State ex rel. Hunt v. North Carolina Reinsurance FacilityState ex rel. Hunt v. North Carolina Reinsurance Facility
- Reporters:
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- Before:
- Carlton
CARLTON, Justice.
We are once again presented with a serious conflict between the insurance industry and the North Carolina Commissioner of Insurance concerning the interpretation of certain insurance laws. In this action, the Commissioner is joined by the Governor and the Attorney General as plaintiffs. In light of our recent extensive treatment of this area, we find it unnecessary to present a historical background of North Carolina‘s insurance laws except as stated briefly and in limited context below. References will be made to the four cases decided by this Court on 15 July 1980 and they will be hereinafter referred to collectively as the 1980 Insurance Cases, and individually as follows: State ex rel. Commissioner of Ins. v. Rate Bureau, 300 N.C. 381, 269 S.E.2d 547 (1980), as 1980 Insurance Case I; State ex rel. Commissioner of Ins. v. Rate Bureau, 300 N.C. 460, 269 S.E.2d 538 (1980), as 1980 Insurance Case II; State ex rel. Commissioner of Ins. v. Rate Bureau, 300 N.C. 474, 269 S.E.2d 595 (1980), as 1980 Insurance Case III; State ex rel. Commissioner of Ins. v. Rate Bureau, 300 N.C. 485, 269 S.E.2d 602 (1980), as 1980 Insurance Case IV.
I.
SUMMARY OF FACTS AND HOLDINGS OF THE LOWER COURTS
On 24 September 1979 plaintiffs, the Governor, the Commissioner of Insurance and the Attorney General, filed a complaint for declaratory relief and motion for preliminary injunction against the North Carolina Reinsurance Facility (Facility), the North Carolina Rate Bureau (Rate Bureau), and approximately 300 of their member companies. Plaintiffs challenged the legality of specific “recoupment surcharges” imposed by the industry on certain motor vehicle insurance policyholders in addition to regular
The motion for preliminary injunction was heard by Judge Braswell at the 18 February 1980 Session of Superior Court, Wake County. In an order filed 26 February 1980 Judge Braswell denied plaintiffs’ motion for preliminary injunction on the grounds (1) that the surcharges were lawful and proper and in compliance with
Plaintiffs appealed the trial court order to the North Carolina Court of Appeals. On 21 October 1980, the Court of Appeals, Judge Wells writing, modified and remanded. That court held that the trial court properly denied plaintiffs’ motion to enjoin collection of the disputed surcharges pendente lite, but that the denial of plaintiffs’ motion that defendants be required to file the disputed surcharges with the Commissioner of Insurance was erroneous. The Court of Appeals agreed with plaintiffs that defendants were required to file the surcharges so that they could be reviewed by the Commissioner, and, if appropriate, by the courts as required by
Judge Hedrick dissented. In his opinion, the appeal should be dismissed since it was from the denial of a preliminary injunction and no substantial right of plaintiffs would be lost if the appeal was not determined before a final hearing on the merits.
Defendants gave notice of appeal to this Court. Since Judge Hedrick‘s dissent did not directly address the filing issue, defendants also simultaneously petitioned this Court for discretionary review which we allowed on 2 December 1980. Oral arguments were heard on 10 February 1981. We disagree with the holding of the Court of Appeals and reverse.
Other facts important to an understanding of our decision are noted below.
II.
JURISDICTION AND EXTENT OF REVIEW
We elect to address a single issue on this appeal: Whether surcharges are “rates” within the meaning of our insurance laws. Other issues were addressed by the Court of Appeals and others have been presented to us by the briefs of the parties. We elect not to address any of them. We have accelerated our efforts to file this opinion in order that it might be promptly available to our legislators who, we understand, are presently considering legislation in this controversial area of our law. To address the
III.
SURCHARGES VIS-A-VIS RATES
A.
In the 1980 Insurance Case I, Section III, we held that evidence, in view of the entire record, was insufficient to support the Commissioner‘s findings and conclusions that the 10% rate differential between insureds ceded to the Facility and those remaining in the voluntary market was unfairly discriminatory. There, we also reviewed the statutes creating the Facility and discussed in detail what we understood to be the intent of our Legislature in creating this form of automobile insurance administration. We noted then the problems relating to recoupment surcharges and that the 1979 Legislature had enacted legislation requiring that “clean risks” in the Facility be charged no higher rate than those outside. We also noted that confusion would continue to surround this phase of automobile insurance regulation in North Carolina until such time as our General Assembly acted to clarify the law. The present action, of course, was initiated prior to our decision in 1980 Insurance Case I and we are, as anticipated, confronted with an issue resulting from further confusion over the interpretation to be given certain provisions within the same area of our insurance laws. In light of our extensive discussion of the Facility legislation contained in 1980 Insurance Case I, discussed here are only those portions of the insurance statutes relevant to this controversy. We will also attempt to place those portions of our insurance law in appropriate historical perspective.
In 1973, the General Assembly created the Facility to replace the outmoded and largely unworkable Assigned Risk Plan. Essentially, the Facility is a pool of insurers which insures drivers who the insurers determine they do not want to individually insure. The Facility is a creation of North Carolina‘s Compulsory Automobile Liability Insurance Law. The pertinent provisions are codified in Article 25A, Chapter 58, of the General Statutes.
The Facility is structured by law to operate on a no profit-no loss basis, and the rates charged drivers ceded to the Facility must reflect this:
All rates shall be on an actuarially sound basis and shall be calculated, insofar as is possible, to produce neither a profit nor a loss.... Rates shall not include any factor for underwriting profit on Facility business, but shall provide an allowance for contingencies. There shall be a strong presumption that the rates and premiums for the business of the Facility are neither unreasonable nor excessive.
The 1977 General Assembly enacted significant amendments to the original 1973 legislation. The most significant was the establishment of the procedures designed to make the Facility self-sustaining. Under the 1977 statute, losses sustained by the Facility can be recouped pursuant to statutory procedures.
(e) ....
The plan of operation [of the Facility] shall provide for, among other matters,. . . the recoupment of losses sustained by the Facility, which losses may be recouped either through surcharging persons reinsured by the Facility or by equitable pro rata assessment of member companies....
The plan of operation shall provide that every member shall, following payment of any pro rata assessment, commence recoupment of that assessment by way of an identifiable surcharge on motor vehicle insurance policies issued by the member or through the Facility until the assessment has been recouped. Such surcharge may be at a percentage of premium or dollar amount per policy adopted by the Board of Governors of the Facility.
With the exception of the recoupment provided for in
G.S. § 58-248.33(l) and with the exception of the surcharge against persons reinsured by the Facility as provided for inG.S. 58-248.34(e) , recoupment, if necessary, shall not be made based on loss or expense experience prior to July 1, 1979. If the amount collected during the period of surcharge exceeds assessments paid by the member to the Facility, the member shall pay over the excess to the Facility at a date specified by the Board of Governors. If the amount collected during the period of surcharge is less than the assessment paid by the member to the Facility, the Facility shall pay the difference to the member. The amount of recoupment shall not be considered or treated as premium for any purpose.
The Facility amended its plan of operation in 1977 to comply with the statutory provisions noted above. The amended plan of operation essentially tracked the statutory language. The amended plan of operation was submitted to the Commissioner of Insurance on 20 October 1977 and approved by him on 18 November 1977.
The 1979 Legislature also enacted significant amendments to the Facility Act which are pertinent to this controversy.
The 1979 Legislature also significantly amended
of a motor vehicle classified as a private passenger non-fleet motor vehicle . . . if the owner and the principal operator and each licensed operator in the owner‘s household have two years’ driving experience and if neither the owner nor any member of his household nor the principal operator had had any chargeable accident or any conviction for a moving traffic violation . . . during the three-year period immediately preceding the date of application for motor vehicle insurance....
The Facility suffered tremendous financial losses pursuant to the statutory scheme summarized above. During the first four years of the Facility‘s operation, rates for ceded business were identical to those for voluntary business. There was, at that time, no provision in the statutes permitting separate rates for those insured by the Facility. Undoubtedly because insureds ceded to the Facility generally presented a greater risk than those not ceded, rates charged the ceded risks were insufficient to cover the claims on those policies and great losses were incurred. The losses for the fiscal years ending 30 September 1974, 30 September 1975 and 30 September 1976 were $14,300.00; $22,000,000 and $25,800,000, respectively. Hence, from its inception through 30 September 1976 the net cumulative operating loss of the Facility exceeded $62,000,000.
This trend of substantial losses was not reversed by the enactment of the 1977 amendments noted above. During the fiscal year ending 30 September 1978 the Facility sustained a net operating loss of $31.4 million, bringing its five-year losses from inception to over $109 million.2 Therefore, in accordance with
At the same meeting, the Board of Governors also voted to implement a separate recoupment pursuant to the 1979 change in
Following the action of the Board of Governors on 25 July 1979, plaintiffs initiated this action in the Superior Court, Wake County, on 24 September 1979 and the case is before us in the procedural context discussed above.
B.
The primary issue presented by this appeal is whether the Court of Appeals erred in holding that recoupment surcharges are “rates” which must be filed with the Commissioner of Insurance.
Plaintiffs are unable to cite any specific statutory or other authority squarely in support of their position. Since our research has also failed to produce any such authority, the issue here presented is purely one of construing the intent of our Legislature. As always, our primary task in statutory construction is to ensure that the purpose of the Legislature is enacting the law, the legislative intent, is accomplished. In re Dillingham, 257 N.C. 684, 127 S.E.2d 584 (1962). The best indicia of that legislative purpose are “the language of the statute, the spirit of the act, and what the act seeks to accomplish.” Stevenson v. City of Durham, 281 N.C. 300, 303, 188 S.E.2d 281, 283 (1972). In addition, a court may consider “circumstances surrounding [the statute‘s] adoption which throw light upon the evils sought to be remedied.” State ex rel. North Carolina Milk Comm. v. National Food Stores, Inc., 270 N.C. 323, 332, 154 S.E.2d 548, 555 (1967). Moreover, we must be guided by the rules of construction that statutes in pari materia, and all parts thereof, should be construed together and compared with each other. Redevelopment Comm. v. Security Nat‘l Bank, 252 N.C. 595, 114 S.E.2d 688 (1960). Such statutes should be reconciled with each other when possible and any irreconcilable ambiguity should be resolved in a manner which most fully effectuates the true legislative intent. Duncan v. Carpenter & Phillips, 233 N.C. 422, 64 S.E.2d 410 (1951), overruled on other grounds, Taylor v. J.P. Stevens & Co., 300 N.C. 94, 265 S.E.2d 144 (1980).
Applying the foregoing rules of statutory construction, we first note the critical statutes authorizing the recoupment surcharges here in question.
The foregoing statutes provide the specific authority for the imposition of the 18.6% surcharge here in question. With respect to the 1.1% surcharge,
Viewing these statutes and others noted below as components of a single and harmonious scheme, we think it obvious that the Legislature intended the “rates” to have a single and consistent meaning throughout and that “rates” does not encompass within its definition, for any purpose, including filing and review, the types of surcharges challenged here. In holding to the contrary, the Court of Appeals erred. We reach this conclusion for the following additional reasons:
(1) In reviewing the language of the 1977 amendments to our automobile insurance laws, all of which were enacted as House Bill 658, it is patently clear that our Legislature had no intention of equating recoupment surcharges with rates. To the contrary, it specifically provided that “[t]he amount of recoupment shall not be considered or treated as premium for any purpose.”
The statutory interchangeable use of “rates” and “premiums” was carried forward into the 1979 Session.
We find no basis from our review of the applicable insurance statutes to support plaintiffs’ position that our Legislature intended to encompass recoupment surcharges within the meaning of “rates” and therefore conclude that there exists no legally defensible basis for the Court of Appeals’ conclusion that recoupment surcharges, as
(2) Review of past decisions of this Court and other authorities leads us to conclude that the Court of Appeals misunderstood the well-established definitions of “rates,” “premiums,” and “surcharges.” “Rates” and “premiums” are usually defined similarly and in no instance do we find any hint which indicates that either “rates” or “premiums” encompasses “surcharges” within its definition:
The rate is the price per unit of exposure that is charged a particular insured for a particular contract of insurance.. . . For the great majority of insureds, the product of the rate times the number of units of exposure equals the premium—the total price paid for the insurance.
C. Kulp & J. Hall, Casualty Insurance 765 (4th ed. 1968) (emphases in original). “Rate” has also been defined as “the amount of premium per unit of insurance or exposure.” Webster‘s Third New International Dictionary 1884 (1971) (emphasis added).
This Court has stated: “For ratemaking purposes, the components of a casualty insurance premium are the ‘pure premium’ and ‘expense loading.’ The ‘pure premium’ is the amount allocated for the settlement of casualty losses, including loss adjustment expenses. ‘Expense loading’ is the amount allocated for operating expenses and for underwriting profit and contingencies.” In re Filing by Automobile Rate Administrative Office, 278 N.C. 302, 312, 180 S.E.2d 155, 162-63 (1971), quoting Virginia State AFL-CIO v. Commonwealth, 209 Va. 776, 777, 167 S.E.2d 322, 323 (1969).
This Court has noted on numerous occasions that ratemaking is a prospective process while surcharge assessments involve recoupment for losses already incurred. As Justice Exum aptly stated in State ex rel. Commissioner of Ins. v. Automobile Rate Office, 294 N.C. 60, 241 S.E.2d 324 (1978), “rates are made prospectively, not retroactively.... ‘[T]he entire procedure [of ratemaking] contemplates a looking to the future.’ ” Id. at 71, 241 S.E.2d at 331, quoting In re Filing of Fire Ins. Rating Bureau, 275 N.C. 15, 32, 165 S.E.2d 207, 219 (1969). In State ex rel. Commissioner of Ins. v. Automobile Rate Admin. Office, 287 N.C. 192, 205, 214 S.E.2d 98, 106 (1975), we described ratemaking as “an attempt to predict the future.” We have said on numerous occasions that the purpose of the ratemaking process is to ensure that premiums are adequate to cover anticipated losses and anticipated expenses and to allow a reasonable profit. In re Filing by Fire Insurance Rating Bureau, 275 N.C. at 39, 40, 165 S.E.2d at 224.
Inclusion of recoupment surcharges within the meaning of “rates” simply does not comport with the established understanding of the meaning of that term. The surcharges imposed pursuant to the Facility Act are, generally speaking, retroactive: they are designed to recoup actual losses, those which have already been incurred. The 18.6% surcharge involves recovery of losses known and verified by audit conducted by independent auditors, as required by
(3) Our conclusion that a recoupment surcharge is not a rate is further buttressed by reference to other portions of the statutory scheme. As stated above in section IIIB, if, as plaintiffs contend, the contested surcharges are rates for purposes of the filing and review requirements, then they must also be rates for all other purposes of our automobile insurance laws, for statutes in pari materia must be construed harmoniously. When the definition of rates is expanded to include surcharges and that definition is applied to other statutory provisions dealing with rates, it becomes obvious that “rates” does not include surcharges.
For example,
Another statute which demonstrates that the Legislature did not intend rates to include surcharges is
(4) We also note that the General Assembly is not unaware of the proper procedure for requiring that recoupment surcharges be filed with the Commissioner. Article 18B, Chapter 58, N.C. General Statutes, provides for recoupment surcharges for urban property reinsurance.
(5) We noted in our 1980 Insurance Case I that one of the primary purposes of the 1977 legislation was to ensure that the Facility would be self-sustaining. Clearly, therefore, the Legislature contemplated that recoupment surcharges would be an indispensible means of funding the operation of the Facility. This is so because our Legislature also specifically provided that Facility rates would be established on a no profit-no loss basis insofar as possible.
(6) Finally, we respond to the Court of Appeals’ reasoning that if recoupment surcharges are not considered rates, then the persons paying such surcharges “would be denied the protection of the laws.” Again, construing the applicable statutes, we find no support for such reasoning. The Legislature clearly structured the statutory scheme to provide for public protection against surcharges of an amount greater than actual losses by requiring that the Facility be operated on a no profit basis. As we understand the statutory scheme, any excess of surcharges over losses would be reflected in the operating results of the Facility for the period during which the surcharge was collected. This would reduce the Facility‘s operating loss for the period of collection and therefore reduce the loss which the facility may recoup by the surcharges. Put another way, the only result of excessive surcharges in one period would be a corresponding offset in the surcharge for the following period. We see no way, under the statutory scheme, for the Facility or its member companies to profit by excessive surcharges. Moreover, we note that, with respect to this portion of our insurance laws, the Commissioner received statutory sanction for independent audits of the Facility‘s annual statements — a device he vigorously contended he needed with respect to other portions of the insurance statutes in the 1980 Insurance Cases. Such audits, we think, provide public protection against excessive surcharges by independent verification of the recoupment surcharges imposed.
(7) We find especially pertinent, in considering the intent of our Legislature, this statement to the 1979 General Assembly commenting on the 1977 insurance law amendments:
Under the old law the participating companies could not transfer more than 50% of their risks to the Facility, had to share Facility losses, and could not charge higher rates for automobile liability policies ceded to the facility. House Bill 658 [, 1977 revision of insurance law,] changed all of that by eliminating the 50% limitation on cessions, by permitting higher rates or surcharges to recover losses of the Facility, and by providing for distribution of Facility gains to policyholders reinsured by the Facility. The apparent intent behind the new provisions is to make the Facility self-sustaining, whereas under the old system the insurance
industry in effect subsidized the Facility by absorbing its losses.
North Carolina Legislative Research Commission, Report to the 1979 General Assembly of North Carolina, Insurance Laws, at 12-13 (1979) (emphasis added).
Again, we find no hint of any intention that surcharges be used for anything other than recoupment of past losses nor that they be treated as rates for the purpose of the statutes requiring filing and review of rates.
In summary, our review of the statutory scheme enacted by our Legislature reveals no legislative intent that recoupment surcharges be considered rates and be subject to the filing and review requirements before the Commissioner of Insurance. Plaintiffs have cited us to no specific authority in support of their contention in this respect nor has our research disclosed any. Likewise, the decision of the Court of Appeals is without citation of authority and our review of the record discloses that its reasoning is unsupportable. We must, therefore, reverse the Court of Appeals and reinstate the order of the trial court.
IV.
SUMMARY AND CONCLUSION
In an insurance case before this Court in 1977, Justice Lake, writing for the Court, stated:
We observe that both the Commissioner and the Bureau are enmeshed in a statutory plan for rate-making so ambiguous and unclear that legislative revision appears to offer more likelihood of future harmony between the Commissioner and the Bureau, in their efforts to bring about a realization of the dual legislative purpose of insurance at a reasonable cost in financially responsible companies, than does piecemeal construction of the statutes through what is now rapidly assuming the proportions of an interminable series of judicial reviews of orders by the Commissioner.
State ex rel. Commissioner of Insurance v. Rating Bureau, 292 N.C. at 490, 234 S.E.2d at 730.
Unfortunately, this piecemeal construction of our insurance statutes has continued. Indeed, during the past eight years, the appellate division has issued over thirty opinions resulting from actions before the Commissioner of Insurance. Although resolving such disputes is, of course, the proper function of the appellate courts, we do not think it unreasonable to observe that these disputes are far too numerous and that the legislative intent behind our insurance statutes should not be so difficult to discern that almost quarterly decisions from the judicial branch of government are required. We think the Legislature should hasten to rewrite the insurance laws in question in clear and unmistakable language.
This unfortunate trend to administer the insurance laws of our state before the courts has resulted in part, we think, as a result of the polarization of views. It serves little purpose for public officials to take the attitude that all insurance companies are constantly attempting to steal from the public. Insurance companies are not charitable institutions and are forced, under the laws of our state, to insure drivers with the worst possible driving records. It is equally useless for the insurance industry to take the view that public officials act for no legitimate purpose and seek only to harass the industry. It has long been established that the insurance business is charged with a public interest, and that its regulation is constitutional. German Alliance Ins. Co. v. Lewis, 233 U.S. 389, 34 S.Ct. 612, 58 L.Ed. 1011 (1914). Indeed, the public demands the effective regulation of the insurance industry.
Our Legislature, therefore, is presented with no enviable task. It must, as our statutory architect, evolve a plan which will best protect the public interest and ensure the liquidity and solvency of participating insurance companies in our state who must also be assured of a reasonable profit. This balancing of equities between the consuming public and the commercial sector can be done only by the legislative branch and the
We hasten to add that we are not inadvertent to the concerns of plaintiffs in this action. There are seemingly apparent inequities in our insurance laws. For example, while this lawsuit was not so posited, we think the underlying concern with respect to recoupment surcharges is that those with safe driving records, defined by statute as “clean risks,” and other insureds outside the Facility are now called upon to support the Facility and to subsidize the costs of insuring drivers with such poor driving records that insurance companies, absent the heavy hand of the law, would refuse to insure. This may well be a legitimate and worthy grievance; however, it is a political one which cannot properly be considered by an appellate court in ascertaining legislative intent. Such a grievance is best remedied by bringing it to the attention of the legislative branch. Whether the cost of providing insurance to persons with poor driving records should be borne by that class alone or by the general driving public is a policy decision that only our General Assembly can make. When that decision has been made, we hope that our legislators will express it in clear and unmistakable language that the Commissioner of Insurance, the Governor, the Attorney General, insurance companies and courts can understand.
There are other concerns which have been brought before us in previous appeals to which the Legislature should give its attention. For example: (1) if the Legislature feels that the Commissioner should be vested with the authority to require that company data in insurance ratemaking hearings be audited, it should so provide, (2) if the General Assembly believes that income on invested capital should be considered in insurance ratemaking cases, it should so provide, (3) if the Legislature feels that the present method for calculating underwriting profit margins is inappropriate, it should clearly spell out the appropriate calculating methodology, (4) if the Legislature feels that the burden of proof in a ratemaking hearing should be placed on the Commissioner of Insurance, it should so provide. See 1980 Insurance Case I. Additionally, raised on oral argument was the issue of the propriety of having the Facility run by a board of governors, the membership of which consists entirely of representatives of member insurance companies. This is a question which we cannot address on this appeal. The Legislature in its wisdom clearly set out the composition of the Board of Governors; it is up to the Legislature, if it wishes, to change that composition.
These concerns and others of a similar nature have been the subject of extensive litigation before the courts, and the policymaking body of the state should resolve them once and for all. The court system in this state remains forever open to resolve legitimate justiciable controversies which will undoubtedly continue to occur in an area of the law as complex and important as this. However, no area of the law should be controlled by statutes which are so confusing and unwieldy that constant recourse to the judicial branch is inevitable. We hope that our Legislature, now in session, will resolve the issues before it in this area of the law expeditiously and express its intent in language which is crystal clear.
For the reasons stated above, we reverse the decision of the Court of Appeals. This matter is remanded to that court with instructions that it remand to the Superior Court, Wake County, for reinstatement of the trial court order of 26 February 1980.
Reversed and Remanded.