McCrary, Matter of

• Decision Date: 05 October 1993
• Docket Number: No. 9210SC656,9210SC656
• Citation: 435 S.E.2d 359,112 N.C.App. 161
• Parties: In the Matter of the Appeal by Sue S. McCRARY from a Decision of the North Carolina Insurance Underwriting Association and the North Carolina Commissioner of Insurance.
• Court: North Carolina Court of Appeals

Page 359

435 S.E.2d 359

112 N.C.App. 161

In the Matter of the Appeal by Sue S. McCRARY from a Decision of the North Carolina Insurance Underwriting Association and the North Carolina Commissioner of Insurance.

No. 9210SC656.

Court of Appeals of North Carolina.

Oct. 5, 1993.

Shipman & Lea by Gary K. Shipman and Jennifer L. Umbaugh, Wilmington, for petitioner-appellant.

Hunton & Williams by Walton K. Joyner and Christopher G. Browning, Jr., Raleigh, for appellee.

JOHN, Judge.

Petitioner Sue S. McCrary contends the trial court erred by affirming an order of a Deputy Commissioner of Insurance (Commissioner) which voided, ab initio, insurance coverage on her property at Topsail Beach, North Carolina. We disagree.

On or about 24 September 1990, Donnie Hamm (Hamm), a licensed State Farm Insurance Agent, was assisting petitioner in obtaining insurance coverage for her beach house at Topsail Beach, North Carolina. Hamm and petitioner submitted an insurance application to the North Carolina Insurance Underwriting Association (Association), which was entitled "SUPPLEMENTAL APPLICATION--PRODUCER'S INSPECTION REPORT."

On this application form were questions addressing occupancy and vacancy of the property. These inquiries and petitioner's responses thereto were as follows:

4. OCCUPANCY (SHOW EACH TYPE OF OCCUPANT IN BUILDING) used as seasonal dwelling for single family

IF HABITATIONAL, SHOW NUMBER OF FAMILIES: 1

IF VACANT: ____ ATTACH VACANCY QUESTIONNAIRE

No "Vacancy Questionnaire" was ever attached to the application or sent to the Association.

At the time petitioner submitted the insurance application, the house had not been occupied for at least one year and nine months due to damage from arson on two previous occasions; no electricity or water served the house; the beds, interior panelling, and sheetrock were gone; and the ceilings had been removed. Although petitioner was conducting renovations to the property, it would not have been ready for occupancy until approximately May or June, 1991.

On 26 September 1990, the Association accepted petitioner's property as an insurable risk. The property was subsequently destroyed by fire on or about 30 October 1990.

After the fire, petitioner filed a claim with the Association. On the basis of discrepancies between petitioner's representations and the actual condition of the house at the time the insurance application was submitted, the Association voided petitioner's insurance coverage ab initio for false and material representations. Petitioner appealed to the Commissioner of Insurance who upheld the Association's actions. Petitioner then appealed to the Superior Court which affirmed the Commissioner's decision.

I.

Petitioner initially contends the standard of judicial review to be applied in reviewing the Commissioner's decision is "de novo " as opposed to the "whole record" test. Petitioner's argument is misdirected.

As a preliminary matter, since the present case concerns both (1) an appeal to the Superior Court of the Commissioner's order and (2) the subsequent appeal to this Court, we find it helpful to elaborate upon the pertinent review procedures applicable at each stage of the appeals process.

The Department of Insurance is a state agency and as such is subject to the Administrative Procedure Act (APA), N.C.G.S. §§ 150B-1 to -52 (1991). N.C. Reinsurance Facility v. Long, 98 N.C.App. 41, 44, 390 S.E.2d 176, 178 (1990). The APA provides:

Any person who is aggrieved by the final decision in a contested case, and who has exhausted all administrative remedies made available to him by statute or agency rule, is entitled to judicial review of the decision under this Article, unless adequate procedure for judicial review is provided by another statute, in which case the review shall be under such other statute.

G.S. § 150B-43. While N.C.G.S. § 58-2-75 (1991) also provides for judicial review of a decision of the Commissioner, this Court has determined G.S. § 150B-51 of the APA to be controlling. Reinsurance Facility v. Long, 98 N.C.App. at 46, 390 S.E.2d at 179. However, "[t]o the extent that G.S. § 58-2-75 adds to and is consistent with [the APA], we will proceed by applying the review standards articulated in both statutes." Id. at 46, 390 S.E.2d at 179.

The APA delineates the appropriate scope of judicial review of a final agency decision. A reviewing court may modify or reverse an agency's decision if the substantial rights of the petitioner may have been prejudiced because the agency's findings, inferences, conclusions, or decisions are:

(4) Affected by ... error of law;

(5) Unsupported by substantial evidence ... in view of the entire record as submitted; or

(6) Arbitrary or capricious.

G.S. § 150B-51(b).

The proper standard of review under this statute depends upon the issues presented on appeal. Walker v. N.C. Department of Human Resources, 100 N.C.App. 498, 502, 397 S.E.2d 350, 354 (1990), disc. review denied, 328 N.C. 98, 402 S.E.2d 430 (1991). If appellant argues the agency's decision was based on an error of law, then "de novo " review is required. Id. 100 N.C.App. at 502, 397 S.E.2d at 354. If, however, appellant questions (1) whether the agency's decision was supported by the evidence or (2) whether the decision was arbitrary or capricious, then the reviewing court must apply the "whole record" test. Id. A reviewing court may even utilize more than one standard of review if the nature of the issues raised so requires. See Ellis v. N.C. Crime Victims Compensation Commission, 111 N.C.App. 157, 162, 432 S.E.2d 160, 164 (1993).

The aforementioned principles apply to the initial appeal of the agency's decision. A subsequent appeal to this Court of a trial court's order affirming the agency's decision presents a different question. Under G.S. § 150B-52, our review of a trial court's order is the same as in any other civil case--consideration of whether the court committed any error of law. In re Kozy, 91 N.C.App. 342, 344, 371 S.E.2d 778, 779-80 (1988), disc. review denied, 323 N.C. 704, 377 S.E.2d 225 (1989). Thus, since the questions initially addressed to the trial court are limited by G.S. § 150B-51(b), our task is to determine whether that court committed any error of law based upon a failure to apply properly the review standards set forth in G.S. § 150B-51(b). Sherrod v. N.C. Department of Human Resources, 105 N.C.App. 526, 530, 414 S.E.2d 50, 53 (1992); In re Kozy, 91 N.C.App. at 344, 371 S.E.2d at 780. However, in instances where the trial court should have utilized de novo review, this Court will directly review the agency's decision under a de novo review standard. Brooks v. Rebarco, Inc., 91 N.C.App. 459, 464, 372 S.E.2d 342, 345 (1988).

Under the aforementioned principles, therefore, the task of this Court is twofold: (1) determine the appropriate standard of review and, when applicable, (2) determine whether the trial court properly applied this standard. See Wiggins v. N.C. Department of Human Resources, 105 N.C.App. 302, 306, 413 S.E.2d 3, 5 (1992).

II.

As previously discussed, the standard of review which should be employed in reviewing an agency decision depends upon the nature of the alleged error. Walker v. N.C. Department of Human Resources, 100 N.C.App. 498, 502, 397 S.E.2d 350, 354 (1990), disc. review denied, 328 N.C. 98, 402 S.E.2d 430 (1991). In the case sub judice, petitioner contends the Commissioner's decision to deny coverage was both (1) contrary to the law and (2) contrary to the evidence presented.

A.

In arguing the Commissioner's decision was contrary to law, petitioner advances a single argument; she maintains the Commissioner did not properly interpret the term "fraudulent" as contained in N.C.G.S. § 58-3-10 (1991). Incorrect statutory interpretation by an agency constitutes an error of law and allows this Court to apply de novo review. Brooks v. Rebarco, Inc., 91 N.C.App. 459, 464, 372 S.E.2d 342, 345 (1988). We are not persuaded by petitioner's contention.

G.S. § 58-3-10 provides:

All statements or descriptions in any application for a policy of insurance, or in the policy itself, shall be deemed representations and not warranties, and a representation, unless material or fraudulent, will not prevent a recovery on the policy.

Petitioner insists this statute requires a showing of fraud, i.e., a false representation of a material fact, reasonably calculated and intentionally made to deceive, which does deceive, causing injury thereby. Shreve v. Combs, 54 N.C.App. 18, 21, 282 S.E.2d 568, 571 (1981). In other words, petitioner argues only a fraudulent misrepresentation can void a policy ab initio, and therefore the Commissioner erred in failing to consider whether her actions were "fraudulent" under the statute.

Petitioner's argument misses the mark. Under G.S. § 58-3-10, an insurer may avoid the policy if the insured makes a representation which is both (1) false and (2) material; the misrepresentation need not be fraudulent. "If the representation is material and false, it is not necessary for avoidance of the policy that the misrepresentation be intentional." Tedder v. Union Fidelity Life Ins. Co., 436 F.Supp. 847, 849 (E.D.N.C.1977) (construing former N.C.G.S. § 58-30 which is identical to present G.S. § 58-3-10); see also Cockerham v. Pilot Life Ins. Co., 92 N.C.App. 218, 220, 374 S.E.2d 174, 176 (1988).

A review of the record reveals the Association, in seeking avoidance of the policy, at all times relied upon the defense of material misrepresentation under G.S. § 58-3-10. Furthermore, while the Commissioner's order does not specifically cite the statute, it tracks the language of G.S. § 58-3-10 and concludes petitioner's application "contained a misrepresentation of material fact." While not necessary, we also note the superior court "examined ... the [b]riefs and heard the arguments of counsel," yet made no reference to fraud in its order, thus suggesting this defense was neither...