North Carolina regulates the issuance of title insurance policies insuring interests in land located within the boundaries of the State. This regulation is administered by the Commissioner of Insurance under the provisions of Chapter 58 of the North Carolina General Statutes. Title insurers are frequently asked to bid premiums, provide unusual coverage or charge preferential premiums. These activities might result in violations of the law. The purpose of this article is to explain how certain restrictions in the statutes have an impact on ethical considerations in real property practice.
NCGS 58-3-1 provides that State law governs all insurance contracts on property, lives, or interests located in North Carolina. No matter where a policy is issued, it is deemed to be made here and is subject to the laws of North Carolina if the application is taken within the State. Under NCGS 58-3-5, "it is unlawful for any company to make any contract of insurance upon or concerning any property or interest or lives in this State, or with any resident thereof, or for any person as insurance agent or insurance broker to make, negotiate, solicit, or in any manner aid in the transaction of such insurance, unless and except as authorized under the provisions of Articles 1 though 64 of this Chapter." We will examine several of the provisions that appear to be misunderstood or ignored in the process of securing polices.
Article 28 of Chapter 58 regulates non-domestic insurers. NCGS 58-28-1 sets forth the policy of the State with regard to out of state insurers and is illustrative. "It is the purpose of this Article to abate and prevent the practices of unauthorized insurers within the State of North Carolina, and to provide methods for effectively enforcing the laws of this State against such practices. The General Assembly finds that there is within this State a substantial amount of insurance business being transacted by insurers who have not complied with the laws of this State and have not been authorized by the Commissioner to do business. These practices by unauthorized insurers are deemed to be harmful and contrary to public welfare of the citizens of this State. The difficulties which arise from the acts and practices of unauthorized insurers are compounded by the fact that such companies may be licensed in foreign jurisdictions and conduct a long-range business without having personal representatives or agents in proximity to insureds. The General Assembly further declares that it is a subject of vital public interest to the State that unlicensed and unauthorized companies have been and are now engaged in soliciting by way of direct mail and other advertising media, insurance risks within this State, and that such companies enjoy the many benefits and privileges provided by the State as well as the protection afforded to citizens under exercise of the police powers of the State, without themselves being subject to the laws designed to protect the insurance consuming public." As a result of this policy NCGS 58-28-5 makes it "unlawful for any company to enter into a contract of insurance as an insurer or to transact insurance business in this State as set forth in G.S. 58-28-10, without a certificate of authority issued by the Commissioner." There are exceptions in the statute but they do not apply to title insurance in most cases. NCGS 58-28-10 makes the following acts, if performed in this State, among those deemed to constitute transacting insurance business here:
"(1) a. Maintaining any agency or office where any acts in furtherance of an insurance business are transacted, including, but not limited to the execution of contracts of insurance with citizens of this or any other state;
b. Maintaining files or records of contracts of insurance; or
c. Receiving payments of premiums for contracts of insurance.
(2) Likewise, any of the following acts in this State, whether effected by mail or otherwise by an unauthorized insurer, is included among those deemed to constitute transacting insurance business in this State:
a. The issuance or delivery of contracts of insurance to residents of this State or to corporations authorized to do business therein;
b. The soliciting of applications for contracts of insurance through the use of the United States mail or any other media, method or device;
c. The collections of premiums, membership fees, assessments or other considerations for such contracts; or
d. The transaction of any matters prior to or subsequent to the execution of such contracts in contemplation thereof or arising out of them."
NCGS 58-28-45 is entitled the Uniform Unauthorized Insurers Act and, among others, it prohibits the following activities:
"(a) No person, corporation, association or partnership shall in this State act as agent for any insurer not authorized to transact business in this State, or negotiate for or place or aid in placing insurance coverage in this State for another with any such insurer."
"(b) No person, corporation, association or partnership shall in this State aid any unauthorized insurer in effecting insurance or in transacting insurance business in this State, either by fixing rates, by adjusting or investigating losses, by inspecting or examining risks"
"(c) Any person, corporation, association or partnership violating any of the provisions of this section shall be guilty of a Class 3 misdemeanor and shall only be fined not less than one thousand dollars ($1,000) nor more than five thousand dollars ($5,000)."
Title insurance is regulated under Chapter 58 and is defined in NCGS 58-7-15(18) as "meaning insuring the owners of real property and chattels real and other persons lawfully interested therein against loss by reason of defective titles and encumbrances thereon and insuring the correctness of searches for all instruments, liens or charges affecting the title to that property, including the power to procure and furnish information relative thereto, and other incidental powers that are specifically granted in Articles 1 through 64 of this Chapter."
Often out of state lenders request attorneys to facilitate a loan transaction by participating in witness or accommodation closings. If these transactions are being insured by title companies that are not licensed in North Carolina, the transactions are clearly in violation of the law and subject to criminal as well as civil sanctions. Arguably, anyone closing such a transaction would be violating NCGS 58-28-45(a). In addition, if the closer were an attorney or the employee of an attorney and the title was not certified by an North Carolina licensed attorney, participation in a witness closing would contravene 98 Formal Ethics Opinion 8 (April 16, 1998). This opinion rules that a lawyer may not participate in a closing if, after reasonable inquiry, the lawyer believes that the title abstract or opinion, upon which the transaction was based, was prepared by a non-lawyer without supervision by a licensed North Carolina lawyer. In participating in witness closings it is imperative to verify that any title insurer is properly licensed to do business in North Carolina and will be issuing its policy based upon the opinion of an attorney licensed to practice law in North Carolina who is not an employee or agent of the company.
Another common problem occurs with companies that offer special rates for "preferred attorneys". NCGS 58-3-120 prohibits discrimination by providing that "No company doing the business of insurance as defined in G.S. 58-7-15 shall make any discrimination in favor of any person." The rate standards are set forth in NCGS 58-40-20. Subsection (a) of the statute states that "rates shall not be excessive, inadequate, or unfairly discriminatory." Subsection (e) provides that a "rate is not unfairly discriminatory in relation to another in the same class if it reflects equitably the differences in expected losses and expenses. Rates are not unfairly discriminatory because different premiums result for policyholders with like loss exposures but different expense factors, or like expense factors but different loss exposures, as long as the rates reflect the differences with reasonable accuracy." It seems clear that a legitimate rate filing has to be based upon losses or expenses or both but can not be based merely upon the utilization of a "preferred attorney". If it is not based upon the utilization of preferred attorneys, it can not be marketed as such. NCGS 58-63-10 prohibits unfair methods of competition or unfair and deceptive acts or practices. The statute defines unfair methods of competition and unfair and deceptive acts or practices in the business of insurance as follows:
"Making, publishing, disseminating, circulating, or placing before the public, or causing, directly or indirectly, to be made, published, disseminated, circulated, or placed before the public, in a newspaper, magazine or other publication, or in the form of a notice, circular, pamphlet, letter or poster, or over any radio station, or in any other way, an advertisement, announcement or statement containing any assertion, representation or statement with respect to the business of insurance or with respect to any person in the conduct of his insurance business, which is untrue, deceptive or misleading."
NCGS 58-40-20 (d) provides that a rate is inadequate if it is unreasonably low for the insurance provided and the use or continued use of the rate by the insurer has had, or will have, the effect of endangering the solvency of the insurer, destroying competition, creating a monopoly, or violating actuarial principles, practices, or soundness. Insurers are not permitted to file unreasonably low rates for anti-competitive purposes
Additional pertinent (edited) statutory provisions of Chapter 58 regarding rate filing and enforcement follow.
58-40-30. Filing of rates and supporting data
(a) With the exception of inland marine insurance that is not written according to manual rates and rating plans, every admitted insurer and every licensed rating organization, which has been designated by any insurer for the filing of rates under G.S. 58-40-40, shall file with the Commissioner all rates and all changes and amendments thereto made by it for use in this State prior to the time they become effective.
58-41-50. Policy form and rate filings;
(a) With the exception of inland marine insurance that is not written according to manual rates and rating plans, all policy forms must be filed with and either approved by the Commissioner or 90 days have elapsed and he has not disapproved the form before they may be used in this State. With respect to liability insurance policy forms, an insurer may exclude or limit coverage for punitive damages awarded against its insured.
(f) It is unlawful for an insurer to charge or collect, or attempt to charge or collect, any premium for insurance except in accordance with filings made with the Commissioner under this section and Article 40 of this Chapter.
In addition to criminal penalties for acts declared unlawful by this Article, any violation of this Article subjects an insurer to revocation or suspension of its certificate of authority, or monetary penalties or payment of restitution as provided in G.S. 58-2-70.
(a) No insurer, agent, broker or limited representative shall knowingly charge, demand or receive a premium for any policy of insurance except in accordance with the applicable filing approved by the Commissioner. No insurer, agent, broker or limited representative shall pay, allow, or give, or offer to pay, allow, or give, directly or indirectly, as an inducement to insurance, or after insurance has been effected, any rebate, discount, abatement, credit, or reduction of the premium named in a policy of insurance, or any special favor or advantage in the dividends or other benefits to accrue thereon, or any valuable consideration or inducement whatever, not specified in the policy of insurance.
It is clearly unlawful for title insurance companies to offer coverage or rates that they have not had approved by the Department of Insurance. This obviously begs the question of how these provisions have an impact upon ethical considerations of real property practice. NCGS 58-33-85(a) also provides that no "insured named in a policy of insurance, nor any employee of such insured, shall knowingly receive or accept, directly or indirectly, any such rebate, discount, abatement or reduction of premium, or any special favor or advantage or valuable consideration or inducement." While none knowledgeable about the closing process would suggest that the typical insured "knowingly" accepts a discounted premium, the real property attorney should be knowledgeable about premium rates in general. The Revised Rules of Professional Conduct, Rule 1.1 provides that "(a) A lawyer shall not handle a legal matter which the lawyer knows or should know he or she is not competent to handle without associating with a lawyer who is competent to handle the matter. Competent representation requires the legal knowledge, skill, thoroughness, and preparation reasonably necessary for the representation." Rates are relatively uniform between insurers because of consumer protection policies of the Department of Insurance and competitive pressures of the industry. If an attorney is offered a rate that is at significant variance from the norm, due inquiry should be considered obligatory. All insurers should be able to fax a copy of their approved rate filing upon request. Once the attorney is informed of an improper premium, it is clear that the subsequent use of the rate is prohibited. Revised Rules of Professional Conduct, Rule 1.2 (d) states that a "lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good-faith effort to determine the validity, scope, meaning, or application of the law."
It is not uncommon for some attorneys to leave the choice of insurer to their staff. Situations where improper rates are involved are analogous to situations where staff members embezzle trust funds. The State Bar has ruled that the attorney is responsible and subject to discipline. There is an additional concern for consumers and attorneys where unusually low rates have been approved. If premiums are marginally profitable, companies tend to be much more conservative in underwriting decisions, coverage interpretations on claims and more aggressive in claims recovery practices. These tendencies are a sure-fire formula for client dissatisfaction, which is often vented on the attorney.
One last topic of concern is the request for unauthorized coverage. As an example, lenders counsel will frequently require removal from the title commitment of the exception for matters occurring of record between the effective date of the title commitment and the policy date. This is, in effect, gap coverage and is clearly not approved in North Carolina. It is not suggested that these attorneys are knowingly demanding illegal coverage. It is suggested that since they are employed for their expertise, professionalism requires that they avail themselves of resources in North Carolina title counsel who can advise them concerning approved coverage before making these demands.