GENERAL ASSEMBLY OF NORTH CAROLINA

SESSION 1999

H	1 

HOUSE BILL 1106

Short Title:  Insurer Audits Privileged.	(Public)

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Sponsors: Representative Gibson.

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Referred to:  Insurance, if favorable, Judiciary I.

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April 15, 1999

A BILL TO BE ENTITLED
AN ACT TO ESTABLISH A PRIVILEGE FOR AUDITS CONDUCTED BY INSURERS.
The General Assembly of North Carolina enacts:
Section 1.  Article 3 of Chapter 58 of the General Statautes is amended by adding the following new sections to read:
"§ 58-3-220.  Insurance compliance audit and insurance compliance self-critical analysis document defined.
As used in this section and in G.S. 58-3-221 through G.S. 58-3-226, the term ‘insurance compliance audit' means a voluntary internal evaluation, review, assessment, audit, or investigation for the purpose of identifying or preventing noncompliance with, or promoting compliance with, laws, rules, orders, or industry or professional standards, which is conducted by or on behalf of an insurer licensed pursuant to this Chapter.  The term ‘insurance compliance self-critical analysis document' or ‘document' means a document prepared as a result of or in connection with an insurance compliance audit.  An insurance compliance self-critical analysis document may include a written response to the findings of an insurance compliance audit.  The document may include, as applicable, field notes and records of observations, workpapers, findings, opinions, suggestions, conclusions, drafts, memoranda, drawings, photographs, exhibits, computer-generated or electronically recorded information, phone records, maps, charts, graphs, and surveys, provided this supporting information is collected or developed for the primary purpose and in the course of an insurance compliance audit.  If the insurance compliance audit is conducted by an auditor, who may be an employee of the insurer or an independent contractor, the document may include the scope of the audit, the information gained in the audit and conclusions and recommendations, with exhibits and appendices.  The document may also include (i)	memoranda and documents analyzing portions, or all, of the insurance compliance audit report and discussing potential implementation issues, (ii) an implementation plan that addresses correcting past noncompliance, improving current compliance and preventing future noncompliance, and (iii) analytic data generated in the course of conducting the insurance compliance audit.
"§ 58-3-221.  Audit documents privileged.
(a)	An insurance compliance self-critical analysis privilege is created to protect the confidentiality of insurance compliance self-critical analysis documents or communications in regard to their content relating to voluntary internal compliance audits conducted by insurers in regard to activities regulated under this Chapter.  The purpose of the privilege is to protect the actions of insurers in conducting voluntary internal audits of compliance programs and management systems and in assessing and improving compliance with State and federal statutes, rules, and orders.
(b)	Except as provided in G.S. 58-3-222 through G.S. 58-3-224, an insurance compliance self-critical analysis document is privileged information and is not discoverable or admissible evidence in any legal action in any civil, criminal, or administrative proceeding.  The privilege is a matter of substantive law of this State and is not merely a procedural matter governing administrative, civil, or criminal procedures in the courts of this State.
(c)	If an insurer, person, or entity performs or directs the performance of an insurance compliance audit, an officer, employee, or agent involved with the insurance compliance audit or any consultant who is hired for the purpose of performing the insurance compliance audit, shall not be examined in any civil, criminal, or administrative proceeding as to the insurance compliance audit or any insurance compliance self-critical analysis document.  This section does not apply if it is determined under G.S. 58-3-223 or G.S. 58-3-224 that the privilege does not apply.
"§ 58-3-222.  Submission to Commissioner.
(a)	Upon request of the Commissioner, an insurer must submit an insurance compliance self-critical analysis document to the Commissioner, or the Commissioner's designee, as a confidential document without waiving the privilege to which the insurer would otherwise be entitled.  The Commissioner shall not make insurance compliance self-critical analysis documents available to the National Association of Insurance Commissioners.  To the extent the Commissioner has the authority to compel the disclosure of an insurance compliance self-critical analysis document under other provisions of applicable law, any report furnished to the Commissioner shall not be provided to any other person or entity and shall be accorded the same confidentiality and other protections as provided in G.S. 58-3-221 for voluntarily submitted documents.  Any use of an insurance compliance self-critical analysis document furnished as a result of a request of the Commissioner, whether under a claim of authority to compel disclosure or not, is limited to determining whether any disclosed defects in an insurer's policies or procedures or inappropriate treatment of customers has been remedied or that an appropriate plan for their remedy is in place.  The Commissioner shall not impose any type of administrative fine or penalty as to any issue addressed or matter covered in an insurance compliance self-critical analysis document furnished at the Commissioner's request, except where there is clear and convincing evidence that the insurer failed to undertake reasonable corrective action, eliminate inappropriate treatment of customers, or failed to implement an appropriate plan to rectify any noncompliance with State and federal statutes, rules, and orders.
(b)	An insurer's compliance self-critical analysis document submitted to the Commissioner remains subject to all applicable statutory or common law privileges.  An insurance compliance self-critical analysis document submitted to and in the possession of the Commissioner remains the property of the insurer and is not subject to any disclosure or production and are not public records pursuant to G.S. 58-2-100 or G.S. 132-1.
(c)	Disclosure of an insurance compliance self-critical analysis document to a governmental agency, whether voluntary or pursuant to compulsion of law, does not constitute a waiver of the privilege with respect to any other person or any other government agency.
"§ 58-3-223. Waiver of privilege by insurer; grounds for determination of privilege.
(a)	The self-critical analysis privilege does not apply to the extent that it is expressly waived by the insurer that prepared or caused to be prepared the insurance compliance self-critical analysis document.
(b)	In a civil or administrative proceeding, the court, after an in-camera review, may require disclosure of material for which the privilege is asserted, if the court determines either (i) the privilege is asserted for a fraudulent purpose, or (ii) the material is not subject to the privilege.
(c)	In a criminal proceeding, the court, after an in-camera review, may require disclosure of material for which the privilege is asserted, if the court determines one of the following:
(1)	The privilege is asserted for a fraudulent purpose;
(2)	The material is not subject to the privilege; or
(3)	The material contains evidence relevant to commission of a criminal offense, and all three of the following factors are present:
a.	The Commissioner or prosecutor has a compelling need for the information;
b.	The information is not otherwise available; and
c.	The Commissioner or prosecutor is unable to obtain the substantial equivalent of the information by any other means without incurring unreasonable cost and delay.
"§ 58-3-224.  Determination of privilege; procedure.
(a)	If a person seeks from an insurer communications involving an insurance compliance audit or any insurance compliance self-critical analysis document during the course of a pending civil or criminal proceeding, the insurer may assert the self-critical analysis privilege and provide the information set forth in G.S. 58-3-223 during the course of those proceedings just as any other privilege is asserted in the courts of this State.  If the court is required to make a determination as to the privilege, the court shall follow the procedure and conditions set forth in G.S. 58-3-222.
(b)	If there is a pending administrative proceeding, or there is no pending civil or criminal proceeding, the Commissioner or prosecutor may serve on an insurer a written request by certified mail for disclosure of an insurance compliance self-critical analysis document.  Within 30 days after the Commissioner or prosecutor serves on an insurer a written request by certified mail for disclosure of an insurance compliance self-critical analysis document, the insurer that prepared or caused the document to be prepared may file with the Superior Court of Wake County a petition requesting an in-camera hearing on whether the insurance compliance self-critical analysis document or portions of the document are privileged or subject to disclosure.  The superior court has jurisdiction over a petition filed by an insurer under this subsection requesting an in-camera hearing on whether the insurance compliance self-critical analysis document or portions of the document are privileged or subject to disclosure.  Failure by the insurer to file a petition waives the privilege for the specific request made only.
(c)	An insurer asserting the insurance compliance self-critical analysis privilege in response to a request for disclosure under this section shall include in its request for an in-camera hearing all of the information set forth in G.S. 58-3-223.
(d)	Upon the filing of a petition under this section, the court shall issue an order scheduling, within 45 days after the filing of the petition, an in-camera hearing to determine whether the insurance compliance self-critical analysis document or portions of the document are privileged or subject to disclosure.
(e)	The court, after an in-camera review, may require disclosure of material for which the privilege is asserted if the court determines, based upon its in-camera review, that any one of the conditions set forth in G.S. 58-3-223(b) is applicable as to a civil or administrative proceeding or that any one of the conditions set forth in G.S. 58-3-223(c) is applicable as to a criminal proceeding.  Upon making such determination, the court may only compel the disclosure of those portions of an insurance compliance self-critical analysis document relevant to issues in dispute in the underlying proceeding.  A compelled disclosure shall not be considered to be a public document or be deemed to be a waiver of the privilege for any other civil, criminal, or administrative proceeding.  An insurer unsuccessfully opposing disclosure may apply to the court for an appropriate order protecting the document from further disclosure.
(f)	An insurer asserting the insurance compliance self-critical analysis privilege in response to a request for disclosure under this section shall provide at the time of making and filing any objection to the disclosure all of the following information:
(1)	The date of the insurance compliance self-critical analysis document;
(2)	The identity of the entity conducting the audit;
(3)	The general nature of the activities covered by the insurance compliance audit; and
(4)	An identification of the portions of the insurance compliance self-critical analysis document for which the privilege is being asserted.
"§ 58-3-225.  Privilege; burden of proof; stipulation.
An insurer asserting the insurance compliance self-critical analysis privilege has the burden of demonstrating the applicability of the privilege.  Once an insurer has established the applicability of the privilege, a party seeking disclosure has the burden of proving that the privilege is asserted for a fraudulent purpose.  The Commissioner or prosecutor seeking disclosure of the privilege has the burden of proving the elements set forth in G.S. 58-3-223(c)(1) and (3).
The parties may at any time stipulate in proceedings under G.S. 58-3-223 or G.S. 58-3-224 to entry of an order directing whether the specific information contained in an insurance compliance self-critical analysis document is or is not subject to the privilege.  Any such stipulation may be limited to the instant proceeding and, absent specific language to the contrary, is not applicable to any other proceeding.
"§ 58-3-226.  Applicability of privilege.
The self-critical analysis privilege does not apply to:
(1)	Documents, communications, data, reports, or other information expressly required to be collected, developed, maintained, or reported to a regulatory agency pursuant to this Chapter, or other federal or State law;
(2)	Information obtained by observation or monitoring by any regulatory agency; or
(3)	Information obtained from a source independent of the insurance compliance audit."
Section 2.  This act becomes effective October 1, 1999, and applies to all litigation or administrative proceedings instituted on or after that date.