STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

STATE FARM, )

)

Petitioner, )

)

vs. ) CASE NO. 96-2618

) DEPARTMENT OF INSURANCE, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, a final hearing was held in this cause on June 13, 1996, in Tallahassee, Florida. The hearing was held before James W. York, duly designated Hearing Officer of the Division of Administrative Hearings. Prior to the hearing, the parties agreed that a recommended order be issued based upon pre-filed affidavits and testimony submitted by the parties. At the hearing, the parties also submitted a stipulated proposed recommended order and were afforded the opportunity to present oral argument.

APPEARANCES

For Petitioner: Vincent J. Rio, III, Esquire

TAYLOR, DAY & RIO

Suite 206, 311 South Calhoun Street

Tallahassee, Florida 32301-1807

For Respondent: Daniel Y. Sumner, Esquire

General Counsel Department of Insurance The Larson Building

200 East Gaines Street Tallahassee, Florida 32399-1300

STATEMENT OF THE ISSUE

Whether State Farm Fire and Casualty Company and State Farm General Insurance Company ("State Farm") made a material misrepresentation or material error in connection with the rate filing that is the subject of this proceeding. For the purpose of this proceeding, a misrepresentation or error would be material if it resulted in the Department approving "ex-wind" (meaning without windstorm coverage) homeowners insurance rates that are excessive for policyholders whose wind coverage is being non-renewed in Dade, Broward and Pinellas Counties.

PRELIMINARY STATEMENT

This matter was initiated by the Department of Insurance ("Department") issuing a Notice of Withdrawal of Rate Approval on February 22, 1996 ("Notice"). The Notice alleged that State Farm had either materially misrepresented its

intentions or submitted a material error in a rate filing, which filing had been made in December 1995 and approved by the Department on February 12, 1996. The Notice also alleged that, as a result of the misrepresentation or error, certain policyholders were being charged excessive or unfairly discriminatory rates in Dade, Broward, and Pinellas Counties. By agreement of the parties at oral argument, the rates that were the subject of the Notice were the rates of those policyholders whose homeowners insurance policies were being renewed "ex-wind."

State Farm Fire and Casualty Company and State Farm General Insurance Company filed a request for these formal proceedings. By stipulation filed on May 31, 1996, augmented by further stipulations entered on the record at oral argument, the parties agreed that the matter would be determined based upon an affidavit of Douglas S. Haseltine, Department Actuary ("Haseltine affidavit") submitted by the Department, and pre-filed testimony of Mark Brannon ("Brannon testimony"), a State Farm actuary submitted by State Farm. The parties further agreed that any proposed recommended orders would be served and filed prior to the hearing, with all objections and matters related to the proposed orders being argued at the hearing, and the parties jointly requested that the Hearing Officer expedite his recommended order.

The parties further agreed at the final hearing that one constructive by- product of this proceeding will be enhanced communication in the future. In this regard, the parties now better understand the nature of changes in information the Department regards as material to rate filings that may be pending in the future. Thus, without creating any legal obligations not existing under present law, State Farm expressed willingness and intent to provide information affecting policyholders subject to a pending rate filing to the Department when it is recognized as being material to the Department's review of future pending rate filings.

THE RECORD

The record in this cause consists of the following exhibits and pre-filed testimony:

1. Exhibit 1. Florida Department of Insurance Property and Casualty Rates and Forms Filing Transmittal submitted by State Farm Fire and Casualty Company/State Farm General Insurance Company, submitted for new business effective March 1, 1996, renewal date April 15, 1996.

   
   

2. Exhibit 2. Statement of Principles Regarding Property and Casualty Insurance Ratemaking. (As adopted by the Boards of Directors of the Casualty Actuarial Society, May 1988.)

   
   

3. Exhibit 3. State Farm Fire and Casualty Company, State Farm General Insurance Company All Florida Total Homeowners indicated rate adjustment. Policies effective March 1, 1996 new, April 15, 1996 renewal. These exhibits were accepted at the final hearing without objection.

   
   

4. The pre-filed testimony of Mark L. Brown, dated June 10, 1996 (filed with the Division of Administrative Hearings Clerk on June 12, 1996).

   
   

5. The affidavit of Douglas S. Haseltine, dated June 4, 1996, filed with the Division of Administrative Hearings Clerk on June 12, 1996.

   
   

6. At the hearing, Petitioner submitted a copy of Respondent's request for Formal Proceedings, filed by Petitioner in this case with the State of Florida

Department of Insurance on March 7, 1996. Attached to this document are a letter to Petitioner's Regional Vice President dated February 12, 1996, signed by Suzanne K. Murphy, Deputy Insurance Commissioner, and a copy of a Notice of Withdrawal of Rate Approval, filed with the Florida State Treasurer and Insurance Commissioner on February 22, 1996, and signed by Florida Treasurer and Insurance Commissioner Bill Nelson. Attached to the Withdrawal of Rate Approval was a "Notice of Rights." These documents were accepted without objection and have been marked Composite Exhibit 4.

FINDINGS OF FACT

The parties in this proceeding have stipulated to the following findings of fact. Based upon a review of the record in this case, these stipulated facts appear to be accurate and are adopted.

1. In December 1995, State Farm submitted a homeowners insurance rate filing effective April 1, 1996, for new business, and May 1, 1996, for renewal business.

   
   

2. With regard to the December 1995, homeowners rate filing, the Department of Insurance approved a 13.8 percent statewide rate increase on February 12, 1996.

   
   

3. On February 18, 1996, State Farm formally announced that it would non- renew over three years the wind coverage for 62,000 policies in Dade, Broward, and Pinellas Counties in Florida Windstorm Underwriting Association eligible areas.

   
   

4. On February 22, 1996, the Department issued a Notice of Withdrawal of Rate Approval ("Notice") to State Farm with regard to homeowner rates approved for Dade, Broward and Pinellas Counties.

   
   

5. Subsequent to the issuance of the Notice, the Department requested that State Farm submit to the Department actuarial information giving further consideration to the proposed non-renewal of wind coverage to policyholders in Dade, Broward and Pinellas Counties.

   
   

6. The evidence adduced in this matter consisted of an affidavit of Douglas S. Haseltine, a Department actuary, on behalf of the Department, and of pre-filed testimony of Mark Brannon, a State Farm actuary, and of the rate filing that is the subject of this litigation and of certain actuarial information that had been provided by State Farm to the Department pursuant to the request described in paragraph 5 above.

   
   

7. The record in this matter otherwise includes the Request For Formal Proceedings filed in this matter by State Farm, with attachments, which include the Notice, and the stipulation filed by the parties on May 31, 1996.

   
   

8. The Haseltine affidavit provides in pertinent part that: "For policyholder whose wind coverage is non-renewed, their remaining premium for coverage ex-wind is not excessive."

   
   

9. The Brannon testimony and the attachments to it establish the methodology by which State Farm establishes rates for policyholders in different territories throughout Florida for homeowners insurance, including both homeowners insurance policies that included wind coverage and policies that excluded wind coverage (hereinafter "ex-wind policies").

10. The Brannon testimony also provided that the rate filing did not reflect the distributional changes that would result from the non-renewal plan that was subsequently announced on February 20, 1996. Mr. Brannon further testified that, in his expert opinion, the failure to point out this non-renewal program did not constitute a material error or material misrepresentation because when the filing was made the decision to initiate these non-renewals had not been made, and because:

    
    

    Even if the non-renewal program had been announced prior to December 15, 1995, it would not have changed the rate request. State Farm's original rate request was a 24 percent increase. The approved rate request included a 40 percent wind or hail exclusion discount. This discount applied to the FWUA eligible areas of Dade, Broward and Pinellas Counties. The amount of this discount was not changed by the non-renewal program.

    Thus, the non-renewal program would not have had a material effect on the filing, even if I had known of the program at the time the filing was made.

    
    

11. Mr. Brannon further testified that the rates proposed in the filing are not excessive or unfairly discriminatory, stating:

    
    

    Q: Are the rates you have proposed in this filing excessive or unfairly discriminatory?

    
    

    A: It is my expert opinion that the proposed rates are reasonable and are not excessive or unfairly discriminatory. Specifically, the proposed rates for both those policies which exclude windstorm or hail coverage, and the rates for those policies which include wind- storm or hail coverage, meet the statutory requirements and are not excessive or unfairly discriminatory.

    
    

12. It appears that there is no misrepresentation or error in the rate filing itself, because the decision that the Department contends should have been disclosed had, as a matter of fact, not yet been made at the time of the filing.

    
    

13. Moreover, if State Farm had an obligation to disclose this decision to the Department prior to the Department's approval of the rate filing, any misrepresentation or error flowing from the failure to disclose would not be material to the filing because the data subsequently provided to the Department and other evidence in this matter show that:

    
    

    1. Policyholders whose wind coverage will be non-renewed will receive a discount that is actuarially sound and commensurate with the reduction in coverage: and hence,

    2. Policyholders whose coverage will be renewed "ex-wind" will not be charged rates that are excessive.

       
       

       CONCLUSIONS OF LAW

       
       

14. The parties have stipulated that the Division of Administrative Hearings has jurisdiction over the parties and the subject matter of this proceeding, pursuant to Section 120.57, Florida Statutes.

    
    

15. Section 627.062(2)(g), Florida Statutes, in pertinent part, provides as follows:

    
    

    (g) The department may at any time review a rate, rating schedule, rating manual, or rate change; the pertinent records of the insurer; and market conditions. If the department finds on a preliminary basis that a rate may be excessive, inadequate, or unfairly discriminatory, the department shall initiate proceedings to disapprove the rate and shall so notify the insurer. [However, the depart- ment may not disapprove as excessive any rate for which it has given final approval or which has been deemed approved for a period of 1 year after the effective date of the filing unless the department finds that a material misrepresentation or material error was made by the insurer or was contained in the filing.] [emphasis supplied]

    
    

16. There is no evidence in the record in this proceeding that State Farm has made any misrepresentation or error in connection with its rate filing that was material to whether its rates were excessive or unfairly discriminatory.

RECOMMENDATION

Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a final order be entered: (1) finding that there was not

a material misrepresentation or material error made by the insurer or contained in the rate filing; and (2) dismissing the Notice.

DONE and ENTERED this 18th day of June, 1996, in Tallahassee, Florida.

JAMES W. YORK, 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 18th day of June, 1996.

COPIES FURNISHED:

Vincent J. Rio, III, Esquire TAYLOR, DAY & RIO

Suite 206

311 South Calhoun Street Tallahassee, Florida 32301-1807

Daniel Y. Sumner, Esquire General Counsel Department of Insurance The Larson Building

200 East Gaines Street Tallahassee, Florida 32399-1300

Bill Nelson

State Treasurer and Insurance Commissioner

The Capitol, Plaza Level 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.

Docket for Case No: 96-002618

Orders for Case No: 96-002618