State ex rel. Com'r of Ins. v. North Carolina Rate Bureau
| Decision Date | 29 November 1977 |
| Citation | 300 N.C. 381,269 S.E.2d 547 |
| Court | North Carolina Supreme Court |
| Parties | STATE of North Carolina ex rel. COMMISSIONER OF INSURANCE v. NORTH CAROLINA RATE BUREAU, North Carolina Reinsurance Facility, Nationwide Mutual Insurance Company, State Farm Mutual Automobile Insurance Company, The Aetna Casualty and Surety Company, Lumbermens Mutual Casualty Company, Great American Insurance Company, The Travelers Indemnity Company, United States Fire Insurance Company and The Shelby Mutual Insurance Company. In the Matter of a FILING DATED |
Atty. Gen. Rufus L. Edmisten by Asst. Atty. Gen. Isham B. Hudson, Jr., and Hunter, Wharton & Howell by John V. Hunter III, Raleigh, for plaintiff-appellee.
Young, Moore, Henderson & Alvis by Charles H. Young, R. Michael Strickland and Charles H. Young, Jr., Raleigh, for defendants-appellants.
Bailey, Dixon, Wooten, McDonald & Fountain by J. Ruffin Bailey, John N. Fountain and Gary S. Parsons, Raleigh, for American Ins. Ass'n as amicus curiae.
Maupin, Taylor & Ellis, P.A. by Armistead J. Maupin and John Turner Williamson, Raleigh, for Insurance Services Office, amicus curiae.
Broughton, Wilkins, Ross & Crampton, P.A. by J. Melville Broughton, Jr. and Charles P. Wilkins, Raleigh, for National Ass'n of Independent Insurers, amicus curiae.
INDEX
-----------------------------------------------------
Historical Background .................... 555
I. Summary of Facts and Holdings ............ 557
II. Audited Data ............................. 558
A. Standards of Judicial Review .......... 558
1. Excess of Statutory Authority ...... 560
2. Unlawful Proceedings (Procedures) .. 566
3. Arbitrary and Capricious Actions ... 572
B. Summary ............................... 573
III. North Carolina Reinsurance Facility ...... 574
A. Scope of Review ....................... 577
B. Material and Substantial Evidence ..... 578
C. Statutory Scheme ...................... 580
D. Acquisition and Service Costs ......... 581
E. Cap on Rate Increase .................. 581
F. Summary ............................... 582
IV. Income on Invested Capital ............... 584
A. Error of Law .......................... 584
B. Majority Rule ......................... 586
C. Statutory Authority ................... 587
D. Summary ............................... 587
V. Underwriting Profit ...................... 588
A. Error of Law .......................... 589
B. Arbitrary and Capricious Actions ...... 590
VI. Burden of Proof ......................... 591
VII. Specificity of Commissioner's Order ...... 592
VIII. Adequacy of Notice ....................... 593
IX. Bad Faith of Appellants .................. 593
X. Other Holdings of Court Appeals .......... 594
XI. Final Disposition ........................ 594
CARLTON, Justice
This opinion deals extensively with certain provisions of the North Carolina Administrative Procedure Act and the powers of State administrative agencies generally, as well as with our general insurance laws.
Numerous opinions of this Court cited in the body of this opinion contain a summary of the history and framework of North Carolina's insurance laws, codified as Chapter 58 of the General Statutes. See especially It has been long established that the insurance business is charged with a public interest, and that its regulation is constitutional. German Alliance Insurance Co. v. Lewis, 233 U.S. 389, 34 S.Ct. 612, 58 L.Ed. 1011 (1914). Likewise, it has been long recognized that regulation of insurance is a function of the states rather than the federal government. Indeed, for many years no effort was made in any court proceedings to apply the Sherman Anti-Trust Act, 15 U.S.C. § 1 et seq., and other acts of Congress to insurance, on the grounds that insurance was not interstate commerce, and that Congress did not intend its acts to relate to insurance. However, in 1944, the Supreme Court of the United States held that insurance companies which conducted their activities across state lines were within the regulatory power of Congress under the Commerce Clause of the Federal Constitution, and that insurance was subject to the Sherman Anti-Trust Act. United States v. South-Eastern Underwriters Association, 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944).
In re Filing by Automobile Rate Administrative Office, 278 N.C. 302, 180 S.E.2d 155 (1971). We therefore find it necessary to present only a limited summary here.
Shortly thereafter, Congress enacted the McCarran-Ferguson Act of March 9, 1945, 59 Stat. 33, 15 U.S.C. §§ 1011-1015. The Act, as finally amended, provided, inter alia, that the business of insurance should be subject to the laws of the several states, and not to the Acts of Congress (unless such acts relate specifically to insurance), except that the Sherman Act, and certain other acts should be applicable to the business of insurance after 30 June 1948 to the extent such business is not regulated by state law. 15 U.S.C. § 1012.
The North Carolina Legislature responded by enacting Chapter 381 of the 1945 Session Laws codified as G.S. § 58-248.1. The statute vested broad review powers in the Commissioner of Insurance to insure that insurance rates not be unreasonable, inadequate, unfairly discriminatory nor harmful to the public interest. Under the 1945 statute, the Commissioner could act "upon his own motion or upon petition of any aggrieved party." Id. No periodic filings by the industry were required. However, the 1965 Legislature incorporated such a requirement into G.S. 58-248 by providing in pertinent part that
On or before July 1 of each calendar year the . . . Rate . . . Office shall submit to the Commissioner the data hereinabove referred to for bodily injury and property damage insurance on private passenger vehicles and a rate review based on such data. Such rate proposals shall be approved or disapproved by the Commissioner . . . . (Emphasis added.)
Both appellate courts in this State have had numerous occasions throughout the years to review proceedings before and orders by the Commissioner in ratemaking cases. During the years prior to 1977 the typical case on appeal involved the Commissioner's disapproval of a rate filing. In most of those cases, this Court or the Court of Appeals found no legal basis for the Commissioner's disapproval and upon remand the Commissioner would find yet another ground for disapproving a proposed rate increase. A stalemate was thus created by the statute's "prior approval" requirement.
Seemingly in response, the 1977 Legislature enacted significant changes in our insurance laws. See 1977 N.C.Sess.Laws 1119, Ch. 828 (). The new legislation effected major changes in three general areas of insurance regulation.
Insurance ratemaking was changed from a "prior approval" system to a "file and use" system. To promulgate new or revised rates, the insurer or rating organization is required only to file the rates and accompanying supportive data with the Commissioner prior to the effective date of the rates. The rates then take effect automatically The statutes also outline procedures by which the Commissioner may contest such rates after they are filed. He must hold a hearing. G.S. 58-124.21 (Cum.Supp.1979) for essential lines of insurance and G.S. 58-131.42 for nonessential lines. If he finds that rates are not in compliance with statutory standards, G.S. 58-124.19 (essential lines) and G.S. 58-131.37 (nonessential lines), he may disapprove the rates and declare them ineffective. G.S. 58-124.21 (essential lines) and G.S. 58-131.42 (nonessential lines). His decision is subject to judicial review, G.S. 58-124.22(a) (essential lines) and G.S. 58-131.54(b) (nonessential lines), but the insurers may continue to use the rates pending such review if the purportedly excessive premiums are placed in an escrow account. G.S. 58-124.22(b) (essential lines) and G.S. 58-131.42(b) (nonessential lines).
and remain in effect until revised rates are filed. The Commissioner's prior approval is not required for rates to take effect. See G.S. 58-124.20 (essential lines), G.S. 58-131.39 and G.S. 58-131.41 (nonessential lines).
In abandoning the prior approval system for the file and use system, North Carolina has joined the general trend of regulatory programs among the states. R. Keeton, Basic Text on Insurance Law § 8.4(b) (1971). Some states have even eliminated the filing requirement. Id.
For ratemaking purposes, the 1977 legislation divided insurance into two categories called essential and nonessential lines. Survey of Developments in North Carolina Law Insurance, 56 N.C.L.Rev. 1084, 1085 (1978). Previously, the types of insurance subject to rate regulation had been divided into five categories, each regulated in a different manner fire, casualty, miscellaneous lines, automobile liability and workers' compensation. Rate regulation patterns for the two new categories are established based upon the mandatory or voluntary Rating Bureau membership. The new file and use system applies to both.
Nonessential lines of insurance, including certain fire and property insurance, casualty insurance and inland marine insurance are governed by Chapter 58, Article 13C. This statute establishes a system of voluntary rating bureau membership. It provides that insurance rates should not be "excessive, inadequate or unfairly discriminatory," G.S. 58-131.34(1), and that the most effective way to achieve rates is through "reasonable price competition among insurers." G.S. 58-131.34(3). Detailed provisions and factors to be considered are...
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