different subparagraphs of section 3(b). All of the states involved in this litigation were and are in compliance with these provisions.
On October 31, 1978, however, the Holtzman Amendment added an eleventh condition to section 3(b) which states:
(11) Notwithstanding any other provision of this section, on and after January 31, 1979, no risk within the plan shall be insured at a rate higher than the rates or advisory rates set by the principal State-licensed rating organization for essential property insurance in the voluntary market; except that this provision shall not be deemed to prohibit the application to any such risk, on a nondiscriminatory basis, of condition charges for substandard physical conditions within the control of the applicant for insurance as set by the principal State-licensed rating organization for the voluntary market.
Both parties agree that the plans of the aforementioned five states do not meet the requirements of this eleventh condition. Defendants contend that in view of the failure of the five states to amend their plans to comply with the Holtzman Amendment, the Administrator was required to terminate all of their federal riot reinsurance, including those policies which have already been reinsured. In reaching this conclusion, the Administrator essentially relied on the provision that "no risk shall be insured" on and after January 1979, and determined that this provision effects an automatic and self-executing cut-off of federal riot reinsurance in states whose plans are not in compliance.
Section 7 of the Act, 12 U.S.C. §§ 1749bbb-7, contains the Act's sanction provisions. Thus, Section 7(c) directs that "[no] reinsurance shall be offered to any insurer or pool in a State... unless there is in effect in such State a [FAIR] plan..." (emphasis added). This, Plaintiffs argue, indicates that the only sanction available in the event of the failure of a state to enact or maintain an acceptable plan is that no new riot reinsurance may be offered or written after the time that the state is determined not to be in compliance, and that it therefore negates any inference that existing insurance may be terminated as a consequence of such noncompliance.
Finally, section 9 of the Act, 12 U.S.C. § 1749bbb-9, explains the conditions under which federal riot reinsurance may be terminated prior to the end of a policy year. Plaintiffs claim that since this section does not explicitly include the failure of a state to maintain a suitable FAIR plan among those conditions, termination is not required or permitted on account of such a failure.
While the statutory provisions do not illuminate the congressional purpose as precisely as one might wish, it is the Court's conclusion that the construction proposed by the Plaintiffs is correct with respect to the issue presented in this litigation.
No one disputes that if a state plan fails to comply with one or more of the First ten subparagraphs of section 3(b) the only sanction available to the Administrator is to refuse to offer new federal riot reinsurance in the offending states when the existing one-year contracts expire. Defendants' attempt to distinguish a failure to comply with the eleventh subparagraph (the Holtzman Amendment), however, based on its provision that "after January 31, 1979, no risk within the plan shall be insured" in case of such a failure, is not persuasive.
It is clear that under the Holtzman Amendment, no new federal riot reinsurance policies may be written in noncomplying states subsequent to January 31, 1979; it is certainly not clear, however, that Congress intended to enact a self-executing cut-off with respect to existing insurance. The language of the Amendment itself is at least as susceptible to the interpretation that subsequent to January 31 1979, no new reinsurance contracts shall be entered into as it is to the construction adopted by the Administrator.
Had the Congress wanted to do more than to simply add a new condition to the ten conditions already required of state plans, placement in section 7 (the sanction provision) or section 9 (the termination provision would have been far more logical than placement in a section having nothing to do with sanctions or terminations.
The words of the Holtzman Amendment, their placement in the statute, and the remainder of the statutory provisions, lead the Court to conclude that defendants erred when they purported to cancel the federal riot reinsurance here in question.
Reasonably construed as a whole, the statutory scheme presently requires that reinsurance contracts entered into subsequent to the adoption of the Holtzman Amendment include fair rate provisions, but causes for termination or other sanctions are governed by sections 7 and 9.
Defendants argue that the Holtzman Amendment was designed to make essential property insurance available t reasonable or fair, rates, and that this beneficial purpose can be achieved only by the construction they have adopted. While, to be sure, the amendment has the laudable purpose of lowering property insurance rates for urban areas, it would be erroneous to construe the amendment retroactively to affect existing reinsurance contracts. That purpose can, and by means of effective enforcement by Defendant presumably will, be attained with respect to further insurance contracts. But the attempt to achieve that purpose with respect to existing reinsurance contracts would expand and distort the statutory scheme beyond reason.
It may be worthy to note that the failure to change the insurance rates in question must be laid at the doorstep not of these Plaintiffs but of the five states involved. Yet it is these Plaintiffs who, under the Administrator's interpretation of the statute, will be left without adequate reinsurance
in the event of major riots or disturbances, and it is their insured who may be injured if adequate coverage cannot be provided.
Accordingly, it is this 3rd day of July, 1979,
ORDERED that Plaintiffs' motion for summary judgment be and it is hereby granted and Defendants' motion for summary judgment be and it is hereby denied, and it is further
ORDERED that Defendants be and they are hereby enjoined from terminating, prior to October 1, 1979, federal riot reinsurance coverage for insurance policies which Plaintiffs issued, and which therefore became insured, prior to Defendants' announced termination of federal riot reinsurance as of March 7, 1979, with respect to the States of Iowa, Minnesota, Missouri, New York and Virginia, and it is further
DECLARED that Defendants' refusal to continue in effect such federal reinsurance on such insurance policies in such states is unlawful, invalid, and void under the Urban Property Protection and Reinsurance Act of 1968, as amended, and that federal reinsurance of all policies issued prior to March 7, 1979, under the law continues in full force and effect in such states to and including September 30, 1979, unless the conditions of 12 U.S.C. § 1749bbb-9 are met.