STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

INSURANCE SERVICES OFFICE, et al. )

)

Petitioners, )

)

vs. ) CASE NO. 79-2432RX

) DEPARTMENT OF INSURANCE, STATE ) OF FLORIDA, )

)

Respondent. )

) GOVERNMENT EMPLOYEES INSURANCE ) COMPANY, et al., )

)

Petitioners, )

)

vs. ) CASE NO. 79-2433RX

)

DEPARTMENT OF INSURANCE, )

)

Respondent. )

) STATE FARM MUTUAL AUTOMOBILE ) INSURANCE COMPANY, )

)

Petitioner, )

)

vs. ) CASE NO. 79-2434RX

) STATE OF FLORIDA, DEPARTMENT OF ) INSURANCE, )

)

Respondent. )

)

FINAL ORDER

This cause came on for final hearing before the undersigned Hearing Officer beginning on January 21, 1980, and concluding on January 31, 1980. By stipulation the parties to this proceeding waived the statutory requirements that a final order be rendered within thirty days after the final hearing.

A list of appearances entered in this cause is omitted because of its length. Such a list can be found elsewhere in the record of this proceeding.

This is an action pursuant to Section 120.56, Florida Statutes, wherein Petitioners seek an administrative determination of the invalidity of Rule 4- 43.03, Florida Administrative Code ("Rule") of the Florida Department of Insurance ("Department or Respondent"). Three separate petitions were initially filed challenging the same rule which, by agreement of the parties, were

consolidated for final hearing. Nationwide Mutual Fire Insurance Company was subsequently allowed to intervene as a party Petitioner.

Petitioners argue that the rule is invalid for four reasons. These reasons are (1) that the rule extends, modifies, conflicts with or enlarges upon the requirements of the Florida Insurance Code and thus exceeds Respondent's rulemaking authority; (2) that the Economic Impact Statement prepared by the Department in promulgation of the rule is inadequate; (3) that the rule is arbitrary and capricious; and (4) that Respondent failed to comply with the procedural requirements of Chapter 120, Florida Statutes, and the rules thereunder. Resolution of the first two issues set forth above being dispositive of this matter, this order does not deal with the last two issues.

Having considered all testimony, evidence, and argument of counsel the Hearing Officer finds the following:

FINDINGS OF FACT

1. Respondent, Department of Insurance, is an agency of the State of Florida. Respondent, Bill Gunter, as Insurance Commissioner of the State of Florida, is the agency head of the Department of Insurance.

   
   

2. Petitioner, Insurance Services Office, is a rating organization qualified to transact, and is transacting, specified rate-making services in Florida pursuant to a certificate of authority issued by Respondent. The other petitioners are foreign corporations authorized to do business in the State of Florida. They are licensed as automobile casualty insurers by Respondent and transact automobile and casualty insurance business in the State of Florida.

   
   

3. The Department has adopted Rule 4-43.03, Florida Administrative Code which provides:

   
   

   4-43.03 Unfair discrimination in private passenger motor vehicle insur- ance rates - based on sex, marital status and scholastic achievement.

   1. No insurer authorized to engage in the business of insurance in the State of Florida shall establish classi-

      fications or premium rates for any policy, contract or certificate of private pas- senger motor vehicle insurance based

      upon the sex, marital status or scholastic achievement of the person or persons insured.

   2. This rule shall become effective on March 1, 1980.

      
      

4. The purpose of the proposed rule is to eliminate the use of sex, marital status and scholastic achievement criteria in the formulation of private passenger automobile insurance premium rates.

   
   

5. Tile business which Petitioners conduct in the State of Florida involves, in some direct manner, the setting of private passenger automobile insurance premium rates. In the formulation of these rates Petitioners use, in part, sex, marital status or scholastic achievement criteria, or some combination thereof.

6. Petitioners, with the exception of Petitioner Insurance Services Office, are insurance companies competing with one another in the private passenger automobile insurance market in Florida. They represent a very significant portion of the private passenger automobile insurance business in Florida. All of their premium rates for such insurance are formulated using sex, marital status, or scholastic achievement, or some combination thereof, along with other factors. The rule would apparently invalidate all of the rate classification plans by which Petitioners set premium rates Presently in force in Florida. To comply with the rule the Petitioners will have to devise and implement new rate classification plans. Such an action is a major undertaking by an insurance company.

   
   

7. Prior to the adoption of the rule the Department's historic interpretation of the Florida Insurance Code and specifically Section 626.9541(15)(h), Florida Statutes, has allowed rate classification plans using sex, marital status and scholastic achievement criteria in their formulation. Such criteria have historically been part of rate classification plans and, prior to adoption of the rule, have never been disapproved by the Department.

   
   

8. It should be noted that Florida is a "use and file" state wherein an insurer files its rate classification plan with the responsibility then shifting to the Department to challenge the validity of that plan.

   
   

9. The Respondent did not offer evidence or testimony sufficient to establish that factual changes of any nature have occurred, or that the Department has become aware of new factual information, which would support a deviation from their historic interpretation of the Florida Insurance Code. Historically the Department has not considered rate classification plans which use sex, marital status and scholastic achievement, along with other criteria in their formulation to be "unfairly discriminatory as that term is used in the Florida Insurance Code.

   
   

10. As confirmed by the testimony of the Chief Actuary and Director of the Division of Insurance Rating for the Department, as well as expert actuaries testifying on behalf of Petitioners, the best way to equitably reflect differences in expected losses among insureds is to reflect those differences as accurately as possible. From an actuarial standpoint the most equitable classification factors are those that are the most actuarially sound. The classification factors of sex, marital status and scholastic achievement, in light of the present state of the art in the industry, enhances the actuarial soundness of a rate classification for automobile insurance. The Chief Actuary and Director of the Division of Insurance Rating for the Department did not know of any classification plan that eliminated sex, marital status and scholastic achievement as classification factors that is as actuarially accurate as Petitioner State Farm's present classification plan which uses some or all of those classification factors.

    
    

11. Respondents have admitted that Section 626.9541 (15)(h), Florida Statutes, (which reads

    
    

    No insurer shall, with respect to premiums charged for automobile insurance, unfairly discriminate solely on the basis of age, sex, marital status or scholastic achievement)

    does not absolutely prohibit all discrimination on the basis of sex, marital status, or scholastic achievement. In the insurance industry rate classifications necessarily discriminate between different classes of individuals with different levels of expected losses and exposure. Such discrimination is not necessarily unfair.

    
    

12. The Economic Impact Statement promulgated by the Department in the adoption of the rule was prepared by Mark Trafton III, Chief Actuary and Director of the Division of Insurance Rating for the Department.

    
    

13. The elimination of the subject criteria by the Rule will require insurance companies writing automobile insurance in Florida to devise and file new rate classification plans. Such action on the part of the insurance companies will cause them to incur expenses, possibly substantial in nature. The Economic Impact Statement contains no estimate of, nor reflects any inquiry into, the expense to the industry or individual insurance companies of devising new rate classification plans for use in Florida.

    
    

14. In Paragraph 1 of the Economic Impact Statement it is estimated that the cost to the Department of implementing the Rule will be approximately

    $6,000.00. The evidence establishes that this estimate, at best, reflects only the cost to the Department of the adoption process. It is not intended to reflect any cost to the Department of the actual implementation of the Rule. It is reasonable to assume that because of the Rule there will be a significant increase in the number of rate filings with the Department which the Department will be required to review. The Economic Impact Statement reflects no assessment of any kind, of this potential cost to the Department.

    
    

15. There is a class of individuals in Florida presently receiving the benefit of discounted premiums through "good student discounts" offered by one or more insurance companies. This class of individuals will be adversely affected by the Rule in that they may no longer receive the discount they are now receiving. No estimate of this cost to that class of individuals is reflected in the Economic Impact Statement and, in fact, no such estimate was made. Further, the testimony establishes that there was no reason why such an estimate could not have been included in the Economic Impact Statement and its omission was probably an oversight by the preparer of the statement.

    
    

16. The evidence establishes that the Department has changed its interpretation of the word "equitably" as used in Section 627.0651(6), Florida Statutes (1979), as well as its interpretation of the phrase "unfair discrimination" as contained in the Florida Insurance Code relevant to this proceeding.

    
    

    CONCLUSIONS OF LAW

    
    

17. The Division of Administrative Hearings has jurisdiction of this cause.

    
    

18. Rule 4-43.03, Florida Administrative Code, is

    a rule as defined by Section 120.52(14), Florida Statutes (1979).

    
    

19. Petitioners are Substantially affected by the Rule.

    
    

20. The Florida Administrative Procedure Act in Section 120.56(1) Florida Statutes, provides that any person substantially affected by a rule may seek an

    administrative determination of the invalidity of the rule on the ground that it is "..an invalid exercise of delegated legislative authority". In determining the issues before this proceeding we are concerned not with the validity of any action taken by Petitioners prior to or subsequent to the adoption of the rule, but rather with the validity of the rule adopted by the Department. The validity of the rate classification plans presently in use by Petitioners is not an issue in this proceeding.

    
    

21. No agency has inherent rulemaking authority. Section 120.54(14), Florida Statutes. Therefore, one must look to the specific statutory grant of authority to an agency by the legislature to determine the validity of a rule. In this case the Department, in adopting the rule challenged herein, cited as specific authority for its adoption, Section 624.308(1) and Section 626.9611,

    Florida Statutes. The first citation provides that

    
    

    The department may make reasonable rules and regulations necessary for or as an aid to the effectuation of

    any provision of this code as referred to therein. No such rule or regulation shall extend, modify, or conflict with any law of this state or the reasonable

    -- implications thereof. The second citation provides that

    The department may, in accordance

    with chapter 120, promulgate reasonable rules as are necessary or proper to identify specific methods of competition or acts or practices which are prohibited

    by s. 626.9541 or Section 626.9551, but-the rule shall not enlarge upon or extend the provisions of 55. 626.9541 and 626.9551.

    
    

    It is further the common law of this state that administrative agencies may not adopt rules which conflict with, modify, or enlarge upon an existing statute.

    Seitz v. Duval County School Board, 366 So.2d 119, 121 (Fla. 1st DCA 1979); State Department of Transportation v. Pan American Construction Company, 338 So.2d 1291, 1293 (Fla. 1st DCA 1976, Appeal dismissed, 345 So.2d 427 Fla. 1977); DeThorne v. Beck, 280 So.2d 448, 449 (Fla. 4th DCA 1973); Florida Growers Coop Transport v. Department of Revenue, 273 So.2d 142, 144 (Fla. 1st DCA 1973).

    
    

22. It is unquestioned that the Department has the authority to adopt reasonable and necessary rules implementing the Florida Insurance Code and identifying specific methods of competition or acts or practices which are prohibited by part of that code so long as they do not, in the exercise of that rule-making authority, enlarge upon, extend, modify or conflict with any other statute or its reasonable implications. In adopting the subject rule the Department stated that it was implementing Section 627.031 (1)(a) , Florida Statutes wherein it is stated that the purpose of part of the Florida Insurance Code is to .. promote the public welfare by regulating insurance rates as herein provided to the end that they shall not be excessive, inadequate, or unfairly discriminatory The Department further stated that the Rule implements Section 627.062(1), Florida Statutes wherein it is provided that "the rates for all classes of insurance to which the provisions of this part are applicable

    shall not be excessive, inadequate, or unfairly discriminatory." The Department stated that the Rule also implements Section 627.0651, Florida Statutes, subsection (6) of which provides one rate shall be deemed unfairly discriminatory in relation to another in the same class if it clearly fails to reflect equitably the difference in expected losses and expenses". The common thread through these three provisions of law which the Department attempts to implement through the Rule is the phrase "unfairly discriminatory".

    
    

23. The final provision of law which the Department states it is implemention the adoption of the Rule is Section 626.9541(15)(h) , Florida Statutes. This provision is the heart of the controversy at issue in this cause. It provides that "no insurer shall, with respect to premiums charged for automobile insurance, unfairly discriminate solely on the basis of age, sex, marital status or scholastic achievement". Again we find the common thread, the phrase "unfairly discriminate".

    
    

24. In rate setting in the automobile insurance industry discrimination is not prohibited by statute. Rates discriminate among classes of individuals when different classes are charged differing rates because of differing expected losses and exposure. However, insurance companies in Florida are, by law, prevented from setting rates that unfairly discriminate. Specifically, the legislature, in Section 626.9541(15)(h) , Florida Statutes, prohibited unfair discrimination based solely on sex, marital status, or scholastic achievement with respect to premiums charged for automobile insurance. Implicit in that prohibition as set forth in the statute is the authority, with respect to premiums charged for automobile insurance, to discriminate on the basis of sex, marital status or scholastic achievement so long as such discrimination is not unfair and solely on that basis. The Department of Insurance has adhered to this interpretation of the statute for the life of the statute, as evidenced, in part, by its approval of rate classifications based partially on classification criteria including sex, marital status, or scholastic achievement. Thus, the historic interpretation of the statute by the agency charged with its implementation is that there can be fair discrimination based, in part, on the use of criteria such as sex, marital status, or scholastic achievement. The Florida Insurance Code does not prohibit all rate classifications or premiums based upon those that are solely based on those factors that unfairly discriminate.

    
    

25. Comparing the statute, Section 626.9541(15)(h), Florida Statutes, to the Rule in question, they clearly conflict. Rule 4-43.03, Florida Administrative Code, is a blanket prohibition against the use of sex, marital status or scholastic achievement in the formulation of premiums or rate classifications for private passenger automobile insurance. Such a prohibition extends, modifies, and conflicts with the cited statutory provision. The Department does not have the authority to adopt a rule that extends, modifies or conflicts with a statute and therefore the rule is invalid.

    
    

26. It might be argued that the rule does not conflict with the statute if, in fact, any use of sex, marital status or scholastic achievement in the formulation of private passenger automobile insurance premium rates necessarily unfairly discriminates solely on the basis of those criteria. The facts proven in this cause do not support such an argument. It is not necessary to determine the validity of the present rate classification plans of Petitioners to determine from the facts presented in this case and set forth above, that partial use of sex, marital status, and scholastic achievement as criteria in the formulation of private passenger automobile insurance premium rates can enhance the predictive accuracy of a rate classification plan and thus enhance

    the equitability of premiums. Thus it has been established that the use of the criteria prohibited by the Rule does not necessarily result in unfair discrimination.

    
    

27. Section 120.54, Florida Statutes, sets forth the procedural and substantive requirements for the adoption of a rule by an agency. Subsection (2)(a) of that section provides that prior to the adoption of a rule an agency shall prepare a detailed Economic Impact Statement and sets out what that statement shall include. In part it requires an estimate of the cost to the agency of the implementation of the proposed rule, and an estimate of the cost or economic benefit to all persons directly affected by the proposed rule. It further requires an estimate of the impact of the proposed action on competition on the open market for employment, and a detailed statement of the data and method used in making each estimate. Subsection (2)(c) of Section 120.54, Florida Statutes provides that: "Failure to provide an adequate statement of economic impact is grounds for holding the rule invalid In this cause the evidence establishes that, while the Economic Impact Statement estimated the cost to the agency of adopting the Rule, it made no estimate of the cost to the agency of the implementation of the proposed action, including the estimated amount of paper work. Similarly, the evidence establishes that a group of individuals who are presently enjoying the advantages of "good student discounts" will be directly affected by the Rule because it eliminates such discounts, yet the Economic Impact Statement contains no estimate of the cost or economic benefit to those persons. This is not a situation where the agency has found that there will be no economic impact. Rather, it is a situation where no estimate has been made of the economic impact. In fact, the evidence presented in this proceeding strongly indicates that the Rule will economically impact both the Department and the class of individuals enjoying "good student discounts". The Supreme Court of Florida in Florida-Texas Freight, Inc., Petitioner vs. Paula F. Hawkins, et al., Respondents, Case No. 53,303, Opinion filed December 13, 1979, made the following observation with regard to the requirement of an Economic Impact Statement found in Section 120.54(2)(a), Florida Statutes:

    
    

    By this provision the legislature seeks to promote agency introspection in administrative rulemaking. The process of formulating rules and regulations involves an interplay between social and economic factors and the legislative goals underlying agency action. In order to ensure a comprehensive and accurate analysis

    of economic factors in this the

    120.54 (2)(a), to prepare an explicit statement delineating the short-and long-term economic consequences of a proposed rule. Such a procedure directs agency attention to certain key con- siderations and thereby facilitates informed decision making. It also serves the salutary purpose of opening up the administrative process to public scrutiny.

    
    

    The Economic Impact Statement prepared by the Department in this cause is not that explicit statement delineating the short and long-term economic consequences of the subject rule as required by statute and articulated by the court. The Department having failed to provide an adequate statement of economic impact, the Rule must be held invalid pursuant to subsection 120.54(2)(c), Florida Statutes.

28. As noted above, the issues thus far discussed in this order are dispositive of the matter at hand, and it is therefore not necessary to determine the other issues raised by Petitioners.

All proposed findings of fact and conclusions of law not incorporated in this order have been considered by the Hearing Officer and rejected as not established by the evidence, irrelevant, or unnecessary to the final determination of this cause.

Based upon the foregoing Findings of Fact and Conclusions of Law, it is therefore

ORDERED:

1. Rule 4-43.03, Florida Administrative Code, is an invalid exercise of delegated legislative authority.

   
   

2. All motions in this cause not otherwise granted or denied are hereby denied.

DONE and ORDERED this 3rd day of April, 1980, in Tallahassee, Florida.

CHRIS H. BENTLEY, Director

Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301

(904) 488-9675

COPIES FURNISHED:

Vincent J. Rio, III, Esquire

1500 American Heritage Life Building Jacksonville, Florida 32202

William A. Gillen, Esquire

W. Donald Cox, Esquire Post Office Box 1438 Tampa, Florida 33601

Richard C. McFarlain, Esquire 666 Lewis State Bank Building Tallahassee, Florida 32301

Dean Bunch, Esquire Post Office Box 1170

Tallahassee, Florida 32302

Wade L. Hopping, Esquire Richard D. Melson, Esquire Post Office Box 6526 Tallahassee, Florida 32301

Allan J Katz, Esquire Patrick F. Maroney, Esquire Department of Insurance

The Capitol

Tallahassee, Florida 32304

Carroll Webb Executive Director

Joint Administrative Procedures Committee

120 Holland Building Tallahassee, Florida 32301

Ms. Liz Cloud Department of State Room 1802, The Capitol

Tallahassee, Florida 32301

Docket for Case No: 79-002432RX

Orders for Case No: 79-002432RX