STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF INSURANCE, )

)

Petitioner, )

)

vs. ) CASE NO. 91-3416

) DEALERS INSURANCE COMPANY, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, final hearing in the above-styled case was held in Tallahassee, Florida, on June 1, 1992, before Robert E. Meale, Hearing Officer of the Division of Administrative Hearings.

APPEARANCES

The parties were represented at the hearing as follows: For Petitioner: Elizabeth J. Gregovits

Division of Legal Services Department of Insurance

412 Larson Building Tallahassee, FL 32399-0300

For Respondent: Joseph Brennan Donnelly

Greene, Donnelly, et al.

100 S. Ashley Drive, Suite 290 Tampa, FL 33602

STATEMENT OF THE ISSUE

The issue in this case is whether Respondent is guilty of failing to pay Petitioner for the expenses of an examination and, if so, what penalty should be imposed.

PRELIMINARY STATEMENT

By Order to Show Cause filed May 1, 1991, Petitioner alleged that Respondent, which is a licensed domestic insurer, was the subject of an examination from September, 1987, through January, 1989, conducted by Petitioner. The Order to Show Cause alleges that Petitioner incurred expenses of $66,132.95 in performing the examination and that Respondent is required to pay these costs. The Order to Show Cause alleges that, despite repeated demands, Respondent has refused to pay the amount due Petitioner.

Based on the foregoing, the Order to Show Cause alleges that Respondent failed to pay Petitioner the expenses of the examination, in violation of Section 624.320, and violated a lawful order or rule of Petitioner, in violation of Section 624.418(2)(a). The Order to Show Cause alleges that grounds thus

exist for the suspension of Respondent's certificate of authority to conduct insurance business.

By letter dated May 20, 1991, Respondent requested a formal hearing. The letter alleges that Petitioner waived the examination fees in question.

By Order Placing Case in Abeyance entered August 27, 1991, the undersigned abated the case so that a circuit court could be given a chance to determine if it had exclusive jurisdiction over the matter.

By Final Order of Dismissal, the circuit court ordered that the administrative proceedings be reopened and the "hearing officer should proceed to determine the issue of whether the claim of the Florida Department of Insurance was or was not covered by the written stipulation for settlement executed by the parties, and issue a final order or orders with respect thereto."

At the hearing, Petitioner called two witnesses and offered into evidence ten exhibits. Respondent called one witness and offered into evidence three exhibits. All exhibits were admitted.

Neither party ordered a transcript. Each party filed a proposed recommended order. Treatment of the proposed findings is detailed in the appendix.

FINDINGS OF FACT

1. Respondent is a licensed Florida domestic insurer operating under a current certificate of authority.

   
   

2. Prior to the above-styled proceeding, Petitioner and Respondent were involved in another administrative proceeding. Petitioner seeks in the subject case to impose discipline for Respondent's refusal to reimburse Petitioner for audit expenses incurred during and after the prior administrative litigation.

   
   

3. In DOAH Case No. 87-4518, Petitioner alleged, by Notice and Order to Show Cause filed September 11, 1987, that Respondent was in unsound financial condition, using methods of business that rendered its further transacting of insurance hazardous to policyholders and the public, in violation of a lawful order or rule of Petitioner, and in a financial condition that endangered the interests of policyholders, especially because its ratio of net premiums written to surplus exceeded 4:1.

   
   

4. The Notice and Order to Show Cause alleges that the projected annualized ratio of net premiums written to surplus would exceed 4:1 by year- end; Respondent was not properly reserving for losses and expenses in connection with liability policies; the annual and quarterly statements reflect a continuing serious deficiency in loss reserves; financial deterioration seriously endangered the welfare of policyholders and the public; and major material discrepancies existed between Respondent's 1986 annual statement filed with Petitioner and Respondent's 1986 audited annual financial statements.

   
   

5. The major material discrepancies between the financial statements consisted of allegations that the surplus was overstated by $41,327 in the annual statement filed with Petitioner; the loss adjustment expenses and loss reserves were carried at $1.4 million on the annual statement filed with

   Petitioner, but $2.7 million on the financial statement; and the unearned premiums were carried at $3.5 million on the annual statement filed with Petitioner, but $2.1 million on the financial statement.

   
   

6. Three days prior to the filing of the Notice and Order to Show Cause, Petitioner commenced a financial examination of Respondent. The examination, which began on September 8, 1987, was a target examination.

   
   

7. The other type of financial examination conducted by Petitioner is a triennial examination, which is performed not less frequently than every three years. Unlike the triennial examination, a target examination focuses on particular matters--in this case discrepancies between financial statements. Because Respondent commenced doing business on April 5, 1985, it had not yet been the subject of a triennial examination. The target examination is also different from an investigation, which focuses on the business practices of individuals rather than financial matters of insurers.

   
   

8. Due to a perceived lack of reliability with respect to Respondent's accounting records, the scope of the examination was extended to include an analysis of all of Respondent's accounts. This broadening of scope took place during the first audit examination, which culminated with the Report on Examination for the period ending June 30, 1987.

   
   

9. With respect to its examination of Respondent, Petitioner incurred, during the months indicated, the following audit expenses, all of which are reasonable:

No. 87-4518 met to discuss a settlement. Memorializing the meeting, Respondent's counsel acknowledged by letter dated April 13 that Petitioner's counsel indicated a desire "to go back into the company for the purpose of bringing forward the audit that was completed earlier this year." Respondent's counsel suggested a date for Petitioner's auditors to commence another audit and advised that he would postpone discovery in the hopes of settling many of the issues.

1. Negotiations proved successful. On July 14, 1988, the final signatures were affixed to a Joint Settlement Stipulation for Agreed Order (Stipulation). The Stipulation recites in material part:

   
   

   [Petitioner] conducted an investigation of [Respondent], and alleged that it was in violation [of] certain provisions of the

   Florida Insurance Code. These violations included its ratio of net premiums written to surplus as to policyholders and its statutory insurer capital and surplus requirements. [Petitioner] conducted an examination of the company and on March 24, 1988, issued a Report on Examination of [Respondent] as of June 30, 1987.

   
   

2. The Stipulation provides that the Insurance Commissioner may enter an order providing, among other things, that the Stipulation shall be incorporated by reference and that "[e]ach party to this case shall bear its costs, expenses and fees, including attorney's fees." The reference to "expenses" was added at the request of Respondent's counsel.

   
   

3. The Consent Order, which was filed August 2, 1988, incorporates by reference the Stipulation and provides that "each party to this proceeding shall bear its own costs and attorney's fees."

   
   

4. In November or early December, 1988, Respondent received an invoice for audit examination fees incurred from August through October, 1988. As was the case with prior invoices, the invoice recited a past-due amount.

   
   

5. A letter dated December 15, 1988, from Respondent's president responds to the invoice by stating that the past-due amount is "apparently for fees and expenses incurred by [Petitioner] in performance of an audit examination done during the months of September, 1987 through April 1988. This obligation has been satisfied by [the] . . . Stipulation . . .." The December 15 letter does not object to the audit fees incurred during August through October, 1988.

   
   

6. The December 15 letter notes that Petitioner, immediately after filing the Notice and Order to Show Cause in September, 1987, began a "complete audit .

   . . to support its allegations that [Respondent] was in financial circumstances justifying the . . . Order to Show Cause." The letter adds that, pursuant to the Stipulation, Respondent bore its accounting expenses in connection with the audit examination, just as Petitioner must bear its audit examination expenses.

   
   

7. The audit examinations conducted prior to the settlement of DOAH Case No. 87-4518 served the purpose of discovery for Petitioner. Respondent never sought a protective order as to these fact-finding efforts. Although Petitioner conducted no investigation, the allegations in DOAH Case No. 87- 4518 involved Respondent's financial condition, not the business practices of individuals, so an investigation would have been inappropriate.

   
   

8. The early audit examinations culminated in a Report on Examination for the period ending June 30, 1987. The Report on Examination was issued on March 24, 1988.

   
   

9. Later audit examinations culminated in a Report of Examination for the period ending June 30, 1988. This Report of Examination, which was issued on February 26, 1988, states:

   
   

   This is the second report on examination of [Respondent] and represents a continuation and follow-up to the report filed as of June 30, 1987.

10. The effect of the Stipulation and ensuing Consent Order is that Petitioner agreed to absorb all audit examination expenses incurred through the preparation of the Report on Examination for the period ending June 30, 1987. These audit examination expenses ended on or about March 24, 1988, when the first Report on Examination was issued. The March, 1988, audit expenses of

    $645.40 appear to be related to the issuance of the first Report on Examination because all of the activity occurs in the four days prior and two days after March 24. The audit examination expenses incurred through the preparation of the Report on Examination for the period ending June 30, 1987, total $51,278.85.

    
    

11. The letter of December 15, 1988, from the president of Respondent disputes the past-due billing of $51,278.85 because "this obligation" was discharged by the Stipulation. This letter ignores the current billing for audit expenses incurred during August through October, 1988, because the writer knew that these fees were not intended to be covered by the Stipulation.

    
    

12. The letter of April 13, 1988, from Respondent's counsel acknowledges the hiatus disclosed by the monthly statements. By April 13, 1988, there had been a break in audit examinations. The April 13 letter discusses an "updated audit" beginning perhaps May 9, 1988; covering the March 31, 1988, quarter; and hopefully taking less than the five months expended in the first audit resulting in the Report on Examination for the period ending June 30, 1987. In effect, the April 13 letter seeks a settlement in the near future, so that discovery need not be begun, while recognizing that another audit would not be completed for several months. The author of the April 13 letter claims that he

    intended to include in a settlement agreement, which he hoped would be finalized in the near-term, future audit expenses to be incurred over a period of months. If so, the burden was on the author to identify explicitly these future expenses in the Stipulation.

    
    

    CONCLUSIONS OF LAW

    
    

13. The Division of Administrative Hearings has jurisdiction over the subject matter and the parties. Section 120.57(1), Florida Statutes. (All references to Sections are to Florida Statutes.)

    
    

14. Section 624.418(2) provides:

    
    

    [Petitioner] may, in its discretion, suspend or revoke the certificate of authority of an insurer if it finds that the insurer:

    
    

    1. Has violated any lawful order or rule of [Petitioner] or any provision of this code.

15. Section 624.316(1)(a) states: [Petitioner] shall examine the affairs,

transactions, accounts, records, and assets

of each authorized insurer . . . as to the transactions affecting the insurer as often as it deems advisable, except as provided in this section.

26. Section 624.316(2)(a) adds:

[Petitioner] may examine each insurer as often as may be warranted for the protection of the policyholders and in the public interest . . ..

1. Section 624.319(1) provides:

   
   

   [Petitioner] or its examiner shall make a full and true written report of each examination. The examination report shall contain only information obtained from the examination of the records, accounts, files, and documents of relevance to the insurer examined . . . together with relevant conclusions and recommendations of the examiner based thereon.

   
   

2. Section 624.319(2) provides that the examination report and information obtained by the examiner is admissible into evidence in any action or proceeding brought by Petitioner against the person examined.

   
   

3. Section 624.320(1) addresses the matter of payment of audit expenses as follows:

   
   

   Each insurer so examined shall pay [Petitioner] the expenses of the examination at the rates adopted by [Petitioner].

   
   

4. Section 624.4211(1) provides:

   
   

   If [Petitioner] finds that one or more grounds exist for the discretionary revocation or suspension of a certificate of authority issued under this chapter, [Petitioner] may, in lieu of such revocation or suspension, impose a fine upon the issuer.

   
   

5. Section 624.4211(2) and (3) provide respectively for a maximum fine of

   $2500 per violation for a nonwilful violation and $20,000 per violation for a wilful violation.

   
   

6. Petitioner must prove the material allegations against Respondent by clear and convincing evidence. Ferris v. Turlington, 510 So. 2d 292 (Fla. 1987).

   
   

7. If Petitioner lacks the legal authority to relieve Respondent of its statutory obligation to pay the examination expenses, then the meaning of the Stipulation is irrelevant. However, Section 624.320(1) does not prevent Petitioner from entering into an agreement to settle pending litigation and, as part of that agreement, relieve an insurer of all or part of the burden of paying for examination expenses when they are in whole or in part discovery costs.

   
   

8. It is not uncommon to allocate discovery-type expenses incurred through a specific point in time prior to the date of settlement or even as of

   the date of settlement.1/ The audit examinations in connection with the preparation of the Report on Examination for the period ending June 30, 1987, served a dual purpose. These examinations discharged Petitioner's normal responsibilities in monitoring the financial condition of insurers. But these examinations also served as discovery in DOAH Case No. 87-4518. Given the role of these expenses in pending litigation, Petitioner may absorb the cost of such trial preparation to settle the case and avoid the expenditure of even more costs.

   
   

9. The question then arises whether the Stipulation covers all of part of the examination expenses. Although the Consent Order omits mention of "expenses," it incorporates the Stipulation, which requires each party to bear its own "expenses." Until and unless paid by Respondent, the examination expenses were Petitioner's. It is not unusual for a settlement agreement to require each party to bear its own litigation costs. The addition to the Stipulation of "expenses," which is the word used by the statutes to describe examination expenditures, undermines Petitioner's contention that the Stipulation does not address any examination expenses.

   
   

10. But the evidence does not support Respondent's interpretation that all examination expenses were to be absorbed by Petitioner. The effect of the Stipulation is to relive Respondent from the obligation of paying examination expenses of $51,278.85, which represent the cost of preparation of the Report on Examination for the period ending June 30, 1987. The Stipulation imposes upon Petitioner the responsibility for this amount, but not the $14,854.10 incurred after the first examination report was finished (as well as after the execution of the Stipulation).

    
    

11. Requiring one party to absorb expenses incurred into an uncertain future--what turned out to be three months after the date of settlement-- requires explicit language in the settlement document, notwithstanding that the Report of Examination for the period ending June 30, 1988, is a continuation of the report for the earlier period. Such future expenses are not of a type typically included in settlement agreements. Even Respondent's president assumes as much in his letter of December 15, 1988.

    
    

12. Based on the foregoing, Petitioner has proved by clear and convincing evidence that Respondent violated a lawful order when Respondent failed to pay

$14,854.10 of the $66,132.95 claim. Based on Respondent's letter of December 15, 1988, there is little justification for Respondent's refusal to pay the

$14,854.10. The penalty should therefore address not merely the matter of belated compliance with the lawful portion of the order, but a penalty for Respondent's failure to do so. However, the failure to pay the remaining

$14,854.10 was not wilful. Respondent's refusal was not wilful because Respondent could contend (though not successfully) that the later examination expenses were merely a continuation of the earlier expenses and, as such, were covered in the Stipulation.

RECOMMENDATION

Based on the foregoing, it is hereby

RECOMMENDED that the Department of Insurance enter a final order suspending the certificate of authority of Respondent until the earlier of: a) six months or b) such time as Respondent complies with prior lawful orders of the Department of Insurance by remitting the sum of $14,854.10 and pays an administrative fine of $2500.

ENTERED this 15 day of July, 1992, in Tallahassee, Florida.

ROBERT E. MEALE

Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, FL 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 15 day of July, 1992.

ENDNOTES

1/ Actually, if the cutoff were July 14, 1988, when the Stipulation was finally executed, the allocation of expenses would be the same. All of the July expenses were incurred after July 14 and no expenses were incurred in April or May. Thus, Petitioner would bear the same amount--$51,278.85--regardless whether the cutoff date were the completion of audit work in connection with the Report on Examination for the period ending June 30, 1987, or the execution of the Stipulation.

APPENDIX

Treatment Accorded Proposed Findings of Petitioner 1-9: adopted or adopted in substance.

10: rejected as unsupported by the appropriate weight of the evidence. 11: rejected as subordinate and irrelevant.

12: adopted in substance. The May 13 date marks when the first examination report was filed as a public document. However, the document was sent to Respondent on March 24 with authorization for Respondent to reproduce the document.

13: rejected as unsupported by the appropriate weight of the evidence as to audit expenses incurred prior to the end of March, 1988.

14: adopted as to the entire $66,000+. 15: rejected as recitation of evidence.

16: rejected as legal argument and irrelevant. 17-18: rejected as irrelevant.

19: rejected as legal argument and recitation of evidence.

20: rejected as unsupported by the appropriate weight of the evidence.

Treatment Accorded Proposed Findings of Respondent 1-5: adopted or adopted in substance.

6: rejected as unsupported by the appropriate weight of the evidence. A second audit commenced following the conclusion of the first audit in late March, 1988. Although the second audit was a continuation of the first, the two audits are, for the reasons set forth in the recommended order, separate for the purposes of interpreting the Stipulation.

7-8: adopted or adopted in substance.

9-10, 18, and 22: rejected as irrelevant. There is insufficient evidence to determine whether the dismissal of the appeal and abandonment of federal court civil rights litigation represented the relinquishment of valuable rights by Respondent.

11-11.1: rejected as subordinate.

12-14: adopted or adopted in substance.

15: rejected as unsupported by the appropriate weight of the evidence.

16: rejected as unsupported by the appropriate weight of the evidence. The last signature, evidenced by initials, was affixed on July 14, 1988; until then, the document was not fully executed.

17: adopted.

19-20: adopted in substance. 21: rejected as irrelevant.

23 and 25: rejected as unsupported by the appropriate weight of the evidence.

24: rejected as recitation of evidence. 26: adopted.

COPIES FURNISHED:

Attorney Elizabeth J. Gregovits Division of Legal Services Department of Insurance

412 Larson Building Tallahassee, FL 32399-0300

Attorney Joseph Brennan Donnelly Greene, Donnelly, et al.

100 S. Ashley Drive, Suite 290 Tampa, FL 33602

Hon. Tom Gallagher

State Treasurer and Insurance Commissioner The Capitol, Plaza Level

Tallahassee, FL 32399-0300

Bill O'Neil, General Counsel Department of Insurance

The Capitol, PL-11 Tallahassee, FL 32399-0300

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions to this Recommended Order. All agencies allow each party at least 10 days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should contact the agency that will issue the final order in this case concerning agency rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.

Docket for Case No: 91-003416

Orders for Case No: 91-003416