STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
PRUDENTIAL PROPERTY AND ) CASUALTY COMPANY OF INDIANA, )
)
Petitioner, )
)
vs. ) CASE NO. 93-5262
)
STATE OF FLORIDA, )
DEPARTMENT OF INSURANCE, )
)
Respondent. )
)
RECOMMENDED ORDER
On October 25 through 27, 1993, a formal administrative hearing was held in this case in Tallahassee, Florida, before J. Lawrence Johnston, Hearing Officer, Division of Administrative Hearings.
APPEARANCES
For Petitioner: Daniel C. Brown, Esquire
Mitchell B. Haigler, Esquire Brian M. Nugent, Esquire
Katz, Kutter, Haigler, Alderman, Davis, Marks & Bryant, P.A.
Post Office Box 1877 Tallahassee, Florida 32302-1877
For Respondent: Nancy J. Aliff, Esquire
Dennis Silverman, Esquire
Department of Insurance and Treasurer Division of Legal Services
612 Larson Building
Tallahassee, Florida 32399-0300 STATEMENT OF THE ISSUE
The issue in this case is whether the Department of Insurance should grant, in whole or in part, PRUPAC's application for an exception to the Chapter 93- 401, Laws of Florida (1993), moratorium on cancellations and non-renewals of personal lines residential property insurance on the basis of risk of hurricane claims.
PRELIMINARY STATEMENT
(The procedural background is unusually complicated, but it is particularly important to a full understanding of this case. Although this Preliminary Statement is longer and more detailed than usual, it is believed that, more so than in the typical case, a clear picture of the procedural background at the outset will aid in understanding the rest of the Recommended Order.)
On May 19, 1993, the Department of Insurance promulgated emergency rule 4 ER93-18 (ER 18). ER 18(3) imposed a 90-day moratorium on cancellations and non- renewals of personal lines residential property insurance on the basis of risk of hurricane claims. (By law, emergency rules cannot be effective for more than
90 days. Section 120.54(9)(c), Fla. Stat. (Supp. 1992).) ER 18(4) provided: "This rule shall not apply if the insurer can affirmatively demonstrate to the Department that the proposed cancellation or nonrenewal is necessary for the insurer to avoid an unreasonable risk of insolvency." On May 20, 1993, PRUPAC applied for an exemption under ER 18(4).
PRUPAC's application asserted that PRUPAC sustained $1.3 billion in gross losses from Hurricane Andrew. It asserted that, even after utilizing all of PRUPAC's reinsurance benefits, the losses far exceeded PRUPAC's entire policyholder surplus of approximately $578 million. It asserted that, in order to pay the remaining claims and restore the company's surplus to approximately
$671 million at the end of 1992, PRUPAC's parent companies infused $900 million of capital into PRUPAC.
PRUPAC's application also asserted that the company's probable maximum loss (PML) from another Andrew-like hurricane hitting Dade County and Broward County would be approximately $1.5 billion. It requested an exemption from the moratorium in order to proceed with a plan to reduce its PML from such a storm event to approximately $400 million by nonrenewing policies, primarily in Dade and Broward counties but also to a lesser extent in some other parts of the state. PRUPAC proposed to initiate its plan immediately so that, by the end of 1993, it would have nonrenewed approximately 25,000 policies in Dade and Broward counties and approximately 5,000 policies elsewhere in the state. Essentially these nonrenewals would effect a reduction in the company's PML in Dade and Broward counties from $1.3 billion to $400 million. (Other features of PRUPAC's plan are not relevant to this case.)
PRUPAC's application was set for a public hearing in Miami on June 3, 1993.
Meanwhile, the Florida Legislature enacted Chapter 93-401, Laws of Florida (1993). Chapter 93-401 imposed a 180-day moratorium on cancellations and non- renewals of personal lines residential property insurance in Florida on the basis of risk of hurricane claims, beginning on May 19, 1993, the date of ER 18. (The 180-day moratorium expires on November 14, 1993.) Like ER 18, the statutory moratorium also provided for what Section 1(4) of Chapter 93-401 calls an "exception": "This section shall not apply if the insurer can affirmatively demonstrate to the department that the proposed cancellation or nonrenewal is necessary for the insurer to avoid an unreasonable risk of insolvency." But Section 1(4) of Chapter 93-401 elaborated:
In reaching this determination the department shall consider the insurer's size, its market concentration, its general financial condition, the degree to which personal lines residential property insurance comprises its insurance business in this state, and the way in which these factors impact on the risk to the insurer's solvency in relation to its probable maximum loss in the event of a hurricane. In no event shall any insurer be required to risk more than its total surplus
to any objectively defined probable maximum loss resulting from one Florida hurricane loss event.
Section 1(4) of Chapter 93-401 also provided: "The department must respond to an application for a waiver under this subsection with a final decision within
90 days after it receives the application for a waiver." (Other parts of Chapter 93-401 are not relevant to this proceeding.)
Chapter 93-401 was effective on becoming law. Although Chapter 93-401 was not signed into law by the Governor until June 8, 1993, the public hearing on PRUPAC's application was convened on June 3, 1993, with the knowledge that the Legislature had enacted the statutory moratorium, and it was announced at the outset of the June 3 hearing on PRUPAC's application that the hearing was being conducted pursuant to both ER 18 and the new legislation, even though the statutory moratorium was not yet in effect.
It should be noted at this point that more than once during the course of the public hearing on June 3, 1993, PRUPAC assured the Department and its insureds that, upon becoming authorized to begin nonrenewing, whether by being excepted from the moratorium or by expiration of the moratorium, it would not initiate mid-term cancellations of policies renewed during the moratorium. (Pet. Ex. 8, p. 115 and p. 136.)
On June 4, 1993, the Department promulgated emergency rule 4ER93-20 (ER 20). This action, too, was taken with the knowledge that the Legislature had enacted the statutory moratorium, and it established detailed procedures for applying for what it calls an "exemption" from the rule and statutory moratoria. (There seems to be no significance to this difference in nomenclature between the statutory moratorium and the emergency rule.) In addition, ER 20(2) also sets out the following substantive rule criteria for granting exemptions:
(b) A risk of insolvency is not sufficient grounds to obtain an exemption from the moratorium. There must be an "unreasonable" risk of insolvency, which is interpreted by the Department to mean that insolvency is not just a possible outcome, but is in fact the probable outcome, of a denial of exemption. Loss scenarios that depend for their fulfillment upon the occurrence of statistically unlikely events, will not constitute an unreasonable risk of insolvency. Insurers seeking exemptions must present expert opinion as to all assumptions made in the insurers' predictions.
Presumably because ER 20 had not yet been promulgated, the Department did not mention ER 20 when it announced the authority for the June 3, 1993, public hearing on PRUPAC's exemption application at the outset of the hearing, or at any other time in the hearing. The Department also did not specifically advise PRUPAC that ER 20 applied or that additional information was required from PRUPAC in light of ER 20.
On August 10, 1993, the Department sent PRUPAC a letter denying PRUPAC's application. It cited Chapter 93-401 but neither of the emergency rules. In addition to other information contained in the application, already cited above,
it also asserted (based on matters addressed at the public hearing) that PRUPAC's capital and surplus increased to almost $700 million at June 30, 1993, and that PRUPAC had approximately $300 million of reinsurance. Based on those recitations and assertions, the letter of denial concluded that "the proposed cancellations and nonrenewals are not necessary to avoid an unreasonable risk of insolvency."
After denying the application, the denial letter invited PRUPAC to resubmit a proposal in which the planned
cancellations and nonrenewals are designed to reduce your exposure to that amount which, after calculating the effects of reinsurance, would reduce Prupac's probable maximum loss to an amount not in excess of its total surplus. In making any such subsequent proposal the following shall be considered:
A plan for cancellation and nonrenewal that minimizes the market disruption and difficulty for Prupac's insureds;
Availability of capital from the Prudential Insurance Company of America (the Prudential). If your proposal limits Prupac's ability to pay claims to its own resources, with no contribution from the Prudential, then Prupac shall provide verification that all sales, solicitation and advertising for Prupac in this state distinguish, in clear and unambiguous terms, between Prupac and the Prudential, and that none of the foregoing contains any suggestion that the Prudential's capital backs up Prupac's policies.
The denial letter also notified PRUPAC of its right to request either informal or formal administrative proceedings under Chapter 120 of the Florida Statutes. It gave PRUPAC 21 days to make such a request.
On September 2, 1993, ER 20 expired. On the same day, the Department promulgated 4ER93-28 (ER 28). ER 28 is an essentially verbatim repromulgation of ER 20. If valid, it would be effective for another 90 days, until December 2, 1993, after the expiration of the statutory moratorium under Chapter 93-401. Section 120.54(9)(c), Fla. Stat. (Supp. 1992). (ER 18 expired on August 17, 1993, but it was superfluous after Chapter 93-401 went in effect, and it was not repromulgated.)
On or about September 3, 1993, PRUPAC filed a Petition for Formal Administrative Hearing and Motion to Expedite. In addition to alleging facts in support of its assertion that PRUPAC's application should be granted, the pleading sought to expedite the formal administrative proceedings on the ground that the Department had delayed consideration of PRUPAC's application such that the delay, "absent expedited procedures, will deprive PRUPAC of meaningful relief: a final disposition within such a time as to permit PRUPAC to exercise its non-renewal rights in a timely and meaningful way . . .." PRUPAC complained: "Relief through administrative proceedings under normal Chapter 120
time frames is inadequate, since conclusion of such ordinary proceedings will not occur before the remaining moratorium period of Chapter 93-401, Laws of Florida, expires."
The Department referred PRUPAC's petition to the Division of Administrative Hearings on or about September 14, 1993. Before assignment to a hearing officer, District Hearing Officer K.N. Ayers held a prehearing conference on September 15, 1993, to consider the motion to expedite and other prehearing matters. On the same day, a Prehearing Order was entered: scheduling final hearing for October 25 through 27, 1993, at the Division of Administrative Hearings in Tallahassee; establishing a discovery schedule; imposing prehearing procedures; and requiring a prehearing stipulation and the direct testimony of expert witnesses to be filed no later than October 20, 1993. On the same day, September 15, 1993, the case was assigned to the undersigned hearing officer, who issued the Notice of Hearing.
Meanwhile, PRUPAC also filed a petition in the District Court of Appeal, First District of Florida, for review of the Department's August 10, 1993, denial letter on the ground (similar to the ground for its motion to expedite the formal administrative proceeding) that "any final order so entered [not sooner than permitted under Chapter 120] will offer it no timely relief as its right to proceed with nonrenewals during the moratorium will be lost."
On October 11, 1993, PRUPAC filed a petition challenging the validity of emergency rules 4ER93-20 and 4ER93-28 under Section 120.56(4), Fla. Stat. (1991). It was given DOAH Case No. 93-5807RE and, on October 12, 1993, was also assigned to the undersigned hearing officer. On the same day, a Notice of Hearing was issued scheduling final hearing on October 26, 1993, the only day that would comply with both the requirement under Section 120.56(4) that the final hearing be held within 14 days of assignment, and the requirement under Section 120.57(1), Fla. Stat. (Supp. 1992), that 14 days notice be given.
On October 12, 1993, the Department of Insurance moved for a continuance of the final hearing in this case (Case No. 93-5262) on the ground of the unavailability, due to sudden illness and hospitalization, of a Department employee who allegedly was indispensable both as a witness and as the non- attorney party representative for the Department. A hearing was held on the motion on October 13, 1993, and the parties were given until the end of the next day to submit additional evidence and written argument on the motion.
On October 15, 1993, an Order Continuing Final Hearing and Requiring Status Report was entered. After reciting some of the background to the motion for continuance, it stated in part:
The Respondent's Motion for Continuance seeks what, in other cases, would seem to be reasonable and unremarkable relief--a 30-day continuance based on the unexpected illness and hospitalization of an important, allegedly indispensable witness. But, given the expiration of the moratorium on November 14, 1993, the practical effect of the motion for continuance might actually be the same as if the Department had moved for a recommended order to dismiss this case on the grounds of mootness. For, under the current law, on November 15, 1993, the case would appear to
be moot. (There is no way for a hearing officer to predict what the Legislature might
do in the up-coming special legislative session.)
At the same time, it must also be
observed that, as a practical matter, whether or not the motion for continuance is granted, the chances that PRUPAC will get a final order by November 14, 1993, are slim to none. Under the current law, regardless how much time and effort goes into completing preparation for final hearing, final hearing, proposed recommended orders, the recommended order and (if things proceed that far) the final order, on November 15, 1993, the case would appear to be subject to dismissal for mootness. (Even if it is possible for PRUPAC to obtain a final order by November 14, 1993, the practical usefulness of such a final order diminishes each day. At best, it would give PRUPAC the ability to non-renew only policies due to be renewed during the period between 45 days after the date of the final order and 45 days after November 14, 1993.) It seems to this Hearing Officer to be foolish to proceed on such a course. It would be wiser to allow this case to expire along with the moratorium and allow the Legislature to fashion any measures it deems
necessary to deal with November 15, 1993, forward.
Based on this rationale, the final hearing was continued; the parties were required to report in writing, upon enactment of legislation impacting the moratorium and the exception procedures, and in any event by November 22, 1993, whether the case should be dismissed or rescheduled for final hearing as a result of the legislation. (If the latter, they were required to suggest a range of mutually agreeable dates for rescheduling final hearing.)
On or about October 19, 1993, PRUPAC filed another petition in the District Court of Appeal, First District of Florida, for review of non-final agency action, this time directed to the Order Continuing Final Hearing. This petition was given the court's Case No. 93-3311. The Department was required to, and did, file a response to the petition. The Department's response stated in part, "should this Honorable Court desire that the scheduled administrative hearing proceed, rather than exercising its continuance, the Department is prepared to go forward." (It seems that the Department no longer considered its unavailable witness and preferred non-attorney party representative to be indispensable.)
The court held oral argument on Friday, October 22, 1993. After the oral argument, the court entered the following Order in its Case No. 93-3311:
The petition for review of nonfinal administrative action is granted. The October 15, 1993, order of the hearing officer continuing the final hearing and requiring a status report is quashed. The administrative hearing scheduled for October 25, 1993, shall proceed.
Although no copy of this Order was sent to the hearing officer or filed at the Division of Administrative Hearings, the parties advised the hearing officer of its existence. As ordered, this case went to final hearing on October 25, 1993, even though neither the direct testimony of expert witnesses nor a prehearing stipulation had been filed, as required by the Prehearing Order entered on September 15, 1993.
The parties requested a delay in the start of the final hearing until noon on October 25, 1993. When the final hearing commenced, the parties filed a Joint Stipulation, which contained just a few of the items required by Prehearing Order entered on September 15, 1993.
At the outset of the hearing in the emergency rule challenge case, Case No.
93-5807RE, at 9 a.m. on October 26, 1993, the parties advised the hearing officer that, on the previous day, the court had issued a decision in Prudential Property & Casualty Ins. Co. of Indiana v. Dept. of Insurance, 18 Fla. L.W. D2312 (Fla. 1st DCA October 25, 1993). The decision recited that it is not final until the 15 days for filing motions for rehearing expires. But the parties advised that neither planned to move for rehearing, and the time to do so expired without any motion for rehearing being filed.
Aspects of the court decision raised renewed questions regarding mootness.
Cf. discussion in Conclusions of Law 41-50. But, notwithstanding those questions, the court decision clearly again instructed the hearing officer to conduct the final hearing and stated that it anticipated the recommended order to be entered "as soon as possible."
During the final hearing, PRUPAC called three live witnesses and three witnesses (including two adverse party witnesses) through two videotaped depositions and a videotaped statement. PRUPAC also offered Petitioner's Exhibits 1 through 17. All were admitted in evidence except Petitioner's Exhibits 13 and 14, objections to which were sustained. Petitioner's Exhibit 6 consisted of four volumes of transcript of the deposition of the Department's non-attorney party representative at the hearing, Deputy Insurance Commissioner
H. John Kummer, several portions of which were published during the hearing in one form or another. Petitioner's Exhibit 8 was the 201-page transcript of the June 3, 1993, public hearing on PRUPAC's application for exemption, which the parties stipulated into evidence "to the extent that it contains testimony by PRUPAC and by DOI agents or employees."
The Department called four live witnesses, including Deputy Insurance Commissioner Kummer and an adverse party witness. It also offered Respondent's Exhibits 1 through 8. All were admitted in evidence except Respondent's Exhibit
Respondent's Exhibits 7 and 8 were the transcripts of depositions.
On November 1, 1993, PRUPAC filed a copy of the Department's October 26, 1993, "Final Order Granting Partial Exemption," Dept. of Ins. Case No. 93-L- 713NJA. This was the Department's response to the court decision in Prudential Property & Casualty Ins. Co. of Indiana v. Dept. of Insurance, 18 Fla. L.W. D2312 (Fla. 1st DCA October 25, 1993). It authorizes PRUPAC to cancel at least
$500 million of policies in Dade and Broward counties on the condition that PRUPAC ask for cancellation volunteers and offer to pay the first year's premium on a replacement policy.
On November 1, 1993, PRUPAC also advised the hearing officer "that PRUPAC regards the 'partial exemption' issue as now controlled by the First District's opinion, and will seek any relief needed as to the DOI order in DOI case no. 93- L-713NJA by way of appeal to the First District Court of Appeal."
PRUPAC arranged for preparation of daily copy of the transcript of the final hearing (reference as "T.", with page number) for filing on October 28, 1993. PRUPAC also offered to waive proposed recommended orders in order to expedite entry of a recommended order and final order. The Department, however, insisted on its right to file a proposed recommended order, and its request for a week in which to file one (until November 3, 1993) was granted. PRUPAC still waived its proposed recommended order, stating "we will not have time to write a brief." (T. 556). However, it apparently found time and filed a proposed recommended order on November 1, 1993.
Explicit rulings on the proposed findings of fact contained in the parties' proposed recommended orders may be found in the attached Appendix to Recommended Order, Case No. 93-5262.
FINDINGS OF FACT
Hurricane Andrew and its Aftermath
Hurricane Andrew struck Dade County on August 24, 1992. It was a Category 4 hurricane, packing sustained winds of between 131 and 155 miles per hour with higher gusts particularly in vertical swirls along the eye wall and microbursts, which are downbursts associated with thunderstorms imbedded within the hurricane. Andrew's eye crossed Elliott Key and made landfall on the Florida peninsula near the Homestead Air Force Base. Andrew tracked in an approximately westerly direction across Dade County, its eye passing north of Homestead.
Property damage from Andrew caused approximately $18 billion of insurance claims. Several personal lines residential property and casualty insurance companies went bankrupt. The Legislature authorized the Florida Insurance Guaranty Association (FIGA) to float almost $500 million of bonds to finance payment of claims to insureds whose insurers could not pay.
In addition to the companies that were forced out of business, several others took steps to reduce their exposure in Florida. In order to secure coverage for Floridians, the Legislature created the Florida Property and Casualty Joint Underwriting Assocation (the JUA). Eight insurers service the JUA, and the JUA's losses are underwritten by all of the approximately 185 insurance companies writing personal lines residential property and casualty insurance in Florida. Each company underwrites a share of the losses in proportion to their share of the business written in the voluntary market in Florida. In the aggregate, these companies have between $30 billion and $40 billion of policyholder surplus for the payment of claims against the JUA.
Insurers continued to notify the Department of their intention to reduce their risks in Florida. By May 19, 1993, the Department had in its possession notifications from insurers of intent to cancel or nonrenew approximately 800,000 policies. The Department was concerned that, since each company writing business in the voluntary market underwrites a share of JUA losses in proportion to the company's share of the voluntary market, a vicious cycle was in operation: as more policies in the voluntary market were cancelled or nonrenewed, and assigned to the the JUA, the share of a company's exposure to
JUA risk increased to the extent that the company did not also cancel or nonrenew, creating an incentive to cancel or nonrenew policies on the voluntary market that was difficult to control.
On May 19, 1993, the Department of Insurance promulgated emergency rule 4 ER93-18 (ER 18).
ER 18 recited as some of the Department's specific reasons for finding an immediate danger to the public health, safety or welfare:
4. No change has occurred in the risk characteristics of Florida policyholders. Although Hurricane Andrew was devastating to all parties involved, major hurricanes are random events and the risk of another major hurricane making landfall in a heavily populated area of Florida is no greater now than all of the years in which premiums were charged and no hurricanse occurred. According to insurance industry data, there have been 10 hurricanes in Florida with maximum wind speeds over 135 miles per hour [Andrew intensity or greater] from 1871 to
1992, with an additional 13 hurricanes making land fall in Florida during this period with maximum wind speeds of 116 to 135 miles per hour [approximately Category 3]. Thus, it is clear that the claims arising from Hurricane Andrew are in reality the impetus for proposed action by insurers.
* * *
7. . . .. Furthermore, the FRPCJUA was designedto insure people whose insurer became insolvent or who are new homeowners seeking coverage. It was not designed to additionally process and insure hundreds of thousands of people arbitrarily abandoned by their insurers purely due to fear of hurricane exposure. In other words, the FRPCJUA was not designed as a "dumping ground" for insurers.
* * *
9. Until empirical and scientifically verifiable hurricane projections are demonstrated which proves an insurer's solvency is jeopardized, the burden should be borne by insurers through cancellation or nonrenewal. Hurricane season begins June 1. There is immediate need to maintain the status quo to assure consumer protection from unlawful behavior.
ER 18(3) imposed a 90-day moratorium on cancellations and non-renewals of personal lines residential property insurance on the basis of risk of hurricane claims. ER 18(4) provided: "This rule shall not apply if the insurer can
affirmatively demonstrate to the Department that the proposed cancellation or nonrenewal is necessary for the insurer to avoid an unreasonable risk of insolvency."
The PRUPAC Application
The Prudential Property and Casualty Insurance Company of Indiana (PRUPAC) was one of the companies that had notified the Department that it wanted to initiate a plan to reduce its risks in Florida. It had a relatively high concentration of risk in Dade County at the time Andrew struck and was hard hit financially. It incurred approximately $1.3 billion of gross covered losses as a result of Andrew. Even after PRUPAC utilized all of its available reinsurance benefits, the losses far exceeded PRUPAC's entire policyholder surplus of approximately $578 million. In order to pay the remaining claims and restore the company's surplus to approximately $671 million at the end of 1992, PRUPAC's parent companies infused $900 million of capital into PRUPAC.
The day after ER 18 went into effect, PRUPAC applied for an exemption from the moratorium under ER 18(4). PRUPAC's application asserted that, if another storm of approximately Andrew's intensity made landfall just north of Andrew's landfall and followed a slightly more northerly track, the company's gross losses would be approximately $1.5 billion. It called this its "probable maximum loss" from such an occurrence. The application requested an exemption from the moratorium in order to proceed with a plan to reduce its losses from such a storm event to approximately $400 million by nonrenewing policies, primarily in Dade and Broward counties but also to a lesser extent in some other parts of the state. PRUPAC proposed to initiate its plan immediately so that, by the end of 1993, it would have nonrenewed approximately 25,000 policies in Dade and Broward counties and approximately 5,000 policies elsewhere in the state. Essentially these nonrenewals would effect a reduction in the company's alleged PML in Dade and Broward counties from $1.3 billion to $400 million. (Other features of PRUPAC's plan are not relevant to this case.) Under the plan proposed its application, PRUPAC would nonrenew approximately $3 million of exposure per day.
PRUPAC based its application on a policyholder surplus of $700 million, rounded up from the 1992 year end figure of $671 million. As of June 30, 1993, PRUPAC's surplus stood at approximately $657 million.
The Denial Letter
The Department's August 10, 1993, denial letter concluded that "the proposed cancellations and nonrenewals are not necessary to avoid an unreasonable risk of insolvency." It also invited PRUPAC to
resubmit a proposal in which the planned cancellations and nonrenewals are designed to reduce your exposure to that amount which, after calculating the effects of reinsurance, would reduce Prupac's probable maximum loss to an amount not in excess of its total surplus. In making any such subsequent proposal the following shall be considered:
A plan for cancellation and nonrenewal that minimizes the market disruption and difficulty for Prupac's insureds;
Availability of capital from the Prudential Insurance Company of America (the Prudential). If your proposal limits Prupac's ability to pay claims to its own resources, with no contribution from the Prudential, then Prupac shall provide verification that all sales, solicitation and advertising for Prupac in this state distinguish, in clear and unambiguous terms, between Prupac and the Prudential, and that none of the foregoing contains any suggestion that the Prudential's capital backs up Prupac's policies.
The denial letter did not specifically mention that PRUPAC did not prove the likelihood of occurrence of the storm event on which its "probable maximum loss" was predicated. The Department contends that this concern was "inherent" in its consideration of PRUPAC's and all applications for exemptions from the moratorium. See Finding 25. Its ER 20(2)(b) certainly is strong evidence that the Department's position in this regard is not of recent vintage. Indeed, at least from the promulgation ER 20 on June 4, 1993, the Department consistently has contended that this issue should be considered in all exemption applications. The Department persuasively explained that it did not specifically mention PRUPAC's failure to prove the likelihood of occurrence of the storm event on which PRUPAC's application was based because the Department considered the general denial, coupled with the specifically-mentioned grounds for denial, to be sufficient. It denied having any intention to waive consideration of the likelihood of occurrence of the storm event on which PRUPAC's application was based.
Similarly, the denial letter did not mention anything about the tax consequences of hurricane losses. However, the tax consequences of hurricane losses was discussed during the June 3, 1993, public hearing. (Pet. Ex. 8, p. 103). Again, the Department explained that the general denial, coupled with the specifically-mentioned grounds for denial, was considered to be sufficient. The Department denied having any intention to waive consideration of the the tax consequences of hurricane losses.
"Probable Maximum Loss" and Related Concepts
The concept of "probable maximum loss" is widely, though not universally, known in the property and casualty insurance business nationwide. It is a concept utilized to evaluate an insurer's concentration of risk. Generally, concentration of risk is evaluated by reference to the "probable maximum loss" a company should expect to incur if a natural catastrophe--such as a hurricane, earthquake or flood--of a given magnitude occurs in the area under consideration. In such an evaluation, the industry commonly assumes an event that approximates the most costly catastrophe that has occurred in the area.
When it comes to evaluating concentration of risk, the industry has a general understanding of what is usually considered to be an "unreasonable risk of insolvency." It is when the "probable maximum loss" is more than 10-15 percent of the insurance company's surplus. This concept takes into account (1) that the risk being assessed is only one of many catastrophic risks to which an insurer is exposed and (2) that the company's surplus will be called to respond to all of its losses, no matter where in the nation they arise or how.
PRUPAC's share of the personal lines residential property and casualty market in Dade and Broward counties is higher than its share anywhere else in Florida or anywhere in the country. It has approximately 8 percent of the market in those counties. Its overall share of the market in Florida is only 3 percent, and its share of the market nationwide is less.
Given PRUPAC's current concentration of risk, if another storm of approximately Andrew's intensity made landfall just north of Andrew's landfall and followed a slightly more northerly track, PRUPAC's losses would be approximately $1.4 billion.
Using computer modeling, the Natural Hazards Research Service projected that PRUPAC's losses from such an occurrence would total approximately
$1.28 billion. (This is not surprising since the actual losses from Andrew were approximately $1.3 billion.) PRUPAC reasonably added a factor of ten percent for escalation of building costs, bringing the figure to approximately $1.4 billion. But the eight percent factor it added for an increased number of policies, bringing the figure to approximately $1.5 billion, was unreasonable since PRUPAC had no intention of increasing its policies in Florida.
In utilizing the concept "probable maximum loss" in the context of evaluating concentration of risk, the likelihood of occurrence of the assumed catastrophic event clearly is not considered.
In certain insurance contexts other than evaluation of concentration of risk, the concept "probable maximum loss" equates to "maximum probable loss" or "the worst loss that is likely to occur." These concepts come into play in rate-making and usually are not applied to catastrophic risks.
Another related concept is "probability of ruin." This concept is similar to the rate-making concept of "maximum probable loss" in that the likelihood of the actual occurrence of the risk is considered.
The related concepts of "maximum probable loss" and "probability of ruin" also are used by risk managers in evaluating how to fund retained risk or how much insurance to purchase.
The Department takes the position "probable maximum loss," as used in the moratorium statute, means "maximum probable loss" and that it contemplates an evaluation of the likelihood of the actual occurrence of the risk being considered.
The Department also contends that, like its concept of "probable maximum loss," in the context of the moratorium statute, "unreasonable risk of insolvency" means that insolvency is not just a possible outcome, but is in fact the probable outcome, of a denial of exemption. As the Department would apply the term to the moratorium statute, loss scenarios that depend for their fulfillment upon the occurrence of statistically unlikely events would not constitute an "unreasonable risk of insolvency."
It is clear that "insolvency" generally is known to mean an excess of liabilities over assets. Accordingly, the Department's position is that, to prove an "unreasonable risk of insolvency," an insurer not only would have to prove the likelihood of the occurrence of the event that would result in the "probable maximum loss," but also would have to prove that the losses would approximate the company's total surplus.
The Department granted five of the 30 applications for exemption that it considered. Only one of the five included evidence on the probability of the occurrence of the storm event that allegedly would result in an unreasonable risk of insolvency, and that company alleged that there probably would not be another "Andrew" in another thousand years. But all five applications were filed by financially weak applicants. The Department concluded that, in the case of those five, "virtually any hurricane loss would have rendered the company unable to pay claims." Four of the five are now in receivership or are being seriously evaluated for a possible receivership action.
Storm Probabilities
The southeast Florida coast is the Florida (and United States) coastline most vulnerable to hurricanes. Yet the evidence was that, during the
122 years of recorded history, from 1871 through 1992, only seven hurricanes of Category 4 intensity (Andrew-like intensity) or greater have made "direct hits" on or "near misses" of Dade or Broward counties. (There were six Category 4 storms to do so, and one Category 5 storm to do so. There were 14 storms of unknown intensity to do so, but it is unlikely that they were Category 4 or Category 5 storms.) It is very unlikely that a Category 4 or 5 storm will make a direct hit on, or a near miss of, Dade or Broward county during any two consecutive hurricane seasons.
Although there have been very few hurricanes of Andrew-like intensity to hit or nearly miss Dade and Broward counties, there were a total of 46 hurricanes, of all intensity levels, to do so from 1871 through 1992. It can be said that, given those odds, it is likely that one will do so during any two consecutive hurricane seasons. (In addition, there have been 35 tropical storms to hit or nearly miss Dade and Broward counties during the past 122 years.)
PRUPAC's Reinsurance
PRUPAC has reinsurance that would be payable in the event of another hurricane like Andrew. Since Andrew, reinsurance has become more difficult to obtain. PRUPAC has been able to obtain approximately $155 million of reinsurance coverage. None of the reinsurance coverage is payable until after PRUPAC pays approximately $35 million of retained risk. Then, only approximately 88 percent of the $155 million, or $136.4 million, is payable as reinsurance benefits to PRUPAC; the rest of the risk retained by PRUPAC. It is reasonable to round the reinsurance benefit to $140 million for purposes of comparing it to PRUPAC's losses in the event of another hurricane. In addition, PRUPAC is obligated to reinstate the coverage for the rest of the coverage year by repayment of a premium. The reinstatement premium would cost PRUPAC approximately $10 million.
PRUPAC also has approximately $200 million of what is known as "funded reinsurance" or "funded cover." Under such a contract, PRUPAC pays a premium of approximately 20 percent of the face amount of the "cover." Approximately 20 percent of the premium represents the margin retained by the "reinsurer." The rest goes into an "experience fund." If a claim is made, PRUPAC would have to pay another premium to reinstate the coverage. The "reinsurer" would then be obligated to pay the claim. But, under the terms of the "funded cover," PRUPAC would have to contract to repay the "reinsurer" over the next four years.
"Funded reinsurance" or "funded cover" does not shift any risk away from PRUPAC; it just extends PRUPAC a line of credit to pay claims. The Financial Accounting Standards Board recently ruled that "funded cover" does not qualify as reinsurance for purposes of evaluating an insurer's financial condition and solvency.
A "Piece of the Rock"--The Prudential
PRUPAC is owned by Pruco, a "downstream" holding company of The Prudential Life Insurance Company (the Prudential). The Prudential is a mutual life insurance company that is owned by its policyholders. It has approximately
$10 billion of policyholder surplus, making it one of the largest insurance companies in the world. It makes investments on behalf of its policyholders, including its investment in PRUPAC, through Pruco.
At PRUPAC's inception approximately 20 years ago, the Prudential capitalized PRUPAC with an initial investment of approximately $450 million. Until the aftermath of Andrew, relatively little in the way of money has been exchanged between the companies.
The Prudential is a New Jersey company. The laws of New Jersey control the amount of money The Prudential can invest in a subsidiary such as PRUPAC. PRUPAC is domiciled in Indiana, and capital infusions from The Prudential to PRUPAC also would be subject to the Indiana insurance code and to the regulation of the Indiana insurance commissioner. Assuming The Prudential chose to do so, the evidence did not establish how much additional capital it could infuse into PRUPAC within the bounds of those constraints.
Tax Consequences of Losses
PRUPAC apparently got a federal income tax credit of approximately
$300 million as a result of its $1.3 billion of losses to Andrew. (Pet. Ex. 8,
p. 103). However, there also was evidence that PRUPAC was entitled to a credit in the amount of one-third of its $1.3 billion of hurricane losses. (Pet. Ex. 8, p. 102.)
It is not clear why PRUPAC's actual credit was less than one-third of PRUPAC's actual losses from Andrew, and there was no further evidence on how the tax credit is calculated.
CONCLUSIONS OF LAW
Law of the Case?
The decision in Prudential Property & Casualty Ins. Co. of Indiana v. Dept. of Insurance, 18 Fla. L.W. D2312 (Fla. 1st DCA October 25, 1993), now apparently is final. The time to move for rehearing has expired and, in accordance with their representations during the final hearing, apparently neither party has filed such a motion. Indeed, the Department acted on the decision the day after it was entered.
If the court decision is the law of the case, it would control this proceeding, whether or not correct, to the extent that the relevants facts remain the same. See Brunner v. Dept. of Revenue, 452 So. 2d 550 (Fla. 1984); Martinez v. Bolding, 570 So. 2d 1369 (Fla. 1st DCA 1991). Generally, the
doctrine of the law of the case applies when a case is remanded to a lower tribunal after an appeal. Id. It is not clear whether it applies to the court decision, which was on a petition for review of non-final agency action.
Whether or not technically the law of the case, the court's decision clearly binds the parties and should be viewed by this tribunal as dispositive of any legal issues it necessarily decided.
Jurisdiction
Section 1(4) of Chapter 93-401, Laws of Florida (1993), provides: "The department must respond to an application for a waiver under this subsection with a final decision within 90 days after it receives the
application for a waiver." If the August 10, 1993, denial letter was the "final decision," and if "final decision" means "final order," the Division of Administrative Hearings would not have any jurisdiction. If, on the other hand, the August 10, 1993, denial letter was only notice of agency intent to deny the application, it would be a point of entry into administrative proceedings under Section 120.57(1), Fla. Stat. (Supp. 1992), and the Division of Administrative Hearings would have jurisdiction.
The decision in Prudential Property & Casualty Ins. Co. of Indiana v. Dept. of Insurance, 18 Fla. L.W. D2312 (Fla. 1st DCA October 25, 1993), seems to hold that, under Section 1(4) of the statutory moratorium, the Department's "final decision" on PRUPAC's application should have been made within 90 days of the application--i.e., by August 18, 1993. But the court seemed to reject the Department's contention that the denial letter was a "final decision" under the moratorium statute, because the Department chose to issue it on August 10, 1993, and because it merely gave notice of its intent to deny the PRUPAC application and gave PRUPAC a point of entry into Chapter 120 administrative proceedings. Without specifically deciding whether Chapter 120 administrative proceedings were appropriate under the moratorium statute, the court stated that the Department should not have waited almost 90 days to issue its denial letter "if it believed the statute included the right to a section 120.57 hearing." 18 Fla. L.W. at D2314. The court explained that, instead, "if it believed the statute included the right to a section 120.57 hearing," the Department should have promulgated emergency procedures so that the point of entry would have occurred early enough for administrative proceedings to be completed in time for entry of a "final order" with 90-day statutory deadline for a "final decision." The court seemed to hold that the denial letter only gives notice of agency intent to deny the application and a point of entry into administrative proceedings under Section 120.57(1), Fla. Stat. (Supp. 1992), and that it cannot be considered to be the "final decision" referred to in the moratorium statute. The court seems to hold that, in light of the timing and nature of the denial letter, only the "final order" culminating the Chapter 120 administrative proceedings would constitute the "final decision" referred to in the moratorium statute. Then, while apparently granting a partial exemption, the court ordered that formal administrative proceedings be held on the PRUPAC application and that a recommended order be entered "as soon as possible." 18 Fla. L.W. at D2315. Based on the court's decision, it must be concluded that the Division of Administrative Hearings has jurisdiction.
Mootness
The moratorium under Chapter 93-401 expires on November 14, 1993. PRUPAC has argued repeatedly in this and related cases that action on its application for an exemption from the moratorium statute must be expedited because no meaningful relief will be possible once the moratorium ends. That position was the basis for the Motion to Expedite filed with the Petition for Formal Administrative Hearing that initiated this case. It was the basis for PRUPAC's opposition to the motion to continue the final hearing in this case. It was the basis for the petition for review of non-final agency action PRUPAC filed in Prudential Property & Casualty Ins. Co. of Indiana v. Dept. of Insurance, Case No. 93-2893, Dist. Ct. of App., 1st Dist. of Fla. The success of this argument in the appellate court is how PRUPAC persuaded the court to issue its decision in Prudential Property & Casualty Ins. Co. of Indiana v. Dept. of Insurance, 18 Fla. L.W. D2312 (Fla. 1st DCA October 25, 1993).
The court decision recites PRUPAC's position in that case that review of the August 10, 1993, denial letter was appropriate under Section 120.68(1), Fla. Stat. (1991), that "any final order . . . [not entered sooner than required under Chapter 120] will offer it no timely relief as its right to proceed with non renewals during the moratorium will be lost." 18 Fla. L.W. at D2312. It grants the petition for review of the August 10, 1993, denial letter in part, stating:
It appears to us that PRUPAC has no adequate remedy to address the issues hereinafter discussed if it is compelled to await entry of a final order after the scheduled section
120.57 hearing has been completed and a recommended order has been submitted to and acted on by the department.
18 Fla. L.W. at D2313-D2314. Elsewhere, in addressing the need for the Department to have expedited review of PRUPAC's application for an exemption, the court observed the result of the Department's failure to do so:
nsurers seeking exemption from this seemingly confiscatory legislation to avoid future risk of insolvency are essentially left without an effective remedy to obtain any relief during the apparently limited life of this moratorium.
18 Fla. L.W. at D2314. Finally, in a footnote the court took judicial notice of its order quashing the continuance of the final hearing in this case and observed:
For purposes of our decision in this case, we note that had that hearing been continued past the end of the moratorium on November
14 as recited in the hearing officer's order, serious questions concerning the invalidity
of the statute for lack of any meaningful remedy to avoid confiscation of PRUPAC's assets would be presented.
18 Fla. L.W. at D2315, fn. 4. For those reasons, the court decided that review of the August 10, 1993, denial letter was appropriate. One might conclude from the foregoing that the case would become moot upon the expiration of the statutory moratorium, scheduled on November 1, 1993.
Furthermore, the court seemed to decide that the Department should have granted PRUPAC a partial exemption to permit PRUPAC to reduce its "probable maximum loss" by $500 million. 18 Fla. L.W. at D2314. The court decided to "reverse the department's decision and remand this cause with directions that the department reconsider PRUPAC's application and consider granting it an exemption from the moratorium 'in part' on terms that are consistent with this opinion." 18 Fla. L.W. at D2315. If the Department had granted a partial exemption in accordance with the court order, and permitted PRUPAC to initiate its plan to nonrenew policies, PRUPAC's partial exemption would have allowed it to nonrenew policies at least through the expiration of the statutory moratorium. (Just $3 million worth of policies would have come up for renewal per day, on average.) One might think that the PRUPAC application case would have become moot upon issuance of court-ordered partial exemption.
Of course, the Department did not grant a partial exemption in accordance with the court order and permit PRUPAC to initiate its plan to nonrenew policies. Instead, it entered its "Final Order Granting Partial Exemption," Dept. of Ins. Case No. 93-L-713NJA, entered on October 26, 1993, which authorizes PRUPAC to cancel at least $500 million of policies in Dade and Broward counties on the condition that PRUPAC ask for cancellation volunteers and offer to pay the first year's premium on a replacement policy. PRUPAC has advised the hearing officer "that PRUPAC regards the 'partial exemption' issue as now controlled by the First District's opinion, and will seek any relief needed as to the DOI order in DOI case no. 93-L-713NJA by way of appeal to the First District Court of Appeal."
Notwithstanding the court's observations regarding the ineffectiveness of any remedy through a final order entered on or after November 15, 1993, and the court's apparent decision to grant PRUPAC the authority to nonrenew at least
$500 million of policies between the Department's fulfillment of the court's order and the end of the moratorium, the court clearly was not of the opinion that the PRUPAC application case was moot. The court stated:
Whether PRUPAC is entitled to the exemption sought in its application in whole can be determined after receipt of the hearing officer's recommended order, which we anticipate will be entered as soon as possible.
18 Fla. L.W. at D2315. The Department seems to reluctantly concede that, in light of the courts' decision, it cannot contend that this proceeding is moot. (T. p. 195.)
After having succeeded in persuading the court that it is imperative for this proceeding to be expedited so that a final order can be entered before the end of the moratorium, PRUPAC happily also accepts the court's apparent view that neither (a) the court's apparent decision to grant PRUPAC the authority to nonrenew at least $500 million of policies between the Department's fulfillment
of the court's order and the end of the moratorium, nor (b) the end of the moratorium on November 14, 1993, will moot this proceeding. On analysis, the crux of the argument PRUPAC now makes against mootness is that PRUPAC needs a final order in this case in order to be able to establish that it should have been granted an exemption as of May 20, or at least by the date of the public hearing on June 3, 1993, so that it can obtain some kind of injunctive relief in another forum, perhaps in the form of an authorization to cancel policies that would not have been renewed but for the moratorium. (T. pp. 21, 191-193.)
One flaw in PRUPAC's argument is that PRUPAC was not entitled to a "final decision" any earlier than the moratorium statute provides--90 days from application. PRUPAC never has argued that it was not entitled to Chapter 120 administrative proceedings. To the contrary, it initiated these proceedings. The Department gave PRUPAC its point of entry into these proceedings, and it also has maintained consistently that they are appropriate. The court decision in Prudential Property & Casualty Ins. Co. of Indiana v. Dept. of Insurance, 18 Fla. L.W. D2312 (Fla. 1st DCA October 25, 1993), seems to presuppose that the parties' positions in this regard are correct.
If Chapter 120 administrative proceedings are appropriate, it cannot be said that the Department should have granted PRUPAC's application on the date it was filed, or on the date of the public hearing, or on any other date earlier than 90 days from application. Formal administrative proceedings under Section 120.57(1), Fla. Stat. (Supp. 1992), are de novo. Moore v. Dept. of Health, etc., 596 So. 2d 759 (Fla. 1st DCA 1992); McDonald v. Dept. of Banking and Finance, 346 So. 569 (Fla. 1st DCA 1977). They are designed to give affected parties the opportunity to change the agency's mind. Capeletti Bros., Inc., v. Dept. of General Services, 432 So. 2d 1359 (Fla. 1st DCA 1983). Under these principles, both parties had a right to raise and present evidence on issues in the administrative proceeding prior to the "final decision," in the form of the final order culminating the administrative proceedings.
The court agreed with PRUPAC that the "final decision" contained in such a final order should have been issued no later than 90 days from the date of application. Thus, if PRUPAC is entitled to an exemption, it could be argued that it was entitled as of August 18, 1993. However, it also should be pointed out that, more than once during the course of the public hearing on June 3, 1993, PRUPAC assured the Department and its insureds that, upon becoming authorized to beginning nonrenewing, whether by being exempted from the moratorium or by expiration of the moratorium, it would not initiate mid-term cancellations of policies renewed during the moratorium. (Pet. Ex. 8, p. 115 and p. 136.) If PRUPAC is held to this assurance, it is unclear how any kind of injunctive relief can be fashioned to remedy the delay in the "final decision" on PRUPAC's application for an exemption to the moratorium statute.
Despite serious concerns that this proceeding is, or should be, or soon will be moot, it is reluctantly concluded that the recommending dismissal of this proceeding on grounds of mootness would be contrary to the court decision in Prudential Property & Casualty Ins. Co. of Indiana v. Dept. of Insurance, 18 Fla. L.W. D2312 (Fla. 1st DCA October 25, 1993).
The Moratorium Statute and the Parties Positions
Section 1(4) of Chapter 93-401, Laws of Florida (1993), provides:
This section shall not apply if the insurer can affirmatively demonstrate to the department that the proposed cancellation or nonrenewal is necessary for the insurer to avoid an unreasonable risk of insolvency. In reaching this determination the department shall consider the insurer's size, its market concentration, its general financial condition, the degree to which personal lines residential property insurance comprises its insurance business in this state, and the way in which these factors impact on the risk to the insurer's solvency in relation to its probable maximum loss in the event of a hurricane. In no event shall any insurer be required to risk more than its total surplus to any objectively defined probable maximum loss resulting from one Florida hurricane loss event.
PRUPAC contends that, by using the phrases "unreasonable risk of insolvency," "probable maximum loss in the event of a hurricane," and "any objectively defined loss resulting from one Florida hurricane loss event," in the preceding provision, the Legislature did not intend to require an applicant for an exception to prove that the storm event resulting in a "probable maximum loss" is likely to occur during the 1993 or 1994 hurricane seasons (the only two hurricane seasons that would be affected by the moratorium statute.) PRUPAC bases its application on the alleged approximately $1.5 billion "probable maximum loss" from a Category 4 (i.e., Andrew intensity) hurricane making landfall just north of Andrew's landfall, following a slightly more northerly track. (As found, the probable loss from such a storm actually would be somewhat less--$1.4 billion.) While maintaining that it is possible, PRUPAC concedes that it is unlikely that such a storm event will occur during either the 1993 or the 1994 hurricane season.
The Department contends that the language of Section 1(4) of Chapter 93-401 contemplates an evaluation of the likelihood of the actual occurrence of the risk being considered. The Department contends that PRUPAC must prove that the storm event on which its application is based is likely to occur in the next two hurricane seasons.
In deciding how the statutory language should be interpreted, reference must be made to the decision in Prudential Property & Casualty Ins. Co. of Indiana v. Dept. of Insurance, 18 Fla. L.W. D2312 (Fla. 1st DCA October 25, 1993), to any applicable Department rules, and to any indications of the legislative intent.
The Court Decision
As explained in Conclusions of Law 36-38, the decision in Prudential Property & Casualty Ins. Co. of Indiana v. Dept. of Insurance, 18 Fla. L.W. D2312 (Fla. 1st DCA October 25, 1993), must be taken into consideration in
deciding this case. PRUPAC contends that the court decision controls and holds that PRUPAC's "probable maximum loss" is $1.5 billion. But it is concluded that the court decision is unclear on this point.
The court opinion summarized PRUPAC's case for review of the August 10, 1993, denial letter as being non-final agency action that is reviewable under Florida Rules of Appellate Procedure 9.030(b)(1)(c) and 9.100, and Section 120.68(1), Fla. Stat. (1991):
It argues that it is entitled to the exemption as a matter of law, and that the department is without discretion to deny its application because chapter 93-401 authorizes an exemption from the moratorium for an insurer whose risk of probable maximum loss from a single hurricane event exceeds its surplus. This latter fact is the only fact that must be demonstrated to obtain a waiver and, PRUPAC asserts, it has proven this fact beyond any dispute. PRUPAC argues that the department is not free to consider any other factors enumerated in the statute because once this controlling fact has been established the granting of a waiver or exemption is a ministerial act.
18 Fla. L.W. at D2312-D2313. The court went on to decide:
[W]e believe it is readily apparent that PRUPAC's showing before the department made out a prima facie case for exemption in part from the moratorium. PRUPAC asserted that it was subject to a risk of $1.5 billion in claims in the event of a severe hurricane event in north Dade and south Broward counties. . . . Thus, accepting the departments [sic] finding that PRUPAC had
$700 million capital and surplus on its balance sheet, and also had approximately
$300 million in available reinsurance (for a total of $1 billion), the probable maximum loss of $1.5 referred to in the letter remains some $500 million in excess of the total available capital, surplus, and reinsurance. Because these figures were not disputed in the department's letter decision, it is readily apparent that PRUPAC was not entitled to all of the relief it sought, but
nonetheless it was entitled to some relief at least.
18 Fla. L.W. at D2314. At the end of the opinion, the court summarized its holding and the relief granted as follows:
In summary, we hold that the department did not comply with the requirements of
section 1, chapter 93-401, when it failed to grant PRUPAC an exemption "in part" based on
PRUPAC's showing and the reasons for denial stated in the department's August 10 letter. Accordingly, we reverse the department's decision and remand this cause with directions that the department reconsider PRUPAC's application and consider granting it an exemption from the moratorium "in part" on terms that are consistent with this opinion. Whether PRUPAC is entitled to the exemption sought in its application "in whole" can be determined after receipt of the hearing officer's recommended order, which we
anticipate will be entered as soon as possible.
18 Fla. L.W. at D2315.
One might think, from the relief the court granted, that the court must have held: (1) that the Department is estopped to deny the $1.5 billion "probable maximum loss" referred to in its August 10, 1993, denial letter; and
(2) that not allowing PRUPAC to reduce its Florida risks by at least $500 million would be requiring it to "risk more than its total surplus to any objectively defined probable maximum loss resulting from one Florida hurricane loss event". However, in setting out the disputed issues and commenting on them, the court also stated:
[T]he parties to this cause disagree as to the meaning of the phrase "objectively defined probable maximum loss." The department contends that it means only the probability that a hurricane event leading to "probable maximum loss" will occur in the near future; petitioner argues that the phrase means it must establish that such a hurricane event and loss can be reasonably anticipted to occur with a degree of probability at some unspecified time in the future. From a statistical standpoint, we acknowledge that no one can predict exactly when such a hurricane event will occur; it can only be shown that as a matter of reasonable probability such a storm will occur during a stated period at an unspecified time in the future.
18 Fla. L.W. at D2312-D2314. Elsewhere, the court also acknowledged the Department's contention that "it may consider the applicant's available reinsurance and, if necessary, the assets of a parent corporation in determining total available surplus" for purposes of determining whether the applicant is being required "to risk more than its total surplus." 18 Fla. L.W. at D2314. The court stated: "We do not decide this dispute at this time, however." Id. It also stated:
We do not by this opinion decide, as a factual matter, whether PRUPAC's claim of a
$1.5 billion probable maximum loss is accurate, as to do so is beyond the scope of appellate review. Nor do we now undertake to
decide whether the department is correct in its construction of the legislation to include reinsurance in calculating PRUPAC's risk exposure under the terms of this statute. Rather, we leave this determination, and determination of other issues argued on this appeal, open for consideration at the evidentiary hearing to be conducted by a DOAH hearing officer to the extent that evidentiary facts may be relevant
to give meaning to the ambiguous statutory language.
18 Fla. L.W. at D2315.
With the general factual issue whether PRUPAC's probable maximum loss (PML) is $1.5 billion and specifically the issues regarding reinsurance and a parent company's finances still undecided, it is unclear how the court could have ruled that PRUPAC was entitled to a "partial exemption." Conversely, if PRUPAC was entitled to a partial exemption, one would think that the question of PRUPAC's PML would have been settled and that there would be no need for further administrative proceedings on those issues. In short, the court's opinion was not clear on these points.
The Emergency Rules
Section (2) of emergency rule 4ER93-20 (ER 20) states:
(b) A risk of insolvency is not sufficient grounds to obtain an exemption from the moratorium. There must be an "unreasonable" risk of insolvency, which is interpreted by the Department to mean that insolvency is not just a possible outcome, but is in fact the probable outcome, of a denial of exemption. Loss scenarios that depend for their fulfillment upon the occurrence of statistically unlikely events, will not constitute an unreasonable risk of insolvency. Insurers seeking exemptions must present expert opinion as to all assumptions made in the insurers' predictions.
ER 20 was not in effect when PRUPAC applied on May 20, 1993, for an exemption from the emergency rule moratorium contained in 4ER93-18 (ER 18). Perhaps because ER 20 did not go into effect until June 4, 1993, the Department did not mention ER 20 when it announced the authority for the June 3, 1993, public hearing on PRUPAC's exemption application at the outset of the hearing, or at any other time in the hearing. The Department also did not specifically advise PRUPAC that ER 20 applied or that additional information was required from PRUPAC in light of ER 20. ER 20 was in effect at the time of the August 10, 1993, letter denying PRUPAC's application, but the denial letter did not cite any emergency rules.
PRUPAC contends that, in its August 10, 1993, denial letter, the Department did not apply ER 20 to the PRUPAC application and that, for that reason, the Department cannot apply it in this proceeding. The Department contends that ER 20 was applicable to PRUPAC's application for an exemption to
the moratorium statute and that the August 10, 1993, denial letter was based on ER 20(2)(b). The Department contends that it did not specifically mention PRUPAC's failure to prove the likelihood of occurrence of the storm event on which PRUPAC's application was based because the Department considered the general denial, coupled with the specifically-mentioned grounds for denial, to be sufficient. It denied having had any intention to waive consideration of the likelihood of occurrence of the storm event on which PRUPAC's application was based. The Department contends that ER 20 still governs the PRUPAC application.
Formal administrative proceedings under Section 120.57(1), Fla. Stat. (Supp. 1992), are de novo. Moore v. Dept. of Health, etc., 596 So. 2d 759 (Fla. 1st DCA 1992); McDonald v. Dept. of Banking and Finance, 346 So. 569 (Fla. 1st DCA 1977). They are designed to give affected parties the opportunity to change the agency's mind. Capeletti Bros., Inc., v. Dept. of General Services, 432 So. 2d 1359 (Fla. 1st DCA 1983). Except when to do so presents notice problems, they are governed by the rules in effect at the time of the final hearing.
Regardless whether the August 10, 1993, denial letter was based on ER 20(2)(b), ER 20 expired on September 2, 1993. See Section 120.54(9)(c), Fla. Stat. (Supp. 1992). Since ER 20 has expired, it can no longer operate as a rule governing the PRUPAC application.
As previously described, PRUPAC argues that this case is not moot because it should have been granted an exemption in a timely fashion. See Conclusion of Law 46. Had its application been considered in a timely fashion, ER 20 would have been in effect at the time. But the Department should not be allowed use its unlawful delay in processing PRUPAC's application as a basis for utitilizing, in this case, a rule that has expired.
On the day ER 20 expired, the Department promulgated 4ER93-28 (ER 28). ER 28 is an essentially verbatim repromulgation of ER 20. If valid, it would be effective for another 90 days, until December 2, 1993, after the expiration of the statutory moratorium under Chapter 93-401. Section 120.54(9)(c), Fla. Stat. (Supp. 1992). But, as has been held in the Final Order, Prudential Property & Casualty Ins. Co. of Indiana v. Dept. of Insurance, DOAH Case No. 93-5807RE, entered November 9, 1993, ER 28 is invalid and also cannot operate as a rule governing the PRUPAC application in this case.
Indications of Legislative Intent
Without the benefit of any clear determination of this issue by the court, and without any applicable rules, it is necessary to undertake independently an examination of the indications of the legislative intent behind the phrases "unreasonable risk of insolvency," "probable maximum loss in the event of a hurricane," and "any objectively defined loss resulting from one Florida hurricane loss event," in Section 1(4) of the moratorium statute.
Impossible Burden of Proof?
PRUPAC argues that it would be absurd to interpret these phrases to require an applicant to prove the likelihood of an Andrew-like storm event during the 1993 or 1994 hurricane seasons. The evidence is clear that no insurance company could meet such a burden of proof and that no exceptions to the statutory moratorium would be possible.
There is reason to believe that the Legislature also was familiar with emergency rule 4ER93-18, the rule moratorium in effect at the time of enactment of the statutory moratorium. The Legislature could well have been of the view that there was only approximately a 38 percent chance that an Andrew-like hurricane would make landfall anywhere in Florida during any two consecutive hurricane seasons. See Conclusion of Law 79. But there is no evidence that the Legislature had knowledge of the frequency of storms of lesser intensity.
The evidence in this case was that, during the 122 years of recorded hurricane history, from 1871 through 1992, only seven Category 4 storms (Andrew- like intensity) or greater have made "direct hits" on or "near misses" of Dade or Broward counties. From this information, it could be said that, historically, there is only an 11 percent chance that a Category 4 or 5 storm will make a direct hit on, or a near miss of, Dade or Broward county during any two consecutive hurricane seasons.
Although there have been very few hurricanes of Andrew-like intensity to hit or nearly miss Dade and Broward counties, there were a total of 46 hurricanes, of all intensity levels, to do so from 1871 through 1992. From this information, it could be said that, historically, there is a 75 percent chance that a hurricane will do so during any two consecutive hurricane seasons.
Given those odds, it would not necessarily be an absurdity for the Legislature to require an applicant for an exception to prove that a particular storm event is likely to occur during the 1993 or 1994 hurricane seasons. If a company's surplus is low enough, it is conceivable that it could prove the likelihood of a storm event during the period of time affected by the moratorium that would either create an "unreasonable risk of insolvency" or result in losses in excess of its total surplus.
Insurance Industry Concepts.--
There was evidence that the concept which PRUPAC calls "probable maximum loss" is familiar in the industry. As found, it is utilized to evaluate an insurer's concentration of risk. In evaluating concentration of risk in an area, the industry commonly assumes an event that approximates the most costly catastrophe that has occurred in the area. It does not attempt to project the likelihood that such an event will occur in the near future.
At the same time, in other insurance contexts, "probable maximum loss" equates to "maximum probable loss" or "the worst loss that is likely to occur." A related concept is "probability of ruin." These concepts consider the likelihood of the actual occurrence of the risk in question. They usually are not applied to catastrophic risks.
Similarly, the concept which PRUPAC calls "unreasonable risk of insolvency" also is familiar in the industry in the context of evaluating concentration of risk. As found, it is when the "probable maximum loss" is more than 10-15 percent of the insurance company's surplus.
The industry concept of "unreasonable risk of insolvency" in evaluating concentration of risk is similar to Florida's statute prohibiting insurers from exposing more than ten percent of policyholder surplus to any one risk. See Section 624.609(1), Fla. Stat. (1991).
The Department takes the position that "probable maximum loss," as used in the moratorium statute, means "maximum probable loss," as used in the insurance contexts referred to in the preceding paragraph. For that reason, the Department contends, it contemplates an evaluation of the likelihood of the actual occurrence of the risk being considered.
The Department also contends that, like its concept of "probable maximum loss," in the context of the moratorium statute, "unreasonable risk of insolvency" means that insolvency is not just a possible outcome, but is in fact the probable outcome, of a denial of exemption. As the Department would apply the term to the moratorium statute, loss scenarios that depend for their fulfillment upon the occurrence of statistically unlikely events would not constitute an "unreasonable risk of insolvency." In addition, since "insolvency" generally is known to mean an excess of liabilities over assets, the Department's position is that, to prove an "unreasonable risk of insolvency," an insurer not only would have to prove the likelihood of the occurrence of the event that would result in the "probable maximum losses," but also would have to prove that the losses would approximately the company's total surplus.
It is concluded that the moratorium statute in this case is its own unique insurance context. It is difficult to say with confidence that the Legislature intended to adopt the definitions of "probable maximum loss" or "unreasonable risk of insolvency" from any other insurance context.
Legislative and Rule Findings.--
Section 1(1) of Chapter 93-401 provides in pertinent part:
(1) FINDINGS AND PURPOSE.--The Legislature finds that property insurers, as a condition of doing business in this state, have a responsibility to contribute to an orderly market for property insurance and that there is a compelling state interest in maintaining an orderly market for property
insurance. . . . The Legislature further finds that the massive cancellations and nonrenewals announced, proposed, or contemplated by certain insurers constitute a significant danger to the public health, safety, and welfare, especially in the context of a new hurrican season, and destabilize the insurance market.
There is reason to believe that the Legislature also was familiar with emergency rule 4ER93-18, the rule moratorium in effect at the time of enactment of the statutory moratorium. ER 18 recited as some of the Department's specific reasons for finding an immediate danger to the public health, safety or welfare:
4. No change has occurred in the risk characteristics of Florida policyholders. Although Hurricane Andrew was devastating to all parties involved, major hurricanes are random events and the risk of another major hurricane making landfall in a heavily populated area of Florida is no greater now
than all of the years in which premiums were charged and no hurricanse occurred.
According to insurance industry data, there have been 10 hurricanes in Florida with maximum wind speeds over 135 miles per hour [Andrew intensity or greater] from 1871 to 1992, with an additional 13 hurricanes making land fall in Florida during this period with maximum wind speeds of 116 to 135 miles per hour [approximately Category 3]. Thus, it is clear that the claims arising from Hurricane Andrew are in reality the impetus for proposed action by insurers.
* * *
7. Recently however, as a result of the massive number and amount of claims arising from Hurricane Andrew, and the fear of future claims from some future hurricane, insurers have expanded their attempts to reduce their exposure to hurricanes by initiating campaigns to cancel and/or non-renew current policyholders totalling in the aggregate approximately 500,000 policyholders. The FRPCJUA is the only alternative for most policyholders who are being cancelled or non- renewed, but the FRPCJUA is required by law to charge extremely high rates designed for high risk policies. . . . Furthermore, the FRPCJUA was designed to insure people whose insurer became insolvent or who are new homeowners seeking coverage. It was not designed to additionally process and insure hundreds of thousands of people arbitrarily abandoned by their insurers purely due to fear of hurricane exposure. In other words, the FRPCJUA was not designed as a "dumping ground" for insurers.
* * *
9. Until empirical and scientifically verifiable hurricane projections are demonstrated which proves an insurer's solvency is jeopardized, the burden should be borne by insurers for perceived hurricane risk, rather than upon policyholders through cancellation or nonrenewal.
Both ER 18 and the statutory moratorium provided that the moratorium "shall not apply if the insurer can affirmatively demonstrate to the department that the proposed cancellation or nonrenewal is necessary for the insurer to avoid an unreasonable risk of insolvency." Only Section 1(4) of Chapter 93-401 elaborated:
In reaching this determination the department shall consider the insurer's size, its market concentration, its general financial condition, the degree to which personal lines residential property insurance comprises its
insurance business in this state, and the way in which these factors impact on the risk to the insurer's solvency in relation to its probable maximum loss in the event of a hurricane. In no event shall any insurer be required to risk more than its total surplus to any objectively defined probable maximum loss resulting from one Florida hurricane loss event.
The concerns of Chapter 93-401 are more similar to the evaluation of concentration of risk than any of the other insurance contexts cited by the Department. Although the legislative intent is far from clear, it is concluded that the Legislature intended the phrases in Section 1(4) of Chapter 93-401 "probable maximum loss in the event of a hurricane" and "any objectively defined loss resulting from one Florida hurricane loss event," on the one hand, and "unreasonable risk of insolvency," on the other, to be interpreted the way "probable maximum loss," on the one hand, and "unreasonable risk of insolvency," on the other, are defined for purposes of evaluating concentration of risk.
Reinsurance
It is concluded that, under Section 1(4) of Chapter 93-401, the Department should take into account the amount of PRUPAC's reinsurance for purposes of determining whether PRUPAC proved that an exemption is necessary to avoid an "unreasonable risk of insolvency" or whether PRUPAC is being "required to risk more than its total surplus to any objectively defined probable maximum loss resulting from one Florida hurricane loss event."
"Funded cover" is not reinsurance and should not be considered as reinsurance for purposes of making the determinations referred to in the preceding paragraph.
As found, PRUPAC's effective reinsurance benefits in the event of another hurricane are approximately $130 million--$140 million of reinsurance, less the approximately $10 million it would have to pay to reinstate the reinsurance premium for the rest of the coverage period.
The Department argues that PRUPAC is bound by larger reinsurance (and policyholder surplus) numbers found in its application. But, as previously discussed, these proceedings are de novo. See Conclusions of Law 48. The determination whether PRUPAC's application should be granted should be made on the Findings of Fact.
Parent's Finances
The Department is not correct that, in order to determine whether an applicant's "probable maximum loss" creates an "unreasonable risk of insolvency," or that it exceeds the company's surplus, the Department must take into account the finances of the company's parent, at least under the facts of this case.
It is clear that the Florida Insurance Code generally treats insurers as separate from their parents, and vice versa. Cf. Sections 625.325, 631.0515, 628.801, 628.803 and 624.406, Fla. Stat. (1991). The moratorium statute makes no special provision for consideration of a parent's assets when considering the solvency of an applicant under the Section(4) of Chapter 93-401.
PRUPAC's parent companies infused $900 million to keep PRUPAC solvent and to restore its surplus to pre-Andrew levels. Whether this capital infusion was purely voluntary or could have been compelled through legal proceedings, and whether PRUPAC's parents could infuse more capital, the facts remain that PRUPAC's surplus is what it is and that PRUPAC's solvency can only be determined in comparison to its surplus. Whether PRUPAC's parents would infuse more capital to remove the effects of another insolvency would not change the fact of the insolvency.
Tax Consequences of Losses
PRUPAC contends that the Department cannot raise the issue of the federal income tax consequences of PRUPAC's losses from another hurricane because it was not mentioned as a ground for denial in the August 10, 1993, denial letter. PRUPAC bases its argument on the decision in Prudential Property & Casualty Ins. Co. of Indiana v. Dept. of Insurance, 18 Fla. L.W. D2312 (Fla. 1st DCA October 25, 1993), and on Section 120.60(2), Fla. Stat. (1991).
The court decision states in part that the Department must: state the reason for its decision on the
application in its written decision. (Citations omitted.) In view of the facts accepted by the department in its August 10 letter . . . , we believe it is readily apparent that PRUPAC's showing before the department made out a prima facie case for exemption in part from the moratorium.
18 Fla. L.W. at D2314. As discussed previously, it is unclear what the court intended when it granted a "partial exemption" yet ordered a formal administrative proceeding on issues such as whether PRUPAC's PML is $1.5 billion and whether reinsurance and the parents' finances should be considered. It did not clearly rule that the denial letter forecloses the Department from raising the tax consequence issue.
Section 120.60(2), Fla. Stat. (1991), applies only to licensing. Section 120.52(9), Fla. Stat. (1991), states: "'License'means a franchise, permit, certification, registration, charter, or similar form of authorization required by law . . .." When construing a statute, the mention of one thing in the statute implies the exclusion of things not mentioned. (Expressio unius est exclusio alterius.) Thayer v. State, 335 So. 2d 815 (Fla. 1976); Devin v. City of Hollywood, 351 So. 2d 1022 (Fla. 1976). Another rule of construction of statutes is that, where general words follow a list of particulars, the general words are presumed to be restricted by the nature of the particulars. (Ejusdem generis.) Cf. Shepard v. Thames, 251 So. 2d 265 (Fla. 1971); Arnold v. Shumpert, 217 So. 2d 116 (Fla. 1968). Under those rules of construction, it is concluded that an exception to the statutory moratorium is not a "license" under Section 120.52(9), and Section 120.60(2) does not apply.
Even if Section 120.60(2) did apply, it would not preclude the Department from considering the tax consequences of a catastrophic hurricane loss. It states in pertinent part:
Each agency, upon issuing or denying a license, shall state with particularity the grounds or basis for the issuance or denial of the license, except when issuance is a ministerial act. On denial of a license application on which there has been no hearing, the denying agency shall inform the applicant of any right to a hearing pursuant to s. 120.57.
As previously discussed, this is a de novo proceeding. Moore v. Dept. of Health, etc., supra; Capeletti Bros., Inc., v. Dept. of General Services, supra; McDonald v. Dept. of Banking and Finance, supra. PRUPAC's exemption application has not yet been denied. Rather, there has been a notice of intent to deny and a point of entry into these formal administrative proceedings.
The August 10, 1993, denial letter notifies PRUPAC that the Department did not think PRUPAC had demonstrated that its nonrenewal plan was "necessary to avoid an unreasonable risk of insolvency." That was sufficient to place PRUPAC on notice to inquire as to the precise grounds. No more detailed notice was required. See Florida Optometric Ass'n v. Dept. of Prof. Reg., 567 So. 2d 928 (Fla. 1st DCA 1990); Sims v. Bd. of Trustees, etc. 444 So. 2d 1115 (Fla. 1st DCA 1984); Lin v. Dept. of Prof. Reg., 444 So. 2d 1105 (Fla. 1st DCA 1984). Discovery was available to ascertain the issues with more particularity.
The evidence was not clear what the federal income tax consequences of losses from another hurricane would be. From the evidence, it is possible that PRUPAC could get a federal income tax credit for one-third of its losses. Somehow PRUPAC'a actual tax credit from Andrew apparently was less-- approximately $300 million as a result of its $1.3 billion of losses. The evidence was not clear how this tax credit was calculated, or why it was less than one-third of the amount of the losses. Cf. Findings 34-35.
Under Section 1(4) of Chapter 93-401, it was PRUPAC's burden to "affirmatively demonstrate" why it should be granted an exemption. In view of its failure to present clearer evidence on the tax consequences of losses from a future hurricane, it is concluded that the Department should assume, for purposes of PURPAC's application, that PRUPAC will get a federal tax credit in the amount of one-third of any such losses.
Clearly, if a future hurricane loss resulted in insolvency, tax credits would be of no use to PRUPAC. They should not be considered in deciding whether PRUPAC is risking "more than its total surplus to any objectively defined probable maximum loss resulting from one Florida hurricane loss event." However, if PRUPAC survives a future hurricane loss, it could make use of at least some of a federal tax credit to soften the impact of such losses, and the availability of a tax credit should be considered in deciding whether PRUPAC has proved an "unreasonable risk of insolvency."
Summary of Conclusions
Under Section 1(4) of Chapter 93-401, a hurricane loss of $278 million would result in a loss to PRUPAC of approximately $98.5 million, after considering the effect of PRUPAC's $130 million of reinsurance benefits and a federal tax credit in the amount of one-third of the hurricane loss. Since
$98.5 million is 15 percent of PRUPAC's policyholder surplus of $657 million, PRUPAC should be entitled to an exemption from the statutory moratorium so as to authorize it to reduce its "probable maximum loss" to $278 million in order to avoid an "unreasonable risk of insolvency." (This is less than its total surplus of $657 million, and the threshold exemption in the second part of Section 1(4) need not be applied.) Since PRUPAC's actual "probable actual loss" is $1.4 billion, it would be entitled to reduce its risks in Dade and Broward counties by approximately $1.1 billion under Section 1(4). This is far more than the reduction for which PRUPAC applied.
Caveat
The media have reported that the Legislature just passed new legislation on this subject. The legislation has not been presented by the parties, and it is not clear at this time when it will become law. In any event, in keeping with the apparent dictates of the decision in Prudential Property & Casualty Ins. Co. of Indiana v. Dept. of Insurance, 18 Fla. L.W. D2312 (Fla. 1st DCA October 25, 1993), this Recommended Order does not attempt to address the impact of the new legislation.
Based on the foregoing Findings of Fact and Conclusions of Law, it is recommended that the Department of Insurance enter a final order granting PRUPAC's application, subject to the impact of the new legislation on the subject.
RECOMMENDED this 12th day of November, 1993, in Tallahassee, Florida.
J. LAWRENCE JOHNSTON 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 12th day of November, 1993.
APPENDIX TO RECOMMENDED ORDER, CASE NO. 93-5262
To comply with the requirements of Section 120.59(2), Fla. Stat. (1991), the following rulings are made on the parties' proposed findings of fact:
Petitioner's Proposed Findings of Fact.
Accepted and incorporated.
"1.5" is rejected; it was 1.4. and incorporated.
Accepted and incorporated.
"Much" is rejected as not proven. Otherwise, accepted but not necessary.
"260" is rejected as not proven. (It does not account for tax credits.) Otherwise, accepted and incorporated to the extent not subordinate or unnecessary.
6.-10. Accepted and incorporated to the extent not subordinate or unnecessary.
Rejected as not proven that the Department's General Counsel "instructed" PRUPAC as to what its application should be or contain. Accepted that the Department's General Counsel offered procedural guidance on how to apply and accepted as to the contents of the application; those items are incorporated to the extent not subordinate or unnecessary.
Accepted and incorporated to the extent not subordinate or unnecessary. (All five were in dire financial straits. Virtually any hurricane losses would lead to financial ruin.)
13.-14. Accepted and incorporated.
First three sentences, accepted and incorporated to the extent not subordinate or unnecessary. Last sentence, rejected as to (2) and (3); accepted as to the rest. Incorporated to the extent not subordinate or unnecessary.
Accepted but subordinate and unnecessary.
First two sentences, accepted and incorporated to the extent not subordinate or unnecessary. Third sentence, rejected as to (2) and (3); accepted as to the rest. Incorporated to the extent not subordinate or unnecessary. Last sentence, rejected as not proven and as contrary to the findings of fact and the greater weight of the evidence.
Accepted and incorporated to the extent not subordinate or unnecessary.
Rejected as not proven and as contrary to the findings of fact and the greater weight of the evidence. There are probabilities based on historical fact.
20.-22. Accepted and incorporated to the extent not subordinate or unnecessary.
Rejected as not proven as to "III"; otherwise, accepted and incorporated.
"More than double" is rejected as not proven. (Accepted that the Department has stated that it would be more, but subordinate and unnecessary.)
"Mere brush" is rejected as not proven. (Reference was being made to a storm that tracked north to south just off the Atlantic coast, thereby ravaging the entire coastline.)
26.-27. Accepted and incorporated. (This is done for purposes of evaluating concentration of catastrophic risk.)
28. Accepted but subordinate and unnecessary.
29.-30. Rejected as irrelevant. Regardless of how "extraordinary" they actually were, the "extraordinary circumstances" are the same ones that led the Legislature to enact the moratorium statute. PRUPAC's argument actually is that the facts were different than the Legislature thought. This may have been an argument to make in lobbying against the enactment of legislation, but it is not
a good argument for PRUPAC's interpretation of the statute that has been enacted.
Rejected. As to the first sentence, such evidence was offered. Besides, the burden of proof was on PRUPAC. The rest is rejected as being conclusion of law.
Rejected. As to the first two sentences, such inquiries were made and such evidence was offered. Besides, the burden of proof was on PRUPAC. As for "considering" those matters, this is a de novo proceeding. See Conclusion of Law 48. The Department will not complete its "consideration" of them until it reviews this Recommended Order and enters and Final Order.
Last sentence, accepted and incorporated. Penultimate sentence, rejected as being conclusion of law. The rest is rejected as contrary to the evidence. Also, the burden of proof was on PRUPAC.
34.-35. Accepted and incorporated.
36. Accepted but subordinate and unnecessary.
Respondent's Proposed Findings of Fact.
1.-2. Accepted and incorporated.
3. "Compelled by a virtual tide" is rejected as argument. Also rejected that the legislative intent was "that such policies not be terminated."
4.-10. Accepted and incorporated.
Rejected as contrary to facts found.
Except for the amount, accepted and incorporated.
Accepted but subordinate and unnecessary.
Accepted and incorporated.
15.-17. Accepted but subordinate and unnecessary.
Accepted and incorporated.
Rejected that the reinsurance actually was $300 million. Otherwise, accepted and incorporated to the extent not subordinate or unnecessary.
20.-21. Accepted as accurately reciting his testimony. Rejected as to being the legislative intent.
22.-24. Accepted. Subordinate to facts found.
Accepted but subordinate and unnecessary.
Accepted and incorporated.
Accepted and incorporated. However, subject to applicable laws. 28.-30. Accepted. Subordinate to some of the facts found. Otherwise,
unnecessary.
31.-32. Accepted and incorporated.
Accepted but subordinate and unnecessary.
Accepted and incorporated.
35.-38. Accepted and incorporated to the extent not subordinate or unnecessary.
39.-41. Accepted to the extent subordinate to facts found.
Rejected as not supported by the evidence.
Rejected as contrary to facts found and contrary to the greater weight of the evidence.
Rejected as contrary to facts found.
Rejected as generally subordinate to facts contrary to those found and as being argument.
Accepted and incorporated that Bernstein's testimony did not "take into account" the Legislature's perceptions. It was from the standpoint of evaluation concentration of catastrophic risk. But it was concluded that the Legislature meant for the words it chose to have the same meaning.
Accepted to the extent facts and not conclusions of law.
Rejected as to the truth of those matters. They were not proven in this proceeding. However, accepted and incorporated that both the Department and the Legislature had the perceptions that the JUA was not designed to handle all of the cancellations and nonrenewals that seemed to be coming and that a vicious cycle was in operation.
First sentence, rejected as not proven; second sentence, accepted. Both irrelevant to this proceeding, subordinate and unnecessary.
COPIES FURNISHED:
Daniel C. Brown, Esquire Mitchell B. Haigler, Esquire Brian M. Nugent, Esquire
Katz, Kutter, Haigler, Alderman, Davis, Marks & Bryant, P.A.
Post Office Box 1877 Tallahassee, Florida 32302-1877
Nancy J. Aliff, Esquire Dennis Silverman, Esquire
Department of Insurance and Treasurer Division of Legal Services
612 Larson Building
Tallahassee, Florida 32399-0300
Honorable Tom Gallagher Insurance Commissioner The Capitol, Plaza Level
Tallahassee, Florida 32399-0300
Bill O'Neil, Esquire General Counsel Department of Insurance
and Treasurer The Capitol, PL-11
Tallahassee, Florida 32399-0300
NOTICE OF RIGHT TO SUBMIT EXCEPTIONS
All parties have the right to submit to the Department of Insurance written exceptions to this Recommended Order. All agencies allow each party at least ten days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should consult with the Department of Insurance concerning its rules on the deadline for filing exceptions to this Recommended Order.
=================================================================
AGENCY FINAL ORDER
=================================================================
OFFICE OF THE TREASURER DEPARTMENT OF INSURANCE
IN THE MATTER OF:
PRUDENTIAL PROPERTY AND
CASUALTY INSURANCE COMPANY DOAH CASE NO: 93-5262 OF INDIANA,
/
FINAL ORDER
THIS CAUSE came on before the undersigned Treasurer of the State of Florida, acting in his capacity as Insurance Commissioner, for consideration and final agency action. On August 10, 1993, the Department issued a letter denying Prudential Property and Casualty Insurance Company of Indiana (hereinafter referred to as "PRUPAC") application for an exemption to the moratorium on cancellations and nonrenewals of policies imposed by Chapter 93-401, Laws of Florida (1993). PRUPAC timely filed a request for a formal proceeding pursuant to Section 120.57(1), Florida Statutes. Pursuant to notice, the matter was heard before J. Lawrence Johnston, Hearing Officer for the Division of Administrative Hearings, on October 25 - 27, 1993 in Tallahassee, Florida.
After consideration of the evidence, argument and testimony presented at hearing, and subsequent written submissions by the parties, the hearing officer issued a Recommended Order. (Attached as Exhibit A). The hearing officer recommended that a final order be entered granting PRUPAC's application, subject to the impact of the new legislation on the subject. The Department filed timely exceptions to the Recommended Order. PRUPAC filed no exceptions to Recommended Order.
RULINGS ON THE DEPARTMENT'S EXCEPTIONS TO FINDINGS OF FACT
The Department excepted to Finding of Fact, paragraph 1 as being incomplete in that it was uncontroverted that Hurricane Andrew had peak gusts of
175 miles per hour which were reflected in the model submitted by PRUPAC. Department's exception is well taken as supported by substantial competent evidence contained in the record of these proceedings. Kimball v. Hawkins, 364 So.2d 463, 466 (Fla. 1978), Florida Department of Corrections v. Bradley, 510 So.2d 1122, 1123 (Fla. 1st DCA 1987).
The Department excepted to Finding of Fact paragraph 14, stating that the hearing officer construes the statutory moratorium term "unreasonable risk of insolvency" to mean when the "probable maximum loss" is more than 10-15 percent of an insurance company's surplus. The hearing officer clearly states in the first sentence of paragraph 14 that "... the industry has a general understanding of what is usually considered to be an 'unreasonable risk of insolvency.'" The hearing officer does not appear to attribute this interpretation to the Department and testimony and evidence presented at the
hearing and on the record clearly set forth the Department's interpretation of "unreasonable risk of insolvency" and "probable maximum loss" to be other than the industry's general understanding.
The industry's general understanding with respect to interpretation of a statute is irrelevant. Schomer v. Department of Professional Regulation, 417 So.2d 1089, 1091 (Fla. 3d DCA 1982). Chapter 93-401, Laws of Florida (1993), Sec. 4 clearly states
In no event shall any insurer be required to risk more that its total surplus to any objectively defined probable maximum loss resulting from one Florida hurricane loss event. (Emphasis added.)
The statute clearly and unequivocally uses the word "total" with respect to an insurer's surplus which cannot be construed to mean 10 percent - 15 percent of an insurer's surplus.
To the extent that the finding in paragraph 14 substitutes for any Departmental interpretation of Chapter 93-401, Laws of Florida (1993), it must be rejected. In this case, the Department, as agency charged with the interpretation of the language of Chapter 93-401, Laws of Florida (1993) and its predecessor emergency rule, 4ER93-18, F.A.C., does not interpret "unreasonable risk of insolvency" to mean when the "probable maximum loss" is more that 10 percent - 15 percent of any insurer's surplus. Therefore the agency's interpretation, as supported by testimony on the record, is within the range of permissible interpretations of the statutes and must be sustained. (Escambia County v. Trans Pac, 584 So.2d 603, 605 (Fla. 1st DCA 1991); Natelson v.
Department of Insurance, 454 So.2d 31, 32 (Fla. 1st DCA 1984); Department of
Environmental Regulation v. Goldring, 477 So.2d 532 (Fla. 1985)).
The Department excepted to Finding of Fact paragraphs 18 and 19 in which the hearing officer limits the term "probable maximum loss" (PML) to evaluating concentration of risk and excludes the likelihood or frequency of the catastrophic event from the meaning of that term. These findings are supported by substantial competent evidence contained in the record and therefore, the Department's exception is rejected.
The Department excepted to Finding of Fact paragraph 26 to the extent that the hearing officer characterizes the seven hurricanes of category 4 intensity as "Andrew-like" intensity. The Department's exception is well taken as supported by substantial competent evidence contained in the record of these proceedings.
RULINGS ON THE DEPARTMENT'S EXCEPTIONS TO CONCLUSIONS OF LAW
The Department excepted to Conclusion of Law paragraph 68 in which the hearing officer states that there have been seven category 4 hurricanes and that there is an 11 percent chance that a Category 4 or 5 storm will hit Dade or Broward County during any two consecutive hurricane seasons. To the extent that this Conclusion of Law is based on Finding of Fact, paragraph 26, which is erroneous to the extent of its description of category 4 hurricanes as being of "Andrew-like" intensity, it must be rejected.
The Department excepted to Conclusions of Law paragraphs 71 and 72. These findings are supported by substantial competent evidence contained in the record as more fully set out in paragraph 3, above, and therefore, the Department's exception is rejected.
The Department excepted to Conclusions of Law paragraphs 73 and 74. The hearing officer bases these conclusions of law on Finding of Fact paragraph
Since this Finding of Fact was not based on substantial competent evidence as more fully discussed in paragraph 1, above, these Conclusions of Law must be rejected.
The Department excepted to Conclusions of Law paragraph 81, in which the hearing officer reiterates the construction of "unreasonable risk of insolvency" and "probable maximum loss." This exception is rejected for the reasons set forth in paragraphs 3 and 6, above.
The Department excepted to Conclusions of Law paragraphs 87 and 88, in which the hearing officer concludes that the capital of PRUPAC's parent, Prudential Life Insurance Company, need not be considered when evaluating PRUPAC's risk of insolvency. The hearing officer is essentially correct in his citation of statutory sections in paragraph 87. There is no specific statutory provision requiring consideration of the parent corporation's assets when considering the solvency of an applicant for an exemption from the moratorium. However, there is a very close relationship between PRUPAC and its parent corporation which the hearing officer has ignored. The parent corporation voluntarily infused $900 million to maintain the solvency of its subsidiary and thereby protecting its corporate name. As such, it maintains total control over the solvency of its subsidiary, PRUPAC, and the analysis would not be complete without considering the parent's solvency. However, there is no mechanism contained in Chapter 93-401, Laws of Florida (1993) providing for this analysis and therefore, this exception must be rejected.
The Department excepted to Conclusions of Law paragraph 97. The hearing officer bases his Summary of Conclusions on Finding of Fact paragraph
Since this Finding of Fact was not based on substantial competent evidence as more fully discussed in paragraph 1, above, this Summary of Conclusions is erroneous to the extent that the hearing officer's calculations are incorrectly based on the industry's general understanding of probable maximum loss and unreasonable risk of insolvency rather than the plain language of the statute and Departmental interpretation, and therefore, must be rejected.
Upon consideration of the foregoing and the entire record, the submissions of the parties and being otherwise advised in the premises, it is
ORDERED:
The Findings of Fact of the hearing officer are adopted as the Department's Findings of Fact, except for paragraphs 1, 14, and 26, which have been addressed herein.
The Conclusions of Law of the hearing officer are adopted with the exception of paragraphs 68, 73, 74, and 97, which have been addressed herein.
The hearing officer's recommendation that PRUPAC's application to reduce its direct and reinsured exposure in Dade and Broward Counties, Florida to 400 million dollars be granted is approved. However, prior to commencing
non-voluntary cancellations or non-renewals, PRUPAC shall continue the voluntary
program set forth in the FINAL ORDER GRANTING PARTIAL EXEMPTION dated October 26, 1993, to wit: PRUPAC shall offer to policyholders in the two affected counties to pay their first year's premium on their replacement policy, whether in the voluntary market or in the Florida Residential Property and Casualty Joint Underwriting Association (FRPCJUA), in exchange for the policyholders' voluntarily cancelling or nonrenewal of their PRUPAC policies. Or, PRUPAC will pay for both a homeowners and a windstorm policy if the covered property is in an area eligible for windstorm coverage through the Florida Windstorm Underwriting Association. And the written offer shall contain a description of coverage differences between the current PRUPAC policy and a policy issued by the FRPCJUA; and it shall include an election form and a return envelope for the use of the policyholder. The written offer may include a date by which the policyholder must respond to the offer, which date shall be at least sixty (60) days from the date of the written offer.
DONE and ORDERED this 10th day of February, 1994.
TOM GALLAGHER
Treasurer and Insurance Commissioner
COPIES FURNISHED TO:
Honorable J. Lawrence Johnston Hearing Officer
Division of Administrative Hearings The DeSoto Building
1230 Apalachee Parkway
Tallahassee, Florida 32399-1550
Daniel C. Brown, Esquire Mitchell B. Haigler, Esquire Brian M. Nugent, Esquire
Katz, Kutter, Haigler, Alderman, Davis, Marks & Bryant, P.A.
P. O. Box 1877
106 East College Avenue Suite 1200
Tallahassee, Florida 32302-1877
Nancy J. Aliff, Esquire Dennis S. Silverman, Esquire Division of Legal Services 612 Larson Building
Tallahassee, Florida 32399-0300
NOTICE OF RIGHTS
Any party to these proceedings adversely affected by this Order is entitled to seek review of this Order pursuant to Section 120.68, Florida Statutes, and Rule 9.110, Florida Rules of Appellate Procedure. Review proceedings must be instituted by filing a petition or notice of appeal with the General Counsel, acting as the agency clerk, at 612 Larson Building, Tallahassee, Florida, and a copy of the same with the appropriate district court of appeal within thirty
(30) days of rendition of this Order.
| Issue Date | Proceedings |
|---|---|
| Feb. 16, 1994 | Final Order filed. |
| Nov. 12, 1993 | Recommended Order sent out. CASE CLOSED. Hearing held October 25 through 27, 1993. |
| Nov. 03, 1993 | Respondent`s Proposed Recommended Order filed. |
| Nov. 01, 1993 | Final Order Granting Partial Exemption filed. |
| Nov. 01, 1993 | Petitioner`s Hearing Memorandum; Petitioner`s Proposed Recommended Order w/cover ltr filed. |
| Oct. 28, 1993 | Transcript (Volumes 1-4) filed. |
| Oct. 27, 1993 | CASE STATUS: Hearing Held. |
| Oct. 27, 1993 | Videotape Deposition of Tome Gallagher filed. |
| Oct. 26, 1993 | Respondent`s Memorandum in Opposition to Petitioner`s Motion in Limine; Renewed Motion in Limine by Petitioner filed. |
| Oct. 25, 1993 | Joint Stipulation filed. |
| Oct. 22, 1993 | Letter to JLJ from Mitchell B. Haigler (re: Respondent`s Order to Show Cause) filed. |
| Oct. 19, 1993 | Petition for review of non-final administrative action under the Florida administrative procedure act filed. |
| Oct. 18, 1993 | Respondent`s Motion for Continuance filed. |
| Oct. 18, 1993 | Respondent`s Motion for Continuance filed. |
| Oct. 15, 1993 | Order Continuing Final Hearing and Requiring Status Report sent out.(hearing date to be rescheduled at a later date; parties to file status report by 11/22/93) |
| Oct. 14, 1993 | Respondent`s Memorandum in Support of The Motion for Continuance w/Affidavit & attachments filed. |
| Oct. 14, 1993 | Petitioner`s Supplemental Response to Motion for Continuance w/CC Videotape Deposition of Hugo John Kummer, Jr. filed. |
| Oct. 13, 1993 | Petitioner`s Response in Opposition to Respondent`s Motion for Continuance; Deposition of Stephen C. Burgess) filed. |
| Oct. 12, 1993 | Letter to JLJ from Mitchell B. Haigler (re: request that Hearing Officer DO NOT rule on Motion for continuance) filed. |
| Oct. 11, 1993 | Subpoena Duces Tecum w/Affidavit of Service filed. (From Daniel C. Brown) |
| Oct. 06, 1993 | (Petitioner) Notice of Taking Deposition Duces Tecum filed. |
| Oct. 05, 1993 | (Petitioner) Notice of Taking Deposition Duces Tecum w/(4) Affidavits filed. |
| Oct. 05, 1993 | (Petitioner) Amended Notice of Taking Deposition filed. |
| Oct. 05, 1993 | Respondent`s Witness List filed. |
| Oct. 04, 1993 | Petitioner`s Witness List filed. |
| Oct. 01, 1993 | Notice of Service of Petitioner`s Answers to Respondent`s First Interrogatories w/Petitioner`s Response to Respondents` First Set of Interrogatories & Exhibits + other supporting papers filed. |
| Sep. 30, 1993 | Respondent`s Response to Petitioner`s First Request for Production of Documents; Respondent`s Response to Petitioner`s First Request for Admissions filed. |
| Sep. 30, 1993 | Respondent`s Notice of Service of Its Answers to Interrogatories of Petitioner filed. |
| Sep. 30, 1993 | (Petitioner) Notice of Taking Deposition filed. |
| Sep. 30, 1993 | (3) Amended Notice of Taking Deposition filed. (From Daniel C. Brown) |
| Sep. 30, 1993 | (Petitioner) Notice of Taking Deposition filed. |
| Sep. 29, 1993 | (Petitioner) Amended Notice of Taking Deposition Duces Tecum filed. |
| Sep. 22, 1993 | Amended Notice of Taking Deposition filed. |
| Sep. 20, 1993 | Notice of Taking Deposition (5) filed. |
| Sep. 20, 1993 | Petitioner`s First Request for Admissions to Respondent (+ att`s); Notice of Service of Interrogatories to Defendants; Petitioner`s First Request for Production of Documents filed. |
| Sep. 16, 1993 | Letter to KNA from Daniel C. Brown (re: assignment of Hearing Officer) filed. |
| Sep. 15, 1993 | Prehearing Order sent out. |
| Sep. 15, 1993 | Notice of Hearing sent out. (hearing set for 10/25/93;9:00AM;Tallahassee) |
| Sep. 15, 1993 | (Petitioner) Request for Official Recognition w/Exhibits A-C filed. |
| Sep. 14, 1993 | Notice Of Appearance; Request for Official Recognition; Supportive Documents filed. |
| Sep. 10, 1993 | Agency referral letter; Petition for Formal Administrative Hearing and Motion To Expedite; Supportive Documents filed. |
| Issue Date | Document | Summary |
|---|---|---|
| Feb. 10, 1994 | Agency Final Order | |
| Nov. 12, 1993 | Recommended Order | Petitioner entitled to exemption from moratorium on homwowner policy nonrenewal based on hurricane risk; otherwise, an "unreasonable risk of insolvency." |
