Court Opinion

ID: 8896832
Source: CourtListenerOpinion
Date Created: 2022-11-27 00:12:14.866787+00
Date Added: 2024-06-11T17:07:33.119361
License: Public Domain

TYSON, Judge
dissenting.
I respectfully dissent from the majority’s opinion.
*435I.Issue
The issue before this court is whether the Commissioner’s order is supported by material and substantial evidence where the expert witness, whose opinion the Commissioner relied upon to support his findings of fact, ignored and expressly excluded consideration of statutorily required factors.
II.Standard of Review
On judicial review, this Court employs the “whole record test” to determine whether material and substantial evidence supports the findings of fact and conclusions of law of the Commissioner. State ex rel. Comm’r of Ins. v. N.C. Rate Bureau (1996 Auto), 350 N.C. 539, 547, 516 S.E.2d 150, 155, reh’g denied, 350 N.C. 852, 539 S.E.2d 11 (1999). “The whole record test requires the reviewing court to consider the record evidence supporting the Commissioner’s order, to also consider the record evidence contradicting the Commissioner’s findings, and to determine if the Commissioner’s decision had a rational basis in the material and substantial evidence offered.” State ex rel. Comm’r of Ins. v. N.C. Rate Bureau, 124 N.C. App. 674, 678, 478 S.E.2d 794, 797 (1996). The Commissioner’s order, if supported by substantial and material evidence, is presumed to be correct and proper. 1996 Auto, 350 N.C. at 547, 516 S.E.2d at 155. This Court should not substitute its judgment for that of the Commissioner’s when the evidence is conflicting. Id. at 548, 516 S.E.2d at 155.
The record shows that the Commissioner’s findings of fact fail to conform to these requirements and are not supported by substantial and material evidence in the whole record. The order failed to meet the requirements of N.C. Gen. Stat. § 58-36-10.
III.Reliance on Countrywide Loss and Expense Experience
The Bureau asserts in their first assignment of error, that the Commissioner relied on expert testimony that does not compare returns on insurance operations in North Carolina to industries of comparable risk in North Carolina. ■
N.C. Gen. Stat. § 58-36-10 (2001) requires:
(2) Due consideration shall be given to actual loss and expense experience within this State for the most recent three-year period for which that information is available . . . Provided, however, that countrywide expense and loss experience and other *436countrywide data may be considered only where credible North Carolina experience or data is not available.
(emphasis supplied).
The statute requires that the Commissioner “shall” consider North Carolina data over the most recent three-year period in making his findings of fact. N.C. Gen. Stat. § 58-36-10(2) (2001). The Commissioner may consider countrywide data “only” if he finds that the North Carolina data is not “credible” or “available.” Id.
When finding returns on insurance operations, the Commissioner primarily relied on the expert opinion of the department’s witness Allan I. Schwartz (“Schwartz”). Schwartz testified that the eighteen year average return on countrywide insurance operations for the property and casualty insurance industry was 3.7%. He further testified that property/casualty risks are lower than the risks associated with automobile liability. Relying on this testimony, the Commissioner made the following finding of fact:
162. The lack of “comparability” is evidenced by the Bureau’s prospective range of returns of 13.1% to 15.3% compared to the average pre-tax historical returns on insurance operations during an eighteen year period of the countrywide property/casualty industry of approximately 3.7% and the ten year average pre-tax returns in competitive rating states of 4.3% liability and 6.4% physical damage. This lack of “comparability” is further evidenced by the resulting profit provisions of 9.5% and 14.0%, which are higher than several of the witnesses have ever encountered in any jurisdiction and certainly higher than the profit provisions recently utilized by the top ten writers in three neighboring states.
(emphasis supplied). The Commissioner had previously and expressly found that the North Carolina data required to be considered by the statute was credible and available. The Commissioner made the following findings of fact:
85. N.C. Gen. Stat. § 58-36-10 does require due consideration of the latest three years of data, that data is available in the filing for all three years and, according to the Bureau’s credibility standards, all three years are fully credible. There doesn’t appear to be any reason, therefore, for all three years not to be used. In fact, there appears to be a number of reasons why three years of data should be used in the rate calculations ....
*43786. Therefore, based on the evidence in this case, the Commissioner finds that use of the three year unweighted average of the indications for the years 1997-1999 is the appropriate way to provide due consideration of the latest three years of experience for the bodily injury, property damage, medical payments, comprehensive and collision coverages. The use of three years of data will produce rates that are neither inadequate, excessive or unfairly discriminatory.
(emphasis supplied).
In spite of these findings, the Commissioner relied on countrywide data from the property/casualty industry sector and data from neighboring states to set the overall return on operations at Schwartz’s calculation of 3.7%. Schwartz admitted in his testimony that property and casualty risks were lower than automobile liability risks. Schwartz testified that “[property and casualty insurance companies are better than average (lower risk) for beta, safety and price stability, and lower than average (higher risk) for earnings predictability. Overall, the property and casualty insurance industry is of about average or somewhat below average risk.”
The Commissioner also considered data from the past eighteen years and failed to abide by the statutory time frame requiring data from the “most recent three-year period.” N.C. Gen. Stat. § 58-36-10(2) (2001). By relying on countrywide data after finding that North Carolina data was “credible” and “available” and by relying upon data six times older than the “most recent three year period,” the Commissioner’s findings of fact failed to comply with the statutory requirements and do not support his conclusions. Id.
IV. Due Consideration of Dividends and Deviations
A. Zero Percent Factor
The Bureau also contends the Commissioner did not give “due consideration” to dividends and deviations.
N.C. Gen. Stat. § 58-36-10 (2001) requires: “(1) Rates or loss costs shall not be excessive, inadequate or unfairly discriminatory. (2) Due consideration shall be given ... to dividends, savings, or unabsorbed premium deposits allowed or returned by insurers to their policyholders, members, or subscribers . . . .” (emphasis supplied). N.C. Gen. Stat. § 58-36-10(1) requires the Commissioner to determine whether the proposed rates will produce “a fair and reasonable profit and no more.” 1996 Auto, 350 N.C. at 542, 516 S.E.2d at 151.
*438In State ex rel. Comm’r of Ins. v. N.C. Rate Bureau, Judge Johnson found “[t]he Commissioner . . . elected to assign a valuation of zero to dividends returned to policyholders and rate deviations.” 102 N.C. App. 824, 404 S.E.2d 368, slip op. at 7 (May 7, 1991) (No. 9010INS864) (unpublished) (Judges, now Justices, Parker and Orr concurring); Rule 30(e)(3). This Court held:
[t]he net result of the Commissioner’s decision is that the calculated rates are completely unaffected by dividends and deviations. As we have carefully considered the Commissioner’s findings of fact, calculations and conclusions of law, we are nonetheless unable to adopt his argument that by assigning zero values to both dividends and deviations, he has complied with existing case law.
Id. (citations omitted).
All evidence was presented to the Commissioner in the form of expert testimony. The Commissioner again relied on Schwartz’s expert testimony. Schwartz testified that allowing dividends and deviations to be included as a factor in the rate decision, was against “good public policy” and would result in unfairly discriminatory rates. Schwartz also testified that on “public policy grounds ... it is not appropriate to build an additional cost factor for dividends and deviations back into the manual rate level” and that “dividends and deviations should not be built back into the manual rate level . . . since that procedure would eliminate any savings . . . . ” Relying on this testimony, the Commissioner’s findings of fact applied a “zero percent factor” for dividends and deviations in setting the insurance rates.
Public policy in North Carolina is and has been set by the North Carolina Legislature. N.C. Gen. Stat. § 58-36-10(2) (2001) requires “[d]ue consideration shall be given ... to dividends, savings, or unabsorbed premium deposits allowed” in setting rates. No specific number must be assigned to these factors. 1996 Auto, 350 N.C. at 547, 516 S.E.2d at 154-55. However, there must be substantial evidence in the record to show that dividends and deviations were given “due consideration.” Id. In 1996 Auto, our Supreme Court found that the Commissioner’s rates expressly included a 5% margin for dividends and deviations and held that substantial evidence supported the Commissioner’s findings of fact regarding dividends and deviations. Id. at 548, 516 S.E.2d at 155. That case is distinguishable. Here, the Commissioner claims that he included a 4.5 to 5% margin as he did in *4391996 Auto. However, unlike in 1996 Auto, nothing in the Commissioner’s order shows that this 4.5 to 5% margin was expressly included in the rates. The order simply states that the 4.5 to 5% margin is “implicit” in his calculations. In his dissent from the 1996 Auto case, Chief Justice Mitchell stated:
[T]he Commissioner is required to give each factor some weight and that this must be reflected in his order. Otherwise, a reviewing court is faced with an inadequate appellate record and must, as here, simply accept the Commissioner’s conclusory statements that he has taken all of the statutory factors into account. It is not enough for the Commissioner to note in conclusory fashion that dividends and deviations crossed his mind when he was entering his order.
Id. at 549, 516 S.E.2d at 156. The majority opinion states:
The weight to be given the respective factors is for the Commissioner to determine in the exercise of his sound discretion and expertise, but he may not arrive at his determination as to the propriety of the filing by shutting his eyes to experience shown by evidence of reasonably probative value. . . .
Id. at 547, 516 S.E.2d at 155, quoting State ex. rel. Comm’r of Ins. v. N.C. Fire Ins. Rating Bureau, 292 N.C. 471, 488-89, 234 S.E.2d 720, 729-30 (1977). N.C. Gen. Stat. § 58-36-10(2) requires that the Commissioner “shall” give “due consideration” to dividends and deviations, not “implicit” inclusion.
B. Classification of Dividends and Deviations
In their second assignment of error, the Bureau asserts error in the Commissioner’s finding that dividends and deviations are “profits” to the Bureau’s member companies rather than costs.
As previously noted, “[t]he whole record test requires the reviewing court to consider the record evidence supporting the Commissioner’s order, to also consider the record evidence contradicting the Commissioner’s findings, and to determine if the Commissioner’s decision had a rational basis in the material and substantial evidence offered.” State ex rel. Comm’r of Ins. v. N.C. Rate Bureau, 124 N.C. App. at 678, 478 S.E.2d at 797. The Commissioner relied on Schwartz’s expert opinion and found that dividends and deviations were “profits” instead of costs for the Bureau’s member companies. The Commissioner concluded that since a provision for *440profit already existed, adding an additional provision in the ratemak-ing formula for these types of profit is redundant. The Commissioner based these findings on Schwartz’s opinion that these dividends and deviations are a “voluntarily distribution based upon individual company management decisions.” As Judge Johnson held in State ex rel. Comm’r of Ins. v. N.C. Rate Bureau:
In addition, we are unprepared to adopt his finding that dividends and deviations are voluntary decisions of the member companies and cannot be guaranteed by the Rate Bureau or the Commissioner. To the extent that the Commissioner ignored dividends to policyholders and rate deviations in his calculations, the ordered underwriting profit provisions must be recalculated to reflect an adjustment for these rating criteria.
102 N.C. App. 824, 404 S.E.2d 368, slip op. at 7 (May 7,1991) (citations omitted). The logic of that case applies equally here.
The Commissioner also found that including a specific provision for dividends and deviations was “unnecessary” because the use of an average rate “implicitly” included consideration of dividends and deviations. The Commissioner’s findings that dividends and deviations are profits and not costs to the Bureau’s member companies has no basis in fact. Treating dividends and deviations as profits and assuming a zero percent factor forces the Bureau’s member companies to either: (1) absorb these costs, which causes the rates to be “inadequate,” or (2) exclude higher risk policyholders who would otherwise qualify for the manual rate, which causes the rates to be “discriminatory.” N.C. Gen. Stat. § 58-36-10(1) (2001).
1. Absorption of Costs bv Bureau’s Member Companies
The Commissioner set his rate based upon the “average” profit or return. The “average” or midpoint return places an equal number of policyholders in the risk pool on either side of the average. Lower risk policyholders demand and receive discounts or deviations from the manual rate from the Bureau’s member companies. Deviations are discounts from the manual rates and are never paid by the policyholders. 1996 Auto, 350 N.C. at 545, 516 S.E.2d at 154; see N.C. Gen. Stat. § 58-36-30 (2001). Dividends are, essentially, rebates returned to policyholders at the end of the policy period. Id.; see N.C. Gen. Stat. § 58-36-60 (2001). The reason the statute requires “due consideration” of discounts and deviations in setting rates is that both reductions from the manual rate are tools the Bureau’s member companies *441expend to attract and retain lower risk policyholders within the risk pool. Id. at 546, 516 S.E.2d at 154.
Retention of lower risk policyholders in the risk pool is the basis for the legislature’s policy choice that dividends and deviations be given “due consideration” in setting rates. Without retention of lower risk policyholders in the risk pool, the relative risk of the pool to the insurer increases.
Expressly excluding or ignoring the costs of dividends and deviations to a zero percent factor in setting the manual rate causes the average risk of the pool to shift higher, destroys the equilibrium required by the statute, and makes rates “inadequate.” N.C. Gen. Stat. § 58-36-10(1) (2001). Applying a zero percent factor excludes “due consideration” of dividends and deviations, shifts the average risk, and causes the relative risk of the pool to be 4.5 to 5.0% higher, without providing the insurer offsetting compensation for the higher risk. To disallow insurers from treating dividends and deviations as costs requires the companies to absorb this cost and to subsidize rates for higher risk drivers. This forces the insurer to absorb these costs on a pool that is riskier than “average,” and makes the rates “inadequate.” Id.
2, Exclusion of Higher Risk Policyholders
If insurers are not allowed consideration for dividends and deviations, they may seek to exclude higher risk drivers from manual rates who would have otherwise qualified. If otherwise qualified drivers are excluded from manual rates, this “zero percent factor” for dividends and deviations makes the rates “discriminatory.” Id. Using a zero percent factor for dividends and deviations causes the relative risk of the pool of policyholders to be higher than the average risk of the pool. Higher risk policyholders, who would have otherwise qualified for manual rates, may be excluded from manual rates and be assigned to the reinsurance facility in order to restore balance to the risk pool. In this situation, if dividends and deviations are not treated as costs, rates become “discriminatory” against excluded policyholders, who would have otherwise qualified for manual rates. Id. The statute’s requirement of “due consideration” to dividends and deviations reflects the General Assembly’s public policy choice: (1) to provide affordable insurance coverage to the widest possible pool of drivers, at rates that are neither excessive, inadequate, or unfairly discriminatory and (2) to encourage efficient and economic practices for the purchase of liability insurance by all owners of vehicles oper*442ated on our highways. N.C. Gen. Stat. § 58.40-1 (2001); also see generally George A. Akerlof, The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, 84 Qu. J. Econ. 488, 488-90, 492-500 (1970) (2001 Nobel Laureate in Economics).
V. Substantial Evidence to Support Findings of Fact
Judicial reviews of other North Carolina Commissions’ orders have held that findings of fact are not supported by substantial evidence when the expert opinion, upon which these findings were based, ignored legally required factors. Holley v. Acts, Inc., 357 N.C. 228, 581 S.E.2d 750 (2003); In re Corbett, 355 N.C. 181, 558 S.E.2d 82 (2002). Holley involved an appeal from the Industrial Commission granting a worker’s compensation claim. Our Supreme Court held “when such expert testimony is based merely upon speculation and conjecture, ... it is not sufficiently reliable to qualify as competent evidence . . . .” 357 N.C. at 232, 581 S.E.2d at 753. Our Supreme Court reversed the Industrial Commission and held that the expert opinion evidence, upon which the Industrial Commission relied to make its findings, failed to meet the “reasonable degree of medical certainty” standard required by law. Id. at 234, 581 S.E.2d at 754. Without expert testimony based upon legal requirements, no competent evidence supported the Industrial Commission’s findings of fact. The Supreme Court reversed the Industrial Commission’s decision. Id.
In re Corbett involved an appeal from the Property Tax Commission’s order of value of real property. Our Supreme Court held that “based on statutory mandate, once it is determined that valuation or revaluation of a property is statutorily required, any valuation which is not made in accordance with the schedules, standards and rules used in the County’s most recent general reappraisal or horizontal adjustment is in violation of the statutory requirements of section 105-287.” 355 N.C. at 189, 558 S.E.2d at 87. Our Supreme Court stated “if the provisions of [the statute] are triggered, it necessarily follows that the only statutorily permissible method of valuation is through the application of the County’s schedules, standards and rules.” Id. at 185, 558 S.E.2d at 84. Our Supreme Court reversed and remanded because the expert witness did not follow the statutory requirements in formulating his opinion. Id. at 189, 558 S.E.2d at 87.
VI. Conclusion
N.C. Gen. Stat. § 58-36-10 (2001) requires that the Commissioner’s findings shall give “due consideration” to “credible” and “available” North Carolina data from the “most recent three year period” and to *443dividends and deviations in setting rates. The Commissioner primarily relied on one expert’s testimony, who not only ignored, but expressly excluded on “public policy grounds,” these statutorily required factors in formulating his opinion. This expert witness also based his opinion on eighteen year old countrywide data after the Commissioner had found North Carolina data from the most recent three year period to be “credible” and “available.” Schwartz’s opinion testimony failed to comply with the statute and fails to provide substantial evidence to support the Commissioner’s findings of fact. I would reverse and remand this case to the Commissioner to base his order on substantial evidence that includes “due consideration” to the General Assembly’s statutory requirements. I respectfully dissent.