), 135 N.H. 625, 630 (1992).

"The party asserting a Contract Clause violation must first demonstrate retroactive application of a law." Petition of Concord Teachers, 158 N.H. 529, 537 (2009). We have held that "every statute which takes away or impairs vested rights, acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability, in respect to transactions or considerations already past, must be deemed retrospective." In the Matter of Goldman & Elliott, 151 N.H. 770, 772 (2005) (quotation omitted). Thus, "[i]f application of a new law would adversely affect an individual's substantive rights, it may not be applied retroactively." Id.

The vested rights that the petitioners assert as the predicate for their claims are grounded in their contracts with the JUA. See, e.g., Hughes v. N.H. Div. of Aeronautics, 152 N.H. 30, 37 (2005) (contract rights can constitute vested property rights). The transfers required by the Act occur over fiscal years 2009, 2010, and 2011. However, because we find, for the reasons stated below, that the petitioners' contracts embody vested rights, and that the Act impairs those rights, the Act "must be deemed retrospective." In the Matter of Goldman & Elliott, 151 N.H. at 772 (quotation omitted).

Contract Clause analysis in New Hampshire requires a threshold inquiry as to whether the legislation operates as a "substantial impairment of a contractual relationship." Lower Village Hydroelectric Assocs. v. City of Claremont, 147 N.H. 73, 77 (2001). "This inquiry has three components: whether there is a contractual relationship, whether a change in law impairs that contractual relationship, and whether the impairment is substantial." Id. (quotation omitted). If the legislation substantially impairs the contract, "a balancing of the police power and the rights protected by the contract clauses must be performed, and . . . [the] law . . . may pass constitutional muster only if it is reasonable and necessary to serve an important public purpose." Furlough, 135 N.H. at 634 (quotation omitted).

We note that other courts reviewing Contract Clause claims have expressed the balancing test using an array of phraseologies and placing emphasis on a variety of factors. See, e.g., In re Certified Question, 527 N.W.2d 468, 474 (Mich. 1994), cert. denied, 514 U.S. 1127 (1995); Pomponio v. Claridge of Pompano Condominium, 378 So. 2d 774, 780 (Fla. 1979). Ultimately, "Contract Clause cases involve individual inquiries, for no two cases are necessarily alike." Buffalo Teachers Federation v. Tobe, 464 F.3d 362, 373 (2d Cir. 2006), cert. denied, 550 U.S. 918 (2007); see also Home Bldg. & L. Assn. v. Blaisdell, 290 U.S. 398, 430 (1934) ("Every case must be determined upon its own circumstances." (quotation omitted)). Accordingly, we take care to avoid a mechanical application of factors or criteria. Otherwise, we risk undermining the core task involved in resolving Contract Clause claims: striking a balance between constitutionally protected contract rights and the State's legitimate exercise of its reserved police power.

A. Substantial Impairment

1. Contractual Relationship

An insurance policy is a contract. See, e.g., Bates v. Phenix Mut. Fire Ins. Co., 156 N.H. 719, 722 (2008) ("The fundamental goal of interpreting an insurance policy, as in all contracts, is to carry out the intent of the contracting parties." (quotation omitted)). The undisputed facts of this case establish that some of the petitioners have current contractual relationships with the JUA, as documented by their insurance policies. It is these petitioners (hereafter "policyholders") whose Contract Clause claims we examine, because the petitioners whose contracts have expired may not assert such claims. See University of Hawaii Prof. Assembly v. Cayetano, 125 F. Supp. 2d 1237, 1240 (D. Haw. 2000) ("The contracts clause is only implicated when an existing contract is substantially impaired.").

2. Impairment of Contractual Relationship

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 ("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 (holding that individuals' contracts with the State are protected under the Contract Clause); Eckles v. State of Oregon, 760 P.2d 846, 853 (Or. 1988), appeal dismissed, 490 U.S. 1032 (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 (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 (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 (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 ("[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 (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, 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, 476 N.E.2d 304 (N.Y. 1985), appeal denied, 474 U.S. 801 (1985), as contrasted to its analysis in Chu, 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., 476 N.E.2d at 309-10; see also Chu, 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., 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, 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 (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 ("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 chapter400-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. 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 (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, 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.

3. Substantiality of the impairment

Having found that the Act impairs the petitioners' contracts, we next consider whether the impairment is substantial. See Furlough, 135 N.H. at 633. Although the United States Supreme Court has provided little specific guidance as to what constitutes a "substantial" contract impairment, Baltimore Tchrs. Un. v. Mayor, Etc. of Baltimore, 6 F.3d 1012, 1017 (4th Cir. 1993), cert. denied, 510 U.S. 1141 (1994), "[t]otal destruction of contractual expectations is not necessary for a finding of substantial impairment," Energy Reserves Group, 459 U.S. at 411.

The severity of an impairment of contractual obligations can be measured by the factors that reflect the high value the Framers placed on the protection of private contracts. Contracts enable individuals to order their personal and business affairs according to their particular needs and interests. Once arranged, those rights and obligations are binding under the law, and the parties are entitled to rely on them.

Furlough, 135 N.H. at 633 (quotation omitted). The degree of the Act's impairment of the contracts is particularly pertinent because [t]he severity of the impairment measures the height of the hurdle the state legislation must clear. Minimal alteration of contractual obligations may end the inquiry at its first stage. Severe impairment, on the other hand, will push the inquiry to a careful examination of the nature and purpose of the state legislation.

Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 245 (1978) (footnote omitted).

We recognize that the determination of whether a contract impairment is substantial may be influenced by whether the contracting parties relied on the abridged contract right. "[W]here the right abridged was one that induced the parties to contract in the first place, a court can assume the impairment to be substantial." Fraternal Order of Police, 645 F. Supp. 2d at 510 (quotation omitted). The trial court found that "[t]he JUA has offered an assessable and participating policy approved by the Commissioner since its inception with no hint in the record that anyone had ever intended otherwise." The State does not contest this ruling, nor does it contend that any factual dispute exists regarding the participating nature of the policies. Neither does the State assert on appeal that the policyholders did not rely on the participating nature of the policies. Thus, under the circumstances of this case, whether any particular policyholders relied upon the participating nature of the policies is not relevant to our analysis.

In determining whether contract impairment is substantial, some courts look to whether the subject matter of the contract has been the focus of heavy state regulation. See, e.g., Energy Reserves Group, 459 U.S. at 413. If so, further regulation might be foreseeable and, thus, any change to the contract caused by such regulation would not necessarily constitute a substantial impairment. See, e.g., Mercado-Boneta v. Admin. Del Fondo de Compensacion, 125 F.3d 9, 13-14 (1st Cir. 1997). However, standing alone, "a history of regulation is never a sufficient condition for rejecting a challenge based on the contracts clause." Chrysler Corp. v. Kolosso Sales, Inc., 148 F.3d 892, 895 (7th Cir. 1998), cert. denied, 525 U.S. 1177 (1999); see also Mercado-Boneta, 125 F.3d at 14 n.7 ("Contract Clause analysis would be enervated if the mere fact of regulation meant there was always foreseeability of more regulation and thus no substantial impairment.").

The simple fact that insurance is a heavily regulated industry does not preclude a conclusion that the Act substantially impairs the policyholders' vested contract rights to share in the JUA earnings. The policyholders did not "purchase[] into an enterprise already regulated in the particular to which [they] now object[]." Veix v. Sixth Ward Bldg. & Ln. Assn., 310 U.S. 32, 38 (1940). The State cites no provision of the regulatory scheme in place prior to the passage of the Act that would suggest that private insureds should anticipate the transfer of monies retained by their insurer into the state's general fund. Neither the JUA policies, nor the insurance regulations incorporated in the policies, make reference to any governmental reservation of power to amend the rights and obligations established by the assessable and participating policies. On the contrary, the policyholders' contracts expressly entitle them to participate in the JUA's earnings, and the regulations incorporated into their contracts likewise leave no potential outlet for the accumulated funds other than application against future assessments, or distribution to the policyholders. Although insurance is a heavily regulated industry, the record does not reflect a basis in law for the policyholders to expect that the funds in which they have a beneficial interest would be transferred from the JUA into the general fund.

In Furlough, we held that a legislative requirement that certain public employees be furloughed would constitute a substantial impairment because such a requirement "impairs the very heart of an employment contract: the promise of certain work for certain income. Its impact would likely wreak havoc on the finances of many of the affected workers . . . ." Furlough, 135 N.H. at 634. We have also found substantial impairment of contract rights by the legislature's retroactive repeal of a statute permitting municipalities to contractually set alternatives to tax obligations where such action resulted in an additional tax burden of nearly $40,000 to a plaintiff. Lower Village Hydroelectric Assocs., 147 N.H. at 77; see also State v. Vashaw, 113 N.H. 636, 637-38 (1973) ("The underlying policy of this prohibition is to prevent the legislature from interfering with the expectations of persons as to the legal significance of their actions taken prior to the enactment of a law.").

Here, we conclude that the Act substantially impairs the policyholders' contract rights for at least two reasons. First, the Act effectively eliminates the "participating" character of the policies, thus changing the very nature of the contracts. The effect of the Act is to dramatically reduce, if not eliminate, the policyholders' rights to a fundamental contractual benefit - sharing in any excess surplus funds created by their premium payments.

Second, the Act divests the JUA board of its obligation to the policyholders to treat any excess surplus for their benefit, including protecting against insolvency. As the JUA advised the trial court,

The JUA can only comfortably state today that it has earned a profit or lost money in 1986, 1987 and 1988. It is incumbent on the JUA to protect the policyholders in the interim to maintain adequate surplus and defend those claims that may yet arise by keeping funds available for those uncertainties, both legally and in terms of the market . . . . [The board maintains] this conservative sense of the need . . . to make sure that there are funds there available . . . that there are sufficient funds within our own capital to fulfill the purpose of the JUA.

The trial court recognized the importance of a JUA surplus, including its impact on the ...

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