STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
ATTORNEYS' TITLE INSURANCE | ) | |||
FUND, INC., | ) ) | |||
Petitioner, | ) | |||
and | ) ) | Case | No. | 07-5387RP |
) | ||||
STEWART TITLE GUARANTY COMPANY, | ) | |||
) | ||||
Intervenor, | ) | |||
) | ||||
vs. | ) | |||
) | ||||
FINANCIAL SERVICES COMMISSION, | ) | |||
OFFICE OF INSURANCE REGULATION, | ) | |||
) | ||||
Respondent, | ) | |||
) | ||||
and | ) | |||
) | ||||
FIRST AMERICAN TITLE INSURANCE | ) | |||
COMPANY, | ) | |||
) | ||||
Intervenor. | ) | |||
| ) |
FINAL ORDER
A final hearing was conducted in this case on March 17 and 18, 2008, in Tallahassee, Florida, before Lawrence P. Stevenson, a duly-designated Administrative Law Judge with the Division of Administrative Hearings.
APPEARANCES
For Petitioner Attorneys' Title Insurance Fund, Inc. ("ATIF") and Intervenor Stewart Title Guaranty Company ("Stewart Title"):
Maureen McCarthy Daughton, Esquire Donna Holshouser Stinson, Esquire Broad and Cassel
215 South Monroe Street, Suite 400 Post Office Drawer 11300 Tallahassee, Florida 32302-1300
For Respondent Department of Financial Services, Office of Insurance Regulation ("OIR"):
Stephen H. Thomas, Jr., Esquire Assistant General Counsel Jeffrey W. Joseph, Esquire Assistant General Counsel Office of Insurance Regulation
200 East Gaines Street Tallahassee, Florida 32399-0326
For Intervenor First American Title Insurance Company ("First American"):
Richard Santurri, Esquire Wendy Russell Wiener, Esquire Mang Law Firm, P.A.
Post Office Box 11127
660 East Jefferson Street Tallahassee, Florida 32302
STATEMENT OF THE ISSUE
At issue in this proceeding is whether proposed Florida Administrative Code Rule 69O-186.003(1)(c) constitutes an invalid exercise of delegated legislative authority.
PRELIMINARY STATEMENT
On June 22, 2007, Respondent OIR published proposed Florida Administrative Code Rule 69O-186.003(1)(c) in the Florida Administrative Weekly, vol. 33, no. 25, pp. 2807-2809 (the "Proposed Rule"). The Proposed Rule establishes risk rate premiums to be charged for the "junior loan title insurance" product, more commonly called the "junior loan policy" or "JLP." The Proposed Rule would set the premium for the JLP at $0.86 per
$1,000 of liability written, set a minimum premium of $50.00, and set the minimum insurer retention at 30%. The Proposed Rule would approve the rate for use with certain specified American Land Title Association ("ALTA") JLP forms and "[a]ny substantially similar product that insures the same type risk." The Proposed Rule would also restrict eligibility for the JLP in certain ways that were not contested in this proceeding.1
On November 26, 2007, Petitioner ATIF filed a Petition to Determine the Invalidity of Proposed Rules (the "Petition").
The Petition alleged that proposed Florida Administrative Code Rule 69O-186.003(1)(c) was an "invalid exercise of delegated legislative authority" pursuant to Subsection 120.52(8) and Section 120.56, Florida Statutes.
The Division of Administrative Hearings ("DOAH") assigned DOAH Case No. 07-5387RP to this matter. On November 27, 2007, the case was assigned to the undersigned, who scheduled
the final hearing for December 10 and 11, 2007. On
December 3, 2007, ATIF filed a Motion to Continue, which was granted by order dated December 5, 2007. The case was rescheduled for hearing on February 25 and 26, 2008.
On December 10, 2007, First American filed a Motion to Intervene, which was granted by order dated December 18, 2007. On January 14, 2008, Stewart Title filed a Petition to Intervene, which was granted by order dated January 15, 2008.
On February 19, 2008, OIR filed a Motion for Continuance, which was granted by order dated February 26, 2008. The order granting continuance rescheduled the hearing for March 17 and 18, 2008.
At the final hearing, ATIF and Stewart Title (jointly referenced herein as "Petitioners") presented the testimony of William Theodore Conner, ATIF's vice president and associate general counsel; Barry Scholnik, vice president and Florida underwriting counsel for Stewart Title; and Dr. Nelson R. Lipshutz, a regulatory economist and an expert in the economics of title insurance. Petitioners' Exhibits 1 through 13,
16 through 21, 24, 25, 27, 28, 30 through 33, 35, 36, 38 through
44, 48, and 52 through 55 were admitted into evidence. OIR presented the testimony of Paul Struzzieri, principal and consulting actuary with Milliman, Inc., and an expert in actuarial sciences; and Steven H. Parton, OIR's general counsel.
OIR's Exhibits 1 through 7 were admitted into evidence. First American presented no testimony and offered no exhibits.
A transcript of the final hearing was filed with DOAH on April 1, 2008. At the final hearing, the parties requested and were granted a period of 20 days after the filing of the transcript in which to file their proposed final orders. On April 21, 2008, OIR filed an unopposed motion to extend the filing period for proposed final orders to April 28, 2008.
The motion was granted by order dated April 22, 2008. The Petitioners and OIR timely filed their proposed final orders. First American did not file a proposed final order.
Except where otherwise noted, citations to the Florida Statutes refer to the 2007 edition.
FINDINGS OF FACT
Parties
ATIF was established in 1948 by Florida lawyers in order to provide title insurance services to their clients. ATIF has over 6,000 member agents, all of whom are members of the Florida Bar issuing title insurance in private practice. ATIF issues policies exclusively through its member agents.
Stewart Title is a title insurer operating in all 50 states. Stewart Title issues title insurance policies in Florida directly, through affiliated companies, and through independent agents.
First American is a title insurer operating throughout the United States. It offers the JLP in states other than Florida, and sells the product directly, through independent agents, and through affiliated agents. As of 2007, approximately 27% of First American's business was written directly.
The Financial Services Commission (the "Commission") serves as the agency head of OIR for purposes that include rulemaking. The Commission comprises the Governor, Attorney General, Chief Financial Officer, and Commissioner of Agriculture. § 20.121(3) and (3)(c), Fla. Stat. OIR is a structural unit of the Commission responsible for all activities concerning insurers and other risk bearing entities, including but not limited to licensing, rates and policy forms. The head of OIR is the Director, also known as the Commissioner of Insurance Regulation. § 20.121(3)(a)1, Fla. Stat.
The JLP
Title insurance is purchased to insure the purchaser (or his lender) against disputes regarding the ownership of a given piece of real property. Title insurance guarantees the transferability of the title to real property. The JLP is title insurance intended to cover "junior" mortgages, which include second mortgages and home equity loans. The JLP is intended to be less comprehensive and less expensive than a traditional
owner's or lender's primary title insurance policy. The JLP ensures that the borrower is the last grantee of record for the property being used as collateral for the loan. It ensures that the tax payments are current, insures against any liens on the property, and ensures that the legal description on the policy is the same legal description found on the last deed of record.2 The JLP is not authorized for sale in the state of Florida because OIR has yet to approve a premium rate for this type of title insurance. As more fully explained below, ATIF and First American filed petitions in 2003 seeking OIR's approval of the forms and rates necessary for the issuance of the JLP, pursuant to Section 627.782, Florida Statutes.
The Statute and Proposed Rule
Title insurance contracts generally are governed by Chapter 627, Part XIII, Florida Statutes. Section 627.7711, Florida Statutes, provides the following definitions:
As used in this part, the term:
(1)(a) "Closing services" means services performed by a licensed title insurer, title insurance agent or agency, or attorney agent in the agent's or agency's capacity as such, including, but not limited to, preparing documents necessary to close the transaction, conducting the closing, or handling the disbursing of funds related to the closing in a real estate closing transaction in which a title insurance commitment or policy is to be issued.
(b) "Primary title services" means determining insurability in accordance with sound underwriting practices based upon evaluation of a reasonable title search or a search of the records of a Uniform Commercial Code filing office and such other information as may be necessary, determination and clearance of underwriting objections and requirements to eliminate risk, preparation and issuance of a title insurance commitment setting forth the requirements to insure, and preparation and issuance of the policy. Such services do not include closing services or title searches, for which a separate charge or separate charges may be made.
"Premium" means the charge, as specified by rule of the commission, that is made by a title insurer for a title insurance policy, including the charge for performance of primary title services by a title insurer or title insurance agent or agency, and incurring the risks incident to such policy, under the several classifications of title insurance contracts and forms, and upon which charge a premium tax is paid under s. 624.509. As used in this part or in any other law, with respect to title insurance, the word "premium" does not include a commission.
"Title insurer" means any domestic company organized and authorized to do business under the provisions of chapter 624, for the purpose of issuing title insurance, or any insurer organized under the laws of another state, the District of Columbia, or a foreign country and holding a certificate of authority to transact business in this state, for the purpose of issuing title insurance.
"Title search" means the compiling of title information from official or public records.[3]
Section 627.782, Florida Statutes, titled "Adoption of Rates," provides as follows:
Subject to the rating provisions of this code, the commission must adopt a rule specifying the premium to be charged in this state by title insurers for the respective types of title insurance contracts and, for policies issued through agents or agencies, the percentage of such premium required to be retained by the title insurer which shall not be less than 30 percent. However, in a transaction subject to the Real Estate Settlement Procedures Act of 1974, 12 U.S.C. ss. 2601 et seq., as amended, no portion of the premium attributable to providing a primary title service shall be paid to or retained by any person who does not actually perform or is not liable for the performance of such service.
In adopting premium rates, the commission must give due consideration to the following:
The title insurers' loss experience and prospective loss experience under closing protection letters and policy liabilities.
A reasonable margin for underwriting profit and contingencies, including contingent liability under s. 627.7865, sufficient to allow title insurers, agents, and agencies to earn a rate of return on their capital that will attract and retain adequate capital investment in the title insurance business and maintain an efficient title insurance delivery system.
Past expenses and prospective expenses for administration and handling of risks.
Liability for defalcation.
Other relevant factors.
Rates may be grouped by classification or schedule and may differ as to class of risk assumed.
Rates may not be excessive, inadequate, or unfairly discriminatory.
The premium applies to each $100 of insurance issued to an insured.
The premium rates apply throughout this state.
The commission shall, in accordance with the standards provided in subsection (2), review the premium as needed, but not less frequently than once every 3 years, and shall, based upon the review required by this subsection, revise the premium if the results of the review so warrant.
The commission may, by rule, require licensees under this part to annually submit statistical information, including loss and expense data, as the department determines to be necessary to analyze premium rates, retention rates, and the condition of the title insurance industry.
Section 627.783, Florida Statutes, titled "Rate deviation," provides as follows:
A title insurer may petition the office for an order authorizing a specific deviation from the adopted premium. The petition shall be in writing and sworn to and shall set forth allegations of fact upon which the petitioner will rely, including the petitioner's reasons for requesting the deviation. Any authorized title insurer, agent, or agency may join in the petition for like authority to deviate or may file a separate petition praying for like authority or opposing the deviation. The office shall rule on all such petitions simultaneously.
If, in the judgment of the office, the requested deviation is not justified, the office may enter an order denying the petition. An order granting a petition constitutes an amendment to the adopted premium as to the petitioners named in the order, and is subject to s. 627.782.
Section 627.7843, Florida Statutes, titled "Ownership and encumbrance reports," provides as follows:
As used in this section, the term "ownership and encumbrance report" means a report that discloses certain defined documents imparting constructive notice and appearing in the official records relating to specified real property.
An ownership and encumbrance report may not directly or indirectly set forth or imply any opinion, warranty, guarantee, insurance, or other similar assurance as to the status of title to real property.
Any ownership and encumbrance report or similar report that is relied on or intended to be relied on by a consumer must be on forms approved by the office, and must provide for a maximum liability for incorrect information of not more than
$1,000.
On April 11, 2003, First American filed with OIR a petition for approval of title insurance policy forms, including schedules and endorsements thereto, previously approved by ALTA, for the issuance of the JLP in Florida, subject to a rate determination pursuant to Section 676.782, Florida Statutes.
The petition asserted that First American had established historical data reflecting an "almost negligible default rate"
for such policies, and that the growing market for "no-cost" or "low-cost" home equity loans and junior loans had led many institutional lenders to seek a product such as the JLP that could be provided quickly, accurately, and at a reasonable cost to the lender or borrower. First American did not suggest a specific premium rate for its proposed JLP.4
On or about April 14, 2003, ATIF filed with OIR a "petition for rulemaking setting title insurance rates." ATIF's petition sought approval of forms previously adopted by ALTA. Unlike the First American petition, the ATIF petition requested a specific premium rate, in the following terms:
Based on the high-demand and low anticipated claims rates for this type of coverage, Petitioner estimates that a rate equal to 30% of the rate premiums presently promulgated for a mortgage title insurance policy pursuant to Rule 4-186.003, F.A.C.[5] with a minimum premium of $100.00 per policy, will provide a reasonable margin for underwriting profit and contingencies, including contingent liability as provided in [Section 627.7865, Florida Statutes],[6] such as to allow a rate of return on capital that will attract and retain adequate capital investments in the title insurance business and maintain an efficient title insurance delivery system. In support of such rate, Petitioner would show as follows:
The Petitioner's low prospective loss experience under the proposed policy.
The Petitioner's low expenses and low prospective expenses for administration and handling of risks.
The proposed premium will be $1.725 per
$1,000 of coverage up to and including
$100,000, and $1.50 per $1,000 of coverage in excess of $100,000, up to and including
$250,000 of maximum coverage, with a minimum premium of $100.00.
This proposed rate will not be excessive, inadequate or unfairly discriminatory, and will apply throughout the State of Florida.
This proposed rate will be subject to the Respondent's review not less frequently than once every three (3) years, and may be revised based on such review.
By letter dated June 13, 2003, OIR informed ATIF that it agreed the rulemaking process should be initiated in this matter, and that OIR would hold workshops to gather information as to the propriety of the rate suggested by ATIF. OIR's letter notified ATIF that OIR neither approved nor disapproved of the forms submitted by ATIF at that time, pending receipt of sufficient data at the workshops to permit OIR to make an informed decision. By letter dated June 23, 2003, ATIF's senior underwriting counsel, Ted Conner, informed OIR that ATIF did not dispute OIR's decision to initiate the rulemaking process and postpone approval of ATIF's forms.
Following receipt of the First American and ATIF petitions and the decision to initiate the rulemaking process, OIR commissioned The David Cox Company to prepare an actuarial report (the "Cox Report") on the rates and forms for the
proposed JLP. OIR general counsel Steven Parton recalled that Mr. Cox was hired to provide "an independent look" at the two proposed rates. Mr. Cox requested information from ATIF and First American. ATIF responded with detailed answers to
Mr. Cox' questions as well as to follow-up questions from OIR concerning the scope of services required to make the
determination of insurability under the JLP and the events that might trigger a claim under such a policy.7
The Cox Report, dated September 2003, and provided to OIR on November 24, 2003, made the following relevant recommendations: the ALTA Residential Limited Coverage Junior Loan Policy form, the Short Form Limited Coverage Junior Loan Policy and endorsements JR1 and JR2, all dated 10/19/96, should be adopted; eligibility for the JLP should be restricted to
institutional lenders, to land having 1-4 residential units, and to loan amounts less than or equal to $250,000; and that the JLP premium should be no lower than $2.00 per $1,000 of liability and no higher than $2.60 per $1,000 of liability. The premium for a standard title insurance policy is $5.75 per thousand of liability. Fla. Admin. Code R. 69O-186.003(1)(a).
Mr. Cox justified his premium recommendation in summary as follows:
My recommended Junior Loan Policy risk rate of $2.00 to $2.60 is a 55% to 65% discount off of the owner's policy risk rate. The
discount is based on judgment considering the relatively low level of expense and loss for the Junior Loan Policy, other Florida risk rate discounts and rates used in other states. The proposed rates should not result in inadequate compensation to insurers operating through independent agents.
The Cox Report was conceptually based on a comparison of the JLP to a standard title insurance policy. Mr. Cox ultimately made an actuarial judgment as to the proper discount based on the reduced coverage, the fact that eligibility would be restricted to low cost, low risk title transactions, and the reduced expenses associated with the JLP. Mr. Cox concluded his report as follows:
The Junior Loan Policy is a new product in Florida and out-of-state experience is incomplete and in some respects is not comparable. By necessity judgment must be used to set the Junior Loan Policy risk rate. This section will examine the consequences of setting an initial risk rate that is either too high or too low.
The title insurance industry tends to view lenders as customers and not land owners [as customers]. This is because lenders are constant business associates while owners come and go. State and Federal laws prohibit rebating to lenders and other middlemen. Rebating drives up the cost of title insurance for the land owner. Rates for the junior loan policy that are set too low would act as a rebate to the lenders who pay the Junior Loan Policy premium directly. Furthermore, title insurers do not intend to track the expenses of the junior loan policy versus the owner's policy and any subsidy of the junior loan policy rates by the owner's
policy rates will never be detected and corrected.
Florida case law has upheld the rebating of commissions by title insurance agents (the agent's 70% share of the risk premium).[8] The rebating of related title services is not permitted under [Florida Administrative Code Rule 4-186.003(13)(a)][9] in that related title services cannot be provided below actual cost. Assuming there is competition in the junior loan title insurance segment, there would be little error in having a somewhat high risk rate because rebating commissions would adjust the risk rate downward.[10] This assumption does not, however, apply to policies written directly buy [sic] an insurer, in which case there is no commission to rebate. There are currently no insurers operating primarily on a direct basis in Florida . . .
The primary consumer for the Junior Loan Policy is the lender. The second mortgage lender is concerned with low closing costs and usually pays the title insurance premium directly. Lenders have much more bargaining power than borrowers as regards title insurance premiums. Price competition for the Junior Loan Policy is expected to be strong and lenders should be able to obtain rebates on commissions and discounts on related title services.
A critical part of title insurance risk rate is that part retained by insurers operating through independent agents. This segment's only source of revenue is the 30% retained risk rate. Agents, attorneys, insurers operating through owned agencies, insurers writing directly and insurers providing related title services can supplement their revenues with related title service fees, which are essentially unregulated. Two prominent Florida title insurers, United General Title Insurance Company and Alliance Title of America, Inc. rely predominantly on
the insurer's portion of the risk premium. These companies could sustain a net operating loss on Junior Loan Policy business if the risk rate is set too low.
There is a range of reasonable risk rates for the Junior Loan Policy. A rate set on the high end of this range would avoid hurting insurers operating through independent agents while not necessarily hurting others. Setting a flat risk rate rather than a series of risk rates that decrease with the amount of liability further provides support for insurers operating through independent agents.
Subsequent to the issuance of the Cox Report, First American commissioned Milliman USA to prepare an actuarial report (the "Milliman Report") regarding rates and forms for the JLP. The Milliman Report, written by actuary Paul Struzzieri, was dated February 2004. The Milliman Report concurred with the Cox Report as to the ALTA forms that should be adopted, and that eligibility for the JLP should be restricted to land having 1-4 residential units. As to rates, the Milliman Report recommended that the JLP premium should be no lower than $0.86 per $1000 of liability, and no higher than $1.33 per $1000 of liability, and recommended a cap of $500,000 on the junior mortgage loan.
In his report, Mr. Struzzieri took a different conceptual approach from that taken by Mr. Cox, who compared the JLP to a standard title insurance policy to arrive at a judgment of how much the standard policy's rate should be discounted to arrive at a fair JLP rate. Mr. Struzzieri believed that a more
valid JLP rate could be derived from viewing the rates charged for JLPs in other states, and by comparison to the rates charged in Florida for the Ownership and Encumbrance ("O&E") reports described in Section 627.7843, Florida Statutes, which is set forth in full at Finding of Fact 9, supra. Mr. Struzzieri explained his proposed rates as follows:
The rationale for my proposed rates is two- fold. The Junior Loan Policy has less risk than the Original Title Insurance Policy.
The reduced risk comes from reduced levels of coverage and the elimination of defalcation claims. . . . Because there is less coverage, there is significantly less work involved in preparing and issuing a Junior Loan Policy.
The following sections describe the support for the Junior Loan Policy losses (associated with reduced risk) and expenses (associated with reduced work load). I believe that these reduced amounts are reflective of the costs underlying a Junior Loan Policy by comparison to (a) rates for Junior Loan Policies in other states and
rates for the Ownership and Encumbrance (O&E) report, to which the Junior Loan Policy coverage is most compatible.
Reduced Risk
As shown in the Cox report, losses are approximately 4% to 7% of the rate in Florida. . . . The current rate for an Original Title Insurance Policy (Owner or Lender) is $5.75 per $1,000 of liability.
At a 5% loss ratio, losses would equal approximately $0.30 per $1,000 of liability.
In First American's August 15, 2003, response to Cox's request for information regarding the Junior Loan Policy, a loss
rate of $0.03 per $1,000 of liability is assumed. I believe that this is a reasonable estimate of the loss potential for the Junior Loan Policy, based on my attached analysis. . . .[11] This represents a 90% decrease in the losses underlying the Original Title Insurance Policy rates.
The proposed Junior Loan Policy rates are 74% to 85% lower than the $5.75 rate, lower percentages than that indicated by the loss experience (i.e., 90%).[12] I believe that this comparison is illustrative of the magnitude of the reduced coverage and, therefore, the reduced effort and expense involved in issuing a Junior Loan Policy.
Reduced Work
In Florida, "primary title services" are included in the rate and are defined to include:
determination of insurability in accordance with sound underwriting practices based upon evaluation of a reasonable search and examination of the title,
determination and clearance of underwriting objections and requirements to eliminate risk,
preparation and issuance of a title insurance commitment setting forth the requirements to insure, and
preparation and issuance of the policy.
The amount of work involved in issuing a Junior Loan Policy is greatly reduced because of the reduced coverage. In addition, the risk is reduced because of certain services that are generally performed by the lender.
As an example of reduced work, a Junior Loan Policy insures against losses related to the borrower not being the same as the grantee in the last recorded deed. In order to determine insurability for a Junior Loan Policy, one must review the search to verify
that the borrower is the grantee in the last deed of record. In addition, one must determine that the land described in the policy is the same as the land described in the deed to the borrower. To clear underwriting objections and eliminate risk, one must review the search results from the public records to verify that there are no liens against that borrower and that real estate taxes are current.
As an example of reduced risk, I point out that the home equity lender generally performs the closing and disbursement functions. Therefore, most of the costs associated with these functions are borne by the lender and not the Junior Loan Policy issuer. Since neither the agent nor underwriter is involved in disbursing the funds, the defalcation element of the premium is eliminated.
Mr. Struzzieri believed that the O&E report is the product most comparable to the JLP and therefore the one most likely to yield a reasonable rate:
While the above discussion illustrates the minimal level of work involved in issuing a Junior Loan Policy, it is difficult to quantify the cost of this work because solid expense data is not available. Therefore, it is appropriate to compare the Junior Loan Policy to an O&E report.
Essentially, the level of work involved in issuing a Junior Loan Policy is the same as the work performed for an O&E report. The majority of home equity loan transactions in Florida are currently closed using an O&E report. The cost of an O&E report to the lender is typically between $60 and $100 (this includes the cost of a search, which for the Junior Loan Policy would be an additional charge). Anecdotally, the O&E
report is purported to be profitable to the companies in this business.
For the $75,000 home equity loan used by Cox in the exhibits to his report, the premium for the Junior Loan Policy at the lower proposed rate ($0.86 per $1,000 of liability) would be $64.50[,] just above the low end of the range of O&E costs. Although the Junior Loan Policy provides broader coverage than the O&E report in Florida, the loss portion of the rate is small (estimated at $0.03 earlier in this report).
Therefore, we conclude that my proposed rate (lower bound) of $0.86 is appropriate in Florida. The higher bound proposed rate ($1.33) would produce a premium of $99.75 in this example[,] equal to the high end of the range of O&E costs. As mentioned earlier, the cost associated with a search would be added onto the $99.75 premium. Therefore, I believe that any rate higher than $1.33 would be excessive.
Unlike the Cox Report, the Milliman Report did not expressly consider the impact of an insurer's business model in the rate determination. Mr. Cox noted that setting a rate at the high end of his reasonable range "would avoid hurting insurers operating through independent agents while not necessarily hurting others." Mr. Struzzieri made no assessment of the impact his proposed rate would have on title insurers that operate through independent agents. This impact is of great concern to ATIF because it operates exclusively through independent agents, and because Subsection 627.782(1), Florida Statutes, permits the agent to retain as much as 70% of the premium.
On April 30, 2004, OIR published proposed JLP rules establishing a JLP premium rate of $1.33 per $1000 of liability. Florida Administrative Weekly, vol. 30, no. 18, pp. 1788-1790. OIR general counsel Steven Parton testified that this rate was based on the Milliman Report and on "what we thought was an understanding among insurers that $1.33 per $1,000 would be acceptable to everybody. That turned out not to be true."
Mr. Parton recalled that ATIF did not find the $1.33 rate acceptable.13
On September 10, 2004, OIR published a "Notice of Withdrawal" of those proposed rules. Florida Administrative Weekly, vol. 30, no. 37, p. 3784.
In a letter to Ted Conner of ATIF dated
August 17, 2004, OIR deputy director Lisa K. Miller explained OIR's decision to withdraw the proposed JLP rule as follows, in pertinent part:
Thank you for working with the Office during the investigation of the proposed junior loan title product and the development of proposed rule drafts. At this time the Office has determined not to adopt the requested junior loan title product.
Applicable statutory provisions do not specifically grant legislative authority for a rule adopting the JLP product, as required by FL Board of Medicine v. FL Academy of Cosmetic Surgery, Inc., 808 So. 2d 243, 253 (Fla. 1st DCA 2002). Additionally, Section 627.784, Florida Statutes prohibits casualty title insurance such as the JLP product.[14] Adoption of this proposed rule would
therefore be arbitrary, capricious, and not reasonably related to any statue that could possibly enable the Office to adopt the JLP through a rule, in contravention of Joseph v. Henderson, 834 So. 2d 373, 375 (Fla. 2d DCA 2003). . . .
By Order dated May 20, 2005, OIR approved First American's use of the ALTA Residential Limited Coverage Junior Loan Policy form, with Florida modifications, and endorsement form JR1, both dated 10/19/96.
On June 3, 2005, OIR published proposed Florida Administrative Code Rule 69O-186.003 with a proposed rate of
$0.86 per $1000 of liability written. Florida Administrative Weekly, vol. 31, no. 22, pp. 2029-2030. This version of the proposed rule was held to be an invalid exercise of delegated legislative authority, but only on the procedural ground that OIR had published the rule without the approval of the Commission as the agency head. Attorneys' Title Insurance Fund, Inc. and Florida Land Title Association, Inc. v. Financial
Services Commission and Office of Insurance Regulation, Case No. 05-2630RP (DOAH May 17, 2006). OIR filed its notice of appeal of the summary final order in Case No. 05-2630RP to the First District Court of Appeal, but voluntarily dismissed the appeal on March 23, 2007.
On June 12, 2007, the Commission approved for publication proposed Florida Administrative Code Rule
69O-186.003, again proposing a rate of $0.86 per $1,000 of liability written. The full text of the Proposed Rule is as follows:
69O-186.003 Title Insurance Rates.
The following are risk rate premiums to be charged by title insurers in this state for the respective types of title insurance contracts. To compute any insurance premium on a fractional thousand of insurance (except as to minimum premiums), multiply such fractional thousand by the rate per thousand applicable, considering any fraction of $100.00 as a full $100.00.
(1)(a) and (b) No change.
For junior loan title insurance:
The premium for junior loan title insurance shall be:
$0.86 per $1,000.00 of liability written;
The minimum premium shall be $50.00;
The minimum insurer retention shall be 30%.
This rate is approved for use with the following junior loan title insurance policy forms, copies of which are available on the Office's website www.floir.com:
ALTA Residential Limited Coverage Junior Loan Policy (10/19/96)(with Florida Modifications) and ALTA Endorsement JR 1 (10/19/96);
ALTA Short Form Residential Limited Coverage Junior Loan Policy (10/19/96)(with Florida Modifications), and ALTA Endorsement JR 1 (10/19/96); and
Any substantially similar product that insures the same type risk.
This rate does not include the $25.00 premium that shall be charged when issuing the optional ALTA Endorsement JR 2 (Revolving Credit/Variable Rate)(10/19/96) on a junior loan title insurance policy, as provided for in Florida Administrative Code Rule 69O-186.005(6)(c).[15]
Eligibility for the junior loan policy shall be restricted to the following:
The insured title is for land having 1-4 residential units;
The junior loan must be a second or subsequent mortgage loan and must meet the definitional requirements of a "federally related mortgage loan", as defined in the Real Estate Settlement Procedures Act of 1974, 12 U.S.C. s. 2602, which is incorporated by reference and a copy is available from the Office;
The junior mortgage loan amount is less than or equal to $500,000;
No junior loan policy may be issued for an amount less than the full junior loan principal debt.
(2) through (12) No change.
On June 22, 2007, OIR published the notice of the Proposed Rule. As specific authority for the Proposed Rule, the notice cited Sections 624.308, 626.9611, 627.777, 627.782, and 627.793, Florida Statutes. The notice stated that the Proposed Rule would implement the following: Subsections 624.307(1), 626.9541(1)(h)3.a., Sections 627.777, 627.782, 627.783,
627.7831, 627.7841, 627.7845, and Subsection 697.04(1), Florida Statutes.
OIR held a rule development workshop on July 24, 2007.
On November 14, 2007, the Commission approved the Proposed Rule
for final adoption.
Petitioners' claim
The Petition notes that Subsection 627.782(1), Florida Statutes, provides that at least 30% of the proposed JLP premium must be retained by the title insurer. ATIF asserts (without contradiction at the hearing) that the Legislature established this 30% minimum retention to ensure that market pressures, such as competition to attract and keep agents, do not lead title insurers to retain less premium than necessary to maintain their economic viability. Florida title insurers generally retain only the minimum 30% of the premium due to competition for agents.
At the hearing, Petitioners presented a breakdown of the division of premium that would occur with the sale of a
$100,000 policy if the JLP premium were set at $0.86 per $1,000. Out of a total premium of $86.00, the title insurer would receive $25.80. From this premium, the insurer must cover its expenses for issuing the JLP, generate a profit sufficient to attract and retain adequate capital investment, and set aside reserves to pay for claims.
Petitioners noted that Subsection 625.111(1)(b), Florida Statutes, requires title insurers to maintain a guaranty fund of $0.30 per $1,000 of net retained liability for policies written or title liability assumed in reinsurance. On a
$100,000 policy, the title insurer would be required to place
$30.00 into the guaranty fund.
Petitioners also noted that Section 624.509, Florida Statutes, requires title insurers to pay a premium tax of 1.75% of their gross receipts on each policy. The insurer is liable for the tax on the full premium, even though the insurer actually retains only 30% of that amount. On a $100,000 policy with a premium of $86.00, the premium tax paid by the insurer would therefore be $1.51.
Petitioners concluded that when the statutory liabilities ($30.00 guaranty fund and $1.51 premium tax) are deducted from the title insurer's 30% share of the $86.00 premium, the title insurer would actually lose $5.71 on a
$100,000 policy. This deficit would have to be covered by funds from the insurer's general operating budget. Mr. Conner, now ATIF's vice president and associate general counsel, testified that the $5.71 per policy loss does not address other underwriting costs, such as policy processing, the cost of operating the claims department, the general overhead of running
a large business, or the return on capital required under Subsection 627.782(2)(b), Florida Statutes.
Petitioners also offered evidence that the overall cost of performing the services associated with a JLP policy would greatly exceed the premium generated by the $0.86 per
$1,000 rate. Mr. Conner spoke at the July 2007, workshop and tried to explain that the proposed JLP rate would not cover the expense of providing primary title services. OIR general counsel Steve Parton responded that OIR had no hard data on the cost of those functions and thus had no way of incorporating ATIF's concerns into the proposed rate.
In an attempt to quantify the cost of providing primary title services for a JLP policy, Mr. Conner directed his central Florida branch staff to randomly16 select five residential properties on which a hypothetical second mortgage would be sought and to conduct a search and examination of title consistent with issuing a JLP.
This analysis yielded the conclusion that primary title services, including labor costs, for a JLP policy cost a little over $100 per policy. If overhead is included, the total costs are approximately $150 per policy. Mr. Conner testified that the cost of performing these primary title services would be constant regardless of the size of the policy, and that they would have to be paid from the agent's maximum 70% share of the
premium.17 On a $100,000 policy, the agent's share of the premium based on a rate of $0.86 per $1,000 would be $60.20.
Mr. Conner further testified that a rate sufficient to cover the cost of the primary title services and provide a reasonable profit would be very close to the $2.00 to $2.60 range recommended by the Cox Report. Mr. Conner concluded that the agent's share would be "wholly inadequate" to compensate him for the work he must do.
Mr. Conner testified that a number of ATIF's member agents represent lenders such as credit unions and community banks, and these agents will be issuing policies on second mortgages issued by those institutions. ATIF is concerned that the inadequate rate proposed by OIR could lead agents to issue the JLP without performing all the necessary title services, which would naturally increase ATIF's claims experience.18
Mr. Conner concluded that any title company offering the JLP at $0.86 per $1000 of liability, even by selling the product directly, would be offering it as a loss leader to obtain customers for other products.
Petitioners contend that OIR's proposed adoption of the $0.86 per $1000 premium rate for the JLP fails to give "due consideration" to the specific ratemaking criteria set forth in Subsection 627.782(2), Florida Statutes. Petitioners contend that the proposed premium is plainly inadequate and insufficient
for the JLP to exist as a self-sustaining product, and will thus require the title insurer to supplement issuance of the JLP with premium dollars collected on its other title insurance policies. Petitioners note that such a drain on premiums for these other policies was not contemplated when those policies' rates were adopted.
Petitioners contend that the evidence establishes that OIR and the Commission have failed to consider the impact of the proposed premium rate on title insurance agents, including the adequacy of the rate in paying for the cost of primary title services connected with the JLP, and the agents' ability to earn a rate of return on their capital that will attract and retain adequate capital investment in the title insurance business and maintain an efficient title insurance delivery system, as required by Subsection 627.782(2)(b), Florida Statutes.
Finally, Petitioners contend that the proposed JLP rule is vague and ambiguous because it provides that the JLP premium is approved for use with the named ALTA policies or with "[a]ny substantially similar product that insures the same type risk," but does not define the term "substantially similar
product."
OIR's response
OIR's position is that it fulfilled its statutory ratemaking obligations under Subsection 627.082(2)(b), Florida
Statutes, and made a rational decision to rely on the Milliman Report and the opinion of Mr. Struzzieri. Mr. Parton conceded the apparent anomaly of rejecting the OIR-commissioned, independent actuarial report of Mr. Cox in favor of a report commissioned by and based entirely on information provided to the actuary by a single company, First American. Mr. Parton also offered considered reasons for the agency's rejection of its own actuarial report.
Mr. Parton testified that OIR had a number of concerns with the Cox Report. In the first place, Mr. Cox' fundamental premise regarding Florida law was inaccurate: OIR is not required to "create a rate that would fit everybody's business model." The rate promulgated by OIR need not be sufficient to guarantee profits to companies operating through agents. OIR believed that the Cox Report placed undue emphasis on setting a rate amenable to companies that worked only through agents and disregarded companies that perform direct sales even though the JLP, because it is a simple transaction, is tailored toward a direct business approach. Mr. Parton believed that Mr. Cox should have focused on a company such as First American, which was actually selling the JLP in other states and presumably could provide actual market data for use in recommending a rate.
OIR also took issue with Mr. Cox' preference for setting the rate on the high side of the recommended range. The
Cox Report noted that agents are free to rebate part of the rate to their customers. Relying on a rebate scheme to bring down rates hides the real cost of title insurance from both the consumer and regulator, and introduces unfair discrimination because not everyone will be able to take advantage of the rebate. OIR concluded that the existence of a rebate scheme constitutes an admission that the rate is excessive.
OIR also suggested that ATIF's concern about not being able to cover expenses from the insurer's 30% share of premium could be solved by the insurer taking a greater share of the premium.
OIR believed that the conceptual approach of the Milliman Report was more sound, because the agency was persuaded that the JLP bears much more resemblance to an O&E report than to a primary title insurance policy. Mr. Parton testified that during discussions with industry representatives, he had raised the question whether the JLP was really a title insurance product at all. Mr. Parton felt that the JLP was really "an [O&E] report that is trying to be dignified to the level of actually being an insurance policy, whereas an [O&E] report as it is set out in statute is not for the purposes of insurance and has a limit I believe of $1,000 for which you can make any claim against that report. Yet here we were with essentially a product that did nothing more than create an [O&E] report."
OIR believed that the Milliman Report made more sense than the Cox Report because the former treated the product as OIR saw it: an O&E report with an insurance product attached.
Mr. Parton pointed out that both reports relied on a great deal of actuarial judgment because the JLP is a new product to Florida. Mr. Cox arrived at his recommended rate by discounting a standard title insurance policy, whereas Mr. Struzzieri chose to rely on the costs and loss experience of a company that is actually writing this type of policy in other states. OIR concluded that the Milliman Report more consistently reflected the risk associated with the policy and the policy's intent to deal with simple transactions.
Mr. Parton testified that OIR considered the statutory "reasonable margin for underwriting profit and contingencies" ratemaking factor through its reliance on the Milliman Report's analysis of O&E reports. By assuming that the costs embedded in an O&E report are covered by the price First American charges for that product, and then assuming that the cost of producing a JLP would be similar to the costs of producing an O&E report, Mr. Struzzieri was able to arrive at the concluding assumption that $0.86 per $1,000 of coverage would provide a reasonable level of profit for the JLP. OIR accepted the Milliman Report's conclusions without further inquiry into the data upon which Mr. Stuzzieri relied.
Mr. Parton testified that OIR did consider all the business models in the industry, but finally chose to go with the lowest rate proposed:
[T]he OIR and the Governor and Cabinet in looking at the business models, [ATIF] is a strictly agent-driven entity; that is to say, all sales are through agents.
First American as well as [Fidelity National Title Insurance Company], who also sells this product and is not contesting this rate, use a combination of sales through independent agents, affiliated agencies, which are owned, if you will, by the company in direct writing. [The JLP] is a product that frankly lends itself greatly to direct writing, particularly since what you're talking about is essentially simple transactions as opposed to major transfers of title of property.
So at the end of the day, in looking at what is going on, we're looking at a company, actually two companies, who are actually selling this product nationwide, have a business model which allows them to write direct, which we believe and I think it's reported reduces costs, and a company who does it strictly through agents and who is not selling this product and has never sold this product . . .
[OIR] and [the Commission] in our recommendation and explanation has [sic] come to the conclusion that we have an ability here to actually set a rate that significantly lowers cost in at least limited circumstances. We have a company who is actually engaged in the business of selling this, and we have a company who has proposed a rate and had said, "I can write this rate and make a profit at 86 cents." So ultimately the decision was to go with that particular matter.
Thus, OIR's position on giving "due consideration" to the ratemaking factor of "reasonable margin for underwriting profit and contingencies" found at Subsection 627.782(2)(b), Florida Statutes, as explicated by Mr. Parton, is that the statute allows OIR to set the rate at the lowest level at which any one company's actuary concludes it can make a profit.19 If the rate is set any higher, then the company that could have made a profit at the lower rate will be charging an excessive rate, to the detriment of policyholders.
Mr. Parton testified that OIR was "not setting the rate for the industry as a whole. . . . I'm setting the rate we believe . . . meets all the requirements of the law, which may not be for the industry as a whole, but in fact can be adjusted if needed." OIR set great store in the fact that the $0.86 per
$1,000 rate was proposed by "someone who actually engages in that business, who has engaged an actuary to take a look at the rate based upon the factors of the company who is actually doing it, and they use a direct business model."
ATIF is not marketing this product anywhere in the country, and may never market it with its totally agent- generated business model. Mr. Parton stated that "due consideration was given by the fact that the insurers that are actually doing business in this matter have a business model
which puts less emphasis on agent generated business and more on direct writing . . .".
Mr. Parton noted that one factor leading to the adoption of the proposed rate was the availability of the "rate deviation" process set forth in Section 627.783, Florida Statutes. See Finding of Fact 8, supra, for the statute's text. Mr. Parton testified that Mr. Cox erred in not taking note of the rate deviation statute in his recommendation:
... Florida law allows any insurer to petition for deviation from a promulgated rate, and that's one of the things that, frankly, I believe Mr. Cox did not consider in setting this rate. If, in fact, the rates were set too low for [an] insurer operating through independent agents, and that insurer felt that it hurt him to be able to charge that, that insurer has the ability to petition for deviation and to have a rate set higher than that based upon what they have petitioned. . . . All they have to do is petition the Office pursuant to the statute, prepare whatever documentation under oath they feel supports what they need, and the Department [sic] will make a determination whether or not that justifies a higher rate.[20]
* * *
. . . It is not necessary for us to take into account the whole industry in adopting a rate when, in fact, the law particularly contemplates that that rate is not necessarily going to be the same for everybody and allows for companies who have a different business practice and different approach to present that to the Office for approval to charge a different rate. And if that's what [ATIF] wants to do, that's fine.
So, it's difficult for me to understand how they're adversely impacted by that.
Mr. Parton asserted that the rate deviation statute was especially significant to OIR's analysis because
Chapter 99-286, sec. 13, Laws of Florida, changed the provision from an industry-wide deviation to one applying to a single applicant, meaning that for the first time the Legislature had authorized more than one rate for each type of title insurance.21
Mr. Parton testified that OIR considered the statutory "loss experience and prospective loss experience" ratemaking factor by holding a rate hearing to which the entire industry was invited, as well as by considering the Cox and Milliman Reports, both of which took loss experience into consideration.
Mr. Parton testified that OIR's consideration of the statutory "past expenses and prospective expenses" ratemaking factor was essentially confined to its reliance on the Milliman Report's actuarial judgment in basing the potential costs expenses for the JLP on the costs and expenses associated with an O&E report.
Mr. Parton testified that OIR's consideration of the statutory "defalcation" ratemaking factor consisted of adopting the Milliman Report's finding that there is virtually no danger of defalcation with the JLP product because the refinancing
would almost always be handled by a bank, eliminating the danger of money passing through the hands of an agent.
In summary, OIR's defense of proposed Florida Administrative Code Rule 69O-186.003(1)(c) is premised on its acceptance of the Milliman Report. This acceptance in turn reflects acceptance of the core concept of that report: that the JLP more resembles an O&E report than it does a traditional primary title mortgage policy.
Expert testimony on the Milliman Report
Dr. Nelson R. Lipshutz testified on behalf of Petitioners as an expert in the economics of the title insurance industry. Dr. Lipshutz has decades of experience in the design and implementation of title insurance statistical plans and ratemaking, including having designed ALTA's Uniform Financial Reporting Plan and Uniform Statistical Plan, which are used as the basis for title insurance regulation in roughly half of the United States. He collects data on behalf of rating bureaus in three states, has served as a consultant for several state departments of insurance (including Florida's) and is the author of a textbook, The Regulatory Economics of Title Insurance.
Dr. Lipshutz was retained by ATIF to analyze the Milliman Report. At the hearing, Dr. Lipshutz explained that, unlike other lines of insurance, title insurance is not a loss reimbursement activity; rather, it is a loss prevention
activity. Title insurance does not insure against some future contingency, but looks to the past to insure the state of title at a particular point in time. Relative to other lines of insurance, losses consume a small portion of the premium. With title insurance, more of the premium goes toward searching the title in a very complete way. Dr. Lipshutz stated that in most casualty lines, the amount of premiums going out in losses is between 60% and 110%, whereas the losses for title insurance are between 3% and 10%. Because such a small percentage of the title insurance premium goes to the underwriter, the losses are still significant, but loss prevention costs drive the rate for title insurance.
In examining the Milliman Report, Dr. Lipshutz first critiqued Mr. Struzzieri's loss calculation, which was based on five years (1999 through 2003) of First American's experience writing JLPs. Mr. Struzzieri had data from First American as to its total liability written in each of those years, and the actual losses incurred on those policies up to June 2003. He also had national loss data averages developed by Milliman to predict the percentage of overall expected losses that were represented by those actual losses as of June 2003. These numbers allowed Mr. Struzzieri to calculate projected ultimate losses for each year, including a projected ultimate loss per
$1,000 of liability. Mr. Struzzieri's ultimate projection was
an expected loss of $0.03 per $1,000 of liability for the JLP. This projection included two years, 2001 and 2003, for which Mr. Struzzieri had no loss data and thus projected zero losses on over $6 million in liability written.
At the outset, Dr. Lipshutz noted that title insurance has a long tail line, meaning that losses take a long time to come in. Unlike auto insurance, where the losses are fairly well known during the policy year, the tail on title insurance can go out for 20 years. The losses in title insurance must be projected and Mr. Struzzieri was conceptually correct in attempting a loss projection.
Dr. Lipshutz faulted Mr. Struzzieri's projection for including the "highly unlikely" scenario of policy years with zero losses. Dr. Lipshutz also noted that the estimated losses for 1999, the earliest year in the report and therefore the year with the most fully developed losses, were $0.14 per $1,000, almost five times Mr. Struzzieri's overall projected loss for the JLP. Dr. Lipshutz was also critical of Mr. Struzzieri's use of national data because title insurance is "highly geographically idiosyncratic." Factors that can lead to losses in Florida, such as navigational servitudes, are insignificant in a state such as Arizona. Dr. Lipshutz found no discussion in the Milliman Report of the Florida market, as opposed to general comments on the title insurance industry.
Dr. Lipshutz also noted that mortgage fraud is "endemic" in Florida. The state ranks first in the nation in mortgage fraud, with a rate twice the national average in 2006. Because a JLP is essentially insuring the identity of the property owner, fraud and identity theft in Florida should not be ignored in any loss calculation.
Finally, Dr. Lipshutz faulted Mr. Struzzieri's loss calculation for failing to account for the cyclical nature of title insurance. When the real estate market is doing well, the losses on title insurance are low. When the market goes down, there are large spikes in the loss ratios. Dr. Lipshutz stated that the five years included in Mr. Struzzieri's analysis were some of the best years ever in the real estate industry. Using a mere five-year experience base will not lead to a good result unless the analysis accounts for the fact that the years under review are very strong for the market, and factors in the inevitable down cycles of the market. Dr. Lipshutz believed that Mr. Struzzieri's analysis gave insufficient consideration of what will happen in a downturn.
Dr. Lipshutz next critiqued the Milliman Report's expense calculation or, rather, its lack of an expense calculation. After describing the "minimal level of work" involved in the issuance of a JLP, Mr. Struzzieri noted that it would be difficult to quantify the cost of the work because
"solid expense data is not available." Therefore, Mr. Struzzieri looked to expense data for O&E reports as his point of comparison for deriving a JLP expense estimate.
The problem with this approach, according to Dr.
Lipshutz, was that Mr. Struzzieri also lacked "solid expense data" for O&E reports. Mr. Struzzieri's analysis is "extremely simple" and based on a series of assumptions that lack empirical support. First, Mr. Struzzieri assumes that "the level of work involved in issuing a Junior Loan Policy is the same as the work performed for an O&E report." Nothing in the Milliman Report attempts to quantify the expenses involved in issuing a JLP beyond the assertion that the work is the same as that involved in issuing an O&E report.
Having made that assumption, Mr. Struzzieri then asserts that the cost of an O&E report to a lender is usually between $60 and $100. The Milliman Report provides no data to support that assertion. At the hearing, Mr. Struzzieri conceded that he had no supporting data for the $60 to $100 cost range and testified that an unnamed employee of First American gave him those numbers during a telephone conversation. Dr. Lipshutz testified that his own casual Google search of O&E prices in Florida turned up figures ranging from $125 to $250. While acknowledging that his search did not produce a scientific sample, Dr. Lipshutz rightly contended that it nonetheless
called into question the validity of the upper end of Mr. Struzzieri's cost range.
Finally, Mr. Struzzieri makes an assumption, based on anecdote, that O&R reports are profitable to the companies in that business. The Milliman Report does not include the anecdotes on which this assumption is based. Dr. Lipshutz thus described the Milliman Report's analysis as a conclusion reached at the end of a string of unsupported assumptions: if one assumes that the level of work for a JLP equals that for an O&E report, and assumes that the cost of an O&E report is between
$60 and $100, and assumes that the companies make a profit by charging between $60 and $100, then one may assume that a JLP rate that provides the same revenue (calculated by Mr.
Struzzieri to be between $0.86 and $1.33 per $1,000 on a $75,000 loan) would be profitable. Because the Milliman Report contained no data to allow one to test the reasonableness of its assumptions, Dr. Lipshutz concluded that the report's findings were unsupported and unreliable.
Dr. Lipshutz disputed that a JLP is directly comparable to an O&E report, or at least the notion that such a comparison may be assumed without proof. He pointed out that an O&E differs from a JLP "even on the simplest financial terms." Because an O&E report is not an insurance product, no premium tax is charged on it. Dr. Lipshutz was not certain whether the
issuer of an O&E report is required to maintain a guaranty fund, but noted that any such contribution would be negligible because the liability on an O&E report is limited to $1,000.
The analysis discussed at Findings of Fact 35 and 36, supra, was performed at Dr. Lipshutz' request. As noted above, ATIF calculated that performing primary title services, including labor costs, for a JLP policy would cost slightly more than $100 per policy, and about $150 if overhead costs are included. ATIF performed the same calculation for an O&E report and found that the production cost would be just under $50 per policy, and just over $100 if overhead is included.22
Included in Dr. Lipshutz' written report were two charts produced by ATIF to support its calculation of the difference in cost between a JLP and an O&E report. The first chart showed the differences in coverage between the two products:
Coverage | JLP | O&E |
Limit of liability | $500,000 | $1,000 |
Ad valorem taxes | Yes | No |
Gap coverage | Yes | No |
Encumbrances created by or liens against current owner | Yes | Yes |
Encumbrances created by or liens against prior owners | Yes | No |
Closing protection letter (CPL) coverage for failure of agent to follow lenders' closing instructions | Available at no additional charge | Not available |
CPL coverage for fraud or dishonesty of agent in handling lenders' funds or documents | Available at no additional charge | Not available |
Revolving credit/variable rate endorsement | Available for $25 | Not available |
Retain evidence of determination of insurability and premium charged for seven years | Yes | No |
The second chart showed the tasks required to produce a JLP and an O&E report:23
TASK | JLP | O&E |
Collect documents from recorder's office relevant to the property AFTER date of last deed or mortgage | Yes | Yes |
Collect documents from recorder's office relevant to the property BEFORE date of last deed or mortgage | Yes | No |
Check validity of documents | Yes | No |
Collect documents from courts for names in ownership AFTER date of last deed or mortgage | Yes | Yes |
Collect documents from courts for names in ownership BEFORE date of last deed or mortgage | Yes | No |
Check probate and foreclosure cases | Yes | No |
Check identity in case of common name | Yes | No |
Check for tax liens recorded AFTER date of last deed or mortgage | Yes | Yes |
Check for tax liens recorded BEFORE date of last deed or mortgage | Yes | No |
Check city and county tax offices for taxes owed | Yes | No |
Prepare O&E report | No | Yes |
Prepare commitment | Yes | No |
Downdate search before closing | Yes | No |
Review closing documents for compliance with conditions in commitment | Yes | No |
Review closing documents for compliance with lender's closing instructions | Yes | No |
Prepare policy | Yes | No |
Downdate search after recording and issue JR-1 and/or JR-2 endorsement | Yes | No |
From this data provided by ATIF, Dr. Lipshutz concluded that the extra work makes the cost of producing a JLP 85% higher than the cost of producing an O&E report, and corresponds to a rate of $2.52 per $1,000 of insured liability. Even accepting Mr. Struzzieri's range of reasonable rates ($0.86 to $1.33 per $1,000 of liability written), applying this 85% cost factor would change the range to $1.59 to $2.46 per $1,000 of liability. Dr. Lipshutz noted that this range overlaps significantly with the range of $2.00 to $2.60 per $1,000 recommended in the Cox Report.
Dr. Lipshutz termed "specious" the statement in the Milliman Report that "[t]he proposed Junior Loan Policy rates are 74% to 85% lower than the $5.75 rate, lower percentages than that indicated by the loss experience (i.e., 90%)."
Dr. Lipshutz stated that this statement would be reasonable in the context of auto insurance, where the primary concern is loss reimbursement: if the loss is 90% lower, then the rate should be
90% lower. However, in this case it is "downright silly" to tie rates to losses because loss prevention, not loss reimbursement, drives expenses in title insurance.
As noted above, OIR contended that if an underwriter took a larger split of the premium from its agents, or wrote the policies directly, then the $0.86 per $1,000 rate for the JLP would be adequate. Dr. Lipshutz called this contention "violently incorrect." He stated that it is a "specious distinction" to say that a rate could be adequate for a direct writer but inadequate for an underwriter working through agents. Certain core title services must be performed, certain reserves must be set aside, and certain losses will have to be paid regardless of the premium split between the agent and underwriter. If the premium is not large enough to cover all of those costs, the rate will be inadequate regardless of the insurer's business model.
As a secondary matter, Dr. Lipshutz noted that it is difficult for underwriters to dictate changes in the premium split to their agents. The market is competitive, and agents will walk away from an insurer that attempts to take more than the statutory 30% split of the premium. Many agents write for multiple insurers, and would likely direct most of their business toward those who were most generous in their premium splits. Dr. Lipshutz did not believe that changing the split is
a practical way to solve the rate adequacy problem even from the underwriter's standpoint.
Dr. Lipshutz was also critical of OIR's suggestion that dissatisfied insurers could avail themselves of the rate deviation statute, because it is difficult if not impossible to charge a significantly higher price than that charged by other participants in a competitive market. Dr. Lipshutz testified that rates are supposed to be based on industry averages, and thus disputed OIR's theory that a rate is "excessive" for any company that could offer the product for less than the promulgated rate. In a system of regulated competition as described by Dr. Lipshutz, it is a certainty that some companies are going to make more money than others at the promulgated rate. Those companies that cannot make a profit at the promulgated rate will drift out of that line of business. Those companies with high profits will invest more in their business, improving their technology and workflow. The profits and increased efficiency of these companies will appear in the industry data presented to the regulator, which will then fulfill its statutory mandate and lower the rate.
However, if the initial rate is set so low that only one firm can sell the product at a profit, all of the other insurers are immediately knocked out of the market. Competition in the title insurance market is based on service as well as
price, but the service element of competition would be wiped out by the low rate. Dr. Lipshutz was skeptical of the idea that a title insurer could offset an inadequate JLP premium with other charges because this product will be sold mostly to banks and other large institutional carriers, which have the leverage to resist paying extra charges above the statutory premium rate.
Mr. Struzzieri testified at the hearing, after Dr.
Lipshutz, to explain his methodology and defend the Milliman Report. He explained that he was contacted by First American to provide a rate analysis for filing with OIR. He reviewed the Cox Report and documents filed by First American in response to the report.
Because there was no Florida experience on which to base his calculation, Mr. Struzzieri looked for other benchmarks and decided that the most relevant other experience would be JLP experience in other states. He examined the JLP loss experience of First American in other states and estimated an expected loss of $0.03 per $1,000 of liability written. This contrasted with an expected loss in the range of $0.20 to $0.30 per $1,000 on an original owner's or lender's policy.
Mr. Struzzieri noted that, all things being equal, lower losses should result in a lower rate for the product. He agreed with Dr. Lipshutz that in title insurance, underwriting expenses are a more significant factor than expected losses in
setting rates. Based on his understanding of the JLP product and what it covers, Mr. Struzzieri concluded that there is less work involved in the JLP than in a primary title policy and therefore less expense.
Mr. Struzzieri's understanding was that the JLP "is intended for simple transactions such as, you know, a home equity loan, and that the lender on home equity loans is going to be performing the closing services as opposed to the title agent or the title company, the title insurers." This direct performance of closing services by the lender would eliminate the risk of defalcation by the title insurer or its agents, thus further driving down the cost of the JLP.
Mr. Struzzieri stated that First American had no specific expense data for the JLP that would permit him to measure the work involved in producing a policy. Therefore, he needed to find other relevant data that would allow him to estimate the average cost of the work. Mr. Struzzieri's discussions with First American led him to study the O&E report, which seemed "parallel" to the JLP, such that the amount of work involved in the JLP could be assumed equivalent to the amount of work needed to produce an O&E report.24
Mr. Struzzieri decided to use O&E report costs as a proxy for the expense portion of the JLP product. First American told him that O&E report costs were between $60 and
$100. Mr. Struzzieri conceded that he had no data to support those O&E costs, and did not doubt that Dr. Lipshutz found companies offering Florida O&E reports at prices well in excess of $100.
Mr. Struzzieri also conceded that First American had initially convinced him of the comparability of the JLP and the O&E report by stating that the lender "probably will not close" if any adverse matters are uncovered during the limited search envisioned by the JLP. However, further discussions with First American had clarified that another option would be to exclude the adverse matters from coverage under the JLP and allow the lender to decide whether to close.
Mr. Struzzieri pointed out that he checked his recommended rate range of $0.86 to $1.33 per $1,000 against the JLP rates charged by First American in other states. He believed that a comparison to other states' JLPs was more valid than a comparison to an original issue or owner's or lender's policy because of the greatly reduced scope, coverage, and the amount of work involved in a JLP. The data provided by First American showed rates that ranged widely, from $0.73 per $1,000 in California to $3.40 per $1,000 in New Mexico. Out of 29 states listed, only two had rates lower than $0.86 per $1,000. Seventeen of the 29 fell within a range of $1.33 to $2.33. Nonetheless, Mr. Struzzieri pronounced himself satisfied that
his recommended range fit reasonably within the range of rates charged in other states.
Mr. Struzzieri testified that he accepted Dr. Lipshutz' estimate of the risk of fraud and had no
reason to doubt Dr. Lipshutz' data on the subject. However,
Mr. Struzzieri did not believe that fraud had any bearing on his calculation of a $0.03 per $1,000 loss on the JLP because fraud losses are a small percentage of total title insurance losses.
He acknowledged that there may be a small fraud component that his calculation missed by using national data rather than Florida data, given Florida's higher rate of fraud, but concluded that this component would be at most incremental.
Mr. Struzzieri agreed that his data on the cost and profitability of an O&E report was anecdotal and unverified, but disagreed with Dr. Lipshutz' assertion that his anecdotal information about O&E profitability was the source of his conclusion that the JLP will be profitable at the recommended range of rates. Rather, said Mr. Struzzieri, the source of his assertion of profitability was the fact that First American is writing JLP policies in 29 other states, including California at
$0.73 per $1,000, and appears to be making a profit on that business. He conceded, however, that this, too, was an assumption on his part.
On cross-examination, Mr. Struzzieri was asked about a document he filed at OIR in response to a 2005 title insurance data call issued by OIR. In a letter dated November 17, 2005, Mr. Struzzieri wrote "to point out what I believe are several critical deficiencies in the 2005 title insurance data call." Mr. Struzzieri wrote that the deficiencies fell into two categories: missing information and insufficient data. As to the latter deficiency, Mr. Struzzieri wrote that OIR was not asking for enough information:
It is my strong belief based on my many years of working with title insurance data that 5 policy years is insufficient to make rates. Reasons supporting this belief include:
Long loss development "tail" -- Title insurance policies have no expiration date; claims continue to be reported far beyond 5 years after the policy effective date. . . .
Not many losses reported in first 5 years -- Milliman analysis of title industry composite loss development triangles indicates that only a small percentage of total losses from policy years 2000 through 2004 are expected to have been reported as of December 31, 2004. For example, for policy year 2004, we would expect only 13% of "ultimate" losses to be reported by December 31, 2004. It is, therefore, my belief that policy years 2000 through 2004 are all too immature to be used in ratemaking without the benefit of additional policy years of data and will result in highly variable results.
Title insurance cycle Milliman
analysis of title insurance profitability
indicates that title insurance is cyclical in nature. Specifically, profits vary with the real estate cycle; in particular, mortgage interest rates [sic]. For example, when interest rates are falling, title insurance revenue is higher and loss ratios are generally lower. Expenses are also higher; but not as high as revenue because certain expenses are relatively fixed.
Therefore, profits are generally higher. When interest rates rise, revenues fall, expenses fall (but not as fast as revenue) and loss ratios increase. As a result, profits are lower. For this reason, I believe that any title insurance rate making exercise should use as many as 20 years of data (or at least 10 years). The number of years should correspond to a full real estate cycle. The 5 policy years included in the data call correspond to the lowest interest rates in the last 40 years.
Therefore, the profits are likely much higher than an average year. When the real estate cycle turns (and there [are] indications that it soon may), the title industry may face losses. By using only the last 5 years, the OIR will be applying rates based off of the most profitable years and applying them to perhaps some very unprofitable years. However, if instead rates were based on 10, 15 or better yet 20 years of data, the OIR will have captured a complete cycle and will have made rates that are appropriate in the long run and, on average, for each individual year of the cycle.
Mr. Struzzieri acknowledged his prior opinion that five years of data provides an insufficient basis for ratemaking, especially when those years were so recent that ultimate losses are uncertain. He further acknowledged that his own recommendation for a range of JLP rates was in part based on
projected loss data from five years of recent First American policies. Mr. Struzzieri explained this apparent contradiction by noting that, as to primary title insurance, companies have sold the products in Florida for 50 to 60 years and typically report 20 years of data. As to the JLP, First American only had the five years of data used by Mr. Struzzieri. He agreed that more data would be better, but he used what was available.
Summary Findings
When it decided to commence rulemaking to set a premium rate for the JLP, OIR commissioned The David Cox Company to prepare an actuarial report on the rates and forms for the proposed JLP. The Cox Report recommended a rate ranging from
$2.00 to $2.60 per $1,000 of liability, based on Mr. Cox' comparison of the JLP to a standard title insurance policy.
Mr. Cox advocated setting the rate on the high end of the recommended range to avoid hurting insurers that operate through independent agents.
OIR reviewed the Cox Report and found it flawed. OIR believed the Cox Report's recommended rate range was too high, because Mr. Cox overemphasized protecting companies that operate through agents, when the JLP appears more amenable to direct sales. OIR disapproved of Mr. Cox' rebate strategy for holding down rates, his assumption that the insurer is always bound to accept the 30% minimum premium split with its agents, and his
failure to focus on actual market data generated by companies that are selling the JLP in other states.
All of OIR's criticisms of the Cox Report's methodology and conclusions were reasonable concerns voiced by the regulatory entity charged with the responsibility to set a premium rate for the JLP. OIR had misgivings about whether the JLP qualified as an insurance product at all, and therefore found the Cox Report's conceptual strategy of "backing out" a JLP rate from the standard title insurance rate less than persuasive. The preponderance of the evidence at the hearing established that OIR's decision to reject the recommendations of the Cox Report was reasonable.
OIR has freely conceded that the Proposed Rule is entirely dependent on the Milliman Report, with its recommended range of rates between $0.86 and $1.33 based on First American's experience in other states and the close comparison of the JLP to a non-insurance product, the O&E report.
OIR's position, as elucidated by Mr. Parton, is that Section 627.782, Florida Statutes, allows OIR to base its ratemaking decision exclusively on an actuarial analysis conducted on behalf of one company, based on data derived exclusively from that company. OIR is under no obligation to set a rate for the industry as a whole, because any insurer that does not believe it can make a profit at the promulgated rate
may petition for an upward deviation pursuant to Section 627.783, Florida Statutes. The rate should be set at the lowest level recommended by any single company's actuary, to ensure that no company can charge an excessive rate.
ATIF demonstrated that it cannot profitably sell the JLP at the $0.86 rate set forth in the Proposed Rule. The insurer's 30% share of premium on a $100,000 policy ($25.80) is insufficient to cover its statutory liabilities ($30.00 to the guaranty fund and $1.51 premium tax), let alone its other underwriting costs. The insurer would be required to cover the losses with premiums from other policies.25
Mr. Parton pointed out that the insurer could solve this problem by forcing its agents to accept a 60-40 premium split. However, Dr. Lipshutz convincingly testified that such an imposition is not easily accomplished in a competitive market. Agents would either walk away or steer their less desirable risks toward that insurer.
Further, ATIF showed that the cost of performing primary title services for a JLP policy would be a little more than $100, whereas the agent's 70% share of premium on a
$100,000 JLP policy at the $0.86 rate would be only $60.20.26 Cutting the agent's share to 60% would merely shift more of the loss for a $100,000 policy onto the agent. However, because the agent's costs are fixed, his 70% share would more than cover
expenses on a policy written for $167,000 or more. At a 60% share, the agent would not cover expenses on any policy worth less than $195,000.
Mr. Conner of ATIF and Barry Scholnik of Stewart Title agreed that no company could issue the JLP for $0.86 per
$1,000 and make a profit, and that a company selling the JLP at that rate would be offering it as a loss leader.
OIR countered that ATIF is not marketing the JLP anywhere in the country, and may never do so. OIR asserted that it was entitled to rely on the fact that the $0.86 per $1,000 rate was proposed by a company that is actually selling the JLP throughout the country and has engaged an actuary to make a recommendation based on actual market data. First American maintains that it can generate a profit at the proposed rate through its direct business model. The Florida JLP purchaser should not be forced to pay higher rates in order to subsidize the less efficient "member agent" business model of ATIF.
Petitioners' expert, Dr. Lipshutz, discussed at length his dispute with Mr. Struzzieri's loss projection of
$0.03 per $1,000 of liability for the JLP. Dr. Lipshutz made valid points regarding the long tail line and cyclical nature of title insurance versus the very recent five years' data employed by Mr. Struzzieri, which included the unlikely projection of two years with zero losses. Mr. Struzzieri conceded that his loss
data from First American was not optimal. However, both experts agreed that loss experience is not the driving force in setting title insurance rates. Additionally, Mr. Struzzieri's point that defalcation losses will be virtually nonexistent with the JLP was not effectively countered by Dr. Lipshutz. Even conceding the validity of Dr. Lipshutz' critique, Mr. Struzzieri persuasively argued that any upward projection of the loss projection would have an insignificant effect on the recommended range of rates.
The experts and industry witnesses agreed that expenses are the main driver of title insurance rates. Dr. Lipshutz disputed that Mr. Struzzieri performed an expense calculation at all, and certainly questioned every expense assumption upon which Mr. Struzzieri ultimately based his rate recommendation.
Mr. Struzzieri first assumed that expense data for O&E reports would provide a reliable basis for a JLP expense estimate. He was forced to use this assumption because First American could provide him with no specific expense data for the JLP, a fact that undercut the rationale for OIR's reliance on the Milliman Report as based on real industry data from a company actually selling the JLP. In fact, Mr. Struzzieri used First American's JLP price data from other states only after the
fact as a tool to check the reasonableness of his rate recommendation.
The evidence is not entirely clear whether
Mr. Struzzieri independently reached the conclusion that the two products are equivalent, or whether this assumption was provided by First American. The Milliman Report does not explain the basis for its assumed equivalence of the O&E report and the JLP beyond a simple assertion that the "level of work . . . is the same" for the two products. At the hearing, Mr. Struzzieri merely stated that he found parallels between the O&E report and the JLP that allowed him to assume their equivalence.
Mr. Conner of ATIF testified that the tasks necessary to issue a JLP are "not even close" to those employed to produce an O&E report. In support of this position, Petitioners offered a detailed, step-by-step review of the JLP process versus the process involved in producing an O&E report. This review led Dr. Lipshutz to conclude that the cost of producing a JLP
would be 85% higher than the cost of producing an O&E report. Dr. Lipshutz' analysis on this point was credible, the more so because OIR offered no serious criticism of or alternative to Petitioners' evidence regarding the extensive differences between the production process for the two products. The preponderance of the evidence produced at the hearing
established that the Milliman Report's assumption of equivalence between the JLP and an O&E report was simply wrong.
Even if it were granted that the cost of an O&E report is comparable to that of a JLP, Mr. Struzzieri's assertion that the cost of an O&E report to a lender is usually between $60 and $100 was unsupported. At the hearing,
Mr. Struzzieri conceded that he had no supporting data for the assertion and was unable to name the First American employee who gave him those numbers. Dr. Lipshutz' sworn testimony that he found O&E price quotes in Florida ranging from $125 to $250 was admittedly anecdotal but even so was at least as credible as Mr. Struzzieri's undocumented hearsay cost data from an unnamed source. The preponderance of the evidence produced at the hearing established that the Milliman Report's statement of the cost of a typical O&E report was an assumption lacking empirical support. The unsupported assumptions regarding the comparability of the JLP to the O&E report and regarding the cost of an O&E report render the Milliman Report's rate recommendation a speculative exercise, not the basis for an industry-wide JLP rate.
Mr. Parton testified that Mr. Struzzieri employed a great deal of actuarial judgment in making his recommendation because the JLP is a new product to Florida, and that OIR
was entitled to rely on that actuarial judgment. However, Mr. Struzzieri himself qualified his report with the following:
In performing this analysis we have relied on data and other information provided to us by First American Title Insurance Company.
We have not audited, verified, or reviewed this data and other information for reasonableness and consistency. Such a review is beyond the scope of our assignment. If the underlying data or information is inaccurate or incomplete, the results of our analysis may likewise be inaccurate or incomplete. (Emphasis added)
Petitioners did not question Mr. Struzzieri's actuarial judgment. They questioned the underlying data provided by First American to Mr. Struzzieri, and showed that data to be unsupported in the case of the JLP/O&E comparison, and unverifiable in the case of the O&E costs. Mr. Struzzieri's qualifying statement acknowledges that his conclusions are only as good as their underlying information.
OIR may have been entitled to rely on the Milliman Report at the time the Proposed Rule was published, before the agency was aware of the report's flaws. However, this rule challenge hearing is a de novo proceeding, not a review of OIR's past actions. At the hearing, Petitioners established that the Milliman Report was based on faulty assumptions and inadequate data. OIR failed to respond adequately to the objections raised by Petitioners. OIR simply reiterated its position that it had the discretion to rely on Mr. Struzzieri's actuarial analysis,
without really answering Petitioners' evidence that the assumptions undergirding the analysis were unsubstantiated.
OIR essentially adopted the Milliman Report as its own. Mr. Parton testified that as to each of the "due consideration" ratemaking factors listed in Subsection 627.782(2), Florida Statutes, OIR derived its conclusions largely from the Milliman Report. Whatever the merits of OIR's legal reasoning regarding its statutory ratemaking
responsibilities, OIR's reliance on the Milliman Report to meet those responsibilities was misplaced. OIR's only response to Petitioners' sustained attack on Mr. Struzzieri's assumptions was to reiterate its reliance on the Milliman Report. The preponderance of the evidence established that the Proposed Rule was based on unsupported data and was, therefore, arbitrary.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the parties and the subject matter of this proceeding pursuant to Section 120.56, Florida Statutes.
Subsection 120.56(1)(a), Florida Statutes, provides that, "Any person substantially affected by a rule or a proposed rule may seek an administrative determination of the invalidity of the rule on the ground that the rule is an invalid exercise of delegated legislative authority." Subsection 120.56(2)(a), Florida Statutes, provides that in challenges to proposed rules,
"[P]etitioner has the burden of going forward. The agency then has the burden to prove by a preponderance of the evidence that the proposed rule is not an invalid exercise of delegated legislative authority as to the objections raised."
In order to prove that they are "person[s] substantially affected" in this case, ATIF and Stewart Title must show that they will suffer injury in fact of sufficient immediacy to entitle them to a hearing, and that their substantial injury is of a type or nature which the requested hearing is designed to protect. Agrico Chemical Company v. Department of Environmental Regulation, 406 So. 2d 478, 482 (Fla. 2d DCA 1981). The "injury in fact" aspect of the test deals with the degree of the injury, and the "zone of interest" aspect deals with the nature of the injury. Id. See also Lanoue v. Florida Department of Law Enforcement, 751 So. 2d 94, 96-97 (Fla. 1st DCA 1999).
OIR contends that Petitioners will suffer no injury by application of the Proposed Rule. They do not sell the JLP in Florida, and OIR contends that it is speculative that they ever will attempt to sell the JLP in Florida. If they do wish to sell the JLP in Florida but cannot do so at the promulgated rate, they may petition for a deviation pursuant to Section 627.783, Florida Statutes.
OIR's argument is not persuasive. At present, no one sells the JLP in Florida. It is therefore "speculative" whether any title insurer will ever sell the JLP in Florida. However, if and when the rate is established, all title insurers will have the option of selling the product. OIR's logic would deny standing to any title insurer to challenge the Proposed Rule setting an initial rate for this new product.
Uniform premium rates for each type of title insurance policy issued in Florida are initially promulgated by OIR. The rates must be adopted by rule by the Commission before any such premium may be quoted, charged, or collected.
§§ 627.780 and 627.782, Fla. Stat.
Petitioners have demonstrated that they will suffer an injury in fact from the proposed JLP premium rate and that their interests fall within the zone of interest protected by Section 627.782, Florida Statutes. The evidence produced at the hearing established that, as title insurers, Petitioners would be subject to the proposed rate if they wished to sell the JLP in the state of Florida.
The availability of the deviation petition does not make the Proposed Rule any less applicable to the Petitioners. In fact, OIR's assertion that Petitioners could avail themselves of the provisions of Section 627.783, Florida Statutes, effectively concedes that the premium rates established by the
Proposed Rule would apply to Petitioners. OIR did not contest Petitioners' evidence that they would be unable to offer the JLP at the proposed rate without having to subsidize the product with revenues from their other offerings, except by the demonstrably impractical suggestion that Petitioners retain more than 30% of the premium. ATIF and Stewart Title have established their standing to maintain this rule challenge.
Subsection 120.56(1)(e), Florida Statutes, provides that a rule challenge proceeding is de novo in nature and that the standard of proof is a preponderance of the evidence. The Administrative Law Judge should consider and base the decision upon all of the available evidence, regardless of whether the evidence was placed before the agency during its rulemaking proceedings. Department of Health v. Merritt, 919 So. 2d 561,
564 (Fla. 1st DCA 2006) (concluding that the Legislature has overruled the court's holding in Board of Medicine v. Florida Academy of Cosmetic Surgery, 808 So. 2d 243 (Fla. 1st DCA 2002), that an administrative law judge's role in a proposed rule challenge is limited to a review of the record and a determination as to whether the agency action was supported by legally sufficient evidence).
Subsection 120.56(2)(a), Florida Statutes, provides that in a proposed rule challenge proceeding, the petitioner has the burden of going forward. The agency then has the burden to
prove by a preponderance of the evidence that the proposed rule is not an invalid exercise of delegated legislative authority as to the objections raised. Thus, once a petitioner has established a factual basis for its objection to the proposed rule, the agency has the ultimate burden of persuasion of showing that the proposed rule is a valid exercise of delegated legislative authority. Southwest Florida Water Management District v. Charlotte County, 774 So. 2d 903, 908 (Fla. 2d DCA 2001), quoting St. Johns River Water Management District v.
Consolidated-Tomoka Land Co., 717 So. 2d 72, 77 (Fla. 1st DCA 1998).
Subsection 120.52(8), Florida Statutes, states as
follows:
"Invalid exercise of delegated legislative authority" means action which goes beyond the powers, functions, and duties delegated by the Legislature. A proposed or existing rule is an invalid exercise of delegated legislative authority if any one of the following applies:
The agency has materially failed to follow the applicable rulemaking procedures or requirements set forth in this chapter;
The agency has exceeded its grant of rulemaking authority, citation to which is required by s. 120.54(3)(a)1.;
The rule enlarges, modifies, or contravenes the specific provisions of law implemented, citation to which is required by s. 120.54(3)(a)1.;
The rule is vague, fails to establish adequate standards for agency decisions, or vests unbridled discretion in the agency;
The rule is arbitrary or capricious. A rule is arbitrary if it is not supported by logic or the necessary facts; a rule is capricious if it is adopted without thought or reason or is irrational;
The rule imposes regulatory costs on the regulated person, county, or city which could be reduced by the adoption of less costly alternatives that substantially accomplish the statutory objectives.
A grant of rulemaking authority is necessary but not sufficient to allow an agency to adopt a rule; a specific law to be implemented is also required. An agency may adopt only rules that implement or interpret the specific powers and duties granted by the enabling statute. No agency shall have authority to adopt a rule only because it is reasonably related to the purpose of the enabling legislation and is not arbitrary and capricious or is within the agency's class of powers and duties, nor shall an agency have the authority to implement statutory provisions setting forth general legislative intent or policy. Statutory language granting rulemaking authority or generally describing the powers and functions of an agency shall be construed to extend no further than implementing or interpreting the specific powers and duties conferred by the same statute.
In this case, Petitioners challenge the proposed rule based on Subsections 120.52(8)(c), (d), and (e), Florida Statutes. Each of these potential reasons for invaliding the proposed rule is addressed below.
Subsection 120.52(8)(c), Florida Statutes
The Proposed Rule cites Subsections 624.307(1) and 626.9541(1)(h)3.a. and Sections 627.777, 627.782, 627.783, 627.7831, 627.7841, and 627.7845, Florida Statutes, as laws implemented. Subsection 624.307(1), Florida Statutes (OIR's enforcement duties), Subsection 626.9541(1)(h)3.a., Florida Statutes (unlawful rebates of title insurance premiums), Section 627.777, Florida Statutes (approval of forms), Section 627.7831, Florida Statutes (title insurance commitments), Section 627.7841, Florida Statutes (insurance against adverse matters or defects in title), and 627.7845, Florida Statutes (determination of insurability and preservation of evidence of
title search and examination) were not challenged by Petitioners as being enlarged, modified, or contravened by the Proposed Rule.27
Section 627.782, Florida Statutes, is set forth at Finding of Fact 7 above. Section 627.783, Florida Statutes, is set forth at Finding of Fact 8 above.
Petitioners confined their attack to Subsections (2) and (4) of Section 627.782, Florida Statutes. They contended that the Proposed Rule contravenes the provisions of Subsection 627.782(2) because there has been no "due consideration" of the ratemaking factors listed therein. They contended that the
Proposed Rule contravenes the provisions of Subsection 627.782(4) because it is inadequate and unfairly discriminatory.
Petitioners chief grievance is that the Proposed Rule will not allow ATIF and Stewart Title to sell the JLP product through their agents with a "reasonable margin for underwriting profit and contingencies" for both the insurers and their agents. Petitioners offered evidence sufficient to establish that a company operating according to ATIF's business model is highly unlikely to make a profit on the JLP where the rate is fixed at $0.86 per $1,000 of liability and the insurer/agent premium split is fixed at the statutory minimum split of 30%/70%. Petitioners' evidence further established that ATIF's agents would also be selling the product at a loss by taking 70% of the premium on a JLP written for less than $167,000.
OIR responded that "due consideration" does not mean that the agency is required to adopt a premium rate that guarantees a profit to every title insurer. Petitioners' own expert, Dr. Lipshutz, testified that not every company is expected to make a profit when the regulator establishes a premium rate. Though it ultimately based its decision entirely on the Milliman Report, OIR asserted that it did consider the Cox Report and all of the submissions made by title insurers during the protracted rulemaking proceedings in this matter.
"Due consideration" is not defined in Subsection 627.782(2), Florida Statutes. The plain meaning of the term "due consideration" carries the import of a fair, evenhanded treatment of the decisional criteria listed in the statute. The use and nature of the term, as well as the context of the entire subsection,28 invests OIR with great discretion in its ratemaking determination, provided it demonstrates that it fully and fairly considered the elements listed in Subsection 627.782(2).
Subsection 627.782(2) mandates the factors OIR must consider in adopting premium rates, but does not dictate the result of that consideration. For example, paragraph (2)(b) provides that the Commission must give "due consideration" to:
A reasonable margin for underwriting profit and contingencies, including contingent liability under s. 627.7865, sufficient to allow title insurers, agents, and agencies to earn a rate of return on their capital that will attract and retain adequate capital investment in the title insurance business and maintain an efficient title insurance delivery system.
Petitioners contend that this paragraph requires OIR to propose a rate that allows agents and title insurers to earn a rate of return sufficient to attract and retain adequate capital investment and maintain an efficient delivery system. The better reading is that the paragraph requires the Commission to give "due consideration" to that factor, but does not force the
Commission to adopt a rate that satisfies the business model of every entity in the title insurance industry.
OIR contended that it gave due consideration to the Cox Report, to the materials submitted by Petitioners during the rulemaking process, and to the presentations made by Petitioners at the rule development workshop and adoption proceedings. OIR made a reasonable decision to reject the Cox Report, despite the fact that the agency commissioned the report. OIR stated that it considered the market factors presented during the rulemaking process in determining that a direct sales model would be the better and more efficient way to market the JLP, and thus decided to give less emphasis to promulgating a rate that would ensure profits to less efficient companies.
Up to this point, OIR's actions facially comported with Subsection 627.782(2), Florida Statutes. OIR was correct in its contention that Petitioners were entitled to full consideration of their arguments, but were not entitled to a particular premium rate. Even OIR's embrace of the Milliman Report's rationale would not alone have established a failure of due consideration at the time OIR published the Proposed Rule,29 had it been premised in the criteria of Subsection 627.782(2).
However, OIR's acceptance of the Milliman Report and its final proposal to set the JLP premium rate at the bottom of the range recommended by Mr. Struzzieri were not based in
statutory criteria. OIR's decision was based on the premise that the agency should establish the premium rate at the lowest level at which any one company can produce an actuarial opinion of profitability. Any rate above that level would constitute an "excessive" rate, in violation of Subsection 627.872(4), Florida Statutes. This contention was not based on the statutory ratemaking provisions and was unsupported by any evidence presented at the hearing. Dr. Lipshutz, an expert in the economics of the title insurance industry with years of experience in the field of ratemaking, convincingly refuted this view.30
OIR's contention was based on a fundamental misreading of Section 627.782, Florida Statutes. Mr. Parton insisted that the presence of the rate deviation statute, Section 627.783, Florida Statutes, releases the agency from any obligation to set an industry-wide premium rate. According to Mr. Parton's view, the Commission may set the initial rate to meet the request of First American, without regard to its impact on other entities in the title insurance industry. The other companies can then petition for deviations from that rate if it proves unprofitable.
Nothing in Section 627.782, Florida Statutes, supports Mr. Parton's reading. The plain language of the statute is that the Commission must adopt a rule specifying the
premium to be charged in this state by title insurers for their products. The rate deviation statute does not exempt the agency from its duty to adopt a rule establishing a JLP rate for the entire industry. The JLP rate may or may not be acceptable to every title insurer and agent, but there should be evidence that the interests of all entities in the industry were fairly considered when the rate was adopted. The rationale announced by Mr. Parton calls into question whether OIR's process was driven by anything other than a desire to set the rate at the lowest possible level,31 without regard to the "due consideration" criteria set forth in Subsection 627.782(2), Florida Statutes.
Thus, it must be concluded that the Proposed Rule contravenes the specific provisions of Subsection 627.782(2), Florida Statutes. Despite OIR's claim of evenhandedness in affording due consideration to the statutory ratemaking criteria and in dealing with the proposals and submissions of various title insurers, the evidence produced at the hearing established that OIR did not see itself as setting an industry-wide rate, but a rate requested by and acceptable to a single company. The statutory scheme contemplates industry-wide title insurance premiums, with rate deviations available to individual companies upon petition and justification. The very term "rate deviation" indicates an exceptional circumstance rather than the norm.
OIR's rationale would turn that scheme upside-down: the premium rate would be established for a single company and the rest of the industry would be left to operate at a loss, not sell the product at all at the risk of losing customers for their other products, or scramble to obtain uncertain approval for rate deviations.
The evidence presented at the hearing was insufficient to establish that that the Proposed Rule contravenes the provisions of Subsection 627.782(4) on the grounds that it is inadequate and unfairly discriminatory. In insurance regulation, "unfairly discriminatory" refers to relationships among policyholders or classes thereof, and the disparate impact of rates on these groups. See, e.g., Subsections 627.062(2)(e)6. and 627.0651(6)-(8), Florida Statutes. No evidence was presented to show that the proposed premium rate would have a disparate impact on any particular group of policyholders. Petitioners point to no precedent for applying the term to a rate's impact on different insurers. As to the alleged inadequacy of the rate, Petitioners established that they would not make a profit if the rate is set at $0.86 per $1,000 in liability, but did not necessarily establish that the rate would be unsustainable on an industry-wide basis.
Subsection 120.52(8)(d), Florida Statutes
Petitioners argue that the Proposed Rule is vague, fails to establish adequate standards for agency decisions, and vests unbridled discretion in the regulating agencies. The test for vagueness of a rule or statute is "whether men of common understanding and intelligence must guess at [the provision's] meaning" and differ as to its application. Department of Health and Rehabilitative Services v. Health Care and Retirement Corporation of America, 593 So. 2d 539, 541 (Fla. 1st DCA 1992), quoting State v. Cumming, 365 So. 2d 153, 156 (Fla. 1978) and State v. Rodriguez, 365 So. 2d 157, 159 (Fla. 1978). See also Witmer v. Department of Business and Professional Regulation, 662 So. 2d 1299, 1302 (Fla. 4th DCA 1995).
Proposed Florida Administrative Code Rule
69O-186.003(1)(c)2.c. approves the JLP premium rate for use with "[a]ny substantially similar product that insures the same type risk" as the ALTA forms cited in the Proposed Rule. Petitioners contend that the Proposed Rule is rendered vague by the quoted language because it does not further define the term "substantially similar product." Petitioners also contend that the "substantially similar product" language is inconsistent with Section 627.777, Florida Statutes, which provides that a title insurer may not issue any title insurance policy or form unless it has first been filed with and approved by OIR.
Petitioners are correct in both of their contentions.
The Proposed Rule leaves it to the imagination as to what constitutes a "substantially similar product that insures the same type risk," and appears to approve the issuance of such a product without OIR's approval of the form. The portion of the Proposed Rule under discussion is vague and appears to contravene Section 627.777, Florida Statutes, which is cited as specific authority for and a law implemented by the Proposed Rule.
Subsection 120.52(8)(e), Florida Statutes
Finally, Petitioners contend that the Proposed Rule is arbitrary and capricious. Florida Administrative Code
Rule 120.52(8)(e) provides: "A rule is arbitrary if it is not supported by logic or the necessary facts; a rule is capricious if it is adopted without thought or reason or is irrational." Similarly, case law provides that an "arbitrary" decision is one not supported by facts or logic, or despotic, and a "capricious" decision is one taken irrationally, or without thought or reason. Board of Clinical Laboratory Personnel v. Florida Association of Blood Banks, 721 So. 2d 317, 318 (Fla. 1st DCA 1998); Board of Trustees of the Internal Improvement Trust Fund v. Levy, 656 So. 2d 1359, 1362 (Fla. 1st DCA 1995). In
undertaking this analysis, the undersigned is mindful that these definitions:
add color and flavor to our traditionally dry legal vocabulary, but do not assist an objective legal analysis. If an administrative decision is justifiable under any analysis that a reasonable person would use to reach a decision of similar importance, it would seem that the decision is neither arbitrary nor capricious.
Dravo Basic Materials Company, Inc. v. Department of Transportation, 602 So. 2d 632, 635 n.3 (Fla. 2d DCA 1992).
As discussed at length above, the Proposed Rule's JLP premium rate is at the heart of Petitioners' challenge. The JLP premium rate is set at the bottom of the range of rates recommended in the Milliman Report. Mr. Parton's testimony made it clear that reliance on the Milliman Report pervaded every aspect of OIR's "due consideration" of the ratemaking factors of Subsection 627.782(2), Florida Statutes. The evidence presented at the hearing established that the Milliman Report was premised on unfounded assumptions and unverifiable data.32
The Proposed Rule is not supported by logic or the necessary facts. It is therefore arbitrary.
ORDER
Based on the foregoing Findings of Fact and Conclusions of Law, it is
ORDERED:
Proposed Florida Administrative Code Rule 69O-186.003(1)(c) is an invalid exercise of delegated legislative authority.
DONE AND ORDERED this 25th day of June, 2008, in Tallahassee, Leon County, Florida.
S
LAWRENCE P. STEVENSON
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 25th day of June, 2008.
ENDNOTES
1 The full text of the Proposed Rule is set forth in Finding of Fact 26, infra.
2 The ALTA Residential Limited Coverage Junior Loan Policy (10/19/96) approved in the Proposed Rule provides against loss or damage sustained by the insured by reason of:
The Grantee not being the named grantee on the last document recorded in the public records purporting to vest title to the fee estate in the land or the description of the land in this policy not being the same as that contained in said document.
Any monetary lien affecting the title, recorded in the public records.
Any ad valorem taxes or assessments of any governmental taxing authority which constitute a lien on the title and which appear on Date of Policy in the official ad valorem tax records where the land is located.
The policy expressly excludes coverage for damages arising by reason of:
Any invalidity, unenforceability or ineffectiveness of the insured's mortgage.
Defects, liens, encumbrances, adverse claims or other matters:
created, suffered, assumed or agreed to by the insured claimant;
known to the insured claimant whether or not disclosed in the public records;
resulting in no loss or damage to the insured claimant; or
recorded or filed in the public records subsequent to Date of Policy.
3 These definitions became effective on October 1, 2007. See section 3, Chapter 2007-44, Laws of Florida. The proposed rule was published on June 22, 2007, and approved by the Commission on November 14, 2007. At the time that proposed Florida Administrative Code Rule 69O-186.003(1)(c) was published, the definitions set forth in Section 627.7711(1), Florida Statutes, read as follows:
(1)(a) "Related title services" means services performed by a title insurer or title insurance agent or agency, in the agent's or agency's capacity as such, including, but not limited to, preparing or obtaining a title search, examining title, examining searches of the records of a Uniform Commercial Code filing office and such other information as may be necessary, preparing documents necessary to close the transaction, conducting the closing, or handling the disbursing of funds related to the closing in a real estate closing transaction in which a title insurance commitment or policy is to be issued. The premium, together with the charge for related title services, constitutes the regular title insurance premium.
(b) "Primary title services" means determining insurability in accordance with
sound underwriting practices based upon evaluation of a reasonable search and examination of the title or the records of a Uniform Commercial Code filing office and such other information as may be necessary, determination and clearance of underwriting objections and requirements to eliminate risk, preparation and issuance of a title insurance commitment setting forth the requirements to insure, and preparation and issuance of the policy.
In addition to the changes in the text of Subsection (1)(a), the 2007 amendment to Section 627.7711 also added Subsection (4), defining "title search." According to the staff analysis of the House Jobs and Entrepreneurship Council, the definitional changes were intended to make it clear that the newly-named "closing services" will not be considered part of the title insurance premium and therefore may be rebated or lowered by the title agent, with "primary title services" therefore covering those services that are included in the premium. House Staff Analysis for CS/HB 111, Title Insurance, April 14, 2007, p.4. See http://www.myfloridahouse.gov/ Sections/Documents/loaddoc.aspx?FileName=h0111c.JEC.doc&Document Type=Analysis&BillNumber=0111&Session=2007
4 At some point between the filing of its petition and the commission of the Cox Report (see Findings of Fact 13 through 16, infra), First American proposed a rate of 15% of the $5.75 per $1000 rate for an original owner's title policy, or $0.86 per $1000 up to $100,000 in coverage. See Petitioners' Exhibit 12, p. 8 (the Cox Report).
5 The former rule referenced here is currently Florida Administrative Code Rule 69O-186.003, Title Insurance Rates. At the time of ATIF's petition, the rate premiums for original title insurance were $5.75 per thousand for the first $100,000 of liability written, and $5.00 per thousand for additional amounts up to $1 million. Those rates have been in place for at least a decade and remain in effect today.
6 Due to a typographical error, ATIF's petition cited a nonexistent statute. The context made it clear that ATIF intended to cite Section 627.7865, Florida Statutes.
7 First American also responded to Mr. Cox' request, but its responses were not part of the record in this proceeding.
8 Mr. Cox here references Chicago Title Insurance Co. v. Butler, 770 So. 2d 1210 (Fla. 2000), which affirmed a trial court's holding that several anti-rebate statutes and rules were unconstitutional under Article I, section 9 of the Florida Constitution (due process) insofar as they prohibited title insurance agents from negotiating with their customers to provide rebates of a portion of the agents' 70% share of the premium.
9 The former rule referenced by Mr. Cox is currently Florida Administrative Code Rule 69O-186.003(11)(a), which provides:
Unlawful Rebates or Abatement of Charges.
No title insurer, title insurance agent or agency, including attorney agent, shall decrease the risk premium by an illegal rebate or abatement of charges for abstracting, examinations, or closing charges. At least actual cost must be charged for related title services in addition to the adopted risk premium. . . .
10 See Finding of Fact 44, infra, for OIR's criticism of this aspect of the Cox Report.
11 The contents of Mr. Struzzieri's loss estimate analysis are discussed at Findings of Fact 61-65, infra, along with Dr. Nelson Lipshutz' critique of that analysis.
12 JLP rates that are 74% to 85% lower than the $5.75 rate would be in the range of $0.86 to $1.50. The evidence at hearing indicated that an earlier draft of the Milliman Report in fact recommended a rate range of $0.86 to $1.50. It is presumed that Mr. Struzzieri neglected to correct the "74% to 85%" language when he changed the recommended range to $0.86 to $1.33. Mr. Struzzieri was unclear as to when or why the high end of his range was reduced to $1.33.
13 Mr. Parton further testified that OIR believed that $1.33 would be high for certain insurers such as First American, but that the agency was willing to live with that rate if the industry was agreeable. Once it became apparent that the entire industry was not willing to sign on to the $1.33 rate, OIR decided to adopt the $0.86 per $1,000 rate, which the agency believed was the better rate.
14 Section 627.784, Florida Statutes, provides: "A title insurance policy or guarantee of title may not be issued without regard to the possible existence of adverse matters or defects of title." This language has been unchanged since 1999. At the hearing in this case, OIR did not offer a coherent explanation for its change of position between Ms. Miller's letter of
August 17, 2004, and the publication of the Proposed Rule on June 3, 2005. Mr. Parton testified as to OIR's continuing skepticism about the nature of the JLP product, but not regarding OIR's position that it lacked statutory authority to adopt a JLP rate rule.
15 Florida Administrative Code Rule 69O-186.005 sets forth the premium schedules applicable to "Truth in Lending" and other endorsements. Along with the Proposed Rule at issue in this case, OIR has proposed a new paragraph (6)(c) in Florida Administrative Code Rule 69O-186.005 that would provide as follows:
In recognition of the increased risk in issuing optional ALTA Endorsement JR 2 (Revolving Credit/Variable Rate)(10/19/96) on a junior loan title insurance policy as provided for in Rule 69O-186.003(1)(c), F.A.C., the premium shall be $25.00 for issuing ALTA Endorsement JR 2 (Revolving Credit/Variable Rate)(10/19/96) on any such junior loan title insurance policy issued. ALTA Endorsement JR 2 (Revolving Credit/Variable Rate)(10/19/96) is the only optional endorsement available for issue with any such junior loan title insurance policy and this endorsement shall be itemized on the closing statement furnished to the insured. Irrespective of whether the ALTA Endorsement JR 2 (Revolving Credit/Variable Rate)(10/19/96) is issued, no additional premium shall apply to the ALTA Endorsement JR 1 (10/19/96), which must accompany any junior loan title insurance policy issued. Copies of these forms are available on the Office's website at www.floir.com.
16 ATIF concedes that "random" is not employed here in the sense of a stratified random sample, and that its small sample of five properties yields a result with a high variance.
17 Mr. Conner pointed out that the 2007 statutory amendments changed the factors included in "primary title services" and "related title services," the latter of which are now called "closing services charges." See endnote 3 and accompanying text, supra. Mr. Conner pointed out that prior to 2007, the agent was allowed to charge separately for examination of title. The 2007 amendments moved that function from "related title services" to "primary title services," so that an agent is not allowed to charge separately for examination of title, but must recoup that expense from the premium.
18 Barry Scholnik, vice president and Florida underwriting counsel for Stewart Title, shared the view that no company could issue a JLP for $0.86 per $1,000 and make a profit, and that agents would be tempted to cut corners on their services.
19 Further, if that company plans to market the product on a direct basis, then OIR need not consider the agents' profit margins. Mr. Parton testified that if First American's plan is to market the JLP on a direct basis, then "the agents are really not a big consideration in this at all." When specifically asked how OIR considered Section 627.782(2)(b), Florida Statutes, with regard to agents and their ability to earn a rate of return, Mr. Parton responded:
Well, first of all, this product does not have to be sold by agents. Okay. Secondly, companies don't have to retain 30%, they retain more, which would be less money for the agent. Thirdly, again, to the extent that it adversely impacts agents or insurers, that deviation [pursuant to Section 627.783] is available to both, as I understand it.
20 Under cross-examination, Mr. Parton was forced to concede that Section 627.783, Florida Statutes, provides no specific criteria for the approval of a deviation petition, aside from "the judgment" of OIR. No rule has been promulgated to establish the procedure for a deviation proceeding.
21 The referenced 1999 amendment to Section 627.783(2), Florida Statutes, added the language "as to the petitioners named in the
order" to Section 627.783(2), set forth in full above. OIR reasons that prior to the adoption of the new language in 1999, any order granting a rate deviation applied to the entire industry rather than the applicant alone. The undersigned finds this reasoning open to question based on the entire history of the rate deviation statute, which seems always to have contemplated a case-by-case individuated deviation scheme, though the language as it stood just before the 1999 amendment was concededly ambiguous on the point. However, whether the statute actually operated industry-wide or only as to individual petitioners prior to 1999 is not significant to the determination of the issues in this case.
22 Dr. Lipshutz testified that he did not examine the work behind the data provided to him by ATIF, though he did understand the procedures that Mr. Conner instructed his staff to carry out.
23 The format of this ATIF chart has been modified for ease of comparing the two charts. None of the information on the chart has been altered.
24 Mr. Struzzieri's engagement letter to First American, dated January 30, 2004, provides as follows regarding the "scope of the assignment," in relevant part:
We intend to determine the rates for the Junior Loan Policy by comparing it to the loss and expense experience of a non- insurance product, the Ownership & Encumbrance ("O&E") report, which the Junior Loan Policy is intended to replace. We will rely on First American and its subsidiaries to provide us with information related to the O&E product.
Thus, it appears that the idea of the JLP being more or less interchangeable with the O&E report was firmly in Mr.
Struzzieri's mind at the outset of his engagement.
25 It should be noted that if the rate were set at $1.33, the upper end of Mr. Struzzieri's range, the insurer's 30% share of premium on a $100,000 policy would be $39.90, more than enough to cover its statutory liabilities ($30.00 to the guaranty fund and $2.33 premium tax).
26 The agent's 70% share on a $100,000 policy at a premium rate of $1.33 would be $93.10, much closer to a break-even point than is obtained at the $0.86 rate.
27 In their vagueness challenge, discussed under the "Subsection 120.52(8)(d), Florida Statutes" heading below, Petitioners do contend that the Proposed Rule's "substantially similar product" provision falls afoul of Section 627.777, Florida Statutes.
28 After listing a series of specific factors to which OIR must give "due consideration," Section 627.782(2)(e) states that the Commission must also consider "other relevant factors." Thus, the agency is free to make an independent decision to include relevant factors of its own choosing, apart from the statutory list, in arriving at a premium rate.
29 OIR's embrace of the Milliman Report did lead to an arbitrary result because of the report's unfounded assumptions and unverifiable data, but those flaws were not obvious to OIR at the time the rule was published.
30 Dr. Lipshutz testified that rates should be based on industry averages, concededly difficult when setting the initial rate for a new product, but necessary to avoid clearing all but one company from the market before competition can develop. OIR was not bound to accept this view of ratemaking. However, once Dr. Lipshutz refuted Mr. Parton's rationale, the agency was bound either to counter Dr. Lipshutz' testimony or offer an alternate justification for its "low bidder" approach to setting the rate. OIR did neither.
31 Certainly OIR's continuing skepticism as to whether the JLP constitutes a true insurance product at all played a part in its desire to establish a rock-bottom rate for the product. Whether or not the Milliman Report was consciously crafted to appeal to OIR's stated skepticism, the conceptual pairing of the JLP with the O&E report struck a responsive chord with the agency.
32 That is, unverifiable through the evidence submitted at the hearing. It is possible that Mr. Struzzieri and First American could return to the drawing board and produce a report backed by defensible assumptions and confirmable data that arrived at the same range of recommended rates. In this order, the undersigned was careful not to imply that there was anything inherently, transcendently wrong with the rate of $0.86 per $1,000 of liability, beyond its onerous impact on the two Petitioners in this proceeding. OIR's problem was having only the very thin
Milliman Report to defend that rate. The Milliman Report as written was simply incapable of supporting the rate once its premises came under attack by Petitioners.
COPIES FURNISHED:
Maureen McCarthy Daughton, Esquire Donna Holshouser Stinson, Esquire Broad and Cassel
215 South Monroe Street, Suite 400 Post Office Drawer 11300 Tallahassee, Florida 32302-1300
Stephen H. Thomas, Jr., Esquire Assistant General Counsel Jeffrey W. Joseph, Esquire Assistant General Counsel Office of Insurance Regulation
200 East Gaines Street Tallahassee, Florida 32399-0326
Richard Santurri, Esquire Wendy Russell Wiener, Esquire Mang Law Firm, P.A.
Post Office Box 11127
660 East Jefferson Street Tallahassee, Florida 32302
Kevin M. McCarty, Commissioner Office of Insurance Regulation
200 East Gaines Street Tallahassee, Florida 32399-4274
Steve Parton, General Counsel Office of Insurance Regulation
200 East Gaines Street Tallahassee, Florida 32399-4274
Scott Boyd, Executive Director and General Counsel
Joint Administrative Procedures Committee
120 Holland Building Tallahassee, Florida 32399-1300
Liz Cloud, Program Administrator Bureau of Administrative Code Department of State
R.A. Gray Building, Suite 101 Tallahassee, FL 32399-0250
THE NOTICE OF RIGHT TO JUDICIAL REVIEW
A party who is adversely affected by this Final Order is entitled to judicial review pursuant to Section 120.68, Florida Statutes. Review proceedings are governed by the Florida Rules of Appellate Procedure. Such proceedings are commenced by filing the original Notice of Appeal with the agency Clerk of the Division of Administrative Hearings and a copy, accompanied by filing fees prescribed by law, with the District Court of Appeal, First District, or with the District Court of Appeal in the Appellate District where the party resides. The notice of appeal must be filed within 30 days of rendition of the order to be reviewed.
| Issue Date | Document | Summary |
|---|---|---|
| Jun. 25, 2008 | DOAH Final Order | The proposed rule establishing rates for "junior" loan title insurance contravenes the specific provisions of law it purports to implement, and is arbitrary, due to fact that it is based on unfounded assumptions and unverifiable data. |
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