When the NC Insurance Commissioner collects money from a regulated insurance company, does that money go to the public schools or can the Department of Insurance keep it?
Plain-English summary
NC's Department of Insurance collects two kinds of money from insurance companies it regulates: civil penalties that punish violations of the insurance code, and restitution that puts wronged policyholders back where they started. General Counsel Peter Kolbe asked the AG how to split those collections between two competing claims: the schools' constitutional claim to penalty money under Article IX, Section 7 of the NC Constitution, and the Commissioner's statutory power to recover restitution for harmed consumers.
The AG's answer turns on the nature of each payment, not on which statute the Commissioner used to collect it. Punitive payments go to the schools through the State Civil Penalty and Forfeiture Fund. Remedial payments stay with the Commissioner for victim compensation or consumer-protection programs.
The constitutional anchor. Article IX, Section 7 says the clear proceeds of all penalties, forfeitures, and fines collected for any breach of penal laws belong to the counties and must be used to maintain free public schools. The NC Supreme Court read that section in Craven County Board of Education v. Boyles (1996), confirming that the constitutional reach is limited to payments that are "penal in nature." Remedial payments, including those that compensate a particular party, are outside the section's reach. Mussallam v. Mussallam (1988) drew the same line earlier.
Penalties and forfeitures are penal. The Commissioner can impose civil penalties up to $1,000 under G.S. 58-2-70(c) and (d) and cease-and-desist forfeitures up to $5,000 under G.S. 58-63-50. Both are designed to punish noncompliance with the insurance code. They are therefore subject to Article IX, Section 7. The "clear proceeds" of those payments must be remitted to the Civil Penalty and Forfeiture Fund and used for free public schools. The statutes themselves direct the same result by referencing the Fund.
Settlements are still penal. The AG specifically rejected the argument that a settlement converts a civil penalty into something different. A penalty paid voluntarily under a settlement still has its punitive character. Craven County held that the form of collection does not change the substance. So an insurer that pays a $750 settlement amount to avoid an administrative penalty proceeding has still funded the schools, not the DOI.
Restitution is remedial. G.S. 58-2-70(e) lets the Commissioner petition Wake County Superior Court for an order requiring restitution "to make whole any person harmed by the violation." That is remedial, not punitive. It compensates victims, prevents unjust enrichment of the wrongdoer, and is not controlled by Article IX, Section 7. Restitution payments are applied to the statutory purpose. Usually that means actually paying injured consumers.
The de-minimis carve-out. When restitution to identifiable victims is impractical (the harm per person is too small, or victims cannot be located), the AG approved a cy-pres-style approach. The Commissioner may apply remedial recoveries toward consumer protection programs consistent with the statute's objectives. The AG cited United States v. Exxon Corporation (an oil-overcharge case where unidentifiable victims meant the recovery was directed to state energy-conservation programs) and the Sharpe v. American Family Publishers settlement (consumer education funded by a remedial payment to the AG).
Injunctive recoveries are not penal. Money tied to injunctive relief under G.S. 58-2-60 is not punitive. It is part of the equitable remedy for stopping a violation and stays with the Commissioner.
The May 1997 AG letter. The Attorney General had previously sent a generic letter to every state agency that collects money explaining which payments fall under Article IX, Section 7. The 1999 opinion confirmed that the prior letter's classification of DOI collections was still correct: civil penalties under G.S. 58-2-70(d) and forfeitures under G.S. 58-63-50 belong to the schools; remedies under G.S. 58-2-70(e) and 58-2-60 do not.
Currency note
This opinion was issued in 1999. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.
The penal-versus-remedial line drawn here remains a foundational principle of NC civil penalty practice. The Civil Penalty and Forfeiture Fund still routes most state-agency civil penalty collections to public schools, and Craven County remains the leading case. State agencies have wrestled repeatedly with how to classify specific recoveries (cost-recovery components of enforcement settlements, multi-purpose payments, attorney's fees), and the legislature has amended specific statutes from time to time to address particular collection mechanisms. Anyone analyzing a current question should pull the operative statute and check for the post-1999 amendments, and should also check the State Treasurer's procedures for reporting to the Fund.
Common questions
Q: Why do school systems get money from insurance companies that violate insurance law?
A: Because the NC Constitution says so. Article IX, Section 7 dedicates the clear proceeds of all penalties, forfeitures, and fines from any breach of penal laws to the counties for free public schools. When the Insurance Commissioner imposes a $1,000 civil penalty on an unfair-trade-practices violator, the money is "the clear proceeds of a penalty" and therefore goes to the schools through the State Civil Penalty and Forfeiture Fund.
Q: Can DOI keep enforcement collections to fund its own work?
A: Only the remedial portion. Penalties and forfeitures go to the schools. Restitution and equitable recoveries stay within the DOI's statutory remit, which usually means paying back consumers who were actually harmed.
Q: What if DOI can't identify which consumers were hurt?
A: The AG allows DOI to apply the remedial recovery to consumer-protection programs that serve the same statutory purpose as the original restitution. The federal Exxon case provided the template: when individual harm is too diffuse to refund, the remedial recovery can fund related public-purpose programs.
Q: Does it matter whether the company paid voluntarily or after an administrative hearing?
A: No. Craven County settled that question. A civil penalty paid voluntarily under a settlement is still a civil penalty for Article IX, Section 7 purposes. Form does not change substance.
Q: What is the "Civil Penalty and Forfeiture Fund"?
A: The State Treasurer's account that receives clear proceeds of civil penalties, forfeitures, and fines from various state agencies. The Fund is then distributed to local school administrative units in proportion to average daily membership.
Q: Why isn't the cost of enforcement deducted before money goes to schools?
A: That is the "clear proceeds" question. The NC Supreme Court has read "clear proceeds" to permit deduction of certain direct collection costs, but not to permit the agency to keep the bulk of the penalty. This opinion does not address the clear-proceeds calculation in detail. Agencies routinely ask the AG and the Treasurer about the deductible costs for their own enforcement programs.
Background and statutory framework
Article IX, Section 7 of the NC Constitution dates to the 1868 Constitution and has been a stable feature of NC fiscal law ever since. The provision diverts a class of state collections (penalties, forfeitures, fines on penal laws) to local school systems, on the theory that the schools are the constitutional beneficiary of the state's punitive collections. The provision has been a flashpoint in agency-budget disputes for over a century: every time a state agency collects penalty-style money, the schools have a constitutional claim to it.
The Insurance Commissioner's enforcement arsenal includes several distinct tools. Civil penalties under G.S. 58-2-70(c) and (d) target violations of specific articles of the insurance code; the cap is $1,000 per violation, with a higher cap for unfair-trade-practices and life-and-health insurance violations. Cease-and-desist forfeitures under G.S. 58-63-50 reach up to $5,000 per violation for continued unfair methods of competition after a cease-and-desist order. Restitution under G.S. 58-2-70(e) compensates harmed consumers. Injunctive relief under G.S. 58-2-60 enforces the substantive provisions of the insurance code. Each tool has a distinct legal character that determines how recoveries are routed.
The 1996 Craven County decision was the modern leading case. It involved a $24,500 settlement between a local school board and contractors over bond defaults; the school board argued the money should pass to other school boards under Article IX, Section 7. The NC Supreme Court rejected that, holding that the settlement payment was contractual, not penal. Craven County installed the penal-versus-remedial line as the controlling test and explicitly resolved the prior uncertainty about settlements: voluntary form does not change penal substance.
The 1999 AG opinion is a straightforward application of Craven County to the DOI's particular collection categories. The DOI's General Counsel needed the analysis because the Department's fiscal officers had been receiving payments without a clear procedure for splitting them between Fund-bound penalties and Department-bound restitution. The AG's letter gave the Department the rule and the rationale.
Citations
- N.C. Const. art. IX, § 7 (clear proceeds of penalties, forfeitures, and fines to local schools)
- N.C. Gen. Stat. § 58-1-1 et seq. (NC insurance code)
- N.C. Gen. Stat. § 58-2-60 (injunctive relief)
- N.C. Gen. Stat. § 58-2-70(c), (d) (civil penalties)
- N.C. Gen. Stat. § 58-2-70(e) (restitution authority)
- N.C. Gen. Stat. § 58-63-50 (cease-and-desist forfeitures)
- Craven County Board of Education v. Boyles, 343 N.C. 87, 468 S.E.2d 50 (1996)
- State ex rel. Thornburg v. House and Lot, 334 N.C. 290, 432 S.E.2d 684 (1993)
- Mussallam v. Mussallam, 321 N.C. 504, 364 S.E.2d 364 (1988)
- United States v. Exxon Corporation, 561 F. Supp. 816 (D.D.C. 1983), aff'd, 773 F.2d 1240 (Temp. Emer. Ct. App. 1985)
- Asheville Land Co. v. Lang, 150 N.C. 26, 164 S.E.2d 164 (1908)
- Booher v. Frue, 86 N.C. App. 390, 358 S.E.2d 127, aff'd per curiam, 321 N.C. 590, 364 S.E.2d 141 (1990)
- Roberts v. Madison County Realtors Association, 344 N.C. 394, 474 S.E.2d 783 (1996)
- D. Lawrence, Fines, Penalties, and Forfeitures: An Historical and Comparative Analysis, 65 N.C. L. Rev. 49, 82 (1986)
- 1 Dan B. Dobbs, The Law of Remedies, § 4.1 (2d ed. 1993)
Source
Original opinion text
October 15, 1999
Mr. Peter Kolbe
General Counsel
North Carolina Department of Insurance
P.O. Box 26387
Raleigh, NC 27611
Re: Advisory Opinion – N.C.G.S. §§ 58-2-60; 58-2-70(c), (d) and (e); 58-63-50 – Scope of Authority of Commissioner of Insurance
Dear Mr. Kolbe:
You ask for guidance concerning the proper disposition of monetary payments the Commissioner of Insurance collects from regulated persons and businesses for failure to comply with North Carolina's insurance statutes, N.C.G.S. §§ 58-1-1 et seq. For the reasons explained below, the Commissioner must distribute to the State Civil Penalty and Forfeiture Fund for the benefit of local school systems the clear proceeds of all monetary payments, collected as part of those enforcement activities, which are punitive in nature and "intended to penalize the wrongdoer." In contrast, the proceeds of monetary payments which are remedial or equitable in nature, or which are not otherwise intended to punish the wrongdoer, must be applied to purposes consistent with the statute under which they were collected, and are not paid into the State Civil Penalty and Forfeiture Fund.
Article IX, Section 7 of the North Carolina Constitution provides:
. . . the clear proceeds of all penalties and forfeitures and of all fines collected in the several counties for any breach of the penal laws of the State, shall belong to and remain in the several counties, and shall be faithfully appropriated and used exclusively for maintaining free public schools.
In Craven County Board of Education v. Boyles, 343 N.C. 87, 468 S.E.2d 50 (1996), the Supreme Court of North Carolina reaffirmed that Article IX, Section 7 applies only to civil penalties and forfeitures which are "penal in nature." Id. 343 N.C. at 90-91, 468 S.E.2d at 52; see also State ex rel. Thornburg v. House and Lot, 334 N.C. 290, 432 S.E.2d 684 (1993). Monetary payments which are "remedial in nature," including those intended to "compensate a particular party," are clearly not included within the scope and coverage of Article IX, Section 7. Mussallam v. Mussallam, 321 N.C. 504, 508-509, 364 S.E.2d 364, 366-367 (1988); see also D. Lawrence, Fines, Penalties, and Forfeitures: An Historical and Comparative Analysis, 65 N.C. L. Rev. 49, 82 (1986).
The Commissioner of Insurance has several statutory mechanisms to foster compliance with the insurance laws and regulations. The Commissioner may impose "civil penalties" of not more than $1,000 upon regulated persons who violate specified articles of the insurance laws, including Article 63, "Unfair Trade Practices." N.C.G.S. § 58-2-70(c) and (d). In addition, he may impose a "forfeiture" of up to $5,000 upon a person who violates an order to cease and desist from engaging in unfair methods of competition or deceptive practices. N.C.G.S. § 58-63-50. The Commissioner also may petition the Superior Court of Wake County to order a violator of the insurance laws to "make restitution in an amount that would make whole any person harmed by the violation," N.C.G.S. § 58-2-70(c) and (e), and to seek injunctive relief to remedy certain violations of the insurance statutes, N.C.G.S. § 58-2-60. The proper disposition of monetary payments collected by the Commissioner in the exercise of his authority is determined by the purpose for which the payments are obtained.
Applying the Supreme Court's reasoning in Craven County, Thornburg and Mussallam to the monetary payments about which you inquire, it is clear that civil penalties imposed by the Commissioner for a violation of the insurance laws, as well as forfeitures accruing to the Commissioner for failure of a regulated person to comply with a cease and desist order, are punitive in nature because they are intended to penalize the wrongdoer. Therefore, Article IX, Section 7 controls the disposition of these monetary payments and requires their clear proceeds to be paid to the local school systems and used for maintaining free public schools. These conclusions also are supported by the legislative directive contained in each statute that the "clear proceeds" of these monetary payments "shall be remitted to the Civil Penalty and Forfeiture Fund . . ." See N.C.G.S. §§ 58-2-70(d) and 58-63-50. The fact that a civil penalty is paid voluntarily pursuant to the settlement of a civil penalty claim, as opposed to involuntarily under an order issued in an administrative action or judicial proceeding, does not change its punitive nature. Craven County, supra, 343 N.C. at 90, 468 S.E.2d at 52.
In contrast, monetary payments for restorative, corrective or other equitable purposes are not penal in nature. Because such payments are not intended to punish the wrongdoer, they are not controlled by Article IX, Section 7. Consequently, payments made to the Commissioner of Insurance pursuant to N.C.G.S. § 58-2-70(e), which provides for the Commissioner to recover restitution to "make whole any person harmed by the violation," must be applied to purposes consistent with that statute. Such payments usually are properly directed to injured parties. However, when the amount of restitution owing to each injured person is de minimis, the persons entitled to restitution cannot reasonably be identified, or when otherwise required by equity, a remedial payment may be applied toward making the public whole through consumer protection programs consistent with the objectives of the laws at issue and beneficial to the public good. See e.g., United States v. Exxon Corporation, 561 F. Supp. 816 (D.D.C. 1983), aff'd, 773 F.2d 1240 (Temp. Emer. Ct. App. 1985), cert. denied, 474 U.S. 1105, 106 S. Ct. 892, 88 L. Ed. 2d 926 (1986) (where victims of oil overcharge scheme could not be reasonably identified or the amount of each purchaser's overcharge could not reasonably be determined, equity permits defendant's restitution payment to the government to be forwarded to the states for use in energy conservation programs); Asheville Land Co. v. Lang, 150 N.C. 26, 164 S.E.2d 164 (1908) (remedial statutes must be liberally construed to advance the remedy); Booher v. Frue, 86 N.C. App. 390, 358 S.E.2d 127, aff'd per curiam, 321 N.C. 590, 364 S.E.2d 141 (1990) (purposes of restitution include not only compensating the victim, but also preventing unjust enrichment by wrongdoer); 1 Dan B. Dobbs, The Law of Remedies, § 4.1 (2d ed. 1993) (same); Roberts v. Madison County Realtors Association, 344 N.C. 394, 474 S.E.2d 783 (1996) (when equitable relief is sought, courts have the power to grant, deny, limit or shape that relief as a matter of discretion); Sharpe v. American Family Publishers, (Unpub. July 7, 1999 Order approving settlement) (Docket No. 91-181-CV-5-BO) (E.D.N.C. 1999) (remedial payment to the Attorney General for appropriate consumer education purposes is proper remedy to cure defendant's deception).
Accordingly, in keeping with the powers and duties of the Commissioner of Insurance to protect the public against fraud, deception and overreaching by insurance companies, remedies obtained by the Commissioner which are remedial or equitable in nature may in appropriate cases be directed to funding consumer protection programs administered by the Commissioner, including educating or warning the public about certain unlawful practices.
In May of 1997 the Attorney General provided to the attorney for each state agency authorized to assess and collect monetary payments a letter explaining the appropriate disposition of each payment which arguably could be considered a civil fine, forfeiture, or penalty included within the scope of Article IX, Section 7. That letter included a list of the monetary payments collected by the Department which should go to the local school systems. The list is again provided for your consideration. The clear proceeds from civil penalties authorized by N.C.G.S. § 58-2-70(d) and civil forfeitures authorized by N.C.G.S. § 58-63-50 were among those identified in the list as belonging to the local school systems. Remedies obtained under N.C.G.S. § 58-2-70(e) or N.C.G.S. § 58-2-60 were not identified as belonging to the school fund.
I trust this information has been responsive to your inquiry.
Sincerely,
Reginald L. Watkins
Senior Deputy Attorney General
Lorinzo L. Joyner
Special Deputy Attorney General
W. Dale Talbert
Special Deputy Attorney General