Vesta Fire Ins. v. State of Florida , 141 F.3d 1427 ( 1998 )

PUBLISH
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
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Nos. 96-3657 & 97-2041
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D. C. Docket No. 95-40138-WS
VESTA FIRE INSURANCE CORPORATION, VESTA
INSURANCE CORP., SHEFFIELD INSURANCE
CORPORATION, an Alabama Corporation,
Plaintiffs-Appellants,
versus
STATE OF FLORIDA, TOM GALLAGHER, in his
capacity as Insurance Commissioner, STATE
BOARD OF ADMINISTRATION, WILLIAM ASH, JR., in
his capacity as Executive Director,
Defendants-Appellees.
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Appeals from the United States District Court
for the Northern District of Florida
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(May 22 , 1998)
Before EDMONDSON and BIRCH, Circuit Judges, and FAY, Senior Circuit Judge.
EDMONDSON, Circuit Judge:
Plaintiffs appeal the district court’s
grant of summary judgment in favor of
Defendants. In evaluating cross-motions
for summary judgment, the district court
decided that no genuine issues of material
fact existed and that judgment could be
granted to Defendants as a matter of law
on Plaintiffs’ claims that recent Florida
insurance legislation violated the Due
Process, Taking, and Contract Clauses of the
United States Constitution. Because we
2
conclude that the district court erred in
granting summary judgment about
whether a regulatory taking occurred, we
vacate the grant of summary judgment
on that issue and remand for further
proceedings consistent with this opinion.
1
We affirm on all other issues.
Background
1
Plaintiffs in this case are insurance companies subject to
the Florida statutes. Defendants include the state agencies
responsible for administering the insurance regulations found
in the statutes.
3
After Hurricane Andrew hit Florida in
1992, insurance companies began to lessen
their potential exposure to policies likely
to result in hurricane damage liability:
residential line policies in Florida. To
prevent the total withdrawal of insurance
companies and the subsequent
unavailability of insurance if companies
left the Florida market, the Florida
legislature passed several statutes.
4
The first of these statutes was a
“Moratorium Statute,” which prohibited the
nonrenewal and cancellation of
residential line insurance policies for
reasons related to the risk of hurricane
damage. See 1993 Fla. Laws ch. 93-401 § 1. The
Moratorium Statute was passed as
temporary legislation.
The Florida legislature then passed the
“Moratorium Phaseout Statute,” which
allowed limited cancellation and
5
nonrenewal of residential policies. See Fla.
2
Stat. § 627.7013; see also 1993 Fla. Laws ch.
93-410 § 19; 1993 Fla. Laws ch. 93-411 § 1. The
Moratorium Phaseout Statute provided
that, in a twelve-month period, no insurer
could cancel or nonrenew more than 5% of
2
When the summary judgment motions
were argued in the district court,
Defendants said that the moratorium
would end in November 1996. The
Moratorium Phaseout and related statutes
have since been extended and are not
scheduled to end until 1999. See 1996 Fla. Laws
ch. 96-194 § 13. Whether future extensions
might be made is unknown.
6
its residential policies in Florida or more
than 10% of its residential policies in a
single Florida county. See Fla. Stat. §
627.7013. This phaseout plan was
interpreted by Department of Insurance
(DOI) rules -- despite a Florida statute
permitting the total withdrawal of
insurance companies upon 45- days notice,
see Fla. Stat. § 627.4133(2) -- as generally
prohibiting an insurer’s total withdrawal
7
from doing business in the State of
3
Florida.
In addition, legislation was passed
requiring insurers to pay annual
premiums to the Florida Hurricane
Catastrophe Fund. This fund is intended to
provide reinsurance to insurance
3
The DOI reasoned that the other, more
general withdrawal statute would continue
to apply to other kinds of insurance -- car,
fire, life -- and that the new, specific
Moratorium Phaseout Statute would apply
only to companies issuing residential
home insurance policies.
8
companies doing business in Florida. The
reinsurance provides protection to
companies which, following a hurricane,
are unable to pay fully on their policies.
Plaintiffs wish to withdraw entirely
from the insurance industry in Florida
but have been prohibited from doing so by
4
the Moratorium Phaseout Statute. This
Although
4
Plaintiffs challenge the
constitutionality of both the Moratorium
Phaseout and the Catastrophe Fund
legislation, only the Moratorium Phaseout
Statute directly implicates the
Constitution. The required contribution to
9
prohibition, Plaintiffs argue, violates
several provisions of the United States
Constitution: (1) the Taking Clause of the
Fifth Amendment; (2) the Contract Clause;
and (3) Plaintiffs’ Substantive Due Process
the fund, absent the Moratorium Phaseout
Statute, is a constitutional exercise of the
State of Florida’s police power. See, e.g.,
Meriden Trust & Safe Deposit Co. v. FDIC, 62
F.3d 449, 454-55 (2d Cir. 1995). Thus, the
constitutionality of the Moratorium
Phaseout Statute is the focus of this
opinion.
10
5
rights under the Fourteenth Amendment.
5
Plaintiffs claim that their Substantive
Due Process rights were violated. Plaintiffs’
argument focuses on the right to freedom
of association, but this case does not
involve infringement of that right. Also,
because the regulation about which
Plaintiffs complain is economic, the
legislation is presumed valid unless no
rational basis exists for its enactment.
See Usery v. Turner Elkhorn Mining Co., 96
S.Ct. 2882, 2892 (1976). We cannot say
Florida lacked a rational basis for passing
this legislation. Plaintiffs’ Substantive
Due Process claim is without merit, and we
do not discuss further that claim.
Also without merit is Plaintiffs’ claim
that the district court erred by ruling on
the motions for summary judgment before
ruling on Plaintiffs’ motion to compel
discovery. We, therefore, affirm the
11
Plaintiffs filed complaints alleging
6
these constitutional violations. Both
Plaintiffs and Defendants moved for
summary judgment. Plaintiffs, however,
did not move for summary judgment on
the issue of regulatory taking. Instead,
Plaintiffs argued that summary judgment
was precluded because genuine issues of
district court’s decision on these issues.
6
Two cases by insurance companies
against the Defendants were consolidated
in this appeal.
12
material fact existed on that claim. The
district court granted summary judgment
in favor of Defendants on all claims.
Discussion
The district court’s grant of summary
judgment is reviewed by this court de novo.
See Real Estate Financing v. Resolution
Trust Corp., 950 F.2d 1540, 1543 (11th Cir.
1992). Summary judgment is appropriate
13
only when “there is no genuine issue as to
any material fact and . . . the moving
party is entitled to a judgment as a
matter of law.” Fed.R.Civ.P. 56(c); see also
Hale v. Tallapoosa County, 50 F.3d 1579, 1581
(11th Cir. 1995).
I. The Taking Clause
The Taking Clause of the Fifth
Amendment states, in relevant part,
14
“nor shall private property be taken for
public use, without just compensation.” U.S.
Const. amend. V; see also Penn Cent.
Transp. Co. v. New York City, 98 S.Ct. 2646,
2658 (1978) (applying the Fifth
Amendment to the States through the
Fourteenth Amendment). “The Fifth
Amendment’s guarantee that private
property shall not be taken for a public use
without just compensation was designed to
bar [the] Government from forcing some
15
people alone to bear public burdens which,
in all fairness and justice, should be borne
by the public as a whole.” Armstrong v.
United States, 80 S.Ct. 1563, 1569 (1960).
Plaintiffs allege substantial financial
losses as a result of the prohibition of
withdrawal from Florida, coupled with the
forced contributions to the Catastrophe
Fund. This statutory scheme, Plaintiffs
argue, precludes them from allocating their
companies’ resources as they see fit and
16
forces them to suffer net economic losses
in the Florida market, resulting in a
taking of their “property” without just
compensation in violation of the Fifth
Amendment to the United States
7
Constitution.
Plaintiffs argued an additional issue:
7
that the district court erred because it
treated Plaintiffs’ taking challenge as
“facial” instead of as an “as applied”
constitutional challenge. We believe the
district court properly addressed the
challenge in this case as an “as applied”
challenge. Plaintiffs now, and in the
district court, challenged the Florida
statutes only as applied to Plaintiffs. Thus,
17
A. Per Se Takings
Whether government conduct, in
relation to private property, works a
taking involves the courts in an ad hoc,
factual inquiry. See Penn Central, 98 S.Ct.
we do not consider the statutory scheme’s
constitutionality on its face. We discuss
(as urged by Plaintiffs) the
constitutionality of the statutes only “as
applied” to Plaintiffs. Compare Agins v.
City of Tiburon, 100 S.Ct. 2138, 2141 (1980)
(facial challenge), with Penn Central, 98
S.Ct. 2646, 2661-62 (as applied challenge).
18
at 2659. But, certain invasions of
private property are deemed “takings”
without regard to the state’s interest in
possessing or otherwise using the property:
per se takings. See New Port Largo, Inc. v.
Monroe County, 95 F.3d 1084, 1089 (11th Cir.
1996) (“In addition to physical invasions of
property, the Supreme Court has also
accorded ‘categorical [per se] treatment,’
invariably requiring compensation, to
cases ‘where regulation denies all
19
economically beneficial or productive use
of land.’”) (emphasis added) (citation
omitted).
Plaintiffs argue that the statutes
establishing the Moratorium Phaseout and
the Catastrophe Fund are per se takings
because of the compulsory nature of the
government act: the statutes make it
mandatory for all insurance companies
currently doing business in Florida to
remain in that market and contribute to
20
the fund. But, the mandatory nature of
the government’s act does not place these
statutes in the per se takings category:
neither a physical invasion nor a denial
of all beneficial use of “property” has been
shown. As the district court properly
pointed out: “[t]he compelled insurance
contracts still belong to Plaintiffs; the
insureds must still pay Plaintiffs all
required premiums; Plaintiffs can still
cancel or nonrenew policies for
21
[nonhurricane related reasons]; [and]
Plaintiffs can still apply for rate
increases . . . .” District Court Order at 20.
Plaintiffs also argue that these statutes
effect a government takeover of private
insurance companies, resulting in per se
takings. But the cases relied on by
Plaintiffs -- United States v. Pewee Coal Co.,
71 S.Ct. 670 (1951), and United States v.
United Mine Workers, 67 S.Ct. 677 (1947) --
22
are not comparable to this case. In Pewee
Coal and United Mine Workers, the
government took total, direct control of
private businesses. This case does not
present that kind of occupation or
takeover, and it does not present a per se
taking.
B. Regulatory Takings
23
Plaintiffs also allege that a regulatory
(non per se) taking is effected by the
8
statutes. The current standard for
evaluating such claims is found in
Connolly v. Pension Benefit Guaranty
Corp., 106 S.Ct. 1018 (1986). In Connolly, the
Supreme Court recognized three factors
8
At the outset, we recognize that insurance contracts can be
property subject to an unconstitutional taking under the Fifth
Amendment. See Lynch v. United States, 54 S.Ct. 840, 843
(1934) (“Valid contracts are property . . . .”); see also
Ruckelshaus v. Monsanto Co., 104 S.Ct. 2862, 2873 (1984). “If
regulation goes too far it will be recognized as a taking.”
Pennsylvania Coal Co. v. Mahon, 43 S.Ct. 158, 160 (1922). But,
“that legislation disregards or destroys existing contractual
rights [like the right to cancel an insurance contract] does not
always transform the regulation into an illegal taking.”
Connolly v. Pension Benefit Guar. Corp., 106 S.Ct. 1018, 1025
(1986).
24
that should be considered to identify a
regulatory taking: (1) the economic impact
of the challenged rule, regulation, or statute
on the plaintiff; (2) the extent to which
the regulation interferes with
investment-backed expectations; and (3)
the nature of the challenged action. See id.
at 1026 (citations omitted). Plaintiffs
contend, and we agree, that the district
court failed to consider properly these
factors and that genuine issues of
25
material fact exist to preclude summary
judgment on this claim.
1. Economic Impact on Plaintiffs
Plaintiffs point to their economic loss
in the Florida market and the
approximately $1 million premium paid to
the Catastrophe Fund as a negative
economic impact. Plaintiffs also argue
26
that the nature of the Moratorium
Phaseout Statute -- the potential for
another extension -- requires them to stay
in the Florida insurance market
indefinitely, creating a substantial
economic impact. But Defendants say that
the possibility for rate increases
counteracts the negative economic
impact. Plaintiffs’ applications for rate
increases, however, have been denied. We
believe that, when considering the
27
economic impact on Plaintiffs, the
potential for future extensions of the
Moratorium Phaseout cannot be
determined; and the potential for future
rate increases is no answer to Plaintiffs’
ongoing economic loss when rate
increases have been applied for and have
been denied.
The district court should have considered
what economic impact Plaintiffs have
suffered and will suffer as a result of the
28
challenged statutes. The parties dispute
exactly what return Plaintiffs have
enjoyed in the Florida market since the
moratorium and whether that return is
reasonable. Defendants, and the district
court in its decision, relied heavily on the
fact that the moratorium would end in
1996. But now, in 1998, the moratorium still
exists and is scheduled to exist until June
1999. Thus, the extent of the economic
impact on Plaintiffs remains a material
29
fact that must be determined based upon
9
an expiration of the moratorium in 1999.
2. Investment-Backed Expectations
Plaintiffs also allege that the
limitations on their withdrawal from the
9
The extension of the moratorium statutes into 1999 occurred
after Plaintiffs filed their complaint. Thus we expect Plaintiffs
will be permitted to file supplemental pleadings, which would
include the economic effect of the moratorium statutes due to
the latest extension. See Fed.R.Civ.P. 15(d) (providing for the
filing of supplemental briefs, upon motion of a party, “setting
forth transactions or occurrences or events which have
happened since the date of the pleading sought to be
supplemented”).
30
Florida market interfere with their
investment-backed expectations. The
district court did not address this factor.
In general, “[t]hose who do business in
the regulated field [of insurance] cannot
object if the legislative scheme is buttressed
by subsequent amendments to achieve the
legislative end.” Connolly, 106 S.Ct. at 1027(internal quotations and citations
omitted). This case, however, does not
present the typical situation of simple
31
regulation as a condition of doing
business: the statutes require the doing of
business.
The Supreme Court has written these
words about the constitutionality of a
taking: “A different case would be
presented were the statute, on its face or
as applied, to compel a landowner over
objection to rent his property or to
refrain in perpetuity from terminating
a tenancy.” Yee v. City of Escondido, 112
32
S.Ct. 1522, 1529 (1992); see also Lewis v.
Safeco Ins. Co. of America, 414 N.Y.S.2d
823, 861 (1978) (“[T]his law expressly
requires that . . . insurance companies, like
the defendants, renew automobile
insurance policies and, accordingly, it
warrants careful review.”). This case may
be that “different case”: insurance
companies must refrain, potentially in
perpetuity, from terminating contracts.
“While [a state’s] police power may limit
33
and restrict the uses to which an owner
may put his property, it may not compel
him to use such property for a particular
purpose if he prefers to abandon such a use
thereof.” Department of Pub. Works v. City
of San Diego, 10 P.2d 102, 105 (Cal. Ct. App.
1932).
Interference with investment-backed
expectations occurs when an inadequate
history of similar government regulation
exists: where the earlier regulation does
34
not provide companies with sufficient
notice that they may be subject to the new
or additional regulation. See Connolly, 106
S.Ct. at 1027. Plaintiffs argue that the
moratorium statutes interfere with
reasonable investment-backed
expectations. Plaintiffs contend that
whatever regulation Plaintiffs may have
anticipated when they entered the Florida
market they could not anticipate that
withdrawal from that market -- should
35
additional regulation become too
burdensome -- would be prohibited. The
district court, however, did not consider
whether the regulation at issue should have
been anticipated by Plaintiffs, particularly
the Moratorium Phaseout Statute which
prohibits Plaintiffs’ total withdrawal from
doing business in Florida.
Interference with the investment-
backed expectations must be considered
with the other factors: the government’s
36
interest and the economic impact on
Plaintiffs. Genuine issues of material
fact exist about what investment-backed
expectations Plaintiffs had when they
entered the Florida market and what
impact the moratorium statutes have had
on Plaintiffs’ expectations. So, summary
judgment was inappropriate.
3. Nature of the Government Action
37
In addition, Plaintiffs argue that the
nature of the government acts supports
the takings claim. Plaintiffs contend that
the compulsory nature of the legislation
alone results in a taking; but all
government regulation is compulsory in
nature. “[I]t cannot be said that the
Taking Clause is violated whenever
legislation requires one person to use his
or her assets for the benefit of another.”
Connolly, 106 S.Ct. at 1025. But the nature
38
of the state’s interest is critical in
determining whether a taking has
occurred. See id. When important public
interests are served, a taking is less likely
to have occurred. See Keystone Bituminous
Coal Ass’n v. DeBenedictis, 107 S.Ct. 1232,
1242-43 (1987).
No doubt can exist that the general
regulation of insurance is within the
State’s police powers. See 15 U.S.C. §§ 1012(“The business of insurance, and every
39
person engaged therein, shall be subject to
the laws of the several States which relate
to the regulation or taxation of such
business.”). After Hurricane Andrew,
several insurance companies became
insolvent, unable to pay their policies.
Other companies sought to withdraw
altogether from the Florida insurance
market. This withdrawal could have had
serious negative effects on Florida’s real
estate market and on the economy of the
40
State. The moratorium was intended as a
stabilizing force in the market and was
within the State of Florida’s police power.
The government interest in this case was
the public welfare of the residents of
Florida. But the nature of the government
interest and its importance, given all the
circumstances, as well as the extent of the
regulations’ harsh impact on Plaintiffs’
interests must be determined by the
district court.
41
The district court erroneously granted
Defendants’ motion for summary
judgment without considering the
financial rate of return for Plaintiffs
and the impact on Plaintiffs’ investment-
backed expectations. “These ‘ad hoc, factual
inquiries’ must be conducted with respect
to specific property, and the particular
estimates of economic impact and
ultimate valuation relevant in the unique
circumstances.” Hodel v. Virginia Surface
42
Mining and Reclamation Ass’n, Inc., 101
S.Ct. 2352, 2370 (1981). Without knowing
the economic impact of the legislation and
the Plaintiffs’ reasonable expectations, the
necessary study of competing interests
cannot be accomplished and summary
judgment cannot be granted. See
generally Penn Central, 98 S.Ct. 2646,
2659-61 (discussing the variety of
interests involved and to be considered in
a taking case).
43
II. Contract Clause
The Contract Clause of the United States
Constitution provides that “[n]o State shall
. . . pass any . . . Law impairing the
Obligation of Contracts.” U.S. Const. art. 1,
§ 10. “Although the language of the Contract
Clause is facially absolute, its prohibition
must be accommodated to the inherent
police power of the State ‘to safeguard the
44
vital interests of its people.’” Energy
Reserves Group, Inc. v. Kansas Power and
Light Co., 103 S.Ct. 697, 704 (1983) (citation
omitted).
Three factors are considered when
evaluating a claim that the Contract
Clause has been violated: (1) whether the law
substantially impairs a contractual
relationship; (2) whether there is a
significant and legitimate public purpose
for the law; and (3) whether the
45
adjustments of rights and responsibilities
of the contracting parties are based upon
reasonable conditions and are of an
appropriate nature. See id. at 704-05.
Plaintiffs make a sufficient showing
that the Florida legislation substantially
impaired the contracts between the
insurance companies and their insureds.
Insurance provides coverage of a specified
risk for a specified time. At the end of
that time, insurance companies
46
reevaluate the risk and decide whether they
wish to remain the insurers of that risk.
“Total destruction of contractual
expectations is not necessary for a
finding of substantial impairment.” Id.
at 704. Under the Moratorium Phaseout,
Plaintiffs are forced to continue
contractual relationships that otherwise,
pursuant to the terms of the contracts,
could be rightfully terminated.
47
Assuming a substantial impairment to
Plaintiffs’ contracts exists, the State
“must have a significant and legitimate
public purpose behind the regulation.” Id.“[T]he public purpose need not be addressed
to an emergency or temporary situation.”
Id. at 705. Defendants have
demonstrated a legitimate public purpose:
protection and stabilization of the Florida
economy, particularly the real estate
market. See generally Allied Structural
48
Steel Co. v. Spannaus, 98 S.Ct. 2716 (1978);
Home Building & Loan Ass’n v. Blaisdell, 54
S.Ct. 231 (1934).
Once a legitimate purpose is identified,
we must look to whether the state’s
adjustments of the rights and
responsibilities of the contracting parties
are based upon reasonable conditions and
are of an appropriate nature. See
Energy Reserves, 103 S.Ct. at 705. “Unless
the State itself is a contracting party . . .
49
courts properly defer to legislative
judgment as to the necessity and
reasonableness of a particular measure.”
Id. (internal citations and quotations
omitted). The State was no party to the
10
insurance contracts; so based upon the
Plaintiffs
10
argue that we cannot
consider the legislature’s purported
purposes for the statutes because the State
is a third-party beneficiary to the
contracts based upon its control of the
Catastrophe Fund. The law of Florida does
not support this theory. See Thompson v.
Commercial Union Ins. Co., 250 So.2d 259,
262 (Fla. 1971) (To be third-party
beneficiary, “[t]he clear intent and
50
legislature’s judgment, the statutes’ impact
on existing insurance contracts cannot
be said to be an unconstitutional
impairment.
Conclusion
No factual disputes exist about the
Contract Clause, Substantive Due Process, or
purpose of the contract [must be] to
directly and substantially benefit the third
party.”).
51
Per Se Taking claims; so summary judgment
was appropriate for Defendant on those
claims. But, summary judgment was
incorrect on Plaintiffs’ claim of
regulatory taking resulting from the
Florida insurance statutes.
AFFIRMED in part; VACATED and
REMANDED in part.
52