North Carolina Department of Justice
North Carolina Department of Justice
North Carolina Department of Justice
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REPLY TO: Thomas J. Ziko

Education Section

Tele: (919) 716-6920

FAX: (919) 716-6764

February 20, 2002

Edwin Dunlap, Jr. Executive Director North Carolina School Boards Association

P.O. Box 97877 Raleigh, North Carolina 27624-7877

Re: Advisory Opinion; Authority of Local Boards of Educations to Participate in Risk Management Pools; Chapter 160A, Article 20; G.S. §§ 115C-42 and 43.

Dear Ed:

On behalf of the member school boards of the North Carolina School Boards Association, you have written to ask for our opinion on several legal issues relevant to the North Carolina School Board Insurance Trust.

Since 1986, the North Carolina School Board Association (NCSBA) has managed a risk management program initially known as the North Carolina School Board Insurance Trust and now known as the North Carolina School Boards Trust (NCSBT). On February 5, 1986, the Attorney General issued a formal opinion regarding local boards of educations’ authority to participate in the NCSBT. 55 NCAG 77. In that opinion, this Office stated that local boards of education could participate in a risk management program by entering into interlocal government agreements under Chapter 160A, Article 20, provided the agreements incorporated the provisions required by G.S. § 160A-464 and were consistent with the limitations specified in G.S. §§ 115C-42 and 43. Since that time, there have been some statutory amendments and additional precedents related to governmental entities’ participation in risk management programs. In light of those amendments and precedents, you have written to ask whether the Attorney General continues to believe that the February 5, 1986, opinion remains the best interpretation of the laws applicable to the NCSBT. Having reviewed the applicable statutes and precedents, our opinion of the NCSBT remains the same and we continue to endorse the analysis and conclusions in the February 5, 1986, formal opinion.

As noted in the February 5, 1986, opinion, local boards of education have the authority under G.S. § 160A-462 to establish a “joint agency” to administer a self-insurance program to pay claims and judgments as allowed under G.S. §§ 115C-42 and 43 up to a certain “self retained” amount and to purchase insurance policies to protect members of the joint agency against claims in excess of the “self-retained” amount. It was our opinion in February 1986, and it remains our opinion, that the NCSBT is such a “joint agency” created to administer a risk management program under a valid interlocal cooperation agreement among participating local boards of education acting under G.S. § 160A-462. The February 1986 opinion, however, did not address the question of whether participation in the NCSBT would constitute a waiver of the local board of education’s governmental immunity.

Pursuant to your request, we have reviewed the applicable statutes and the decisions in Lyles v. City of Charlotte, 120 N.C. App. 96, 461 S.E.2d 347 (1995), rev’d and remanded, 344 N.C. 676, 477 S.E.2d 150 (1996); Hallman v. Charlotte-Mecklenburg Board of Education, 124 N.C. App. 435, 477 S.E.2d 179 (1996); Mullis v. Sechrest, 126 N.C. App. 91, 484 S.E.2d 423 (1997), rev’d in part, 347 N.C. 548, 495 S.E.2d 721 (1998); and Town of Kill Devil Hills

v. Smith, 123 N.C. App. 790 (Sept. 17, 1996) (unpublished), disc. rev. denied, 345 N.C. 646, 483 S.E.2d 718 (1997) to determine whether these post-1986 precedents affect our February 1986 opinion and whether a local board’s participation in the NCSBT constitutes a waiver of its governmental immunity.

In Hallman, the evidence showed that the Charlotte-Mecklenburg Board of Education (“Charlotte-Mecklenburg Board”) participated in the “insurance and selfretention program” or “local government risk pool” managed by the Division of Insurance and Risk Management of the Finance Department of the City of Charlotte (DIRM). 124

N.C. at 436. Under the terms of the DIRM program, the Charlotte-Mecklenburg Board “self-retained” the first $1 million of risk of liability for negligence of the Board or its employees but purchased insurance to cover potential liability of itself or its employees for amounts above the $1 million “self-retained” liability. The question before the Court was whether the Charlotte-Mecklenburg Board’s participation in the DIRM constituted the purchase of insurance and thereby a waiver of governmental immunity under G.S. § 115C42 for claims under $1 million.

In resolving that issue, the Court first recognized that the rules of statutory construction require statutes that authorize the waiver of sovereign immunity to be strictly construed. Id. at 438. Applying a strict construction to G.S. § 115C-42, the Court held the Charlotte-Mecklenburg Board had not waived its immunity for claims under $1 million. The Court noted that, unlike G.S. § 160A-485(a), which governs cities’ participation in local government risk pools, G.S. § 115C-42 does not state that a local board of education’s participation in a risk management pool shall constitute a waiver of governmental immunity. Id. Moreover, the Court found that the DIRM was not an insurance company under state statutes and did not enter into insurance contracts. Id. at 438-439. Consequently, the Hallman Court held that the Charlotte-Mecklenburg Board’s participation in the local government risk pool did not result in a waiver of its governmental immunity for liability on a claim for $45,000. Id. at 438.

Lyles v. City of Charlotte, 120 N.C. App. 96, 461 S.E.2d 347 (1995), rev’d and remanded, 344 N.C. 676, 477 S.E.2d 150 (1996) provides further support for the Court of Appeal’s decision in Hallman. In Lyles, the Court of Appeals had held that the City of Charlotte’s participation in the DIRM’s local government risk pool constituted a waiver of its governmental immunity. The Hallman Court distinguished the decision in Lyles based on the fact that G.S. § 115C-485(a) (1994) explicitly states that a city’s participation in a government risk pool pursuant to Article 23 of Chapter 58 of the General Statutes “shall be deemed to be the purchase of insurance for the purpose of this section,” whereas G.S. § 115C-42 contains no similar statement regarding local boards of education. It is notable for purposes of our present analysis that the North Carolina Supreme Court reversed the Court of Appeals’ decision in Lyles on grounds that the DIRM’s local government risk pool did not constitute a “contract” for a “local government risk pool” as defined in G.S. § 58-23-15 and, therefore, the City of Charlotte did not waive its governmental immunity by participating in the “self-retained” liability component of the program. In reaching that decision, the Supreme Court expressly stated that a board of education could not join a local government risk pool pursuant to Article 23 of Chapter 58 because that statute is limited to counties, cities, and housing authorities. Id. at 680. Consequently, G.S. § 160A-485(a) is inapplicable to local boards of education.

In Mullis v. Sechrest, 126 N.C. App. 91, 484 S.E.2d 423 (1997), rev’d in part on other grounds, 347 N.C. 548, 495 S.E.2d 721 (1998), the Court of Appeals relied upon the decisions in Hallman and Lyles to hold that the Charlotte-Mecklenburg Board of Education’s participation in the DIRM’s local government risk pool did not constitute the purchase of a contract of insurance under G.S. § 115-42 and, therefore, did not result in a waiver of governmental immunity under that statute.

In light of the decisions in Hallman, Lyles and Mullis, it is our opinion that a local board of education’s participation in a risk management pool such as the NCSBT does not constitute the purchase of a contract of insurance under G.S. § 115-42 and does not result in a waiver of governmental immunity under that statute. However, it is our opinion that a member local board of education does waive its governmental immunity to the extent that the NCSBT purchases excess coverage insurance policies from insurance carriers or companies to cover claims made against the member. See, e.g., Hallman v. Charlotte-Mecklenburg Board of Education, 124 N.C. at 438 (holding participation in risk management agreement did not constitute a waiver of governmental immunity under G.S. § 115C-42 “for claims not covered by insurance.”) In our February 1986 opinion, we stated that “when the Trust acts through, for and on behalf of local boards in purchasing excess insurance we believe that the provisions of G.S. § 115C-42 are applicable. . .” 55 NCAG at 81-82. Consistent with that statement, it is our opinion that, when the NCSBT acts as a joint agency to purchase insurance pursuant to its members’ authority under G.S. § 115C-42, its actions are attributable to its members and have the same effect as actions taken by the boards themselves, i.e., the purchase of insurance waives the member boards’ governmental immunity under G.S. § 115C-42.

You have also asked whether the NCSBT is subject to regulation by the Department of Insurance under Chapter 58 of the General Statutes. It is our opinion that the NCSBT agreement is not a contract of insurance and the NCSBT is not currently subject to regulation by the Department of Insurance. G.S. § 58-1-10 defines a “contract of insurance” as:

A contract of insurance is an agreement by which the insurer is bound to pay money or its equivalent or to do some act of value to the insured upon, and as an indemnity or reimbursement for the destruction, loss, or injury of something in which the other party has an interest.

(Emphasis added). While this definition of “contract of insurance” is appropriately broad to permit the Department of Insurance to protect the public, it is expressly limited to contracts entered into with an “insurer.”

For purposes of G.S. § 58-1-10, G.S. § 58-1-5(3) defines “insurer” to include:

any corporation, association, partnership, society, order, individual or aggregation of individuals engaging or proposing or attempting to engage as principals in any kind of insurance business, including the exchanging of reciprocal or interinsurance contracts between individuals, partnerships and corporations. "Company" or "insurance company" or "insurer" does not mean the State of North Carolina or any county, city, or other political subdivision of the State of North Carolina.

(Emphasis added). The italicized language was added to the definition in 1999. 1999 N.C. Sess. Laws 219, s. 5.5.

Similarly, G.S. § 58-1-5(9) defines “person” to mean:

an individual, partnership, firm, association, corporation, joint-stock company, trust, any similar entity, or any combination of the foregoing acting in concert. "Person" does not mean the State of North Carolina or any county, city, or other political subdivision of the State of North Carolina.

The italicized language was added to the definition in 1995. 1995 N.C. Sess. Laws 193, s.

1.

Local boards of education are political subdivisions of the State of North Carolina. See, Rowan County Bd. of Education v. United States Gypsum Co., 87 N.C. App. 106, 359 S.E.2d 814, disc. rev. denied, 321 N.C. 298, 362 S.E.2d 782 (1987) (holding local boards of education are political subdivisions of the State and, therefore, are not subject to statute of limitations in action to recover expense of removing asbestos from school buildings).

Consequently, whatever the state of the law may have been prior to 1995, as a result of the amendments to G.S. § 58-1-5(9) and G.S. § 58-1-5(3), those statutes now clearly exclude political subdivisions of the State, including local boards of education, from the definition of “insurers” that can enter into contracts of insurance under G.S. § 58-1-10.

In our opinion, the exclusion of political subdivisions of the State from the definitions of “insurer” in G.S. § 58-1-5(3) and “person” in G.S. § 58-1-5(9) extend to a joint agency created by political subdivisions of the State acting pursuant to their authority under Article 20 of Chapter 160A. Consequently, irrespective of its terms, the NCSBT Agreement is not a “contract of insurance” subject to Chapter 58 because the NCSBT is not an “insurer” as defined in G.S. § 58-1-5(3). In light of that fact, it is our opinion that the NCSBT and the NCSBT Agreement are not subject to regulation by the Department of Insurance under Chapter 58.

We have also examined the Court of Appeals’ unpublished opinion in Town of Kill Devil Hills v. Smith, No. COA95-435 (N.C. App. September 17, 1996). In that case, the Court held that the Town’s decision to provide its employees with a health care plan made it an “insurer” under Chapter 58, as it was written at the time, and subjected the Town to the jurisdiction of the Commissioner of Insurance. You have indicated that you are concerned that this decision affects the NCSBT’s status under the law and could be used as precedent to place the NCSBT under the jurisdiction of the Commissioner of Insurance. In our opinion, that decision is inapplicable to the NCSBT.

First, the Court itself noted that “the statutory amendment [to expressly exclude the State of North Carolina or any county, city, or other political subdivision of the State of North Carolina from the definition of “person” in G.S. § 58-1-5(9)] may effectively limit the purview of our holding herein to the case sub judice.” Id. at slip op. 6. As noted above, we believe that the amendment to G.S. § 58-1-5(9) as well as the subsequent amendment to

G.S. § 58-1-5(3) plainly place the NCSBT outside G.S. § 58-1-10 and the jurisdiction of the Commissioner of Insurance. These subsequent acts of the General Assembly prevent the decision in Town of Kill Devil Hills from having any effect on the NCSBT. Second, the North Carolina Rules of Appellate Procedure state that an unpublished opinion should not be cited as precedent in any court, except in the case in which the decision was rendered.

N.C. R. App. P. 30(e)(3). Given those limitations on the precedential value of the decision in Town of Kill Devil Hills, we do not believe that the decision provides any support for the proposition that the NCSBT is currently subject to regulation as an insurer under Chapter 58 of the General Statutes.

In summary, we reaffirm the February 1986 Attorney General’s opinion that, pursuant to authority granted them under Chapter 160A, Article 20, local boards of education may enter into interlocal agreements to form NCSBT. Furthermore, based upon our reading of the statutes and precedents, it is our opinion that a local board of education’s participation in the self retained component of the NCSBT’s risk management program does not constitute a waiver of governmental immunity under G.S. § 115C-42. However, it is also our opinion that the local boards have waived their governmental immunity to the extent that the boards themselves are named insureds under any excess insurance policies that the NCSBT has purchased. Finally, it is our opinion that the risk management component of the NCSBT is not a “contract for insurance” subject to regulation by the Department of Insurance.

Very truly yours,

Grayson G. Kelley Senior Deputy Attorney General

Thomas J. Ziko Special Deputy Attorney General

Laura E. Crumpler Assistant Attorney General