State ex rel. Commissioner of Insurance v. North Carolina Automobile Rate Administrative Office

MORRIS, Judge.

This case is before us for review upon seven assignments of error based on 147 exceptions. The assignments of error are presented by defendants under four principal arguments: (1) The order entered was in excess of and contrary to the statutory rate-making procedure required by Article 25, Chapter 58, of the General Statutes of North Carolina and approved by this Court and the Supreme Court of North Carolina, (2) the order is not supported by material and substantial evidence, (3) the order was in violation of the rights of appellants guaranteed by the due process clause of the Fourteenth Amendment to the United States Constitution, and the law of the land clause of Article I, Section 19, of the Constitution of North Carolina and in contravention of the provisions of Article I, Section 6, and Article 1 of the Constitution of North Carolina reserving legislative power of the State to the General Assembly; and (4) the order is prejudicial to the substantial rights of the appellants and therefore reversible because it was based upon hearings conducted by the Commissioner of Insurance as a consumer advocate rather than as a governmental adjudicator and independent decision-maker and in an arbitrary and capricious manner denying to appellants due process of law in contravention of the law of the land clause of Article I, Section 19, of the Constitution of North Carolina, and the due process clause of the Fourteenth Amendment to the United States Constitution.

We choose to discuss only one of the arguments. This is not to say that the others are without validity. However, it appears to us that the order is so obviously not supported by material and substantial evidence, that it is unnecessary to discuss the other assignments of error.

Assuming then, for purposes of argument only, that the Commissioner did not exceed his statutory authority as to rate-making, we look at the entire record to determine whether the order entered was supported by material and substantial evidence. G.S. 58-9.4 provides that “[a]ny order or decision of the Commissioner, if supported by substantial evidence, shall be presumed to be correct and proper” (emphasis supplied), and G.S. 58-9.6 (b) provides that the court “may affirm or reverse the decision of the Commissioner, declare the same null and void, or remand the case for further proceedings; or it may reverse or modify the decision if the substantial rights of the appellants have been prejudiced because the Commissioner’s findings, inferences, conclusions or decisions are . . . (5) [u] nsupported by material and substantial evidence in view of the entire record as submitted. ...”

“Substantial evidence has been described as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. Universal Camera Corp. v. NLRB, 340 U.S. 474, 95 L.Ed. 456, 71 S.Ct. 456 (1951) ; see Hanft, Some Aspects of Evidence in Adjudications by Administrative Agencies in North Carolina, 49 N.C.L. Rev. 635, 666-68 (1971) ; 2 Am. Jur. 2d, Administrative Law §§ 621 and 688 (1962). ‘Substantial evidence is more than a scintilla or a permissible inference.’ Utilities Commission v. Trucking Company, 223 N.C. 687, 690, 28 S.E. 2d 201, 203 (1943).” Comr. of Insurance v. Automobile Rate Office, 287 N.C. 192, 205, 214 S.E. 2d 98 (1975).

In his order, the Commissioner made 36 findings of fact. In 25 of those findings, the Commissioner expressly stated that they were supported by the testimony of the expert witness Stern, who testified for the Commissioner. Mr. Stern was a member of the staff of the Department of Insurance, State of New Jersey. No actuary on the staff of the North Carolina Department of Insurance testified, and he was the only witness for the Commissioner.

We think that certain excerpts from Mr. Stern’s testimony are revealing.

“Me. Steen: Yes, I have analyzed and studied this filing, Exhibits RO 22 and RO 22-A which are the exhibits in the record of this hearing and constitute the amended filing which you have just handed me and which is the subject of these proceedings. I will proceed to describe the analysis I have made of the filing- and offer as I come to them any exhibits I may have prepared to illustrate my testimony.

I analyzed this filing and realizing that the statute requires that due consideration be given to past and prospective loss experience and expense experience, I prepared several exhibits pertaining to that matter. But we also know that any other factors, relevant factors, must be considered and I believe that one of the most important such other relevant factors is the effect of the present driving conditions of the population in North Carolina and country wide. We have been supplied, all states have been supplied with very valuable information on this subject through the National Association of Insurance Commissioners. One report was submitted to the NAIC in a letter from the Insurance Services Office dated November 15, 1974, and signed by Mr. McNamara, President of ISO.”

“Mr. Stern : I would like to explain first the genesis of this type of information. When the energy crisis began in October and November, 1973, many commissions including the Commissioner in New Jersey where I work, were concerned about methods by which the effect could be measured on automobile insurance rates because the public wanted to know: ‘What are you going to do about it?’ And various states started contacting companies and organizations about getting some extra statistics and the NAIC stepped in and told the Commissioners, ‘Hold it, we’re going to get some real good experts together and they are going to see to it that data are collected in an orderly manner.’ And at the December meeting 1973 of the NAIC, the Commissioners were informed that the steps have been taken and the data are going to be collected, and this type of data was explained at that time. Now the data were delivered the — the collection of the data was delivered the — limited to those companies that were able to respond quickly and short of the extra expense. Realizing that they are going to represent such a large sample of the total insurance industry, that the data, that the results could be accepted as being significant, the alternative would have been for every state to issue its own call for experience — cost the companies a great deal of expense — and force every company to report on data which really do not vary from company to company. What was to be measured was the effect of people not having enough gasoline, having to stand in lines to wait for it for hours and what effect it would have on driving conditions; also, of course, the effect of speed limits, the reduced speed limits.

It is obvious that people didn’t line up by company in front of the gas pumps; they didn’t have special lines for the sixty-five percent of cars which I included in these data for North Carolina and special lines for people in the other thirty-five percent; they didn’t have special enforcement procedures for those people who are insured with the sixty-five percent as opposed to those who are insured with the other thirty-five percent. This is the typical kind of other relevent information which is contemplated by the rate regulatory statute; that is, data other than strict'y insurance statistics, other than loss and expense experience. And that is why I made a study of these data to present to you here, today. ...”

“ ... Now we all were under the impression when we all read these latest releases from the NAIC that the — somebody may call it a trend, has simmered it down and really the third quarter of 1974 has gone back to, somewhat went back to normal. However, we now have an additional piece of information and before I introduce that exhibit, I want to mention this: The NAIC at its last meeting decided to discontinue the collection of these fast track monitoring statistics, probably based on the sentiment I just referred to, that the energy crisis is over. Some states didn’t agree and the Commissioner of North Carolina didn’t agree and he instructed the two statistical agencies, Insurance Services Office and National Association of Independent Insurers, who are involved in this project, to continue to report to him the data for North Carolina, and such first report was received here with letter from the National Association of Independent Insurers on February 4- — • the date is February 4, 1975.”

“ . . . My personal feeling is that a more straightforward method would be to combine claim freqency and claim cost into a quantity which we refer to as a pure premium. Pure premium is simply the average loss cost per car and the loss cost per car depends upon how much you pay on the average per claim and how many claims you have on the average per car. It is the most straightforward method of measuring really what it costs to insure cars, so I simply took the data shown in the filing for claim cost and claim frequency and I combined them into a pure premium, which is a simple arithmetic calculation of multiplying frequency by claim cost and I would like to offer an exhibit pertaining to bodily injury.”

“Mr. Stern: To summarize the information we looked at before, we saw substantial decreases in bodily injury frequencies and decreases in property damage pure premiums on Exhibit ID 50. We noted the decrease in loss ratios of the magnitude of, in the neighborhood of five percent for each of the periods of bodily injury and around three percent, four percent for property damage, except for the third quarter of 1974 and that was shown in Exhibit ID 52. And finally we looked at the latest data for the eleven months, comparing eleven months of 1974 compared with the eleven months of 1973, Exhibit ID 53, which indicated a substantial decrease in frequencies in bodily injury of thirteen percent and a property damage pure premium decrease of six percent. There are other relevant factors which affect the cost of insurance, or the occurrence of losses. The reduced — the reduction in the driving and the use of automobiles is not only affected by availability of gasoline, but also by the price of gasoline. Many people have to restrict their driving because Of the high cost of gasoline compared with normal times, the years reflected by the accident year experience 1972 and ’73, the early part of ’73, because the accident year experience ends on June 30, 1973. Another important element that affects the exposure to road hazards is the economic condition of the country, particularly North Carolina. Today’s newspaper reports that the unemployment rate in North Carolina is ten point six percent. It must be obvious that people who have to live on unemployment insurance benefits must be restricting many activities and driving should be one of the first ones to restrict. They are troubled by inflation and unemployment, now. It will also affect drinking habits. We know that driving after drinking is one of the very frequent causes of serious injury. Apparently the people are unemployed, they won’t go to the bar, they are lucky they can drink their beer at home, which means they won’t drive after they have their beer. And I think prior recessions have shown that, that during a period of recession of reduced activity insurance experience does show an improvement. Now these are qualitative characteristics — we cannot quantify them for you, except for what we have already presented here. I conclude that taking all these factors together, a supplementary rate level reduction factor of five percentage points would be more than justified. And I want to point out this is not a trend factor. Looking at exhibit—

The Commissioner: Would that be a minus five percent?

Mr. Stern: Yes, sir. Looking at Exhibit ID 53, it tells us that the pure premium for property damage liability went down from twenty dollars and forty-six cents in 1973 to nineteen dollars and twenty-six cents. I am not saying that this is a trend that will accumulate from year to year, and if that will present a six percent decrease, it’s going to be twelve percent the next year and eighteen percent the next as we do when we use a trend factor, where we multiply the annual increment by the number of years to which you are projecting to. I am simply saying that, let’s only assume that the experience will stand still at this point, that the eleven months of 1975 compared to eleven months of 1973 would show the same picture as what we see on Exhibit ID 53 to be true if you compare ’74 with ’73. I am not suggesting that you can reasonably project into the future — I am only suggesting that we are taking this as the last information we have and base the loss level on this last piece of information.

And again in a qualitative way, I am suggesting that a supplementary factor of minus five percentage points be applied to the rate level calculations. And that means that on bodily injury on Exhibit IB (sic) 56, the minus eighteen point nine would become a minus twenty-three point nine percent. And on Exhibit ID 57-A, the plus seven point one would become a plus two point one. That concludes my observation on this rate filing.”

Turning now to the findings of fact, we find:

“6. That the effect of paid claim costs and paid claim frequencies is combined in the average loss cost per car, which is referred to as pure premium, and that a trend adjustment for changes in pure premium is the most straightforward method of measuring the trend in the cost of providing automobile liability insurance, which finding is supported by the testimony of expert witness Stern.

7. That a period of 2.25 years is a reasonable period for computing a pure premium trend factor for the amended filing, which finding is supported by the testimony of expert witness Stern.

8. That bodily injury pure premium for all companies writing private passenger automobile liability insurance in North Carolina for the annual periods ending at the end of each quarter from June 30, 1971, through March 31, 1974, remained basically unchanged, and therefore the bodily injury pure premium trend factor should be unity, which finding is supported by the testimony of expert witness Stern, who concluded, after considering the miniscule annual increase in bodily injury pure premium (most of which resulted from the relatively low starting point in 1971 prior to the relaxing of federal price controls and also prior to the experience period used in this filing), that the appropriate way of reflecting past and prospective bodily injury loss experience in the amended filing is by a trend factor of unity.

9. That property damage pure premium for all companies writing private passenger automobile liability insurance in North Carolina for the annual periods ending at the end of each quarter from June 30, 1971, through March 31, 1974, reflects an annual increase of 4.8% per year, based on an actuarilly acceptable line of best fit method, which finding is supported by the testimony of expert witness Stern.

10. That a bodily injury pure premium trend factor of 1.00 (or unity) provides an adequate bodily injury loss trend adjustment from the amended filing (derived from the finding that such pure premium has remained basically unchanged), which finding is supported by the testimony of expert witness Stern.

11. That a property damage pure premium trend factor of 1.108 provides an adequate property damage loss trend adjustment for the amended filing (derived from the finding of a 4.8% increase per year and a 2.25-year period), which finding is supported by the testimony of expert witness Stern.”

“25. That the National Association of Insurance Commissioners ‘energy crisis’ experience for North Carolina collected under said plan or system represents the private passenger automobile liability insurance loss experience for companies writing approximately 65 % of the total premium volume for such insurance in North Carolina and that therefore such experience is significant for rate-making purposes in North Carolina, which finding is supported by the testimony of expert witness Stern.

26. That evidence in the record, including the ‘energy crisis’ data collected under said plan or system, shows a need for a supplementary reduction in the rate level in addition to those changes set forth above, which finding is supported by the testimony of expert witness Stern.

27. That said ‘energy crisis’ data reflect the results of the reduction in speed limits, the unavailability of gasoline for some time, and the continued lesser accessibility of gasoline to many because of increased costs, which findings are supported by the testimony of expert witness Stern.”

“29. That, taking the latest information available, including the ‘energy crisis’ data referred to above, along with other relevant factors, such as the rate unemployment in North Carolina, demonstrates the need for a supplementary rate level reduction factor of five (5) percentage points for both bodily injury and property damage rates in addition to those changes set forth above, which reduction is a ‘one-step’ trend: resulting in a total rate level change indication of a 23.8% reduction in bodily injury rates and a 2.5% increase in property damage rates, which finding is supported by the testimony of expert witness Stern, who reached this conclusion based on all the business done by all companies in North Carolina.

30. That such a further 5% reduction is a conservative reduction which gives full consideration to the partially offsetting effect of inflation, which finding is supported by the testimony of expert witness Stern.”

The Commissioner further concluded that “the ‘energy crisis’ data referred to in the above findings of fact come within the description in this provision of said Article (Article 25, Chapter 58 N.C.G.S.) of what the Commissioner shall give consideration to; and therefore it is concluded that the Commissioner is required by the provisions of said Article to give consideration to the ‘energy crisis’ data in this record in determining the necessity for an adjustment of rates.” He then ordered “that private passenger automobile liability insurance rates for use in North Carolina be decreased by 23.8% for bodily injury and increased by a 2.5% for property damage to be effective on 1 May 1975.”

It is obvious that the Commissioner adopted witness Stern’s testimony that a supplementary rate level reduction factor of 5 percentage points was necessary for both bodily injury and property damage rates in addition to certain changes he enumerated. It is also obvious that witness Stern based that figure on extremely tenuous theories deriving from his personal evaluation of the results and effect of the “energy crisis” and general economic conditions on North Carolina drivers. Admittedly, the effects on automobile liability insurance costs in North Carolina, if any, of the so-called “energy crisis” and economic conditions are difficult, if not impossible, to quantify. Nevertheless, rates cannot be based upon such speculative statements as contained in the record before us.

In short, in our opinion the order of the Commissioner was not based on material and substantial evidence and must be

Reversed.

Judge Parker concurs. Judge Martin dissents.