New Hampshire’s Scopes (Manual) trial
Insurance department case shows how administrative law has ‘evolved’
Americans are taught that the powers of our government have been thoughtfully and carefully divided into three distinct categories – legislative, executive and judicial. James Madison wrote that this separation of powers “is admitted on all hands to be essential to the preservation of liberty.” With the advent of the modern administrative state, however, state and federal executive agencies have assumed all three powers within their various areas of regulatory authority.
In almost all states, including New Hampshire, the risks to citizens of combining the three powers of government in the hands of a single branch of government are checked by rights to appeal agency decisions to courts and through legislative oversight of agency regulations. In New Hampshire, these protections are contained in our Administrative Procedure Act, or APA).
While the APA allows agencies to exercise executive, rulemaking and judicial functions, it requires that state agencies remain subject to the careful oversight of the legislature in doing so. When promulgating a regulation with the effective force of law, an agency must submit that regulation to the legislature for review and approval by the joint legislative committee on administrative rules.
This balance works well as long as rulemaking remains with the agency. However, we successfully litigated a case before the NH Insurance Department in June 2014 in which much of the regulatory, decision-making framework had been developed (and was being enforced) by a private organization whose decisions were not, and could not, be subject to legislative or public oversight under the APA.
Worse, the private organization was controlled by private businesses whose economic interests were directly opposed to our client’s.
The case involved Nature’s Classroom, a private nonprofit organization providing environmental education services to students throughout the region. As a New Hampshire employer, Nature’s Classroom was required by law to carry workers’ compensation insurance. Because of the nature of its business, Nature’s Classroom was part of an assigned-risk pool for higher risk businesses. The pool’s rates are set by the Insurance Department under state law and after public hearing.
The department has contracted with a private third party to describe the categories of businesses into which an insured will fall for the purpose of determining its insurance rates in New Hampshire and to determine whether businesses have been placed in the proper category.
These are the most important acts in determining what a business will pay for mandatory workers’ compensation insurance because the category of business may result in a premium that is four or five times higher than another category. The third-party business that develops these categories and confirms their application to a particular business is the National Council on Compensation Insurance, or NCCI. The categories NCCI has developed are set forth in a document called the Scopes Manual.
For decades, our client had been classified as an educational institution under this system. In 2014, NCCI sought to reclassify our client as a “camp,” with substantial negative financial consequences to the business.
As we reviewed the case, we determined that the very act of drawing the detailed classifications upon which the NH Insurance Department would rely to resolve our case amounted to privately promulgated regulations. We were further disturbed by the fact that at least one of the employment categories in the case had been revised by NCCI nine times through a nonpublic process with no legislative oversight.
Perhaps most troubling, we believed that if our client prevailed before the Insurance Department, NCCI could subsequently rewrite the description of the category without any mandatory oversight and reverse the outcome.
We challenged the process in litigation before the department, arguing that it violated the Administrative Procedures Act. The hearing officer, while declining to adopt our legal conclusion, overturned the NCCI determination and ruled in favor of Nature’s Classroom.
We believe this may have been the first time that an insured has bested NCCI in classification litigation before the NH Insurance Department.
The overall lessons from our case are:
• Businesses should be aware of, and concerned about, delegation of the regulatory process to private parties with respect to a wide range of economic matters, including the development of industry standards and guidelines
• Businesses should be prepared to invoke the APA and its underlying separation of powers bargain to challenge the legitimacy of this process or the resulting standards if they are disadvantaged by them.
Michael S. Lewis and Steven J. Lauwers are attorneys in the Financial Institutions Practice of Concord-based Rath, Young and Pignatelli.