STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

LIBERTY NATIONAL FIRE )

INSURANCE COMPANY, )

)

Petitioner, )

)

vs. ) CASE NO. 93-5803

)

DEPARTMENT OF INSURANCE AND )

TREASURER, )

)

Respondent. )

)

RECOMMENDED ORDER

By stipulation of the parties, this case has been submitted for preparation of a Recommended Order on the basis of stipulated facts. The assigned Hearing Officer is Michael M. Parrish. Appearances for the parties are as follows:

APPEARANCES

For Petitioner: Mark A. Cohen, Esquire

Mark A. Cohen & Associates, P.A. 1221 Brickell Avenue, Suite 1780

Miami, Florida 33131

For Respondent: Nancy Aliff, Esquire

Department of Insurance Division of Legal Services 612 Larson Building

Tallahassee, Florida 32399 STATEMENT OF THE ISSUES

In their Statement of Stipulated Facts the parties have described the issues as follows:

1. It is the position of Liberty National that the issue before the Division of Administrative Hearing is whether in complying with the moratorium, Liberty National is in direct breach of its reinsurance contracts, and whether without such reinsurance coverage, Liberty National faces an unreasonable risk of insolvency.

2. It is the position of the Department that the issue before the Division of

Administrative Hearings is whether based upon the facts in this case, the application which Liberty National submitted to the Florida Department of Insurance met the requirements

of Section 1(4) of 93-401 Laws of Florida and Emergency Rule 4ER93-20, and therefore [whether] Liberty National was entitled to an exemption from the Moratorium.

PRELIMINARY STATEMENT

Following a Department decision denying the Petitioner's request for an exemption from the moratorium imposed by Emergency Rule 4ER93-18 and House Bill 89-B (Chapter 93-401, Laws of Florida), the Petitioner filed a petition seeking a formal hearing on the denial decision. Thereafter, the parties submitted a written stipulation in which they stipulated to a number of facts and also stipulated to inclusion of a number of documents in the record of this proceeding.

The parties agreed to waive a formal hearing in this case and to submit the case to the Hearing Officer on the basis of the stipulated facts and documents. The parties also agreed to deadlines of January 3, 1994, for the filing of their briefs on the legal issues and of January 10, 1994, for the filing of reply briefs. Both parties filed timely briefs and reply briefs. The parties' briefs have been carefully considered during the preparation of this Recommended Order. The findings of fact which follow are based on the parties' stipulations.

FINDINGS OF FACT

1. Liberty National Fire Insurance Company (hereinafter referred to as "Liberty National") is a licensed foreign insurer in the State of Florida and subject to the jurisdiction and regulation of the Florida Department of Insurance (hereinafter referred to as "Department"), pursuant to Chapter 624, Florida Statutes.

   
   

2. Liberty National is headquartered in Birmingham, Alabama, and writes business in 45 states, in direct personal lines business, direct commercial lines business, and almost an equal amount of assumed reinsurance.

   
   

3. Prior to Hurricane Andrew, as of August 1, 1992, Liberty National had approximately 40,000 personal line policies in the State of Florida. This figure includes all personal lines; the homeowners, preferred homeowners, special homeowners, industrial fire, business resale, and mobile homes.

   
   

4. In 1987 Liberty National started writing mobile home programs with the Raymond Patterson Agency as their managing general agent.

   
   

5. On May 19, 1993, the Department of Insurance promulgated emergency Rule

   4 ER93-18. Subsection (3) imposed a 90 day moratorium on cancellations and nonrenewals of personal lines residential property insurance on the basis of hurricane claims. Subsection (4) provided: "This rule shall not apply if the insurer can affirmatively demonstrate to the Department that the proposed cancellation or nonrenewal is necessary for the insurer to avoid an unreasonable risk of insolvency."

6. In direct response to the devastation in the wake of Hurricane Andrew and the resulting nonrenewals and cancellations of homeowner coverage by insurers, at Special Session B (1993) of the Florida Legislature, Section 1 of Chapter 93-401, Laws of Florida (HB 89-B) was passed which provided for a "moratorium on cancellation and nonrenewal of residential property coverage." This "moratorium law" was signed by the Governor on June 8, 1993, and by its terms was effective from May 19, 1993, until November 14, 1993.

   
   

7. Subsection (1) of the moratorium law sets forth the "Findings and Purpose" of the Legislature in passing the bill:

   
   

   1. FINDINGS AND PURPOSE. -- The Legislature finds that property insurers, as a condition

      of doing business in this state, have a responsibility to contribute to an orderly market for property insurance and that there is a compelling state interest in maintaining an orderly market for property insurance.

      . . . The Legislature further finds that the massive cancellations and nonrenewals announced, proposed, or contemplated by certain insurers constitute a significant danger to the public health, safety, and welfare, especially in the context of a new hurricane season, and destabilize the insurance market. In furtherance of the overwhelming public necessity for an orderly market for property insurance, it is the intent of the Legislature to impose, for a limited time, a moratorium on cancellation or nonrenewal of personal lines residential property insurance policies.

      
      

8. Subsection (3) describes the nature of the moratorium imposed by the Legislature:

   
   

   (3) MORATORIUM IMPOSED. -- Effective May 19, 1993, no insurer authorized to transact insurance in this state shall, until the expiration of this section pursuant to subsection (6), cancel or nonrenew any

   personal lines property insurance policy in this state, or issue any notice of cancellation or nonrenewal, on the basis of risk of hurricane claims. All cancellations or nonrenewals must be substantiated by underwriting rules filed with and accepted for use by the Department of Insurance, unless inconsistent with the provisions of this section. The Department of Insurance is hereby granted all necessary power to carry out the provisions of this section.

9. On June 4, 1993, Respondent, Department of Insurance (DOI) filed 4ER93-

   20 (published in the Florida Administrative Weekly, Vol. 19, No. 24, pp. 3398- 3400), indicating that the laws implemented included the moratorium law, Subsections 626.9541(1)(a)(d)(x) and Section 627.4133 of the Florida Insurance Code.

   
   

10. The Emergency rule 4ER93-20 is entitled "Procedures For Applying for Moratorium Exemption and Required Insurer Corrective Action on Previous Notices of Cancellation or Nonrenewal" and indicates as follows:

    
    

    The purpose of this rule is to enumerate the procedures required for an insurer to be granted an exemption to that rule [the Department moratorium Rule 4ER93-18]; and to specify corrective action required of any insurer which has sent out a notice of cancellation or nonrenewal which is prohibited under the moratorium.

    
    

11. On June 15, 1993, Liberty National submitted a request for an exemption from the Moratorium.

    
    

12. In the request for partial exemption, Liberty National requested the nonrenewal of approximately 6,000 of 17,000 mobile home policies on one program only, which were written through Raymond Patterson Agency of Fort Lauderdale.

    
    

13. The basis for Liberty National's request for exemption, was that subsequent to Hurricane Andrew they incurred problems with their ceded reinsurance program. Liberty National alleges that the problem with the reinsurance was that Liberty National was only able to secure foreign reinsurance and no domestic reinsurance. Liberty National is continuously trying to obtain domestic reinsurance.

    
    

14. Effective July 1993 Liberty National's reinsurance provides caps for each county based on a Tier System dividing the counties in Florida into Tier 1, Tier 2, and Tier 3 counties. The cap for Tier 1 counties is $7,500,000; Tier 2 is $15,000,000; and Tier 3 is $25,000,000. A chart was submitted to the department as part of Liberty National's exemption application with the total exposure that Liberty National has in each county.

    
    

15. Liberty National had also contracted with a firm, Applied Insurance Research, which does windstorm analysis for various companies, to develop loss scenarios, and this information was submitted to the Department as part of the application.

    
    

16. On August 12, 1993, Liberty National submitted additional information to the Department, pursuant to their exemption request. In the material Liberty National reported surplus as of December 31, 1992, in the amount of $66,798,297, and a contribution by Tourchmark of $50,000,000 additional capital on July 16, 1993.

    
    

17. On August 19, 1993, the Department held a public hearing on Liberty National's request for partial exemption at which Liberty National introduced two exhibits that contained supplemental information regarding Liberty National's application for partial exemption.

18. On September 2, 1993, the Department issued a letter denying Liberty National's request for exemption.

    
    

    CONCLUSIONS OF LAW

    
    

19. The Division of Administrative Hearings has jurisdiction over the parties to and the subject matter of this proceeding. See, Section 120.57, Florida Statutes. See also, the discussion of jurisdiction at paragraphs 39-40 of the conclusions of law in the Recommended Order in Prudential Property and Casualty Company of Indiana v. State, Department of Insurance, DOAH Case No. 93- 5362 (RO issued November 12, 1993).

    
    

20. Disposition of the issues in this case requires a consideration of some of the provisions of Chapter 93-401, Laws of Florida, which became a law on June 8, 1993. Attention is directed to the following provisions of that law:

    
    

    Section 1. Moratorium on cancellation and nonrenewal of residential property coverages.

    
    

    1. FINDINGS AND PURPOSE. -- The Legislature finds that property insurers, as a condition

       of doing business in this state, have a responsibility to contribute to an orderly market for property insurance and that there is a compelling state interest in maintaining an orderly market for property insurance.

       The Legislature further finds that Hurricane Andrew, which caused over $16 billion of insured losses in South Florida has reinforced the need of consumers to have reliable homeowner's insurance coverage; however, the enormous monetary impact to insurers of Hurricane Andrew claims has prompted insurers to propose substantial cancellation or nonrenewal of their homeowner's policyholders. The Legislature further finds that the massive cancellations and nonrenewals announced, proposed, or contemplated by certain insurers constitute a significant danger to the public health, safety, and welfare, especially in the context of a new hurricane season, and destabilize the insurance market. In furtherance of the overwhelming public necessity for an orderly market for property insurance, it is the intent of the Legislature to impose, for a limited time, a moratorium on cancellation or nonrenewal of personal lines residential property insurance policies.

    2. APPLICABILITY. -- This section applies to personal lines residential property insurance in this state. The term "personal lines residential property insurance" includes the following coverages: homeowner's; condominium unit owner's; mobile homeowner's, including mobile home coverage

       written on auto physical damage type policies; and dwelling fire including rental dwelling coverages. This section does not apply to commercial coverages and does not apply to commercial or private passenger auto coverages.

    3. MORATORIUM IMPOSED. -- Effective May 19, 1993, no insurer authorized to transact insurance in this state shall, until the expiration of this section pursuant to subsection (6), cancel or nonrenew any

       personal lines property insurance policy in this state, or issue any notice of cancellation or nonrenewal, on the basis of risk of hurricane claims. All cancellations or nonrenewals must be substantiated by underwriting rules filed with and accepted for use by the Department of Insurance, unless inconsistent with the provisions of this section. The Department of Insurance is hereby granted all necessary power to carry out the provisions of this section.

    4. EXCEPTION. -- This section shall not apply if the insurer can affirmatively demonstrate to the department that the proposed cancellation or nonrenewal is necessary for the insurer to avoid an unreasonable risk of insolvency. In reaching this determination the department shall consider the insurer's size, its market concentration, its general financial condition, the degree to which personal lines residential property insurance comprises its insurance business in this state and the way in which these factors impact on the risk to the insurer's solvency in relation to its probable maximum loss in the event of a hurricane. In no event shall any insurer be required to risk more than its total surplus to any objectively defined probable maximum loss resulting from one Florida hurricane loss event. In the event that the department determines that the moratorium does not apply in whole or in part and the department further determines that the exception affects more than 1 percent of any class of business within the personal lines residential property insurance market in this state, the department shall in the order set forth a nonrenewal, cancellation, or withdrawal schedule that avoids unnecessary market disruption or exposure to the insureds statewide or in any locale. The department must respond to an application for a waiver under this subsection with a final decision within 90 days after it receives the application for a waiver.

    5. PENALTY. -- Any violation of this section constitutes a violation of the Insurance Code. Each cancellation or nonrenewal of a policy in violation of this section shall be considered a separate action.

    6. REPEAL. -- This section is repealed on November 14, 1993. [Emphasis added.]

       
       

21. Attention must also be given to the more recent provisions of Chapters 93-410 and 93-411, Laws of Florida, both of which became effective on November 10, 1993. Chapter 93-410, Laws of Florida, at Section 19, created a new Section 627.7013, Florida Statutes, the catch line of which reads, "Orderly markets for personal lines residential property." Chapter 93-411, Laws of Florida, amended numerous provisions of the newly created Section 627.7013, Florida Statutes. As amended, the newly created Section 627.7013, Florida Statutes, reads as follows in pertinent part:

    
    

    (2) Moratorium phaseout. --

    (a) Effective upon the expiration of the moratorium on cancellation or nonrenewal of personal lines residential property insurance policies under ch. 93-401, Laws of Florida, the following restrictions shall apply to the cancellation or nonrenewal of personal lines residential property insurance policies that were in force on November 14, 1993, and were subject to the moratorium:

    1. In any 12-month period, an insurer may not cancel or nonrenew more than 5 percent of its homeowner's policies, 5 percent of its mobile home owner's policies, or 5 percent of its personal lines residential policies of all types and classes in the state for the purpose of reducing the insurer's exposure to hurricane claims and may not, with respect to any county, cancel or nonrenew more than 10 percent of its homeowner's policies, 10 percent of its mobile home owner's policies, or 10 percent of its personal lines residential policies of all types and classes in the county for the purpose of reducing the insurer's exposure to hurricane claims. This subparagraph does not prohibit any cancellations or nonrenewals of such policies for any other lawful reason unrelated to the risk of loss from hurricane exposure.

    * * *

    b. If the insurer considers the number of cancellations and nonrenewals under sub- subparagraph a. to be insufficient, the insurer may apply for approval of additional cancellations or nonrenewals on the basis of an unreasonable risk of insolvency. In evaluating a request under this sub- subparagraph, the department shall consider, and shall require the insurer to provide information relevant to: the insurer's size,

    market concentration, and general financial condition; the portion of the insurer's business in this state represented by personal lines residential property insurance; the reasonableness of assumptions with respect to size, frequency, severity, and path of hurricanes; the reinsurance available to the insurer and potential recoveries from the Florida Hurricane Catastrophe Fund; and the extent to which the insurer's assets have been voluntarily transferred by dividend or otherwise from the insurer to its stockholders, parent companies, or affiliated companies since May 19, 1993. In the implementation of exposure reductions under this sub-subparagraph, the department and the insurer shall consider such factors as policyholder longevity, the use of voluntary incentives to accomplish the exposure reduction, and geographic distribution.

    * * *

    3. In addition to the cancellations or nonrenewals authorized under this section, an insurer may cancel or nonrenew policies to the extent authorized by an exemption from the moratorium on cancellations or nonrenewals of personal lines property insurance policies under chapter 93-401, Laws of Florida, granted prior to November 5, 1993, by order of the department, by final order in an administrative proceeding, or by order in a judicial proceeding, or ordered on or after November 5, 1993, by final order in an administrative proceeding or ordered on or after November 5, 1993, in a judicial proceeding relative to the moratorium on cancellations or nonrenewals of personal lines property insurance policies under chapter 93-401, Laws of Florida, if the administrative or judicial action was pending on November 5, 1993. (Underscored language added by Chapter 93-411, Laws of Florida.)

    
    

22. The newly created Section 627.7013, Florida Statutes, as amended, closes with the following enigmatic language:

    
    

    In respect to any proceedings for review of the denial, in whole or in part, of an insurer's application for exemption from chapter 93-401, Laws of Florida, under s.

    120.57 or judicial review thereof, nothing in the preceding paragraphs of this section, or any part thereof, shall be considered as clarifying the intent of the Legislature as to the meaning of the provisions of chapter 93-401, Laws of Florida, providing for the

    exemption of insurers from the provisions of that law; nor shall anything in the preceding paragraphs of this section, or any part thereof, be considered as having application to the question of the correctness or incorrectness of the department's denial of an exemption application, in whole or in part, under the provisions of that law.

    
    

23. With regard to the issue of what rules are applicable to the processing of the subject application, it is instructive to consider the following language from the conclusions of law in the Recommended Order in Prudential Property and Casualty Company of Indiana v. State, Department of Insurance, DOAH Case No. 93-5262 (RO issued November 12, 1993):

    
    

    1. Formal administrative proceedings under Section 120.57(1), Fla. Stat. (Supp. 1992), are de novo. Moore v. Dept. of Health, etc.,

       596 So.2d 759 (Fla. 1st DCA 1992); McDonald

       v. Dept. of Banking and Finance, 346 So.2d

       569 (Fla. 1st DCA 1977). They are designed to give affected parties the opportunity to change the agency's mind. Capeletti Bros., Inc. v. Dept. of General Services, 432 So.2d 1359 (Fla. 1st DCA 1983). Except when to do so presents notice problems, they are governed by the rules in effect at the time of the final hearing.

    2. Regardless whether the . . . denial letter was based on ER 20(2)(b), ER 20 expired on September 2, 1993. See Section 120.54(9)(c), Fla. Stat. (Supp. 1992). Since ER 20 has expired, it can no longer operate as a rule governing the . . . application.

    * * *

    64. On the day ER 20 expired, the Department promulgated 4ER93-28 (ER 28). ER 28 is an essentially verbatim reproclamation of ER 20. If valid, it would be effective for another

    90 days, until December 2, 1993, after the expiration of the statutory moratorium under Chapter 93-401. Section 120.54(9)(c), Fla. Stat. (Supp. 1992). But, as has been held in the Final Order, Prudential Property & Casualty Ins. Co. of Indiana v. Dept. of Insurance, DOAH Case No. 93-5807RE, entered November 9, 1993, ER 28 is invalid and also cannot operate as a rule governing the . . . application in this case.

    
    

24. The conclusions quoted immediately above are equally applicable to the consideration of the application in this case. Accordingly, the determination of whether the Petitioner is entitled to the exemption or exception it seeks must be determined on the basis of the applicable statutory language, without resort to the expired or invalidated emergency rules.

25. In the normal course of events, the construction to be given to a statute often involves reading the statute in pari materia with other statutes on the same subject matter. In this regard it is often especially helpful in the interpretation of an earlier statute to compare the earlier statutory language with more recent legislative enactments on the same subject matter. But in the interpretation of Chapter 93-401, Laws of Florida, the Legislature has instructed us not to seek clarification by resort to later enacted legislation. (See the last paragraph of Section 627.7013, Florida Statutes, as amended by Chapter 93-411, Laws of Florida.) Accordingly, in determining the

    construction to be given to the language of Chapter 93-401, Laws of Florida, any differences in language used in Chapter 93-411, Laws of Florida, should not be considered.

    
    

26. The Department argues that it is not necessary to address the substance of the application because, in the Department's view, the matter is moot because the statutory moratorium period has expired. The Department's argument in this regard overlooks the fact that the recently enacted provisions of Section 627.7013(2)(a)3, Florida Statutes, have breathed new life into the statutory moratorium for insurers, like the Petitioner in this case, who had an administrative action pending on November 5, 1993.

    
    

27. Turning now to the substance of the subject application, it is first noted that to be entitled to the benefits of the statutory exception in Chapter 93-401, Laws of Florida, the Petitioner must "affirmatively demonstrate to the department that the proposed cancellation or nonrenewal is necessary for the insurer to avoid an unreasonable risk of insolvency." [Emphasis added]. This is consistent with the traditional notion that, as a general rule, in administrative proceedings the burden of proof is on the party asserting the affirmative of an issue. See Balino v. Department of Health and Rehabilitative Services, 348 So.2d 349 (Fla. 1st DCA 1977); Florida Department of Transportation v. J.W.C. Co., 396 So.2d 778, 788 (Fla. 1st DCA 1981); McDonald

    v. Department of Professional Regulation, Board of Pilot Commissioners, 582 So.2d 660, 670 (Fla. 1st DCA 1991). And, of course, any failure of proof inures to the detriment of the party bearing the burden of proof. For the reasons explained below, the facts stipulated to in this case and the information in the documents submitted with and incorporated into the parties' stipulation are simply insufficient to affirmatively demonstrate that the nonrenewals proposed by the Petitioner are necessary to avoid an unreasonable risk of insolvency.

    
    

28. The first insufficiency is in the quality of the information submitted regarding the probable maximum losses projected in the Petitioner's application. There is no reason to have any confidence in the conclusions reached in those projections, because there is no record explanation as to the methodology employed in the creation of the projections. For example, there is no information in the record of this case as to what assumptions were indulged in in the construction of the model. Similarly, the record in this case contains no expert opinion as to the accuracy or reliability of the projections, or as to how closely the modeling results could be expected to predict future hurricane events. There is also no information as to what assumptions were made in order to calculate the extent of damage the model hurricanes would cause. Without some record basis for judging the reliability of the projections submitted by the Petitioner, it cannot be said that the results of those projections constitute an "objectively defined probable maximum loss resulting from one Florida hurricane loss event," within the meaning of the exception language of Chapter 93-401, Laws of Florida. Without detailed information as to how the modeling was done, it simply cannot be said to what extent the results of the modeling are objective, subjective, or sheer speculation.

29. The risk of insolvency described by the Petitioner fails to be "objectively defined" for yet another reason. The Petitioner's argument in support of the exemption it seeks hinges primarily on the contention that without the exemption it will be in violation of its reinsurance agreements and that as a result of those violations its reinsurance contracts will be totally void, and without the reinsurance the Petitioner would be seriously exposed to insolvency in the event of a significant hurricane event. The validity of the Petitioner's argument in this regard depends, of necessity, on the terms and conditions of the reinsurance contracts. Those contracts are not part of the record in this case, nor does the record contain sufficient evidence about the contents of the reinsurance contracts upon which to hazard even a guess as to whether the reinsurance would be void without the relief sought by the Petitioner. Finally, the record does not contain evidence of any expert opinion to the effect that the subject reinsurance contracts would be void under the circumstances of concern to the Petitioner. The most that has been shown on the record in this case is that under certain circumstances it is possible that the Petitioner might have some problems enforcing its reinsurance contracts. But on the record of this case, the likelihood of any such problems and the possible magnitude of any such problems are matters of conjecture and speculation. The record with regard to such matters is insufficient to "affirmatively demonstrate

. . . an unreasonable risk of insolvency."

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Insurance issue a Final Order in this case denying the exemption sought by the Petitioner.

DONE AND ENTERED this 14th day of February 1994 in Tallahassee, Leon County, Florida.

MICHAEL M. PARRISH

Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 14th day of February 1994.

COPIES FURNISHED:

Mark A. Cohen, Esquire

Mark A. Cohen & Associates, P.A. 1221 Brickell Avenue, Suite 1780

Miami, Florida 33131

Nancy Aliff, Esquire Department of Insurance Division of Legal Services 612 Larson Building

Tallahassee, Florida 32399

Honorable Tom Gallagher

State Treasurer and Insurance Commissioner The Capitol, Plaza Level

Tallahassee, Florida 32399-0300

Bill O'Neil General Counsel

Department of Insurance The Capitol, PL-11

Tallahassee, Florida 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 ten 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: 93-005803

Orders for Case No: 93-005803