Discovery Ins. Co. v. The NC Dep't of Ins.Â

IN THE COURT OF APPEALS OF NORTH CAROLINA
No. COA17-285
Filed: 3 October 2017
Wake County, No. 14 CVS 15290
DISCOVERY INSURANCE COMPANY, Petitioner,
v.
THE NORTH CAROLINA DEPARTMENT OF INSURANCE, COMMISSIONER OF
INSURANCE WAYNE GOODWIN and THE NORTH CAROLINA REINSURANCE
FACILITY, Respondents.
Appeal by petitioner from order entered 18 November 2016 by Judge G. Bryan
Collins in Wake County Superior Court. Heard in the Court of Appeals 6 September
2017.
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
DISCOVERY INS. CO. V. N.C. REINSURANCE FAC.
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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.
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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(l).
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.
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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
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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).
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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.
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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).
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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.
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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
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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,
284 N.C. 236, 200 S.E.2d 40 (1973); Weston v. Lumber Co., 160 N.C. 263, 75 S.E. 800(1912)).
2. Discovery’s Contentions
Discovery contends the Commissioner erred by concluding as a matter of law
“[t]he decision of the Board is thus not inconsistent with any provision of the Facility
Act or with any provision of the Plan of Operation or the Manual.” Discovery asserts
the Commissioner erred because no express authority empowers the Facility to order
Discover to repay the approximately $1.3 million fraudulent payments at issue in the
Facility Act, the Plan of Operation, and the Standard Practice Manual.
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The Facility Act is remedial in nature and is to be construed liberally. Burgess,
298 N.C. 520 at 524, 259 S.E.2d at 251. The Facility Act was clearly enacted to serve
the remedial purpose of establishing a system of reinsurance to ensure that North
Carolina drivers can obtain vehicle liability coverage from insurers, which companies
are otherwise unwilling to cover them. See Hunt, 302 N.C. at 283, 275 S.E.2d at 402(stating the Facility “is a creature of North Carolina’s Compulsory Automobile
Liability Insurance Law,” and is “[e]ssentially a pool of insurers which insures drivers
who the insurers determine they do not want to individually insure.”).
3. Facility Board’s Authority
Discovery does not dispute that the approximately $1.3 million of fraudulently
paid claims was attributable to Steed’s actions of “fidelity losses arising out of claims
handling.” Rule E of Section 5 of the Standard Practice Manual prohibits the Facility
from being responsible for “fidelity losses arising out of claims handling” and squarely
places the responsibility to absorb such losses upon the member company. The
Commissioner properly concluded the Facility Board acted within the scope of its
authority under the Facility Act, by ordering Discovery to repay the sums the Facility
fraudulently paid.
Although stated in general terms, N.C. Gen. Stat. § 58-37-35(g)(12) expressly
grants the Facility Board the authority “to do anything else . . . which is otherwise
necessary to accomplish the purpose of the Facility.” The superior court properly
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affirmed the Commissioner’s decision that the Facility Board had acted within its
statutory authority to order Discovery to repay the approximately $1.3 million. See
Burgess, 298 N.C. at 524, 259 S.E.2d at 251 (construing a remedial statute liberally).
The Facility was informed that approximately $1.3 million in reimbursements
made to Discovery were actually fraudulent “fidelity losses arising out of claims
handling” and attributable to Discovery’s employee, Steed. Discovery is required to
bear these losses pursuant to Rule E of Section 5 of the Standard Practice Manual.
In ordering Discovery to repay the approximately $1.3 million in fraudulent
payments, the Facility acted within its statutory authority to do what “is otherwise
necessary to accomplish the purpose of the Facility . . . .” N.C. Gen. Stat. § 58-37-
35(g)(12). Discovery’s argument that the Facility acted outside the scope of its
statutory authority is overruled.
B. The Facility is Not Required to Commence a Civil Action to Recover
Reimbursements
Discovery argues that because the Facility Act vests the Facility Board with
authority “to sue and be sued in the name of the Facility[,]” the Facility’s proper and
only means for seeking recovery of the fraudulent reimbursement losses would be for
the Facility to institute a civil action in superior court. N.C. Gen. Stat. § 58-37-
35(g)(1). We disagree.
N.C. Gen. Stat. § 58-37-35(g)(1) provides:
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(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:
(1) To sue and be sued in the name of the Facility. No
judgment against the Facility shall create any direct
liability in the individual member companies of the
Facility.
Even though N.C. Gen. Stat. § 58-37-35(g)(1) provides statutory authority for
the Facility Board to sue on behalf of the Facility, Discovery’s contention that this
statute is the sole means under which the Facility can seek reimbursement from
Discovery under these circumstances is without merit.
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.” Additionally, Rule E of Section 5 of
the Standard Practice Manual prohibits the Facility from being responsible for
“fidelity losses arising out of claims handling” and places the responsibility for such
losses on the member company. Here, it is undisputed that over $1.3 million in
fraudulent reimbursement payments were specifically requested by Discovery,
though Steed, and were paid by the Facility under the mistaken belief that these were
reimbursements for bona fide claims under policies ceded to and covered by the
Facility.
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There is no dispute these reimbursements were paid for fraudulent claims
attributable to the fidelity losses of Discovery specifically caused by their employee
Steed. Chapter 7.C of Section 4 of the Standard Practice Manual permits the Facility
to report errors in claims and give “appropriate instructions for prompt correction.”
N.C. Gen. Stat. § 58-37-35(g)(12) grants the Facility Board the authority “to do
anything else . . . which is otherwise necessary to accomplish the purpose of the
Facility.”
N.C. Gen. Stat § 58-37-35(l) requires the Facility to operate on a no-profit no-
loss basis. Chapter 7.C of Section 4 of the Standard Practice Manual, N.C. Gen. Stat.
§§ 58-37-35(l) and 58-37-35(g)(12) construed together provides the Facility Board
with the authority to order a member company to correct claims reimbursements
erroneously paid by the Facility due to “fidelity losses arising out of claims handling.”
Discovery cites two cases it asserts are analogous to the case at bar. Charlotte
Liberty Mut. Ins. Co. v. State ex rel. Lanier dealt with whether the Commissioner of
Insurance had the authority to enforce an insurance rule by issuing a letter ordering
an insurance company not to enter a proposed lease transaction. Charlotte Liberty,
16 N.C. App. 381, 381-83, 192 S.E.2d 57, 57-58 (1972). This Court determined,
“[c]learly the statutes creating the Department of Insurance and prescribing the
powers and duties of the Commissioner, do not purport to grant him the power of
issuing restraining orders and injunctions.” Id. at 385, 192 S.E.2d at 59. The Court
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noted, “[i]n administering the laws relative to the insurance industry, the
Commissioner, if he deems it necessary, may apply to the courts for restraining orders
and injunctions . . . .” Id.The facts and holding in Charlotte Liberty are not analogous to this case. The
statutes creating the Department of Insurance did not grant the Commissioner the
direct power to issue restraining orders and injunctions. Chapter 7.C of Section 4 of
the Standard Practice Manual reflects the authority of the Facility to instruct
member companies to correct “errors detected through the . . . functions of the
Facility.”
Before Steed’s fraudulent actions were uncovered, Discovery and the Facility
both conducted business under the erroneous representation that the claim payments
submitted by Steed to the Facility for reimbursement were for legitimate claims
under ceded policies. The Facility Board acted within its statutory authority to order
Discovery to reverse the reimbursement payments, and was neither limited nor
required by N.C. Gen. Stat. § 58-37-35(g)(1) to bring suit in the courts to recover those
reimbursements. Discovery’s argument is overruled.
C. The Commissioner’s Findings of Fact and Conclusions of Law Are Supported by
the Whole Record
Defendant challenges the Commissioner’s Findings of Fact 12 and 13 and
Conclusion of Law 13 regarding the Facility’s audit responsibilities and asserts the
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Findings of Fact are not supported by substantial evidence in the whole record. We
disagree.
We first note that the majority of the Commissioner’s Findings of Fact are not
challenged and are binding upon appeal. Koufman v. Koufman, 330 N.C. 93, 97, 408
S.E.2d 729, 731 (1991) (“Where no exception is taken to a finding of fact by the trial
court, the finding is presumed to be supported by competent evidence and is binding
on appeal.”) (citations omitted). Because Findings of Fact 12 and 13 are the only
findings, which are challenged by Discovery with specific arguments, any other issues
concerning the remaining challenged findings are abandoned. N.C. R. App. P.
28(b)(6).
1. Finding of Fact 12
The Commissioner’s Finding of Fact 12 in the amended order states:
The Facility does not conduct claims audits for the purpose
of identifying potential fraudulent claims activity by claims
representatives of its member companies; and the Facility
does not represent to its member companies that its claims
audit process is designed to or capable of identifying
fraudulent conduct by claims representatives of its
member companies
Discovery contends substantial evidence contradicts the Commissioner’s
Finding of “The Facility does not conduct claims audits for the purpose of identifying
potential fraudulent claims activity by claims representatives of its member
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companies . . . .” Discovery cites the testimony of Edith Davis, the Chief Operating
Officer of the Facility, to dispute Finding of Fact 12:
A: The audit responsibilities of the Facility are to audit the
member companies and to verify, if you will, the
transactions that are being reported to the Facility and
look for, you know, poor claims-handling practices, poor
underwriting -- the answer I’m giving is in context to
claims, not to premiums and underwriting.
Moreover, Discovery cites Section 6 of the Facility’s Standard Practice Manual:
The Facility will review and examine statistical reports
and comparisons in order to detect any adverse trends
which shall be thoroughly investigated. The Claim Staff,
Claim Quality Control Committee, the Audit Staff and both
the Audit Committee and Compliance Committee shall
coordinate the efforts and exchange information. If these
reviews indicate any irregularities, appropriate action will
be taken.
After reviewing the portion of Edith Davis’ testimony and Section 6 of the
Standard Practice Manual cited by Discovery in light of the whole record, the “poor
claims-handling practices” referred to by Edith Davis and the “irregularities” referred
to in Section 6 of the Standard Practice Manual do not refer to fraudulent claims
made by member companies and their employees.
The Standard Practice Manual expressly states that the purpose of Facility
audits of business reinsured with the Facility is “to determine that procedures
established by the Plan of Operation and the Rules of Operation have been complied
with, and that policies that have been reinsured are receiving the same service as
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those which are not reinsured.”
Additional substantial evidence in the record supports Finding of Fact 12.
The Facility Act vests the Facility Board with the “power and responsibility . . . to
establish procedures for reviewing claims practices of member companies to the end
that claims to the account of the Facility will be handled fairly and efficiently.” N.C.
Gen. Stat. § 58-37-35(g)(11). The Act requires “[e]ach member company shall
authorize the Facility to audit that part of the company’s business which is written
subject to the Facility in a manner and time prescribed by the Board of Governors.”
N.C. Gen. Stat. § 58-37-35(h) (emphasis supplied).
The “manner and time” for audits conducted by the Facility are outlined in
Section 6 of the Facility’s Standard Practice Manual. The Manual sets forth the
internal audit responsibilities of its member companies and requires: “each member
is responsible to ensure that its own internal control and spot-check procedure is
sufficient to detect any irregularity in handling business which is either ceded to the
Facility or with respect to which recoupment surcharges are applicable.” (Emphasis
supplied.)
The Manual further specifies standards regarding each member’s internal
control procedure:
These controls include, but are not restricted to, the
following items:
1. That all cessions, premiums and claims are accurately
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and promptly reported to the Facility;
2. That all reports, whether on a regular basis or by special
call, are filed accurately and promptly;
3. That all agents are fully complying with the Plan of
Operation and Rules of Operation;
4. That ceded policies are properly rated and ceded claims
properly handled; [and,]
5. That recoupment surcharges for all policies subject to
recoupment are properly determined and promptly
reported to the Facility.
Additionally, the Standard Practice Manual requires member companies “shall
obtain claimant confirmation on a reasonably representative number of claim
payments on Facility ceded business.” When requested by the Facility, member
companies must provide reports of their claim confirmation activities. In addition to
the member companies’ claim confirmation duties, the Facility retains the right to
“confirm with the payee of claim payments made on ceded business[,]” but is not
required to do so.
Furthermore, Edith Davis testified:
We have no responsibility for protecting the company in
their claims-handling procedures . . . . I have three auditors
and over a hundred member companies and about $675
million worth of losses being reported to the Facility. We
have no responsibility to protect the member company and
their own claim-handling procedures. That responsibility
is solely at the member company.
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After carefully reviewing the record, substantial evidence in the record
supports the Commissioner’s Finding of Fact 12.
2. Finding of Fact 13
Discovery also challenges the Commissioner’s Finding of Fact 13, which states:
When a Facility claims auditor determines that there is not
sufficient documentation to substantiate a payment made
on a given claim, it is the policy and practice of the Facility
to ask the appropriate claims contact person at the member
company either to provide the appropriate documentation
or to reverse the earlier reimbursement of that payment by
the Facility.
Edith Davis testified that when the Facility conducts a claims audit, it looks
for the appropriate documentation for a claim payment. Ms. Davis furthered
testified:
Q: All right. Typically when an auditor asks the -- or notes
for the company that there’s -- they’re not finding
documentation in the claim file for a particular claim
payment, what does your auditor ask the company to do?
A: Provide documentation.
Q: And what happens if the company does not provide
documentation?
A: They’re advised to reverse the transaction.
Q: So is it correct that it is a typical occurrence between the
Facility staff and a company that if they don’t -- if the
Facility auditor doesn’t see appropriate documentation in
the claim file, that it asks the company to either provide
the documentation or reverse the transaction?
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A: Yes.
Discovery references a 2004 audit in which the Facility identified issues with
Discovery’s policy claims that were managed by Steed and ceded to the Facility. The
Facility’s 2004 Audit Summary report recommended:
Based on these 3 files with reporting errors admitted by the
carrier and a previous audit which revealed 2 files with
incorrectly reported accident dates, may wish to have
claims dept [sic] review more files from this carrier due to
possible reporting errors.
Discovery asserts cross-examination testimony of Edith Davis, given before the
Hearing Officer, indicates the Facility failed to follow-up with Steed and Discovery
regarding the discrepancies referred to in the 2004 Audit Summary report:
Q: And based on the information that we provided [. . .] but
based on the information that we provided, did you -- was
there any information in there that would provide that Mr.
- - or that would support the fact that Mr. Steed, on behalf
of Discovery at that time, provided an explanation for these
discrepancies?
A: There was not. I --
Discovery characterizes this testimony as contradicting Finding of Fact 13 to
the extent it indicates it was not the “practice of the Facility to ask the appropriate
claims contact person at the member company either to provide the appropriate
documentation or to reverse the earlier reimbursement of that payment[.]”
“It is for the agency, not a reviewing court, to determine the weight and
sufficiency of the evidence and the credibility of the witnesses, to draw inferences
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Opinion of the Court
from the facts, and to appraise conflicting and circumstantial evidence[,] if any.’’
Carroll, 358 N.C. at 674, 599 S.E.2d at 904 (alteration in original) (internal quotation
marks and citations omitted). To the extent contradictions exist in the evidence
pertinent to Finding of Fact 13, the Hearing Officer, acting on behalf of the
Commissioner, weighed the evidence, assessed witness’ credibility, and drew
inferences thereon to resolve those factual conflicts. Id.The Hearing Officer’s resolution of the material conflicts in the evidence has a
rational basis in the evidence presented. The testimony of Edith Davis affirmatively
states the practice of the Facility’s auditor was to ask a member company to either
provide claim documentation or reverse the transaction. Substantial evidence
supports Finding of Fact 13. Discovery’s argument is overruled.
Discovery additionally argues record evidence does not support Conclusion of
Law 13. We disagree.
Conclusion of Law 13 states:
The Facility did not discover the fraudulent conduct of
Discovery’s employee Steed before 5 November 2011, and
the Facility could not reasonably have discovered his fraud
before that date.
Findings of Fact 7 through 11, and 16 through 19, none of which are challenged
by Discovery on appeal, constitute substantial evidence to support this conclusion of
law. “Where no exception is taken to a finding of fact by the trial court, the finding
is presumed to be supported by competent evidence and is binding on appeal.”
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Koufman, 330 N.C. at 97, 408 S.E.2d at 731 (citations omitted).
Those Findings of Fact are:
7. Before 5 November 2011, neither the Facility nor any
person at Discovery other than Steed was aware of Steed’s
fraudulent conduct.
8. Steed issued at least 936 fraudulent checks between 1
January 2005 and 5 November 2011 for a total sum
exceeding $5,200,000.00, which payments were actually
paid to Steed and/or a number of co-conspirators involved
in his fraudulent scheme. Of that total, Discovery
submitted $1,347,168.55 to the Facility for reimbursement,
and obtained reimbursement from the Facility for
fraudulent claim payments in the amount of $1,347,168.55.
During the normal course of operations in responding to
Facility questions on its routine, random claims audit
process, Discovery reversed one or more of the payments
that resulted from Steed’s fraudulent claims activities, and
one such reversal had been inadvertently included in this
total. Thus at the time of the decision of the Board here at
issue, the Facility had reimbursed to Discovery the net
amount of $1,340,921.25 for payments that had been
confirmed to be fraudulent payments.
9. Each year [the] Facility receives and processes
approximately $675,000,000 in claims from its member
companies. On average during the Relevant Timeframe,
Discovery reported approximately $13,500,000.00 in
annual claims payments.
10. The Facility has a small audit staff that performs
various different types of audits on the motor vehicle
liability insurance policies ceded to it by its member
companies. The audits include, among others, premium
audits, recoupment audits, and claims audits. For claims
audits, the Facility audits 10 to 20 claim files from each
member company each year. This typically means that the
Facility audits a very small percentage of the claim
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Opinion of the Court
payments submitted for reimbursement by member
companies each year. Discovery, for example, reports in
excess of 6,000 loss transactions to the Facility on an
annual basis.
11. The claim files selected for audit are generally
randomly selected. The items checked during a typical
claims audit include whether the policy was eligible for
cession; whether the policy was properly ceded; whether
the policy included coverage for the vehicle involved in the
claim; whether the accident occurred during the period the
policy was ceded to the Facility; whether the claim file
included appropriate documentation for the claim
payment; and whether any salvage and subrogation had
been properly handled and reported to the Facility.
....
16. Discovery has identified a small number of fraudulent
claim payments by Steed that occurred in claim files that
happened to have been audited by the Facility and that
were questioned by a Facility claims auditor due to the lack
of appropriate documentation in the claims file.
17. Steed was designated by Discovery as the person to
whom the Facility was directed to communicate regarding
any claim-related issues, including questions relating to
claim audits.
18. On each of the small number of occasions that a Facility
auditor requested documentation for the payments that
ultimately were determined to be fraudulent, Steed
advised the Facility that these claim payments had been
submitted inadvertently because of an administrative
error and that Discovery would reverse the charges.
During and before the Relevant Timeframe, Facility claims
auditors also requested documentation of claim payments
from Steed on numerous claims that were not fraudulent
which requests resulted in Discovery’s reversal of
reimbursements for similar reasons.
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DISCOVERY INS. CO. V. N.C. REINSURANCE FAC.
Opinion of the Court
19. The rate at which Facility auditors encountered
documentation errors and reversals of charges based on the
inadvertent submission of payments to the Facility by
Discovery was not out of proportion to the rate of such
errors among other similarly situated member companies.
Unchallenged findings of fact support the Commissioner’s Conclusion of Law
13. See Hershner v. N.C. Dep’t of Admin., 232 N.C. App. 552, 553, 754 S.E.2d 847, 848
(2014) (“Where unchallenged findings of fact support the decisions of the
administrative law judge . . . the trial court did not err in adopting their findings of
fact and conclusions of law.”). Discovery’s arguments contesting the Commissioner’s
Findings of Fact 12 and 13 and Conclusion of Law 13 are without merit and are
overruled.
D. The Doctrine of “Unclean Hands” Bars Discovery’s Equitable Defenses
Discovery argues the Commissioner erred in concluding Discovery’s appeal of
the Board’s decision is not a civil action and equitable doctrines of estoppel and
ratification do not apply. Discovery asserts the Facility is estopped from seeking
repayment for the fraudulent claims at issue, the Facility ratified Steed’s fraudulent
conduct, and Discovery should not be required to repay the reimbursed sums at issue
under general equitable principles. We disagree.
The Commissioner made the following relevant Conclusions of Law:
16. Because this is not a civil action, common law doctrines,
including the doctrines of estoppel, ratification, and
general equitable relief are not applicable to this statutory
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Opinion of the Court
appeal.
17. Even if this was a civil action, the doctrines of estoppel,
ratification, and general equitable relief would not
preclude the Facility from requiring repayment by
Discovery of previously reimbursed fidelity losses.
“Equity is for the protection of innocent persons and is a tool used by the
court to intervene where injustice would otherwise result. See Cunningham v.
Brigman, 263 N.C. 208, 211, 139 S.E.2d 353, 355 (1964) (only innocent persons may
claim the benefit of equitable estoppel).” Swan Quarter Farms, Inc. v. Spencer, 133
N.C. App. 106, 110, 514 S.E.2d 735, 738, disc. review denied 350 N.C. 850, 539
S.E.2d 651 (1999).
In determining whether the doctrine of estoppel applies,
“the conduct of both parties must be weighed in the
balances of equity and the party claiming the estoppel no
less than the party sought to be estopped must conform to
fixed standards of equity.” Hawkins v. M & J Finance
Corp., 238 N.C. 174, 177, 77 S.E.2d 669, 672 (1953). The
essential elements of equitable estoppel relating to the
party estopped are: (1) conduct which amounts to a false
representation or concealment of material facts, or at least,
which is reasonably calculated to convey the impression
that the facts are otherwise than, and inconsistent with,
those which the party afterwards attempts to assert; (2)
intention or expectation that such conduct shall be acted
upon by the other party, or conduct which at least is
calculated to induce a reasonably prudent person to believe
such conduct was intended or expected to be relied and
acted upon; (3) knowledge, actual or constructive, of the
real facts. Hawkins, 238 N.C. at 177-78, 77 S.E.2d at 672.
The elements relating to the party claiming estoppel are:
(1) lack of knowledge and the means of knowledge of the
truth as to the facts in question; (2) reliance upon the
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Opinion of the Court
conduct of the party sought to be estopped; and (3) action
based thereon of such a character as to change his position
prejudicially. Id.....
A party cannot rely on equitable estoppel if it “was put on
inquiry as to the truth and had available the means for
ascertaining it.” Hawkins, 238 N.C. at 179, 77 S.E.2d at
673 (citation omitted).
Wade S. Dunbar Ins. Agency, Inc. v. Barber, 147 N.C. App. 463, 470, 556 S.E.2d 331,
336 (2001). “[H]e who comes into equity must come with clean hands; otherwise his
claim to equity will be barred by the doctrine of unclean hands.” Hurston v.
Hurston, 179 N.C. App. 809, 814, 635 S.E.2d 451, 454 (2006).
Discovery asserts the equitable doctrines of estoppel, ratification, and quasi-
estoppel bar the Facility from seeking repayment of the fraudulent claims previously
reimbursed by the Facility. See Whitacre P’ship v. Biosignia, Inc., 358 N.C. 1, 18, 591
S.E.2d 870, 881 (2004) (recognizing quasi-estoppel as a branch of equitable estoppel);
Pittman v. Barker, 117 N.C. App. 580, 591, 452 S.E.2d 326, 332, (“[E]quitable defenses
. . . [include] estoppel, laches, ratification, and waiver[.]”), disc. review denied 340
N.C. 261, 456 S.E.2d 833 (1995).
Presuming, arguendo, that Discovery is correct in asserting common law
equitable principles are applicable here, Discovery cannot claim the benefit of
equitable defenses because of the doctrine of unclean hands.
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Opinion of the Court
Discovery argues the Facility is estopped from denying the legitimacy of the
reimbursements paid to Discovery caused by Steed’s fraud, because the Facility
through its claims audit process did not discover Steed was committing fraud.
The Facility’s Standard Practice Manual mandates “[m]ember companies
shall obtain claimant confirmation on a reasonably representative number of claim
payments on Facility ceded business.” Discovery represented in annual Internal
Control Questionnaires submitted to the Facility it had proper internal control
procedures in place designed to detect fraudulent activity. The record shows Stuart
Lindley, the President of Discovery, provided verbal information to the Facility Board
indicating that:
At no time during the period 2005 through 2011 did
Discovery have in place any internal audit procedure
designed to routinely or randomly audit claims files under
the management or control of Steed, nor any process to
verify that claims checks generated by Steed were for
payment of legitimate claims . . . .
Discovery cannot be heard to argue the Facility is precluded from seeking
reimbursement for the fraudulent claim payments because the Facility allegedly did
not follow its claims audit process. The record evidence shows Discovery itself was
in violation of its duty under the Standard Practice Manual to “obtain claimant
confirmation on a reasonably representative number of claim payments.”
As between two innocent parties, the party who put the individual in a position
to commit the fraudulent conduct, and failed to reasonably supervise his actions,
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Opinion of the Court
should bear the loss. Johnson v. Schultz, 364 N.C. 90, 93, 691 S.E.2d 701, 704 (2010)
(citations omitted). Even if common law principles do apply in this case, Discovery
itself would be liable and bear the loss for the fraudulent activity of its employee,
Steed.
The general rule is that a principal is responsible to third
parties for injuries resulting from the fraud of his agent
committed during the existence of the agency and within
the scope of the agent’s actual or apparent authority from
the principal, even though the principal did not know or
authorize the commission of the fraudulent acts . . . .
Parsons v. Bailey, 30 N.C. App. 497, 501, 227 S.E.2d 166, 168 (1976) (citations and
quotation marks omitted). “It makes no difference that the agent was acting in his
own behalf and not in the interests of the principal when the fraudulent act was
perpetrated unless the third parties had notice of that fact.” Id. at 501-02, 227 S.E.2d
at 168 (citations omitted).
Based upon the Commissioner’s undisputed Finding of Fact 7, “Before 5
November 2011, neither the Facility nor any person at Discovery other than Steed
was aware of Steed’s fraudulent conduct.” Therefore, Discovery did not have notice
Steed was acting on his own behalf. See id. It is undisputed that Steed committed
fraud in filing fraudulent claims under his authority to manage claims on behalf of
Discovery. Even though Discovery “did not know or authorize” Steed’s fraud, as his
employer it would still be responsible for Steed’s fraud under common law principles.
See id. at 501, 227 S.E.2d at 168.
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Based on Discovery’s unclean hands, attributable to its responsibility for
Steed’s fraud under common law principles, the Commissioner did not abuse his
discretion in determining “estoppel, ratification, and general equitable relief would
not preclude the Facility from requiring repayment by Discovery of previously
reimbursed fidelity losses.” Discovery’s arguments are overruled.
E. The Commissioner Did Not Err by Denying Pre-Hearing Discovery
Discovery asserts the Commissioner erred in ordering that the parties had no
right to formal discovery. Discovery argues it should have been allowed to conduct
pre-hearing discovery prior to the appeal hearing before the Commissioner. We
disagree.
Discovery cites N.C. Gen. Stat. § 58-2-50, governing hearings before the
Commissioner, in support of its argument. This statute provides, in relevant part:
All hearings shall, unless otherwise specially provided, be
held in accordance with this Article and Article 3A of
Chapter 150B of the General Statutes and at a time and
place designated in a written notice given by the
Commissioner to the person cited to appear.
N.C. Gen. Stat. § 58-2-50 (emphasis supplied). N.C. Gen. Stat. § 150B-39 provides
for the right of pre-hearing discovery.
Contrary to Discovery’s assertion that N.C. Gen. Stat. § 58-2-50 governs the
hearing before the Commissioner, the proceedings before the Commissioner are
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specifically governed by N.C. Gen. Stat § 58-37-65. N.C. Gen. Stat § 58-37-65 states,
in relevant part:
(a) . . . any member of the Facility and any agent duly
licensed to write motor vehicle insurance, may request a
formal hearing and ruling by the Board of Governors of the
Facility on any alleged violation of or failure to comply with
the plan of operation or the provisions of this Article or any
alleged improper act or ruling of the Facility directly
affecting him as to coverage or premium or in the case of a
member directly affecting its assessment . . . .
(b) Any formal ruling by the Board of Governors may be
appealed to the Commissioner by filing notice of appeal
with the Facility and Commissioner within 30 days after
issuance of the ruling.
....
(f) All rulings or orders of the Commissioner under this
section shall be subject to judicial review as approved
in G.S. 58-2-75.
N.C. Gen. Stat § 58-37-65 (2015).
Because N.C. Gen. Stat § 58-37-65 specifically covers appeals of formal rulings
by the Facility Board to the Commissioner, it controls over N.C. Gen. Stat. § 58-2-50.
Trustees of Rowan Tech. v. J. Hyatt Hammond, 313 N.C. 230, 238, 328 S.E.2d 274,
279 (1985) (citations omitted) (“Where one of two statutes might apply to the same
situation, the statute which deals more directly and specifically with the situation
controls over the statute of more general applicability.”).
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N.C. Gen. Stat. § 58-2-52 provides: “[t]he Commissioner may adopt rules for
the hearing of appeals by the Commissioner or the Commissioner’s designated
hearing officer under . . . § 58-37-65” and “these rules may provide for . . . discovery .
. . .” N.C. Gen. Stat. § 58-2-52 (2015). The Commissioner has not adopted any rules
providing for formal discovery in an appeal under N.C. Gen. Stat. § 58-37-65.
The only rules adopted by the Commissioner pertaining to the conduct of
formal discovery in hearings before the Commissioner are those set forth at 11
N.C.A.C. 1.0401 et seq. Those rules apply solely to contested cases governed by N.C.
Gen. Stat. § 150B-38 et seq. See 11 N.C.A.C. 01.0401 (granting party right to appeal
in accordance with “Article 3A of G.S. 150B”); 11 N.C.A.C. 01.0414(4) (“Except as
otherwise provided by statute, the rules contained in this Section govern the conduct
of contested case hearings under Chapter 58 of the General Statutes.”)
An appeal under N.C. Gen. Stat. § 58-37-65 is not a contested case within the
meaning of N.C. Gen. Stat. § 150B. N.C. Gen. Stat. § 58-2-52(c) (specifying that
appeals under N.C. Gen. Stat. §§ 58-36-35, 58-37-65, 58-45-50, 58-46-30, 58-48-
40(c)(7), 58-48-42, and 58-62-51(c) are not contested cases within the meaning of N.C.
Gen. Stat. § 150B (emphasis supplied)).
N.C. Gen. Stat. § 58-37-65 is the specific statute controlling over N.C. Gen.
Stat. § 58-2-50. This statute does not provide for formal discovery for this hearing
and the Commissioner has not promulgated any rules providing for formal discovery
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Opinion of the Court
under N.C. Gen. Stat. § 58-2-52. The Hearing Officer did not err in concluding the
parties were not entitled to conduct formal discovery. Discovery’s argument is
overruled.
F. The Decision of the Facility Board to Issue the Supplemental Account Activity
Statement is Not Before this Court
Defendant contends the Facility was without authority to issue the letter and
attached Supplemental Account Activity Statement on 16 December 2013. However,
Discovery did not appeal the 16 December 2013 decision of the Facility to issue the
letter and Supplemental Account Activity Statement pursuant to N.C. Gen. Stat. §
58-37-65(b). Because Discovery never appealed the decision of the Facility to issue
the letter and Supplemental Account Activity Statement, the Commissioner correctly
concluded the 16 December 2013 action of the Facility was not properly before him.
The 16 December 2013 action was not the subject of judicial review at the superior
court and is not properly before this Court. This argument is dismissed.
VI. Conclusion
After review of the Commissioner’s order and the superior court’s review, we
hold the order reflects a rational consideration of the evidence. The evidence in the
record supports the Commissioner’s findings of fact, which in turn support the
ultimate conclusions of law.
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This Court does not review the Commissioner’s determinations concerning
resolutions of conflicting evidence, credibility of the witnesses, or the weight to be
given their testimony. Rather, we review whether competent evidence in the whole
record supports those findings. The order of the superior court, which affirmed the
Commissioner’s decision, is affirmed. It is so ordered.
AFFIRMED.
Judges ELMORE and STROUD concur.
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