Argued September 25, 1968
Decided December 12, 1968
Appeal from the Appellate Division of the Supreme Court in the First Judicial Department, PETER A. QUINN, J.
John Van Voorhis, J. Daniel Mahoney, Mario Biaggi, Bernard A. Feuerstein and Irwin P. Underweiser for appellant.
Ralph A. Cascella, Henry H. Abrams, Aaron Greengold and Alan Jay Martin for intervenors-appellants. Louis J. Lefkowitz, Attorney-General ( Samuel A. Hirshowitz, Mark T. Walsh, Philip Weinberg and Karla Moskowitz of counsel), for respondent.
In early 1968, the Superintendent of Insurance undertook an examination of the loss reserve practices of Citizens Casualty Insurance Company (Insurance Law, § 28, subd. 1). The examination was conducted by 17 experienced examiners who reported to the Superintendent that the company's loss reserves were understated by over six million dollars and that, due to this error, the company was insolvent, as defined by section 93 of the Insurance Law, to the extent of four million dollars.
All sections hereinafter cited are from the Insurance Law unless otherwise specified.
The Superintendent did not adopt the examiners' report, as provided in section 30, which would have permitted Citizens an opportunity to request an administrative hearing. Instead, he chose to institute suit in Supreme Court, under article XVI of the Insurance Law, to rehabilitate the company. Sections 93 and 511 authorize the Superintendent to seek such judicial action if an insurer is found to be insolvent. Section 526 provides that the court at such a hearing shall either deny or grant the application to rehabilitate the company after a "full hearing". At this hearing section 30 permits the Superintendent to introduce into evidence the report of examination as proof of the insurer's insolvency.
At Special Term, the Superintendent offered in evidence the report of insolvency. Citizens, however, was not permitted to introduce any evidence in support of its contention of solvency, although the court did permit the company to cross-examine the two witnesses called by the Superintendent who testified to the procedures followed in compiling the report.
The issue presented by this appeal is whether Citizens was denied the statutory "full hearing" mandated by section 526 when it was prevented from introducing any evidence on the issue of solvency in a rehabilitation proceeding instituted by the Superintendent pursuant to article XVI.
The field of insurance falls within that sector of the economy extensively regulated by the State because the business practices of insurance companies have an immediate and substantial effect on the public ( Matter of General Reinsurance Corp. v. Pink, 269 N.Y. 347, 351; Matter of Bean v. Stoddard, 207 App. Div. 276, 279, affd. 238 N.Y. 618; California Auto. Assn. v. Maloney, 341 U.S. 105, 109-110). In this regulatory scheme there is an undeniable need for the Superintendent to have available fast and flexible procedures to be used in supervising the industry. The desire of the Superintendent to have a summary procedure to protect the public from undesirable practices on the part of insurers, however, must be balanced against the necessity of according the party affected an adequate opportunity to be heard in response to the Superintendent's charge ( Rhode Is. Ins. Co. v. Downey, 95 Cal.App.2d 220; cf. Title Guar. Sur. Co. v. Idaho [ Allen], 240 U.S. 136, 141-142). When faced with the interpretation of a regulatory scheme, the judiciary should attempt to afford the affected party the fullest opportunity for a hearing consistent with the protection of the public interest. This is what due process requires. (See Matter of Hecht v. Monaghan, 307 N.Y. 461; People ex rel. Copcutt v. Board of Health, 140 N.Y. 1, 6-7; Anti-Fascist Comm. v. McGrath, 341 U.S. 123, 161-165 [FRANKFURTER, J., concurring].)
The Superintendent asserts that section 526 of the Insurance Law authorizes a summary proceeding by which he can take over the property of an insurer and conduct its business by offering a report of insolvency and introducing evidence of the regularity of the procedures followed in compiling the report. He contends that the insurer can test the propriety of the intervention by instituting a subsequent proceeding under section 512 (subd. 3) to have the Superintendent removed as rehabilitator.
The Superintendent in support of this interpretation of the Insurance Law refers us to State banking statutes of New York and other States, which grant the Superintendent of Banks power to take possession of bank assets without first providing an opportunity for the bank to contest the action. This power he equates with his authority under section 526. (New York Banking Law, §§ 606, 607; see, e.g., New Jersey Stat. Ann., § 17:30-1; Wash. Rev. Code Ann., § 48.31.190; Smith-Hurd Ill. Ann. Stat., tit. 73, § 800.1; Purdon's Penna. Stat. Ann., tit. 40, § 202.) The analogy is further extended by citing section 512 (subd. 3) as the tandem provision of the Insurance Law which saves the Superintendent's intervention from any due process implication because, like the banking legislation, it provides for a hearing after the intervention when the merits of the Superintendent's act can be adjudged. ( State Sav. Commercial Bank v. Anderson, 165 Cal. 437, affd. Per Curiam 238 U.S. 611. [The California banking legislation in issue in Anderson was modeled after the New York Banking Law].)
Though the suggested reading of the Insurance Law could certainly have been enacted by the Legislature, we conclude that the present provisions and the statutory framework do not support such an interpretation. If the Legislature had intended to give the Superintendent of Insurance the same powers as that of the Superintendent of Banks, the statutory provisions would have more closely paralleled one another.
Analysis of the provisions of the Insurance Law indicates that section 526 was not intended to be a summary proceeding as the Superintendent contends. None of the provisions contained in article XVI delineate the requirements of a full hearing. Nevertheless, use of the term "full hearing" itself engenders the notion of a hearing in which the parties will be permitted to introduce evidence at least in keeping with minimal due process requirements. (1 Cooper, State Administrative Law 367 ; see De Bierre v. Darvas, 22 A.D.2d 550; Morgan v. United States, 304 U.S. 1, 18-19; Morgan v. United States, 298 U.S. 468, 480-481.) The language certainly indicates an intention that fundamental requirements of fairness be accorded which are the essence of due process. The requirement of a "full hearing" has obvious reference to the tradition of judicial proceedings in which evidence is received and weighed by the trier of the facts.
Moreover, the Legislature's failure to define "full hearing" in an article XVI proceeding might have arisen because the proceeding was to be a judicial hearing, not an administrative one. By using "full hearing" the Legislature must be presumed to have intended that the procedures normally followed by judicial tribunals would be continued. This would appear reasonable in light of the fact that the Legislature, when dealing with administrative proceedings, specifically delineated the rights of a party in such a hearing. "Every person affected shall be allowed to be present during the giving of all testimony, and shall be allowed a reasonable opportunity to inspect all adverse documentary proof, to examine and cross-examine witnesses, and to present proof in support of his interest" (§ 23).
The procedures to be followed in any hearing, as mandated by due process, depend to a degree on the issues in dispute. ( Matter of Heaney v. McGoldrick, 286 N.Y. 38, 45; Anti-Fascist Comm. v. McGrath, 341 U.S. 123, 162-163, supra [FRANKFURTER, J.]; United States v. Storer Broadcasting Co., 351 U.S. 192, 202-205.) In this case there is a dispute as to whether the insurer is insolvent within the meaning of the Insurance Law. The statute does not set forth in particular detail how solvency is to be determined. The statute merely defines insolvency as being that time when an "insurer is unable to pay its outstanding lawful obligations as they mature in the regular course of business, as may be shown either by an excess of its required reserves and other liabilities over its admitted assets, or by its not having sufficient assets to reinsure all of its outstanding risks" (§ 93; emphasis added).
The statute does not specify in great particularity how reserves are to be determined. Sections 73 and 326 simply require that the insurer provide for reserves in amounts estimated to cover all losses insured. These estimates are to be arrived at by taking into account the prior experience of the company. In light of these provisions, it is clear that the question of sufficiency of reserves is not solely a question of statutory interpretation, but rather a factual determination to be arrived at by actuarial calculations. Accordingly, a hearing is necessitated at which the parties can introduce evidence in support of their respective contentions. (1 Davis, Administrative Law Treatise, § 7.02, p. 413; § 7.05; People v. Richetti, 302 N.Y. 290, 297; Matter of New York Water Serv. Corp. v. Water Power Control Comm., 283 N.Y. 23, 31; Denver Stock Yard v. Livestock Assn., 356 U.S. 282, 287.)
The conclusion that an evidentiary hearing is required is amply supported by reference to the quasi-judicial type of hearing which the Superintendent himself must conduct if he desires to adopt a report of examination (§ 30). Robert Benjamin, a special commissioner appointed by Governor Lehman to investigate administrative adjudication in New York, in discussing an administrative hearing which exemplified the wide-ranging latitude accorded an insurer, chose as his prime example a hearing brought about at the insistence of the insurer when a dispute arose as to the proper calculation of loss reserves. Benjamin reported:
"The company sought to establish its claim as to proper loss reserves by testimony of its actuary and of its auditor, whose report of audit was received in evidence * * * In addition to offering this testimony, company counsel stated, he would show by four familiar tests that the examiner's reserves were excessive. * * *
"The facts upon which these tests were based were presented by the company's actuary and auditor."
The company was permitted full latitude in presenting proof in support of its objections. The hearing covered a period of five full days. About 600 pages of testimony were taken. (Benjamin, Administrative Adjudication in the State of New York, Insurance Department Monograph, p. 85 .)
It is patently clear that, if the Superintendent had adopted the examiner's report, Citizens could have availed itself of such an administrative hearing (§§ 30, 23). The Superintendent, however, brought this judicial proceeding claiming the company was insolvent due to its reserve practices. Undoubtedly, the factor of insolvency compels the Superintendent to seek a faster procedure than an administrative hearing after which a judicial proceeding would still have to be instituted. It is upon this alleged need for speedy action that the Superintendent bases his argument.
Nevertheless, a court should not be quick to find summary proceedings embodied in a statutory enactment unless the provisions clearly specify this course or the exigencies of the situation warrant no other response. It is evident from the prior discussion that there is no explicit legislative mandate for a summary proceeding. The issue then is whether there is a need to imply an authorization for such a procedure. We think not. The Superintendent has not shown that the statutory scheme is inadequate. First, sections 526 and 512 (subd. 3) eliminate the preliminary step of an administrative hearing. Second, the statute provides an alternative for summary relief.
Sections 526 and 512 (subd. 3) are not the only sections which must be considered in order to determine whether the Superintendent has adequate procedures to protect the public without having to interpret these sections as permitting a summary proceeding. Section 528 of article XVI authorizes the Superintendent, after he has instituted suit under the article, to apply for an injunction "at any time" before a Justice who "may, without notice," enjoin the company "from the transaction of its business, or the waste or disposition of its property until the further order of the court" It appears that the public would be adequately protected by an injunction during the period of the hearing under section 526 without having to permit the Superintendent to take possession of the assets before the insurer can have an evidentiary hearing. Robert Benjamin, in his report of the administrative agencies in this State, voiced these incisive remarks about the present problem of according the Superintendent summary procedures: "In instances where prompt action is necessary in the public interest, but where there may be doubt as to the advisability of adopting a summary administrative procedure, a possible alternative may be to authorize an administrative agency to bring a judicial proceeding for an injunction, making specific provision for the issuance of temporary injunctions (see, e.g., Insurance Law, Section 34)". (Benjamin, Administrative Adjudication in New York State, p. 96 . Former § 34 [L. 1939, ch. 882], renum. § 35 by L. 1947, ch. 323, eff. March 24, 1947.)
The conclusion that an injunction would be a sufficient remedy to protect the public permits a more consistent reading of sections 512 (subd. 3) and 526, in light of the language employed, than does the Superintendent's interpretation.
The Superintendent additionally urges, but not forcefully, that the full hearing mandated by section 526 actually took place because the expression "deemed insolvent" employed in section 93 creates a conclusive presumption, and, therefore, any evidence as to the actual financial condition of the company was not germane to the issues before the court. This reasoning overlooks the fact that section 511 of the Insurance Law lists 13 other separate grounds, besides insolvency, as the basis upon which the Superintendent can move under section 526 to rehabilitate an insurer. The logic of the argument leads to a rather anomalous interpretation. There would have to be a full evidentiary hearing if the Superintendent moves on any of the other enumerated grounds in section 511, but not if the basis of his request is insolvency of the insurer. This interpretation is offered even though the other grounds specified in section 511 equally exhibit similar danger to the public.
For example, subdivision (e) authorizes rehabilitation if the insurance company "is found, after an examination, to be in such condition that its further transaction of business will be hazardous to its policyholders, or to its creditors, or to the public". In a proceeding instituted under section 511 (subd. [e]) the hazards of delay are equally great as those encountered in insolvency, but still an evidentiary hearing is required. ( Matter of People [ International Workers Order], 305 N.Y. 258. ) Certainly, the legislative scheme shows no indication that a proceeding brought on the basis of some other subdivision of section 511 should be treated in a different manner from insolvency. It would be a strained construction to hold that all the other specified grounds require full evidentiary hearings, but that the word "deemed" bars such a finding when the request for rehabilitation is based on insolvency.
One further point requires brief comment. The dissenting opinion would save the statutory scheme from any constitutional infirmity by permitting the insurer to seek review of the Superintendent's determination of insolvency in an article 78 proceeding. This argument was not advanced by either party for good reason. The language of section 34 of the Insurance Law, upon which the dissent relies, was added in 1956. (Insurance Law, § 34, as amd. by L. 1956, ch. 932.) Prior to that amendment the insurer could not have sought review of a determination of insolvency by way of an article 78 proceeding. Therefore, to accept the reasoning of the dissent would require an admission that the statute was unconstitutional for over 50 years. We cannot accept the argument that the Legislature drafted a constitutionally deficient statute when a fair reading of the provisions establishes that there was no such infirmity.
Finally, if the only remedy open to an insurance company faced with a situation like that here is to resign itself to the appointment of a rehabilitator and then later bring a section 512 (subd. 3) proceeding, it is rather hollow relief. There should be a method whereby the propriety of the Superintendent's action can be tested before rather than after the fact. In most cases the appointment of the rehabilitator would spell financial ruin for the company.
Since a "full hearing" should have been accorded the insurer, a subsidiary question arises whether Citizens' offer of proof was sufficient to put solvency in issue.
While the Appellate Division rejected the contention that a proceeding under section 526 is not to be a full evidentiary hearing, the court nonetheless affirmed the finding that the offer of proof was insufficient. The court remarked: "That Citizens might differ with the evaluation of certain assets, the methods of evaluation of others, or the omission of a potential asset * * * would not prove that the Superintendent's determination of insolvency warranting rehabilitation was unsupported, nor that the court's conclusion was error, even if the exact nature of the proceeding might not have been adequately understood by Special Term" ( 30 A.D.2d, p. 296).
The Appellate Division, in affirming the trial court, failed to perceive that neither the Superintendent nor the court had ever determined that Citizens was insolvent after a hearing in which evidence of both parties was received. The report offered to the trial court was merely an ex parte report which contained the summary and conclusions of an examination. In this case the judicial rule that the court will accept the administrative act if it is found to be supported by a rational basis in the record also has no place. ( Matter of Mounting Finishing Co. v. McGoldrick, 294 N.Y. 104, 108.) No record was ever developed which would permit one to draw that conclusion.
At the hearing accorded the insurer it was prevented from introducing any contradictory evidence of solvency. Cross-examination of an adversary's witnesses, no matter how extensive, is no substitute for the introduction of evidence. In a case where disputed questions of fact are in issue, it is up to the trier of fact to determine what actually transpired after a "full hearing". A determination cannot be adequately made and supported simply on the evidence offered by one party weighed against the other party's offer of proof. As we said in Matter of Hecht v. Monaghan ( 307 N.Y. 461, 470): "`To one who protests against the taking of his property without due process of law, it is no answer to say that in his particular case due process of law would have led to the same result because he had no adequate defense upon the merits.' * * * ( Coe v. Armour Fertilizer Works, 237 U.S. 413, 424)".
A violation of the Insurance Law must be proved before the Superintendent can intervene to rehabilitate a company. We cannot speculate how the insurer's case would have developed, or how the Judge would have viewed the facts after the insurer was given the opportunity to present its case on a "full hearing". It is sufficient to say in this case that the procedure adopted by the trial court prevented any opportunity for this evidence to be aired. Since the insurer was not given an opportunity to controvert the keystone of the Superintendent's contention that the insurer was insolvent, we fail to see how the Appellate Division concluded that the insurer's offer of proof was insufficient since the insurer's specific objection to the hearing accorded would have preserved its right to appeal even if no offer of proof was made.
Consequently, the view of the Appellate Division that the Superintendent's finding of insolvency, even if Citizens differed with it, "would not prove that the Superintendent's determination of insolvency warranting rehabilitation was unsupported" is incorrect.
One final point must be made concerning the argument advanced by the intervenors-appellants, two sellers of insurance for Citizens. The intervenors objected to part of the Superintendent's petition against Citizens. They moved to have the objectionable paragraph stricken from the petition, and the court so ordered. Subsequently they offered to submit findings which the court rejected. They now claim that it was prejudicial for the court to refuse to determine the issues raised against them which the court struck from the petition. This proceeding is not one to vindicate private parties from unwarranted attacks by public officials. The allegation was stricken. This is all the relief to which they are entitled.
The order of the Appellate Division should be reversed and the case remitted for further proceedings in accordance with this opinion.
I cannot subscribe to the view of the majority that the "full hearing" referred to in section 526 of the Insurance Law envisages or calls for a trial de novo on the issue of the insurer's insolvency. It is indisputable that an extensive hearing was held in this case — indeed, the testimony accounts for nearly 300 pages in the printed record on appeal — but the appellant insurance company contends that the judge, by refusing to allow it to present certain evidence, failed to comply with the statutory mandate and denied it due process of law.
Citizens Casualty urges that the special summary proceeding provided by section 526 was the proper forum for the introduction of extensive evidence which, it asserts, would have tended to show its solvency. To allow it to do so, however, would, it seems to me, be completely destructive of the purpose and policy which underlie the provisions for the speedy appointment of a rehabilitator as a temporary receiver to preserve and protect the company's assets. It would mean that the extensive and exhaustive study and investigation conducted by the Superintendent of Insurance as to the insurer's financial integrity, its insolvency and the need for its rehabilitation would go for naught and that, despite the investigation that had been made, no effective action could be taken until after a full-blown trial with all the delay which that would involve, at the expense of the rights of policyholders, creditors and the public generally.
Section 526 recites that, if the Superintendent of Insurance desires to rehabilitate an insurance company, he must commence a proceeding in the Supreme Court by an order to show cause and "after a full hearing, which shall be held by the court or justice without delay, such court, or justice shall either deny the application or grant the same". And section 511 provides, insofar as here relevant, that the Superintendent may apply for such an order on the ground that the insurer "is insolvent within the meaning of section ninety-three". Based on that provision, as well as the underlying policy considerations, the court concluded — as I suggest it was required to do — that it was. In so many words, the Legislature declared in section 93 that "Whenever the superintendent finds * * * from a report on examination" of an insurer that it "is unable to pay its outstanding lawful obligations as they mature in the regular course of business * * * such insurer shall be deemed insolvent and he may proceed against it under the provisions of article sixteen". (Emphasis supplied.)
It seems manifest that the requirements of those sections (§§ 93, 511) were satisfied when it was established that there had been an investigation of the insurance company, that a report had been made which demonstrated that the company's liabilities exceeded its assets and that, on the strength of such report, the Superintendent had found that the company was insolvent. Once this was shown, the statute proclaims, the insurer was "deemed" to be insolvent, and the court was not required or authorized to take evidence as to the company's financial condition. In other words, the court's rejection of the proof proffered, far from being an attempt to limit Citizens' procedural rights, merely constituted the exclusion of irrelevant evidence.
However, and this is of high significance, the court's action did not foreclose review of the Superintendent's finding and determination of insolvency. Section 526 of the Insurance Law is implicit with the idea of further judicial action and, as section 34 of that statute indicates, an article 78 proceeding is at hand to assure the company judicial review of the issue once the statutory proceeding has been concluded. (See, e.g., Matter of Guardian Life Ins. Co. v. Bohlinger, 308 N.Y. 174, 182; see L. 1956, ch. 932.) The availability of this alternative procedure refutes the company's claim that it was denied due process of law. The constitutional guarantee of due process does not require that a hearing be held before an administrative officer can take effective action. (See, e.g., Ewing v. Mytinger Casselberry, 339 U.S. 594, 599.) As the Supreme Court stated in the Ewing case, "The harm to property and business can also be incalculable by the mere institution of proceedings. Yet it has never been held that the hand of government must be stayed until the courts have an opportunity to determine whether the government is justified in instituting suit in the courts. Discretion of any official may be abused. Yet it is not a requirement of due process that there be judicial inquiry before discretion can be exercised. It is sufficient, where only property rights are concerned, that there is at some stage an opportunity for a hearing and a judicial determination" (339 U.S., at p. 599; emphasis supplied).
In point of fact, Citizens actually instituted such a proceeding and the court below expressly declared that it was prepared to take evidence on the subject of insolvency and pass on the merits of that question in that article 78 proceeding.
A moment's reflection, I suggest, points the need — if the insurance company desires court review in a case such as the present — that the question of solvency be fully explored only in a later article 78 proceeding. Section 526 provides for a special proceeding intended to be speedily disposed of; the statute explicitly specifies that the proceeding is to be commenced by order to show cause and heard "without delay". It would be unreasonable, indeed unfair to both parties, to use a hearing instituted on such short notice as the forum for the exposition and development of the complex and difficult issues involved in the consideration of an insurance company's solvency. The need to spend the extensive time which would be required for the presentation of the detailed factual contentions and their evaluation by the court of first instance and by the appellate courts — to which the case would inevitably be prosecuted — would overturn the legislative design that a petition for rehabilitation be decided speedily and without delay.
The hearing court's reliance, at this stage of the litigation, on the Superintendent's determination that Citizens was insolvent not only comports with the statutory scheme but allows for the most efficacious resolution of all of the conflicting interests. The Superintendent is afforded a provisional remedy that assures the public protection while, at the same time, permitting the company to remain in business. The factual basis of the finding of insolvency would still be subject to review but in a more deliberate proceeding in which both parties would have the fullest opportunity to prepare and present their cases.
Over and beyond this, I think that the Appellate Division was eminently correct in concluding that, even if the court were privileged, in a section 526 proceeding, to try the issue of insolvency and render its own independent determination, the items of proof which the appellant presented were not, in any event, sufficient to raise a substantial issue as to the factual basis of the Superintendent's determination. Without going into the many different items contained in the offer of proof individually, they may be divided into two principal categories: (1) challenges to the particular sampling methods used by the examiners and (2) attempts to attribute deficiencies and improper practices to the prior management of the insurer. The essential correctness of the Superintendent's finding that there was an "excess of its required reserves and other liabilities over its admitted assets" at the time in question was not challenged by any of the items of proof offered. In fact, a quarterly statement, issued by the appellant during the course of the hearing, indicates that it did not yet have sufficient information to determine its own financial condition and that it was certainly in no position to disprove the Superintendent's finding of insolvency. Consequently, in my opinion, this case involves nothing more than a totally inadequate offer of proof.
In view of the protection against arbitrary action afforded by section 34 of the Insurance Law and article 78 of the CPLR, and having in mind the grave public necessity for prompt and decisive steps to prevent the continued unsupervised operation of insurance companies found to be insolvent, further delay in the appointment of a rehabilitator in this case should not be sanctioned.
The order appealed from should be affirmed.
Judges BURKE, SCILEPPI and BREITEL concur with Judge KEATING; Chief Judge FULD dissents and votes to affirm in a separate opinion in which Judges BERGAN and JASEN concur.
Order reversed, with costs, and matter remitted to Supreme Court, New York County, for further proceedings in accordance with the opinion herein.