STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

THE CONTINENTAL INSURANCE COMPANY; ) THE GLENS FALLS INSURANCE COMPANY; ) KANSAS CITY FIRE & MARINE ) INSURANCE COMPANY; THE FIDELITY & ) CASUALTY COMPANY OF NEW YORK; THE ) BUCKEYE UNION INSURANCE COMPANY; ) BOSTON OLD COLONY INSURANCE ) COMPANY; COMMERCIAL INSURANCE ) COMPANY OF NEWARK, NJ; FIREMEN'S ) INSURANCE COMPANY OF NEWARK, NJ; ) and NATIONAL-BEN FRANKLIN ) INSURANCE COMPANY OF ILLINOIS, )

)

Petitioners, )

)

vs. ) Case No. 98-1557RU

)

DEPARTMENT OF INSURANCE, )

)

Respondent. )

)

FINAL ORDER

Pursuant to notice, a formal hearing was held in this case on May 4, 1998, at Tallahassee, Florida, before J. D. Parrish, a designated Administrative Law Judge of the Division of Administrative Hearings.

APPEARANCES

For Petitioners: Andrew Seiden, Esquire

Stephens, Lynn, Klein & McNicholas Northbridge Centre, Suite 1600

515 North Flagler Drive

West Palm Beach, Florida 33401

Paul R. Bradshaw, Esquire Brian Ballard, Esquire

Smith, Ballard, Bradshaw & Logan, P.A.

201 South Monroe Street, Suite 300 Tallahassee, Florida 32301

For Respondent: Steven H. Parton, Esquire

David Busch, Esquire Division of Legal Services 612 Larson Building

Tallahassee, Florida 32399-0333

STATEMENT OF THE ISSUES

As stated in the Respondent's Motion to Dismiss Petition filed on April 20, 1998.

PRELIMINARY STATEMENT

This case began on March 30, 1998, when Petitioners filed a Rule Challenge Petition seeking to invalidate a non-promulgated statement issued by the Department of Insurance in a letter dated July 21, 1997. By Order of Assignment entered on April 7, 1998, the case was assigned for hearing and later scheduled for May 4, 1998.

On April 20, 1998, Respondent filed a Motion to Dismiss Petition. Such motion alleged, in pertinent part, that the Petitioners had failed to allege sufficient standing to indicate how "they are substantially affected by, or would be substantially affected by, the 'rule.'" Secondly, the Respondent maintains that since it has not announced a policy of general applicability, the letter of the Department dated July 21, 1997, cannot stand as a "rule" as claimed by Petitioners.

At the hearing conducted on May 4, 1998, ruling on the motion was reserved. This order is entered to resolve this outstanding matter.

Petitioners presented testimony from the following

witnesses: Damian Sepanik, vice-president and associate general counsel for the CNA Insurance Company; Norman E. Taplin, an attorney; and Susanne Murphy, deputy insurance commissioner.

Petitioners' Exhibits numbered 1 through 4 were admitted into evidence.

Respondent offered testimony from Susanne Murphy and Kevin Matthew McCarty, deputy director of insurer services for the Department. Respondent's Exhibit 1 was also received into evidence.

The transcript of the proceeding was filed on May 5, 1998. Proposed final orders are not yet due, and will not be reviewed as ruling on the outstanding motion is dispositive of the issues.

FINDINGS OF FACT

1. The Petitioners are authorized insurance companies in the State of Florida.

2. Each Petitioner holds a certificate of authority but only one currently writes homeowner insurance in the state.

3. Only The Fidelity and Casualty Company of New York (Fidelity) writes new business in Florida and none of the other Petitioner companies intends to renew a policy except into Fidelity.

4. The rate approved for Fidelity (and presumably the premiums derived from same) is substantially higher than the rates approved for the other Petitioners.

5. Although the record does not precisely define the

   business relationships, the Petitioners are companies affiliated to "the Continental companies and the CNA companies."

6. After companies were consolidated with "the Continental companies" the group determined it had a rate inadequacy and sought to remedy the problem. As a result, it determined it would combine the business of "the Continental companies and the CNA companies."

7. Thereafter, representatives from the Petitioners met with the Department of Insurance in order to plan how best to accomplish this objective.

8. No one from the Department ever advised Petitioners that such a combining of insurance business would avoid a rate filing.

9. In order to bring the Continental business together with the CNA business, the entities did, in fact, submit a rate filing that was approved by the Department in September 1996.

10. Thereafter, the Petitioners sought to transition their business into Fidelity but did not submit a rate filing.

11. Under the authority of Section 627.7013, Florida Statutes, Petitioners then sought to effect the proposed transition.

12. On July 21, 1997, the Department issued a letter which provided, in part:

    As I see it, there are two separate issues which must be resolved. First, it must be determined whether CNA may, consistent with the moratorium, legally transfer all of its homeowners policies to the Fidelity and Casualty Company of New

    York. And second, whether the rate to be charged in the surviving company is actuarially justified.

    
    

    As to the first issue, the moratorium statute, at Section 627.7013(2)(b)5.a. permits an insurer to transfer ". . . risk from one admitted insurer to another admitted insurer. . . ." Therefore, consistent with this statute, the transition of CNA's homeowners policies to the Fidelity and Casualty Company of New York is permitted under an exemption contained in the moratorium statute. However, such a movement of polices from one program to another must be actuarially justified in a rate filing which supports the rate change for the transitioned policyholders. As a consequence, the Department cannot consider the pending base rate filing, since the underlying base rate has not been actuarially supported.

    I recognize that CNA's ability to continue to write homeowners insurance is contingent on the degree which you are able to achieve what you believe to be rate adequacy. However, any rate changes will have to be justified to the satisfaction of the Department to ensure that such a rate change complies with Florida law.

13. On March 30, 1998, Petitioners filed a Rule Challenge Petition that claims the foregoing statement constitutes a rule as it seeks to implement practices not specifically required by statute or existing rule. Petitioners maintain that Section 627.7013, Florida Statutes, does not require a rate filing nor that a transfer pursuant to its terms be "actuarially justified in a rate filing which supports the rate change for the transitioned policyholders."

14. The allegations as to Petitioners' interests in this

    matter merely states that "as licensed and authorized personal lines residential property insurers in the State of Florida, with approved rates and forms," they are substantially affected by the Department's July 21, 1997, letter.

15. The Petitioners have not alleged, nor established, how they are "substantially affected." Presumably, the Petitioners perceive the requirement of a rate filing as an adverse consequence or injury. Undoubtedly, they perceive such requirement beyond the scope of Section 627.7013, Florida Statutes.

16. Rate filings are required by the Department whenever an insurer intends to change its rate. In this instance, Petitioners argue that Fidelity will not change its rate. The approved rate for Fidelity will be applied to the non-Fidelity policyholders who will be renewed at the Fidelity rate.

17. The non-Fidelity policyholders will then be charged a premium based upon a rate which is approximately 28 percent greater than the rates now charged by their insurance companies.

18. If successful, the Petitioners will achieve a rate increase for the business going into Fidelity without having filed for same. Thus, the Petitioners will have reduced their exposure in the companies transferring their business and achieved a rate increase through Fidelity.

19. The Department requires rate filings whenever a company seeks to change its rate. When companies combine their insurance

    business, the result may or may not affect the rate approved for the entity receiving the business. As the "book of business" for the entities is known, it is possible to project the combined business in order to ascertain an appropriate rate. Unlike adding new business (which does not have the history of an established "book of business") the company seeking to assume another company's book of business can readily discern an appropriate rate.

20. The Department's letter dated July 21, 1997, was not issued with an intent to create rights or require compliance or otherwise to have the effect of law. It sought to enforce the provisions of Section 627.062, Florida Statutes, governing rate changes. It required an applicant for a transition under one statute to comply with the provisions of another governing provision. That is, to apply both statutes to the requested action.

    CONCLUSIONS OF LAW

    
    

21. The Division of Administrative Hearings has jurisdiction over the parties to, and the subject matter of, these proceedings.

22. Section 627.7013, Florida Statutes, provides, in pertinent part:

    1. The Legislature finds that personal lines residential property insurers, as a condition of doing business in this state, have a responsibility to contribute to an orderly market for personal lines residential property insurance and that there is a

       compelling state interest in maintaining an orderly market for personal lines residential property insurance. The Legislature further finds that Hurricane Andrew, which caused over $15 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 insurance 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, and destabilize the insurance market. In furtherance of the overwhelming public necessity for an orderly market for property insurance, the Legislature, in chapter 93-401, Laws of Florida, imposed, for a limited time, a moratorium on cancellation or nonrenewal of personal lines residential property insurance policies. The Legislature further finds that upon expiration of the moratorium, additional actions are required to maintain an orderly market for personal lines residential property insurance in this state. The purposes of this section are to provide for a phaseout of the moratorium and to require advance planning and approval for programs of exposure reduction.

       * * *

       
       

       1. The following actions by an insurer do not constitute cancellations or nonrenewals for purposes of this subsection:

          1. The transfer of a risk from one admitted insurer to another admitted insurer, unless the terms of the new or replacement policy place the policyholder in default of a mortgage obligation.

23. Section 627.062, Florida Statutes, provides, in part:

    
    

    1. The rates for all classes of insurance to which the provisions of this part are applicable shall not be excessive,

       inadequate, or unfairly discriminatory.

    2. As to all such classes of insurance:

       1. Insurers or rating organizations shall establish and use rates, rating schedules, or rating manuals to allow the insurer a reasonable rate of return on such classes of insurance written in this state. A copy of rates, rating schedules, rating manuals, premium credits or discount schedules, and surcharge schedules, and changes thereto, shall be filed with the department.

          
          

          * * *

          
          

       2. Upon receiving a rate filing, the department shall review the rate filing to determine if a rate is excessive, inadequate, or unfairly discriminatory. In making that determination, the department shall, in accordance with generally accepted and reasonable actuarial techniques, consider the following factors:

    1. Past and prospective loss experience within and without this state.

    2. Past and prospective expenses.

    3. The degree of competition among insurers for the risk insured.

    * * *

    
    

    13. Other relevant factors which impact upon the frequency or severity of claims upon expenses.

    1. After consideration of the rate factors provided in paragraphs (b), (c), and (d), a rate may be found by the department to be excessive, inadequate, or unfairly discriminatory based upon the following standards:

       1. Rates shall be deemed excessive if they are likely to produce a profit from Florida business that is unreasonably high in relation to the risk involved in the class of business or if expenses are unreasonably high in relation to services rendered.

       * * *

       
       

    2. In reviewing a rate filing, the

    department may require the insurer to provide at the insurer's expense all information necessary to evaluate the condition of the company and the reasonableness of the filing according to the criteria enumerated in this section. [Emphasis added.]

    
    

24. Section 120.56(4), Florida Statutes, provides, in part:

    
    

    Any person substantially affected by an agency statement may seek an administrative determination that the statement violates s. 120.54(1)(a). The petition shall include the text of the statement or a description of the statement and shall state with particularity facts sufficient to show that the statement constitutes a rule under s. 120.652 and that the agency has not adopted the statement by the rulemaking procedure provided by

    s. 120.54.

    
    

25. Section 120.52(15), Florida Statutes, provides, in part:

    1. "Rule" means each agency statement of general applicability that implements, interprets, or prescribes law or policy or describes the procedure or practice requirements of an agency and includes any form which imposes any requirement or solicits any information not specifically required by statute or by an existing rule. The term also includes the amendment or repeal of a rule. The term does not include:

       1. Internal management memoranda which do not affect either the private interests of any person or any plan or procedure important to the public and which have no application outside the agency issuing the memorandum.

       2. Legal memoranda or opinions issued to an agency by the Attorney General or agency legal opinions prior to their use in connection with an agency action.

       3. The preparation or modification of:

    1. Agency budgets.

    2. Statements, memoranda, or instructions to state agencies issued by the Comptroller as chief fiscal officer of the state and relating or pertaining to claims

       for payment submitted by state agencies to the Comptroller.

    3. Contractual provisions reached as a result of collective bargaining.

    4. Memoranda issued by the Executive Office of the Governor relating to information resources management.

    
    

26. In the instant matter, the insurers hope to convert policies from affiliated companies to Fidelity. It is undisputed that such conversion will result in a rate change for the non- Fidelity book of business. From the time CNA Insurance Companies acquired Continental Insurance Company and its affiliated companies, it has sought to transition business to one rate level. It had originally intended to utilize, and had recognized the need for, subsequent rate filings in order to "move gradually to a single rate level for all business."

27. Then, for reasons unexplained by this record, Petitioners sought, by way of the moratorium statute, to transition the business in one event without a rate filing. The "statement" at issue in this case is the Department's response to the proposed consolidation given to CNA (not a party herein) regarding whether it may legally transfer all of its policies to Fidelity and, if so, whether the rate to be charged by Fidelity is actuarially justified.

28. This "statement" is essentially the Department's findings based upon CNA's requests. With regard to the initial query, the Department found that the moratorium statute allows an insurer to transfer "risk from one admitted insurer to another

    admitted insurer." This conclusion is reached from a plain reading of Section 627.7013, Florida Statutes, and with which Petitioners agree.

29. With regard to the rate applicable to the consolidated book of business, the Department found that the transitioned policyholders (the non-Fidelity business) would incur a rate change so that CNA or Fidelity must actuarially justify the rate. Petitioners argue that nothing in Section 627.7013, Florida Statutes, requires this rate filing. Thus, they maintain, this requirement must be the Department's non-rule policy.

30. To the contrary, the Department recognized that rates are governed by Section 627.062, Florida Statutes. That provision recognizes that rate changes must be accompanied by a rate filing. The change is generated by the conversion to Fidelity and must recognize the non-Fidelity book of business.

31. Statutes governing the insurance industry must be read in pari materia, not in isolation. It would defeat the rating statute if Petitioners were allowed to circumvent its provisions by way of the moratorium statute. All classes of insurance are

    governed by Section 627.062. This is the legislative mandate of the statute not an unpromulgated rule of the Department.

32. Finally, Petitioners bear the burden of proof to establish their standing in this cause. Petitioners have failed to allege, or prove, how the statement requiring a rate filing constitutes an injury in fact. No evidence supports a finding that a rate filing is an onerous burden or financial hardship. They allege that as authorized insurers they have standing to proceed in this matter yet have failed to establish how they are substantially affected by the Department's decision related to a non-party and one Petitioner. Even as to Fidelity, Petitioners failed to establish an injury in fact.

ORDER

Based on the foregoing Findings of Fact and Conclusions of Law, it is ORDERED that the Petitioners' challenge be dismissed.

DONE AND ENTERED this 12th day of May, 1998, in Tallahassee, Leon County, Florida.

J. D. Parrish Administrative Law Judge

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(850) 488-9675 SUNCOM 278-9675

Fax Filing (850) 921-6847

Filed with the Clerk of the Division of Administrative Hearings this 12th day of May, 1998.

COPIES FURNISHED:

Paul R. Bradshaw, Esquire Brian Ballard, Esquire

Smith, Ballard, Bradshaw & Logan, P.A.

201 South Monroe Street, Suite 300 Tallahassee, Florida 32301

Andrew Seiden, Esquire

Stephens, Lynn, Klein & McNicholas Northbridge Centre, Suite 1600

515 North Flagler Drive

West Palm Beach, Florida 33401

Steven H. Parton, Esquire David Busch, Esquire Division of Legal Services 612 Larson Building

Tallahassee, Florida 32399-0333

Bill Nelson

State Treasurer and Insurance Commissioner

Department of Insurance and Treasurer

The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300

Daniel Y. Sumner, General Counsel Department of Insurance

and Treasurer

The Capitol, Lower Level 26 Tallahassee, Florida 32399-0300

Carroll Webb

Executive Director and General Counsel Joint Administrative Procedures Committee Holland Building, Room 120

Tallahassee, Florida 32399-1300

Liz Cloud, Chief

Bureau of Administrative Code The Elliott Building Tallahassee, Florida 32399-0250

NOTICE OF RIGHT TO JUDICIAL REVIEW

A party who is adversely affected by this Final Order is entitled to judicial review pursuant to Section 120.68, Florida Statutes. Review proceedings are governed by the Florida Rules of Appellate Procedure. Such proceedings are commenced by filing one copy of a Notice of Appeal with the agency clerk of the Division of Administrative Hearings and a second copy, accompanied by filing fees prescribed by law, with the District Court of Appeal, First District, or with the District Court of Appeal in the appellate district where the party resides. The Notice of Appeal must be filed within 30 days of rendition of the order to be reviewed.

Docket for Case No: 98-001557RU

Orders for Case No: 98-001557RU