DONOFRIO, Presiding Judge.
Plaintiffs-appellants have instituted this action to challenge the constitutionality of Article VI, Chapter III, Title 20, Arizona Revised Statutes, known as the "Arizona Insurance Guaranty Act", herein referred to as the "Act". The trial court found the Act to be constitutional.
The Act is based upon the National Association of Insurance Commissioners State Post Assessment Insurers Guaranty Association Model Bill adopted by the National Association of Insurance Commissioners (N.A.I.C.). Approximately 40 states have enacted the N.A.I.C. model bill into law.
Appellant challenges the Act on four constitutional grounds.
I. DOES THE ACT CONTRAVENE ARTICLE XIV, SECTION II OF THE ARIZONA CONSTITUTION, A.R.S.?
Article XIV, Section II provides:
Article XIV, Section I provides:
Appellants argue that the Act creates a corporation which falls within this constitutional prohibition of creating corporations by special acts. Only one pertinent case in Arizona has been found interpreting
The constitutional provision prohibiting the creation of corporations by special acts is based in part on the policy of removing the danger of favoritism and corruption in the creation of corporations. Others have argued that these prohibitions are aimed at uniformity and convenience. See Fletcher, Cyclopedia of the Law of Corporations, Vol. I, §§ 169-170, pp. 663-667. The question then becomes, will the policy behind this constitutional constraint be weakened by allowing the statute to stand? We think no damage will occur.
The intent of the Legislature in passing the Act cannot be said to be granting a privilege to any group. Whether the organization be classified as an association or corporation need not be decided at this point, for the crucial inquiry is the purpose of the Act, in that the classification is unimportant if the Act has been created out of a public purpose. Whether a law is general or special is to be determined from the law itself. It is the substance of the act which determines its character. City and County of San Francisco v. Spring Valley Water Works, 48 Cal. 493 (1874).
It is stated in 82 C.J.S. Statutes § 179 at p. 296 that constitutional prohibitions against the creation of corporations or the grant of corporate powers are generally applied exclusively to private corporations, although in some jurisdictions municipal corporations are included within such provisions. See State ex rel. W. Va. Housing Development Fund v. Copenhaver, 153 W.Va. 636, 171 S.E.2d 545 (1969) where the court construed their constitutional provision prohibiting creation of a corporation by special act to apply only to private corporations and not to public corporations created for public purposes. In O'Malley v. Florida Insurance Guaranty Association, 257 So.2d 9 (Fla. 1971), the Florida Supreme Court ruled that their insurance association modeled after the N.A.I.C. bill was not a special private corporation under their constitutional prohibition. The Florida constitutional provision, Art. 3, Sec. 11(a)(12) reads:
This similar constitutional provision, coupled with the similarity of the statutes in both Arizona and Florida, is authority for finding the creation of the association by our Legislature to be within the bounds of its authority. The Guaranty Association serves the function of fulfilling a public need without private profit. It promotes the public welfare which is within the state's police power, by protecting those who have suffered loss of insurance protection through the insolvency of their insurers. In short, it is created for the benefit of the public. Thus, it must be found that the Act because of its manifest intent
II. DOES THE ACT CONSTITUTE AN UNCONSTITUTIONAL DELEGATION OF LEGISLATIVE AUTHORITY?
Appellants, recognizing that the line is dim between what is a constitutional and what is an unconstitutional delegation of legislative power, State v. Phelps, 12 Ariz.App. 83, 467 P.2d 923 (1970), urges this Court to shed the light on the Act as an improper delegation. In examining the constitutionality of a statute the court follows certain guidelines. There is a presumption in favor of the constitutionality of a legislative enactment. State v. Krug, 96 Ariz. 225, 393 P.2d 916 (1964). The court must be satisfied beyond a reasonable doubt that the statute is unconstitutional, Shaw v. State, 8 Ariz.App. 447, 447 P.2d 262 (1968), and a liberal construction be utilized in construing the legislation to uphold its constitutionality. Shaw v. State, supra. Also see New Times, Inc. v. Arizona Board of Regents, 110 Ariz. 367, 519 P.2d 169 (1974). Thus, our examination begins from this basis.
We do not believe that the Act delegates unlimited regulatory power to the Association with no prescribed restraint. However, because the Association is not a state administrative agency, it is argued that the law of delegation as it applies to state administrative agencies is inappropriate as the Association is not an agency of the state. Yet, it is important to note that the Association as organized is solely interested in pursuing a governmental purpose under the control of the Director, i.e., insuring the insurance of the public in the specified areas of the Act.
Appellants, although arguing that the law of delegation as it applies to state administrative agencies is inappropriate, offer no alternatives for analysis. In part they rely upon State v. Marana Plantations, 75 Ariz. 111, 252 P.2d 87 (1953) for this proposition. Yet, this case defines the standards of delegation necessary for a state administrative agency. The basis of appellants' argument that a stricter test be applied as to analyzing the question of delegation is the Association's lack of accountability to the Legislature. On its face this might appear to be so, but in practical application it is not. The Legislature retains the power to terminate the Association by repealing the Act as it was formed by legislative enactment. If abuse was evident, therefore, the existence of the Association could be ended. In addition, the Director of the Association is the State Insurance Director, § 20-661(4). Lord v. Arizona Corp. Commission, 9 Ariz.App. 34, 449 P.2d 51 (1968).
State v. Arizona Mines Supply Co., 107 Ariz. 199, 484 P.2d 619 (1971) sets forth a complete statement on the subject of delegation of powers. Within that analysis it cites from Department of Health v. Owens-Corning Fiberglas, 100 N.J.Super. 366, 242 A.2d 21 at 29-30 (1968) for the proposition that,
The Act meets this standard for it states a clear purpose, the persons who constitute member insurers, the class of persons protected, the conditions and circumstances under which assessments are to be made, a formula for determining the amount to be assessed against each member insurer and the purposes for which the assessments are to be expended. In addition,
The specifics of the statute in conjunction with the inferential controls of the statute as a whole, combined with its relationship to other statutes, i.e., A.R.S. §§ 20-142, 20-156, 20-157 and 20-158, create a proper delegation of authority and thus is not violative of the separation of powers of our constitution.
III. THE ACT VIOLATES THE DUE PROCESS REQUIREMENTS OF THE UNITED STATES CONSTITUTION
A. PROCEDURAL ASPECT
Appellants complain that the Act fails to meet the requirements of procedural due process in six instances. These are:
Essentially, appellants' complaint appears to be that the Act does not contain or make provision for adequate notice and opportunity to participate. Before an analysis of appellants' objection can be undertaken, it is necessary to have an understanding of basic due process notions in the present context. Procedural due process is a term not easily susceptible to precise
The constitutional guaranties of due process of law do not require that parties shall be entitled to any particular form of action or method of procedure for the protection of rights or redress of wrongs. Yakus v. United States, 321 U.S. 414, 64 S.Ct. 660, 88 L.Ed. 834 (1944). Therefore, consideration of what procedural due process may require under any given set of circumstances must advance from a determination of the precise nature of the government function involved, as well as of the private interest affected by the governmental action. The Association serves an important and valuable public function as has been illuminated previously, and the imposition of procedural safeguards must be judged in light of the purpose and framework behind the statutes of its creation. The provisions of the Act applicable to certain casualty and other insurers doing business in the state appear to be within the Legislature's province to exercise under the police power for benefit of the public.
The insurance business is affected with a public interest and the state may by legislation control and regulate it. Employers' Liability Assurance Corp. v. Frost (Industrial Commission), 48 Ariz. 402, 62 P.2d 320 (1936). Thus, we are concerned with an exercise of a legislative power delegated to the Association. A distinction exists regarding due process of law between a legislative hearing and an adversary proceeding. As said in Hart v. Bayless Investment & Trading Co., 86 Ariz. 379, 346 P.2d 1101 (1959):
In our opinion the Act is not without adequate procedural safeguards in the context of its purpose and structure. The Act provides guidelines for operation of the Association in A.R.S. § 20-664. A.R.S. § 20-665 requires the Association to submit a plan of operation to the Director of Insurance and sets forth internal procedures to be utilized in the plan of operation. The Act provides for representation of all member insurers (defined in A.R.S. § 20-661(6)) who are permitted to elect their own directors subject to the Director's approval. The Director under A.R.S. § 20-663 is to see that member insurers are fairly represented. Under A.R.S. § 20-665(C) (7) any member insurer aggrieved by any final action of the Association may appeal to the Director within thirty days after the action and decision. Furthermore, under A.R.S. § 20-666(C) anyone aggrieved by any final action or order of the Director may seek review as provided in A.R.S. §§ 20-161 to 20-166. These procedures are thus available to all member insurers. Although the possibility exists that the Association might exercise its power in an arbitrary and capricious way, this does not infer that the Act is invalid. As our Supreme Court said in Southwest Engineering Co. v. Ernst, 79 Ariz. 403, 291 P.2d 764 (1955):
Appellants' complaint that members of the Board of Directors of the Association are to be selected for terms established by the Plan of Operation but that the Plan of Operation cannot be drawn up and selected until the Board of Directors has been appointed or selected ignores A.R.S. § 20-663 when read in conjunction with A.R.S. § 20-665. These sections indicate that the initial members of the Board of Directors are to be selected within sixty days after the effective date of the article in question. After the initial election, the Board members must prepare a Plan of Operation setting forth the term of office.
Appellants' complaint that the Association is exposed to an unlimited obligation is also in error. Appellants' exposure is limited to one percent of their Arizona net premiums. Claims are paid only to the extent funds are available under the one percent of net premiums assessment formula. See A.R.S. § 20-664(A)(3). In addition, the entire amount of "covered claims"
SUBSTANTIVE DUE PROCESS
In essence, appellants argue that the Act violates substantive due process in that the Act requires certain companies to become a financially contributing member of an Association that is organized to take care of obligations of like competitive insurance companies which the individual members and Association have no way to exercise any control over in terms of their method of operation. See § 20-664(A)(3) which provides:
Appellants argue that this means that the legislatures of other states, in passing capital and surplus legislation, regulate which members may be exempted from assessment. Even if this interpretation were
This Act meets such requirements. The business of insurance is affected with a public interest and as such is a proper subject of regulation and control by the state through the exercise of its police power in the interest of public convenience and the general good of the people. Employers Liability Assurance Corp. v. Frost, 48 Ariz. 402, 62 P.2d 320 (1936); 43 Am.Jur.2d Insurance § 52. It is obvious that the result of the exercise of the police power in many instances will result in the abridgement of private rights. The sacrifice of private rights can be sustained only if the utilization of the police power attains some public object of sufficient necessity and importance to justly warrant the exertion of the power. Edwards v. State Board of Barber Examiners, 72 Ariz. 108, 231 P.2d 450 (1951). It is generally stated that the means adopted must be suitable to the end in view; that there must exist a real and substantial relation to their purpose; and that the infringement of private rights must not extend beyond the necessities of the situation. As was said in Nebbia v. N.Y., 291 U.S. 502, 54 S.Ct. 505, 78 L.Ed. 940 (1934):
Thus, it is the court's function to decide whether it is feasible to say that the legislative decision is without a rational basis. We believe such a rational basis exists; that the means adopted to accomplish the Association's purpose are suitable; and that the infringement on private rights is minimal and constitutionally permissible as an exercise of the police power.
The history of the Model Bill drafted by the N.A.I.C. shows that the social and economic problems arising from insurance company insolvencies have been a concern to the federal government as well as to the states.
Appellant argues that the Act is violative of the equal protection clause in that
"The prohibition of the Equal Protection Clause goes no further than the invidious discrimination." Williamson v. Lee Optical of Oklahoma, 348 U.S. 483, 489, 75 S.Ct. 461, 465, 99 L.Ed. 563 (1955). A classification having any reasonable basis must be upheld as long as the discrimination has a reasonable relationship to the differences. The insurance industry being one of public concern allows the legislature great latitude in adopting enactments in regulation thereof. German Alliance Ins. Co. v. Lewis, 233 U.S. 389, 34 S.Ct. 612, 58 L.Ed. 1011 (1914). Because insurance is very much clothed with public interest and in part can be thought of as a depository of the money of the insured, how necessary their solvency is is manifest. It is precisely the purposes of the Act to guard against insolvencies and to reimburse those insured who are the victims of an insurance company insolvency. This purpose is accomplished by the provisions of the Act. The classification complained of by appellants is reasonable and is directly related to the purposes of the Act, i.e., the prevention of insolvencies and the protection of the policyholders of an insolvent or marginal insurer. Upon careful scrutiny we cannot find that the classification fails to exhibit a rational relationship to the accomplishment of a legitimate legislative goal.
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:
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:
While A.R.S. § 20-665(C) requires that the "plan of operation" shall:
In addition, A.R.S. § 20-664(A) authorizes the association to:
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:
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
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 Supreme Court recognized that Chapter 78, Laws of 1970, imposed liability
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:
Article 4, Part 2, § 13 of the Arizona Constitution provides:
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
For the foregoing reasons, and those stated in appellant's brief, I must dissent.