Court Opinion

ID: 9846292
Source: CourtListenerOpinion
Date Created: 2023-09-24 03:38:47.603677+00
Date Added: 2024-06-11T09:16:48.384186
License: Public Domain

Justice Lake
dissenting.
With reference to the findings of fact which the Commissioner of Insurance must make in a proceeding to fix the premium rates, there is no difference between fire insurance and automobile liability insurance. In reviewing an order by the Commissioner, fixing premiums for fire insurance policies, this Court said:
“The ultimate question to be determined by the Commissioner is whether an increase in premium rates is necessary in order to yield a ‘fair and reasonable profit’ in the immediate future (i.e., treating the Bureau as if it were an operating company whose experience in the past is a composite of the experiences of all the operating companies), and, if so, how much increase is required for that purpose. This cannot be determined without specific findings of fact, upon substantial evidence, as to (1) the reasonably anticipated loss experience during the life of the policies to be issued in the near future, (2) the reasonably anticipated operating expenses in the same period, and (3) the per cent of Earned Premiums which will constitute a ‘fair and reasonable profit’ in that period.” In re Filing by Fire Insurance Rating Bureau, 275 N.C. 15, 39, 165 S.E. 2d 207.
In the present case, the Commissioner has not made any finding as to items (2) and (3). Without such preliminary findings of fact, his declaration “that the present rates for private passenger automobile liability insurance are inadequate” and his declaration “that the record shows and the statistics support the need for some rate relief for private passenger automobile liability insurance in North Carolina” are not findings of fact, but are mere administrative declarations which no court can review intelligibly. To affirm an order fixing premium rates upon a mere administrative declaration that the old rates are “inadequate” and the new ones are “reason*323able” subjects both the public and the insurance carriers to the danger of arbitrary action by the Commissioner. It is to guard against that danger that the duty of judicial review is imposed upon us by G.S. 58-9.3. We may not properly avoid it by merely accepting the Commissioner’s declarations because of our confidence in his superior knowledge of the field.
G.S. 58-248.1 provides: “Whenever the Commissioner * * * shall determine, after notice and a hearing, that the rates charged or filed * * * are excessive, inadequate, unreasonable * * * or otherwise not in the public interest * * * he shall issue an order to the bureau directing that such rates * * * be altered or revised * * * to the extent stated in such order to produce rates * * * which are reasonable, adequate * * * and in the public interest.”
G.S. 58-248.5 provides: “A review of any order made by the Commissioner * * * shall be by appeal to the Superior Court of Wake County in accordance with the provisions of § 58.9.3.” G.S. 58.9.3 provides for judicial review of any order of the Commissioner except one to make good an impairment of capital or surplus or a deficiency in the amount of admitted assets. Consequently, the judicial review which it is our duty to make in the present case is precisely the same as that which we must make of an order fixing premium rates for fire insurance. In re Filing by Fire Insurance Rating Bureau, supra, is, therefore, applicable to the present case.
G.S. 58-9.3 (a) specifically recognizes the right of any person aggrieved by an order of the Commissioner to obtain a judicial review of its merits. Obviously, it does not contemplate that the reviewing court will make its own findings of fact concerning what per cent of earned premiums will constitute a fair and reasonable profit or what operating expenses are reasonably to be anticipated in the period in which the premium rates are to be in effect. The reviewing court is charged by G.S. 58-9.3 (b) with the duty of reviewing findings of fact made by the Commissioner. To enable it to do so, this statute requires the Commissioner to file with the court a complete transcript of the record of the hearing before him. The statute states that the order of the Commissioner “if supported by substantial evidence” shall be presumed to be correct. Obviously, the statute contemplates that the reviewing court is to determine whether there is substantial evidence in the record to *324support the Commissioner’s findings of fact which are essential to his ultimate finding that the rates are excessive or inadequate, reasonable or unreasonable.
Before this ultimate finding can be made and reviewed there must be findings by someone as to the earned premiums to be anticipated by the company (i.e., all companies operating in North Carolina considered as one), the anticipated payments to be made on account of claims, the anticipated operating expenses and what is a reasonable and fair profit. Clearly, the statute does not contemplate that the reviewing court will make its own findings of fact as to these matters. The judicial review contemplated by the statute cannot be had unless the Commissioner’s findings on these preliminary matters are set forth in his order. In the present case, such findings are not set forth in the order of the Commissioner.
In the present case, it is the rate payers, represented by the Attorney General, who appealed. In re Filing by Fire Insurance Rating Bureau, supra, was an appeal by the companies, represented by the Rating Bureau. To affirm an order of the Commissioner fixing premium rates when, as here, the Court does not have before it these essential preliminary findings of fact by the Commissioner is to expose both the rate payers and the companies to the danger of arbitrary rate making by the Commissioner. How can this Court review the Commissioner’s findings that the former rates are inadequate and the rates now fixed by him are reasonable when we do not know what profit either schedule of rates will produce and do not know what profit the Commissioner deems reasonable? This Court should remand this matter to the Commissioner with instructions comparable to those given in the case of the Fire Insurance Rating Bureau, supra.
Furthermore, there is not in the present record evidence sufficient to support findings of fact upon these essential preliminary questions. No exhibit and no testimony in the record before us shows: (1) The total amount of earned premiums anticipated in a 12 month period, either from the present rates or from the proposed rates, when applied to the number of vehicles registered at the time of filing; (2) the total amount of company expenses, other than payment of losses and expenses related to the payment of losses, attributable to North Carolina *325business in such period; or (3) the total amount of profit or loss anticipated under either the present rates or the proposed rates.
An exhibit filed by the Rate Office shows in precise figures the bodily injury and property damage losses actually incurred by the companies in North Carolina in the two test years, within the minimum coverage limits; that is, payments on claims and expenses incurred in settling them. By pro forma adjustments, apparently proper, the Rate Office computed that such losses and loss adjustment expenses amounted to 68.6 cents of each earned premium dollar under the then present rates. This is a figure which purports to show the actual expenditures by the companies, attributable to their North Carolina business for the payment of losses and expenses relating thereto. Nothing in the record casts doubt upon its substantial accuracy.
Obviously, an insurance company has other expenses. The Rate Office breaks these down into four types: Production Costs; General Administration; Taxes, Licenses, Fees; and Inspection and Bureau. However, instead of showing the amounts actually expended during the test period, in or attributable to North Carolina, for these items, as it did in the matter of losses and expenses related thereto, the evidence of the Rate Office merely allocates to each of these items a specified percentage of the premium dollar, these allocations being: Production Costs 16.8%; General Administration 5.5%; Taxes, Licenses, Fees 3.1%; and Inspection and Bureau 1.0%, making a total for the four items of 26.4 cents out of each earned premium dollar. Adding this to the 68.6 cents of the premium dollar, computed from actual experience as the amount paid for losses and expenses relating thereto, the total was 95 cents out of the earned premium dollar. This, says the Rate Office, leaves 5 cents of each earned premium dollar for “underwriting profit and contingency.” Of this, income taxes will consume 2.6 cents, leaving 2.4 cents for addition to surplus or declaration of dividends.
When expressed in terms of 2.4 cents per premium dollar, the net profit after taxes, and, of course, after the payment of all losses and expenses, seems trivial. The actual fact is quite to the contrary. In 1967 the earned premiums just from the then minimum coverages of $5,000 for bodily injury to one person, $10,000 for all injuries in a single accident, and $5,000 for property damage totaled $113,424,348. Since that time, the mini*326mum coverage has been increased by statute and, according to the evidence of the Bureau, there has been an increase of 7% each year in the number of vehicles registered in the State, which means a substantial increase in the earned premiums without any increase in the rate. Even on the 1967 total earned premiums a profit of 2.4 cents per premium dollar would be $2,722,184 annually after taxes. Thus, we are not here concerned with trivial amounts. When the increase in profit of only a fraction of a cent per dollar of earned premiums amounts to so large a sum, by reason of the tremendous volume of business done, the public interest, as well as fair treatment of investors in insurance company securities, requires that the Commissioner abstain from fixing rates on the basis of rough estimates and guess.
The Rate Office in the present case has offered no evidence to show the actual expenses of the companies for production costs, or for general administration expense, attributable to North Carolina business. If each of these items has been overstated by as little as one cent per premium dollar, the amount actually remaining for underwriting profit would, necessarily, be increased by two cents of each earned premium dollar, which would amount to a very large sum, indeed, upon the total business done in this State.
It is essential to proper rate making that the expenses of the company, as well as its payments upon claims, be computed accurately on the basis of North Carolina experience, not just approximated on the basis of a hypothetical or theoretical allocation of the earned premium dollar as was done by the Rate Office and accepted by the Commissioner in this case.
The testimony of the witnesses for the Rate Office shows that they arrived at their computation of the allocation of the earned premium dollar to these expenses not from North Carolina experience, but from “countrywide expense experience” of all members of the Insurance Rating Board, one of the statistical agents. This “countrywide experience” not only relates to experience of insurers outside this State but includes the experience of companies not doing any business in North Carolina at all and excludes the experience of those who do operate here but report to a different statistical agent.
Furthermore, to predicate a rate increase on the premise that the expense of the insurance companies for General Administration varies in direct proportion to the premium receipts, as *327the Rate Office and the Commissioner have done, strains credulity beyond the breaking point. Salaries of filing clerks, secretaries and administration officers of the company are not fixed on this basis and neither are office rent and many other expenses of the home office and regional office operations. To conclude from this “countrywide experience” that the General Administration expense of the companies attributable to their North Carolina business has been or will be 5.50% of the earned premium dollar in this State, irrespective of what the premium rate is, is sheer approximation in an area where an error of a fraction of one per cent results in a substantial variation of the amount remaining for profit. A finding on such a basis that the present rates are “inadequate” is not a finding supported by substantial evidence in the record.
The statistical exhibits filed by the Rate Office in this case showing the actual payments on claims and claim adjustment expense, based upon actual North Carolina experience, demonstrates that these companies can compile accurate data with reference to their expense experience attributable to their business in this State alone. It is not unreasonable to require these companies to assume the task of allocating to the respective states they serve the appropriate shares of their general expenses. The statutory plan for insurance rate making adopted by this State contemplates that the Commissioner of Insurance will require such proof before authorizing an increase in the premium rates for liability insurance policies issued to the residents of this State.
There are substantial differences between North Carolina and other states in regard to automobile liability insurance. This is a compulsory insurance state. Few of the other states are. The companies have in North Carolina a captive market. Not only does this greatly increase the volume of business, which usually affects the profit necessary per unit of sale, but it also tends to reduce the sales promotion cost per policy. On the basis of “countrywide experience” the Rate Office allocated, and the Commissioner accepted, 16.8 cents of each premium dollar in North Carolina to Production Expense. If this allocation is only one cent too high, as applied to North Carolina, the result is a concealment in “Expense” of more than $1,000,000 in profit.
It is quite true that in North Carolina the companies must issue assigned risk policies. This, no doubt, tends to increase the hazard, per policy, but on the Rate Office’s own evidence, *328the total of all payments for losses and loss adjustment expense, including the assigned risks, is only 68.6 cents of each earned premium dollar under the rates in effect prior to the order here in question. How much of the remaining 31.4 cents of each earned premium dollar is actual profit should be determined on the basis of actual North Carolina expenses incurred, not on the basis of “countrywide experience.”
Assuming that the actual profit derived by the companies from their North Carolina business has been determined accurately, the question remains, is this a fair and reasonable profit ? This can be determined only in the light of the ratio of profits to gross sales in other businesses of comparable risk. A reviewing court is not the proper body to determine that question. That determination should be made by the Commissioner. He has not done so in this case.
There is in the record no substantial evidence to support a finding by the Commissioner upon this question. Assuming that an expert insurance actuary is also an expert in the matter of determining a fair rate of profit, which in my opinion does not follow necessarily, a finding by the Commissioner that a certain rate of profit is reasonable requires for its support more than the mere assertion by an expert witness that it is so. In McCormick on Evidence, § 12, it is said:
“Undoubtedly there is a kind of statment by the witness which amounts to little more than an expression of his belief as to how the case should be decided or as to the amount of damages which should be given or as to the credibility of certain testimony. Such extreme expressions as these all courts, it is believed, would exclude. There is no necessity for such evidence, and to receive it would tend to suggest that the judge and jury may shift responsibility for a decision to the witnesses.”
This statement is equally applicable to an administrative officer, such as the Commissioner of Insurance, when conducting an inquiry into the reasonableness of a rate of profit.
North Carolina, being a compulsory insurance state, is relatively unique among the states of the Union. Consequently, the mere statement that a certain rate of profit is allowed, or accepted, in other states is not substantial evidence that it is a fair and reasonable rate of profit in this State. This is especially so in the total absence of any evidence as to which other states *329have so determined and as to how and by whom their determinations were made.
The majority opinion appears to proceed from the position, indicated in its statement of the facts, that the Attorney General raised no point other than the competency of evidence admitted over his objection.
The fourth assignment of error in the petition for review filed by the Attorney General in the Superior Court reads as follows:
“(4) That the Commissioner erred in overruling the Attorney General’s motion to dismiss made at the end of the Rating Bureau’s evidence and again at the end of all the evidence on the ground that there was not sufficient competent evidence to support any part of the suggested rate increase.”
Since the first three assignments of error in the petition for review were directed specifically at the alleged errors of the Commissioner in overruling the Attorney General’s objections to testimony and exhibits offered by the Rate Office, it seems clear that Assignment of Error No. 4 was directed to the sufficiency of the evidence to sustain the burden of proof placed upon the Rate Office in such proceedings as this.
Assignment of Error (10) reads:
“(10) That the Commissioner erred in ordering * * * that private passenger automobile liability insurance rates be increased by 2.8% in that such order is based upon erroneous findings of fact and erroneous conclusions of law which resulted from incompetent testimony to which the Attorney General consistently made timely objections and motions to strike.”
While these assignments of error are not stated with the utmost precision, they are, in my opinion, sufficient to present for the consideration of a reviewing court the sufficiency of the Commissioner’s findings of fact and the sufficiency of the evidence to support them.
The learned judge who heard the matter in the Superior Court evidently regarded this question as having been raised for Conclusion No. 9 in his judgment reads: “There is substantial evidence in the record * * * to support the findings and con-*330elusions of the Commissioner in finding present rates inadequate and ordering a 2.8% overall private passenger automobile liability insurance rate increase on and after January 28, 1970.” The Attorney General assigned this conclusion as error in his appeal to this Court.
G.S. 58-9.3 (b) provides that upon judicial review “the order or decision of the Commissioner if supported by substantial evidence shall be presumed to be correct and proper.” This presumption relates to the correctness of the Commissioner’s findings of fact. It does not bar reversal of the order for the failure of the Commissioner to make findings of fact adequate to support his order since, when this omission occurs, it is an error of law, apparent upon the face of the order.
Consequently, it is my view that the sufficiency of the evidence to support the Commissioner’s findings of fact as to the adequacy or inadequacy of the former rates and the sufficiency of those findings of fact to support the order allowing the increase in the rates are questions properly before us on this appeal. For the reasons above mentioned, it is my view that the order of the Commissioner should be reversed and this matter remanded to him for the making of findings required by In Re Filing by Fire Insurance Rating Bureau, supra.
The statutes of this State impose upon the Commissioner the authority and the responsibility to make the determination of what is the profit actually made in North Carolina. He is not authorized by the statutes to accept determinations “elsewhere in the country” as to what is a reasonable “allocation” to profit, simply because such determinations have been made there. As the majority opinion states, there is nothing whatsoever in this record to show what profits were actually made by the insurance companies operating in North Carolina from their North Carolina business in the test years used in this proceeding. Without such evidence the finding of the Commissioner that a higher premium rate must be paid by the people of this State is unauthorized and should not be affirmed. It is, of course, entirely possible, so far as this record shows, that the Commissioner should have allowed an even larger increase. The difficulty is that the record does not show what, if any, increase is necessary to make the former rates “adequate.”
The majority opinion notes the fact that North Carolina premium rates are lower than the average in the 25 Eastern *331states, only two of these having rates lower than those paid in North Carolina. Elsewhere the majority opinion notes that “the Commissioner has held a tight rein with reference to any proposed increase of rates.” It is not the function of the Commissioner to hold a tight rein or a loose one. He is charged with the duty of fixing rates which are adequate and reasonable.
The majority opinion says that the Legislature has not defined a “reasonable rate” or provided a formula to guide the Commissioner in determining the same. That being true, we must find the guidance in the terms “adequate” and “reasonable,” which the Legislature has used, or conclude that the statute is designed to give the Commissioner arbitrary, dictatorial power to fix rates, in which event the statute itself would be unconstitutional. It is my view that the words “adequate” and “reasonable” are, themselves, sufficient as standards and, by analogy to the statutes providing for regulation of public utility rates, mean that the premium rates are to be fixed so as to provide sufficient funds to pay losses, all operating expenses, including taxes, and leave a margin of profit sufficient to attract investors to the insurance business in comparison with other businesses of like risk. See, Blue field Waterworks & Improvement Co. v. Public Service Commission, 262 U.S. 679, 43 S.Ct. 675, 67 L. Ed. 1176. Without adequate findings of fact by the Commissioner no reviewing court can determine whether his order meets this requirement.
The majority opinion says, “It is noteworthy that a casualty insurance company, unlike a public utility, has no monopolistic or exclusive rights.” In this State the companies are forbidden by law to vary from the premium rates fixed by the Commissioner. The Commissioner, in the present order, stated correctly that he fixes premium rates as if all the companies operating in this State were a single company, having the composite experience of all of them with reference to losses and operating expenses. Furthermore, the automobile owner and driver in North Carolina is required to purchase liability insurance, subject to an exception which for practical purposes may be disregarded. Technically, it may be correct to say that the automobile liability insurance business in North Carolina is not monopolistic but, so far as rate making is concerned, it is a complete monopoly whose services the public is not even at liberty to reject. The only thing that saves it from condemnation as a monopoly under the rule of United States v. Southeastern Un*332derwriters Association, 322 U.S. 533, 64 S.Ct. 1162, 88 L. Ed. 1440, is that the State has provided a statutory procedure for regulating its rates in the public interest. Its rates should, therefore, be regulated at least as carefully as those of a public utility for whose services the public can often find an adequate substitute.
Of course, an insurance company has nothing comparable to the rate base of a public utility. The test of a fair return or profit to the insurance company is not to be measured by a percentage of the value of its properties in this State, but a fair return, measured by a percentage of gross sales in this State, can still be determined by the test of what is necessary to attract investors to this business. It is not sufficient for the Commissioner simply to take “allocations” made “elsewhere in the country.”
The majority opinion holds that G.S. 143-317 and G.S. 143-318 are not applicable to a hearing before the Commissioner of Insurance for the purpose of a general revision of insurance rates. With this, and the implication inherent therein, that in such a proceeding the Commissioner of Insurance may act upon evidence not competent for admission in the Superior Court, I cannot agree. This decision, on this point, exposes the insurance companies, as well as the public, to the danger of arbitrary rate making, which danger is not insignificant merely because of justified confidence in the fairness and ability of the present Commissioner.
It is not necessary for this Court in this proceeding to hold G.S. 143-317 and G.S. 143-318 are not applicable to such hearings. The statistical data introduced in evidence over objection by the Attorney General was, in my opinion, clearly admissible in a proceeding in the Superior Court. This evidence falls within the limits of the well known exception to the Hearsay Rule for entries made in the regular course of business. Sims v. Insurance Co., 257 N.C. 32, 125 S.E. 2d 326; Insurance Co. v. Railroad, 138 N.C. 42, 50 S.E. 452; Stansbury, North Carolina Evidence, 2d Ed, §§ 144, 155; Wigmore on Evidence, 3d Ed, § 1530. The admission of compilations and summaries of data, themselves prepared in the regular course of business, in lieu of a mass of original entries, is a proper extension of this exception to the Hearsay Rule. See: Papadakis v. United States, 208 F. 2d 945; Massachusetts Bonding & Insurance Co. v. Norwich Pharmacal *333Co., 18 F. 2d 934; King v. State ex rel Murdock Acceptance Corp., 222 So. 2d 393 (Miss.); 1964 pocket supplements to Wigmore on Evidence, 3d Ed, § 1530.
G.S. 143-317 defines “Administrative Agency” to mean any State authority * * * or officer authorized by law to make administrative decisions, except agencies in the legislative and judicial departments of government * * *.” It defines “Proceeding” to mean “any proceeding, by whatever name called, before an administrative agency of the State, wherein the legal rights, duties, or privileges of specific parties are required by law * * * to be determined after an opportunity for agency hearing.” G.S. 143-318 provides, “In all proceedings * * * [t]he rules of evidence as applied in the superior and district court divisions of the General Court of Justice shall be followed.”
The Commissioner of Insurance is a State officer authorized by law to make administrative decisions. He is a member of the executive, not of the legislative or judicial department of the State government. Constitution of North Carolina, Art. Ill, § 1. Consequently, he is an administrative agency within the meaning of these statutes. Although the fixing of rates by the Commissioner is an exercise of the State’s legislative power, In re Filing by Fire Insurance Rating Bureau, supra, the Commissioner exercises this power as an administrative officer to whom it has been delegated by the Legislature. The hearing before him is not comparable to a hearing before a committee of the Legislature considering proposed legislative action. The purpose of the proceedings before him is to determine the right of the insurance companies operating in this State to charge the premiums which they propose to charge. That right is required by G.S. 58-248.1 to be determined after a hearing. G.S. 58-248.5 provides that a determination of such right is reviewable by appeal to the Superior Court of Wake County and thence to the Appellate Division, the judicial review being a “review of findings of fact and errors of law only.” G.S. 58-9.3.
The plain language of the statutes seems clearly to encompass a hearing before the Commissioner for the fixing of insurance rates. The fact that the ratepayers are not designated by name and the fact that the petitioner in the proceeding represents 251 insurance companies, rather than one alone, are not material. If this were a proceeding by a single insurance company to determine its legal right to charge a higher premium *334rate, it would seem quite clearly to fall squarely within the definitions of G.S. 143-317. The statute expressly excepts from its application proceedings before the North Carolina Utilities Commission. This strengthens my conclusion that it was intended to include proceedings before the Commissioner of Insurance to fix premium rates. The exclusion of the Utilities Commission clearly indicates that the Legislature understood a rate making proceeding before the North Carolina Utilities Commission would be within the statute without such exclusion. The obvious reason for the exclusion is that substantially the same provision is made applicable to the Utilities Commission by G.S. 62-65.
If the Commissioner can order a rate increase on the basis of evidence not admissible in the Superior Court, in a proceeding in which the judge sits without a jury, he can also order a decrease in the rates on the basis of such evidence. Thus, the insurance companies, as well as the public, are exposed by this decision to future findings made without support of evidence competent for consideration by the courts of this State. It is a high price to pay for a rate increase.