SC Administrative Law Court Decisions

Nothing in the Code of Laws of South Carolina or the Department's regulations supports Appellant's claim that the letters are final agency decisions in a contested case from which appeals could be taken. The applicable insurance regulation provides that a decision does not become final until the Chief Insurance Commissioner has reviewed the exceptions, records, the presiding officer's report, and issued a written order. 25A S.C. Code Ann. Regs. 69-31-ZZ (1976). Mr. Kruger was not the Director of the Department. The Department's decision, therefore, only became final when the Director issued his Order on July 25, 2001.

Similar to cases involving other state agencies, the letters by staff simply served as an initial method to define the issues, and obviously, was the first step of many available to and used by the Appellant. Appellant was given a fair opportunity to present its evidence and to challenge Respondent's evidence at the contested case hearing conducted by Ms. Clawson. Appellant participated in that hearing and had every opportunity to contest the letters of Mr. Kruger at that time, to cross-examine him, and present Appellant's opinion for consideration and review.

Since Mr. Kruger's letters were not final agency decisions, Appellant's claims of statutory and procedural errors fail. There was no statutory or regulatory requirement to provide notice to Appellant before Mr. Kruger issued the letters. In addition, there was no requirement by the Department to provide notice of appeal of those letters within thirty days after their issuance as required by the Administrative Procedures Act ("APA") in contested case hearings. Further, Appellant's claim that Mr. Kruger's letters failed to explain the position of the Department is without merit. Appellant had notice of the hearing in 1996 and participated fully.

As to any prejudice suffered by Appellant due to a change in the Department's position as expressed in the two letters, Appellant's participation in the hearing allowed it to advance its position fully before th hearing officer. This argument is without merit.

Mr. Kruger's letters were initial letters by the Department outlining its position. They only notified Appellant of the position of the Department. Appellant thereafter proceeded pursuant to the APA to request a contested case hearing or public hearing, advocate its positions, and seek a final decision from the agency. From that final decision Appellant had the right to appeal to the Division. Such procedure was followed and no procedural or statutory errors have been shown.

Further, no procedural due process violation has been shown. For the above reasons stated, i.e., opportunity for a hearing, opportunity to present testimony and offer evidence and to submit a post-hearing brief and a proposed order, Appellant was provided all allowable due process. Appellant appealed the Final Order of the Department to the Division and may now appeal this decision on appeal to circuit court pursuant to S.C. Code Ann. §§ 1-23-380 and 1-23-610.

Since the Final Order was issued by the Director, no premium has been collected as a result of the letters issued by Mr. Kruger. Appellant has not suffered any erroneous deprivation, economic or otherwise, as a result of the letters. The substantive and procedural safeguards afforded the Appellant are numerous, and it has not met its burden to show a due process violation.

• Director's Final Order

Appellant also argues that the Final Order issued by the Director on July 25, 2001, violates the provisions contained in S.C. Code Ann. §§ 38-73-490 and 38-73-495 (Supp. 2001), which require that workers' compensation rates must be "fair, reasonable, adequate, and nondiscriminatory." Further, Appellant assumes that providing lifeguard exposure should not generate an additional premium because its employees spend only a small fraction of time on lifeguard rescues, i.e., 0.0035% to 0.0047%. Appellant posits that none of the workers' compensation carriers for the period from 1974 through 1991 have paid many claims and those paid have related almost exclusively to injuries arising out of the beach equipment rental activities.

Appellant concedes that it is required by its contract with the City of Myrtle Beach and Horry County to provide lifeguard services in exchange for its commercial franchises. Appellant also concedes that its employees provide life guarding services for the entire time they are on duty, i.e., from 8:00 a.m. to 5:00 p.m. each day. Appellant further concedes that all its employees are required to be certified lifeguards and wear shirts with the words "Lifeguard" stamped on the back.

Class Code 8017, entitled "Phraseology-Store: Retail NOC," provides that this classification applies to "concessions, such as . . . rolling chairs on boardwalks, beach chairs, and beach umbrellas."

Class Code 9015, entitled "Phraseology: Buildings-Operation by Owner or Lessee," is applicable to buildings operated by owners or lessees of office, apartment, tenement, mercantile, or industrial buildings. It encompasses all superintendents, custodial and maintenance operations conducted by an owner or lessee of a building. It further applies to a bathhouse-beach and camp operation, which for classification purposes, is generally considered to be an enterprise providing recreational activities that are principally outdoor in nature for individuals who partake of the camp's services on a temporary basis. This classification also covers "lifeguards and swimming instructors at municipal or public pools."

Rule IV(E)(2) of the Basic Manual for Workers Compensation and Employers Liability Insurance ("Manual"), addresses situations involving an employee who performs duties related to more than one classification. This is called the "Interchange of Labor" rule, which provides "[s]ome employees, who are not miscellaneous employees, may perform duties directly related to more than one classification. . . . When there is such an interchange of labor, the entire payroll of employees who interchange shall be assigned to the highest rated classification representing any part of their work." ⁽³⁾ Rule IV(D)(3) of the Manual, entitled "Business Not Described by a Manual Classification," provides that "[i]f there is no classification which describes the business, the classification which most closely describes the business shall be assigned."

David Cavanaugh, Underwriting Product Manager for the National Council on Compensation Insurance ("NCCI") and the person responsible for maintaining and updating the Manual, testified at the hearing that payroll of Appellant's employees cannot be segregated to take into account separate duties of employees since the employees are performing both their lifeguard and beach chair concession duties at the same time.

Appellant, however, argues that its employees perform their beach chair concession duties 99.995% of time and that the lifeguard duties only have the potential to be performed 0.0047% of the time. Appellant further argues that performing lifeguard duties is not the primary business and that the loss risk by the carrier is extremely small. Thus, Appellant seeks to quantify the time spent by its employees to establish a fair and reasonable premium to be paid. However, there is no provision in the Manual for such. Since Appellant's employees were engaged at all times both in beach equipment concessions and lifeguard duties, Appellant's argument that "the interchange of labor" rule does not secure "fair, reasonable, adequate, and non-discriminatory rates" fails. This case is an excellent example of the applicability of the "interchange of labor" rule.

For the reasons stated herein, the Final Order of the Director dated July 25, 2001, does not violate S.C. Code Ann. §§ 38-73-490 and 38-73-495.

Constitutional Claims

Appellant challenges the Final Order of the Director on several constitutional grounds, including due process and equal protection. For the reasons set forth below, these arguments also fail.

When due process is analyzed, it must be considered in the context of procedural due process and substantive due process. Procedural due process addresses procedure and requires that certain procedural safeguards be observed before depriving an individual of property. United States v. James Daniel Good Real Property, 510 U.S. 43 (1993). The fundamental protection provided by procedural due process is the opportunity to be heard "at a meaningful time in a meaningful manner." Matthews v. Eldridge, 424 U.S. 319 (1976).

Procedural due process is a "flexible concept." The required procedures vary depending upon the importance attached to the interest being terminated and the circumstances under which the deprivation may occur. Walters v. National Ass'n of Radiation Survivors, 473 U.S. 305 (1905). The purpose is to ensure fair play and to protect an individual's "use and possession of property from arbitrary encroachment-to minimize substantively unfair or mistaken deprivations of property." Fuentes v. Shevin, 407 U.S. 67 (1972).

Substantive due process addresses the substance of the process and is considered more than a procedural safeguard. It "reaches those situations where a deprivation of life, liberty, or property is accomplished by legislation which can, given even the fairest procedure in application to individuals, destroy the enjoyment of all three." Poe v. Ullman, 367 U.S. 497 (1961). Thus, it requires that a law shall not be unreasonable, arbitrary, or capricious and that the means selected have some relation to the object sought to be obtained. McMahan v. International Ass'n of Bridge, Structural & Ornamental Ion Workers, 858 F. Supp. 529 (D.S.C. 1994). When a statute is challenged under a substantive due process claim, a reviewing court only requires that the act be reasonably designed to accomplish its purpose, unless some fundamental right or suspect class is involved. State v. Hornsby, 484 S.E.2d 869 (1997). The burden of showing that a statute is unreasonable falls on the party who attacks it on due process grounds.

The test of constitutionality in the context of substantive due process is not whether the legislature was wise or fair in the economic sense in enacting legislation, but simply whether the statute is rational. Usery v. Turner Elkhorn Mining Co., 428 U.S. 1 (1976). Moreover, a legislative act will not be declared unconstitutional unless its repugnance to the Constitution is clear and beyond a reasonable doubt. Legislation adjusting the burdens and benefits of economic life comes to the court with a presumption of constitutionality, and one complaining of a substantive due process violation must establish that the legislature has acted arbitrarily and irrationally. McMahan, at 548 (citing Usery v. Turner Elkhorn Mining Co.).

Finally, the purpose of the Equal Protection Clause is to prevent the government from making improper classifications. McMahan. The Equal Protection Clause concerns itself with preventing unconstitutional discrimination by the states. Smith Setzer & Sons, Inc. v. South Carolina Procurement Review Panel, 20 F. 3d 1311 (4^th Cir. 1994). It does not require that each person must be treated the same; however, it does require that all persons similarly situated be treated alike. Faulkner v. Jones, 858 F. Supp. 552 (D.S.C. 1994).

Courts apply different standards of review depending on the classification and right involved. A rational basis standard of review is employed in all cases, except those involving a suspect class (race, national origin, gender, illegitimacy) or a fundamental right (interstate travel, marriage/family rights, voting, access to justice). Since this case does not involve a suspect class or a fundamental right, the standard for evaluating the constitutionality is "mere rationality." In other words, the "court must determine whether there is some rational relation between the statute's creation of a class and a legitimate legislative objective." McMahan, at 550.

Our court follows the same rule in cases involving the Equal Protection Clause under either the United States or the South Carolina constitutions. To satisfy Equal Protection, a classification must (1) bear a reasonable relation to the legislative purpose sought to be achieved, (2) members of the class must be treated alike under similar circumstances, and (3) the classification must rest on some rational basis. D. W. Flowe & Sons, Inc. v. Christopher Construction Co., 482 S.E.2d 558 (1997) (citing Jenkins v. Meares, 302 S.C. 142, 394 S.E.2d 317 (1990)). Furthermore, a legislative enactment will be sustained against constitutional attack if there is "any reasonable hypothesis" to support it. Gary Concerete Products, Inc. v. Riley, 285 S.C. 498, 331 S.E.2d 335 (1985).

Courts view economic classifications with extreme deference and give them a heavy presumption of constitutionality. McMahan, at 550. "The classification must be reasonable, not arbitrary, and must rest upon some ground of difference having a fair and substantial relation to the object of the legislation, so that all persons similarly circumstanced shall be treated alike. F. S. Royster Guano Co. v. Virginia, 253 U.S. 412 (1920).

Appellant is not a member of a suspect class nor is a fundamental right implicated in any way. Appellant has not offered any evidence that it has been treated any differently than other employers who dispute the classifications assigned to payroll. For these reasons, neither procedural due process nor equal protection issues are implicated. Substantive due process would only be implicated if the pertinent statutes are not "rational" and it is clear beyond a reasonable doubt that the legislature acted arbitrarily and irrationally. Appellant has not met this burden.

The first constitutional challenge is that NCCI's system of classification set forth in the Manual is an improper delegation of executive power. However, the Manual is not related to any executive function. The executive branch of government is charged with enforcing the law, and only the Department has that enforcement role. NCCI does not collect premiums, prosecute fraud cases, or levy fines for non-compliance with regulations. NCCI is not involved in the function involved herein, which is an executive function. Thus, this argument is without merit.

More important, the South Carolina legislature has mandated by statute the use of a "nonpartisan rating bureau for workers' compensation" and requires each insurer, including this Respondent, to be a member. S.C. Code Ann. § 38-73-510 (Supp. 2001). NCCI is the nonpartisan rating bureau for workers' compensation of South Carolina and thirty-three other states, is the administrator of the assigned risk market in South Carolina, and files with the Department "every manual of classifications, rules, and rates, every rating plan, and every modification of any of these which it proposes to use" as required by S.C. Code Ann. § 38-73-520 (Supp. 2001). Since the Department can amend or reject the classifications and rules that Appellant challenges, there is no improper delegation of executive power to the nonpartisan rating bureau.

Appellant also argues that the "interchange of labor" rule contained in the Manual violates due process. Rule IV(E)(2) of the Manual addresses situations when an employee performs duties related to more than one classification. Appellant cannot show that this rule is not rational nor can Appellant show that it was developed in an arbitrary and irrational manner. Its employees cannot be separated into separate duties since the employees are performing both the lifeguard duties and the beach chair concession duties simultaneously. Their duties are unlike the lifeguards employed at a YMCA or at a club where that is their sole responsibility and other employees at that facility have other distinct and separate duties. For the carrier to request and for the Department to determine that the classification which most adequately addresses all the risks the insurer is covering is a rational conclusion. To the contrary, applying this rule is the most logical and rational means to address exposure in situations in which workers engage in several activities. In fact, if the "the interchange of labor" rule was not applied, there would be an arbitrary or unfounded result. Appellant does not meet its burden to show a violation of due process.

Finally, Appellant argues that S.C. Code Ann. § 38-73-495 is "unconstitutionally vague." However, equal protection is not implicated because the statute applies equally to any person or entity which disputes a classification. Also, due process is not implicated because Appellant cannot meet the burden of showing that the statute is irrational beyond a reasonable doubt. Thus, this argument is without substance and is meritless.

The statutory framework provides very objective criteria in determining whether a classification is properly applied. Premium rates for each classification are approved by the Department and classifications are described in detail in the Manual, which is presented to, considered by, and approved by the Department. The rates and classifications are developed by NCCI using actuarial methods. Since the rates and classifications are objectively derived, the criteria the Director considered-whether a previously approved rate or classification-do not violate due process nor are they "unconstitutionally vague."

As stated above, the issues raised by Appellant in its appeal are rejected. The letter by Mr. Kruger dated March 14, 1995, is not a "final agency decision." It was only an initial determination as made by many state agencies. Further, its argument that it should not have to pay for workers' compensation coverage for time its employees spent on lifeguard rescues since such was a small fraction of the time spent on the beach each day by its employees is inconsistent with the purpose of insuring risks. One must pay for insuring a risk even though it is small. The risk still exists.

Appellant received notice of and participated in a full contested case/public hearing conducted by an agent of the Director. Further, Appellant had every opportunity to advocate its position, to call witnesses, to cross-examine witnesses, and to present evidence. The constitutional challenges also fail for the reasons stated herein.

ORDER

IT IS HEREBY ORDERED that the Final Order of the Director of the Department of Insurance dated July 25, 2001, is affirmed. The Class Code 9015 applies to Appellant's workers' compensation insurance premium effective June 1, 1999, the date the hearing officer issued its report based on the findings of the public hearing.

AND IT IS SO ORDERED.

__________________________________

MARVIN F. KITTRELL

Chief Administrative Law Judge

February 20, 2002

Columbia, South Carolina

1. Effective May 1, 2001, ALJD Rule 36 was amended to specify the procedure by which the agency must file the Record with the Division. The rule specifically standardized the content and format of the Record. Although the Department timely filed the Record in this case, the Department failed to file it in compliance with ALJD Rule 36. In the future, the Record will be returned to the Department if it fails to comply with this rule.

2. In 1993, 1994, and 1995, thirty-five ten-thousandths percent (0.0035%), forty-seven ten-thousandths percent (0.0047%), and thirty-five ten-thousandths percent (0.0035%), respectively, of Appellant's business hours consisted of executing water rescues.

3. The Basic Manual for Workers Compensation and Employers Liability Insurance, including the "interchange of labor" rule, was approved by the Department pursuant to S.C. Code Ann. § 38-73-520 (Supp. 2000).