2. Insurance--health care--agents directly or indirectly writing contracts_-
unauthorized business--strict civil liability
A de novo review revealed that the trial court did not err in a declaratory judgment action
when it ruled that defendant insurance agent who wrote unlicensed contracts of insurance to
citizens of North Carolina was subject to strict civil liability for unpaid claims in the amount of
$9,464.76 even though defendant contends he was acting under a genuine belief that he was
marketing an ERISA certified health coverage plan which was not subject to any state licensing
requirement, because: (1) the plain language of N.C.G.S. § 58-33-95 has no intent requirement;
(2) the insurance agent is in a better position than the insured to determine if the insurance
company was lawfully doing business in the state; and (3) the framework and language of
N.C.G.S. § 58-33-95, together with the public policy concerns of protecting the rights and claims
of insureds, show that the statute imposes a standard of strict liability on agents who directly or
indirectly write contracts of insurance where a company is not authorized to do business in the
State of North Carolina.
Attorney General Roy Cooper, by Assistant Attorney General E.
Clementine Peterson, for the State.
Daniel R. Flebotte for defendant appellant.
McCULLOUGH, Judge.
This case is one of twenty-seven similar cases designated as
exceptional pursuant to Rule 2.1 of the General Rules of Practice
for the Superior and District Courts. The following are the
stipulated facts of this case: In or about 1995, certain persons in
New York formed legal entities for the purpose of providing health
care benefits to employees who participated in an arrangement they
created which purported to be a multiple insurance plan. The
arrangement was between an organization they created called the
National Association of Business Owners and Professionals (NABOP)
and a pre-existing labor union, the International Workers Guild
(IWG). The Fidelity Group (Fidelity) was the third-party
administrator of the plan for claims made under the arrangement.
The arrangement was such that people seeking health care benefits
would be allowed to join the IWG and would be provided health
benefits through the administration of a third-party trust called
International Workers' Guild Health and Welfare Trust Fund (IWG
Fund). The IWG Fund was administered by Fidelity. The arrangement
provided in part that employers would join in a purported
collective bargaining agreement prepared by the organizers of the
arrangement with IWG and NABOP. The essence of the plan was that
the employers would join NABOP and the employees would join IWG.
All parties would agree to bind themselves to the purported
collective bargaining agreement that was already negotiated by the
organizers of the arrangement. Certain filings were made with the United States Department of
Labor to qualify and register the IWG Fund to be a federal Employee
Retirement Income Security Act (ERISA) plan, 29 U.S.C. §§
1001-1461. Prospective members were informed that the employee
benefit welfare plan arrangement was designed to provide health
benefits pursuant to ERISA.
Prior to marketing the employee benefit welfare plan
arrangement in North Carolina, the organizers/officers of this
arrangement registered the corporate entity of the International
Workers Guild, Inc., with the Secretary of State of North Carolina.
However, they did not seek or obtain approval to be a licensed
insurer in the state pursuant to applicable North Carolina law.
Organizers/officers of this arrangement approached North
Carolina insurance agents, such as defendant Mr. Clair Hammond (Mr.
Hammond), to market the plan. Mr. Hammond, licensed to sell health
insurance in North Carolina, attended several marketing meetings in
which the arrangement was presented to him as an opportunity to
provide health care benefits to citizens of North Carolina. Mr.
Hammond, representing the IWG Fund, received compensation for
marketing the arrangement to various employers and employees of
North Carolina.
During 1997 and thereafter, claims for health care services
were made by various employees of companies that participated in
this arrangement throughout the United States, including many by
North Carolina citizens, and many of such claims went unpaid.
On 15 December 1998, a civil action was filed by the Secretary
of Labor (SOL) for the United States Department of Labor (DOL) in the U.S. District Court for the Eastern District of New York
against NABOP, IWG, and the IWG Fund. The SOL charged those
defendants with breaches of their fiduciary duties in
administration of the IWG Fund under various ERISA provisions and
sought to enjoin acts and practices alleged to be in violation of
provisions of ERISA. Within the federal matter, David W. Silverman
(Silverman) was appointed by court order dated 24 December 1998 to
be an independent fiduciary of the IWG Fund and receiver for the
original fund trustee, Fidelity.
On 7 January 2000, a supplemental complaint was filed within
the federal action by Silverman to recover IWG Fund assets.
Silverman pleaded that the IWG Fund was funded by contributions
from employers participating in the IWG Fund; that there were
invoices characterizing a portion of the payment to the IWG Fund as
“union fees” and “association fees” and that the purpose of the
payment was to obtain health benefits on behalf of participants of
the IWG Fund; and that contributions remitted by the employers for
the purpose of obtaining benefits through the Fund, including
amounts reported to be union fees or association fees, were “plan
assets” within the meaning of ERISA. In the supplemental pleadings,
Silverman further alleged that the insurance agents and various
other persons who had marketed the arrangement, including
defendant, were recipients of trust assets, and provided
administrative and financial services to the IWG Fund by procuring
third-party employers to purchase health services for themselves
and their employees and thus were “a party in interest” under
ERISA. See 29 U.S.C. § 1002(14)(B). By marketing the arrangement,these defendants became agents of NABOP and IWG and their acts were
that of fiduciaries. Because these defendants received trust
assets from the IWG Fund, in the form of commissions on their
sales, Silverman contended that these defendants engaged in
prohibited transactions in violation of ERISA and he thus sought
monetary damages or a constructive trust over the assets of the
agents or for other equitable relief.
Several of the North Carolina defendants to Silverman's
supplemental complaint settled their claims relating to trust
assets received as commissions, and a voluntary dismissal was taken
against them. A default judgment was entered against Mr. Hammond.
Upon learning that there were unpaid medical claims, the North
Carolina Commissioner of Insurance (Commissioner) initiated an
investigation. At an administrative hearing, the Commissioner
determined that the arrangement that had been sold in North
Carolina was a Multiple Employer Welfare Arrangement (MEWA) and
therefore subject to the North Carolina Department of Insurance.
Pursuant to this determination, the State of North Carolina
initiated suit in Wake County Superior Court to seek an order of
liquidation against the IWG Fund. On 29 March 1999 the Court
ordered the liquidation and appointed James E. Long, Commissioner
of Insurance, to be liquidator. Under the order, the Commissioner
was empowered and directed to exercise, enforce, and prosecute all
rights, remedies, and powers of any creditor, shareholder,
policyholder, or member of the IWG Fund.
Beginning in the year 2000, the Attorney General of the State
of North Carolina, as counsel for the Commissioner, brought variousactions against agents to collect money to pay unpaid medical
claims due under IWG Fund insurance contracts. In a complaint filed
22 July 2000 against defendant, the Commissioner alleged defendant
marketed and sold contracts of medical insurance for a company not
licensed by North Carolina and in direct violation of State law.
Specifically, the Commissioner alleged that these medical benefits
provided for by the Fund were not fully insured by a State
authorized insurer and the Fund operated in North Carolina as a
MEWA as defined by North Carolina law and ERISA. The Commissioner
further contended that the Fund was not exempt from State
regulations under the ERISA provisions. Pursuant to these claims,
the Commissioner sought payment of claims in the amount due under
the IWG Fund contracts made through Mr. Hammond.
On 15 February 2002, the named parties to this case submitted
to the superior court a joint motion for declaratory ruling with
regard to two issues: the first issue was for the court to
determine whether the IWG Fund was required to be licensed under
the insurance laws of North Carolina; the second issue was whether
the insurance agents in North Carolina who sold the IWG Fund are
“strictly liable” under N.C. Gen. Stat. § 58-33-95 (2003) for
unpaid claims. On 22 July 2002, the court entered its Order and
Opinion. The court found that the IWG Fund did require licensing by
the State, and that agents who write contracts for unlicensed
insurers are strictly liable under N.C. Gen. Stat. § 58-33-95.
Pursuant to this judgment, the Commissioner filed a motion for
summary judgment on 7 November 2002. On 6 March 2003, Judge
Tennille, who issued the 2002 declaratory order, granted summaryjudgment in favor of the Commissioner in the amount of $9,464.76
which represented certain claims owed by the IWG Fund to claimants
solicited to the Fund by Mr. Hammond.
In this appeal, defendant Hammond has assigned multiple errors
to both Judge Tennille's declaratory order, and his order granting
summary judgment. These errors are framed in two issues as set out
here and addressed below: (I) the trial court committed reversible
error when it denied Mr. Hammond's motion to dismiss on
jurisdictional grounds of federal preemption; (II) the trial court
committed reversible error when it ruled N.C. Gen. Stat. § 58-33-95
imposes a standard of strict liability on agents who directly or
indirectly write contracts of insurance where a company is not
authorized to do business in the State of North Carolina. As to
both of these issues reviewed de novo, we affirm the trial court's
declaratory order and grant of summary judgment in favor of the
Commissioner.
As stipulated to in this case, employers would join the
purported collective bargaining agreement between NABOP and IWG. By
joining, this allowed employers to confer health care benefits to
their employees as insured by the self-insured IWG Fund, a benefit
described in 29 U.S.C. § 1002(1). The IWG Fund was administered by
the third-party trustee, Fidelity. The health care plan was
offered to employees of two or more employers domiciled in North
Carolina. Therefore, we hold that under the ERISA definition, the
arrangement at issue in this case was a MEWA.
We find support in our holding in Mr. Silverman's supplemental
complaint to that of the SOL, in which it was alleged the
arrangement was a MEWA. A default judgment was later entered
against Mr. Hammond as to this complaint. The effect of a default
judgment deems Mr. Hammond as having admitted the arrangement was
a MEWA. See Trans World Airlines, Inc. v. Hughes, 449 F.2d 51,
69-70 (2d Cir. 1971), rev'd on other grounds, 409 U.S. 363, 34 L.
Ed. 2d 577 (1971). We therefore deem those pleadings as admittedin this Court. First-Citizens Bank & Trust Co. v. Four Oaks Bank &
Trust Co., 156 N.C. App. 378, 380, 576 S.E.2d 722, 724 (2003)
(granting full faith and credit to a federal judgment).
Additionally, at oral argument Mr. Hammond did not contest that the
subject arrangement was otherwise a MEWA, but contended that it
fell out of the definition of a MEWA as it fit within the
collective bargaining exception to the MEWA definition.
B. Does the IWG Fund Meet the Collective Bargaining
Exception to the definition of a MEWA?
A plan that otherwise fits the definition of a MEWA, can fall
out of that definition if it is “under or pursuant to one or more
agreements which the Secretary finds to be collective bargaining
agreements[.]” 29 U.S.C. § 1002(40)(A)(i) (emphasis added). There
is no such finding by the SOL in the record, and both parties
stipulate to such:
35. As of today's date neither the United
States Department of Labor and any subsection
thereof nor any specific secretary or
assistant secretary or other authorized
official has made any official determination
as to whether the IWG Fund was properly
established an ERISA Plan entitling it to
preemption from state regulation, or that the
IWG Fund was a Multiple Employer Welfare
Arrangement (MEWA).
We accordingly find this arrangement a MEWA without exception.
Defendant cites Virginia Beach Policemen's Benev. Ass'n v.
Reich, 881 F. Supp. 1059 (E.D. Va. 1995), aff'd without opinion, 96
F.3d 1440 (4th Cir. Va. 1996), for the proposition that a federal
court is best suited to determine if a MEWA falls within a
collective bargaining agreement when the SOL has made no such
findings. We agree Virginia Beach offers guidance, but does so onthe fact that a state is presumptively free to regulate a MEWA when
the SOL has not made findings as to its collective bargaining
status. The court in Virginia Beach found,
[i]t is clear that, through ERISA section
3(40)(A)(i), Congress intended to promote
state regulation of MEWAs. The Court finds
that, consistent with the legislative history,
only if the Secretary chooses to make a
finding, would a MEWA receive exemption from
state regulation.
Id. at 1070 (emphasis added). The rationale for this conclusion
was based on interpretation of ERISA section 3(40)(A)(i),
particularly with respect to the legislative history. Id. at 1067-
71. The 10th Circuit has held similarly: “Congress obviously viewed
self funded arrangements by multiple employers to be different, and
less deserving of federal preemption from state insurance
regulators[.]” Fuller v. Norton, 86 F.3d 1016, 1024 (10th Cir.
1996). The court in Virginia Beach went on to hold that the SOL's
decision whether to make a finding under ERISA section 3(40)(A)(i)
is committed to agency discretion and therefore unreviewable.
Virginia Beach Policemen's Benev. Ass'n, 881 F. Supp. at 1071.
The statutory language as to the collective bargaining
agreement exception to the MEWA definition is clear. It refers only
to those agreements that the SOL finds to be collective bargaining
agreements, and therefore we need not make our own determination as
to whether the subject arrangement was made pursuant to a
collective bargaining agreement under North Carolina law. We
conclude that, because the IWG Fund otherwise meets the definition
of a MEWA, a determination the Commissioner of Insurance can makeon its own, North Carolina can regulate the MEWA until the SOL
makes some finding to the contrary.
Because we hold that the IWG Fund is a MEWA, without
exception, and therefore subject to state regulation, we next
consider the applicability of North Carolina insurance law to this
MEWA.
II. Applicable State Law
A. Required Showing of Preemption in N.C.
To show jurisdictional preemption, North Carolina insurance
law requires the following:
A person may show that it is subject to
the exclusive jurisdiction of another agency
or subdivision of this State or the federal
government, by providing to the Commissioner
the appropriate certificate, license, or other
document issued by the other governmental
agency that permits or qualifies it to provide
those services. If no documentation is issued
by that other agency, the person may provide a
certification by an official of that agency
that states that the person is under the
exclusive jurisdiction of that agency.
N.C. Gen. Stat. § 58-49-10 (2003). The record shows no
“certificate, license, or other documents” have been provided to
the Commissioner. The parties themselves have stipulated no such
preemption documentation has been provided. Therefore, the IWG Fund
was subject to all appropriate provisions of Chapter 58 regarding
the conduct of its business. See N.C. Gen. Stat. § 58-49-20
(2003).
Mr. Hammond argues that the presumed jurisdiction of N.C. Gen.
Stat. § 58-49-10, without a showing otherwise, is in conflict with
the preemptive declaration of ERISA in 29 U.S.C. § 1144(a). We
disagree. Generally, the U.S. Supreme Court has held that there is a
presumption against federal preemption, absent some showing to the
contrary. Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S.
724, 741, 85 L. Ed. 2d 728, 741 (1985). This is especially true
when determining applicable regulation of a MEWA. 29 U.S.C. §
1144(b)(6)(A)(ii), expressly grants MEWA regulation to the states
as MEWA is defined by ERISA. For an insurance plan that otherwise
meets the definition of a MEWA to then have that MEWA status
removed as one made pursuant to a collective bargaining agreement,
it must provide an affirmative finding by the SOL. 29 U.S.C. §
1002(40). This finding by the SOL is tantamount to that required
under N.C. Gen. Stat. § 58-49-10, and would surely suffice as such.
Therefore, rather than contradictory, N.C. Gen. Stat. § 58-49-10
and ERISA at 29 U.S.C. 1144(b)(6)(A)(ii), as a MEWA is defined by
ERISA section 3(40)(A), mesh consistently.
B. State MEWA Requirements
North Carolina insurance law provides that the term MEWA means
that term as defined by ERISA at 29 U.S.C. § 1002(40)(A). N.C.
Gen. Stat. § 58-49-30 (2003). North Carolina law requires MEWAs be
licensed:
(a) It is unlawful to operate, maintain,
or establish a MEWA unless the MEWA has a
valid license issued by the Commissioner. Any
MEWA operating in this State without a valid
license is an unauthorized insurer.
N.C. Gen. Stat. § 58-49-35 (2003). There is no dispute over the
fact that Mr. Hammond did not comply with this statute when selling
the IWG Fund, a MEWA. In light of the analysis above, Mr. Hammondwas therefore properly subject to the penalty of N.C. Gen. Stat. §
58-33-95 for selling the unlicensed MEWA.
(3) Enhanced efficiency and economy of
liquidation, through clarification of the law,
to minimize legal uncertainty and litigation;
N.C. Gen. Stat. § 58-30-1 (2003) (emphasis added). It is under this
liberal construction that a liquidator has the power “[t]o exercise
and enforce all rights, remedies, and powers of any creditor,
shareholder, [or] policyholder[.]” N.C. Gen. Stat. § 58-30-120(19)
(2003) (enumerating the powers of a liquidator).
Pursuant to the liberal powers of the liquidator under Article
30, the Commissioner brought an action under N.C. Gen. Stat. § 58-33-95 against Mr. Hammond, the undisputed agent of the insurer.
That statute provides:
Any person representing an insurer is
personally liable on all contracts of
insurance unlawfully made by or through him,
directly or indirectly, for any company not
authorized to do business in the
State. . . . If any person shall unlawfully
solicit, negotiate for, collect or transmit a
premium for a contract of insurance or act in
any way in the negotiation or transaction of
any unlawful insurance with an insurance
company not licensed to do an insurance
business in North Carolina, he shall be guilty
of a Class 1 misdemeanor.
Id. (emphasis added). The statute warrants both civil and criminal
liability without mention of any intent. Summary judgment was
granted in favor of the State finding Mr. Hammond personally and
strictly liable under this statute. The State brought no criminal
charges.
The plain language of N.C. Gen. Stat. § 58-33-95 has no intent
requirement, and we will not attempt to engraft it where the
language is clear and unambiguous. Begley v. Employment Security
Comm., 50 N.C. App. 432, 436, 274 S.E.2d 370, 373 (1981). We find
our unambiguous reading of the statute supported by the fact that
Article 33 contains another section which was last amended in 1994
along with N.C. Gen. Stat. § 58-33-95, and that this section does
possess an element of intent. See N.C. Gen. Stat. § 58-33-105
(2003) (dealing with false statements made in applications for
insurance, requiring “knowing[] or willful[]” acts). We credit the
legislature with deliberate composition of its statutes unless
there is some construction and policy concern sufficient to raise
an ambiguity. There is no such ambiguity in the statute at issue. Our interpretation of N.C. Gen. Stat. § 58-33-95 is supported
by the public policy underpinnings of comporting with the state's
overall interest in protecting its insured citizens. Judge
Tennille stated this policy consideration succinctly in finding
no. 31 of his order, where he stated:
[T]he agent was in a better position than the
insured to determine if the company was
lawfully doing business in the state.
Consumers, particularly in plans such as that
offered by IWG, have little knowledge of the
licensing requirements and virtually no way to
protect themselves. Agents, on the other
hand, are more sophisticated and should know
if the company they represent is licensed. If
it is not, they know they are taking some risk
in selling the product and have some
obligation to determine if the company should
be licensed. Where, as here, the agents
themselves have been misled by the company,
the State has elected to place the burden of
the failure to pay the claims on the agents
who sold the product and received commissions
rather than the consumers who have paid
premiums and relied on the existence of
coverage. That allocation is fair.
We believe this same policy consideration is reflected in the
construction of Article 30 and the liquidator's power to pursue the
rights and actions of policyholders under laws that are clear and
efficient. The liquidator is often acting on behalf of the state's
insured, protecting their rights and claims. We conclude these
policy considerations support our strict construction of N.C. Gen.
Stat. § 58-33-95.
For the foregoing reasons, we uphold Judge Tennille's
declaratory order and opinion and his grant of summary judgment in
favor of the State, pursuant to that order and opinion. We
conclude that the IWG Fund was required to be licensed under the
provisions of Article 49 of Chapter 58 of the North CarolinaGeneral Statutes and that N.C. Gen. Stat. § 58-33-95 imposes a
standard of strict liability on agents, such as Mr. Hammond who
wrote the IWG Fund contracts of insurance. Mr. Hammond is therefore
liable in the amount of $9,464.76 for unpaid claims under the IWG
Fund.
Affirmed.
Judges HUNTER and LEVINSON concur.
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