The Supreme Court has been asked to review the first reported decision to hold that private insurers providing no-fault or other compulsory coverage become arms of the state subject to the same constitutional restraints as other government units.
The case involves the 1973 Michigan No-Fault Act, which compels every owner of a motor vehicle to buy insurance coverage.
In a 4-to-3 ruling last June, the Michigan Supreme Court struck down the requirement, which, it said, "profoundly and importantly affects a crucial dimension of our lives."
The requirement is unconstitutional, the majority said, because it denies the due process of law guaranteed by both the Michigan and federal constitutions to anyone who may be deprived of his property by the action of a state.
For practical purposes, Justice G. Mennen Williams wrote for the court, the insurers are the state because they "are the instruments through which the legislature carries out a scheme of general welfare."
Vehicle owners who don't buy policies may face "criminal and civil actions," Williams said. In addition, the law "specifies the extent of coverage to be provided and the conditions of payment for insurance benefits." Finally, he said, the law and the Insurance Code "provide for the assignment of claims and risks." He continued:
"This legislation goes beyond a grant of a monopoly or an attempt to regulate a utility; there exists a sufficiently close nexus between the state and the challenged action of the regulated entity so that the action . . . may fairly be treated as that of the state itself."
Having found that the insurers engage in "state action," the court held that the law denied due process by failing to provide sufficient procedural safeguards for insured persons as to the companies' conduct in setting no-fault rates, refusing to sell or renew policies and canceling coverage.
Michigan residents have an interest, protected by law, in no-fault insurance as "fair and equitable" rates, the court said. The interest is entitled to the protection of due process, and the insurers are constitutionally obligated to provide it, the court held.
Significantly, however, the court delayed the effective date of its finding of unconstitutionality for 18 months - to December 8, 1979 - on the assumption that the legislature and the insurance commissioner by that deadline will "seek to remedy the constitutional deficiencies" by seeing to it that "rates shall not be excessive, inadequate or unfairly discriminatory."
The real effect of all this is sharply disputed.
Allstate Insurance Co., which petitioned the U.S. Supreme Court for review, of course denies that insurers engage in state action, saying that in providing no-fault coverage they "do not perform a public function which has traditionally been performed by the state."
Beyond that, Allstate says, the decision, if permitted to stand, could subject insurers in every state and the District of Columbia to due process - meaning, at a minimum, that every motorist could get a prompt administrative review of, say, the calculation of his premium, or of the basis for a refusal or cancellation of coverage.
Thus, the decision confronts insurers with a threat of having to adopt "costly and time-consuming formal procedures," perhaps even for claims adjustments, Allstate said, and, it argued, the decision has implications beyond the insurance industry for private sectors that also provide essential services.
In a similar vein, the National Association of Independent Insurers and the Alliance of American Insurers, which enroll more than 500 insurance companies, submitted a friend-of-the-court brief contending that the "novel proposition" of the Michigan tribunal calls into question the constitutionality of compulsory insurance statutes of 24 states other than Michigan, including Maryland.
By contrast, the state of Michigan emphasized that its tribunal did not issue a "final judgment," that the U.S. Supreme Court's jurisdiction over the highest court of the state is limited to "final judgments and decrees," and that Allstate doesn't have a basis for litigating because it hasn't been harmed, the decision not having taken effect.
Moreover, said state Attorney General Frank J. Kelley, even if the decision was a final judgment, it rested on the due process clause in the Michigan constitution as well as on its counterpart in the federal Constitution. In such circumstances, Kelley contended, the long-settled rule of the Supreme Court is that it doesn't have jurisdiction.