STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF INSURANCE, )

)

Petitioner, )

)

vs. ) CASE NO. 89-3804

)

ARTHUR A. PAPPAS, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, a final hearing in the above- styled matter was held on November 14, 1989, in Fort Lauderdale, Florida, before Joyous D. Parrish, a designated Hearing Officer of the Division of Administrative Hearings. The parties were represented at the hearing as follows:

APPEARANCES

For Petitioner: James A. Bossart

Division of Legal Services Department of Insurance

412 Larson Building

Tallahassee, Florida 32399-0300

For Respondent: John P. Kelly

FLEMING, O'BRYAN & FLEMING

Broward Financial Centre

500 East Broward Boulevard 7th Floor

Fort Lauderdale, Florida 33394-3071 STATEMENT OF THE ISSUES

The central issue in this case is whether Respondent is guilty of the violations alleged in the administrative complaint filed June 6, 1989; and, if so, what penalty should be imposed.

PRELIMINARY STATEMENT

This case began on June 6, 1989, when the Office of the Treasurer, Department of Insurance (Department) filed an administrative complaint against the Respondent, Arthur A. Pappas. The complaint alleged eight violations of Chapter 626, Florida Statutes. More specifically, the administrative complaint alleged that Respondent had failed to account for and pay insurance premiums belonging to an insurer in violation of Section 626.561(1), Florida Statutes; had demonstrated a lack of fitness or trustworthiness to engage in the business of insurance in violation of Section 626.611(7), Florida Statutes; had demonstrated a lack of reasonably adequate knowledge and technical competence to engage in the transactions authorized by his license or permit in violation of Section 626.611(8), Florida Statutes; had exhibited fraudulent or dishonest practices in the conduct of business under his license or permit in violation of Section 626.611(9), Florida Statutes; had misappropriated, converted, or unlawfully withheld monies belonging to insurers, to insureds, to beneficiaries, or to others, which monies had been received in the conduct of his business under the license in violation of Section 626.611(10), Florida Statutes; had willfully failed to comply with, or willfully violated a proper order or rule of the department or willfully violated a provision of the code in violation of Section 626.611(13), Florida Statutes; had violated a provision of the code or of any other law applicable to the business of insurance in the course of dealing under the license or permit in violation of Section 626.621(2), Florida Statutes; and had engaged in unfair methods of competition or in unfair or deceptive acts or practices, as prohibited under Part X of chapter 626, or shown himself to be a source of injury or loss to the public or detrimental to the public interest in violation of Section 626.621(6), Florida Statutes. All of the alleged violations stemmed from Respondent's alleged failure to remit premiums due to New York Life Insurance Company which he had allegedly received under, and acting as agent for, a group policy contract. Respondent denied the factual allegations and requested an administrative review of the allegations.

The case was forwarded to the Division of Administrative Hearings for formal proceedings on July 18, 1989.

At the hearing, the Department presented the testimony of the following witnesses: Mary Hynes, an assistant vice president employed by New York Life Insurance Company; and Raymond O'Sullivan, an associate general auditor employed with New York Life Insurance Company. The Department's exhibits numbered 1 through 9 were admitted into evidence. The Respondent testified in his own behalf and offered the testimony of the following witnesses: Patrick LaSalle, Jr., a certified public accountant; John

1. Tengblad, a licensed insurance agent; and James Holland, regional sales manager for Reliance Standard Life Insurance Company. Respondent's exhibits numbered 1 through 7 were admitted into evidence.

   
   

   After the hearing, the parties filed proposed recommended orders which have been considered in the preparation of this order. Specific rulings on the proposed findings of fact are included in the attached appendix.

   
   

   FINDINGS OF FACT

   
   

   Based upon the testimony of the witnesses and the documentary evidence received at the hearing, the following findings of fact are made:

   
   

   1. At all times material to the allegations of the administrative complaint, the Respondent, Arthur A. Pappas, was licensed in the State of Florida and authorized to solicit life and health insurance on behalf of New York Life Insurance Company.

      
      

   2. The Respondent is currently licensed and eligible for licensure as a life and health insurance agent.

      
      

   3. On or about September 29, 1972, Benefit Plans Association, Inc. (BPA) was organized under the laws of Florida. At all times material to the allegations of the administrative complaint, Respondent was the president and sole director for BPA.

      
      

   4. On or about December 20, 1983, BPA was authorized to operate as an administrator pursuant to Sections 626.879- 626.8858, Florida Statutes. In attaining this authorization, Respondent was the only individual identified on the application for certification who was

      licensed by the Department. The corporation was involuntarily dissolved on October 13, 1989.

      
      

   5. On or about May 20, 1986, New York Life Insurance Company and BPA entered into an agreement whereby BPA was to act as a broker/administrator for a group life insurance contract. This agreement, which was executed on

      behalf of BPA by Respondent, provided, in part:

      
      

      PART V PREMIUM

      
      

      1. It is understood that BPA, a licensed broker, will receive payments toward premium from Participating Employers on behalf of the Trust and will remit to New York Life, on behalf of the Trust, timely premium payments under the group policies. BPA warrants that all payments toward premium received by BPA on behalf of the Trust shall be deposited in a fiduciary account or accounts in the name of the Trust with Commercial Bank of Kendall and that withdrawals from each such account shall be made only (a) to pay the premium due under the group policy held by the Trust, (b) to pay compensation due BPA from New York Life as determined pursuant to Part XI of this Agreement and (c) to remit return of insurance premiums to persons entitled thereto.

         
         

   6. Pursuant to Part XI of the agreement, BPA was to receive 24 percent of the premium for each policy year of each policy for which the premium was received by New York Life.

      
      

   7. In executing the agreement, BPA was to serve as administrator on behalf of a multiple employer trust, a group of employers who joined together to participate in a group life and health insurance contract. In addition to being the administrator, BPA was to also participate as an employer/member of the group. This group policy was designated by the number G- 7920.

      
      

   8. In early March, 1988, Respondent notified New York Life Insurance Company that there was a problem with the funds on deposit in the BPA premium trust account. In

      connection with the problem, Respondent requested a meeting which took place in New York on or about March 4, 1988. At that time, Respondent advised officials of New York Life Insurance Company that he had been using premium money to operate his business. More specifically, Respondent admitted that premiums, which had been remitted to BPA from employers participating in the group, had been diverted to pay business overhead expenses. The use of such premiums in the manner described was done with Respondent's knowledge and consent.

      
      

   9. At the time of the meeting described in paragraph 7, Respondent estimated that the premium shortfall was approximately $300,000.

      
      

   10. Effective March 7, 1988, Respondent executed a form and BPA resigned as administrator for group policy G- 7920.

       
       

   11. Subsequent to the meeting described in paragraph 7, New York Life sent a team of auditors to the BPA offices in Miami in order to review the accounts for policy no. G- 7920. As a result of that audit, the shortfall in the premium trust account, for the period from July 1, 1986 through March 4, 1988, was calculated to be $390,923.59.

       As of the date of the hearing, these monies had not been remitted to New York Life.

       
       

   12. Portions of the shortfall were premium amounts which BPA had not paid for its group membership in the policy. BPA had credited itself with a commission on the unpaid premiums it should have remitted to New York Life. Further, although its membership should have been terminated, BPA employees continued to make claims against the policy as if fully entitled to do so. The amount of those claims, which were paid by New York Life, was approximately $72,000. Respondent knew that BPA was not remitting its premium, but did not take action to terminate the policy.

       
       

   13. During the last twelve years, Respondent has enjoyed an excellent reputation in the insurance community.

       
       

   14. Respondent was the only licensee who served as an officer or director for BPA.

   15. Respondent's poor business judgment and indifference to comply with the terms of the administrator agreement and relevant laws resulted in premium funds being inappropriately used for business expenses.

       
       

   16. As a result of the acts described in paragraph 8, 9, 11 and 12, New York Life Insurance Company sustained a financial loss.

       
       

       CONCLUSIONS OF LAW

       
       

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

       
       

   18. Section 626.611, Florida Statutes, provides, in pertinent part:

       
       

       The department shall deny, suspend, revoke, or refuse to renew or continue the license of any agent, solicitor, or adjuster or the permit of any service representative, supervising or managing general agent, or claims investigator, and it shall suspend or revoke the eligibility to hold a license or permit of any such person, if it finds that as to the applicant, licensee, or permittee any one or more of the following applicable grounds exist:

       * * *

       1. Demonstrated lack of fitness or trustworthiness to engage in the business of insurance.

       2. Demonstrated lack of reasonably adequate knowledge and technical competence to engage in the transactions authorized by the license or permit.

       3. Fraudulent or dishonest practices in the conduct of business under the license or permit.

       4. Misappropriation, conversion, or unlawful withholding of moneys belonging to insurers or insureds or beneficiaries or to others and received in conduct of business under the license.

       * * *

       (13) Willful failure to comply with, or willful violation of, any proper order or rule of the department or willful violation of any provision of this code.

       
       

   19. Section 626.621, Florida Statutes, provides, in pertinent part:

       
       

       The department may, in its discretion, deny, suspend, revoke, or refuse to renew or continue the license of any agent, solicitor, or adjuster or the permit of any service representative, supervising or managing general agent, or claims investigator, and it may suspend or revoke the eligibility to hold a license or permit of any such person, if it finds that as to the applicant, licensee, or permittee any one of more of the following applicable grounds exist under circumstances for which such denial, suspension, revocation, or refusal is not mandatory under s. 626.611:

       * * *

       (2) Violation of any provision of this code or of any other law applicable to the business of insurance in the course of dealing under the license or permit.

       * * *

       (6) In the conduct of business under the license or permit, engaging in unfair methods of competition or in unfair or deceptive acts or practices, as prohibited under part X of this chapter, or having otherwise shown himself to be a source of injury or loss to the public or detrimental to the public interest.

       
       

   20. Section 626.681, Florida Statutes, authorizes the Department to impose an administrative fine in lieu of suspension, revocation, or refusal of license or permit when it finds grounds exist which justify the imposition of one of the penalties.

       
       

   21. Section 626.691, Florida Statutes, authorizes the Department to impose probation for a specified period when it determines that other penalties are inappropriate.

       Such probation may specify terms and conditions to be fulfilled by the probationer during the term of probation.

       
       

   22. Section 626.561, Florida Statutes, provides, in pertinent part:

       
       

       (1) All premiums, return premiums, or other funds belonging to insurers or others received by an agent, solicitor, or adjuster in transactions under his license shall be trust funds so received by the licensee in a fiduciary capacity; and the licensee in the applicable regular course of business shall account for and pay the same to the insurer, insured, or other person entitled thereto.

       
       

   23. Section 626.883, Florida Statutes, provides, in pertinent part:

       
       

       1. If an insurer utilizes the services of

          an administrator under the terms of a written agreement, the payment to the administrator of any premiums or charges for insurance by or on behalf of the insured shall be deemed to have been received by the insurer, and return premiums or claim payments forwarded by the insurer to the administrator shall not be deemed to have been paid to the insured or claimant until such payments are received by the insured or claimant. Nothing in this part limits any right of the insurer against the administrator resulting from the failure of the administrator to make payments to the insurer, insureds, or claimants.

       2. All insurance charges or premiums collected by an administrator on behalf of or for an insurer or insurers, shall be held by the administrator in a fiduciary capacity. Such funds shall be immediately remitted to the person or persons entitled to them or shall be deposited promptly in a fiduciary account established and maintained by the administrator in a financial institution.

       * * *

       1. The administrator may not pay any claim by withdrawals from a fiduciary account. Withdrawals from such account shall be made

          as provided in the written agreement between the administrator and the insurer for any of the following:

          1. Remittance to an insurer entitled to such remittance.

          2. Deposit in an account maintained in the name of such insurer.

          3. Transfer to and deposit in a claims- paying account, with claims to be paid as provided by such insurer.

          4. Payment to a group policyholder for remittance to the insurer entitled to such remittance.

          5. Payment to the administrator of the commission, fees, or charges of the administrator.

          6. Remittance of return premium to the person or persons entitled to such return premium.

       
       

   24. Section 626.795, Florida Statutes, provides:

       
       

       Any life insurance agent who is an officer, director, stockholder, or employee of an incorporated life insurance agency shall remain personally and fully liable and accountable for any wrongful acts, misconduct, or violations of any provisions of this code committed by such licensee or by any person under his direct supervision and control while acting on behalf of the corporation.

       
       

   25. In this case, Respondent, as president and director of BPA, was responsible for the certification and registration of BPA. Respondent was at the helm of the company's daily operations and knew that BPA did not remit the premiums it owed to New York Life for the group policy. Further, Respondent admitted that BPA utilized premiums received from other group members to pay BPA operating expenses. Respondent did not conceal the shortfall from New York Life. Respondent does not dispute that monies owed New York Life were not remitted.

       
       

   26. Respondent argues that he, personally, did not fail to compensate agents and brokers, did not misappropriate money, did not fail to remit premiums due

       under a group policy. Further, the Respondent argues that the Department has not established, by clear and convincing evidence, that the Respondent willfully violated the law.

       
       

   27. In this case, the Department has established by clear and convincing evidence that BPA failed to remit premiums due to New York Life. As a licensed officer and director for BPA, Respondent is personally liable for the acts and misconduct of the corporation. Respondent's license was utilized to assure that BPA received the certification necessary to be approved as an administrator by the Department. Respondent cannot claim the benefits of licensure in one instance when it suits his betterment and disclaim responsibility for the company's misconduct in the next.

       
       

   28. The Department has proved the

       Respondent demonstrated a lack of trustworthiness to engage in the business of insurance in violation of Section 626.611(7), Florida Statutes. Respondent failed to terminate BPA's participation in the group policy, failed to advise New York Life of the financial shortfalls until March, 1988, and failed to remit premiums which had been received and were owed to New York Life.

       
       

   29. The Department has not established that the Respondent has a lack of reasonably adequate knowledge and technical competence to engage in the business of insurance. Clearly, Respondent knew the nonpayment of premiums was inappropriate. To his credit he did limit the amount of the shortfall by notifying New York Life in March, 1988. Theoretically, the amount of the shortfall could have been greater had BPA, with Respondent's knowledge and consent, continued to divert funds to cover its operating expenses.

       
       

   30. For the reasons stated above, Respondent is guilty of violating Sections 626.611(9) and (10), Florida Statutes, since the misappropriation of the premiums owed New York Life constitutes a dishonest practice in the conduct of business.

       
       

   31. Finally, the Department has established by clear and convincing evidence that as an administrator, BPA failed to remit premiums in violation of Section 626.883,

Florida Statutes. As its licensed officer/director, Respondent is personally responsible for such acts.

RECOMMENDATION

Based on the foregoing, it is RECOMMENDED:

That the Office of the Treasurer, Department of Insurance enter a final order revoking the license and eligibility for licensure of the Respondent.

DONE and ENTERED this 31st day of January, 1990, in Tallahassee, Leon County, Florida.

Hearings

Hearings 1990.

JOYOUS D. PARRISH

Hearing Officer

Division of Administrative

The DeSoto Building 1230 Apalachee Parkway

Tallahassee, Florida 32301

(904)488-9675

Filed with the Clerk of the Division of Administrative

this 31st day of January,

APPENDIX

RULINGS ON THE PROPOSED FINDINGS OF FACT SUBMITTED BY THE DEPARTMENT:

1. Paragraphs 1 through 11 are accepted.

2. With regard to paragraph 12, while New York Life did not

   allow "advances," it did permit "allowances"' which

   were

   computed by BPA on a month-to-month basis.

3. Paragraphs 13 through 21 are accepted.

4. Although the amount listed in paragraph 22 differs

   from the various amounts described in the audit papers,

   it

   is accepted that a sum in excess of $392,000 was owed by BPA

   to New York Life.

5. Paragraphs 23 through 33 are rejected as irrelevant, cumulative or unnecessary to the resolution

   of

   the issues of this case. See comment in 4. above as to amount owed New York Life.

6. Paragraphs 34 through 44 are accepted.

RULINGS ON THE PROPOSED FINDINGS OF FACT SUBMITTED BY THE RESPONDENT:

1. Paragraphs 1 through 9 are accepted.

2. Paragraph 10 is rejected as contrary to the weight of the

   
   

   was

   evidence. The Department established that Respondent

   
   

   responsible for the solicitation of the group members, including BPA, and such group was brought to New York

   Life

   for their approval.

3. Paragraphs 11 through 13 are accepted.

4. With regard to paragraph 14, it is accepted that

   the agreement between the parties did not specify the

   time

   frame for remittances; however, by procedure and acceptance

   of the parties, the amounts were remitted monthly.

   Moreover,

   BPA did not remit all premiums due New York Life even to the

   date of the formal hearing.

5. With regard to paragraph 15, it is accepted that BPA was to

   receive 24 percent (as stated in finding of fact), the balance of the paragraph is rejected as argument or

   comment.

6. Paragraph 16 is rejected as contrary to the weight of credible evidence.

7. Paragraph 17 is accepted.

8. Paragraph 18 is rejected as contrary to the weight of credible evidence.

9. Paragraph 19 is accepted.

10. Paragraphs 20 and 21 are rejected as argument or unsupported

    by the record.

11. Paragraph 22 is accepted.

12. Paragraph 23 is accepted.

13. Paragraph 24 is rejected as irrelevant or contrary to the

    weight of the evidence.

14. Paragraph 25 is rejected as irrelevant or immaterial

    and contrary to the weight of credible evidence.

    Neither the

    agreement nor statutory guidelines allowed a withdrawal

    for the purposes expressed by Respondent. Respondent transferred funds in excess of those he was entitled to

    claim

    under even the most generous interpretation of the agreement.

15. Paragraph 26 is accepted.

16. Paragraph 27 is rejected as irrelevant.

17. Paragraph 28 is rejected as nonsense.

18. Paragraphs 29 and 30 are accepted.

19. Paragraph 31 is rejected as irrelevant. That group members

    (including the BPA employees) reaped a windfall at the expense of the insurer does not justify the nonpayment

    of

    premiums. By law, since they had paid the

    administrator

    there was a presumption of payment to New York Life which it

    was obligated to honor.

20. Paragraphs 32 through 34 are rejected asirrelevant.

21. Paragraph 35 is rejected as irrelevant, argument or comment.

22. Paragraph 36 is rejected as irrelevant to the resolution of

    the issues of this case.

23. Paragraphs 37 through 42 are rejected as irrelevant,

    cumulative, or unnecessary to the resolution of the issues of

    this case.

24. Paragraph 43 is rejected as contrary to the weight of the

    credible evidence.

25. Paragraphs 44 and 45 are rejected as irrelevant, supposition,

or argument.

COPIES FURNISHED:

James A. Bossart

Division of Legal Services Department of Insurance

412 Larson Building

Tallahassee, Florida 32399-0300

John P. Kelly

FLEMING, O'BRYAN & FLEMING

Broward Financial Centre

500 East Broward Boulevard 7th Floor

Fort Lauderdale, Florida 33394-3071

Hon. Tom Gallagher State Treasurer and Insurance Commissioner

The Capitol, Plaza Level Tallahassee, Florida 32399-0300

Don Dowdell General Counsel

Department of Insurance The Capitol, Plaza Level

Tallahassee, Florida 32399-0300

Docket for Case No: 89-003804

Orders for Case No: 89-003804