PUBLISH IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT ------------------------------------------- Nos. 96-3657 & 97-2041 -------------------------------------------- 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.

---------------------------------------------------------------- Appeals from the United States District Court for the Northern District of Florida ---------------------------------------------------------------- (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 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.

We affirm on all other issues.

Background

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.

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.

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

nonrenewal of residential policies. See Fla. 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

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. 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

from doing business in the State of 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

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. 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 the Moratorium Phaseout Statute. This

Although 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 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. rights under the Fourteenth Amendment.

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 Plaintiffs filed complaints alleging 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.

Two cases by insurance companies against the Defendants were consolidated in this appeal. 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

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,

“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

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

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 Constitution.

Plaintiffs argued an additional issue:

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, 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). 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

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

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

[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) --

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

Plaintiffs also allege that a regulatory

(non per se) taking is effected by the 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

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). 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

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

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

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

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

fact that must be determined based upon an expiration of the moratorium in 1999.

2. Investment-Backed Expectations

Plaintiffs also allege that the

limitations on their withdrawal from the

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”).

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

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

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

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

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

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

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

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

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

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.

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

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).

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

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

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

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.

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

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 . . .

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 insurance contracts; so based upon the

Plaintiffs 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 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.”).

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.