STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
DEPARTMENT OF INSURANCE )
AND TREASURER, )
)
Petitioner, )
)
vs. )
) AMERICAN FAMILY BENEFITS GROUP, )
INCORPORATED, a Florida )
corporation; ROY L. BEACH, ) individually and as an officer, ) director or executive vice- ) president of AMERICAN FAMILY ) BENEFITS GROUP, INCORPORATED; )
ELLIS LEROY PRESTON, individually )
and as an officer, director, ) CASE NO. 94-1579 employee or marketing executive )
of AMERICAN FAMILY BENEFITS ) GROUP, INCORPORATED; KENNETH B. )
KING, individually and as an ) officer, director or vice- ) president of AMERICAN FAMILY ) BENEFITS GROUP, INCORPORATED; )
ROBERT KING, individually and ) as an officer, director, employee ) or marketing executive of ) AMERICAN FAMILY BENEFITS GROUP, ) INCORPORATED, )
)
Respondent. )
)
RECOMMENDED ORDER
A formal hearing was conducted in this proceeding before Daniel Manry, a duly designated Hearing Officer of the Division of Administrative Hearings, on September 29 and November 7, 1995, in Orlando, Florida. The court reporter, some of the witnesses, and all of the Respondents except Mr. Robert King, attended the hearing in Orlando. Mr. Robert King did not attend the formal hearing but was represented by Mr. Roy Beach. The undersigned, counsel for Petitioner, and witnesses other than those attending in Orlando participated by video conference from Tallahassee, Florida.
APPEARANCES
For Petitioner: Charles Faircloth, Esquire
Senior Attorney
Department of Insurance and Treasurer Division of Insurance Fraud
200 East Gaines Street Tallahassee, Florida 32399-0324
For Respondent: Roy L. Beach, Esquire
806 East Washington Street Orlando, Florida 32801
STATEMENT OF THE ISSUES
The issues for determination in this proceeding are whether Respondent committed the acts alleged in the Amended Notice And Order To Show Cause and, if so, what, if any, penalty should be imposed.
PRELIMINARY STATEMENT
Petitioner filed an Amended Notice And Order To Show Cause on May 16, 1994.
Respondent requested a formal hearing.
At the formal hearing, Petitioner presented the testimony of six witnesses.
Petitioner submitted 12 exhibits for admission in evidence. Respondents presented the testimony of two witnesses and submitted two exhibits for admission in evidence.
The identity of the witnesses and exhibits, and the evidentiary rulings regarding each, are described in the transcript of the formal hearing. The original transcript was filed with the undersigned on December 7, 1994.
Petitioner timely filed its proposed recommended order ("PRO") on January 23, 1995. Respondents timely filed their PRO on December 15, 1994. Proposed findings of fact in the parties' PROs are addressed in the Appendix to this Recommended Order.
FINDINGS OF FACT
Parties
Petitioner is the state agency responsible for regulating insurance and insurance related activities in Florida. Petitioner is the agency responsible for regulating any licensed or unlicensed person or entity engaged in unfair insurance trade practices within the meaning of Section 626.951, Florida Statutes. 1/
Respondent, Leroy Preston, is licensed to sell life and health insurance in Florida. The other Respondents are not licensed to transact insurance in Florida and are not otherwise licensed by Petitioner pursuant to Chapters 624 through 632, 634, 635, 637, 638, 641, 648, and 651 (the "Florida Insurance Code").
Respondent, American Family Benefits Group, Incorporated ("AFBG, Inc.") is a Florida corporation wholly owned by the four individual Respondents. Respondent, Roy L. Beach, is an officer and director of AFBG, Inc., and is an attorney licensed to practice law in Florida.
Respondents, Preston, Kenneth King, and Robert King, are officers and directors of AFBG, Inc. The individual Respondents comprise American Family Benefits Group ("AFBG") and the board of directors for AFBG, Inc. (the "Board").
Background
Respondents designed a marketing program for the sale of memberships in AFBG, Inc. Promotional materials describing the benefits of membership were reviewed and approved by each member of the Board and mailed to thousands of prospective customers in 50 states.
Memberships were offered to individuals at a price of $99 per membership. The benefits of membership included: life insurance up to $350,000 at no cost to members; a certificate of deposit of $5,000; a major bank credit card, regardless of credit history, secured by the certificate of deposit; non- qualifying mortgage loans; non-qualifying automobile leases; discounted long distance service; and discounted catalog prices.
Respondents received approximately 140,000 applications for membership. Approximately 600 applications included payment of the $99 membership fee.
Petitioner issued a Notice And Order To Show Cause on February 10, 1994. The marketing program for the sale of memberships in AFBG, Inc. was terminated by Respondents. Respondents returned the membership fee paid by approximately 300 applicants.
On May 6, 1994, Petitioner issued an Amended Notice And Order To Show Cause ("Amended Notice"). The Amended Notice charges that Respondents violated Sections 626.9521, 626.9541(1)(a), (b), (h), (l), and (n).
The Amended Notice charges that Respondents violated Section 626.9541(1)(a) by making misrepresentations for the purpose of effecting an assignment or pledge of insurance policies to secure a loan. Respondents allegedly violated Section 626.9541(1)(b) by representing that insurance policies obtained on the life of members would be used to secure a loan that would fund membership benefits. Respondents allegedly violated Section 626.9541(1)(h) by offering the payment of money to induce customers to enter into an insurance contract.
The Amended Notice charges that Respondents violated Section 626.9541(1)(l) by inducing customers to pledge, assign, borrow on insurance policies, convert insurance policies, or to take out an insurance policy with another insurer ("twisting"). Finally, the Amended Notice charges that Respondents violated Section 626.9541(1)(n) by offering free insurance as an inducement for the purchase or sale or services directly or indirectly connected with real or personal property.
Pledge Or Assignment To Effect A Loan: Section 626.9541(1)(a)
Respondents knowingly issued and circulated a statement or sales presentation (the "promotional materials") that was a misrepresentation. The misrepresentation was made for the purposes of: effecting a pledge or assignment of an insurance policy; and effecting a loan against an insurance policy.
Payment of the $99 membership fee did not entitle a new member to any of the benefits of membership. A new member was not required to elect any membership benefit, including the insurance benefits. Such a member could simply pay Respondents $99 and choose to receive none of the benefits of membership.
A new member who wished to elect any of the benefits of membership was in substantially the same position as a new member who chose to receive no benefits. A new member who desired any one of the benefits of membership was first required to elect the insurance benefits.
Insurance benefits entitled a new member to five universal life insurance policies on the life of the new member. Each policy was to be issued for $70,000. 2/
No life insurance policies were available unless a new member applied for and obtained all five policies and assigned four of the five policies to a bank. The bank must then make a loan in an amount and terms that were sufficient to fund all of the benefits of membership. 3/
A loan in the gross amount of $84,000 was needed to fund the benefits of membership. The net loan proceeds were to be used to purchase an annuity, a certificate of deposit to secure the credit card for the new member, pay Respondents a profit of $5,000, pay commissions and referral fees to independent parties up to $3,000, pay administrative costs, and fund the other benefits of membership. 4/
Respondents' pro forma projections of economic feasibility for the membership program showed an annual interest rate of six per cent, an amortization period of 20 years, and level periodic payments of principal and interest. Respondents' pro formal projections were based, in relevant part, on three assumptions. First, the insurance policies would be used as part of the collateral securing the loan needed to fund the benefits of membership. Second, Respondents were to be personally liable for each loan. Third, an annuity would secure the loan, pay the debt service on the loan, and pay the premiums for the insurance policies assigned to the lender.
The insurance policies that new members were required to assign to the lender to secure the purported loan had no loan value. Respondents represented to prospective members that the life insurance policies were universal life policies. However, the policies were "skeleton" universal life policies that had de minimis cash value and no loan value. The loan to value ratio of any loan secured by the insurance policies would necessarily exceed 100 percent.
Respondents' personal liability for loans to new members lacked economic substance. Capital contributions to AFBG, Inc. and Respondents' individual assets were inadequate to secure individual loans of $84,000 to 140,000 members.
The annuity needed to pay the debt service on the loan and the insurance premiums on the policies securing the loan was not economically feasible. 5/ The membership fee of $99 was inadequate to pay the first year insurance premium on one $70,000 policy, much less the other four policies required to fund any of the benefits of membership.
The economic reality of the membership program required a new member to pay Respondents $99 and to apply for and obtain five insurance policies from independent insurance agents. There was little or no probability of receiving any of the benefits of membership because the loan needed to fund those benefits had little or no economic reality. Thus, the membership program required a new member to pay $99 to Respondents for no benefits of membership. If $99 had been paid by all 140,000 applicants, Respondents would have received $13,860,000 in return for illusory promises of membership benefits.
Insurance Policies To Secure Loan: Section 626.9541(1)(b)
Respondents knowingly published, circulated, disseminated, and placed before the public an untrue statement concerning the business of insurance. Respondents represented that the universal life insurance policies obtained by individual members would be used as collateral to secure the loan needed to fund their insurance benefits. Respondents knew that the insurance policies were skeleton policies with little or no cash value and no loan value.
The untrue statements issued by Respondents concerned the business of insurance. Respondents used economic incentives to induce prospective members to obtain life insurance policies. Without life insurance policies, new members were not entitled to any of the other benefits of membership including, a certificate of deposit, a credit card, non-qualifying mortgages, and non- qualifying car leases. The purchase and assignment of life insurance policies was an integral part of the business conducted by Respondents.
The economic incentives used by Respondents were designed to effectuate a contract of insurance. Respondents effectuated approximately five contracts of insurance.
The subsequent assignment of insurance policies to a lender also constituted the business of insurance. Those assignments constituted the transaction of matters subsequent to the insurance contract and arising out of the insurance contract.
Unlawful Rebates: Section 626.9541(1)(h)
27. Respondents knowingly offered an indirect rebate of an insurance premium to prospective members as an inducement to enter into an insurance contract. Respondents' offer to pay the insurance premiums on members' insurance policies was a valuable consideration intended to induce new members to enter into insurance contracts.
Twisting: Section 626.9541(1)(l)
28. Respondents knowingly made misleading representations with respect to insurance policies for the purpose of inducing or tending to induce new members to pledge, assign, borrow on, or convert an insurance policy or to take out a policy of insurance in another insurer. Respondents representations were misleading. 29. Respondents' representations led prospective members to believe that a pledge, assignment, or conversion of their insurance policies could be used to secure a loan needed to fund other membership benefits. The representation that a loan could be obtained by new members upon assignment of their insurance policies had no economic reality.
Free Insurance: Section 626.9541(1)(n)
Respondents offered to provide free insurance as an inducement for new members to purchase real or personal property. The benefits of membership included non-qualifying mortgages in real property, non-qualifying car leases, and non-qualifying bank credit cards. None of those benefits were available to new members unless they obtained life insurance policies and assigned those policies to a lender.
The insurance policies were free to new members. There was no cost to new members. The insurance premiums were to be paid out of the annuity to be purchased from the net loan proceeds.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the subject matter of this proceeding and the parties thereto. The parties were duly noticed for the formal hearing.
The burden of proof is on Petitioner. Petitioner must show by clear and convincing evidence that Respondent is guilty of the acts alleged in the Amended Notice and the appropriateness of any disciplinary action to be taken against Respondent's certification. Ferris v. Turlington, 510 So.2d 292 (Fla. 1987).
Petitioner satisfied its burden of proof. Petitioner showed by clear and convincing evidence that Respondents violated Sections 626.9541(1)(a), (b), (h), (l), and (n).
The Business Of Insurance
Respondents engaged in the business of insurance within the meaning of Section 624.10. The sale of insurance policies was central to the membership program in AFBG, Inc.
Respondents induced prospective members to purchase insurance within the meaning of Section 624.10(1). No benefits of membership were available to new members unless they obtained the insurance benefits offered under the program.
Respondents assert that new members were not required to purchase insurance because they could choose to pay their $99 membership fee and receive no benefits of insurance. Respondents' assertion ignores economic reality and is unreasonable.
The economic reality of the membership program made benefits contingent on insurance policies and thereby effectuated a contract of insurance within the meaning of Section 624.10(3). The subsequent assignment of insurance policies to a lender constituted the transaction of matters subsequent to the insurance contract, and arising out of it, within the meaning of Section 624.10(4).
Knowing Misrepresentation
Respondents knowingly issued and circulated promotional materials containing misrepresentations in violation of Section 626.9541(1)(a). The misrepresentations were made for the purpose of effecting a pledge or assignment of an insurance policy and for the purpose of effecting a loan against an insurance policy.
Respondents knowingly published, circulated, disseminated, and placed before the public an untrue statement concerning the business of insurance in violation of Section 626.9541(1)(b). Respondents represented that the universal life insurance policies obtained by individual members would be used as collateral to secure a loan needed to fund their insurance benefits.
Respondents knew that the insurance policies were skeleton policies with little or no cash value and no loan value.
Respondents knowingly offered an indirect rebate of an insurance premium to prospective members as an inducement to enter into an insurance contract in violation of Section 626.9541(1)(h). Respondents' offer to pay the insurance premiums for new members was a valuable consideration intended to induce new members to enter into insurance contracts.
Prospective members were referred to Respondent, Preston, who is a licensed insurance agent. He sold all of the insurance policies purchased by prospective members.
Respondents knowingly made misleading representations with respect to insurance policies for the purpose of inducing new members to pledge, assign, borrow on, or convert their insurance policies. Respondents knowingly made misleading representations to induce new members to take out a policy of insurance in another insurer. Both misleading statements violated Section 626.9541(1)(l).
Respondents offered to provide free insurance as an inducement for new members to purchase real or personal property in violation of Section 626.9541(1)(n). The benefits of membership included non-qualifying mortgages in real property, non-qualifying car leases, and non-qualifying bank credit cards. None of those benefits were available to new members unless they obtained life insurance policies and assigned those policies to a lender.
The insurance policies were free to new members. There was no cost to new members. The insurance premiums were to be paid out of the annuity to be purchased from the net loan proceeds.
The evidence submitted by Petitioner was clear and convincing. Respondents' testified that they did not misrepresent the program to prospective members. Any misrepresentation that did occur, according to Respondents, was not knowingly made. Respondents' testimony was neither credible nor persuasive. It failed to rebut the clear and convincing evidence submitted by Petitioner.
6/
Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Petitioner enter a Final Order finding Respondents guilty
of all of the charges in the Amended Notice and ordering Respondents to permanently cease and desist the marketing of memberships in AFBG, Inc. It is further recommended that a fine of $4,000 should be imposed on each of the Respondents, not to exceed the aggregate amount of $20,000, and that the license of Respondent, Leroy Preston, should be suspended for 30 days.
RECOMMENDED this 28th day of March, 1995, in Tallahassee, Florida.
DANIEL MANRY
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 28th day of March, 1995.
ENDNOTES
1/ All chapter and section references are to Florida Statutes (1993) unless otherwise stated.
2/ Respondents did not sell life insurance policies to new members. Respondents referred new members to insurance agents who processed the applications and coordinated issuance of the policies. Only five policies were actually issued before Petitioner filed its Amended Notice and Respondents terminated operations. All five policies were sold by Respondent, Preston.
3/ The new member was entitled to retain one of the five insurance policies. The premiums due on the policy retained by the new member would be paid by from an annuity to be purchased out of the loan proceeds.
4/ The insurance policies, annuity, and certificate of deposit, were to be held in trust by the lender. Respondents were supposed to be personally liable on all indebtedness. The lender was supposed to have authority as trustee to execute all documents necessary to satisfy the obligations to the lender.
Disbursement of the loan proceeds and the execution of all documents necessary to secure and service the loan were to occur simultaneously in a single loan closing transaction.
5/ Respondents assumed a variable annuity, not a fixed rate annuity, with a net rate of return of between 7 1/2 percent and 20 percent. Petitioner submitted clear and convincing expert testimony that Respondents' assumptions concerning a variable annuity were unreasonable and lacked economic substance. The variable annuity had no minimum, or guaranteed rate of return. The personal liability of Respondents and the skeleton universal life insurance policies had little or no loan value to a lender. The rate of return on the variable annuity had to exceed 71/2 percent by a substantial amount in order to pay the debt service, insurance premiums, $5,000 profit to Respondents, $5,000 certificate of deposit,
$3,000 in referral fees, administrative costs, and other benefits of membership. Finally, the premiums on the universal life insurance policies increased as the mortality rates for the insured increased over the term of the loan. This occurred because the insurance policies accumulated little or no cash value and were, in effect, little more than term policies. Thus, the rate of return on the variable annuity could decline during the term of the loan while insurance premium rates increased.
6/ The parties spent a great deal of time and effort on the issue of whether Respondents made misrepresentations that Massachusetts General Life Insurance Company ("MGL") would provide life insurance policies for new members.
Petitioner failed to submit clear and convincing evidence on this issue. The evidence that Petitioner did submit was largely hearsay. The evidence submitted by Respondents shows that Respondents did not misrepresent this issue. The only policies sold were policies issued by MGL. After MGL advised Respondents to stop using the name of MGL in the promotional materials, Respondents complied with that request in a timely manner. However, Petitioner showed by clear and convincing evidence that Respondents are guilty of the charges in the Amended Notice for reasons separate and apart from the MGL issue.
APPENDIX TO RECOMMENDED ORDER, CASE NO. 94-1579
Petitioner's Proposed Findings Of Fact. 1.-17. Accepted in substance
Rejected as not supported by credible and persuasive evidence
Rejected as recited testimony 20.-21. Accepted in substance
22. Rejected as not supported by clear and convincing evidence
23.-24. Rejected as immaterial. The misrepresentations at issue are material misrepresentations and misrepresentations made to the public, not to the investigator.
25.-27. Accepted in substance Respondent's Proposed Findings Of Fact.
A.-E. Accepted in substance
F.-H. Rejected as conclusions of law
I.-J. Rejected as not supported by credible and persuasive evidence and as conclusion of law
(sic) Accepted in substance
(sic) Rejected as recited testimony
Rejected as conclusion of law
Accepted in substance as to MGL and otherwise rejected as conclusions of law
M.-N. Rejected as recited testimony
Rejected as legal argument
Accepted in substance
Rejected as not supported by credible and persuasive evidence
R.-S. Rejected as conclusions of law
T. Rejected as not supported by credible and persuasive evidence
COPIES FURNISHED:
Charles Faircloth, Esquire Senior Attorney
Department of Insurance and Treasurer Division of Insurance Fraud
200 East Gaines Street Tallahassee, Florida 32399-0324
Roy L. Beach, Esquire
806 East Washington Street Orlando, Florida 32801
The Honorable Bill Nelson State Treasurer and Insurance
Commissioner
The Capitol, Plaza Level Tallahassee, Florida 32399-0300
Dan Sumner, Esquire Acting 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 written exceptions to this Recommended Order. All agencies allow each party at least 10 days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should contact the agency that will issue the final order in this case concerning agency rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.
| Issue Date | Proceedings |
|---|---|
| Jul. 19, 1995 | (Roy L. Beach) Notice of Change of Address filed. |
| Jun. 21, 1995 | Final Order filed. |
| Apr. 10, 1995 | Exceptions to Recommended Order (Respondents) filed. |
| Mar. 28, 1995 | Recommended Order sent out. CASE CLOSED. Hearing held 09/29 & 11/07/94. |
| Jan. 26, 1995 | Letter to Hearing Officer from C. Faircloth, Jr. re: Proposed Recommended Orders filed. |
| Jan. 23, 1995 | (Petitioner) Proposed Recommended Order filed. |
| Dec. 29, 1994 | Order Granting Extension of Time sent out. (Motion granted) |
| Dec. 19, 1994 | (Petitioner) Motion for Extension of Time filed. |
| Dec. 15, 1994 | Letter to Hearing Officer from R. Beach (Re: Proposed Order containing specific findings of fact and conclusions of law); Order (for Hearing Officer Signature) filed. |
| Dec. 07, 1994 | (2 vols) Transcripts w/exhibits filed. |
| Nov. 16, 1994 | Letter to DSM from C. Faircloth (RE: returning Motion to DSM that was used by Dept.) filed. |
| Nov. 07, 1994 | CASE STATUS: Hearing Held. |
| Nov. 07, 1994 | CASE STATUS: Hearing Held. |
| Oct. 25, 1994 | (Petitioner) Amended Response to Respondent`s First Set of Interrogatories filed. |
| Oct. 04, 1994 | Order Continuing And Rescheduling Formal Hearing sent out. (Video Hearing set for 11/7/94; 9:30am; Orlando) |
| Sep. 28, 1994 | (Petitioner) Motion for Official Recognition filed. |
| Sep. 27, 1994 | Motion in Limine; Motion to Compel or Exclude Testimony (filed by C. Faircloth) filed. |
| Sep. 20, 1994 | Amended Notice of Hearing sent out. (Video Hearing set for 9/29-20/94; at 9:30am; in Tallahassee) |
| Sep. 01, 1994 | Order Granting Enlargement of Time sent out. (amended Motion GRANTED) |
| Aug. 24, 1994 | (4) Notice of Taking Deposition filed. (From Charles Faircloth, Jr.) |
| Aug. 23, 1994 | (Petitioner) Amended Response to Respondent`s First Set of Interrogatories; Amended Motion for Enlargement of Time or to Accept as Timely Filed filed. |
| Aug. 19, 1994 | (Petitioner) Response to Request for Admissions; Motion for Enlargement of Time or to Accept as Timely Filed filed. |
| Aug. 12, 1994 | Petitioner`s Answers to Respondent`s First Set of Interrogatories; Certificate of Service of Petitioner`s Answers to Respondent`s First Set of Interrogatories filed. |
| Jul. 11, 1994 | Letter to DSM from Roy L. Beach (re: Order Compelling a Notice of Compliance w/Order Compelling Discovery was not recieved) filed. |
| Jul. 11, 1994 | (Respondents) Notice of Serving Answers to Interrogatories; Request for Admissions; Notice of Serving Interrogatories filed. |
| Jun. 29, 1994 | Order Compelling Discovery sent out. (Petitioner`s Motion to compel granted) |
| Jun. 14, 1994 | (Petitioner) Motion to Compel filed. |
| Jun. 09, 1994 | CC: Letter to R. Beach from C. Faircloth (RE: response to requests) filed. |
| Jun. 01, 1994 | (Respondent) Response to Request for Admissions filed. |
| May 19, 1994 | Order Continuing and Rescheduling Formal Hearing sent out. (hearing rescheduled for 9/29-30/94; 9:30am; Orlando) |
| May 16, 1994 | Exhibit-A (inadvertently not attached to the Motion for Continuance) filed. (From Charles Faircloth) |
| May 16, 1994 | (Petitioner) Motion for Continuance; Motion to Amend; Amended Notice And Order to Show Cause filed. |
| Apr. 29, 1994 | Department`s Request for Production of Documents; Notice of Service of Interrogatories; Notice of Service of Request for Admissions; Petitioner`s First Request for Admissions filed. |
| Apr. 22, 1994 | Notice of Hearing sent out. (hearing set for 6/2-3/94; at 9:30am; inOrlando) |
| Apr. 07, 1994 | (Petitioner) Response to Initial Order filed. |
| Mar. 29, 1994 | Initial Order issued. |
| Mar. 22, 1994 | Agency referral letter; Letter to C. Faircloth from R. Beach; Petition for Review of Agency Action; Notice and Order to Show Cause filed. |
| Issue Date | Document | Summary |
|---|---|---|
| Jun. 20, 1995 | Agency Final Order | |
| Mar. 28, 1995 | Recommended Order | Sale of memberships for $99 with no economically feasible prospect of receiving benefits, including insurance benefits is unfair or deceptive act involving insurance |
