STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
PRIMEGUARD INSURANCE COMPANY, ) INC., )
)
Petitioner, )
)
vs. ) Case No. 00-1172
)
DEPARTMENT OF INSURANCE, )
)
Respondent. )
)
RECOMMENDED ORDER
This case came on for formal hearing on July 27, 2000, in Tallahassee, Florida, before the Division of Administrative Hearings, by its designated Administrative Law Judge, Suzanne F. Hood.
APPEARANCES
For Petitioner: John Keller, Esquire
Margaret-Ray Kemper, Esquire Ruden, McClosky, Smith,
Schuster, & Russell, P.A.
215 South Monroe Street, Suite 815 Tallahassee, Florida 32301
For Respondent: Robert Prentiss, Esquire
Department of Insurance Division of Legal Services
200 East Gaines Street Tallahassee, Florida 32399-0333
STATEMENT OF THE ISSUE
The issue is whether Petitioner is entitled to be registered as a risk retention group that has the right to do business in Florida.
PRELIMINARY STATEMENT
By letter dated February 21, 2000, Respondent Department of Insurance (Respondent) denied Petitioner PrimeGuard Insurance Company's (Petitioner) application to register as a risk retention group. The denial was based on the following:
The Department has been unable to determine that PrimeGuard meets the definition of a risk retention group as defined in Section 627.942(9), Florida Statutes. PrimeGuard has refused to provided organization charts or other information which shows that the sole owner of the group (First Assured Warranty) is comprised of members which also comprise the membership of Prime Guard and that the sole owner is owned by persons that are members of PrimeGuard and that are provided insurance by PrimeGuard.
The copy of the plan of operations supplied to the Department by PrimeGuard did not provide any documentation regarding the ownership of PrimeGuard that establishes that PrimeGuard meets the definition of a risk retention group.
The Notice of Operations required by Section 627.944(1), F.S., did not provide sufficient documentation that
PrimeGuard qualifies as a risk
retention group under the requirements of Chapter 627, Part XIX, Florida Statutes.
On or about March 31, 2000, Petitioner filed a request for a formal administrative hearing to contest the denial of its
application. Petitioner's request alleged as follows: (a) Petitioner had supplied Respondent with all documentation required by the federal Liability Risk Retention Act (LRRA,) 15
U.S.C. Section 3901 et. seq.; (b) Respondent was attempting to regulate Petitioner in violation of LRRA by imposing conditions of registration not required by federal law; (c) Respondent was required to rely on Hawaii's licensure of Petitioner as a liability insurance company and to recognize Petitioner as a risk retention group pursuant to LRRA; and (d) Respondent was discriminating against Petitioner and its members contrary to 15
Section 3902(4).
On March 17, 2000, Respondent referred this matter to the Division of Administrative Hearings. The parties filed a Response to Initial Order on March 31, 2000. A Notice of Hearing dated April 10, 2000, scheduled the hearing for July 27- 28, 2000.
On June 2, 2000, Respondent filed a Motion for Leave to File Amended Letter of Disapproval. Respondent's First Amended Letter of Denial was attached to the motion, which states as follows in relevant part:
The denial is based on the following reasons:
The Department has determined that PrimeGuard does not meet the definition of a risk retention group as defined in 15 U.S.C. [Section] 3901(a)(4)(E) and Section 627.941(9)(e)(2), Florida Statutes, as it
does not have as its owners only those persons who comprise the membership of the risk retention group or an organization which has its sole owner persons who comprise the membership of the organization.
PrimeGuard's sole business purpose in Florida is the insuring of a contractual liability of its members arising from their obligations under an Extended Service Agreement. This type of liability does not meet the definition of liability as set forth in 15 U.S.C. [Section 3901(a)](2)(A), and Section 627.942(4), Florida Statutes, and therefore is not a purpose from which a risk retention group may be registered.
PrimeGuard proposes to insure new and used automobile dealers against their obligations under an "extended service agreement" issued either by PrimeGuard, or by the individual members. Either arrangement is prohibited by Chapter 634, Florida Statutes. Motor vehicle service agreements in Florida may only be issued by licensed motor vehicle service agreement companies and may only be sold by appropriately licensed persons, pursuant to Sections 634.031, 634.041 and 634.171, Florida Statutes. Additionally, federal law does not allow non-licensed risk retention groups to issue motor vehicle service agreements to non-members.
On June 9, 2000, Petitioner filed a response in Opposition to Motion for Leave to File Amended Letter of Disapproval. This response requested a continuance if the undersigned granted the motion.
On June 22, 2000, the undersigned granted Respondent's Motion for Leave to File Amended Letter of Disapproval. This order directed the parties to file a Joint Status Report advising whether the hearing should be continued, and if so,
providing mutually convenient dates for rescheduling the hearing.
On June 30, 2000, Petitioner filed a Status Report Regarding the Need for a Continuance. This report requested that the hearing not be rescheduled.
On July 3, 2000, Respondent filed a Status Report and Request to Continue. Petitioner filed a response in opposition to Respondent's request for continuance on July 7, 2000.
On July 7, 2000, the undersigned issued an Order Denying Request to Continue.
On July 19, 2000, Petitioner filed a unilateral Pre-Hearing Stipulation. Respondent filed a unilateral Pre-Hearing Stipulation on July 24, 2000.
On July 24, 2000, Petitioner filed a Motion in Limine to Exclude Gary Smith as a witness. Respondent filed a response in opposition to this motion on July 25, 2000. This motion was denied during the hearing on July 27, 2000.
During the hearing, Petitioner presented the testimony of one witness, Robert Dungan. Respondent also presented the testimony of one witness, Gary Smith. The parties offered Joint Exhibits 1-17 and 20-31, which were accepted into evidence. The parties agreed that Petitioner would file the corrections page to Robert Dungan's deposition, Joint Exhibit 24, after the
hearing. They also agreed that Respondent would file copies of Joint Exhibits 30 and 31 after the hearing.
On July 27, 2000, Respondent filed copies of Joint Exhibits
30 and 31. Petitioner filed the corrections page to Robert Dungan's deposition, Joint Exhibit 24, on July 31, 2000.
The court reporter filed the Transcript of the proceeding on August 4, 2000.
Petitioner filed its Proposed Recommended Order on August 28, 2000. That same day, Petitioner filed Notice of Filing excerpts of Joint Exhibits 30 and 31.
Respondent filed its Proposed Recommended Order on August 29, 2000.
FINDINGS OF FACT
In February 1998, Petitioner was incorporated in the State of Hawaii. On April 6, 1998, the State of Hawaii licensed Petitioner as a risk retention captive insurance company, authorized to provide its members contractual liability insurance in the manner provided by Chapter 431, Article 19, Hawaii Revised Statutes.
Petitioner submitted an "Application for Registration as a Risk Retention Group" dated February 3, 1999, to Respondent. Along with the application, Petitioner furnished Respondent a copy of the plan of operation that it had previously submitted to Hawaii, an Appointment of the Insurance
Commissioner of the State of Florida to accept service of process, and a resolution by Petitioner's Board of Directors authorizing the appointment.
Petitioner furnished Respondent other information, including, but not limited to, the "Statement of Actuarial Opinion of PrimeGuard" for the year ended December 31, 1998, its annual statement for the year ended December 31, 1998, and its quarterly statement as of March 31, 1999, in the form prescribed by the National Association of Insurance Commissioners. Petitioner had previously furnished Hawaii and the other states in which it was doing business with this information.
Respondent requested additional information for each of Petitioner's directors and officers, including the following: biographical affidavits, releases of information forms, waiving any right of confidentiality; fingerprint cards; and background investigative reports. Respondent also requested Petitioner to furnish an economic feasibility study for Florida, an organizational chart, copies of relevant Hawaii law, documents relating to the relationship between Petitioner and First Assured Warranty Corporation (FAWC), financial statements for FAWC, information regarding an entity described as "Transportation American Group," and copies of agreement relating to Petitioner's initial funding. Petitioner did not furnish Respondent with the requested information.
By letter dated February 21, 2000, Respondent advised Petitioner that its application was incomplete and therefore denied. On or about June 22, 2000, Respondent issued the Amended Letter of Disapproval referenced above in the Preliminary Statement.
At the time of the hearing, Petitioner was registered as a non-domiciliary risk retention group in over 30 states.
In 1997, Respondent approved the registration of two non-domiciliary risk retention groups, both of which were chartered in Vermont. The business plans of these risk retention groups provide that they will spread and assume the liabilities of their members' failure to perform under home warranties that their members issue, and will directly perform those obligations should the member not do so. These groups are: (a) United Home Insurance Company, owned by Beezer Homes, USA, Inc. and its wholly-owned subsidiaries; and (b) Columbia National Risk Retention Group, owned by the Ryland Group and its wholly-owned operating subsidiaries.
As of December 31, 1999, Petitioner had only three members. Two members were "third party obligors" or automobile warranty companies that market, issue and administer automotive service warranties. The third member was a "dealer-obligor."
As of March 1, 2000, Petitioner had seven members.
Five members were auto dealers in Oklahoma, and two were
warranty companies in Colorado. FAWC was one of the two warranty companies. Petitioner had no members in Hawaii, its state of incorporation and charter.
In the "insurance policy" between Petitioner and the dealers, the phrase "the Company" refers to Petitioner. The term "insured" is defined as "[t]he person, corporation, partnership or other entity, who is a member of PrimeGuard and participates in PrimeGuard's Administrator's program. In addition, the Insured issued an accepted and validated ESA [extended service agreement] to the Purchaser and is named on the ESA as the Obligor."
Petitioner's Articles of Incorporation limit its board of directors to three members.
Petitioner has two types of stock, series A redeemable preferred (preferred) and common. Holders of both types of stock have voting rights.
The holders of preferred stock as a class are entitled to elect at least 40 percent, or two of the three directors. FAWC owns all of Petitioner's preferred stock; therefore, FAWC has the right to elect the majority of the board.
Petitioner issues its members one share of common stock at a cost of $1 per share. FAWC owns 100,000 shares of common stock; it has the right to one vote per share of common
stock. The six other members have one share of common stock each for a total of six votes.
The holders of the common stock are entitled to vote on the third director. Because FAWC has the majority of the common stock, it also controls the election of the third director.
Only the class of shareholders that elects a director may fill a vacancy in the position of that director. Therefore, FAWC will always control the election of Petitioner's board, which may take any action regarding Petitioner's management with or without a formal meeting.
FAWC owns 650,000 shares of preferred stock. With one vote per share of stock, FAWC has 750,000 votes, 650,000 votes from its preferred stock and 100,000 votes from its common stock.
Petitioner can take no significant action (merger, payment of dividends, or entry into reinsurance agreements) without the consent of the preferred stockholders. Therefore, Petitioner cannot take any such action without the approval of FAWC.
The Articles of Incorporation state that the preferred stock is redeemable. Petitioner asserts that its goal is redemption of that stock. However, as of the date of the hearing, no preferred stock has been redeemed.
The common stock issued to the five auto dealers has no investment potential.
Petitioner has no authority to demand that its members make up a deficiency.
On its face, Petitioner's plan of operation provides that only persons or entities who are obligated to perform under motor vehicle service warranties, and who are members and equity owners of Petitioner, are to be insured by Petitioner; the plan reflects that Petitioner has as its owners only persons or companies who comprise the membership of Petitioner and who are provided insurance by Petitioner.
Additionally, the plan provides that Petitioner will not, itself, sell or provide motor vehicle service warranties or extended service warranties to consumers or owners of automobiles, but will instead accept and spread, and issue insurance policies for the liability exposure of its members' failure or inability to perform their obligations under motor vehicle service warranties, which the members have provided to consumers.
Petitioner has designated FAWC as the administrator of its extended service agreement (ESA) program. FAWC is required to establish a "Dealer/Administrator Agreement" which must be signed by FAWC and dealers, who enroll in the ESA program and
"sell" the ESAs. Petitioner obtains its business through FAWC and these dealer members.
Petitioner's actuaries determine the prices that it will charge for the ESAs. FAWC then provides the dealers with pricing information regarding each of Petitioner's ESA programs. Petitioner issues the ESAs, not the dealers. The dealers merely sell the ESAs to their customers, the general public.
When auto dealers sell a warranty to car buyers, they enter certain information into FAWC's computer system, which automatically displays the "best coverage" for the particular vehicle, based on mileage, age, and other guidelines. The dealers enter their "markup percentage or fixed dollar amount markup," which is automatically added to the "dealer cost" to produce the suggested list price. In other words, dealers are paid a commission for each warranty sold.
The dealers keep the commission and remit the "net dealer cost" to FAWC. The net dealer cost first goes to FAWC, then to Petitioner as its premium for the issuance of the warranty. The dealers pay no part of the premium.
FAWC decides whether to accept or reject the applications for ESAs submitted by dealers. Dealers may not sell an ESA on a vehicle that does not meet Petitioner's underwriting guidelines. FAWC's computer system generates the ESA acceptance or rejection postcards for mailing directly to
the ESA holders. This is exactly the way an insurance agent sells insurance for an authorized insurer. In this case, the dealer sells a warranty issued by Petitioner.
FAWC's computer system provides instant access to each dealer's complete history "in regards to monthly production." In the insurance industry, a producer is an insurance salesman.
Every ESA contains "convenience benefits," including towing coverage, substitute car rental coverage, tire/road hazard protection, lost key/lockout assistance, and trip interruption protection.
A customer, dealer, or transient repair facility may file a claim for service directly to FAWC. FAWC processes the claim, reports it to Petitioner, and requests claim payment from Petitioner. Petitioner sends funds for claim payment to FAWC, which issues the check for the repair directly to the customer (reimbursement), dealer, or transient repair facility.
Pursuant to the ESA application, FAWC has sole discretion to determine whether a particular repair or replacement of a part is covered by the ESA. FAWC must pre- authorize all services provided under an ESA, except for certain emergency repairs.
FAWC requires a dealer to "highlight the parts and labor charges for which you expect payment." A dealer must
obtain an authorization number from FAWC before the dealer can begin making repairs.
The only time that the dealer is involved in the claims process is when dealer makes the actual repairs. The dealer has no obligation to make the repairs.
Petitioner will either repair or replace, or pay for the repair or replacement of any warranted failures to a covered vehicle.
When ESA owners wish to cancel their warranties, they send FAWC a written request. FAWC processes the cancellation and requests the unearned premium from Petitioner. Petitioner refunds the unearned premium for the warranty directly to the purchaser, not the dealer.
FAWC audits each dealer's earned loss ratios. FAWC will take corrective action against a dealer if necessary. Corrective action may include, but is not limited to, imposing a surcharge on all ESAs a dealer writes or negotiating a discounted repair pricing structure.
If a dealer has too many claims, the dealer may be required to give up its share of common stock. In that case, Petitioner will reimburse the dealer for the price of its stock.
Petitioner has purchased "New and Used Automobile Warranty Aggregate Stop Reinsurance" from Swiss Re America.
In Petitioner's application to become a captive insurance company in the State of Hawaii, Petitioner could not provide financial information about its owners/insureds because it could not begin operations until it was licensed in Hawaii and registered in the jurisdictions in which it intended to market and insure risks.
Petitioner provided the State of Hawaii with additional information in a supplemental application. This information indicates that Petitioner's line of business would be automotive service contracts. Petitioner projected that it would insure approximately 3,500 vehicles in the first year. Petitioner set forth the following marketing strategies:
First Assured will use its own marketing force to initially solicit automobile dealers within the states of Colorado, Arizona, New Mexico and Utah. By developing a service contact [sic] that offers a variety of comprehensive coverage options, many customer-friendly features, and a competitive price, First Assured believes that it can and will capture a respectable share of the marker. Most importantly,
the level of service that First Assured will provide its dealers will be unmatched in the industry.
There is no evidence that Hawaii ever made a determination that Petitioner was structured properly as a risk retention group. Moreover, Hawaii did not license Petitioner as an insurer. Instead, Hawaii licensed Petitioner as a captive
insurance company to provide contractual liability insurance to its members under Article 19, Hawaii Revised Statutes.
Neither Petitioner nor FAWC is licensed in Florida as a motor vehicle service agreement company.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction of the parties and the subject matter of this proceeding. Sections 120.569 and 120.57(1), Florida Statutes.
Petitioner has the burden of proving by a preponderance of the evidence that it is qualified to be registered in Florida as a risk retention group. Florida Department of Transportation v. J.W.C. Co., 396 So. 2d 778 (Fla.
1st DCA 1981).
Congress enacted The Products Liability Risk Retention Act (PLRRA) in 1981 to encourage the formation of risk retention groups because of the lack of product liability insurance at affordable rates. National Risk Retention Association v. Brown, 927 F. Supp. 195, 197 (M.D. La. 1996), citing Mears Transportation Group v. State, 34 F.3d 1013, 1016 (11th Cir.
1994). The PLRRA sought to "reduce the problem of the rising cost of product liability insurance by permitting product manufacturers to purchase insurance on a group basis at more favorable rates (via purchasing groups) or to self-insure through insurance cooperatives called risk retention groups."
H.R.Rep. No. 190 at 4(1981), reprinted in 1981 U.S.C.C.A.N.
1432.
In 1986, Congress enacted the Liability Risk Retention Act (LRRA) to broaden the PLRRA and to allow business and professional groups, including health care providers, to form additional risk retention groups. See 15 U.S.C. Section 3901 et. seq., as amended.
Some of the relevant definitions in the LRRA are as
follows:
As used in this chapter--
"insurance" means primary insurance, excess insurance, reinsurance, surplus lines insurance, and any other arrangement for shifting and distributing risk which is determined to be insurance under applicable State or Federal law;
"liability"--
means legal liability for damages (including costs of defense, legal costs and fees, and other claims expenses) because of injuries to other persons, damage to their property, or other damage or loss to such other person resulting from or arising out of--
any business (whether profit or nonprofit), trade, product, services (including professional services), premises, or operations . . .
* * *
does not include personal risk liability and an employer's liability with respect to its employees other than legal liability under the Federal Employers' Liability Act (45 U.S.C. 51 et seq.);
"personal risk liability" means liability for damages because of injury to
any person, damage to property, or other loss or damage resulting from any personal, familial, or household responsibilities or activities, rather than from responsibilities or activities referred to in paragraphs (2)(A) and (2)(B);
"risk retention group" means any corporation or other limited liability association--
whose primary activity consists of assuming, and spreading all, or any portion, of the liability exposure of its group members;
which is organized for the primary purpose of conducting the activity described under subparagraph (A);
which--
(i) is chartered or licensed as a liability insurance company under the laws of a State and authorized to engage in the business of insurance under the laws of such State; . .
* * *
which--
has as its owners only persons who comprise the membership of the risk retention group and who are provided insurance by such group; or
has as its sole owner an organization which has as--
its members only persons who comprise the membership of the risk retention group; and
its owners only persons who comprise the membership of the risk retention group and who are provided insurance by such group;
whose members are engaged in businesses or activities similar or related with respect to the liability to which such members are exposed by virtue of any related, similar, or common business, trade, product, services, premises, or operations;
whose activities do not include the provision of insurance other than--
liability insurance for assuming and spreading all or any portion of the similar or related liability exposure of its group members . . .
15 U.S.C. Section 3901(a).
The LRRA provides as follows regarding the construction of the above referenced definitions:
Nothing in this chapter shall be construed to affect either the tort law or the law governing the interpretation of insurance contracts of any State, and the definitions of liability, personal risk liability, and insurance under any State law shall not be applied for the purposes of this chapter, including recognition or qualification of risk retention groups or purchasing groups.
15 U.S.C. Section 3901(b).
The LRRA exempts risk retention groups from most state laws, rules, regulations, or orders as set forth below in pertinent part:
Exemptions from State laws, rules, regulations, or orders
Except as provided in this section, a risk retention group is exempt from any State law, rule, regulation, or order to the extent that such law, rule, regulation, or order would--
make unlawful, or regulate, directly or indirectly, the operation of a risk retention group except that the jurisdiction in which it is chartered may regulate the formation and operation of such a group and any State may require a group to--
comply with the unfair claim settlement practices law of the State;
pay, on a nondiscriminatory basis, applicable premium and other taxes which are
levied on admitted insurers and surplus lines insurers, brokers, or policyholders under the laws of the State;
participate, on a nondiscriminatory basis, in any mechanism established or authorized under the law of the State for the equitable apportionment among insurers of liability insurance losses and expenses incurred on policies written through such mechanism;
register with and designate the State insurance commissioner as its agent solely for the purpose of receiving service of legal documents or process;
submit to an examination by the State insurance commissioners in any State in which the group is doing business to determine the group's financial condition, if--
the commissioner of the jurisdiction in which the group is chartered has not begun or has refused to initiate an examination of the group . . .
* * *
comply with a lawful order issued--
in a delinquency proceeding commenced by the State insurance commissioner if there has been a finding of financial impairment under subparagraph (E); or
in a voluntary dissolution proceeding;
comply with any State law regarding deceptive, false, or fraudulent acts or practices, except that if the State seeks an injunction regarding the conduct described in this subparagraph, such injunction must be obtained from a court of competent jurisdiction;
comply with an injunction issued by a court of competent jurisdiction, upon a petition by the State insurance commissioner alleging that the group is in hazardous financial condition or is financially impaired . . .
* * *
require or permit a risk retention group to participate in any insurance insolvency guaranty association to which an insurer licensed in the State is required to belong;
* * *
(4) otherwise discriminate against a risk retention group or any of its members, except that nothing in this section shall be construed to affect the applicability of State laws generally applicable to persons or corporations.
15 U.S.C. Section 3902(a).
The LRRA sets forth the scope of the above reference exemptions as follows in pertinent part:
(b) Scope of exemptions
The exemptions specified in subsection (a) of this section apply to law governing the insurance business pertaining to--
liability insurance coverage provided by a risk retention group for--
such group; or
any person who is a member of such group;
the sale of liability insurance coverage for a risk retention group; and
the provision of--
insurance related services;
management, operations, and investment activities; or
loss control and claims administration (including loss control and claims administration services for uninsured risks retained by any member of such group)
for a risk retention group or any member of such group with respect to liability for which the group provides insurance.
15 U.S.C. Section 3902(b).
When seeking a charter from a domiciliary state or registering with a non-domiciliary state, risk retention groups must provide insurance commissioners with the following documents in relevant part:
Documents for submission to State insurance commissioners
Each risk retention group shall submit--
to the insurance commissioner of the State in which it is chartered--
before it may offer insurance in any State, a plan of operation or a feasibility study which includes the coverages, deductibles, coverage limits, rates, and rating classification systems for each line of insurance the group intends to offer; and
revision of such plan or study if the group intends to offer any additional lines of liability insurance;
to the insurance commissioner of each State in which it intends to do business, before it may offer insurance in such State-
a copy of such plan or study (which shall include the name of the State in which it is chartered and its principal place of business); and
a copy of any revisions to such plan or study, as provided in paragraph (1)(B) (which shall include any change in the designation of the State in which it is chartered); and
to the insurance commissioner of each State in which it is doing business, a copy of the group's annual financial statement submitted to the State in which the group is chartered as an insurance company; which statement shall be certified by an independent public accountant and contain a statement of opinion on loss and loss adjustment expense reserves . . .
15 U.S.C. Section 3902(d).
The LRRA gives state and federal courts the following specific powers:
Power of courts to enjoin conduct Nothing in this section shall be construed to affect the authority of any Federal or State court to enjoin--
the solicitation or sale of insurance by a risk retention group to any person who is not eligible for membership in such group; or
the solicitation or sale of insurance by, or operation of, a risk retention group that is in hazardous financial condition or is financially impaired.
State powers to enforce State laws
Subject to the provisions of (a)(1)(G) of this section (relating to injunctions) and paragraph (2), nothing in this chapter shall be construed to affect the authority of any State to make use of any of its powers to enforce the law of such State with respect to which a risk retention group is not exempt under this chapter.
If a State seeks an injunction regarding the conduct described in paragraphs (1) and (2) of subsection (e) of the section, such injunction must be obtained from a Federal or State court of competent jurisdiction.
15 U.S.C. Sections 3902(e) and 3902(f).
Risk retention groups are not full-fledged multi-line insurance companies. They are limited to providing coverage only to members and only for a narrow type of coverage. Mears Transportation Group v. State of Florida, 34 F.3d 1013, 1017 (11th Cir. 1994).
In order for a risk retention group to be exempt from regulation in a state, other than its chartering state, it must
be in the business of selling insurance to group members, rather than to the general public. National Risk Retention Association v. Brown, 927 F. Supp. 195, 197 (M.D. La. 1996).
An entity must qualify as a risk retention group under the definition in 15 U.S.C. Section 3901(a)(4). Otherwise it is not entitled to act as a risk retention group.
Registration of a risk retention group by a non- chartering state is not a ministerial function. Regulatory authority over the business of insurance remains with the individual state, limited only by preemption provisions contained in federal statutes, including the LRRA. Insurance Company of Pennsylvania v. Corcoran, 850 F.2d 88, 91 (2d Cir.
1988).
The LRRA does not require the chartering state to determine: (a) that the insurer qualifies as a risk retention group; (b) that the ownership of the proposed group meets the requirements of the LRRA for a risk retention group; and (c) that the particular type of insurance being sold by the risk retention group covers a liability risk as defined by 15 U.S.C. Section 3901(a)(2). The insurer has the responsibility to meet the requirements of the LRRA. If it fails to do so, it is treated like any other liability insurer.
The chartering state's control over a true risk retention group is the same control it has over any other
liability company in its state. The LRRA does not require a risk retention group to do business as such rather than as a liability company in its chartering or non-chartering state. The choice is the company's. It may either comply with the LRRA, and operate in non-chartering states as a risk retention group, or it must be licensed as a full-line insurer in those non-chartering states.
The LRRA does not prohibit a non-chartering state from examining the filing of a prospective registrant to determine whether the applicant meets the definition of a risk retention group as set forth in 15 U.S.C. Section 3901(a)(4).
In Black's Law Dictionary, 6th Ed. 1995, an "owner" is
defined as:
The person in whom is vested the ownership, dominion, or title of property; proprietor. The one who has dominion of a thing, real or personal, corporeal or incorporeal, which he has a right to enjoy and do with as he pleases, even to spoil or destroy it, as far as the law permits, unless he be prevented by some agreement or covenant which restrains his right . . . The term is, however, a nomen generalissimum, and its meaning is to be gathered from the connection in which it is used, and from the subject-matter to which it is applied . . . The term 'owner' is used to indicate a person in whom one or more interests are vested for his own benefit.
Petitioner has one owner, FAWC. For all intents and purposes, FAWC is Petitioner's parent company. The other
members have no control and cannot effectuate any significant action on behalf of the company.
Risk retention groups are groups of risk-bearers who have banded together in an insurance cooperative to share liability. Preferred Physicians Mutual Risk Retention Group v.
Pataki, 85 F.3d 913 (2nd. Cir. 1996). In this case, Petitioner is an insurer owned by one entity; it is not a cooperative of auto dealers because it members do not share liability as required by 15 U.S.C. Section 3901(a)(4)(E). Therefore, Petitioner is not a risk retention group.
For Petitioner's auto-dealer members to be defined as owners, they must be provided "insurance" by the risk retention group. This is not the case here for two reasons: (a) the product offered by Petitioner is a warranty and not insurance; and (b) the product is provided to the general public and not to the auto dealers. The auto dealers merely sell the warranty and receive a commission.
The warranty marketed by Petitioner is not one of the types of coverages set forth in 15 U.S.C. Section 3901(a)(1). A warranty is not insurance. Rayos v. Chrysler Credit Corp., 683
S.W.2d | 546 | (Tex. App. 1985); Austine v. Lake Darling Ranch, 233 |
N.W.2d | 723 | (Minn. 1995); State Division of Insurance v. Norwest |
Corp., | 581 | N.W.2d 158 (S.D. 1998). |
The product that Petitioner proposes to issue in Florida is entitled "Insurance Policy." It purportedly covers a risk of the dealer/obligor. However, when the terms of the contract are examined, it is clear that it is a motor vehicle warranty. The dealer has no liability and pays no premium. There is no risk for the auto dealer to insure against.
FAWC is not in the business of selling automobiles and therefore, is not in the same business as Petitioner's members who are auto dealers. FAWC's principle business involves the marketing of automobile service contracts.
FAWC acts as the purported administrator of Petitioner's ESA programs. However, FAWC approves and issues every warranty that a dealer/producer sells. FAWC also provides insurance on the warranties to consumers who buy the warranties and who are, in fact, the insureds. The LRRA limits a risk retention group to insuring only the liability risks of its members; it is prohibited from selling to the general public under a marketing scheme like the one at issue here.
The LRRA was enacted to increase the availability of "commercial liability" insurance. State of Florida, Department of Insurance v. National Amusement Purchasing Group, Inc., 905 F.2d 361, 362 (11th Cir. 1990); Insurance Company of State of Pennsylvania v. Corcoran, 850 F.2d 88 (2nd Cir. 1988). The
warranty that Petitioner proposes to sell is not commercial
liability insurance. It comes into existence as the result of a contract between Petitioner/FAWC and the purchaser of the vehicle. It is contractual liability, not commercial liability. It does not protect the member from a liability "resulting from or arising out of" its business as required by 15 U.S.C. Section 3901(a)(2). Instead, the warranty is the result of an extracurricular profit-making contract undertaken by the dealer and Petitioner/FAWC.
For the reasons set forth above, Petitioner is not a risk retention group that can conduct business in Florida without a certificate of authority as a full-line insurer or a license to do business as a motor vehicle service agreement company. Therefore it is not necessary to address Petitioner's argument that 15 U.S.C. Section 3901 et seq. preempts Florida laws, rules and regulations. Nevertheless, it was appropriate to present evidence as to the preemption issues raised by Petitioner so that those issues can be preserved for possible appellate review and so that a factual record is available if disposition of those issues is deemed appropriate by the appellate court.
State and federal courts clearly have the authority and the jurisdiction to adjudicate issues pertaining to the preemption of state regulation by federal law. See Blue Cross &
Blue Shield v. Weiner, 868 F.2d 1550, 1552 (11th Cir. 1989);
Browning Corp. Int'l v. Lee, 624 F. Supp. 555, 557 (N.D. Tex.
1986). On the other hand, an administrative agency has no authority to declare a statute void or unenforceable on grounds that the statute is preempted by federal law, that it is contrary to federal law, or that it offends the Constitution of the United States or the Constitution of the State of Florida. See Palm Harbor Special Fire Control District v. Kelly, 516 So. 2d 249, 250 (Fla. 1987)(finding that an administrative agency has no power to declare a statute void or otherwise unenforceable).
Until a court of competent jurisdiction determines that the provisions of 15 U.S.C. Section 3902 et seq. preempt
the regulation of Petitioner activities in Florida, Respondent is required to presume that the state's laws are enforceable and it should discharge its regulatory responsibilities accordingly.
Section 634.011(8), Florida Statutes, defines a "motor vehicle service agreement company" or "service agreement company" as "any corporation, sole proprietorship or partnership (other than an authorized insurer) issuing motor vehicle service agreements." An "authorized" insurer is one that possesses a certificate of authority to transact insurance business in this state. Section 624.09, Florida Statutes.
Under Section 634.031, Florida Statutes, a person or entity may not transact, administer, or market motor vehicle
service agreements in Florida unless it is authorized to do so under a subsisting license. Section 634.041, Florida Statutes, sets forth the qualifications for licensure as a motor vehicle service agreement company.
At first blush, Petitioner appears to be a risk retention group. However, close examination of its corporate structure and plan of operation reveals that it is a marketing device for a foreign captive insurer to unlawfully market its auto warranties through unlicensed Florida auto dealers.
In sum, Petitioner is prohibited from issuing auto warranties for several reasons. First, Hawaii has not chartered Petitioner as a liability company as required by 15 U.S.C. Section 3901(a)(4)(C). Second, the warranty Petitioner proposes to sell in Florida is not insurance as required by 15 U.S.C. Section 3901(a)(1). Third, a warranty does not provide coverage for a liability risk as required by 15 U.S.C. Section 3901(a)(2). Fourth, Petitioner is not owned by its members as required by 15 U.S.C. Section 3901(a)(4)(E). Fifth, Petitioner is not a licensed motor vehicle service agreement company or an authorized insurer as required by Chapter 634, Florida Statutes. Finally, Petitioner proposes to sell warranties to the general public, and not to its auto dealer members. Petitioner has not met its burden of proving that it is qualified to be registered in Florida as a risk retention group.
Based on the foregoing Findings of Fact and Conclusions of Law, it is
RECOMMENDED:
That Respondent enter a final order denying Petitioner's application to register as a risk retention group.
DONE AND ENTERED this 3rd day of October, 2000, in Tallahassee, Leon County, Florida.
SUZANNE F. HOOD
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 www.doah.state.fl.us
Filed with the Clerk of the Division of Administrative Hearings this 3rd day of October, 2000.
COPIES FURNISHED:
John Keller, Esquire Margaret-Ray Kemper, Esquire Ruden, McClosky, Smith,
Schuster, & Russell, P.A.
215 South Monroe Street, Suite 815 Tallahassee, Florida 32301
Robert Prentiss, Esquire Department of Insurance Division of Legal Services
200 East Gaines Street Tallahassee, Florida 32399-0333
Daniel Y. Sumner, General Counsel Department of Insurance
The Capitol, Lower Level 26 Tallahassee, Florida 32399-0307
Honorable Bill Nelson Commissioner
Department of Insurance
The Capitol, Plaza Level 02 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.
| Issue Date | Document | Summary |
|---|---|---|
| Dec. 04, 2001 | Agency Final Order | |
| Dec. 04, 2000 | Agency Final Order | |
| Oct. 03, 2000 | Recommended Order | Petitioner is not entitled to register as a risk retention group to market motor vehicle service agreements. |
