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SC Administrative Law Court Decisions

SCDOI vs. Liberty Life Insurance Company

South Carolina Department of Insurance

South Carolina Department of Insurance

Liberty Life Insurance Company

For the Petitioners:
A. Camden Lewis, Esquire
David E. Belton, Esquire

For the Respondent:
Frank R. Ellerbe, III, Esquire
Kevin K. Bell, Esquire

Charles T. Speth, Esquire




Liberty Life Insurance Company ("Respondent") filed a request for a contested case hearing on December 21, 2001 in response to the order ("order") issued by the South Carolina Department of Insurance ("Department") on December 19, 2001. In the order, the Department alleges that Respondent has violated state and federal law by engaging in racial discrimination in regard to its life insurance policyholders. Specifically, the Department alleges that Respondent has violated federal civil rights statutes, 42 U.S.C. §§ 1981 and 1982, and the South Carolina Constitution, Art. I, § 3, which prohibits racial discrimination in the making, performance, modification, and termination of contracts. The Department also contends that the use of racially distinct mortality tables violates 42 U.S.C. §§ 1981 and 1982, and Art. I, § 3 of the South Carolina Constitution. Further, the Department alleges that Respondent's conduct is prohibited by S.C. Code Ann. §§ 38-55-50 and 38-57-120(1) (Supp. 2000).

In its order, the Department fined Respondent $2 million dollars and suspended its authority to transact business in South Carolina, along with a requirement that Respondent bear the costs of the Department's investigation. The order further instructed Respondent to increase benefits by 33% to parties covered under race-based policies, and to invest $1 million dollars in a fund for policyholders who were insured prior to January 1, 1986 under policies differentiated on the basis of race.

Subsequent to the assignment of the case to the undersigned, the Department filed a Motion for Partial Summary Judgment on March 5, 2002. Respondent filed a Motion for Summary Judgment on March 5, 2002. A hearing on these Motions was held on March 20, 2002.


The facts in this case are not in dispute. The Respondent Liberty Life Insurance Company is a corporation involved in the issuance of insurance products in South Carolina. The issue in this case arose in regard to Respondent's sale of certain life insurance policies to African-Americans; in particular, the industrial life insurance policies issued from 1905 to 1967. (1) Industrial life insurance is a type of small face value life insurance, with most of the policies having values from two hundred fifty ($250) to five hundred ($500) dollars. This type of insurance is sometimes referred to as "burial insurance."

In issuing these industrial life insurance policies to African-Americans, Respondent used a mortality table different from the one used for whites for setting premiums. The mortality tables used for setting these premiums showed African-Americans as having a shorter life expectancy than whites. As a result of using separate and racially distinct mortality tables, African-Americans were charged premiums that were thirty-three percent (33%) higher than that charged to whites for the same policy benefits. There are approximately 56,000 policies written in South Carolina that are in question in this case, not including lapsed policies or those in which the benefits have been paid. While Respondent ceased issuing policies based on racially distinct mortality tables in 1967, it has continued to collect the higher premiums based on those tables.

Beginning in July 2000, the Department conducted a target market conduct examination of the books and records of Respondent. The Department specifically inquired as to whether Respondent engaged in the practice of race-based underwriting for life insurance products. Respondent admitted that it had engaged in such conduct but contended that this practice was actuarially sound and was permissible under South Carolina law. Pursuant to S.C. Code Ann. § 38-13-30(B), the Department forwarded its Report on Examination to the Respondent. On June 13, 2001 and again on October 10, 2001, Respondent submitted comments to the Report. After consideration of these comments, the Department issued its Order Adopting Report on Examination on December 19, 2001.


The Department alleges that Respondent has engaged in racial discrimination that violates both state and federal law. Specifically, the Department alleges the following violations: contracts for insurance written in violation of the United States Constitution, Federal civil rights laws, and the South Carolina Constitution are illegal and unenforceable; using racially distinct mortality tables violates 42 U.S.C. §§ 1981 and 1982; using racially distinct mortality tables violates Article I, Section 3 of the South Carolina Constitution; and Respondent's conduct violated S.C. Code Ann. § 38-55-50 and § 38-57-120(1).

Both Respondent and Petitioner have devoted considerable time arguing whether the Department has jurisdiction to enforce federal law, in particular regarding 42 U.S.C. §§ 1981 and 1982. (2) However, this court declines to address the federal causes of action put forth by the Department. Rather, this court feels it is appropriate to focus its attention on the alleged violations of the South Carolina statutes governing insurance. Also, while not definitive, Federal District Judge Vance in Louisiana has ruled in a similar case that 42 U.S.C. §§ 1981 and 1982 are subjects "over which this Court enjoys original jurisdiction and over which the [state] Departments of Insurance have no authority." Irvin v. Liberty Life Insurance Co., 2001 WL 246408 (E.D.La.).

The Department, through its Director, is charged with "regulat[ing] the rates and service of every insurer in this State and fix[ing] just and reasonable standards, classifications, regulations, practices, and measurements of service to be observed and followed by every insurer doing business in this State." S.C. Code Ann. § 38-3-110(1) (Supp. 2000). Further, the Department is to "see that all laws of this State governing insurers or relating to the business of insurance are faithfully executed." S.C. Code Ann. § 38-3-110(2) (Supp. 2000). "Every insurer doing business in this State must be licensed and supervised by the director or his designee." S.C. Code Ann. § 38-5-10 (Supp. 2000). In accordance with its duty to enforce the South Carolina insurance laws, the Department has the authority to conduct an examination of an insurer doing business in South Carolina "as often as the director or his designee consider appropriate," but no less than once every five years. S.C. Code Ann. § 38-13-10(A) (Supp. 2000). Further, the Department has authority to fine and suspend the licenses of insurers who violate South Carolina insurance laws. S.C. Code Ann. § 38-2-10 (Supp. 2001). Upon the Department's issuance of an order adopting an examination report, the affected insurer has the right to request a hearing before an Administrative Law Judge. S.C. Code Ann. § 38-13-10(D)(1)(Supp. 2000).

The Department alleges that the Respondent's practice of charging African-Americans 33% higher rates than whites for the same benefits violates S.C. Code Ann. § 38-55-50 (Supp. 2000) and S.C. Code Ann. § 38-57-120(1) (Supp. 2000). Section 38-55-50 prohibits discrimination in insurance generally, while § 38-57-120(1) prohibits discrimination in life insurance. Section 38-55-50 provides that "An insurer . . . may not make or permit any discrimination in favor of individuals between insureds of the same class and risk involving the same hazards in the amount of payment of premiums or rates charged for policies of insurance except as provided in Sections 38-57-140, 38-65-310, and 38-71-1110." § 38-57-120(1) states that "No person may make or permit any unfair discrimination between individuals of the same class and equal expectation of life in the rates charged for any contract of life insurance."

None of the exceptions mentioned in § 38-55-50 refer in any way to the allowance of discrimination based on race. Equally absent in either statute is language that specifically prohibits discrimination based on ethnicity or race. Both § 38-55-50 and § 38-57-120(1) state that an insurer may not discriminate between "individuals of the same class." The term "class" is not specifically defined in the statutes governing insurance. However, it is difficult to believe that the legislature intended to allow whites and African-Americans to be divided into separate classes for purposes of setting insurance rates based upon nothing more than their skin color.

Respondent argues that charging higher premiums to African-Americans was lawful conduct under these two statutes. Respondent supports this position by evidence which states that life expectancy for African-Americans for most of the twentieth century has been lower than that for whites. Thus, Respondent contends that African-Americans and whites are not of the "same class and risk" or of "equal expectation of life" for purposes of Sections 38-55-50 and 38-57-120(1). Respondent argues that under the language of these statutes, it is justified in using mortality tables which separate African-Americans from whites, and further contends that the company would not have been financially responsible if it had ignored the difference in life expectancy between African-Americans and whites.

Respondent's proposition is disputed by the National Association of Insurance Commissioners (NAIC) which filed a Memorandum of Amicus Curiae. In its memorandum, the NAIC states that "There is no actuarial necessity or requirement to discriminate on the basis of race." The NAIC also conducted a survey of life insurers to determine if insurers were using race as a basis for determining premium rates. Of 2,719 responses to the survey, fifty-two companies said race had been used as a basis for differentiating premiums; fifty-one of these said they no longer continued this practice. Of these companies, twenty-two continued to collect race-based premiums and twenty-seven had stopped doing so. See Exhibit A to the Department's Memorandum in Support of Motion for Partial Summary Judgment. The Department also submitted an affidavit from George E. Burkett, an insurance agent for New South Life Insurance Company during the 1960's, which stated that during the period in question, his company did not utilize racially distinct mortality tables. See Exhibit E to the Department's Memorandum in Support of Motion for Partial Summary Judgment.

Viewed only in the context of the two ambiguously worded statutes which concern insurance discrimination, and the evidence that African-Americans (when cut out and separated as a race) have a shorter life expectancy than do Caucasians, Respondent's argument seems to have at least a small degree of uncomfortable logic to it. However, when §§ 38-55-50 and 38-57-120(1) are viewed away from a sterile environment and read in the context of existing federal law, Respondent's argument fails. While this court declines to reach the Department's claims regarding 42 U.S.C. §§ 1981 and 1982, the existence of such strong federal law must be taken into consideration when reading South Carolina statutes. It is highly unlikely the South Carolina legislature would bring into existence a law which would plainly be contrary to existing federal legislation.

"The primary concern in interpreting a statute is to determine the intent of the legislature if it can be reasonably discovered in the language when construed in the light of its intended purpose." Ray Bell Constr. Co. v. School Dist. of Greenville County, 331 S.C. 19, 501 S.E.2d 725 (1998). Moreover, if the purpose of the legislature can be reasonably discovered from the language of a statute, such purpose will prevail even over the literal import of the statute. Abell v. Bell, 229 S.C. 1, 91 S.E.2d 548 (1956). In this case, the legislature clearly did not intend to sanction discrimination on the basis of race by allowing insurance companies to use the word "class" to separate African-Americans from whites. Indeed, the legislature has put forth its policy concerning racial discrimination in S.C. Code Ann. § 1-13-20: "The General Assembly hereby declares the practice of discrimination against any individual because of race . . . as a matter of State concern and declares that such discrimination is unlawful and in conflict with the ideals of South Carolina and the nation." While this declaration is set forth in statutes creating the State Human Affairs Commission, it is stated in broad, general, and all-encompassing terms and is strong evidence of the General Assembly's intent. "The goal of statutory construction is to harmonize statutes whenever possible and to prevent an interpretation that would lead to a result that is plainly absurd." Hodges v. Rainey, 341 S.C. 79, 533 S.E.2d 578 (2000). Allowing an insurer to racially discriminate under color of state law, when such action is clearly repugnant under 42 U.S.C. §§ 1981 and 1982 and directly contradicts the General Assembly's statement of policy concerning racial discrimination, would lead to a nonsensical result.

Finally, the Department construes the statutes in question as prohibiting racial discrimination in conducting the business of insurance. "The construction of a statute by the agency charged with executing it is entitled to the most respectful consideration and should not be overruled without cogent reasons." Faile v. South Carolina Employment Security Commission, 267 S.C. 536, 540, 230 S.E.2d 219, 221 (1976). In light of these guiding principles, I find that S.C. Code Ann. §§ 38-55-50 and 38-57-120(1) prohibit discrimination on the basis of race. As such, it is clear that Respondent, by using race-based premiums for the industrial life insurance policies at issue in this case, has violated S.C. Code Ann. §§ 38-55-50 and 38-57-120(1) (Supp. 2001). In light of my determination that Respondent's conduct violates these statutes, it is unnecessary to consider the Department's claim that such conduct is also violative of the South Carolina Constitution.


For all the foregoing reasons,

IT IS HEREBY ORDERED that Respondent's Motion for Summary Judgment is denied.

IT IS FURTHER ORDERED that Petitioner's Motion for Partial Summary Judgment is granted. This case will be set for a hearing on the merits to determine the appropriate penalty to be assessed against the Respondent. A scheduling conference will be set within two weeks of the date of this Order to discuss discovery.




Chief Administrative Law Judge

August 23, 2002

Columbia, South Carolina

1. Some of the policies at question in this case were originally sold by 33 other insurers who have been acquired by Liberty Life.

2. 42 U.S.C. 1981 and 1982, originally devolved from the Civil Rights Act of 1866, prohibit racial discrimination in the making, performance, modification, and termination of contracts.

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