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Discovery Insurance Co. v. The North Carolina Department of Insurance

Court of Appeals of North Carolina

October 3, 2017


          Heard in the Court of Appeals 6 September 2017.

         Appeal by petitioner from order entered 18 November 2016 by Judge G. Bryan Collins in Wake County No. 14 CVS 15290 Superior Court.

          Graebe Hanna & Sullivan, PLLC, by Douglas W. Hanna, for petitioner-appellant.

          Attorney General Joshua H. Stein, by Special Deputy Attorney General Daniel Snipes Johnson and Assistant Attorney General M. Denise Stanford, for respondent-appellee North Carolina Department of Insurance and the Commissioner of Insurance.

          Young Moore and Henderson, P.A., by Marvin M. Spivey, Jr., Glenn C. Raynor and Angela Farag Craddock, for respondent-appellee North Carolina Reinsurance Facility.

          TYSON, Judge.

         I. Background

         Respondent, the North Carolina Reinsurance Facility ("the Facility"), is a statutory entity, consisting of all motor vehicle liability insurers in North Carolina as required members. N.C. Gen. Stat. § 58-37-5 (2015). Discovery Insurance Company ("Discovery") is a Kinston, North Carolina-based insurance company engaged in selling motor vehicle insurance. Discovery was a member of the Facility at all times relevant to this appeal.

         "The Facility is a creation of North Carolina's Compulsory Automobile Liability Insurance Law." State ex rel. Hunt v. N. Carolina Reinsurance Facility, 302 N.C. 274, 283, 275 S.E.2d 399, 402 (1981). "The Facility is a pool of insurers which insures drivers who the insurers determine they do not want to individually insure." Id. The pertinent provisions are codified in Article 37, Chapter 58 of the General Statutes. N.C. Gen. Stat. §§ 58-37-1 to 58-37-75 (2015) (hereinafter referred to as "the Facility Act").

         All insurance companies which write motor vehicle insurance in North Carolina, are required to issue motor vehicle liability coverage insurance to any "eligible risk, " as is defined in N.C. Gen. Stat. § 58-37-1, who applies for that coverage, if the coverage can be ceded to the Facility. N.C. Gen. Stat. § 58-37-25(a). After writing a motor vehicle policy, an insurer can retain it as a part of its voluntary business or cede it to the Facility. Hunt, 302 N.C. at 283, 275 S.E.2d at 402.

         If the policy is ceded, the writing insurer pays the net premium to the Facility, less certain allowed expenses. The Facility becomes liable on that particular policy to reimburse the issuing insurer for claims paid. Id. at 283, 275 S.E.2d at 402-3.

         When a loss and claim occurs under the policy, the ceding company settles the claim and is reimbursed by the Facility. Id. The Facility is only authorized to reinsure coverages arising under motor vehicle insurance policies required to satisfy The Motor Vehicle Safety and Financial Responsibility Act, N.C. Gen. Stat. §§ 20-279.1 et seq., together with any other motor vehicle insurance as is required by federal law or regulation, state law, state administrative code, or rule adopted by the North Carolina Utilities Commission. N.C. Gen. Stat. § 58-37-35(b). The Facility is required to operate on a no profit-no loss basis. N.C. Gen. Stat. § 58-37-35(1).

         In November 2011, Discovery uncovered a fraudulent scheme by one of its claims executives, Roland Steed ("Steed"). From early 2005 until November 2011, Steed issued Discovery claim checks to fictitious persons and entities in order to have the proceeds of those checks to be deposited into accounts he controlled. Steed reported the fraudulent payments as legitimate payments under his management and control.

         Under his scheme, Steed issued checks for fraudulent payments totaling approximately $5.2 million. Of that total, Steed attributed approximately $1.3 million of those payments to claims on auto liability policies, which had been ceded to the Facility by Discovery. Before Steed's scheme was uncovered, the Facility had reimbursed Discovery for the approximately $1.3 million in claims paid under these ceded policies.

         Discovery notified the Facility upon learning of Steed's fraudulent activity in November 2011. Discovery asked the Facility to keep Steed's fraud confidential from all, except a select few of the Facility's executives, to allow the Department of Insurance a period of time required to conduct a criminal fraud investigation.

         The Facility honored Discovery's request and did not independently investigate Steed's fraudulent payments, until after Steed and his co-conspirators were indicted in August 2012. Following Steed's indictment, the Facility confirmed the net total of the claims payments attributable to Steed's fraud and reimbursed to Discovery was $1, 340, 921.25.

         In a letter to Discovery dated 25 October 2013, Facility staff noted the Facility only reimburses companies for payments of valid claims. The letter repeated the Facility's conclusion that $1, 340, 921.25 in reported, but fraudulent, losses reimbursed by the Facility were not valid claim payments, but were fidelity losses that were ineligible for reimbursement. The Facility instructed Discovery to repay these losses to the Facility.

         Discovery requested a hearing, pursuant to N.C. Gen. Stat. § 58-37-65(a), before the Facility's Board of Governors ("the Facility Board") to dispute the Facility's staff's 25 October 2013 letter requesting Discovery to repay the loss payments attributable to Steed's frauds. The Facility Board's hearing took place on 24 July 2013. On 19 August 2013, the Facility Board issued a final decision and held Discovery was obligated to repay the Facility the $1, 340, 921.25 in fraudulent claims payments previously reimbursed by the Facility.

         Discovery appealed the Facility Board's decision to the Commissioner of Insurance pursuant to N.C. Gen. Stat. § 58-37-65(b). At a December 2013 meeting, the Facility Board learned Discovery had appealed the Facility Board's 19 August 2013 ruling and had not repaid the fraudulent reimbursements made by the Facility. The Facility Board instructed Facility staff to issue a letter and a Supplemental Account Activity Statement to Discovery on 16 December 2013.

         The Hearing Officer, on behalf of the Commissioner of Insurance ("the Commissioner"), issued an order which affirmed the ruling of the Facility Board on 20 October 2014.

         Discovery petitioned the Superior Court of Wake County for judicial review of the Commissioner's order pursuant to N.C. Gen. Stat. § 58-37-65(b). The trial court affirmed the Commissioner's Order on 18 November 2016. Discovery timely filed notice of appeal to this Court on 16 December 2016.

         II. Jurisdiction

         The trial court reviewed Discovery's appeal of the Hearing Officer's order as a civil case pursuant to N.C. Gen. Stat. § 58-2-75(b). Jurisdiction lies in this Court from a final order of the superior court pursuant to N.C. Gen. Stat. § 1-277 (2015) and § 7A-27(b) (2015).

         III. Issues

         Discovery requests this Court review whether the Commissioner erred by: (1) holding the Facility acted within its statutory authority by ordering Discovery to repay the disputed claim payments; (2) finding the Facility was not required to institute a separate civil action against Discovery to recover the approximately $1.3 million at issue; (3) making findings of fact and conclusions of law regarding the audit responsibilities of the Facility, which are not supported by the whole record; (4) concluding that Discovery's affirmative defense of estoppel was not applicable; (5) not permitting pre-hearing discovery; and, (6) not considering the Facility's authority to issue the Supplemental Account Activity Statement.

         IV. Standard of Review

          N.C. Gen. Stat. § 58-37-65 of the Facility Act provides that "[a]ll rulings or orders of the Commissioner under this section shall be subject to judicial review as approved in G.S. 58-2-75." This statute provides for judicial review of orders and decisions of the Commissioner by the filing of a petition within 30 days from the date of the delivery of a copy of the order or decision by the Commissioner. Pursuant to N.C. Reinsurance Facility v. Long, 98 N.C.App. 41, 390 S.E.2d 176 (1990), N.C. Gen. Stat. § 58-2-75 is to be read in conjunction with N.C. Gen. Stat. § 150B-51 of the Administrative Procedure Act ("APA"). Long, 98 N.C.App. at 46, 390 S.E.2d at 179.

         Under N.C. Gen. Stat. 150B-51(b), the scope and standard of review is that in "reviewing a final decision, the court may affirm the decision of the agency or remand the case to the agency . . . for further proceedings." The court:

may also reverse or modify the [agency's] decision . . . if the substantial rights of the petitioners may have been prejudiced because the [agency's] findings, inferences, conclusions, or decisions are:
(1) In violation of constitutional provisions;
(2) In excess of the statutory authority or jurisdiction of the agency;
(3) Made upon unlawful procedure;
(4) Affected by other error of law;
(5) Unsupported by substantial evidence . . . in view of the entire record as submitted; or
(6) Arbitrary, capricious, or an abuse of discretion.

N.C. Gen. Stat. § 150B-51(b) (2015).

         The particular standard applied to issues on appeal depends upon the nature of the error asserted. "It is well settled that in cases appealed from administrative tribunals, questions of law receive de novo review, whereas fact-intensive issues such as sufficiency of the evidence to support an agency's decision are reviewed under the whole-record test." N. C. Dep't of Env't & Nat. Res. v. Carroll, 358 N.C. 649, 659, 599 S.E.2d 888, 894 (2004) (brackets, quotation marks and citation omitted).

         Errors asserted under subsections 150B-51(b)(1)-(4) are reviewed de novo. N.C. Gen. Stat. § 150B-51(c) (2015). Under the de novo standard of review, the reviewing court "considers the matter anew and freely substitutes its own judgment[.]" Carroll, 358 N.C. at 660, 599 S.E.2d at 895 (citation, internal quotation marks, and brackets omitted).

         When the error asserted falls within subsections 150B-51(b)(5) and (6), this Court applies the "whole record standard of review." N.C. Gen. Stat. § 150B-51(c) (2015). Under the whole record test,

[the reviewing court] may not substitute its judgment for the agency's as between two conflicting views, even though it could reasonably have reached a different result had it reviewed the matter de novo. Rather, a court must examine all the record evidence-that which detracts from the agency's findings and conclusions as well as that which tends to support them-to determine whether there is substantial evidence to justify the agency's decision.

Carroll, 358 N.C. at 660, 599 S.E.2d at 895 (internal citations and quotation marks omitted). " 'Substantial evidence' means relevant evidence a reasonable mind might accept as adequate to support a conclusion." N.C. Gen. Stat. § 150B-2(8c) (2015).

         V. Analysis

         A. The Facility Board Did Not Exceed Its Authority by Ordering Repayment

         Discovery argues the Facility Act does not authorize the Facility to issue an order of repayment. We disagree.

         When reviewing an action of the Facility Board, the Commissioner determines whether the challenged Facility action was taken in accordance with the Facility Act, the Facility's Plan of Operation and the Facility's Standard Practice Manual. N.C. Gen. Stat. § 58-37-65(c). Rule E of Section 5 of the Standard Practice Manual states "[f]idelity losses arising out of claims handling shall be the sole responsibility of the member company." Chapter 7.C of Section 4 of the Standard Practice Manual provides that "errors detected through the . . . functions of the Facility will be reported to the carrier with appropriate instructions for prompt correction." Regarding the power of the Facility Board, the Facility Act provides in pertinent part:

(g) Except as may be delegated specifically to others in the plan of operation or reserved to the members, power and responsibility for the establishment and operation of the Facility is vested in the Board of Governors, which power and responsibility include but is not limited to the following:
. . . .
(12) To adopt and enforce all rules and to do anything else where the Board is not elsewhere herein specifically empowered which is otherwise necessary to accomplish the purpose of the Facility and is not in conflict with the other provisions of this Article.

          N.C. Gen. Stat. § 58-37-35(g)(12) (emphasis supplied).

         1. Canons of Statutory Construction

         The rules governing this Court's review and construction of the General Statutes are well established. "[W]hen the language of a statute is clear and unambiguous, there is no room for judicial construction and the courts must give its plain and definite meaning, and are without power to interpolate, or superimpose, provisions and limitations not contained therein." State ex rel. Commissioner of Ins. v. North Carolina Rate Bureau, 43 N.C.App. 715, 719-20, 259 S.E.2d 922, 925 (1979) (quoting Norris v. Home Security Life Insurance Co., 42 N.C.App. 719, 721, 257 S.E.2d 647, 648 (1979)).

         "[A] statute, being remedial, should be construed liberally, in a manner which assures fulfillment of the beneficial goals for which it is enacted and which brings within it all cases fairly falling within its intended scope." Burgess v. Joseph Schlitz Brewing Co., 298 N.C. 520, 524, 259 S.E.2d 248, 251 (1979) (citing Hicks v. Albertson, 28 ...

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