STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF INSURANCE AND ) TREASURER, )

)

Petitioner, )

)

vs. ) CASE NO. 93-4342

)

NATIONAL STATES INSURANCE )

COMPANY, )

)

Respondent. )

) DEPARTMENT OF INSURANCE AND ) TREASURER, )

)

Petitioner, )

)

vs. ) CASE NO. 93-6223

)

PENN TREATY LIFE INSURANCE )

COMPANY, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly designated hearing officer, James E. Bradwell, held a formal hearing in this case on August 14, 1994, in Tallahassee, Florida.

APPEARANCES

For Petitioner: J. Reuben Hamlin, Esquire

Michele Guy, Esquire and John L. Swyers, Esquire

Department of Insurance and Treasurer Division of Legal Services

612 Larson Building

Tallahassee, Florida 32399-0333

For Respondent: Alan Sundberg, Esquire National States Carlton, Fields, et al Insurance Co.: 215 South Monroe Street

Tallahassee, Florida 32301

For Respondent: Cynthia S. Tunnicliff, Esquire Penn Treaty Life Pennington, Haben, et al Insurance Co.: 215 South Monroe Street

Tallahassee, Florida 32301

STATEMENT OF THE ISSUES

Whether Respondents, by refusing to allow consumers to cancel their individual health insurance policies subsequent to the "free-look" period and thereby failing to refund premiums paid, engaged in conduct violative of Subsection 627.6043, Florida Statutes.

PRELIMINARY STATEMENT

Petitioner, the Department of Insurance, filed an administrative complaint against Penn Treaty on June 17, 1993 and National States on June 24, 1993, for refusing to allow consumers to cancel their life and health insurance policies subsequent to the "free-look" period. Respondents' positions are that policy holders are not entitled or authorized to cancel their policies prior to the end of the period for which a premium has been paid. Petitioner's position is that Section 627.6043, Florida Statutes, and its predecessor statutes, specifically Section 627.626, Florida Statutes (1989), provided the insureds with the right to cancel any health insurance policy whenever they desire to do so prior to the end of the period for which a premium had been paid.

The parties tried but were unable to amicably resolve their dispute and this matter was transferred to the Division of Administrative Hearings on or about August 8, 1993. The cases were consolidated by Order of Consolidation dated November 19, 1993. For various reasons, hearing dates were from time to time continued and reset. This proceeding eventually ensued.

At the hearing, Petitioner presented the live testimony of J. Robert Merriman, a policy holder with National States Insurance Company (National States); Adelbert F. Gronvold, a policy holder with Penn Treaty Life Insurance Company (Penn Treaty); Leslie Kitterman, insurance analyst II, bureau of life and health rates and insurance with the Petitioner; Dr. E. Ray Solomon, who was tendered and accepted as an expert in actuarial science and is also a professor at Florida State University; and Ellen S. Andrews, a retired assistant bureau chief who was employed with Petitioner in the life and health rates and forms division. Petitioner presented the deposition testimony of George and Elizabeth MacVicar, policy holders with Penn Treaty; George and Marie Hutnyak, also policy holders with Penn Treaty; Kathryn Patterson, a policy holder with National States; and William O'Connor, assistant vice president, policy services, National States. Respondents presented the live testimony of E. Paul Barnhart, who was tendered and accepted as an actuary expert and is a consulting actuary for National States; Thomas Green, National States president; and A.J. Carden, executive vice president of Penn Treaty. Petitioner presented, as a rebuttal witness, Joseph D. Ferraro.

Respondents introduced eight exhibits and Petitioner introduced sixteen exhibits, all of which were received in evidence at the hearing.

The parties filed proposed recommended orders which were considered in preparation of this recommended order. Petitioner's proposed findings of fact are substantially adopted. Proposed findings of fact which are not incorporated herein are the subject of specific rulings in an appendix. In addition, Respondents were afforded an opportunity to file a post hearing supplemental recommended order concerning the issuance of a recommended penalty. Petitioner also filed a response thereto.

FINDINGS OF FACT

1. The parties stipulated that the Petitioner has jurisdiction over Respondents, National States and Penn Treaty, during times material.

   
   

2. On June 24, 1993, Petitioner filed a five count administrative complaint against National States alleging that 20 consumers had purchased various types of health insurance policies and that such policy holders requested cancellation of those policies before the expiration date of their policy. The policy holders prepaid the premiums on such policies.

   
   

3. National States refused to honor those requests for cancellation and did not refund the unearned premiums remaining on those policies.

   
   

4. National States, by its assistant vice president, William O'Connor, advised those policy holders that they were not entitled to cancellation after the "free-look" period and therefore refused to refund any unearned premiums.

   
   

5. Policy holders who were denied premium refunds include the following: Alexandrine Austin, Henry M. and Mary Lou Butler, Madeline Goding, William O. and Rowena Haisten, Sebastian N. and Jane E. Imme, Teresa Karl, John F. Killinger, J. Robert Merriman, Nell I. Mooney, Ralph Motta, Kathryn Patterson, Alene R. Smith, and Bernadine Weiss.

   
   

6. On June 17, 1993, Petitioner filed a three count administrative complaint against Penn Treaty alleging that certain consumers had purchased various health insurance policies, that the policy holders requested cancellation of those policies prior to the expiration and Penn Treaty refused to honor those requests for cancellation and to refund any unearned premium remaining.

   
   

7. Penn Treaty advised those policy holders, by letter, that they could not cancel their policies after the "free-look" period.

   
   

8. The policy holders who were denied cancellation and/or a refund by Penn Treaty were Adelbert Gronvold, George and Marie Hutnyak and George F. and Elizabeth M. MacVicar.

   
   

9. Health insurance policies do not contain a provision granting the policy holder the right to cancel. Ms. Kitterman, a former employee of Petitioner who has reviewed health insurance policies for over sixteen (16) years, was familiar with such policy forms. She has not seen a provision in an individual health insurance policy which specifically granted an insured the right to cancel a policy midterm.

   
   

10. Dr. Solomon, an expert with extensive knowledge concerning health insurance policy provisions or the absence thereof, opined that health insurance policies do not contain a provision dealing with the ability or the right of the insured to cancel or not to cancel their health insurance policy.

    
    

11. Finally, Ms. Andrews, the assistant bureau chief of life and health forms for approximately eight (8) years, has also personally reviewed health insurance policy forms. Ms. Andrews supervised the insurance analysts who reviewed such forms and corroborate the testimony of Kitterman and Solomon that such policy forms do not contain a provision addressing the insured's right to cancel.

12. Petitioner has never required an individual health policy form to contain a provision regarding an insured's right to cancel. Although Petitioner does not require such a provision, it does insist that companies refund unearned premiums once an insured files a request to cancel pursuant to Section 627.6043, Florida Statutes.

    
    

13. A discussion of the "free-look" period is contained in Rule 4-154.003, Florida Administrative Code, entitled "Insured's Right to Return Policy; Notice". That rule states:

    
    

    It is the opinion of the insurance commissioner that it will be in the public interest and of benefit to all if the person to whom the policy is issued has the opportunity to return the policy if he is not satisfied with it, provided such return is made within a reasonable length of time after receipt of the policy; therefore, each and every company issuing for delivery a disability policy in this state is requested to have printed or stamped thereon, or attached thereto a notice in a prominent place stating in substance that the person to whom the policy

    or contract is issued shall be permitted to return the policy or contract within ten (10) days of its delivery to said purchaser and to have the premium paid refunded if, after examination of the policy or contract, the purchaser is not satisfied with it for any reason. The notice may provide that if the

    insured or purchaser pursuant to such notice returns the policy or contract to the insurer at its home office or branch office or to the agent through whom it was purchased, it shall be void from the beginning and the parties shall be in the same position as if no policy or contract had been issued. This rule shall not apply to either single premium non-renewal policies or contracts or travel accident policies or contracts. Notices in this Rule 4-154.003 and in Rule 4.154.001 may be combined. (emphasis added)

    
    

14. Thus, if a policy is returned during the "free look" period, the company is required to return the entire premium paid.

    
    

15. The "free-look" period allows the consumer an opportunity to review the contract for the designated period of time. It allows them to make sure that it was the type of contract they intended to purchase and to review the application that was submitted to the company to verify that the information on it is correct.

    
    

16. "Guaranteed renewable" is defined in Rule 4-154.004, Florida Administrative Code, titled "Non-cancellable or non-cancellable and guaranteed renewable policy; Use of Terms." That rule states:

    
    

    The terms "non-cancellable" or "non-cancellable and guaranteed renewable" may be used only in a policy which the insured has the right to continue in force by the timely payment of premiums set forth in the policy until at least age 50, or

    in the case of a policy issued after age 44, for at least five years from its date of issue, during which period the insurer has no right to

    make unilaterally any change in any provision of the policy while the policy is in force. Except as provided above, the term "guaranteed renewable" may be used only in a policy in which the insured has the right to continue in force by the timely payment of premiums until at least age 50, or in the case of a policy issued after age 44, for at least five years from its date of issue, during which period the insurer has no right to make unilaterally any change in any provision of the policy while the policy is in force, except that the insurer may make changes in premium rates by classes. The foregoing limitation on use of the term "non-cancellable" shall also apply to any synonymous term such as "not cancellable" and the

    limitation on use of the term "guaranteed renewable" shall also apply to any synonymous term such as "guaranteed continuable". Nothing herein contained is intended to restrict the development of policies

    having other guarantees of renewability, or to prevent the accurate description of their terms of renewability or the classification of such policies as guaranteed renewable or non-cancellable for any period during which there may be actually be such, provided the

    terms used to describe them in policy contracts and advertising are not such as may readily be confused with the above terms.

    
    

17. Thus, the term "guaranteed renewable" as defined by Petitioner's rule notably does not contain any prohibitions against an insured's ability to cancel.

    
    

18. Both Dr. Solomon and National States expert, E. Paul Barnhart, agreed that the industry meaning of "guaranteed renewable" is that companies guarantee renewability of a health or accident policy but do not guarantee that the rate will remain constant. Guaranteed renewable policies may be cancelled by the company only for nonpayment of premium or for false statements made by the insured in the application. Guaranteed renewable policies can also be cancelled by the company at the terminal point which, for most of National States policy holders, is when the insured dies but, in a few cases, at age 65.

    
    

19. Whether a policy is marketed by the company as "guaranteed renewable" is a business decision made by the insurer generally to meet competition. Thus, the insurer, in making the decision to market an insurance policy as guaranteed renewable, waives any right that might otherwise be available to the insurer to cancel or non-renew except those authorized by statute which are, as noted, nonpayment of premium and material misrepresentation. Nowhere in any of the expert's opinions or Petitioner's witnesses is the term guaranteed renewable construed to mean that an insured has also waived the right to cancel a health insurance policy.

20. All health insurance policies are cancellable by the insurer unless the company has chosen to market the policy as non-cancellable or guaranteed renewable which, as noted, may be only cancelled for nonpayment of premium and material misrepresentation.

    
    

21. Dr. Solomon's opinion is based on the equitable theory that an insurance company, when it writes a health policy, does not immediately earn all of the premium collected, and the insured is therefore entitled to the unearned premium if he cancels midterm. Mr. Barnhart confirmed that a premium is not totally earned the moment it is collected but that "it's earned over the period of time for which the premium has been paid . . . if someone pays an annual premium, say on July 1, 1993, that annual premium would become earned at a steady rate over the year that follows and become fully earned as of June 30, 1994."

    
    

22. When a premium is received for health and accident policies, the company will establish an unearned premium reserve, which is a basic reserve set up as a result of the payment of premiums and represents, at any given point in time, that portion of the premium that remains unearned.

    
    

23. Insurance companies are required by law to maintain unearned premium reserves because they have not earned the premium. Unearned premium reserve is typically a section in the balance sheet of a company that is reserved for that purpose of paying back premiums that are not earned, or holding premiums in that account, as a segregated item, until such time as they are earned.

    
    

24. Refunds of premiums are made on the basis of either a short-rate or a pro-rata table. Short-rate refunds are for the purpose of returning a portion of the insured's premium in the event that the insured elects to cancel midterm. The insured is penalized for cancelling the policy midterm under the short-term rate table by absorbing some of the company's expenses of underwriting the policy and administrative costs. That is, if the insured cancels an annual policy within one month after which an annual premium has been paid, the insured will receive less than 11/12ths of the advance premium.

    
    

25. Pro-rata refunds mean equal distribution which is the refund procedure used when the insurer makes the decision to cancel. Thus, if the insurer cancels an insured's policy that is so cancellable by the insurer in the annual policy example, the insurer would be liable to make a pro-rata refund of premium to the insured which will be 11/12ths of the premium paid. Thus, an insured is not penalized when it is the insurer who exercises its right to cancel any policies which are so cancellable by the insurer.

    
    

26. Section 627.6043(2), Florida Statutes, states:

    
    

    In the event of a cancellation, the insurer will return promptly the unearned portion of any premium paid. If the insured cancels, the earned premium shall be computed by the use of the short- rate table last filed with the state official having supervision of insurance with the state where the insured resided when the policy was

    issued. If the insurer cancels, the earned premium shall be computed pro-rata. Cancellation shall be without prejudice to any claim originating prior

    to the effective date of cancellation. (emphasis added)

27. Ellen Andrews, the Department's former assistant bureau chief for life and health insurance forms several years prior to 1989, and in 1989 when the statute at issue was initially rewritten by the Legislature and as it is currently written, was familiar with the development of Petitioner's position as the statute went through renumberings in 1990 and 1992. It was part of Ms. Andrews' duties and responsibilities to assist Petitioner in the interpretation of that statute. It was her ultimate responsibility to be in charge of implementation of that statute. Petitioner's initial interpretation has remained unchanged since the statute was initially reworded in 1989 and moved to its various sections of part 6 of Chapter 627, Florida Statutes. The Department's opinion and decision on the meaning of what is currently Section 627.6043(2), Florida Statutes, is that if the insured cancels a policy midterm, the insured would be entitled to a return of premium pursuant to the short-rate table if one was filed with the Department. The Department further interprets the statute to mean that the insurer has a right to cancel, unless the insurer has waived that right by selling a guaranteed renewable or non-cancellable policy and if an insurer exercises that right, the insurer must make a refund to the insured on a pro-rata basis.

    
    

28. Petitioner's position is based on the statutory provision that the insured shall receive a return of premium if the insured cancels and that if the insured didn't have a right to cancel, then the insured wouldn't have a right to receive a refund of premium.

    
    

29. In 1989, Petitioner took the initiative to obtain statutory authority for its position by submitting a proposed draft to the Legislature revising the statute in order to provide insureds, by statute, the right to receive a return of the unearned premium upon notifying the insurer of their decision to cancel the individual health insurance policies.

    
    

30. Mr. Barnhart verified that there would be no claims incurred once a policy ceases to be in force; that National States refund a portion of the premium when a policy is rescinded or terminated and that National States refunds unearned premiums when an insured dies midterm of the policy period whether required by statute or not.

    
    

31. Penn Treaty refunds unearned premiums upon death and has a provision in its individual health and accidental insurance policies which provides that the insured shall receive a refund of unearned premiums upon death.

    
    

32. From an actuarial perspective, there is no difference between either death or cancellation in midterm of a policy period by an insured.

    
    

33. Penn Treaty sells, in Florida, long term care, home health care and medicare supplement insurance policies.

    
    

34. National States generally sells guaranteed renewable policies in Florida.

    
    

35. National States' position is that health and accident policies are not cancellable by the insured in Florida and that only medicare supplement policies are cancellable by the insured because there is a provision in the policy that allows an insured to cancel and because there is statutory authority for the insured to cancel that policy. Its position is that Section 627.6043, Florida Statutes, does not provide for cancellation by the insured. However, National

    States allows that the statutes regarding cancellation under the medicare supplement law, Section 627.6741(4), Florida Statutes, mandates refunds to insureds who request cancellation of their medicare supplement policies.

    
    

36. National States allow cancellations by insureds and refunds unearned premiums on health insurance policies in those other states which have statutes requiring such refunds.

    
    

37. Likewise, Penn Treaty's position is that home health care and long term care policies are not cancellable by the insured because there is no provision in the contract to allow cancellation and because they are guaranteed renewable policies. Its position also is that the insured does not have the right to cancel, either contractually or statutorily. Respondents relied on legal opinions from their counsel (in Florida) and an opinion from Petitioner dated June 12, 1991 to deny refunds.

    
    

38. Florida law addressing an insured's right to cancel a medicare supplement policy is at Section 627.6741(4), Florida Statutes. That section provides, in pertinent part, that:

    
    

    If a policy is cancelled, the insurer must return promptly the unearned portion of any premium paid. If the insured cancels the policy, the earned premium shall be computed by the use of the short-rate table last filed with the state official having supervision of

    insurance in the state where the insured resided when the policy was issued. If the insurer cancels, the earned premium shall be computed pro-rata. Cancellation shall be without prejudice to any claim originating prior to the effective date of the cancellation period. (emphasis added)

    
    

39. The above statute is the only Florida law which addresses an insured's right to cancel his medicare supplement policy.

    
    

40. Florida law requires that medicare supplement policies be guaranteed renewable. That law is found at Section 627.6741(2)(a), Florida Statutes, which provides:

    
    

    For both individual and group medicare supplement policies: an insurer shall neither cancel nor non-renew a medicare supplement policy or certificate for any reason other than non payment of premium or material misrepresentation.

    
    

41. Respondents' position is that in Florida, insureds who purchase their policies are elderly and are easily led. If allowed to cancel, Respondents contend that they would lose out on a number of protections that they would be entitled to if they were required to keep their policies.

    CONCLUSIONS OF LAW

    
    

42. The Division of Administrative Hearings has jurisdiction over the subject matter of and the parties to this proceeding pursuant to Section 120.57(1), Florida Statutes.

    
    

43. The parties were duly noticed pursuant to Chapter 120, Florida Statutes.

    
    

44. The authority of the Petitioner is derived from Chapter 627, Florida Statutes.

    
    

45. Petitioner has the burden of establishing, by clear and convincing evidence, that Respondents committed the conduct which is alleged as violations of Section 627. 6043, Florida Statutes.

    
    

46. Petitioner established, by clear and convincing evidence, that: 1) the individuals listed in the administrative complaints purchased individual health policies which, upon review, were subject to Section 627.6043, Florida Statutes;

    2) each of these individuals requested a refund of the unearned portion of the premium from the insureds; 3) each of those individuals was denied a refund of the unearned portion of the premium by the insureds based on Respondents' determination that Section 627.6043 did not oblige the insureds to make a refund after the "free look" period.

    
    

47. Petitioner also submitted proof of its interpretation which is that the insured does indeed have a right to cancel midterm pursuant to Subsection 627.6043, Florida Statutes, and explicated a rational basis for its interpretation. Petitioner therefore established, by clear and convincing evidence, that Respondents violated Section 627.6043, Florida Statutes.

    
    

48. Respondents failed to establish that the Petitioner's interpretation of 627.6043, and its predecessor numberings, is clearly erroneous and is not a possible interpretation.

    
    

49. Agencies are afforded wide discretion in interpreting statutes that they are charged with enforcing and their interpretations are entitled to great deference unless clearly erroneous. Natelson v. Department of Insurance 454 So.2d 31, 32 (Fla. 1st DCA 1984); Florida Insurance Guaranty Association v. Renfro, 568 So.2d 962 (Fla. 1st DCA 1990).

    
    

50. Moreover, Petitioner's interpretation appears to be supported by a general rule of statutory construction that a court should not construe a statute in any way that make words or phrases meaningless. To hold otherwise would make the phrase, "in the event of cancellation, the insurer will return promptly the unearned portion of any premium paid . . . If the insured cancels," meaningless. This phrase lends support for Petitioner's position that, pursuant to statute, both parties may cancel and unearned premiums must be returned. Therefore unless the Legislature did not intend to grant the insured the right to cancel, an entire subsection of Florida Statutes would be meaningless.

    
    

51. Finally, the medicare supplement statute appears to parallel the Petitioner's interpretation here. Thus, the only difference between Sections 627.6741(4) and 627.6043(2), Florida Statutes, is in the first sentence in each of those paragraphs. When these two statutes are construed, in pari materia, it is concluded that the Department's position parallel the position set forth in Section 627.6741(4), Florida Statutes. No basis has been advanced by

Respondents to interpret these nearly identically written statutes differently. Statutes must be construed, whenever possible, so that they operate in harmony with each other. In so doing, these two statutes, when read consistently, grant insureds the right to cancel their guaranteed-renewable type policies and to receive refunds of any unearned premiums remaining on those policies.

RECOMMENDATION

Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that:

Petitioner enter a final order requiring Respondents to make refunds of premiums to all policy holders who request the cancellation of their health insurance policies after October 1, 1989, with 12 percent interest from the date cancellation was requested and further that Respondents' certificates of authority be placed on suspension for a period of twelve (12) months. It is further recommended that the suspension be suspended upon Respondents, payment of the unearned premiums to the above-referenced consumers. 1/

DONE AND ENTERED this 1st day of March, 1995, in Tallahassee, Florida.

JAMES E. BRADWELL

Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 1st day of March, 1995.

ENDNOTE

1/ This recommended penalty is made based on a bona fide dispute by the parties as to the statutory interpretation of Section 627.6043, Florida Statutes, and other than the referenced consumers, there was no injury to the public.

APPENDIX

Rulings on Petitioner's proposed findings of fact.

Paragraph 6, adopted as relevant only in the preliminary statement. Paragraph 7, rejected, unnecessary.

Paragraphs 23 and 27, rejected, unnecessary.

Paragraphs 34 - 35, rejected, argumentative.

Rulings on Respondents' proposed recommended order.

Paragraph 5, rejected, contrary to the greater weight of evidence, paragraph 27, recommended order

Paragraphs 6 - 8, rejected, unnecessary and not probative.

Paragraph 10, adopted as modified, paragraphs 35 and 37, recommended order. Paragraph 12, rejected, not probative.

Paragraph 13, rejected, contrary to the greater weight of evidence, paragraph 27, recommended order.

Paragraph 16, rejected, not probative.

Paragraph 18, adopted as modified, paragraphs 10-12, recommended order. Paragraph 19, rejected, contrary to the greater weight of evidence,

paragraphs 19-22, recommended order.

Paragraph 20, rejected, argument.

Paragraph 21, rejected, contrary to the greater weight of evidence, paragraphs 19 and 20, recommended order.

Paragraph 22, rejected, unnecessary and argument. Paragraphs 26-30, rejected, unnecessary and not probative. Paragraph 31, rejected, irrelevant.

Paragraph 33, rejected, irrelevant and unnecessary. Paragraphs 34 and 35, rejected, argument.

Paragraph 36, rejected, not probative.

COPIES FURNISHED:

Cynthia S. Tunnicliff, Esquire

P.O. Box 10095

Tallahassee, Florida 32302-2095

Michele Guy, Esquire Department of Insurance Division of Legal Services The Larson Building, Room 612

Tallahassee, Florida 32399-0333

Alan C. Sunberg, Esquire Carlton, Fields, Ward, Emmanuel,

Smith & Cutler, P.A.

215 South Monroe Street, Ste. 500 Tallahassee, Florida 32302

J. Reuben Hamlin, Esquire Division of Legal Services

200 East Gaines Street Tallahassee, Florida 32399-0333

Bill Nelson, State Treasurer and Insurance Commissioner

The Capitol, Plaza Level Tallahassee, Florida 32399-0300

Dan Sumner, Acting General Counsel Department of Insurance

The Capitol, PL-11

Tallahassee, Florida 32399-0300

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions to the Recommended Order. All agencies allow each party at least 10 days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should consult with the agency that will issue the Final Order in this case concerning their rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the Final Order in this case.

Docket for Case No: 93-004342

Orders for Case No: 93-004342