STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

STATE OF FLORIDA, DEPARTMENT ) OF INSURANCE AND TREASURER, )

)

Petitioner, )

)

vs. ) Case No. 97-2912

)

COMMISSION ON HURRICANE ) LOSS PROJECTION METHODOLOGY, )

)

Respondent. )

)

ORDER DENYING MOTION FOR ATTORNEY'S FEES AND COSTS, ORDER DENYING PETITION FOR LEAVE TO INTERVENE,

AND RECOMMENDED ORDER OF DISMISSAL REVIEW OF RATE FILINGS

The State of Florida, Department of Insurance and Treasurer (The Department) considers rate filings by insurers for certain classes of insurance to determine if the proposed rates are excessive, inadequate, or unfairly discriminatory. The Department makes the determinations in accordance with generally acceptable and reasonable actuarial techniques in view of enumerated factors set forth in Section 627.062(2)(b), Florida Statutes (Supp. 1996). Pursuant to Section 627.062(2)(g), Florida Statutes (Supp. 1996), in the event that the Department finds on a preliminary basis that a rate may be excessive, inadequate, or unfairly discriminatory, it initiates proceedings to disapprove the rate and notifies the insurer. In any administrative proceeding relating to the legality of the rate,

the insurer or rating organization carries the burden of proof to establish by a preponderance of the evidence that the rate proposed is not excessive, inadequate, or unfairly discriminatory. Should the Department find that the proposed rate is excessive, inadequate, or unfairly discriminatory, it issues an order disapproving the rate proposal, specifying a new rate or rate schedule that responds to the findings of the Department concerning the rate proposal filed by the insurer, among other responses to the rate proposal. Section 627.3062(2)(h), Florida Statutes (Supp. 1996). The Department conducts its regulatory function as an agency created pursuant to Section 20.13, Florida Statutes (1995).

FLORIDA COMMISSION ON HURRICANE LOSS PROJECTION METHODOLOGY

Pursuant to Section 627.0628, Florida Statutes, the Legislature created the Florida Commission on Hurricane Loss Projection Methodology (the Commission). The Commission has as its responsibility consideration of actuarial methods, principles, standards, models, or output ranges having the potential for improving the accuracy of, or reliability, of hurricane loss projections used in residential property insurance rate filings. In performing its duties the Commission is expected, from time to time, to adopt findings as to the accuracy or reliability of particular methods, principles, standards, models, or output ranges. Section 627.0628(3)(a), Florida Statutes (Supp. 1996).

Under the statement of legislative findings and intent set forth in Section 627.0628(1)(b), Florida Statutes (Supp. 1996), the Legislature has recognized the need for expert evaluation of computer models and other recently developed or improved actuarial methodology related to the projection of hurricane losses. To resolve conflicts among actuarial professionals and to provide needed and continuing improvement in the sophistication of actuarial methods used to set rates charged to consumers, the Legislature created the Commission to perform the tasks that have been described.

The Commission is constituted of 11 members, 6 of whom are appointed by the Insurance Commissioner and serve until the end of the term of office of the Insurance Commissioner who appointed them, absent earlier removal by the Insurance Commissioner for cause. Vacancies on the Commission are filled in a manner consistent with the process of original appointment. Section 627.0628(2), Florida Statutes (Supp. 1996). In accordance with that provision, the Commission is administratively housed within the State Board of Administration; however, it operates independently in the exercise of its powers and duties created by the Legislature.

The consequences of the Commission's decisions in relation to the duties performed by the Department in rate filings are generally described in Section 627.0628(1)(c), Florida Statutes (Supp. 1996), which states:

(1) LEGISLATIVE FINDINGS AND INTENT.--

It is the intent of the Legislature to create the Florida Commission on Hurricane Loss Projection Methodology as a panel of experts to provide the most actuarially sophisticated guidelines and standards for projection of hurricane losses possible, given the current state of actuarial science. It is the further intent of the Legislature that such standards and guidelines . . . may be used

by insurers in rate filings under s. 627.062 unless the way in which such standards and guidelines were applied by the insurer was erroneous, as shown by a preponderance of the evidence.

The specific consequences of decisions by the Commission in passing upon the accuracy or reliability of particular methods, principles, standards, models, or output ranges in relation to the duties performed by the Department in rate filings is described in Section 627.0628(3)(c), Florida Statutes

(Supp. 1996), which states:

(3) ADOPTION AND EFFECT OF STANDARDS AND GUIDELINES. --

(C) With respect to a rate filing under s. 627.062, an insurer may employ actuarial methods, principles, standards, models, or output ranges found by the commission to be accurate or reliable to determine hurricane loss factors for use in a rate filing under

s. 627.062, which findings and factors are admissible and relevant in consideration of a rate filing by the department or in any administrative or judicial review. [Emphasis added.]

THE DEPARTMENT'S PETITION

The Department filed a petition for formal administrative hearing in accordance with Section 120.57(1), Florida Statutes, directed to the Commission. In this petition the Department

alleges that the Commission reviewed an AIR Model, represented by the owner of that model to be a proprietary product, that would be used for a fee by insurance companies to determine hurricane loss

projections. The Department alleges in its petition that these projections are a substantial element in property insurance rate filings in Florida. The Department alleges that following review, and upon votes by the Commission, the Commission found the AIR Model to be accurate and reliable. The Department contends that the action of the Commission finding the AIR Model accurate and reliable affects the Department's substantial interests in considering rate filings pursuant to Section 627.062, Florida Statutes, in that the findings and factors related to the AIR Model as approved by the Commission are by law admissible and relevant in both consideration of a rate filing and in any administrative or judicial review, even in the event the Commission's findings are erroneous. The Department further alleges that the admissibility and relevance of the AIR Model findings and factors as approved by the Commission, in error, frustrate the Department's ability to properly decide whether the proposed rates are excessive, inadequate, or unfairly discriminatory in a rate filing case. In the Department's view, if the Commission has approved an inaccurate or unreliable computer model that would have to be considered in a rate filing case, then the statutory rate-making process has been compromised to the detriment of insurance consumers. Consequently, the Department's petition challenges the Commission's determination of accuracy and reliability of the AIR Model as part of the process engaged in by the Commission. In particular the Department

disputes:

1. Whether the AIR Model is accurate.

   
   

2. Whether the AIR Model is reliable.

   
   

3. Whether the AIR Model satisfies individual standards adopted by the Commission.

   
   

4. Whether the Commission complied with its own standards in adopting the AIR Model.

   
   

5. Whether satisfaction of standards established by the Commission is necessarily indicative of the accuracy and reliability of a hurricane model.

   
   

6. Whether the Commission's determinations regarding the AIR Model is [sic] supported by competent substantial evidence.

The Commission forwarded the Department's petition to the Division of Administrative Hearings (the Division) for the Division's consideration, with a caveat that the Commission had reservations concerning the Division's jurisdiction to consider the case in that the possibility existed that the Commission was not an "Agency" as defined within Chapter 120, Florida Statutes.

THE COMMISSION'S MOTION TO DISMISS

After the case was filed with the Division, the Commission filed a "Motion to Dismiss of Respondent Florida Commission on Hurricane Loss Projection Methodology." In the motion the Commission argues that it is not an "Agency" subject to the Administrative Procedures Act. As a result, the Commission believes that the Division is without jurisdiction to entertain this dispute. The Commission also argues that the Department lacks standing to challenge the Commission's actions in

determining the accuracy and reliability of the AIR Model in relation to the Commission's function as described in Section 627.0628, Florida Statutes (Supp. 1996). In that connection, the Commission asserts that the Department is not precluded from exercising its independent judgment in a rate case considered in accordance with Section 627.062, Florida Statutes, by virtue of determinations by the Commission that the AIR Model is accurate and reliable. The Commission asks that an order be entered dismissing the Department's petition for formal administrative hearing with prejudice. Finally, the Commission asks that it be reimbursed reasonable costs and attorney's fees in relation to preparation of its motion as envisioned by Sections 120.569(2)(c) and 120.595, Florida Statutes (Supp. 1996).

In the Department's response in opposition to the motion to dismiss it contends that the motion to dismiss inappropriately attempts to resolve disputes of fact, rather than address questions of law related to the legal sufficiency of the petition, confined to an examination of the "four corners" of the petition. The Department argues that the Commission is an "Agency" as defined in Section 120.52(1), Florida Statutes (Supp. 1996), and that the Division has jurisdiction to consider the actions by the Commission that are challenged through the petition. The Department argues that it has standing to contest the Commission's decision finding the AIR Model accurate and reliable, outside the opportunity to consider the implications of that determination in

a separate rate hearing held pursuant to Section 627.062, Florida Statutes (Supp. 1996). The Department contends that it has standing to participate in the process involved with the findings of accuracy and reliability by the Commission as contemplated by Section 627.0628, Florida Statutes (Supp. 1996). In its argument the Department expresses the belief that the Commission's determination that the AIR Model is accurate and reliable is in effect, the creation of "a rebuttable presumption of validity" should the AIR Model be applied in an rate determination made by the Department in accordance with Section 627.062, Florida Statutes (Supp. 1996). The Department argues that the assertion by its creators that the AIR Model is proprietary in nature lends credence to the Department's claim of standing to challenge the Commission's determination of accuracy and reliability.

The Department expresses the view that it should be able to overcome the rebuttable presumption of accuracy and reliability prior to an attempt by an insurer to use the AIR Model in a rate filing pursuant to Section 627.062, Florida Statutes (Supp. 1996). Otherwise, the submission of an inaccurate and unreliable AIR Model in the rate filing is disruptive of the performance of the Department's primary function in rate regulation.

THE COMMISSION IS AN "AGENCY"

Section 120.52(1)(b), Florida Statutes (Supp. 1996), defines the term "Agency" to include the term "commission." Unlike some entities identified within the definition of "Agency" through

references made to other statutes, such as a departmental unit described in Section 20.04, Florida Statutes, the term "commission" is not more specifically defined. In particular, the use of the term "commission" within Section 120.52(1)(b), Florida Statutes (Supp. 1996) does not reference the definition of "commission" found at Section 20.03(10), Florida Statutes (1995), which the Commission finds beneficial in its argument concerning the jurisdictional issue. Contrary to that argument, it is concluded that any "commission" as generally described in Section 120.52(1)(b), Florida Statutes (Supp. 1996), created by the Legislature to exercise independent powers in association with state government is deemed to constitute an "Agency" as defined in Section 120.52(1), Florida Statutes (Supp. 1996). The Florida Commission on Hurricane Loss Methodology is an "Agency" pursuant to that definition. Thus, its "action" constituted in whole or in part of a rule or order, or the equivalent, is potentially subject to the jurisdiction of Chapter 120, Florida Statutes, to include the possibility of a formal hearing to resolve disputes concerning the imposition of "Agency action" by the Commission. Sections 120.52(2), 120.569 and 120.57(1), Florida Statutes (Supp. 1996).

The findings by the Commission determining the accuracy or reliability of the AIR Model constitute "Agency action" which is the equivalent of an agency order.

THE DEPARTMENT LACKS STANDING

To proceed with its case the Department must set forth

allegations that are sufficient to demonstrate that its substantial interests are determined by the Commission in the decision finding that the AIR Model is accurate or reliable. To demonstrate its substantial interest the Department's pleading must demonstrate: (1) That the Department will suffer injury in fact which is of sufficient immediacy to entitle the Department to a Section 120.57(1), Florida Statutes hearing resulting from the Commission's findings of accuracy or reliability and (2) That the alleged substantial injury which the Department will suffer by virtue of the Commission's decision finding the AIR Model accurate or reliable is of the type or nature which the proceeding finding the AIR Model accurate or reliable is designed to protect. Agrico Chemical Co. v. Department of Environmental Regulation, 406 So. 2d 478 (Fla. 2d DCA 1981).

In arriving at a decision concerning the Department's standing to challenge the Commission's action the truth of the facts alleged in the petition are assumed to include every reasonable conclusion or inference that can be reached consistent with those factual allegations. Weaver v. Leon County Classroom Teachers Association, 680 So. 2d 478, (Fla. 1st DCA 1996).

In the context of the factual allegations set forth in the petition, as they reference Sections 627.062 and 627.0628, Florida Statutes (Supp. 1996), the Legislature has identified separate and distinct functions which it has mandated to be performed by the Commission and the Department. Those functions are carried out in

turn. First, the Legislature has created the Commission which in accordance with Section 627.0628(3)(a), Florida Statutes (Supp.

1996), is directed to consider any actuarial methods, principles, standards, models, or output ranges having the potential for improving the accuracy of or reliability of hurricane loss projections used in residential property insurance rate filings. In addition to considering those matters, the Commission is directed to adopt findings as to the accuracy or reliability of those matters, to include findings concerning computer models, such as the AIR Model. Beyond the establishment of the Commission's make up, which has a majority of members appointed by the Insurance Commissioner, the Department has been given no statutory responsibility or authority in that process. Its authority and responsibility commence with the exercise of its function in responding to a rate filing consistent with Section 627.062, Florida Statutes (Supp. 1996), in the instance where an insurer, at its election, employs the AIR Model, found by the Commission to be accurate or reliable, for the purpose of determining hurricane loss factors in a rate filing. There the Commission's findings concerning the accuracy or reliability of the AIR Model would be admissible and relevant in consideration of the rate filing by the Department and any subsequent administrative or judicial review of the preliminary determination by the Department concerning the rate filing. However, the Legislature has not established a presumption of correctness,

rebuttable or irrebuttable, which must be overcome by the Department when examining the AIR Model and taking into account its significance to the rate request. The legal concepts of admissibility and relevancy obligate the Department to consider the AIR Model in support of the rate filing, but this obligation does not establish the necessity to overcome a presumption that the AIR Model is accurate or reliable.

This presumption previously existed when Section 627.0628(3)(c), Florida Statutes (1995), stated:

With respect to a rate filing under s. 627.062, an insurer may employ actuarial methods, principles, standards, models, or output ranges found by the commission to be accurate or reliable. In reviewing the rate, the Department of Insurance must accept

the insurer's use of such actuarial methods, principles, standards, models, or output ranges unless the department finds that

the way in which such actuarial methods, principles, standards, models, or output ranges were applied by the insurer was erroneous, as shown by a preponderance of the evidence.

In the past, the failure by the Department to intercede in the process engaged in by the Commission to find materials that were available to insurers in rate filing cases accurate or reliable had immediate and lasting consequences. That is not true today.

Under past circumstances the Department would have had standing to challenge the findings of accuracy or reliability related to actuarial methods, principles, standards, models, or output ranges before the Commission. Otherwise, the Department

would be limited in its ability to oppose the findings to the application of the materials by the insurer in a rate filing, where it could be shown that the insurer applied the materials in error, as demonstrated by a preponderance of the evidence.

Under past circumstances, the Department would have suffered an injury in fact of sufficient immediacy to entitle it to relief, in a setting where that substantial injury, by virtue of the Commission's decision of accuracy or reliability, would have been of the type and nature which the findings on accuracy or reliability were designed to protect.

Presently in accordance with Section 627.0628(3)(c), Florida Statutes (Supp. 1996), the Commission's findings are only admissible and relevant in relation to the AIR Model. The Department in performing its evaluation of a rate filing where the insurer uses the AIR Model may refute its accuracy or reliability, as well as the manner in which it is applied.

The Legislature did not intend that the Department be allowed to challenge the activities of the Commission in the initial process of establishing a finding that the AIR Model is accurate or reliable. That opportunity was left over to the rate filing process.

THE DEPARTMENT'S OPPORTUNITY LIES ELSEWHERE

Ultimately the Department in arriving at its preliminary decision to approve or disapprove the rate change may treat the information associated with the AIR Model as it does any other

evidence. It may find the information associated with the AIR Model persuasive or non-persuasive. Whether the Department scrutinizes evidence presumed to be admissible and relevant by law, or found by the Department to be admissible and relevant, in a disputed fact hearing, the Department must be prepared in its own case in chief to confront the insurer's burden of proving by a preponderance of the evidence that the rate under consideration is not excessive, inadequate, or unfairly discriminatory. Beyond the requirement that the Department must accept the AIR Model and its use as admissible and relevant, there is no difference in the performance of the Department's regulatory function to examine the rate filing and potentially to defend its decision in a contested hearing.

Unlike the circumstance in the hypothetical case that would have existed under the 1995 statute, the decision by the Commission finding the AIR Model accurate or reliable does not cause the Department to suffer injury in fact which is of sufficient immediacy to entitle the Department to a Section 120.57(1), Florida Statutes hearing. Having in mind that the Department has the statutory obligation in a rate filing to consider the findings of the Commission related to accuracy or reliability of the AIR Model in relation to loss factors and the opportunity to dispute those findings beyond the ability of the insurer to have the findings admitted as relevant information, there is insufficient immediacy to entitle the Department to a

Section 120.57(1), Florida Statutes hearing to contest the initial findings of accuracy or reliability. The Legislature has structured Chapter 627, Florida Statutes, in a manner that calls upon the Department to address the finding of accuracy or reliability directed to the AIR Model in a rate filing case where that model is employed, but not before.

Additionally, the status of the law as now written does not contemplate that the determination by the Commission that the AIR Model is accurate or reliable, in view of the perceived problems identified by the Department in its petition caused by that determination, constitute concerns which Section 627.0628, Florida Statutes (Supp. 1996) was designed to protect. Specifically, to the extent that the Department claims inconvenience in having to address the admitted and relevant information found within the AIR Model in reaching a decision concerning a rate filing, as that information influences the determination of loss factors, Section 627.0628, Florida Statutes (Supp. 1996) is not intended to protect the Department against this perceived "inconvenience."

In summary, the Department has failed to meet the standards for pleading its standing consistent with Agrico, supra.

Moreover, reference at Section 627.0628(1)(c), Florida Statutes (Supp. 1996), related to the legislative findings and intent, in which it is stated that an insurer in a rate filing pursuant to Sections 627.062, Florida Statutes, may use standards and guidelines developed by the Commission, unless misapplied, as

shown by a preponderance of the evidence is not controlling over the language at Section 627.0628(3)(c), Florida Statutes (Supp. 1996), which makes the AIR Model admissible and relevant only in the Department's consideration of a rate filing. Adams vs.

Culver, 111 So. 2d 665 (Fla. 1959) and Dept. of Health & Rehab. vs. American Health Corp., 471 So. 2d 1312 (Fla. 1st DCA 1985).

PROPRIETARY CLAIMS

The fact that someone claims proprietary protection against divulging the details associated with the AIR Model, either before, or upon the occasion when the AIR Model is presented to the Department in support of a rate filing, would not preclude the Department from requiring the proponent of protections associated with the proprietary interest to establish the entitlement to those protections, and if established, the ability of the Department to examine the details in the AIR Model subject to limited dissemination of that information and to reject the use of the AIR Model should the insurer refuse or be unable to allow that information to be divulged to the Department in performing its duties in the rate case. Possible proprietary claims do not

create standing for the Department to challenge the Commission's findings that the AIR Model is accurate or reliable.

NO RIGHT TO INTERVENE

Federation of Mobile Home Owners of Florida, Inc. (Federation) filed a petition for leave to intervene in this case. As alleged in its petition Federation has as one of its primary purposes action on behalf of its members by representing their common interests before various governmental entities in Florida. It alleges that nearly each and every member of Federation is affected by rate increases to Florida homeowners' insurance as those increases are reviewed by the Department.

Federation alleges that as the duly designated representative of its mobile home park members it is affected by actions of the Commission whose findings would serve to increase the homeowners' insurance of members of Federation to an unreasonable, unfair, and discriminatory level. The substantive allegations within the petition to intervene track the contentions made by the Department in its petition.

The Commission has responded in opposition to the petition to intervene by filing a motion to dismiss the petition for leave to intervene. In its response, the Commission correctly points out that Federation may not independently maintain this action should the Department fail to adequately plead standing to maintain the original petition. The Department has failed in that attempt.

Therefore, Federation may not proceed with the present action.

Humana of Florida, Inc. vs. Department of Health and Rehabilitative Services, 500 So. 2d 186 (Fla. 1st DCA 1986). In reaching this conclusion it is not necessary to determine whether Federation may pursue its claims independently.

NO RIGHT TO FEES

This case was a matter of first impression. The motives of the Department in filing the petition are not deemed to have been interposed for any improper purpose, such as to arrest or cause unnecessary delay in the Commission's performance of its duties or for any frivolous purpose or needless increase in the cost of litigation. Sections 120.569(2)(c) and 120.595, Florida Statutes (Supp. 1996). Therefore, the Commission is not entitled to the award of costs and attorney's fees associated with the preparation of the motion to dismiss.

To assist the fact-finder in resolving the matters that have been discussed, oral argument was held on August 27, 1997. The Department, the Commission, and Federation participated.

RECOMMENDATION

Upon consideration, it is RECOMMENDED:

That a final order be entered by the Commission dismissing the Department's petition for the reasons set forth above.

DONE AND ENTERED this day of September, 1997, in Tallahassee, Leon County, Florida.

CHARLES C. ADAMS

Administrative Law Judge

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(904) 488-9675 SUNCOM 278-9675

Fax Filing (904) 921-6847

Filed with the Clerk of the Division of Administrative Hearings this day of September, 1997.

COPIES FURNISHED:

Anne Longman, Esquire

Lewis, Longman and Walker, P.A.

125 South Gadsden Street, Suite 300 Tallahassee, Florida 32302

Steven H. Parton, Esquire Dennis Silverman, Esquire Division of Legal Services 625 Larson Building

Tallahassee, Florida 32399-0333

Robert S. Cohen, Esquire Pennington, Moore, Wilkinson

and Dunbar, P.A. Post Office Box 10095

Tallahassee, Florida 32302

Elsie Crowell, Chairperson Commission on Hurricane Loss

Projection Methodology Larson Building, Fifth Floor

Tallahassee, Florida 32399-0300

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within 15 days from the date of 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: 97-002912

Orders for Case No: 97-002912