N.C.M. OF COLLIER COUNTY, INC., )
vs. )
Respondent. )
Case No. 03-2886
Pursuant to notice, a formal hearing was held in this case on November 14, 2003, in Tallahassee, Florida, before Carolyn S. Holifield, a duly-designated Administrative Law Judge of the Division of Administrative Hearings.
For Petitioner: Mark B. Cohn, Esquire
McCarthy, Lebit, Crystal & Liffman Co., L.P.A.
For Respondent: John M. Alford, Esquire
Cynthia A. Shaw, Esquire Department of Financial Services
The issue in this case is whether Petitioner's application for self-insurance for workers' compensation should be approved.
Petitioner, N.C.M. of Collier County, Inc. (Petitioner, N.C.M., or Company), applied for self-insurance status for purposes of workers' compensation in the State of Florida. By letter dated June 30, 2003, Respondent, the Department of Financial Services (Department), denied the application. N.C.M. challenged the decision and filed a Petition for Hearing, seeking review of the denial. The matter was forwarded to the Division of Administrative Hearings for assignment of an Administrative Law Judge to conduct the hearing and prepare a recommended order.
At hearing, Petitioner called five witnesses: Brian Gee, executive director of the Florida Self-Insurers Guaranty Association, Inc.; Susan Christopher, C.P.A. for Rust and Christopher; Shawn Fuentes, chief financial officer for N.C.M.; Michael DelDuca, president of N.C.M.; and Gary Gann, private investigator. Petitioner offered and had nine exhibits received into evidence, including the deposition of Jenny Spencer, audit director for Sharpton, Brunson, and Company. The Department presented the testimony of Cynthia Shaw, assistant general counsel for the Department of Financial Services, Legal
Division, and Brian Gee. Respondent offered no exhibits into evidence.
A Transcript of the proceeding was filed on December 3, 2003. At the conclusion of the hearing, the parties agreed to file proposed recommended orders ten days after the transcript was filed. Both parties filed Proposed Recommended Orders, which have been considered in preparation of this Recommended Order.
Based upon the observation of the witnesses' testimony and the documentary evidence received into evidence, the following relevant and material facts that follow are determined.
The Florida Self-Insurers Guaranty Association, Inc. (Association), is established by Section 440.385, Florida Statutes (2003), and is an organization that provides a guarantee for workers' compensation benefits for companies that are self-insured. The Association pays injured workers their benefits, if the self-insurer becomes insolvent.
An insolvency fund is established and managed by the Association, which funds the workers' compensation benefits for insolvent members. The insolvency fund is funded by assessments from members of the Association.
Pursuant to Florida Administrative Code Rule 69L-5.102 (formerly Florida Administrative Code Rule 4L-5.102), in order
for an employer to qualify for self-insurance under the relevant provisions of law, the applicant must meet the following requirements: (1) have and maintain a minimum net worth of
$1,000,000; (2) have at least three years of financial statements or summaries; (3) if the name of the business has changed in the last three years, provide a copy of the Amended Articles of Incorporation; and (4) have the financial strength to ensure the payment of current and estimated future compensation claims when due, as determined through review of their financial statement or summary by the Department.
Of the general requirements noted in paragraph 3, above, the only issue in this proceeding regards N.C.M.'s financial strength.
An applicant for self-insurance is required to submit in its application audited financial statements for its three most recent years. All financial statements, audits, and other financial information must be prepared in accordance with Generally Accepted Accounting Principles. The Association is required to review each application and the financial documents which are submitted as part of that application to determine if the applicant has the financial strength to ensure the timely payment of all current and future workers' compensation claims.
After the Association reviews the application, it makes a recommendation to the Department as to whether the application for self-insurance should be approved or denied.
The Department is required by law to accept the Association's recommendations unless it finds that the recommendations are clearly and convincingly erroneous.
N.C.M. submitted its application for self-insurance on or about May 6, 2003, and included in its application audited financial statements for its three most recent fiscal years. The statement contained an unqualified opinion from N.C.M.'s accountant.
N.C.M. provided information in its application regarding the number of employees, the worker classifications of these employees, and a payroll classification rating that has been established by the National Council on Compensation Insurance. The application made it clear that the Department could use this information to calculate a manual annual rate premium for each worker classification to determine an overall workers' compensation premium based on statewide manual rates. The Association calculated a standard premium of $507,088.75 for N.C.M., after giving credit for its experience modification
of .71.
N.C.M. confirmed in its application that it was a corporation duly organized and existing in the State of Florida.
N.C.M. also supplied information on its corporate officers and copies of its Articles of Incorporation confirming its corporate existence.
In its application and at the hearing, N.C.M. agreed that, if accepted for membership, it will maintain security deposits and excess insurance as required by the Department's administrative rules.
Upon receipt of N.C.M.'s application, the Association thoroughly reviewed the application and financial statements for the three most recent years. The Association examined the balance sheets to analyze the Company's assets, liabilities, working capital, and equity structure. Additionally, the Association examined N.C.M.'s income statements to analyze the Company's revenues, profits and/or losses, and expenses. The Company's cash flows were examined. The Association calculated various financial ratios for N.C.M. in order to examine, among other things, the company's asset structure, liquidity, total debt to equity structure, and net income or loss as it relates to the company's equity.
The analysis and review performed by the Association, as described in paragraph 12, is the same type of analysis the Association performs on every applicant for self-insurance.
Because applicants for self-insurance come from various types of industries, it is not useful to establish
specific threshold values for various financial ratios in determining financial strength. However, the Association reviews and analyzes the financial statements of each applicant to determine the financial condition of that applicant.
The Association's review of N.C.M.'s audited financial statements revealed that the Company had a net loss of $60,937 in the year ending December 31, 2002. The Company also had a loss from operations in its most recent year in the amount of
$74,897, or negative .62 of its revenues. This was a significant factor to the Association because it revealed N.C.M.'s lack of profitability for its most recent year.
Petitioner's tax return of 2002 showed a profit for the Company. However, the tax returns are not meant to reflect the economic profit of a business and are not prepared in accordance with Generally Accepted Accounting Principles. Rather, the audited financial statements provide more accurate information about the Company’s financial health.
N.C.M.'s 2002 net worth was $1,218,895, which exceeded the $1,000,000 minimum net worth requirement established in the applicable rule cited in paragraph 3 above. However, the Association was concerned about N.C.M.'s net worth when taken as a percentage of its workers' compensation premiums, calculated by using the payroll classification information in N.C.M.'s application. The analysis of N.C.M.'s net worth as a percentage
of workers' compensation premiums is important because workers' compensation claims can accrue each year and be paid out over a long period of time by the self-insurer. A company with equity that is relatively low in comparison to its workers' compensation exposure might, over time, owe its injured workers as much as, or more than, the equity in the company. This would increase the risk for the injured worker.
Upon completing its financial analysis, the Association recommended that N.C.M.'s application for self- insurance be denied. Brian Gee, the executive director of the Association, conveyed the recommendation of denial to the Department in two letters, one dated May 12, 2003, and the other one dated June 19, 2003. The letters were virtually identical, except that the June 19, 2003, letter referred to the specific statute at issue and statutory language that N.C.M. did not have the financial strength necessary to ensure timely payment of all current and future claims.
Attached to both the May 12, 2003, and June 19, 2003, letters was a copy of the Association's summary of N.C.M.'s audited financial statements for the years ended December 31, 2002, 2001, and 2000. Based on the review of the financial data, the Association made the following four findings, which it listed in both letters:
The Company received unqualified audit opinions on its December 31, 2002, 2001, and 2000 financial statements from Rust & Christopher, P.A.
Liquidity - The current ratio has decreased from 1.34 at December 31, 2000 to
1.13 at December 31, 2002.
Capital Structure - The total liabilities to book equity ratio has increased since December 31, 2000 from 1.39 to 1.99 at December 31, 2002.
Results of Operations - The Company's gross profit margin has negative 0.62 for the year ended December 31, 2002. The Company reported a net loss of $60,937 for the year ended December 31, 2002.
Although the above-referenced letters listed findings relative to the Company's liquidity and capital structure,
Mr. Gee did not believe that those findings were of "major significance."
The Association's letters and accompanying financial data were submitted to the Department for a final decision to be made by the Department.
The Department received and reviewed the Association's letters of recommendation and the accompanying documentation. Based on its review of the letter, the Department noted that the Association appeared to have concerns about the Company's liquidity, liabilities, and profitability. However, there was nothing in the letters which indicated that the Association did
not consider the findings related to the Company's liquidity and liabilities (capital structure) to be of major significance.
The Department sent N.C.M.'s application, which included the financial statements, to an outside CPA firm for review. The outside CPA performed a financial analysis, calculated various financial ratios on N.C.M., and provided a report to the Department.
The outside CPA correctly noted in her report that N.C.M.'s gross profit margin for the year ended December 31, 2002, was 15.4 percent.
In Finding No. 4 of its letters of recommendation to the Department, the Association had mistakenly mislabeled the Company's net profit margin as the gross profit margin. As a result of that mislabeling in the letters, the finding incorrectly stated that N.C.M.'s gross profit margin was a negative 0.62 percent for the year ending December 31, 2002. In fact, it was the Company's net profit margin for the year ending December 31, 2001, that was negative 0.62 percent. Notwithstanding the incorrect mislabeling of this item in the letters, the financial summary attached to the letters accurately reflected the Company's gross profits and revenue.
The financial statement of N.C.M. also reflected that for the year ending 2002, the Company had a gross profit of
$1,877,076, and for that same period had a loss from operations of $74,897, or negative .62 percent.
The outside CPA also compared various financial information on N.C.M. to an industry average and concluded that "some of the Company's ratios are below the industry ratios." In making these comparisons, the outside CPA researched two companies she believed were in a business similar to N.C.M. The research on these companies provided an industry average for various financial information on companies in the same industry as the two reference companies. In this case, the two reference companies were primarily producers or sellers of concrete products, as opposed to construction companies like N.C.M. Accordingly, the industry ratios contained in the outside CPA's report may be different than the construction industry and not an appropriate basis with which to compare N.C.M.
The report of the outside CPA stated that N.C.M. pays approximately $1,000,000 a year in workers' compensation insurance. That figure is higher than the premiums calculated by the Association using statewide manual rates. Instead of using those rates, the outside CPA based her figure on a newspaper article, which stated that Mr. DelDuca, president of N.C.M., pays $1,000,000 for workers' compensation insurance.
In her report, the outside CPA cited N.C.M.'s lack of profitability for the year ending 2002 and correctly noted that for that year, the Company reported a net loss of $60,937.
The outside CPA notified the Department that she concurred with the Association's recommendation to deny N.C.M.'s application to become self-insured because the Company had not demonstrated it has the financial strength to ensure timely payment of workers' compensation claims.
The Department reviewed the outside CPA's report and noted the concerns about the company's debt equity and lack of profitability. Based on the outside CPA's report, the Department correctly determined that the report contained no information that the Association's recommendation was clearly and convincingly erroneous.
As a result of its determination that the Association's recommendation to deny N.C.M.'s application for self-insurance was not clearly or convincingly erroneous, the Department denied the application.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction of the parties to and the subject matter of this proceeding. §§ 120.569 and 120.57(1), Fla. Stat. (2003).
The Florida Self-Insurers Guaranty Association, Inc., is a nonprofit corporation created by Section 440.385(1)(a),
Florida Statutes (2003). Pursuant to that provision, "all individual self-insurers as defined in ss. 440.02(23)(a) and 440.38(1)(b) . . . shall be members of the [A]ssociation as a condition of their authority to individually self-insure in this state."
The Association is required to create an Insolvency Fund for the purposes of meeting the obligations of insolvent members of the Association and after the exhaustion of any security deposit. § 440.385(4)(a), Fla. Stat. (2003).
An applicant for self-insurance for workers' compensation must provide proof that it meets the minimum eligibility requirements established in applicable statutes and rules. Section 440.38(1)(b), Florida Statutes (2003), requires that an applicant for self-insurance provide proof to the Association that it "has the financial strength necessary to ensure timely payment of all current and future claims."
With regard to minimum requirements for self- insurance, Florida Administrative Code Rule 69L-5.102(2), provides in relevant part the following:
All other individual employers not eligible under section (1) shall qualify for self-insurance under Section 440.38(1)(b), Florida Statutes, and must meet the following minimum requirements:
Have and maintain a minimum net worth of $1,000,000 U.S.
Have at least three (3) years’ financial statements or summaries in the name of the applicant. If financial statements or financial summaries are prepared on a comparative basis, such statements shall be the most recent fiscal year ending statement and the preceding fiscal year ending statement. If latest financial statement is over six (6) months old at time of application, an interim statement up to, and including, their latest fiscal quarter must be included and must be certified by a corporate officer.
If the name of the business has changed in the last three years, provide a copy of the Amended Articles of Incorporation.
Have the financial strength to ensure the payment of current and estimated future compensation claims when due, as determined through review of their financial statement or summary by the division (Emphasis
supplied.)
The Association is statutorily charged with reviewing applications for self-insurance to determine if the applicant meets the minimum requirements, including whether the applicant "has the financial strength to ensure timely payment of all current and future compensation claims. . . ." § 440.38(1)(b), Fla. Stat. (2003). Upon such determination, the Association is required to make recommendations on the applications to the Department. The Association's role in reviewing applications and recommending applicants for membership and the Department's role in approving or disapproving applications are delineated in
Section 440.385(3)(b)6., Florida Statutes (2003). That section provides in relevant part the following:
(b) The [A]ssociation may:
* * *
6. Review all applications for membership in the [A]ssociation to determine whether the applicant is qualified for membership under the law. The [A]ssociation shall recommend to the [D]epartment that the application be accepted or rejected based on the criteria set forth in s.440.38(1)(b). The [D]epartment shall approve or disapprove the application as provided in paragraph (6)(a).
Section 440.38(1)(b), Florida Statutes (2003), provides the standard to which the Department must adhere in acting on the Association's recommendations. That section provides in relevant part the following:
The [A]ssociation shall review the financial strength of applicants for membership, current members, and former members and make recommendations to the [D]epartment regarding their qualifications to self- insure in accordance with this section and ss. 440.385 and 440.386. The [D]epartment shall act in accordance with the recommendations unless it finds by clear and convincing evidence that the recommendations are erroneous. (Emphasis supplied.)
The evidence established that the Association performed a thorough review and analysis of the financial information submitted in N.C.M.'s application in order to determine the Company's financial strength. The evidence also
established that the documents relied upon by the Association in making its determination and recommendation were the audited financial statements of N.C.M. and financial information for the past three years, all of which was prepared in accordance with Generally Accepted Accounting Principles.
The evidence established that the one of the main reason's that the Association recommended denial of N.C.M.'s was the Company's lack of profitability. It is undisputed that
N.C.M incurred a net loss in 2002 of $60,937 and that its loss from operations for that year was $74,897.
At hearing, Petitioner, a corporation, attempted to offset the losses reflected on its income statements by arguing that if N.C.M. were a different type of entity (i.e., a sole proprietorship or limited liability company), its profitability might have been different because Mr. DelDuca's salary of
$546,195 might be reflected differently on financial statements. Also, Petitioner asserted that its income tax return, which showed a profit, should be considered, notwithstanding that the returns are not meant to reflect the economic profit of a business and are not prepared in accordance with Generally Accepted Accounting Principles. These and other assertions and arguments made by Petitioner are unconvincing.
Here, the Department appropriately accepted the Association's recommendation to deny N.C.M.'s application for
self-insurance, since there was no "clear and convincing evidence" that the Association's recommendation was erroneous.
N.C.M. of Collier County, Inc.'s application for self-insurance.
DONE AND ENTERED this 26th day of February, 2004, in Tallahassee, Leon County, Florida.
CAROLYN S. HOLIFIELD
Filed with the Clerk of the Division of Administrative Hearings this 26th day of February, 2004.
John M. Alford, Esquire
Cynthia A. Shaw, Esquire Department of Financial Services
Mark B. Cohn, Esquire McCarthy, Lebit, Crystal
& Liffman Co., L.P.A.
Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300
Mark Casteel, General Counsel Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300
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.
