The First Circuit recently heard an appeal regarding a challenge to amendments to Puerto Rico’s Compulsory Motor Vehicle Liability Insurance Act, Law No. 253. The law requires auto vehicle registrants, upon vehicle registration, to pay premiums for compulsory auto insurance through a Commonwealth-created association of private insurers in Puerto Rico. The registrants can, within seven years, obtain refunds if they purchase insurance with the same or better terms from another source.

Prior to the challenged amendments, all premium paid upon registering were kept in a reserve account, which was used to refund premiums where appropriate. The Amendments (in 2002 and 2004) provided that large portions of this reserve were to be moved to the General Fund to address budget shortfalls, but that vehicle registrants could still obtain refunds by following a designated procedure. Plaintiffs, vehicle registrants with rights to refunds of their compulsory premiums, claimed that these amendments violated the Takings Clause, the Due Process Clause, and the Equal Protection Clause.

The First Circuit upheld the lower court’s dismissal of the Equal Protection Clause claim with little discussion, applying the lax “rational basis” test. Without squarely addressing the substance of the Takings Clause claim, the First Circuit overturned the District Court’s determination that the claim was unripe.

In its discussion of the Due Process claim, however, the First Circuit left the success of both the Takings Clause claim and the Due Process claim in considerable doubt. In that discussion, the First Circuit noted that “the alleged deprivation caused by Law 230 -- the transfer of the duplicate premiums to the Secretary -- does not cause a permanent escheat,” and that rather, the funds are held in trust until the 7-year period for obtaining refunds passes. The court allowed that in certain previous decisions, even temporary impairments to property rights could constitute Due Process violations. However, the court noted that, unlike in those cases, the plaintiffs here did not have the use of the premiums before the alleged “deprivation;” rather, the funds were merely transferred from one trustee to another. Due to inadequate briefing, however, the First Circuit remanded the case to the District Court to determine whether this minimal impairment – a change in trustees, plus a change in the procedure to obtain a refund – could constitute a Due Process violation.

For a copy of the decision, please click here.