## Facts

- New Jersey’s automobile insurance system used residual-market mechanisms to insure high-risk drivers, culminating in a Joint Underwriting Association (JUA) created in 1983.
- The JUA was financed through multiple revenue streams, including DMV surcharges, per-policy charges, and residual market equalization charges imposed on voluntary-market policies.
- Over time, the JUA insured more than half of New Jersey drivers and accumulated a deficit exceeding $3.3 billion in unpaid claims and other losses.
- The Legislature enacted the Fair Automobile Insurance Reform Act of 1990 (FAIR Act) to reduce insurance costs for most drivers, depopulate the JUA, and create a fund to retire the JUA debt.
- The FAIR Act funded the JUA debt through redirected existing revenues and new sources, including fees on certain professions and businesses, higher vehicle registration fees, and assessments and surtaxes on insurers.
- Section 75 imposed insurer assessments and surtaxes while prohibiting insurers from recouping them through premium surcharges; Section 78 similarly prohibited a separate consumer surtax.
- The Act also stated that insurers were entitled to earn an adequate rate of return through the ratemaking process and included “safety-valve” provisions for rate relief and protections tied to insurer solvency.
- Insurers filed a facial constitutional challenge in the Chancery Division; a preliminary injunction issued, was stayed by the Appellate Division, and the case proceeded to the New Jersey Supreme Court on direct certification.

## Issues

1. Whether the FAIR Act, on its face, violated federal or state due process by denying insurers a constitutionally adequate rate of return through nonrecoupable assessments and limits on premium surcharges.
2. Whether the FAIR Act, on its face, effected an uncompensated taking by compelling insurers to pay assessments and surtaxes toward the JUA deficit without guaranteed recoupment.
3. Whether the FAIR Act violated the federal or state Contract Clause by impairing an alleged contractual relationship between insurers and the State concerning the prior regulatory and financing framework.

## Decision

- The New Jersey Supreme Court rejected the insurers’ facial constitutional challenge and upheld the FAIR Act in all material respects.
- The Court held the Act was not facially confiscatory because the ratemaking structure and statutory relief mechanisms could permit an adequate rate of return.
- The Court held the assessments and surtaxes were part of comprehensive economic regulation and were not a facial taking.
- The Court held there was no contractual relationship between the insurers and the State that could be impaired by the statute.
- The Court left open the possibility of as-applied challenges if particular applications or rate outcomes proved unconstitutional.

## Legal Principles

- A facial constitutional challenge requires showing that no set of circumstances exists under which the statute would be valid.
- Economic regulation of a heavily regulated industry receives substantial judicial deference, especially when addressing a severe public financial problem.
- Due process is not violated on a facial challenge where the statutory scheme preserves ratemaking processes and provides mechanisms for case-by-case relief from confiscatory outcomes.
- Nonrecoupable assessments imposed as part of broad economic regulation do not constitute a facial taking absent a showing that the scheme makes regulated operations economically untenable.
- Regulatory participation in a market does not, without clear legislative intent, create a contract limiting the State’s power to revise the regulatory framework; absent such intent, Contract Clause claims fail.

## Conclusion

The court sustained New Jersey’s FAIR Act against facial due process, takings, and contract-clause attacks, concluding that the statute’s ratemaking framework and relief provisions prevented a facial finding of confiscation, that the assessments were permissible economic regulation, and that insurers lacked a contractual right to the prior regulatory regime.


State Farm Mut. Auto. Ins. Co. v. State, 124 N.J. 32, 590 A.2d 191 (N.J. 1991)