North Carolina Reinsurance Facility v. Causey

IN THE COURT OF APPEALS OF NORTH CAROLINA

No. COA18-1303

Filed: 4 June 2019

Wake County, No. 17 CVS 15538

THE NORTH CAROLINA REINSURANCE FACILITY, Petitioner,

v.

MIKE CAUSEY, COMMISSIONER OF THE NORTH CAROLINA DEPARTMENT

OF INSURANCE, and ALLSTATE INDEMNITY COMPANY, Respondents.

Appeal by petitioner from order entered 6 September 2018 by Judge R. Allen

Baddour, Jr. in Wake County Superior Court. Heard in the Court of Appeals

7 May 2019.

Young Moore and Henderson, P.A., by Walter E. Brock, Jr. and Angela Farag

Craddock, for petitioner-appellant.

Parker Poe Adams & Bernstein LLP, by Catharine Biggs Arrowood, for

respondent-appellee.

ARROWOOD, Judge.

The North Carolina Reinsurance Facility (“petitioner” or “the Facility”)

appeals from the superior court’s order denying petitioner’s petition for review and

affirming an order of the North Carolina Commissioner of Insurance (“the

Commissioner”) that reversed petitioner’s denial of a reimbursement to Allstate

Indemnity Company (“respondent” or “Allstate”). For the reasons that follow, we

reverse and remand.

N.C. REINSURANCE FACILITY V. CAUSEY

Opinion of the Court

I. Background

On 25 October 2007, Allstate issued an automobile insurance policy to Mr.

Jason T. Crouse (“Mr. Crouse”) that was ceded to the Facility, “a nonprofit

unincorporated legal entity . . . consisting of all insurers licensed to write and

engaged in writing within this State motor vehicle insurance or any component

thereof[,]” N.C. Gen. Stat. § 58-37-5 (2017), “which insures drivers who the insurers

determine they do not want to individually insure.” Discovery Ins. Co. v. N.C. Dep’t

of Ins., __ N.C. App. __, __, 807 S.E.2d 582, 585 (2017) (citation and internal quotation

marks omitted).

Mr. Crouse purchased this policy through Allstate agent Ms. Jeannie Scott

(“Ms. Scott”) in North Carolina. Less than a month later, on 2 November 2007, Mr.

Crouse was involved in an automobile accident in Clearwater, Florida. Mr. Crouse’s

vehicle collided with a bicycle operated by a minor, Mr. Matthew R. Hanna (“Mr.

Hanna”). Mr. Hanna suffered traumatic brain damage and other serious injuries.

Mr. Crouse reported the accident to Ms. Scott on 5 November 2007. She

informed him that he had to call a 1-800-Allstate telephone number to report the loss.

However, there is no indication in the record that Mr. Crouse ever called the 1-800-

Allstate telephone number, nor that Allstate received any additional notice of the

claim until after Mr. Hanna’s parents had hired counsel. The Hannas filed a

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complaint against Mr. Crouse in Florida state court on 15 January 2008, seeking

damages from the accident.

On 18 January 2008, a paralegal in the law office representing the Hannas

called the 1-800-Allstate telephone number to report the claim, but did not notify

Allstate that legal action had commenced against Mr. Crouse. Allstate opened a

claim file and began investigating the claim that same day. The adjuster assigned to

the case interviewed Mr. Crouse, hired counsel to represent him, and created an

accident reconstruction. Within five days, Allstate authorized the tender of the policy

limit of $50,000.00 to the Hannas on 23 January 2008. Allstate formally tendered

this offer on 1 February 2008. The Hannas rejected this offer on 14 February 2008.

Mr. Crouse entered into a stipulated settlement with the Hannas on

6 September 2012, whereby he consented to the entry of a $13,800,000.00 judgment

against him and assigned his “claims, rights, and interests in the policy . . . as against

Allstate . . . for any failure to settle or otherwise administer his automobile claims

arising out of the Accident.” As part of this settlement, the Hannas agreed not to

take affirmative actions to record or execute the judgment against Mr. Crouse. The

final judgment was entered on 7 September 2012.

The Hannas filed a complaint against Allstate in the Middle District of Florida

on 10 September 2012. The complaint alleged Allstate breached its duty of good faith

to Mr. Crouse by failing to: (1) timely and reasonably affirmatively seek out a

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Opinion of the Court

settlement of the claims in the Hanna matter; (2) communicate the exposure Mr.

Crouse faced, and to offer advice on how to minimize this exposure; and (3) adopt and

implement standards and procedures for timely and proactive investigation and

resolutions of claims and/or failing to follow such standards Allstate had adopted.

The matter went to trial, and the jury returned a verdict on 3 March 2014 that

determined Allstate had acted in bad faith by failing to settle the claims arising out

of the Hanna matter. The trial court entered a $13,800,000.00 judgment against

Allstate on 4 February 2014. Allstate appealed the judgment, but eventually settled

the matter on 29 September 2015 for $11,000,000.00.

Allstate filed a petition for reimbursement with the Facility on

30 October 2015. The Facility’s claims committee heard the matter on

1 February 2017. On 9 May 2017, the claims committee recommended the denial of

Allstate’s petition. Allstate objected to the claims committee’s recommendation, and

requested a hearing before the Facility’s Board (“the Board”). The Board heard the

matter, and denied the petition for reimbursement on 14 July 2017.

Allstate appealed to the Commissioner pursuant to N.C. Gen. Stat. § 58-37-

65(a) (2017). The matter came on for hearing before the Commissioner’s designated

hearing officer, Hearing Officer A. John Hoomani, Esq., on 30 October 2017. The

Commissioner ordered the Board to reconsider its ruling because its denial of

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Opinion of the Court

Allstate’s petition was not in accordance with the Facility Act, the Facility’s Plan of

Operation, and the Facility’s Standard Practice Manual.

The Facility petitioned for judicial review of the Commissioner’s order on

21 December 2017, and named both Allstate and the Commissioner as a respondent

on appeal. The Commissioner moved to dismiss himself as a party.

The matter came on for hearing before the Honorable R. Allen Baddour, Jr. on

31 July 2018 in Wake County Superior Court. The trial court granted the

Commissioner’s motion to dismiss, entered an order denying the Facility’s petition

for review, and affirmed the Commissioner’s order.

The Facility appeals.

II. Discussion

Petitioner argues the trial court erred by affirming the Commissioner’s order

because the Commissioner: (1) failed to apply paragraph C.2. of Section 5 of the

Facility’s Standard Practice Manual (“Rule 5.C.2.”) according to its plain meaning;

and (2) erroneously determined petitioner’s grounds for the denial of Allstate’s

petition were not in accordance with the Facility Act, the Facility’s Plan of Operation,

and the Facility’s Standard Practice Manual. We agree with petitioner that the

superior court’s affirming the Commissioner was error due to failure to apply Facility

Rule 5.C.2. according to its plain meaning. Therefore, we reverse and remand, and

do not reach the second issue on appeal.

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Opinion of the Court

A. Standard of Review

All of the Commissioner’s rulings or orders made pursuant to N.C. Gen. Stat.

§ 58-37-65 of the Facility Act are “subject to judicial review as approved in G.S. 58-2-

75.” N.C. Gen. Stat. § 58-37-65(f) (2017). N.C. Gen. Stat. § 58-2-75 (2017) provides

that, generally, “[a]ny order or decision made, issued or executed by the

Commissioner” is “subject to review in the Superior Court of Wake County on petition

by any person aggrieved filed within 30 days from the date of the delivery of a copy

of the order or decision made by the Commissioner upon such person.” N.C. Gen.

Stat. § 58-2-75. “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[.]” Discovery Ins. Co., __ N.C.

App. at __, 807 S.E.2d at 587 (citing N.C. Reinsurance Facility v. Long, 98 N.C. App.

41, 46, 390 S.E.2d 176, 179 (1990)).

N.C. Gen. Stat. § 150B-51(b) provides:

The court reviewing a final decision may affirm the

decision or remand the case for further proceedings. It may

also reverse or modify the decision if the substantial rights

of the petitioners may have been prejudiced because the

findings, inferences, conclusions, or decisions are:

(1) In violation of constitutional provisions;

(2) In excess of the statutory authority or

jurisdiction of the agency or administrative law

judge;

(3) Made upon unlawful procedure;

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Opinion of the Court

(4) Affected by other error of law;

(5) Unsupported by substantial evidence admissible

under G.S. 150B-29(a), 150B-30, or 150B-31 in

view of the entire record as submitted; or

(6) Arbitrary, capricious, or an abuse of discretion.

N.C. Gen. Stat. § 150B-51(b) (2017). Our Court reviews errors asserted “pursuant to

subdivisions (1) through (4) of subsection (b) of this section . . . using the de novo

standard of review.” N.C. Gen. Stat. § 150B-51(c). With regard to errors asserted

“pursuant to subdivisions (5) and (6) of subsection (b) of this section, the court”

reviews “the final decision using the whole record standard of review.” Id.

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.

Discovery Ins. Co., __ N.C. App. at __, 807 S.E.2d at 587 (quoting N.C. Dep’t of Env’t

& Nat. Res. v. Carroll, 358 N.C. 649, 660, 599 S.E.2d 888, 895 (2004)) (internal

quotation marks omitted) (alteration in original). “Substantial evidence means

relevant evidence a reasonable mind might accept as adequate to support a

conclusion.” N.C. Gen. Stat. § 150B-2(8c) (2017) (internal quotation marks omitted).

B. The Plain Meaning of Facility Rule 5.C.2.

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Opinion of the Court

The Facility argues the superior court’s judgment is erroneous because the

Commissioner had committed an error of law by failing to apply Rule 5.C.2. of the

Facility’s Standard Practice Manual according to its plain meaning. Additionally, the

Facility contends the judgment appealed from is erroneous because the

Commissioner exceeded his statutory authority by committing this error of law.

We review questions of law in cases appealed from administrative tribunals de

novo. N.C. Gen. Stat. § 150B-51(c); Discovery Ins. Co., __ N.C. App. at __, 807 S.E.2d

at 587. “When the language of regulations is clear and unambiguous, there is no

room for judicial construction, and courts must give the regulations their plain

meaning.” Britt v. N.C. Sheriffs’ Educ. & Training Standards Comm’n, 348 N.C. 573,

576, 501 S.E.2d 75, 77 (1998) (citation omitted).

The Facility’s Standard Practice Manual was established pursuant to N.C.

Gen. Stat. § 58-37-35(g)(8), which provides:

(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:

....

(8) To establish fair and reasonable procedures for the

sharing among members of any loss on Facility business

that cannot be recouped under G.S. 58-37-40(e) and

other costs, charges, expenses, liabilities, income,

property and other assets of the Facility and for

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Opinion of the Court

assessing or distributing to members their appropriate

shares. . . .

N.C. Gen. Stat. § 58-37-35(g)(8) (2017). Section 5 of the Standard Practice Manual

contains general information about a member company’s responsibility regarding

claims management. Subsection C of Section 5 addresses the procedure for

presenting excess judgments or other legal actions against companies to the Facility,

such as the excess judgment in the instant case.

Rule 5.C.2. of this section provides, in pertinent part:

The Governing Board shall consider the petition, and may

at any time prior to judgment against the petitioner or

thereafter authorize the Facility to contribute any part of

sums required to satisfy the excess judgment against the

insured or the judgment or potential judgment against the

petitioner, unless it is the determination of the Board of

Governors that the petitioner was guilty of gross or willful

or wanton mishandling, in which event the petition shall

be denied.

N.C. Reinsurance Facility Standard Practice Manual 5-1, Rule 5.C.2. (2014).

Here, the superior court affirmed the Commissioner holding that “the only

reasonable interpretation of” this Rule, “when read in conjunction with the enabling

legislation,” “is that a petition for reimbursement will be approved by the Facility

unless the member company has engaged in ‘gross or willful or wanton mishandling’

of the claim.” Therefore, the superior court agreed with the Commissioner’s

reasoning that because the Facility and Commissioner had agreed and found Allstate

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was not guilty of gross or willful or wanton mishandling of the claim, Rule 5.C.2.

required the Facility to reimburse Allstate for the $11,000,000.00 settlement.

On appeal, petitioner contends the superior court’s and the Commissioner’s

interpretation is contrary to the plain meaning of Rule 5.C.2. Specifically, petitioner

argues under Rule 5.C.2., the Board has full discretionary authority to approve or

deny Allstate’s petition for reimbursement. We agree.

The first clause of the disputed text provides: “The Governing Board shall

consider the petition” for reimbursement. (Emphasis added). “It is well established

that the word ‘shall’ is generally imperative or mandatory.” Puckett v. Norandal

USA, Inc., 211 N.C. App. 565, 573, 710 S.E.2d 356, 362 (2011) (citation and internal

quotation marks omitted). Here, “shall” is an auxiliary verb to the main verb,

“consider[.]” Therefore, this clause mandates that the Board must consider each

petition for an excess judgment or other legal action against the member companies.

After the first clause, there is a comma, and the conjunction “and” begins the

second clause; thus, the second clause still refers to the action taken by the Board

upon consideration of the petition. The second clause states: “and may at any time

prior to judgment against the petitioner or thereafter authorize the Facility to

contribute any part of sums required to satisfy the excess judgment against the

insured or the judgment or potential judgment against the petitioner.” (Emphasis

added).

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Opinion of the Court

Here, “may” is the auxiliary verb to the main verb, “authorize.” “The use of the

word ‘may’ has been interpreted by our Supreme Court to connote discretionary

power, rather than an obligatory one.” Wade v. Carolina Brush Mfg. Co., 187 N.C.

App. 245, 250-51, 652 S.E.2d 713, 717 (2007) (citing Wise v. Harrington Grove Cmty.

Ass’n, 357 N.C. 396, 402-403, 584 S.E.2d 731, 737 (2003); In re Hardy, 294 N.C. 90,

97, 240 S.E.2d 367, 372 (1978)) (citation omitted). Because “may” is auxiliary to

“authorize[,]” the plain language of this rule mandates that the Facility’s power to

“authorize the Facility to contribute any part of sums required to satisfy the excess

judgment against the insured or the judgment or potential judgment against the

petitioner” is discretionary and not mandatory.

The phrase “to contribute any part of sums required to satisfy the . . . judgment”

clearly authorizes the Facility with the discretionary power to contribute any part of

sums required to satisfy the excess judgment. (Emphasis added). “Contribute[,]”

used as a transitive verb, means “to give or supply in common with others[.]”

Merriam-Webster Dictionary (2014).

Rule 5.C.2. explains that “any part of sums required to satisfy . . . the

judgment” may be contributed. (Emphasis added). “Any” is an adjective that

describes “some, no matter how much or how little, how many, or what kind[.]” Id.

These words read together plainly provide that the Facility has full discretion to

authorize a full or partial contribution, or no contribution.

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Opinion of the Court

After the second clause, there is a comma, followed by the final clause of the

sentence: “unless it is the determination of the Board of Governors that the petitioner

was guilty of gross or willful or wanton mishandling, in which event the petition shall

be denied.” (Emphasis added). The word “unless” signals that this clause contains

an exception. The plain language of this clause states that this exception limits the

Facility’s discretion: the Facility “shall” deny the petition for reimbursement if the

Board determines “the petitioner was guilty of gross or willful or wanton

mishandling.”

In sum, the plain language reading of Rule 5.C.2. provides that, although the

Board must consider all petitions for reimbursement, it has full discretionary

authority to approve or deny these petitions, unless the Board determines “the

petitioner was guilty of gross or willful or wanton mishandling.” Because the parties

stipulated and the Board did not find petitioner guilty of gross or willful or wanton

mishandling, the Board had full discretionary authority to approve or deny Allstate’s

petition for reimbursement in whole or in part.

Despite the plain language in Rule 5.C.2., respondent contends the General

Assembly could not have intended for the Board to have such discretion because it

would not intend for the Board to make arbitrary determinations without

determining principles. The superior court’s judgment affirming the Commissioner’s

order is based in part on this argument, and concludes that reading Rule 5.C.2. as

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granting the Board full discretionary authority over all petitions wherein the

petitioner was not guilty of gross or willful or wanton mishandling of a claim would

create arbitrary results because the Facility’s discretion is “unfettered[.]” The

respondent and the Commissioner relies on Sanchez v. Town of Beaufort, 211 N.C.

App. 574, 710 S.E.2d 350 (2011) to support this assertion, which “held that when an

administrative body establishes certain requirements without the use of any

determining principles from its guidelines, then the administrative body’s decision is

clearly arbitrary.” (Emphasis in original).

Sanchez involved a superior court order that affirmed a Board of Adjustment’s

decision to reverse a town’s Historic Preservation Commission (“Historic

Commission”)’s decision to deny an application for a certificate of appropriateness.

Sanchez, 211 N.C. App. at 575, 710 S.E.2d at 351. The Historic Commission denied

the application because it determined “structure[s] on [the petitioner’s] property over

twenty-four feet in height would be incongruous with the historic district[.]” Id. at

580, 710 S.E.2d at 354 (footnote omitted). The Board of Adjustment held this

requirement was arbitrary and capricious, and our Court agreed, explaining that the

whole record did not contain substantial evidence to support the twenty-four feet

height requirement because:

While there was evidence presented before the [Historic

Commission] that there were other one-and-one-half story

structures in the historic district that ranged between

twenty and twenty-two feet in height, there was also

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evidence presented that the residences closest to the

[petitioner’s] property ranged from twenty-six to thirty-five

feet in height. N.C. Gen. Stat. § 160A-400.9 does not

permit the [Historic Commission] to “cherry pick” certain

properties located within the historic district in order to

determine the congruity of proposed construction; instead,

the [Historic Commission] must determine congruity

contextually, based upon “the total physical environment

of the Historic District.”

Id. at 580-81, 710 S.E.2d at 354-55 (citation omitted). The Court held: “An

administrative ruling is deemed arbitrary and capricious when it is whimsical,

willful, and an unreasonable action without consideration or in disregard of facts or

law or without determining principle.” Id. at 580, 710 S.E.2d at 354.

In the respondent’s view, the plain reading of Rule 5.C.2. as described by this

Court, is contrary to Sanchez because it empowers the Facility with the discretion to

make arbitrary decisions, in disregard of facts or law or without determining

principle. However, the Facility Act and Rule 5.C.2. in the instant case is

distinguishable from the ordinance in Sanchez in that it involves a remedial statutory

scheme. See Discovery Ins. Co., __ N.C. App. at __, 807 S.E.2d at 588 (“The Facility

Act is remedial in nature and is to 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.”) (citations and internal quotation

marks omitted).

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Opinion of the Court

Therefore, our Court’s analysis in Henry v. N.C. Dep’t of Transp., 44 N.C. App.

170, 260 S.E.2d 438 (1979), a case interpreting a remedial statute’s grant of authority

to an agency to reimburse expenses of persons displaced as a result of public works

programs within its discretion, is instructive. The statute, N.C. Gen. Stat. § 133-8(a),

provides: “Whenever the acquisition of real property for a program or project

undertaken by an agency will result in the displacement of any person, such agency

may make a payment to any displaced person, upon application as approved by the

head of the agency . . . .” N.C. Gen. Stat. § 133-8(a) (1979) (emphasis added).1 Our

Court held:

Quite plainly, [N.C. Gen. Stat. § 133-8] commit[s] the

matter of relocation assistance payments absolutely and

solely to the discretion of the officials of the agency

involved. The use of the auxiliary verb “may” connotes

“permission, possibility, probability or contingency”, and,

“[o]rdinarily, when a statute employs the word ‘may,’ its

provisions will be construed as permissive and not

mandatory.” We are of the opinion that [N.C. Gen. Stat.] §

133-8 confers no right either to receive such payments or to

demand that the amount of payments, if granted, be

calculated other than as the agency officials determine.

Henry, 44 N.C. App. at 172-73, 260 S.E.2d at 440 (citations omitted). Accordingly,

our Court held the statute “creates neither right nor remedy pursuant to which

1 This statute was subsequently amended by S.L. 2005-331, § 1, eff. Aug. 26, 2005, and now

provides: “Whenever the acquisition of real property for a program or project undertaken by an agency

will result in the displacement of any person, such agency shall make a payment to any displaced

person, upon application as approved by the head of the agency.” N.C. Gen. Stat. § 133-8 (2017)

(emphasis added).

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plaintiff can press a claim against defendant. The statute bestows no more than a

gift.” Id. at 173, 260 S.E.2d at 440. Thus, under the pre-amended statute, the agency

had complete discretion, without determining principles.

Similarly, here, we consider a remedial act that uses similar discretionary

language, and provides that an agency “may” make a reimbursement. Additionally,

Facility members do not have an automatic right of reimbursement for extra-

contractual losses under the Facility Act; the only “right” of reimbursement a facility

member has when it cedes a policy is the right to receive reimbursement from the

Facility for contractual losses. See N.C. Gen. Stat. § 58-37-35(b). While respondent

does not have a right to reimbursement, it does have a right to have its request

considered. See N.C. Gen. Stat. § 58-37-35(g)(12) (authorizing the Board with

discretionary authority to adopt rules such as Rule 5.C.2., as necessary to accomplish

the purpose of the Facility).

Thus, Rule 5.C.2.’s clear provision that the Facility may exercise discretion

over all petitions wherein the petitioner was not guilty of gross or willful or wanton

mishandling of a claim is permissible, and distinct from Sanchez, a case involving a

town’s police powers related to planning and regulation of development.

Therefore, we reverse the superior court’s judgment, which affirmed the

Commissioner’s order to the extent it is inconsistent with the plain reading of Rule

5.C.2., as discussed herein. Accordingly, we need not reach petitioner’s contention

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that the Hearing Officer’s erroneous interpretation of this statute exceeded his

statutory authority.

We also do not reach the second issue on appeal. The superior court’s affirming

the Commissioner’s determination that petitioner’s grounds for the denial of

Allstate’s petition were not in accordance with the Facility Act, the Facility’s Plan of

Operation, and the Facility’s Standard Practice Manual were made in light of its

erroneous interpretation of Rule 5.C.2. Therefore, we remand to the superior court

for further remand to the Commissioner for reconsideration consistent with this

opinion.

III. Conclusion

For the foregoing reasons, we reverse the superior court’s judgment and

remand to that court for further remand to the Commissioner for reconsideration

consistent with this opinion.

REVERSED AND REMANDED.

Judges TYSON and MURPHY concur.

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