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

The North Carolina Insurance Commissioner asked where to send monetary payments collected from regulated people and businesses for insurance-law violations. The Attorney General drew a line based on the purpose of the payment. The clear proceeds of punitive payments, intended to penalize the wrongdoer, must go to the State Civil Penalty and Forfeiture Fund for local public schools. Remedial or equitable payments must be used for purposes consistent with the statute under which they were collected.

Article IX, Section 7 of the North Carolina Constitution dedicates the clear proceeds of penalties, forfeitures, and fines for breaches of penal laws to free public schools. The opinion cites Craven County Board of Education v. Boyles, 343 N.C. 87, 468 S.E.2d 50 (1996), for the rule that the provision applies to payments "penal in nature." It says a civil penalty remains punitive even when paid voluntarily as part of a settlement.

The opinion identifies civil penalties imposed for insurance-law violations and forfeitures for violating cease-and-desist orders as punitive. It says the Commissioner may impose civil penalties of not more than $1,000 for violations of specified articles, expressly including Article 63 on Unfair Trade Practices. It also describes forfeitures up to $5,000 for violating an order to stop unfair competition or deceptive practices. Their clear proceeds belong in the school fund.

Restitution under N.C.G.S. § 58-2-70(e) has a different purpose: making harmed people whole. The opinion says it is generally paid to injured parties. If individual amounts are minimal, the people entitled to payment cannot reasonably be identified, or equity otherwise requires it, a remedial payment may instead support consumer-protection programs consistent with the laws at issue. It also notes that remedies under N.C.G.S. § 58-2-60 were not on the Attorney General's list of payments belonging to the school fund.

For an enforcement payment, the practical question under this opinion is what the payment is intended to do. The fact that it comes through a settlement does not by itself turn a penalty into restitution.

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.

Check the current insurance statutes and rules for handling a present-day collection.

Common questions

Q: Where do civil penalties collected by the Insurance Commissioner go?
A: The opinion says their clear proceeds go to the Civil Penalty and Forfeiture Fund for local school systems when they punish insurance-law violations.

Q: Does a voluntary settlement change a civil penalty into a remedial payment?
A: No. The opinion cites Craven County for the rule that a penalty's punitive nature does not change merely because it is paid voluntarily in settlement.

Q: Is the penalty cap higher for unfair-trade-practices violations in this opinion?
A: The opinion states a civil-penalty cap of not more than $1,000 for specified articles, expressly including Article 63 on Unfair Trade Practices. It does not state a higher cap for that article.

Q: What happens to restitution if injured consumers cannot reasonably be identified?
A: The opinion says an appropriate remedial payment may be used for consumer-protection programs consistent with the relevant law's objectives and beneficial to the public.

Background and statutory framework

The Commissioner had several tools for insurance-law enforcement: civil penalties, forfeitures for disobeying cease-and-desist orders, restitution to make harmed people whole, and injunctive relief. The opinion explains how Article IX, Section 7's school-fund requirement applies to payments collected under those tools. It cites Craven County for the distinction between penal and remedial payments and for the rule that a voluntary settlement does not change a penalty's character. It gives no facts about the underlying Craven County dispute beyond those points.

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

• Landing page: https://ncdoj.gov/opinions/scope-of-authority-of-commissioner-of-insurance-2/

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