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

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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DISCOVERY INS. CO. V. N.C. REINSURANCE FAC.

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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DISCOVERY INS. CO. V. N.C. REINSURANCE FAC.

Opinion of the Court

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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DISCOVERY INS. CO. V. N.C. REINSURANCE FAC.

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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DISCOVERY INS. CO. V. N.C. REINSURANCE FAC.

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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DISCOVERY INS. CO. V. N.C. REINSURANCE FAC.

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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DISCOVERY INS. CO. V. N.C. REINSURANCE FAC.

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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DISCOVERY INS. CO. V. N.C. REINSURANCE FAC.

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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DISCOVERY INS. CO. V. N.C. REINSURANCE FAC.

Opinion of the Court

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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DISCOVERY INS. CO. V. N.C. REINSURANCE FAC.

Opinion of the Court

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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DISCOVERY INS. CO. V. N.C. REINSURANCE FAC.

Opinion of the Court

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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DISCOVERY INS. CO. V. N.C. REINSURANCE FAC.

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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Opinion of the Court

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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