Fireman's Fund Ins. Co. v. ARIZ. INS. GUAR. ASS'N

OPINION

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.1 Prior to the enactment of the legislation there was a nationwide and statewide call for protective legislation to prevent hardship on individuals who were insured by companies which became insolvent. The problem was most prevalent in the area of fire and casualty insurance which includes automobile liability insurance. Policyholders were left with unpaid claims and no protection was provided to policyholders of said companies against third-party claims. The principal aim as stated in the Act itself under the heading Purpose of Act is to “ . . . avoid financial loss to claimants or policyholders because of the insolvency of an insurer.” The general format of the legislation was the creation of a statutory association consisting of all insurers authorized to transact business in the state in the designated insurance lines. Assessments on said member insurers under the Act are made after the occurrence of an insolvency and after a determination as to the amount of losses or claims anticipated.

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:

“Corporations may be formed under general laws, but shall not be created by special Acts . . . ”

Article XIV, Section I provides:

“The term ‘corporation,’ as used in this Article, shall be construed to include all associations and joint stock companies having any powers or privileges of corporations not possessed by individuals or co-partnerships.”

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 interpret*456ing this provision. In Board of Regents of University of Arizona v. Sullivan, 45 Ariz. 245, 42 P.2d 619 (1935), the Arizona Supreme Court discussed whether the Legislature could confer certain corporate powers upon the Board of Regents of the University of Arizona without violating Article XIV, Section II of the Arizona Constitution. Appellants argue that the court in upholding the power of the Legislature to clothe institutions of higher education with certain corporate powers, interpreted Article XI of the Arizona Constitution as containing a special mandate to the Legislature to enact laws for these educational institutions. Conversely, appellees argue that Board of Regents, supra, does not hold that only educational institutions are excepted from Article XIII and Article XIV, but that other exceptions exist as well. Without referring to any specific language within the opinion itself, our reading of the case cannot yield conclusively a finding that appellants’ or appellees’ interpretation is correct under the present circumstances. We thus find it necessary to interpret the constitutional prohibition in light of the policy meant to be served by it in connection with the purposes of the Act under consideration.

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:

“There shall be no special law or general law of local application pertaining to: private incorporation or grant of privilege to a private corporation;

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 *457does not abridge our constitutional prohibition in that it fulfills a necessary public purpose.

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.2 Therefore, it can be argued that the Association is akin to an administrative agency and should be analyzed in that context. Appellants believe that such an application is inappropriate because state agencies are directly responsible and answerable to the Legislature and dependent upon the Legislature for funding; in other words, that the Association by not being an agency is absolved of accountability and therefore the issue of improper delegation should be evaluated with greater scrutiny. We do not agree.

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. Maraña Plantations, 75 Ariz. Ill, 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.2d51 (1968).2a Because of the special knowledge and skills possessed by the Director, the Legislature has authorized the Director to do things which it might not properly do itself and has set standards within which the Director is to operate. See A.R.S. §§ 20-663, 20-665, 20-666 and *45820-670. Furthermore, A.R.S. §§ 20-142, 20-156, 20-157 and 20-158 establish adequate standards and procedures for overseeing the Association so that it can be determined that there is compliance with the Act. It is therefore our judgment that the rules pertaining to administrative agencies are appropriate in this instance.

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,

“A statute need establish no more than a sufficient basic standard, i. e., a definite policy and rule of action which will serve as a guide for the administrative agency, in order for the delegation of legislative power to be deemed valid, [citations omitted].”

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,

“. . . And the standards which must accompany such grant of legislative power need not necessarily be set forth in express terms if they might reasonably be inferred from the statutory scheme as a whole.” State v. Arizona Mines, supra, at 107 Ariz. 205, 484 P.2d at 625.

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:

1) A failure to assure that all insurance companies whose financial worth is to be made subject to the direction and action of the Board of Directors have a voice in their selection;
2) No provision by statute is made for the method by which the members of the Board of Directors are to be selected ;
3) No indication is given as to how member insurers who qualify to join in the selection of the directors shall be identified;
4) The Act is silent with respect to any notice of hearing in determining amount due from member insurers or who are member insurers subject to assessment;
5) The statute is silent as to any requirements for notice and hearing in relationship to all functions of the Board of Directors; and
6) The statute calls for the organization of the Board of Directors by member insurers and that the Board submit the plan of operation to the Director, yet the plan of operation is to be prepared and adopted before the directors can be selected because the plan of operation is to spell out the terms and plans of the Board of Directors.

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 pre*459cise explanation. 16 Am.Jur.2d, Constitutional Law § 548 (1964) indicates:

“Procedural due process may be defined as the aspect of due process which relates to the requisite characteristics of proceedings looking toward a deprivation of life, liberty or property; procedural due process makes it necessary that one whom it is sought to deprive of such a right must be given notice of this fact . he must be given an opportunity to defend himself . . . and the problem of the propriety of the deprivation, under the circumstances presented, must be resolved in a manner consistent with essential fairness.”

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) :

“It is not necessary, in order to provide due process, that interested parties be present at stages of the legislative deliberations.” 86 Ariz. at 389, 346 P.2d at 1108-1109.

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. § 2Q-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):

“Merely because the possibility exists that there may be an arbitrary and capricious use of power legitimately delegated under the statute is not sufficient reason to entertain a presumption that the power granted will be so exercised, [citations omitted].” 79 Ariz. at 412, 291 P.2d at 770

*460It would be virtually impossible for the Legislature to promulgate comprehensive rules for the administrative procedures and functions of the various administrative agencies. The Association created, clothed with public purpose, must be allowed to make operative decisions free from the interference of adversary hearings in order to smoothly and efficiently function in fulfilling its purpose designed by the Legislature. So long as members have an available method of recourse for grevious actions, due process of law is not violated. To hold otherwise would stifle governmental processes rather than aid them. The Plan of Operation was intended by the Legislature to provide for the administration of the Association and is “to assure the fair, reasonable, and equitable administration of the association.” A.R.S. § 20-665(A). All matters as indicated before are subject to review. As said in O’Malley v. Florida Insurance Guaranty Association, supra, 257 So.2d at p. 13, whose Association like the Arizona Association is based on the model bill:

“Adequate safeguards appear to be provided in the statute for the collection and use of trust funds so far as it is humanly possible by law to safeguard their collection and use. There appears to be conferred in the State Insurance Commissioner adequate supervisory authority over the organization and operation of the Guaranty Association to protect the public interest.”

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” 3 paid will not be entirely lost in that the Association will make recoveries out of the receivership of the insolvent insurer’s assets. A.R.S. § 20-667. Thus, within the Act there are built-in adjustments which are fair, proper and protective of appellants’ economic concerns.

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:

“ . . . The association may exempt or defer, in whole or in part, the assessment of any member insurer, if the assessment would cause the member insurer’s financial statement to reflect amounts of capital or surplus less than the minimum amounts required for a certificate of authority by any jurisdiction in which the member insurer is authorized to transact.”

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 *461correct,4 we do not believe that there is an infringement of substantive due process. Having previously determined that the Association is a creation of the states’ police power, the test of validity of such a statute has been described by our Supreme Court in quoting 16 C.J.S. Constitutional Law § 198, p. 573, as follows:

“ , . . the test of validity within the police power is whether or not ends sought to be attained are appropriate and the regulations prescribed are reasonable. The measure of reasonableness of a police regulation is what is fairly appropriate to its purpose under all circumstances, and not necessarily what is best; and the test of reasonableness is whether the attempted regulation make efficient constitutional guaranties and conserves rights, or is destructive of inherent rights.” Myerson v. Sakrison, 73 Ariz. 308, 313,240 P.2d 1198,1201 (1952).

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):

“. . .If the laws passed are seen to have a reasonable relation to a proper legislative purpose, and are neither arbitrary nor discriminatory, the requirements of due process are satisfied, and judicial determination to that effect renders a court functus officio. . . .” 291 U.S. at 537, 54 S.Ct. at 516.

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.5 The fact that forty states, including Arizona, have enacted the essential elements of the N.A.I.C. Model Bill is a strong barometer that there exists a regulatory need and current usage of such legislation. The rational basis test is clearly met. In short, substantive due process remains unfettered. For a recent Washington case in accord see Aetna Life Ins. Co. v. Washington Life & Dis. I. G. Ass’n, 83 Wash.2d 523, 520 P.2d 162 (1974).

IV. THE ACT VIOLATES THE EQUAL PROTECTION GUARANTEE OF THE UNITED STATES CONSTITUTION

Appellant argues that the Act is violative of the equal protection clause in that *462the Act permits the Association to exempt or defer, in whole or in part, an assessment against a member insurer, with such exemption having no rational relationship to the fulfillment of the purpose of the Act and that the Act arbitrarily and capriciously allocates the economic cost of the operation of the Association .among the general public. Although appellants’ argument is not without merit, its persuasiveness and strength is unable to overcome the presumption of constitutionality.

“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.

Affirmed.

STEVENS, J., concurs.

. The N.A.I.C. Model Bill has been enacted into law by Alaska, Arizona, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, North Dakota, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia and Wyoming. California and Michigan enacted similar legislation prior to the N.A.I.C. Model Bill. New Jersey, New York and Wisconsin enacted guaranty fund legislation prior to the N.A.I.C. Model Bill.

. See § 20-661(6)

. On January 28, 1969 the Governor of Arizona issued his proclamation declaring approval by the people of an amendment of the Constitution of Arizona removing from the Corporation Commission the licensing control and supervision of domestic and foreign insurers and providing for the establishment of a Department of Insurance and appointment of a director thereof by the Governor. See 1969 Session Laws Arizona, Twenty-Ninth Legislature First Regular Session, 565-567 ; Arizona Constitution, Article 14, § 17; Arizona Constitution, Article 15, § 5; and A.R.S. § 20-101.

. See § 20-661(3)

. § 20-664 (A) (3) provides that the association may exempt, therefore such exemption is not mandatory.

. See Memorandum of National Association of Insurance Commissioners, 660 E. Mason St., Milwaukee, Wisconsin 53202 Re: NAIO State Post Assessment Insurers Guaranty Association Model Bill. Prepared by the staff of the NAIC Central office Dec. 31, 1969.