STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
DEPARTMENT OF INSURANCE, )
)
Petitioner, )
)
vs. ) Case No. 00-3238
) SUPERIOR INSURANCE COMPANY, )
)
Respondent. )
)
RECOMMENDED ORDER
Robert E. Meale, Administrative Law Judge of the Division of Administrative Hearings, conducted the final hearing in Tallahassee, Florida, on February 7-8, 2001.
APPEARANCES
For Petitioner: S. Marc Herskovitz
Luke S. Brown
Division of Legal Services Department of Insurance
200 East Gaines Street, Sixth Floor Tallahassee, Florida 32399-0333
For Respondent: Clyde W. Galloway, Jr.
Austin B. Neal Foley & Lardner
106 East College Avenue, Suite 900 Tallahassee, Florida 32301
STATEMENT OF THE ISSUES
The issues are whether Respondent has made unauthorized payments to Superior Insurance Group, its corporate parent, and
whether Respondent has properly disclosed these payments on its financial reports filed with Petitioner.
PRELIMINARY STATEMENT
By Notice of Intent to Issue Cease and Desist Order dated July 7, 2000, Petitioner alleged that Respondent reported net losses and declines in policyholder surplus in 1998, 1999, and that part of 2000 for which financial information was available. Petitioner alleged that, from April 1996 through 1999, Respondent had paid over $35 million to its corporate parent, Superior Group, in excess of the amounts disclosed in financial statements as paid under its management agreement with Superior Group. Petitioner alleged that these overpayments comprised installment fees, policy fees, and finance charges paid by automobile policyholders of Respondent and two affiliated companies.
Count I of the Notice of Intent alleges that Respondent has engaged in conduct that demonstrates a lack of fitness or trustworthiness to engage in the insurance business, is hazardous to the public, or constitutes business operations that are detrimental to policyholders, stockholders, creditors, or the public; Respondent has violated provisions of the Insurance Code, in violation of Section 624.310(3)(a), Florida Statutes; and Respondent has written excessive premiums, relative to surplus, in violation of Section 624.4095(1), Florida Statutes.
Count II of the Notice of Intent alleges that Respondent has paid dividends, unapproved by the Insurance Commissioner, from sources other than surplus, net operating profits, or net realized capital gains, in violation of Section 628.371(1), Florida Statutes; Respondent has paid extraordinary dividends without notice to the Insurance Commissioner, in violation of Rule 4-143.047, Florida Administrative Code; and Respondent has paid dividends in violation of the consent order approving the acquisition of Respondent and the agreement underlying the consent order, in violation of Section 624.310(3)(a), Florida Statutes.
Counts III-VII allege that Respondent’s disclosure or nondisclosure of the payments that it made to Superior Insurance Group violated various requirements for financial reporting and prohibitions against filing misleading or false information.
Count VIII alleges that Respondent, as a “controlled insurer” under Section 626.7491(2)(c), Florida Statutes, failed to comply with the requirement that it maintain an audit committee of independent directors, in violation of Section 626.7491(6), Florida Statutes.
The Notice of Intent informs Respondent that the Insurance Commissioner intends to enter an order directing Respondent to cease and desist from these violations and to take the following corrective actions:
Discontinue the distribution of assets to its parent corporation or any affiliate in excess of the amounts approved by Petitioner in prior agreements or amounts permitted under the Insurance Code.
Seek repayment of all amounts already distributed, from April 30, 1996, through the date of the Cease and Desist Order, by Respondent to its parent corporation in excess of the amounts approved by Petitioner in prior agreements or amounts permitted under the Insurance Code.
File corrected financial-reporting statements.
In the future, file full and true annual statements, quarterly statements, holding company registration statements, management discussions and analyses, and other required filings.
Take all necessary steps to comply with the ratios of premium to surplus specified in Section 624.4095, Florida Statutes.
Establish the audit committee required by Section 626.7491(6), Florida Statutes, and comply with the reporting requirements of Section 626.7491(7), Florida Statutes.
Respondent served a Petition for Formal Hearing on July 28, 2000. Respondent contended that, in approving the acquisition, Petitioner had approved Respondent’s payment of an installment billing fee to its corporate parent.
On January 12, 2001, Petitioner served a Motion for Leave to File an Amended Notice of Intent to Issue a Cease and Desist Order. On January 25, 2001, the Administrative Law Judge granted the motion. The Amended Notice of Intent contains only two counts.
Count I of the Amended Notice of Intent alleges that the excess payments from Respondent to its corporate parent violate the consent order and that Respondent is engaging in conduct that demonstrates a lack of fitness or trustworthiness to engage in the insurance business, is hazardous to the public, or constitutes business operations that are detrimental to policyholders, stockholders, creditors, or the public. Count I also alleges that the excess payments violate the Insurance Code, violate a rule or order of Petitioner, and breach a written agreement with Petitioner, in violation of Section 624.310(3)(a), Florida Statutes.
Count I of the Amended Notice of Intent alleges that Section 628.371(1), Florida Statutes, prohibits an insurer from paying a dividend, cash, or other property to stockholders except from surplus that is derived from realized net operating profits on its business and realized net capital gains. Count I alleges that Rule 4-143.047(3)(a) and (b), Florida Administrative Code, prohibits an insurer from paying an
extraordinary dividend or other distribution to stockholders until 30 days after notice to the Insurance Commissioner.
Count I alleges that Section 624.418(1)(b), Florida Statutes, provides that Petitioner “shall” suspend or revoke an insurer’s certificate of authority if it finds that the insurer is conducting its business so that its further transaction of business in Florida is hazardous or injurious to policyholders or the public. Count I alleges that Section 624.418(2)(a), Florida Statutes, provides that Petitioner “may” suspend or revoke an insurer’s certificate of authority if it finds that the insurer has violated any lawful order or rule of Petitioner or any provision of the Insurance Code.
Count II of the Amended Notice of Intent alleges that Section 624.424(1)(a), Florida Statutes, requires Respondent to file an Annual Statement disclosing its financial condition for the preceding year. Count II alleges that Section 624.424(1)(a), Florida Statutes, requires Respondent to file Quarterly Statements disclosing its financial condition for the covered periods.
Count II alleges that Respondent filed statements showing net losses of approximately $8.1 million for 1998, $19.2 million for 1999, and $2.4 million for the first quarter of 2000. Count II alleges that policyholder surplus declined from approximately
$65.1 million as of year-end 1997 to $24.0 million as of September 30, 2000.
Count II alleges that Respondent materially misrepresented the nature and amount of its payments to its corporate parent in the Annual Statements filed for 1996, 1997, 1998 (as amended on April 1, 1999), and 1999. Count II alleges that the accompanying financial statements misleadingly labeled the excess payments made to the corporate parent as “Service Fee for Ceded Business.” Count II alleges that these transactions were omitted from the Notes to Financial Statements and Schedule Y, Part 2, of the Annual Statement. Count II alleges that Respondent treated these excess payments in an identical manner on its Quarterly Statements for June 30, 1999, September 30, 1999, and March 31, 2000. Count II alleges that Rule
4-137.001(4)(a)1, Florida Administrative Code, requires that insurers prepare all annual and quarterly statements in accordance with the NAIC’s Annual Statement Instructions, Property and Casualty, 1999.
Count II alleges that Petitioner may issue a cease and desist order when an insurer violates any provision of the Insurance Code, as provided by Section 624.310(3)(a), Florida Statutes, or engages in conduct that demonstrates a lack of fitness or trustworthiness to engage in the insurance business, is hazardous to the public, or constitutes business operations
that are detrimental to policyholders, stockholders, creditors, or the public.
Count II alleges that Section 624.418(1)(b), Florida Statutes, provides that Petitioner “shall” suspend or revoke an insurer’s certificate of authority if it finds that the insurer is conducting its business so that its further transaction of business in Florida is hazardous or injurious to policyholders or the public. Count II alleges that Section 624.418(2)(a), Florida Statutes, provides that Petitioner “may” suspend or revoke an insurer’s certificate of authority if it finds that the insurer has violated any lawful order or rule of Petitioner or any provision of the Insurance Code.
Based on the allegations of Counts I and II, the Amended Notice of Intent states that, pursuant to Section 624.310(3), Florida Statutes, the Insurance Commissioner intends to issue a cease and desist order directing Respondent to cease and desist from these violations and take the following corrective action:
Discontinue the distribution of assets to its parent corporation or any affiliate in excess of the amounts approved by Petitioner in prior agreements or amounts permitted under the Insurance Code.
Seek repayment of all amounts already distributed, from April 30, 1996, through the date of the Cease and Desist Order, by Respondent to its parent corporation in excess of the amounts
approved by Petitioner in prior agreements or amounts permitted under the Insurance Code.
In the future, file full and true annual statements, quarterly statements, holding company registration statements, and other required filings.
At the hearing, Petitioner conceded that it bore the burden of proof. However, the parties did not agree as to the standard of proof. The Conclusions of Law identify the appropriate standard of proof.
At the hearing, each party called two witnesses.
Petitioner offered into evidence 24 exhibits, and Respondent offered into evidence 20 exhibits. All exhibits were admitted except Respondent Exhibit 9, which was withdrawn, and Respondent Exhibit 10, which was proffered.
The court reporter filed the transcript on March 9, 2001.
FINDINGS OF FACT
Respondent is a domestic stock insurance company operating under a certificate of authority to transact in Florida the business of property and casualty insurance. As a nonstandard automobile insurer, Respondent primarily deals with policyholders whose driving records and accident histories preclude their coverage by standard automobile insurers.
Superior Insurance Group, Inc. (formerly GGS Management, Inc. (GGS)) owns Respondent; Symons International
Group, Inc. (Symons) owns Superior Insurance Group, Inc. (Superior Group); and Goran Capital, Inc. (Goran) owns 73 percent of Symons. Although publicly traded, Goran was founded, and probably is still controlled, by the Symons family.
Superior Group serves as Respondent’s managing general agent. GGS changed its name to Superior Group in early 2000; where appropriate, this Recommended Order refers to this entity as GGS/Superior Group.
Respondent owns Superior American Insurance Company (Superior American) and Superior Guaranty Insurance Company (Superior Guaranty), which are both domestic stock insurance companies authorized to conduct in Florida the business of property and casualty insurance. Also engaged in the nonstandard automobile insurance business, Superior American and Superior Guaranty transfer all of their premiums and losses to Respondent under a reinsurance agreement. All financial information concerning Superior American and Superior Guaranty, which, for the purpose of this case, are mere conduits to Respondent, are included in the financial information of Respondent.
On or about April 30, 1996, GGS acquired the stock of Respondent, as well as other assets, from an unrelated corporation, Fortis, Inc. or one of its subsidiaries. From the regulatory perspective, the acquisition started when, as
required by law, on or about February 5, 1996, GGS filed with Petitioner a Form A application for Petitioner’s approval of the acquisition of Respondent. This was an extensive document, consisting of more than 1000 pages. One of the purposes of the application process, as described in Section 628.461, Florida Statutes, is to assure the adequacy of the funds used by the entity acquiring the insurer.
The proposed acquisition is described by the Statement Regarding the Acquisition of More Than Five Percent of the Outstanding Voting Securities of Superior Insurance Company
. . . by GGS Management, Inc., dated February 5, 1996 (Acquisition Statement). The Acquisition Statement states that GGS Management Holdings, Inc. owned GGS. (The distinction between GGS and GGS Management Holdings, Inc. is irrelevant to this case, so “GGS,” as used in this Recommended Order, shall also refer to GGS Management Holdings, Inc.)
According to the Acquisition Statement, Symons owned 52 percent of GGS; GS Capital Partners II, L.P., owned 30 percent of GGS; GS Capital Partners II Offshore, L.P., owned 12 percent of GGS; and three mutual funds (probably all affiliates of Goldman Sachs) owned the remaining 6 percent of GGS. GS Capital Partners II, L.P., was owned by 100 investors, including The Goldman Sachs Group, L.P. (16.54 percent), “wealthy individuals and trusts, corporate pension funds, foundations and endowments,
family trusts/corporations and one state pension fund.” The ownership of GS Capital Partners II Offshore, L.P., resembled the ownership of GS Capital Partners II, L.P.
The Acquisition Statement states that GGS “will be the manager of all insurance operations for [Respondent] and will act as the holding company for [Respondent] and [an Indiana nonstandard automobile insurer known as Pafco whose stock Symons was contributing to GGS].”
The Acquisition Statement projects the stock-purchase price, which was expressed as a formula, to be about $60 million. Citing the $2 billion in capital of the two Goldman Sachs limited partnerships and the $50 million in capital of Goran, the Acquisition Statement assures that “GGS has tremendous wherewithal to fund the growth needs of [Respondent]
. . ..” Alluding to Goran’s 20 years’ experience in managing nonstandard automobile insurance companies, the Acquisition Statement represents that the Goldman Sachs limited partnerships and Goran “possess the capital and leadership resources to support the proposed activities of [Respondent].” According to the Acquisition Statement, the Goldman Sachs limited partnerships and Goran “anticipate that the acquisition of [Respondent] is but the first step in an effort to build a significant non-standard auto insurance company.”
The Acquisition Statement describes the respective contributions of the two owners of GGS: Symons will contribute Pafco, which then had a current GAAP book value of $14 million, and the Goldman Sachs limited partnerships will contribute $20 million in cash. With the backing of Symons and the Goldman Sachs limited partnerships and secured by all of the stock of Respondent and GGS, GGS will execute a six-year promissory note with The Chase Manhattan Bank (Chase) for $44 million. Drawing
$40 million from this credit extension and using the $20 million cash contribution of the Goldman Sachs limited partnerships, GGS will fund the anticipated cash purchase price of $60 million.
The Acquisition Statement represents that GGS will be able to service the debt. Due to the cash contribution of the Goldman Sachs limited partnerships, the Chase debt represents only two-thirds of the purchase price. Due to the cash contribution of the Goldman Sachs limited partnerships and the stock contribution by Symons, the Chase debt represents only about one-half of the initial capital of GGS.
The Acquisition Statement states that GGS will service the Chase debt in part by “the combination of the management activities of both Pafco and [Respondent] within GGS, billing fees, other non-insurance company activities and anticipated insurance company operating economies which will result from the combination of these two operations [Pafco and Respondent].”
The equity contributions of cash and stock “contribute significantly to the financial stability of GGS, allowing GGS to service the debt using operating cash flows only, including, if necessary, normal dividends from earned surplus as a secondary source of debt service funds. GGS does not anticipate using dividends from either Pafco or [Respondent] as a primary source of debt service funds.”
The Chase Credit Agreement, which is dated April 30, 1996, requires GGS to use its best efforts to cause Respondent to pay "cash dividends or other distributions or payments in cash including . . . the payment of Billing Fees and Management Fees" in sufficient amounts to pay all principal and interest due under the financing instrument. The Chase Credit Agreement defines "Billing Fees" as: "fees with respect to the payment of premiums on an installment basis that are received by an Insurance Subsidiary from policyholders and in turn paid to [GGS] or received directly by [GGS] . . .." The Chase Credit Agreement defines "Management Fees" as: "all fees paid by an Insurance Subsidiary to [GGS] that are calculated on the basis of gross written premiums."
With respect to the "Management Fees" described in the Chase Credit Agreement, the Acquisition Statement describes a five-year management agreement to be entered into by GGS with Pafco and Respondent (Management Agreement). The Management
Agreement, which GGS and Respondent executed on April 30, 1996, provides that GGS “will provide management services to both Pafco and [Respondent] and will receive from [Respondent] as compensation 17% of [Respondent’s] gross written premium” and a slightly lower percentage of premiums from Pafco (Management Fee). Under the Management Agreement, Respondent “will continue to pay premium taxes, boards and bureaus costs, legal and audit fees and certain computer costs.” The Acquisition Statement states that Respondent’s “operating costs" were about 21%, so the 17% cap “will allow [Respondent] to see a significant and immediate improvement in its overall financial performance”-- over $1 million in 1994, which was the last year for which financial information was then available.
The Management Agreement gives GGS the exclusive right and nondelegable and nonassignable obligation to perform a broad range of business actions on Respondent’s behalf. These actions include accepting contracts, issuing policies, appointing adjustors, and adjusting claims. The Management Agreement requires GGS to "pay [Respondent’s] office rent and occupancy operating expenses from the amounts that it receives pursuant to this Agreement.” In return, the Management Agreement requires Respondent to pay GGS “fees for the business placed with [Respondent as follows:] Agents commission plus 17% not to exceed 32% in total.”
The scope of the services undertaken by GGS in the Management Agreement is similarly described in the Plan of Operation, which GGS filed with Petitioner as part of the application. The Plan of Operation provides that, in exchange for the 17 percent “management commission,” GGS
assumes the responsibility for all aspects of the operating expenses of the book including underwriting, claims handling and administration. The only expenses which remain the responsibility of [Respondent] directly are those expenses directly related to the insurance book, such as premium taxes, boards and bureaus, license fees, guaranty fund assessments and miscellaneous expenses such as legal and audit expenses and certain computer costs associated directly with [Respondent].
In response to a request for additional information, Goran’s general counsel, by letter dated March 13, 1996, to Petitioner’s application coordinator, added another document, Document 26. The new document was a pro forma financial projection for 1996-2002 (Proforma) showing the sources of funds for GGS to service the Chase debt.
The seven-year Proforma contains only two significant sources of income for GGS: “management fee income” and “finance & service fee income" (Finance and Service Fees). By year, starting with 1996, these respective figures are $28.6 million and $7.0 million, $34.2 million and $8.6 million, $38.1 million and $9.9 million, $42.6 million and $11.0 million, $47.5 million
and $12.3 million, $53.0 million and $13.7 million, and $59.3 million and $15.3 million. Accounting for the principal and interest payments over the six-year repayment term of the Chase Credit Agreement, the Proforma shows ending cash balances, during each of the covered years, culminating in a final cash balance, in 2002, of $43.9 million.
By letter dated March 29, 1996, Goran’s general counsel informed Petitioner that an increase in Respondent’s book value had triggered an increase in the purchase price from
$60 million to $66 million. Also, the book value of Pafco had increased from $14 million to $15.3 million, and the cash required of the Goldman Sachs limited partnerships had increased from $20 million to $21.2 million. Additionally, the letter states that Chase had increased its commitment from $44 million to $48 million. A revised Document 26 accompanied the March 29 letter and showed the same income projections. Reflecting increased debt-service projections, the revised Proforma projected lower cash balances, culminating with $39.8 million in 2002.
During a meeting in March 1996, Mr. Alan Symons, president and chief executive officer of Goran and a director of Superior Group and Respondent, met with three of Petitioner's representatives, including Mary Mostoller, Petitioner's employee primarily responsible for the substantive examination of the GGS
application. During that meeting, Mr. Symons informed Petitioner that GGS would receive Finance and Service Fees from Respondent's policyholders who paid their premiums by installments. Ms. Mostoller did not testify, and the sole representative of Petitioner who attended the meeting and testified candidly admitted that he could not recall whether they discussed this matter.
In response to another request for additional information, Respondent’s present counsel, by letter dated April 12, 1996, informed Petitioner that the “finance and service fee income” line of the Proforma “is composed primarily of billing fees assessed to policyholders that choose to make payments on a monthly basis,” using the same rate that Respondent had long used. The letter explains that the projected increase in these fees is attributable solely to a projected increase in business and not to a projected increase
in the rate historically charged policyholders for this service.
In an internal memorandum dated April 18, 1996, Ms. Mostoller noted that GGS would pay the Chase Credit Agreement through a “combination of the management fees and other billing fees of both Pafco and [Respondent].” Later in
the April 18 memorandum, though, Ms. Mostoller suggested, among other things, that Petitioner condition its approval of the acquisition on the right of Petitioner to reevaluate annually
the reasonableness of the “management fee and agent’s commission”--omitting any mention of the "other billing fees."
On April 30, 1996, Petitioner entered a Consent Order Approving Acquisition of Stock Pursuant to Section 628.461, Florida Statutes (Consent Order). Incorporating all of
Ms. Mostoller's recommendations, the Consent Order is signed by Respondent and GGS, which "agree to and consent to all of the above cited terms and conditions . . .." The Consent Order does not incorporate by reference the application and related documents, nor does the Consent Order contain an integration clause, which, if present, would merge all prior written and unwritten agreements into the Consent Order so as to preclude the implementation of such agreements in conjunction with the Consent Order.
Among other things, the Consent Order mandates the following:
[Respondent] shall give advance notice to [Petitioner] of any proposed changes in the [Management Agreement] and shall receive written approval from [Petitioner] prior to implementing those changes. In addition, for a period of three (3) years, [Petitioner] shall reevaluate at the end of each calendar year the reasonableness of the fees as reflected on Addendum A of the [Management] Agreement[.] Furthermore, [Petitioner] may at its sole discretion, and after consideration of the performance and operating percentages of [Respondent] and any other pertinent data, require
[Respondent] to make adjustments in the [M]anagement [F]ee and agent's commission.
GGS . . . shall file each year an audited financial statement with [Petitioner] . . ..
In addition to the above, for a period of 4 years from the date of execution of this Consent Order . . .:
[Respondent] shall not pay or authorize any stockholder dividends to shareholders without prior written approval of [Petitioner].
Any direct or indirect contracts, agreements or transactions of any type or nature including but not limited to the sale or exchange of assets among or between [Respondent] and any member of the Goran
. . . holding company system shall receive prior written approval of [Petitioner].
That failure to adhere to one or more of the above terms and conditions shall result WITHOUT FURTHER PROCEEDINGS in the Treasurer and Insurance Commissioner DENYING the above acquisition, or the REVOCATION of the insurers' certification of authority if such failure to adhere occurs after the issuance of the Consent Order approving the above acquisition.
The Consent Order addresses the Management Fees and the commissions payable to the independent agents who sell Respondent's insurance policies. However, the Consent Order omits any explicit mention of the Finance and Service Fees, even though GGS and Respondent had clearly and unambiguously disclosed these fees to Petitioner on several occasions prior to the issuance of the Consent Order. On its face, the Consent
Order requires prior approval for the payment of Finance and Service Fees, which arise due to a contract or agreement between Respondent and GGS/Superior Group. The Consent Order prohibits "direct or indirect contracts, agreements or transactions of any type or nature including . . . the sale or exchange of assets among or between [Respondent] and any member of the Goran . . . holding company system," without Petitioner's prior written approval.
The exact nature of these Finance and Service Fees facilitates the determination of their proper treatment under the Consent Order and the facts of this case. Ostensibly, the Finance and Service Fees pertain to items not covered by the Management Fees, which cover a wide range of items. In fact, the Finance and Service Fees arise only when a policyholder elects to pay his premium in installments; if no policyholder were to pay his premium by installments, no Finance and Service Fees would be due.
The testimony in the record suggests that the Finance and Service Fees pertain to services that necessarily must be performed when policyholders pay their premiums by installments. This suggestion is true, as far as it goes. Installment payments require an insurer to incur administrative and information-management costs in billing and collecting installment payments. Other costs arise if late installment
payments necessitate the cancellations and if reinstatements follow cancellations. Installment-payment transactions are undeniably more expensive to the insurer than single-payment transactions. The record as to these installment-payment costs, which are more in the nature of a service charge, is well- developed.
However, the Finance and Service Fees also pertain to the cost of the loss of the use of money when policyholders pay their premiums by installments. Installment-payment transactions cause the insurer to lose the use of the deferred portion of the premium for the period of the deferral. The record as to these costs, which are more in the nature of a finance charge or interest, is relatively undeveloped.
At the hearing, Mr. Symons testified that an insurer does not lose the use of the deferred portion of the premium for an established book of business. Mr. Symons illustrated his point by analyzing over a twelve-month period the development of a hypothetical book of business consisting of twelve insureds. If an insurer added its first insured in the first month, added a second in the third, and so forth, until it added its twelfth insured in the twelfth month, and each insured chose to pay a hypothetical $120 annual premium in twelve installments of $10 each, the cash flow in the twelfth and each succeeding month (assuming no changes in the number of insureds) would be $120--
the same that it would have been if each of the insureds chose to pay his premium in full, rather than by installment. Thus, Mr. Symons' point was that, after the first eleven months, installment payments do not result in the loss of the use of money by the insurer.
Mr. Symons' illustration assumes a constant book of business after the twelfth month. However, while the insurer is adding installment-paying insureds, the insurer loses the use of the portion of the first-year premium that is deferred, as is evident in the first eleven months of Mr. Symons' illustration. Also, if the constant book of business is due to a constant replacement of nonrenewing insureds with new insureds--a distinct possibility in the nonstandard automobile market--then the insurer will again suffer the loss of the use of money over the first eleven months. Either way, Mr. Symons' illustration does not eliminate the insurer's loss of the use of money when its insureds pay by installments; the illustration only demonstrates that the extent of the loss of the use of the money may not be as great as one would casually assume.
The Finance and Service Fee is sufficiently broad to encompass all of the terms used in this record to describe it: "installment fee," "billing fee," "service charge," "premium fee," and even "premium finance fee." However, only
"installment fee" is sufficiently broad as to capture both types of costs covered by the Finance and Service Fee.
The dual components of the Finance and Service Fee are suggested by the statute authorizing its imposition. Section 627.902, Florida Statutes, authorizes an insurer or affiliate of the insurer to "finance" premiums at the "service charge or rate of interest" specified in Section 627.901, Florida Statutes, without qualifying as a premium finance company under Chapter 627, Part XV, Florida Statutes. If the insurer or affiliate exceeds these maximum impositions, then it must qualify as a premium finance company.
The "service charge or rate of interest" authorized in Section 627.901, Florida Statutes, is either $1 per installment (subject to limitations irrelevant to this case) or 18 percent simple interest on the unpaid balance. The charge per installment, which is imposed without regard to the amount deferred, suggests a service charge, and the interest charge, which is imposed without regard to the number of installments, suggests a finance charge.
The determination of the proper treatment of the Finance and Service Fees under the Consent Order is also facilitated by consideration of the process by which these fees were transferred to GGS/Superior Group. As anticipated by the parties, after the acquisition of Respondent by GGS, Respondent
retained no employees, and GGS/Superior Group employees performed all of the services required by Respondent.
The process by which Respondent transferred the Finance and Service Fees to GGS/Superior Group began with Respondent issuing a single invoice to the policyholder showing the premium and the Finance and Service Fee, if the policyholder elected to pay by installments. As Mr. Symons testified, Respondent calculated the Finance and Service Fee on the basis of the 1.5 percent per month on the unpaid balance, rather than the specified fee per installment.
The installment-paying policyholder then wrote a check for the invoiced amount, payable to Respondent, and mailed it to Respondent at the address shown on the invoice. Employees of GGS/Superior Group collected the checks and deposited them in Respondent's bank account. From these funds, the employees of GGS/Superior Group then paid the commissions to the independent agents, the Management Fee (calculated without regard to the Finance and Service Fee) to GGS/Superior Group, and the Finance and Service Fee to GGS/Superior Group. Respondent retained the remainder.
Finance and Service Fees can be considerable in the nonstandard automobile insurance business. Many policyholders in this market lack the financial ability to pay premiums in total when due, so they commonly pay their premiums in
installments. At the time of the 1996 acquisition, for instance, about 90 percent of Respondent's policyholders paid their premiums by installments.
For 1996, on gross premiums of $156.4 million, Respondent earned net income (after taxes) of $1.978 million, as compared to gross premiums of $97.6 million and net income of
$5.177 million in 1995. At the end of 1996, Respondent's surplus was $57.1 million, as compared to $49.3 million at the end of the prior year. "Surplus" or "policyholder surplus" for insurance companies is like net worth for other corporations.
In 1996, Respondent received $2.154 million in Finance and Service Fees, as compared to $1.987 million in the prior year. However, Respondent did not pay any Finance and Service Fees to GGS in 1996. For related-party transactions in 1996, Respondent's financial statements disclose the payment of
$155,500 to GGS and Fortis for "management fees," assumed reinsurance premiums and losses, and a capital contribution of
$5.558 million from GGS, of which $4.8 million was in the form of a note. These related-party disclosures for 1996 were adequate.
In August 1997, Symons bought out Goldman Sachs' interest in GGS for $61 million. Following the 1996 acquisition, Goldman Sachs had invested another $3-4 million, but, with a total investment of about $25 million, Goldman Sachs
enjoyed a handsome return in a little over one year. Mr. Symons attributed the relatively high price to then-current valuations, which were 100 percent of annual gross premiums. More colorfully, Mr. Symons' brother, also a principal in the Goran family of corporations, attributed the purchase price to Goldman Sachs' "greed. "
At the same time that Symons bought out Goldman Sachs, Symons enabled GGS to retire the Chase acquisition debt. The elimination of Goldman Sachs and Chase may be related by more than the need for $61 million to buy out Goldman Sachs. The 1996 Annual Statement that Respondent filed with Petitioner reports "total adjusted capital" of $57.1 million and "authorized control level risk-based capital" of $20.7 million, for a ratio of less than 3:1. Section 8.10 of the Chase Credit Agreement states that GGS "will not, on any date, permit the Risk Based Capital Ratio . . . of [Respondent] to be less than 3 to 1." Section 1 of the Chase Credit Agreement defines the ”Risk-Based Capital Ratio" as the ratio of Respondent's "Total Adjusted Capital" to its "Authorized Control Level Risk-Based Capital."
In August 1997, Symons raised $135 million in a public offering of securities that probably more closely resemble debt than equity. After paying $61 million to Goldman Sachs and the
$45-48 million then due Chase under the Credit Agreement (due to
additional advances), Symons applied the remaining loan proceeds to various affiliates, as additional capital contributions, and possibly itself, for cash-flow purposes. The $135 million debt instrument, which remains in place, requires payments over a 30- year term, provides for no repayment of principal until the end of the term, and allows for the deferral of the semi-annual dividend/interest payments for up to five years. Symons exercised its right to defer dividend/interest payments for an undetermined period of time in 2000.
The payments that are the subject of this case took place from 1997 through 1999. During this period, on a gross basis, Respondent paid GGS $35.2 million in Finance and Service Fees. In fact, $1.395 million paid in 1999 were not Finance and Service Fees, but were SR-22 policy fees, which presumably are charges attributable to the preparation and issuance by GGS of certificates of financial responsibility. Because Respondent's financial statements did not separate any SR-22 fees from Finance and Service Fees for 1997 or 1998, it is impossible to identify what, if any, portion of the Finance and Service Fees in those years were actually SR-22 fees. Even though SR-22 fees represent a service charge without an interest component, they are included in Finance and Service Fees for purposes of this Recommended Order.
For 1997, on gross premiums of $188.3 million, Respondent earned net income of $379,000. For 1998, on gross premiums of $179.8 million, Respondent suffered a net loss of
$8.122 million. For 1999, on gross premiums of $170.5 million, Respondent suffered a net loss of $19.232 million. Respondent's surplus decreased from $65.1 million at the end of 1997, to
$57.6 million at the end of 1998, to $34.2 million at the end of 1999.
In its Quarterly Statement filed as of September 30, 2000, Respondent disclosed, for the first nine months of 2000, a net loss of $5.89 million and a decline in surplus to $24.0 million. By the end of 2000, Respondent's surplus decreased to
$21.6 million.
However, at all times, Respondent's surplus exceeded the statutory minimum. For 1999, for example, Respondent's surplus of $34.2 million doubled the statutory minimum. Respondent also satisfied the statutory premium-to-surplus ratio, although possibly not the statutory risk-based capital ratio. As of the final hearing, Petitioner had required Respondent to file a risk-based capital plan, Respondent had done so, Petitioner had required amendments to the plan, Respondent had declined to adopt the amendments, and Petitioner had not yet taken further action.
From 1997-1999, Respondent's annual statements, quarterly statements, and financial statements inadequately disclosed the payments that Respondent made to GGS. The annual statements disclose "Service Fee on Ceded Business," which is a write-in item described in language chosen by Respondent. Petitioner's contention that this item appears to be a reinsurance transaction in which Respondent is ceding risk and premiums to a third-party is rebutted by the fact that the Schedule F, Part 5, on each annual statement discloses relatively minor reinsurance transactions whose ceded premiums would not approach those reported as "Service Fee on Ceded Business."
Notwithstanding the unconvincing nature of Petitioner's contention as to the precise confusion caused by Respondent's reporting of the payment of Finance and Service Fees, Respondent's reporting was clearly inadequate and even misleading. The real problem in the annual statements, quarterly statements, and financial statements is their failure to disclose Respondent's payments to a related party, GGS.
Respondent unconvincingly attempts to explain this omission by an imaginative recharacterization of the Finance and Service Fee transactions as pass-through transactions. These were not pass-through transactions in 1996 when Respondent retained the Finance and Service Fees. These were not pass-
through transactions in 1997-1999 when Respondent properly accounted for these payments from policyholders as income and payments to GGS as expenses.
The proper characterization of these transactions involving the Finance and Service Fees does not depend on the form that Respondent and GGS/Superior Group selected for them-- in which policyholders pay Respondent and Respondent pays GGS/Superior Group--although this form does not serve particularly well Respondent's present contention. Even if Respondent had changed the form so that the policyholders paid the Finance and Service Fees directly to GGS/Superior Group, the economic reality of the transactions would remain the same. Even if policyholders paid their installments to Respondent, GGS/Superior Group, or any other party, the Finance and Service Fees would initially vest in Respondent, which, under an agreement, would then owe them to GGS/Superior Group.
The inadequacy of the disclosure of the Finance and Service Fees is a relatively minor issue, in itself, in this case. In its proposed recommended order, Respondent invites direction as to how Petitioner would like Respondent to report these payments in the future. The major impact of Respondent's nondisclosure of these payments is that none of the statements filed after the 1996 acquisition notified Petitioner of the existence of these payments. It is thus impossible to infer an
agreement or even acquiescence on the part of Petitioner regarding Respondent's payment of Finance and Service Fees to GGS/Superior Group.
The major issue in this case is whether the Consent Order authorizes Respondent to pay $35 million in Finance and Service Fees after the 1996 acquisition or, if not, whether Petitioner has approved of such payments by any other means.
As already noted, the Consent Order authorizes the payment of agents' commissions and Management Fees, but not Finance and Service Fees. To the contrary, the Consent Order prohibits the payment of Finance and Service Fees for four years, at least without Petitioner's approval, because of the provision otherwise prohibiting agreements, contracts, and the transfer of assets involving Respondent and its affiliates.
As noted in the Conclusions of Law, the absence of an integration clause invites consideration of oral agreements that may have preceded the execution of the Consent Order. The Consent Order is somewhat of a hybrid: Petitioner orders and Respondent consents. However, the Consent Order is sufficiently an agreement to be subject to interpretation under normal principles governing the interpretation of contracts.
Respondent contends that such agreements encompassed the payment of Finance and Service Fees because Respondent disclosed such payments several times to Petitioner prior to the issuance of
the Consent Order. (Any testimonial assertion of an explicit agreement by Petitioner to the payment of the Finance and Service Fees is discredited.)
Respondent repeated disclosures to Petitioner of the Finance and Service Fees began with the Acquisition Statement at the start of the application process. The parties discussed these fees in March 1996. The Proformas disclose two main revenue sources from which GGS/Superior Group could service its acquisition debt: Management Fees and Finance and Service Fees. And the Proformas project almost exactly the amount that Respondent paid GGS in Finance and Service Fees from 1997-99.
Although the ratio of Management Fees to Finance and Service Fees was 4:1 in the Proformas, this ratio does not minimize the role of the Finance and Service Fees. Based on gross revenues, this ratio is no indication of the relative profitability of these two sources of revenue. In fact, in 1999, the expenses covered by the Management Agreement exceeded the Management Fees by $3 million. The Finance and Service Fees are thus an important component of the revenue on which GGS intended to rely in servicing the acquisition debt.
However, neither the clear disclosure of the Finance and Service Fees nor Petitioner's recognition of the importance of these fees in servicing the acquisition debt necessarily means that Petitioner agreed to their payment. By a
preponderance of, although less than clear and convincing, evidence, the record precludes the possibility that Petitioner agreed in preclosing discussions or the Consent Order to preapprove the Finance and Service Fees. In this respect, Petitioner treated the Finance and Service Fees differently from the Management Fees, which Petitioner agreed to preapprove, subject to annual reevaluation for the first three years.
At the level of a preponderance of the evidence, it is possible to harmonize this construction of the Consent Order with Respondent's repeated disclosures of the Finance and Service Fees. The Acquisition Statement mentions dividends as a revenue source--although a "secondary" source--and the Consent Order clearly did not impliedly preapprove the payment of dividends.
Aware of the reliance of GGS upon the Finance and Service Fees to service the Chase acquisition debt, Petitioner may have chosen, for the first four years, to consider Respondent's requests for approval of the Finance and Service Fees, based on the circumstances in existence at the time of the requests. This interpretation is consistent with the testimony of Petitioner's employee that he believed that Petitioner would be able to restrict Respondent's payment of Finance and Service Fees to GGS/Superior Group because Petitioner's approval was required for the payment of dividends. The payments are
pursuant to a contract or agreement for services and, as such, are not dividends, but the Consent Order requires Petitioner's approval for all contracts and agreements during the first four years. The common point is that Petitioner understood that its approval would be required for Finance and Service Fees, which had not been preapproved like Management Fees.
During the application process, GGS may not have been concerned by Petitioner's failure to preapprove the Finance and Service Fees. At the time of the 1996 acquisition, as contrasted to the period after the 1997 refinancing, GGS enjoyed a relatively light debt load due to Goldman Sachs' equity investment and the "tremendous wherewithal" of its 48 percent
co-owner.
Another practical distinction between the Finance and Service Fees and the Management Fees militates against finding that the Consent Order impliedly approves the Finance and Service Fees and militates in favor of a finding that GGS viewed these fees as more contingent and less likely to be needed than the Management Fees. At the start of the application process, GGS submitted to Petitioner a form Management Agreement. At no time did GGS ever submit to Petitioner a form Finance and Service Agreement. The contingent nature of the Finance and Service Fees, relative to the Management Fees, is reinforced by
the fact that, in 1996, Respondent retained the Finance and Service Fees.
Respondent's contention that the Finance and Service Fees were a component of the agreement between it and Petitioner is not without its appeal. The contention is sufficient to preclude a finding by clear and convincing evidence that the agreement between the parties did not include a preapproval of Finance and Service Fees. Unlike the Management Fees, the maximum amount of the Finance and Service Fees is set by statute. Two consequences follow. First, Petitioner might not have found it necessary to incorporate these fees in a written agreement, as long as the maximum amount were acceptable to Petitioner, because the law establishes a ceiling on the fees and identifies the services for which they are compensation. Second, Petitioner might not have found it necessary provide for annual reevaluation of the fees, again due to the applicable statutory maximum.
In one respect, the relatively contingent quality of the Finance and Service Fees inures to Respondent's benefit, at least in theory. If no policyholder paid by installments, there would be no Finance and Service Fees; however, as a practical matter, the Finance and Service Fees are almost as pervasive as the Management Fees.
More importantly, though, the Finance and Service Fees, especially when imposed as a percentage of the unpaid balance, contain a significant interest component. Paying these fees to GGS/Superior Group, Respondent denies itself the investment income attributable to this forbearance. Alternatively, to the extent that the Finance and Service Fees defray services, as they do to some unknown extent, the greater weight of the evidence, although not clear and convincing evidence, establishes that these services are among the services that GGS/Superior Group undertook in the Management Agreement. These factors militate strongly against treating the Finance and Service Fees as an implied exception to the provision of the Consent Order requiring approval of all contracts or agreements with affiliates during the first four years.
For these reasons, Petitioner has proved by a preponderance of the evidence, although not clear and convincing evidence, that GGS/Superior Group and Respondent needed Petitioner's approval for all payments of Finance and Service Fees prior to April 30, 2000. To the extent that, as discussed in the Conclusions of Law, Petitioner withholds such approval, the next issue is to determine the amount of Finance and Service Fees that GGS/Superior Group must return to Respondent.
The determination of the amount of the repayment is substantially affected by two facts. First, Petitioner's
approval is not required for any Finance and Service Fees that Respondent paid GGS/Superior Group after April 30, 2000. The Consent Order did not require Petitioner's approval for such payments, which were not dividends, for which approval would always be required, if inadequate surplus existed. Second, GGS/Superior Group is entitled to a dollar-for-dollar credit, against any liability for improperly received Finance and Service Fees, for about $20 million that it directly or indirectly transferred to Respondent since the 1996 acquisition.
Half of the $20 million credit arises from Management Fees that GGS did not collect from Respondent in 1996 and 1998. As Petitioner notes, there is little, if any, documentation concerning these uncollected fees. Mr. Symons persuasively testified that the proper characterization of these amounts is dependent upon the outcome of Petitioner's effort to disallow the Finance and Service Fees already paid by Respondent. Petitioner must credit to GGS/Superior Group these $10 million in fees as an offset to the $35.2 million (or such lesser amount remaining after any retroactive approvals from Petitioner) that Respondent improperly paid GGS/Superior Group in Finance and Service Fees.
Also, in 1997, GGS contributed about $10 million to Respondent's capital. As was the case with the uncollected Management Fees in 1996 and 1998, the record contains little, if
any, documentation concerning the transfer, including any conditions that may have attached to it. Petitioner should credit GGS/Superior Group with this sum as an offset against the
$35.2 million (or such lesser amount remaining after any retroactive approvals from Petitioner) that Respondent improperly paid GGS/Superior Group in Finance and Service Fees.
As for the remaining $15 million in Finance and Service Fees that Respondent improperly paid to GGS through 1999 and any additional amounts through April 30, 2000, the impropriety arises because Respondent failed first to obtain Petitioner's approval--not because any transaction was otherwise necessarily improper. Concerning the remaining $15 million, then, Petitioner should give Respondent and GGS/Superior Group an opportunity to request retroactive approval for the payment of all or part of this sum, without regard to the lateness of the request. Applying any and all factors that Petitioner would ordinarily apply in considering such requests, Petitioner can then reach an informed determination as to the propriety of this
$15 million in Finance and Service Fees.
If Petitioner determines that Respondent must obtain from GGS/Superior Group repayment of any Finance and Service Fees, then Petitioner may consider the issue of the timing of the repayment. As Petitioner mentions in its proposed recommended order, an evidentiary hearing might be useful for
this purpose. Obvious sources would be setoffs against Management Fees and Finance and Service Fees that Respondent is presently paying Superior Group.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the subject matter. Sections 120.57(1) and 624.310(3)(b), Florida Statutes. (All references to Sections are to Florida Statutes. All references to Rules are to the Florida Administrative Code.)
Section 628.461(1) requires GGS to file an application prior to acquiring more than five percent of Respondent's stock. Section 628.461(3)(b) requires that the application disclose, among other things, the "source and amount of the funds or other consideration used, or to be used, in making the acquisition."
However, the statute reveals that the primary purpose of the application and approval process is for the authorization of the acquisition and acquirer, not the authorization of specific elements of the acquisition, such as service contracts. Thus, pursuant to Section 628.461(5)(a), if Petitioner does not act within 90 days, it is deemed to have approved the acquisition, and the acquirer may assume control of the insurer.
Rule 4-143.047(4)(d) describes the process, including a default-approval procedure, for the approval of specific contracts. Covering "all management contracts, service
contracts and all cost sharing agreements," this rule prohibits an insurer and its affiliate from entering into any such transaction "unless the insurer has notified the Department in writing of its intention to enter into such a transaction at least (30) days prior thereto, . . . and the Department has not disapproved it within such period."
Section 628.371(1) prevents an insurer from paying dividends, except from surplus, and Section 628.371(2) and (3) imposes limits based on the portion of surplus to be paid as a dividend. Rule 4-143.047(3) prohibits insurers from paying "extraordinary dividends," which are dividends not provided in Section 628.371, except as approved by Petitioner. Rule
4-143.047(1)(a) and (b) requires that material transactions between insurers and their affiliates shall be "fair" and "reasonable," and the charges or fees for services shall also be "reasonable."
Section 624.310(3) authorizes Petitioner to seek to impose a cease and desist order in the following manner:
The department may issue and serve a complaint stating charges upon any licensee or upon any affiliated party, whenever the department has reasonable cause to believe that the person or individual named therein is engaging in or has engaged in conduct that is:
An act that demonstrates a lack of fitness or trustworthiness to engage in the business of insurance, is hazardous to the insurance buying public, or constitutes
business operations that are a detriment to policyholders, stockholders, investors, creditors, or the public;
A violation of any provision of the Florida Insurance Code;
A violation of any rule of the department;
A violation of any order of the department; or
A breach of any written agreement with the department.
The complaint shall contain a statement of facts and notice of opportunity for a hearing pursuant to ss. 120.569 and 120.57.
If no hearing is requested within the time allowed by ss. 120.569 and 120.57, or if a hearing is held and the department finds that any of the charges are proven, the department may enter an order directing the licensee or the affiliated party named in the complaint to cease and desist from engaging in the conduct complained of and take corrective action to remedy the effects of past improper conduct and assure future compliance.
Section 624.424(1)(a) requires insurers to file with Petitioner "full and true statements of its financial condition, transactions, and affairs."
Despite certain arguments raised by Respondent and addressed below, the main issue, which is whether Petitioner preapproved the payment of Finance and Service Fees in the Consent Order, requires the interpretation of a document that, if not a contract, bears sufficient resemblance to a contract to justify the use of basic contract-interpretation principles.
As always, the key factor is the intent of the parties, and, even in the presence of an integration clause, the modern trend is for the court to allow evidence of the parties' intent. Centennial Mortgage, Inc. v. SG/SC, Ltd., 772 So. 2d 564, 565 (Fla. 1st DCA 2000). Lacking an integration clause, the Consent Order invites consideration of the intent of the parties (if a bilateral contract) or Petitioner (if a unilateral order) in identifying the provisions governing the payment of Finance and Service Fees.
In determining the intent of the parties, it is necessary to place oneself
"in the situation of the parties, and from a consideration of the surrounding circumstances, the occasion, and apparent object of the parties, to determine the meaning and intent of the language employed. Indeed, the great object, and practically the only foundation, of rules for the construction of contracts, is to arrive at the intention of the parties. This is a most conspicuous and far-reaching rule, and involves the nature of the instrument, the condition of the parties, and the objects which they had in view; and, when the intent is thus ascertained, it is to be effectuated, unless forbidden by law. 'Contracts are not to be interpreted by giving a strict and rigid meaning to general words or expressions without regard to the surrounding circumstances or the apparent purpose which the parties sought to accomplish.'" [Emphasis in Underwood decision; citations omitted.]
Underwood v. Underwood, 64 So. 2d 281, 288 (Fla. 1953) (citing
with approval St. Lucie County Bank & Trust Co. v. Aylin, 94 Fla. 528, 538, 114 So. 438, 441 (1927)).
As the parties agree, Petitioner has the burden of proof. It is therefore Petitioner's responsibility to prove, by the applicable standard of proof, the contents of the order or agreement that Respondent violated. As far as Petitioner is concerned, the order or agreement is the Consent Order and nothing more.
In part, Respondent contends that the parties' agreement extends to a preapproval of the Finance and Service Fees. Ultimately, in proving up its case, by the applicable standard of proof, Petitioner must deal with the Respondent's contention that the agreement includes a preapproval of the Finance and Service Fees. Petitioner must deal with this contention either in its main case or in rebuttal after Respondent has gone forward with evidence suggesting Petitioner's preapproval of the Finance and Service Fees. Either way, the result in this case is the same. (In its proposed recommended order, Respondent seems to reflect some ambivalence toward this issue in references, at paragraph 16, to Petitioner's "defense" and, at page 32, to Petitioner failing to meet its burden and Respondent meeting "any reasonable standard
of proof" that Petitioner approved or acquiesced to Respondent paying Finance and Service Fees to GGS/Superior Group.)
The parties disagree as to the standard of proof.
Respondent incorrectly argues that this is a penal proceeding, so that the standard of proof is clear and convincing evidence. See, e.g., Department of Banking and Finance v. Osborne Stern and Company, Inc., 670 So. 2d 932 (Fla. 1996) and Ferris v.
Turlington, 510 So. 2d 292 (Fla. 1987).
Petitioner correctly argues that this is not a penal proceeding because it inflicts no penalty. See, e.g., Chancellor Media Whiteco Outdoor v. Department of Transportation, So. 2d , 2001 WL 201517 (Fla. 5th DCA) (March 2, 2001). Although the Chancellor Media decision
mentions the mere loss of income, as distinguished from the loss of the source of the income, the holding of the case is that the standard of proof in a proceeding to revoke a sign permit is clear and convincing evidence. The actual reasoning of the decision is perhaps ill-revealed by the "loss of income" language, as, for example, a teacher losing a job loses income, but a teacher-termination proceeding is not subject to the clear and convincing standard. Clearly, the court intends by the "loss of income" language the loss of the income-producing asset or property: in that case, a sign permit and, in this case, a
certificate of authority to transact insurance business in Florida.
In the present case, the substantive issue involves merely the reallocation of income, as opposed to the loss of the income-producing property. The sizeable amount of the income does not change the nature of the proceeding, just as a licensing proceeding involving discipline in the form merely of a $50 administrative fine is not converted to a preponderance case due to the negligible amount of the penalty sought. Petitioner seeks neither a penalty nor discipline, but merely a cease and desist order that, in part, restores the status quo prior to certain improper payments. The proper standard of proof in this case is therefore a preponderance of the evidence.
As already noted, Petitioner has proved by a preponderance of the evidence that the Consent Order, as well as any and all other agreements between Petitioner and Respondent and GGS/Superior Group, did not contain any preapproval of an agreement for Respondent to pay Finance and Service Fees to GGS/Superior Group.
Respondent's alternative arguments as to acquiescence and estoppel do not preclude the finding described in the preceding paragraph. As stated in its proposed recommended order, the estoppel argument relies on a change in position by Petitioner. However, Petitioner proved by a preponderance of
the evidence that it never preapproved payments of Finance and Service Fees. Additionally, Respondent's acquiescence and estoppel arguments would have been better served if Respondent's filings had adequately informed Petitioner of the existence of the payments. Lacking such notice, Petitioner could not acquiesce to the payments; providing such inadequate, even misleading disclosure, Respondent can hardly argue equitable estoppel based on Petitioner's behavior in response to such disclosure.
As already noted, Petitioner has not proved by clear and convincing evidence that the Consent Order, as well as any and all other agreements between Petitioner and Respondent and GGS/Superior Group, excluded any preapproval of an agreement for Respondent to pay GGS/Superior Group Finance and Service Fees.
The appealing facts in favor of Respondent's arguments are stated in the Findings of Fact. An appealing legal argument is that Petitioner's failure to reject the payment of Finance and Service Fees constituted a default approval of this transaction. In the context of an application for the approval of the acquisition of an insurer, however, default approval extends to the overall subject of the application--the acquisition, not each specific element of the application.
Nor can Respondent successfully contend that it obtained default approval of the Finance and Service Fees under
Rule 4-143.047(4). The record lacks a definitive, unambiguous request for the approval of such an arrangement. Disclosing the use of such fees does not rule out a subsequent request for the approval to pay them. A proposed form contract, such as the proposed Management Agreement, would have facilitated a finding of such a request, but no such form exists. Instead, Respondent's arguments emphasize portions of the record that Respondent claims show what Petitioner knew, should have known, acquiesced to, and is estopped from denying or changing--not what Petitioner agreed to and not even what Respondent asked for.
However, Petitioner has proved by clear and convincing evidence that the annual and quarterly statements and financial statements filed after the closing were inadequate and even misleading as to their reporting of related-party transactions.
At the final hearing and in note 1 of the proposed recommended order, counsel for Petitioner requested a recommendation of discipline, if the Administrative Law Judge were to determine that Petitioner's proof reached the standard of clear and convincing evidence. This request does not present an issue as to the main question concerning the propriety of the Finance and Service Fee payments.
Petitioner's request for discipline presents an issue on the inadequate and misleading reporting because the proof
rises to the level of clear and convincing evidence. However, this request is denied because the Notice of Intent and Amended Notice of Intent did not seek to impose discipline. The references to Section 624.418(1)(b) and (2)(a), which are disciplinary provisions, are merely for the purpose of identifying provisions of the Insurance Code, whose breach may justify the imposition of a cease and desist order, pursuant to Section 624.310(3)(a)2.
It is
RECOMMENDED that the Department of Insurance enter a final cease and desist order:
Determining that, without the prior written consent of the Department, Superior Insurance Company paid Finance and Service Fees to GGS/Superior Group in the net amount of approximately $15 million, plus all such amounts paid after the period covered by this case through April 30, 2000.
Requiring that Superior Insurance Company immediately file all necessary documentation with the Department to seek the retroactive approval of all or part of the sum set forth in the preceding paragraph.
If any sum remains improperly paid after implementing the procedure set forth in the preceding paragraph, establishing a reasonable repayment schedule for Respondent to impose upon
Superior Group--if necessary, in the form of setoffs of Management Fees and Finance and Service Fees due at the time of, and after, the Final Order.
Determining that Superior Insurance Company inadequately disclosed related-party transactions and ordering that Superior Insurance Company comply with specific guidelines for the reporting of these transactions in the future.
DONE AND ENTERED this 1st day of June, 2001, in Tallahassee, Leon County, Florida.
ROBERT E. MEALE
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 1st day of June, 2001.
COPIES FURNISHED:
Honorable Tom Gallagher
State Treasurer/Insurance Commissioner Department of Insurance
The Capitol, Plaza Level 02 Tallahassee, Florida 32399-0300
Mark Casteel, General Counsel Department of Insurance
The Capitol, Lower Level 26 Tallahassee, Florida 32399-0307
S. Marc Herskovitz Luke S. Brown
Division of Legal Services Department of Insurance
200 East Gaines Street, Sixth Floor Tallahassee, Florida 32399-0333
Clyde W. Galloway, Jr. Austin B. Neal
Foley & Lardner
106 East College Avenue, Suite 900 Tallahassee, Florida 32301
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 must be filed with the agency that will issue the final order in this case.
| Issue Date | Document | Summary |
|---|---|---|
| Aug. 30, 2001 | Agency Final Order | |
| Jun. 01, 2001 | Recommended Order | Petitioner proved Respondent violated consent order approving acquisition of Respondent by holding corporation when Respondent paid Finance and Service Fees to parent corporation. Financial reports inadequate, misleading as to related party transactions. |
