Under Pennsylvania law, is the Commonwealth’s Joint Underwriting Association a public or private entity?
Pennsylvania Prof’l Liab. Joint Underwriting Ass’n v. Wolf, Nos. 18-2297 et al. (3d. Cir), petition for certification of question of state law granted March 8, 2023, SCOPA docket 7 EAP 2023
The Pennsylvania Supreme Court will consider whether the Pennsylvania Joint Underwriting Association (JUA or Association), a statutorily-created nonprofit joint underwriting insurance association, is a public or private entity under Pennsylvania law. This case comes before the court by way of a Petition for Certification of Question of State Law filed by the U.S. Court of Appeals for the Third Circuit (“Third Circuit Petition”) in connection with three related pending appeals from decisions of the U.S. District Court for the Middle District of Pennsylvania finding that a series of state statutes seeking to direct JUA’s assets violated the Fifth Amendment Takings Clause of the U.S. Constitution.
Background
The district court in Pa. Prof’l Liab. Joint Underwriting Ass’n v. Wolf, 324 F. Supp. 3d 519 (M.D. Pa. 2018) (“JUA I”) summarized the background of JUA as follows:
The Joint Underwriting Association is a nonprofit association organized under the laws of the Commonwealth of Pennsylvania. The General Assembly created the Association in 1975 in response to a “hard market” for medical malpractice insurance in the Commonwealth. The Association was initially established and organized by the Pennsylvania Health Care Services Malpractice Act of 1975, P.L. 390, No. 111 (“Act 111”). The General Assembly repealed Act 111 on March 20, 2002, enacting in its place the Medical Care Availability and Reduction of Error Act (“MCARE Act”), 40 Pa. Stat. & Cons. Stat. Ann. § 1303.101 et seq.
1. The MCARE Act and the Joint Underwriting Association
The MCARE Act is a sweeping piece of legislation. The Act’s overarching goal is to ensure a “comprehensive and high-quality health care system” for the citizens of the Commonwealth. Id. § 1303.102(1). In pursuit of this objective, the Act seeks to guarantee that medical professional liability insurance is “obtainable at an affordable and reasonable cost,” to ensure prompt and fair resolution of medical negligence cases, and to reduce and eliminate medical errors. Id. § 1303.102(3)–(5). The Act includes patient safety rules and reporting obligations, see id. §§ 1303.301–.315, establishes requirements relating to reduction and prevention of health care associated infections, see id. §§ 1303.401–.411, and develops standards for medical professional liability litigation and compensation, see id. §§ 1303.501–.516.
The MCARE Act also establishes a Medical Care Availability and Reduction of Error Fund (“the MCARE Fund”). See id. §§ 1303.711–.716. The General Assembly designed the MCARE Fund as a “special fund” within the state treasury to be administered by the Insurance Department of Pennsylvania (“the Department”). Id. §§ 1303.712(a), –.713(a). The Fund provides a secondary layer of medical professional liability coverage for physicians, hospitals, and other health care providers in the Commonwealth. See id. § 1303.711(g). It is funded primarily by annual assessments (“MCARE assessments”) on health care providers as a condition of practicing in the Commonwealth. See id. § 1303.712(d)(1).
Additionally, the MCARE Act continues operation of the Joint Underwriting Association. Id. § 1303.731(a). Unlike the MCARE Fund, the General Assembly did not establish the Association as a “special fund” or a traditional agency within the Commonwealth’s governmental structures. See id.; cf. id. §§ 1303.712(a), –.713(a). Instead, the General Assembly “established” the Association as “a nonprofit joint underwriting association to be known as the Pennsylvania Professional Liability Joint Underwriting Association.” Id. § 1303.731(a). Like its predecessor, see Act 111, § 802, the MCARE Act mandates membership in the Association for insurers authorized to write medical professional liability insurance in the Commonwealth, 40 Pa. Stat. & Cons. Stat. Ann. § 1303.731(a). Currently, the Association has 621 member insurance companies.
The Association is charged by statute with offering medical professional liability insurance to health care providers and entities who “cannot conveniently obtain medical professional liability insurance through ordinary methods at rates not in excess of those applicable to [those] similarly situated.” 40 Pa. Stat. & Cons. Stat. Ann § 1303.732(a). The MCARE Act sets forth broad parameters for achieving this objective, to wit:
The [Joint Underwriting Association] shall ensure that the medical professional liability insurance it offers does all of the following:
(1) Is conveniently and expeditiously available to all health care providers required to be insured under section 711.
(2) Is subject only to the payment or provisions for payment of the premium.
(3) Provides reasonable means for the health care providers it insures to transfer to the ordinary insurance market.
(4) Provides sufficient coverage for a health care provider to satisfy its insurance requirements under section 711 on reasonable and not unfairly discriminatory terms.
(5) Permits a health care provider to finance its premium or allows installment payment of premiums subject to customary terms and conditions.
Id. § 1303.732(b)(1)–(5). The Association insures “all comers” who certify that they cannot obtain coverage at competitive rates. According to the Association, its insureds generally fall into four categories: (1) providers with a history of malpractice occurrences, (2) providers practicing high-risk specialties, (3) providers who have gaps in coverage, or (4) providers reentering the medical profession after loss or suspension of license or voluntary withdrawal from practice.
The Association, like other insurers in the Commonwealth, is “supervised” by the Department through the Insurance Commissioner (“Commissioner”). 40 Pa. Stat. & Cons. Stat. Ann. § 1303.731(a); see, e.g., id. §§ 221.1–a to –.15–a, 1181–99. The MCARE Act prescribes four “duties” to the Association. Id. § 1303.731(b). It requires the Association to submit a plan of operations to the Commissioner for approval. Id. § 1303.731(b)(1). It tasks the Association to submit rates and any rate modifications for Department approval. Id. § 1303.731(b)(2) (incorporating 40 Pa. Stat. & Cons. Stat. Ann. §§ 1181–99). It requires the Association to “[o]ffer medical professional liability insurance to health care providers” as described above. See id. § 1303.731(b)(3). And it directs the Association to file its schedule of occurrence rates with the Commissioner, which she uses to set a “prevailing primary premium” for calculating the annual MCARE assessments for all health care providers in the Commonwealth. Id. § 1303.731(b)(4) (incorporating 40 Pa. Stat. & Cons. Stat. Ann. § 1303.712(f) ). The Act insulates the Commonwealth from the Association’s debts and liabilities. Id. § 1303.731(c).
The MCARE Act provides that all “powers and duties” of the Association “shall be vested in and exercised by a board of directors.” Id. § 1303.731(a). The board’s composition, and all of the Association’s operative principles, are set forth in a plan of operations developed by the Association with Department assistance and approval. []see also 40 Pa. Stat. & Cons. Stat. Ann. § 1303.731(b)(1). The plan establishes a 14–member board of directors, which consists of the current Association president; eight representatives of member companies chosen by member voting; one agent or broker elected by members; and four health care provider or general public representatives who may be nominated by anyone and are appointed by the Commissioner. Under the plan, the Association may be dissolved (1) “by operation of law,” or (2) at the request of its members, subject to Commissioner approval. The plan provides that, “[u]pon dissolution, all assets of the Association, from whatever source, shall be distributed in such manner as the Board may determine subject to the approval of the Commissioner.”
The Joint Underwriting Association writes insurance policies directly to its insured health care providers. Policyholders pay premiums directly to the Association. The Association is funded exclusively by policyholder premiums and investment income. It is not and has never been funded by the Commonwealth, and it holds all premiums and investment funds in private accounts in its own name. The Association currently insures approximately 250 policyholders. The typical medical professional liability policy issued by the Association covers a one-year period, with a limit of $500,000 per claim and aggregate limits of $1,500,000 for individuals and $2,500,000 for hospitals.
The Association maintains contingency funds—its “reserves” and its “surplus”—which allow the Association to fulfill its insurance obligations in the event of greater-than-anticipated claims or losses. An insurer’s “reserves” are the “best estimate of funds … need[ed] to pay for claims that have been incurred but not yet paid.” Its “surplus” represents “capital after all liabilities have been deducted from assets.” The surplus operates as a “backstop” to ensure that unforeseen events do not impede an insurer’s ability to meet obligations to its insureds. As of December 31, 2016, the Joint Underwriting Association maintained a surplus of approximately $268,124,500.
JUA I at 523–26 (internal record citations omitted).
Act 44 (JUA I)
In 2017, Governor Tom Wolf signed Act 44 of 2017, P.L. 725 (Oct. 30, 2017) (Act 44), an enactment implementing the Commonwealth’s 2017-2018 budget into law. Among other things, Act 44 mandated that the JUA pay $200 million to the State Treasurer for deposit into the Commonwealth’s General Fund. Additionally, Act 44 provided that if JUA did not make this transfer within a month and a day, the MCARE Act provision creating JUA would immediately expire and the JUA would be abolished, with its assets transferred to the Insurance Commissioner with direction to deposit the money into the Commonwealth’s General Fund as soon as practicable. Act 44 further stated that JUA has money in excess of the amount reasonably required to fulfill its statutory mandate; those funds do not belong to any members of the JUA or the insureds covered by the policies issued; the JUA is an instrumentality of the Commonwealth, and money under its control belongs to the Commonwealth; the Commonwealth is in need of revenue from all possible sources; and the JUA’s payment of $200 million to the Commonwealth is in the best interest of the Commonwealth’s residents.
JUA filed suit against the Governor of Pennsylvania alleging, inter alia, that Act 44 violated the Takings Clause of the U.S. Constitution by taking JUA’s private assets via transfer to the State Transfer without just compensation. The General Assembly of Pennsylvania intervened and the parties filed cross-motions for summary judgment. The Governor and General Assembly countered that JUA “could not state a claim against the Commonwealth because it is a public entity, i.e., effectively a creature of the Commonwealth, and such suits are barred.” Third Circuit Petition at 9.
The District Court granted summary judgment, declaratory judgment, and permanent injunctive relief in favor of JUA, holding that Act 15 violated the Takings Clause. The Third Circuit summarized the relevant portion of JUA I as it relates to the certified question:
The District Court concluded that the JUA is a “private entity as a matter of law” and so was not barred from asserting federal constitutional claims against the Commonwealth. Id. at 535. Guided by its interpretation of cases from the United States Courts of Appeals for the First and Fifth Circuits involving similar entities, the District Court “holistically examined [the JUA’s] relationship with the state” to determine whether the JUA is a public or private entity. Id.
The Court considered “the nature of the [JUA’s] function, the degree of control reserved in the state (or the level of autonomy granted to the [JUA]), and the statutory treatment, if any, of the [JUA], in addition to the nature of the funds implicated.” Id.
In conducting its analysis, the District Court found, first, that the JUA’s function is “inherently private” because it is comprised of private members, governed by a private board, funded by privately-paid premiums, and provides medical malpractice coverage to private persons; second, that the JUA is subject to de minimis Commonwealth supervision and its board has “nearly unfettered autonomy” in its powers and duties; third, its statutory treatment is limited to general supervision by the Insurance Commissioner, similar to the oversight the Commissioner exerts over all Commonwealth insurers; and fourth, its funds are private because the JUA has never received Commonwealth funding and the funds do not have a public end-use. Id. at 535-38. The District Court held that Act 44 was an unconstitutional taking of private property because the Act failed to provide any compensation for divesting the JUA of $200 million. Id. at 538-39.
Third Circuit Petition at 9-10. The Governor and General Assembly appealed JUA I to the Third Circuit.
Act 41 (JUA II)
Following the district court’s decision in JUA I, Governor Wolf signed Act 41 of 2018, P.L. 273 (June 22, 2018) (“Act 41”) into law. Act 41 declared that the JUA “shall continue as an instrumentality of the Commonwealth” and “operate under the control, direction, and oversight” of the Insurance Department; replaced the member-led JUA board with a state-controlled board; installed a new executive director to be hired and paid by the Commonwealth; provided that any claims against or liabilities of the JUA would be considered a liability against the Commonwealth; and required all documents, papers, and assets of the JUA be transferred to the Insurance Department within 30 days of the Act’s effective date. 40 P.S. §§ 323.11-A, 12-A, 21-A.
In Pa. Prof’l Liab. Joint Underwriting Ass’n v. Wolf, 381 F. Supp. 3d 324 (M.D. Pa. 2018) (JUA II), the district court declined to revisit its holding in JUA I that JUA is a private entity, observing that “a holistic approach, one which thoroughly examines the association’s relationship to the state through the prism of, inter alia, its function, autonomy, and statutory treatment as well as the nature (including the source) of its funds, best answers whether a statutorily-created nonprofit is private or public for constitutional purposes.” Id. at 340. The district court concluded:
The Joint Underwriting Association, since its inception, has been a private institution. It has operated just like a private insurance company for decades. It is privately funded and organized and has never received public funding. Until Act 41, the Commonwealth explicitly disclaimed any responsibility for the Association’s debts and liabilities. The Association covers its own operating expenses and bears its own aggregate insurance risk. Its plan of operations contemplates borrowing and reimbursable member assessments, not state financial support, in the event of a deficit. In stark contrast to MMIA, the Association is subject to minimal supervision by the Commissioner, in a manner not meaningfully different from private insurers. Given all of this, we will deny the legislative defendants’ request that we reconsider and abandon our analysis and holding in JUA I.
Id. The district court granted JUA’s motion for summary judgment and permanently enjoined enforcement of Act 41. The Governor and General Assembly appealed JUA II to the Third Circuit.
Act 15 (JUA III)
In 2019, Governor Wolf signed Act 15 of June 28, 2019, P.L. 101, No. 15, § 7 (Act 15) into law. Act 15 provided that the JUA shall: be funded by appropriations determined by the General Assembly; submit written budget estimates to the Commonwealth each year, about which a JUA agent will testify at a public hearing; appear before both Appropriations Committees of the General Assembly to testify about its fiscal status and make requests for appropriations; hold quarterly public meetings about its actuarial and fiscal status as required by the Commonwealth’s Sunshine Act; be considered a “Commonwealth agency” for purposes of the Commonwealth Attorneys Act, Right-to-Know Law, PennWATCH Act, and Procurement Code; and transmit a list of employees to the Commonwealth, conduct its operations in Commonwealth-owned facilities, and coordinate with the Department of Revenue to ensure that any employees with access to federal tax information have met all requirements of the Department of Revenue. JUA again filed suit in the federal district court challenging the constitutionality of Act 15 as violative of, inter alia, the Fifth Amendment Takings Clause.
Summarizing the district court’s opinion in Pa. Prof’l Liab. Joint Underwriting Ass’n v. Wolf, 509 F. Supp. 3d 212 (M.D. Pa. 2020) (JUA III), the Third Circuit explained:
Before addressing the specifics of Act 15, the District Court again reiterated its holding from JUA I that the JUA “is a private entity [whose] assets are private property[.]” [JUA III] at 222. The Court then evaluated each of the challenged provisions of Act 15 individually, concluding that the act’s mandatory funding of the JUA through the Commonwealth and the requirement that it submit and testify to budget estimates constituted an unconstitutional regulatory taking. Id. at 223-27. The Court also found that the categorization of the JUA as a Commonwealth agency for purposes of the Commonwealth Attorneys Act violated the JUA’s First Amendment right to consult and hire counsel of its choice. Id. at 228-31. Accordingly, the Court granted the JUA’s request for a permanent injunction as to those three sections of Act 15. Id. at 235.
The District Court granted summary judgment for the defendants on the remaining provisions of Act 15 – all of which had to do with the JUA’s disclosures to the public and the Commonwealth. Id. at 231-34. In doing so, the District Court “cabin[ed]” its decisions in JUA I and JUA II, stating: “In holding that the [JUA] is a private entity and its funds private property, we rejected defendants’ claims that the [JUA] is the state itself. We have never denied, however, that the [JUA] is a unique creature – a state-created private entity that furthers the General Assembly’s public-health objectives.” Id. at 232. The Court further stated that, though the JUA is private, “its mission is indisputably public.” Id. at 232 (emphasis in original).
Third Circuit Petition at 13-14. The Governor and General Assembly appealed JUA III as to the First Amendment and Takings Clause claims; JUA cross-appealed.
Certification of Question of State Law
Following briefing and oral argument, the Third Circuit filed a Petition for Certification of Question of State Law with the Pennsylvania Supreme Court. While acknowledging that the “fundamental question before [it] is one of federal law: whether [JUA] is an entity that can assert federal constitutional rights against the Commonwealth,” the Third Circuit concluded “that this case raises an important state law issue that bears on the federal law question, namely, whether as a matter of Pennsylvania law the JUA would be considered a public or private entity.” Third Circuit Petition at 14. The Third Circuit Petition continued:
To date, Pennsylvania courts have not analyzed whether the JUA is a public or private entity, but have referred to it as a “statutory facility,” Hosp. & Healthsystem Ass’n of Pa. v. Ins. Comm’r, 74 A.3d 1108, 1113 n.13 (Pa. Commw. Ct. 2013), and “statutory insurance pool,” id. at 1122 n.3 (Brobson, J., concurring). In JUA I, the District Court referred to the Pennsylvania statute for nonprofit associations, the Pennsylvania Uniform Unincorporated Nonprofit Association Law (“UUNAL”), when considering the JUA’s statutory treatment, stating: “As a nonprofit association, Pennsylvania law authorizes the [JUA] to acquire, hold, or transfer an interest in the funds and to use or set aside those funds for the nonprofit purposes of the [JUA].” 324 F. Supp. 3d at 538 (citing 15 PA. CONS. STAT. §§ 9114-15 (2013)) (cleaned up). Because of that, the District Court found that the nearly $300 million surplus carried by the JUA is private property, and that conclusion contributed to its holding that the JUA is a private entity. Id. at 538-39.
The Governor and Insurance Commissioner have categorized the District Court’s reference to the UUNAL as a fundamental flaw in analyzing the status of the JUA, arguing that the UUNAL was not enacted until 2013 and, before its enactment, unincorporated associations could not hold property. (JUA III Exec. Appellant’s Opening Br. at 20-21.) (citing Krumbine v. Lebanon Cty. Tax Claim Bur., 663 A.2d 158, 160 (Pa. 1995); Campbell v. Floyd, 25 A. 1033, 1036 (Pa. 1893)). The JUA contends that this argument is misplaced because Pennsylvania common law recognized that a nonprofit association authorized by statute, like the JUA, “could possess independent legal significance.” (JUA III JUA Answering Br. at 33.) (citing Krumbine, 663 A.2d at 160). Despite those arguments, it remains unclear whether the JUA’s public or private status is dictated by its possible treatment under other Pennsylvania statutes for example, those pertaining to nonprofit entities. See JUA I, 324 F. Supp. 3d at 537 (considering the JUA’s ability to be dissolved by an operation of law, like any nonprofit in the Commonwealth under 15 PA. CONS. STAT. § 9134(a)(5) (2013)).
In the acts creating the JUA, the General Assembly did not provide explicit direction regarding the status of the entity. Given the lack of clarity regarding that status, and given the importance of the constitutional questions at issue here, we now submit this Petition for Certification to the Pennsylvania Supreme Court.
Third Circuit Petition at 15-16 (footnote omitted).
The Pennsylvania Supreme Court granted the Third Circuit Petition and certified the following question: Under Pennsylvania law, is the Commonwealth’s Joint Underwriting Association a public or private entity?
For more information, contact Kevin McKeon or Dennis Whitaker.