STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
DEPARTMENT OF INSURANCE,
Petitioner,
vs.
FUTURE FIRST FINANCIAL GROUP, INC.,
Respondent.
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) Case No. 00-1289
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RECOMMENDED ORDER
Pursuant to notice this cause came on for formal hearing before P. Michael Ruff, duly-designated Administrative Law Judge of the Division of Administrative Hearings, on August 28, 2001, in Jacksonville, Florida. The appearances were as follows:
APPEARANCES
For Petitioner: Michael H. Davidson, Esquire
Florida Department of Insurance Division of Legal Services
612 Larson building
200 East Gaines Street Tallahassee, Florida 32399
For Respondent: Steven M. Malono, Esquire
Kimberly L. King, Esquire Pennington, Moore, Wilkinson
Bell & Dunbar P.A. Post Office Box 10095
215 south Monroe Street, Second Floor Tallahassee, Florida 32301
STATEMENT OF THE ISSUES
The issues to be resolved in this proceeding concern whether the Respondent has violated various provisions of the Florida Insurance Code as alleged in an Amended Order to Show Cause and, if so, what penalty, if any, is warranted.
PRELIMINARY STATEMENT
This cause arose upon the filing of an Order to Show Cause on February 28, 2000, against the Respondent, Future First Financial Group (Respondent), (Future First). The Order to Show cause alleged five separate counts to the effect that the Respondent has violated various provisions of Chapter 626, Florida Statutes. The Respondent is licensed as a Viatical Settlement Provider pursuant to Part X of Chapter 626, Florida Statutes. The main issues raised by the charges in the Order to Show Cause concern whether the Respondent knew or should have known that certain life insurance policies purchased for re-sale to customers may have been fraudulently procured by the insureds (Viators), whether the Respondent failed to report that purported fraudulent conduct to the Petitioner agency and whether certain "contestable" policies purchased by the Respondent for re-sale to customers were sold to them under proper legal circumstances. The Petitioner has not specifically alleged that the Respondent itself engaged in any fraud, either in connection with the underlying insurance policies, later re-
sold to the Respondent's clients or customers, or otherwise. A formal proceeding pursuant to Subsections 120.569 and 120.57(1), Florida Statutes, was requested by the Respondent. Thereafter, the parties stipulated to a lengthy abatement of the case during which time the Department conducted further investigation and, by agreement, filed an Amended Order to Show Cause on
January 12, 2001, alleging an additional 40 counts, containing allegations of essentially the same type as those in the initial Order to Show Cause. It was later agreed by the parties at hearing that certain counts are either duplicative or would not be the subject of proof at hearing, such that Counts 21, 25, and
26 of the Amended Order were voluntarily dismissed by the Petitioner. Additionally, Count 37 should be dismissed, as conceded by the Petitioner in its Proposed Recommended Order since the necessary exhibit supportive of that count was not admitted into evidence.
The cause thereafter came on for hearing as noticed on August 28, 2001. The Petitioner offered 516 exhibits, most of which were admitted into evidence over the Respondent's continuing hearsay objection, which was overruled based on certain exhibits falling within the business records exception to the hearsay rule, at Subsection 90.803(6), Florida Statutes, or because they were not submitted into evidence to prove the truth of the matters asserted in the exhibits, but rather to
show that the Respondent should have been alerted to the need to comply with the reporting requirement of Subsection 626.989(6), Florida Statutes, by the information depicted on the face of those exhibits. The Petitioner's Exhibits 122, 182, 295, 305 and 366, were not admitted into evidence. The Petitioner's exhibits were submitted in bound individual volumes, respectively related to each individual count of the Amended Order to Show Cause. The Petitioner also moved ore tenus for official recognition to be taken of the proceedings in Department of Insurance vs. Accelerated Benefits Corporation, DOAH Case No. 00-3073 (Recommended and Final Orders), which was granted without objection. The Petitioner (Department) presented Department witnesses Dinon Bovis, Scott Milnes and Janice Davis, employees of the Department, and the testimony of former Department employee Deborah Smith.
The Respondent offered twelve exhibits, all of which were admitted into evidence without objection, except for the Respondent's Exhibit ten, which was the deposition of Steven Grenier, to which the Petitioner objected on grounds of hearsay and on grounds that the other bases in the Florida Rules of Civil Procedure, for admission of a deposition in lieu of live testimony, were not established. The parties were given an opportunity to brief that issue, post-hearing, and on
November 16, 2001, an Order was entered by the undersigned
overruling the Petitioner's objection and admitting the Respondent's Exhibit ten in its entirety into evidence. The Respondent's Motion for Official Recognition of the provisions of Chapter 87-334, Laws of Florida, was granted without objection. Additionally, the Respondent presented the testimony of one witness, Mr. Randy Stelk, President and Chief Executive Officer of the Respondent corporation.
The counts alleged by the Department in the Amended Show Cause Order (Amended Order) can be sub-divided into two broad categories. The first category alleges the repeated violation of the reporting requirement found in Subsection 626.989(6), Florida Statutes, concerning viatical transactions between the Respondent and various viators. The second category alleges the same reporting violation and adds allegations that the Unfair Insurance Trade Practices Act (Part IX of Chapter 626, Florida Statutes), was violated, concerning the sale of contestable life insurance policies to viatical settlement purchasers, allegedly contrary to the viatical settlement purchase agreements. See
Subsection 626.9911(9), Florida Statutes. The former category consists of Counts 1, 3, 4, 6 through 36, and 38 through 45.
Additionally, the latter category consists of Counts 2, 5, 41, 42, 43, and 44 which contain the basic reporting violation allegation plus the violation alleged regarding the sale of contestable life insurance policies to viatical settlement
purchasers contrary to the agreements with those purchasers and without their knowledge. Proposed Recommended Orders were timely filed and have been considered in the rendition of this Recommended Order. The Findings of Fact and Conclusions of Law below will be concerned with those counts with the exception of those referenced above which have been dropped or dismissed from
the proceeding.
FINDINGS OF FACT
The Petitioner is an agency of the State of Florida charged with licensing and regulating viatical settlement providers in the State of Florida.
The Respondent, Future First Financial Group, Inc., is licensed by the State of Florida as a viatical settlement provider. Its President and Chief Executive Officer is
Mr. Randy Stelk.
A viatical settlement contract involves the sale of a life insurance policy's benefits in exchange for an immediate discounted cash settlement to the original policy holder. A Florida resident "viator" (the insured) desiring to enter into a viatical settlement contract, acts through a Florida licensed broker, who provides the policy information to licensed viatical settlement providers like the Respondent, for subsequent re-sale of policy benefits to purchasers.
Future First was initially licensed as a viatical settlement provider on December 26, 1997. The initial regulation of viatical settlement providers in the State of Florida by the Petitioner began at approximately the time Future First initially became licensed.
Consolidated findings concerning Counts 1, 3, 4, 6, 7, 12, 15, 16, 20, 22, 28, 29, 34, 35, 36, 38, 39, 41, 43, 44, and 45:
Future First was a licensee of and regulated by the Department of Insurance at all times pertinent hereto. The health status representations on the exhibits (referenced in the Department's Proposed Recommended Order) concerning each of these counts, which are the insurance policy applications in question in these counts, are materially inconsistent with the health status representations related to the later viatical settlement agreements contained in the other exhibits so referenced as to each of the above-enumerated counts. These latter exhibits constitute the showing of actual medical condition to the Respondent by the insureds or viators in each transaction referenced in these counts. The overall effect of this showing is to indicate to the Respondent that the viators in question in these counts were HIV positive or had the disease AIDS, along with related diseases and medical conditions, contrary to the representations initially made to the insurance companies issuing the subject policies, in the insurance policy
applications referenced in these counts, wherein the viators represented that they suffered from none of the medical diseases or conditions referenced in those application forms, including AIDS.
All the exhibits referenced in these counts came from the business files of Future First and were supplied to the Department by Future First upon the Department's request during the investigation process. These material inconsistencies should have caused Future First to be on notice or to know or believe that the viators in question in these counts had made or indeed may have made fraudulent or material misrepresentations on their insurance policy applications.
Subsection 626.989(6), Florida Statutes, requires Department licensees to report to the Department any knowledge or belief that a fraudulent insurance practice, as defined in Section 817.234, Florida Statutes, had been or was being committed.
Subsection 817.234(3), Florida Statutes, specifically prohibits the presentation of false, incomplete or misleading information in support of an insurance application or the concealing of any fact material to the application. Thus Subsection 817.234(3), supra, specifically prohibits the very act strongly suggested by the evidence presented in the exhibits supportive of the above-referenced counts of the Amended Order.
Future First made no reports to the Department concerning these matters until it contends it first became aware of these inconsistencies in health status representations upon receipt of the Order to Show Cause and later the Amended Order to Show Cause.
Consolidated Findings of Fact Concerning Counts 2, 5, 8, 9, 10, 11, 13, 14, 17, 18, 19, 23, 24, 27, 30, 31, 32, 33, 40, and
42:
The facts established as to these counts are much the same as those referenced above. The health status representations on the insurance policy applications in question and in evidence (exhibit numbers cited in the Proposed Findings as to these counts in the Petitioner's Proposed Recommended Order) are materially inconsistent with the health status representation on the other exhibits which consist generally of the various documents of health or medical information provided to the Respondent by the viators in question, when the transactions leading to the viatical settlement agreements at issue were being entered into and finalized.
The commonality among all of these counts as well as the counts in the above Findings of Fact (Part A above) consist of the viator's having been diagnosed with HIV or AIDS and/or related medical conditions sometime in the past prior to executing the insurance policy applications at issue and then responding in the negative on relevant questions on those policy
applications, the overall effect of which was to deny the HIV positive test result, the HIV infection and the diagnosis of AIDS and related medical conditions. The viators at issue then openly revealed these conditions and the dates of the relevant diagnoses, all of which pre-dated the insurance policy applications, in the medical status representations they made to the Respondent and which were also revealed in the medical records provided to the Respondent at some point prior to the issuance of the Order to Show Cause and Amended Order. The health status representations made by the viators at these two different, germane points in time are materially inconsistent.
Those material inconsistencies reasonably should have caused Future First and its operating officers to be on notice, to know or to believe that the viators made or may have made fraudulent or material misrepresentations on their insurance policy applications.
Moreover, the evidence, as to these counts delineated in Part B above, shows that Future First was actually informed specifically that the policies in question had been rescinded by the insurers because the viators had made material misrepresentations on their policy applications. Exhibits such as the Future First policy summary forms show that Future First had been informed of the policy recisions as to the Counts referenced in Part B above. All of the documents constituting
the Department's exhibits supportive of these findings, and the policy summary forms included, were found within the business files of Future First and were supplied to the Department by Future First upon its request during the investigative phase of this prosecution.
Subsection 626.989(6), Florida Statutes, requires Department licensees to report to the Department any knowledge or belief that a fraudulent insurance practice as defined in Section 817.234, Florida Statutes, had been or was being committed. Subsection 817.234(3), Florida Statutes, specifically prohibits the presentation of false, incomplete or misleading information in support of an insurance application or the concealing of any fact material to the application. Thus, Subsection 817.234(3), supra, specifically prohibits the acts suggested by the documentary evidence presented by the Department, which supports the Findings of Fact herein. Future First made no report on these matters concerning the viators and policies to the Department, prior to the investigatory audit.
Additional Findings of Fact Concerning Counts 2, 5, 41, 42, 43, and 44:
Concerning Count 2, Exhibits 15 through 17 are viatical settlement purchase agreements entered into between Future First and various viatical settlement purchasers. These agreements represent to those purchasers that the policies,
which are the subject of the agreements, are beyond the contestability period (typically two years) during which an insurer company may rescind its policy. The settlement purchase agreements specify that the "contestability period" runs for two years from the date of policy issuance.
Exhibit 2 shows, however, that the policy in question was issued on January 22, 1998, and Exhibits 15 through 17, the agreements, were entered into in February, March and April of 1998, well before the January 22, 2000, conclusion of the contestability period.
Future First thus had within its possession, in its files, the documents and information to show that the policies were not beyond contestability when the interests in those policies were sold to the investors or viatical settlement purchasers. The purchasers, by initialing the relevant portion of their purchase agreements had indicated and contracted for the purchase of non-contestable policies or policies which had survived the two-year contestable period before being purchased by these investors or viatical settlement purchasers.
The vice-president in charge of underwriting, Mr. Sweeney, under the business practices of Future First,
essentially made all the calculations and decisions involved in negotiating and effecting the settlement purchase agreements with the investors and the viatical settlement agreements with
the original viators or insureds. As an experienced insurance executive and underwriter who had all of the relevant documents available to him, he is chargeable with knowledge that the policies he and Future First were conveying to the settlement purchasers were still within the contestability period, despite his being on documentary notice that the investors had contracted to purchase only non-contestable policies.
The officers and directors of the Respondent allowed him to have this independence of action, freedom of conduct and bargaining power on behalf of Future First and therefore, Future First, the corporation, is chargeable with the conduct it allowed him to engage in, even assuming, arguendo, that no other officer, director or employee of the company knew of the relevant details of these transactions. Thus Future First misrepresented to its investors that the policies were beyond contestability when in fact they were not. It thus is chargeable with knowingly selling interests in contestable policies to investors, who had specifically contracted for the purchase for non-contestable policies. This misrepresentation was material to the purchases because the insurers' ability to rescind the policies during contestability, thereby destroying the very instrument securing the purchasers' investment, was not made known to those purchasers. The potential destruction of
that instrument and the consequent loss of the investment to the purchaser is material to any reasoned decision to invest.
CEO Randy Stelk's testimony at hearing to the effect that computer input error had caused contestable policies to be inadvertently sold to purchasers who contractually specified a non-contestable policy is rebutted by Future First's own documents from its records which correctly and explicitly identify the policy as contestable. See Exhibits 11a and 11f, at pages 1 and 4, and Exhibit 24, all of which correctly identify the policy as contestable. Exhibit 24 specifically notes the dates at which the policy was projected to emerge from its contestability period. Thus this documented evidence, together with the evidence of Mr. Sweeney's close and direct involvement with arranging for the transactions and making decisions as to which policies to sell to which investors belies Mr. Stelk's testimony in this regard.
Concerning Count 5, Exhibits 50, 54, 55, 56 and 57, are viatical settlement purchase agreements which inter alia
represented to the respective viatical settlement purchasers that the policy in question was beyond the contestability period during which an insurer may rescind the policy.
The "contestability period" runs for two years from the date of policy issuance. However, Exhibit 39, shows that the policy in question was issued on February 3, 1998, and
Exhibits 50, 54, 55, 56 and 57, were respectively entered into in February of 1998, well prior to the February 3, 2000, end of the contestability period.
Here again, Future First's own records, which correctly and explicitly identify this policy as contestable also specifically note, at Exhibits 42d and 46, the date at which the policy was projected to emerge from the contestability period. The purchase agreements referenced above clearly show that the investors contemplated and contracted to purchase a non-contestable policy. These documents clearly were available to Mr. Sweeney and to Future First at the time Mr. Sweeney was making the underwriting decisions and entering into the agreements with the investors, and consequently this knowledge is chargeable to him and to Future First. Again Mr. Stelks' testimony that computer input error had caused inadvertent sale of contestable policies to purchasers who had contractually specified non-contestable policies is rebutted by Future First's own records, the evidence concerning Future First business practices and specifically Mr. Sweeney's underwriting methods and conduct. Thus, Mr. Stelk's testimony in this regard is not credited.
Thus, it is inferred that Future First, through Mr. Sweeney, knowingly represented to investors that the
policies were beyond contestability when they were not and such
a representation was material to the purchase because the insurers' ability to rescind a policy during contestability and destroy the very instrument securing the investment was not made known to the purchaser. The potential destruction of that instrument and the consequent loss of investment is material to any reasoned decision to invest.
Concerning Count 41, the fifth page of Exhibit 428, contains a paragraph entitled "Incontestability" which establishes that the life insurance policy in question was subject to a two-year contestability period, during which the insurer could rescind the policy. Exhibits 446, 447, 448, 449,
450 and 451, are all viatical settlement purchase agreements through which the viatical settlement investors purchased an interest in the death benefit of the life insurance policy in question.
Each of those purchase agreements contains a standard section entitled "Minimum Criteria" which is initialed by the purchaser, thereby indicating the purchaser's decision to purchase an interest only in a policy which was beyond contestability.
Future First nonetheless placed all of those investors' monies into the policy in question (See Exhibit 428) while it was still within the two-year contestability period without informing the purchasers of that fact. Future First had
the policy in its possession and necessarily had to have a copy of it in possession in order to purchase the policy from the viator, which it did in July of 1998. It thus knew the policy was still within its contestability period when interest in it were sold to the purchasers in question. The same reasons found with regard to Counts 2 and 5 prevail here with regard to
Mr. Sweeney's involvement. The documents were in Future First's possession and within its knowledge such that the circumstantial evidence clearly shows that Future First is chargeable with knowledge or belief that it sold contestable policies to investors who had no reason to believe they were purchasing contestable policies.
Concerning Count 42, Exhibit 453 is dated March 24, 1998, and is a viatical settlement purchase agreement between Future First and the viatical settlement purchaser named therein. The agreement contains the same initialed provision found with regard to the agreements in Counts 2, 5 and 41, indicating the purchasers' decision to invest only in a policy which was beyond the two-year contestability period. The agreement bears the designation "PRA 58075" in the lower left hand corner of the first page (purchaser number).
Exhibit 459 is a letter dated May 21, 1998, authorizing Charles R. Sussman, Trustee for the Fidelity Trust (identified in numerous exhibits, including 454 in this count,
as the escrow agent used by Future First for viatical settlement contract transactions), to wire funds from that trust to Compass Bank for the purchase of an interest in the death benefits of the Farmers New World Life Insurance policy on the viator named therein, which purchase was accomplished through the execution of Exhibit 454 on June 6, 1998.
Among the PRA numbers identified in Exhibit 459, is 58075, corresponding to Exhibit 453, the above-referenced purchase contract. Exhibit 455 is an internally prepared Future First document that clearly states that the life insurance policy in question was still well within its contestability period on May 21, 1998. The exhibits thus establish that Future First represented to the investor that the policy it would purchase with his funds was beyond contestability when, because of the unequivocal documents in its possession, Future First had to have known, through Mr. Sweeney, that it was not.
Indeed all of those exhibits were found within the business files of Future First and Future First stipulated that included in those exhibits are its purchase request agreements that contain the contestability provision in question.
Exhibits 462 and 463 establish that the Manhattan National Life Insurance policy referenced in those exhibits was issued on March 28, 1998. Exhibit 465, establishes that the Manhattan National Life Insurance policy was purchased by Future
First on June 22, 1998. Exhibit 468, establishes that on
July 1, 1998, purchaser 58075's funds were used to purchase an interest in that Manhattan National Life Insurance policy obviously well within the two-year contestability period since the policy was only issued on March 28, 1998. This was despite an express representation otherwise in the viatical settlement purchase agreement.
Exhibits 471 and 472, show that the Manhattan National Life Insurance policy was rescinded during the contestability period in September 1998. Exhibit 473 establishes that Future First decided to switch the viatical settlement purchaser's funds out of the Manhattan National Life Insurance policy into a John Hancock Life Insurance Company policy. However, it did not inform the purchaser that the Manhattan National Life Insurance policy had been rescinded during its contestability period.
Exhibits 485 and 486, establish that the Lincoln Benefit Life Insurance policy referenced therein was issued on January 23, 1998. Exhibit 487 establishes that the Lincoln Benefit Life Insurance policy was purchased by Future First in November of 1998, using the purchaser's funds referenced in Exhibits 488 and 489. Among those purchaser's funds were those of Purchaser 58075. Thus, Purchaser 58075's monies were used to purchase an interest in the death benefit of the Lincoln Benefit Life Insurance policy in question.
Despite the "beyond contestability" representation made in the viatical settlement purchase agreement between Purchaser 58075 and Future First, Future First placed that purchaser's money into the Lincoln Benefit Life Insurance policy while it was still in its contestability period. Future First's own records refute Mr. Stelk's testimony that computer input error caused inadvertent sales of contestable policies to purchasers who had specified, contractually, their desire for non-contestable policies. The documents from Future First's own records in evidence, explicitly identify this policy as contestable and that the purchasers involved had desired non- contestable policies. In light of the foregoing reasons found as fact as to Counts 2, 5 and 41, which are adopted as to
Count 42, Future First is chargeable with knowledge that it was selling contestable policies to purchasers who had specified contractually their wish and intent to purchase non-contestable policies.
Count 43 involves the sale by Future First of interests in the death benefits of J.C. Penny Life Insurance Company Policy No. 25184/74L40L3762 in January of 1998, to three different viatical settlement purchasers. This is evidenced by Exhibits 498, 499 and 500, the respective settlement purchase agreements. Each of those purchase agreements includes a
provision that required the purchase of an interest only in a policy which was beyond contestability.
Exhibits 494, 496, 498, 499 and 500, together however, show that the interest in the policy sold to those purchasers were sold while the policy was still contestable, without informing the purchasers. All of these exhibits came from the business files or records of Future First and Future First stipulated that included in those exhibits are the purchase request agreements that contain the provisions restricting purchases to policies which were beyond the two-year contestability period. In light of the findings made as to Counts 2, 5, 41 and 42, next above, it is determined that Future First, the Respondent, is charged with knowledge that it, and specifically its vice-president in charge of underwriting,
Mr. Sweeney, sold those policies which were still contestable to the relevant purchasers; that those purchasers had specified in their purchase agreements their intent to purchase only policies which were uncontestable and that it had not so informed those purchasers.
Count 44, concerns a viatical settlement purchase agreement entered into by Future First on March 24, 1998, relating to the sale and purchase of an interest in the death benefit of an insurance policy. See Exhibit 510, in evidence. That agreement represented to the purchaser that the interest to
be purchased was to be from a policy which was beyond the two- year contestability period. See Exhibits 508 and 510.
However, the policy selected for investment for that purchaser by Future First was not beyond contestability. Exhibit 506, obtained from Future First's own files, clearly shows that the issuance date of the policy was May 6, 1998, and Exhibits 504, 508 and 510 considered together, indicate that the policy was sold to that purchaser while it was still contestable. Future First thus subjected the purchaser's investment to the undisclosed risk of rescission of the policy. The existence of such a risk would certainly be material to that investor's decision about whether to so invest. Thus by investing the purchaser's funds in a contestable policy instead of an uncontestable policy, without advising that investor of such a deviation from their contractual agreement, is, in effect, a material misrepresentation in that transaction.
For the reasons found as to Counts 2, 5, 41, 42 and 43 above, Future First is chargeable with knowledge that the policy was contestable and that it had invested the purchaser's funds in a contestable policy when it was contractually bound to only invest that purchaser's funds in an uncontestable policy, as established by the terms of the viatical settlement purchase agreement.
Future First's business practices.
Future First conducts its business in various states through representatives resident in such states known as viatical settlement brokers. Viatical settlement brokers gather all relevant information, including available medical information and usually provide it to various viatical settlement providers in order to solicit multiple bids on a particular policy. Future First does not solicit viators itself.
During the time period relevant to the allegation in the Amended Order, when Future First initially received a package from a broker, it was divided into its insurance and medical components. The insurance component was provided to Mr. William Sweeney, Future First's Vice-President of Underwriting. The medical component was provided to a nurse on the staff with Future First for initial medical review and then forwarded to Future First's independent medical consultant,
Dr. Michael Duffy.
During the time period relevant to the Amended Order, Future First offered a one, two or three-year viatical purchase program. That is, viators must have a certified life expectancy of one, two or three years in order to qualify with Future First. After Dr. Duffy reviewed a particular file and the viator was deemed qualified as to one of the three available
programs, Dr. Duffy would certify and assign a life expectancy to the viator and return the file to Mr. Sweeney. Life expectancy estimates are inherently subject to many variables, are unpredictable and constitute a risk to the purchaser.
Mr. Sweeney's responsibilities included verification that the insurance information provided with any particular file was correct and complete (including insurance policy applications), that the policy actually existed and was in force, that premiums were paid up to date, that the insurance company had the appropriate rating, as well as conducting other verifications. Before a policy was approved for purchase, it was Mr. Sweeney's ultimate responsibility, pursuant to Future First's existing corporate policy, to compare the date of initial diagnosis of a potential viator's medical condition to the insurance policy application to look for any inconsistencies.
Mr. Sweeney next completed a "file summary cover sheet" referencing certain information and verifications and attached it to the file. Mr. Sweeney was essentially a "one-man operation" in exclusive control of Future First's underwriting department and was ultimately responsible for deciding whether or not Future First would offer to bid on a particular policy.
Future First's business operations in effect at the time relevant to the Amended Order were so compartmentalized
that other officers or employees at Future First might not know any details associated with Mr. Sweeney's activities.
After Mr. Sweeney authorized Future First to bid on a particular policy, the file was transferred to the bidding department. The bidding department did not re-visit or otherwise question Mr. Sweeney's decision to bid on a particular policy, but only reviewed the cover sheet to establish a bid price.
If documentation was missing from any file, it was Mr. Sweeney's responsibility to contact the broker to request the missing documents. All viatical settlement brokers with whom Future First did business in Florida were required to be licensed by the Petitioner.
Future First currently no longer conducts business with the broker "Funds For Life" because that particular broker dealt solely in "contestable" policies and Future First no longer purchases such policies, at least since the Petitioner's audit.
Future First no longer has a business relationship with the Texas-based broker "Southwest Viatical," in part because Southwest Viatical routinely failed to provide complete documentation to Future First, including the insurance applications of viators. Southwest Viatical was specifically requested to provide insurance policy applications regarding the
relevant policies referred to in the Amended Order but refused to do so. Most of the Southwest Viatical files purchased by Future First did not include insurance applications at the time of purchase. The insurance applications were ultimately obtained by Future First, however, at some point prior to the 1999 audit by the Petitioner.
Future First became concerned about the character of individuals associated with Southwest Viatical and when requested by Southwest Viatical to forward commission funds to an offshore account, Future First declined to do so and immediately ceased doing business with Southwest Viatical. Future First cooperated thoroughly with Texas authorities in their investigation of Southwest Viatical, ultimately culminating, as a direct result of Future First's assistance, with the apprehension and subsequent incarceration of two principals of Southwest Viatical.
During the period of time alleged in the Amended Order Future First received, on the average, between 400 and 600 policies per month from brokers requesting a bid. Future First rejected and never bid on the majority of policies referred to it by Southwest Viatical. On the average, Future First ultimately purchased approximately 25 percent of the policies submitted to it for a bid.
Mr. Sweeney was primarily responsible for communicating with brokers as to all aspects of a potential viatical settlement transaction and to request all required documentation, including insurance policy applications. During the course of Mr. Stelk's affiliation with Future First he personally became familiar with the handwriting of William F. Sweeney. It is Mr. Sweeney's initials which appear on the cover sheets entered into evidence by the Petitioner, exemplified by Petitioner's Exhibit 4a. All the remaining "cover sheet" exhibits of the Petitioner contain the initials "WFS" on the top right hand corner which are Mr. Sweeney's initials.
Mr. Sweeney is not currently an officer, director or employee of Future First because he was removed from any position with the Respondent corporation by order of the Petitioner. No other officers, directors or employees of the Respondent have been subject to a similar removal order, nor has Future First itself.
The criminal proceedings currently pending against the Respondent are the direct result of Mr. Sweeney's activities while employed by Future First. The Petitioner's lead investigator reviewing Future First's business activities recommended that individual charges only be brought against
Mr. Sweeney and against no other individual employed by or affiliated with the Respondent.
Future First has a business relationship with licensed life insurance agents and/or securities brokers throughout the United States to solicit funds from individuals for ultimate purchase of viatical settlements. Those licensed individuals present an approved Purchase Request Agreement (PRA) to a potential purchaser to discuss the various Future First programs available and to help the purchaser finalize a PRA.
Depending on what state the purchaser resided in, the purchaser would then issue a check either to Future First directly or to the Fidelity Trust (Future First's escrow agent), to be held until such time as Future First could purchase from a viator a policy matching the program desired by that purchaser. Thereafter, a formal "closing" would occur when the purchaser was, where appropriate, made a beneficiary on one or more insurance policies; all verifications and notifications to the insurance company and other entities were completed; an attorney and the trustee, would approve all aspects of the transaction within their purview, and a copy of the closing package would be sent to the purchaser for his or her records.
After the closing, Future First would engage Life Watch Services, Inc., an unaffiliated company, to monitor the health status of the viator on a monthly basis in order that all appropriate actions may be taken at the time of the viator's
death, so that the policy benefits may be promptly paid to the purchaser.
Future First initially engaged in the purchase of contestable policies only after being approached by groups of agents with potential purchasers willing to assume the risk associated with contestable policies. Understanding the risk associated with such policies, Future First reserved 20 percent of its potential profit from such transactions and placed those funds in trust in a "Guaranty Fund" in the event that an insurance company rescinded a policy within the contestable period. In the event an insurer rescinded a contestable policy, Future First purchased a new policy for its customer out of the Guaranty Fund, at no additional cost to the customer.
No purchaser ever lost any "investment time" if a policy was rescinded by an insurance company because that purchaser would be provided a new policy involving a viator with the same ultimate remaining life expectancy.
Thus, without any prompting by a governmental authority, Future First made the business decision to voluntarily exceed the protections of Florida law by establishing the Guaranty Fund in order to purchase replacement policies for its customers if the initial policy was rescinded by the insurer. The Guaranty Fund was also utilized to make the purchaser whole even when an insurance company cancelled or non-
renewed an insurance policy on an entire group, or if a new insurance carrier for a particular group later reduced the benefit level assigned to the purchaser.
The Guaranty Fund was also used for the benefit of purchasers if a viator as a member of an employer group, quit his or her job and the viator exercised a statutory right to have the group policy benefits converted to an individual policy. Because benefit levels on such individual policies are typically lower, the Guaranty Fund was used to purchase additional insurance benefits to assign to the purchaser.
Additionally, if a policy lapsed for any reason, the Guaranty Fund was used to procure a new policy or policies in order that the purchaser would be fully protected according to the terms of the PRA. No policy purchased by Future First has ever lapsed for failure of Future First to pay the premium. Funds from the Guaranty Fund have been used to purchase new policies when a viator committed suicide and the insurance company later rescinded the policy, as well.
The Guaranty Fund maintained by Future First existed to cover other contingencies beyond just the possible recession of insurance policies because of the misrepresentation of the viator discovered by the insurer within the contestable period. Future First, through use of the Guaranty Fund, has replaced approximately 17 million dollars in face value of insurance
policies, equating to about 12.4 million dollars in direct cost to Future First and, as a result, no Future First purchaser has ever been harmed. The 12.4 million dollars used to purchase replacement policies would otherwise have been retained by Future First as profit.
Today Future First does not purchase contestable policies in the regular course of its business. The only exception to that occurs when an insured group undergoes a carrier change and a new contestable period is automatically instituted by the new carrier.
There is no prohibition in Florida either presently or during the times relevant to the Amended Order, against the purchase of contestable policies by a viatical settlement provider. The recission of the contestable policies at issue in fact immediately followed an inquiry from the Department of Insurance to the insurers, which alerted them that the Department suspected fraud in the inception of the policies. That is, it suspected fraud on the part of the viators or insureds on those policies, not Future First.
Future First immediately utilized the Guaranty Fund and began replacing the policies. None of the rescinding insurers have accused Future First of any complicity in any alleged fraud with respect to the policies referenced in the Amended Order, nor has the Department of Insurance alleged any
such fraud against Future First. All but one or two of the rescinded policies have been replaced and the purchasers made whole, pursuant to the terms of their original PRA.
One of the two policies not fully replaced as of the date of the hearing was being contested by Future First as to the legality of the insurance company's rescission, and Future First will replace the policy, if needed, at such time as that legal issue is resolved.
Of all the policies at issue in the Amended Order, including, as well, any replacement policy subsequently purchased by Future First with money from the Guaranty Fund, only one or two contestable periods had not expired as of the date of the hearing. Those contestable periods were to expire thirty to sixty days after the date of the final hearing in this matter.
Future First regularly monitors and verifies the status of all policies assigned to its purchasers, including the status of all replacement policies. The direct costs to Future First to purchase replacement policies for the rescinded policies referenced in the amended order was approximately $1.5 million dollars paid out of the Guaranty Fund.
Since its initial licensure in the State of Florida, Future First has cooperated with the Petitioner concerning pending legislation, rule development and other contacts with
the Petitioner agency. It has cooperated fully with the Petitioner when the audit of Future First occurred in February of 1999, provided all requested information and documentation and made all personnel available to confer with examiners in a full and frank manner. In the course of the four-week on-site audit, Mr. Stelk personally met with the Petitioner's examiners once or twice a week to discuss the Petitioner's suggestions for improving compliance.
The Petitioner issued a draft "Report of Examination" as a result of its audit on August 5, 1999. It contained suggestions, comments and recommendations which had been discussed during Future First's staff meetings with the examiners. Future First addressed many of the Petitioner's concerns raised in the Report of Examination (report) and implemented certain suggested changes in its business practices.
Mr. Stelk directed that a formal response to the report be filed, addressing the specific points raised by the Petitioner and explaining any corrective action taken where applicable. Future First viewed certain of the findings and suggestions made at the earlier meetings and later contained in the draft report as potentially helpful to its business. It therefore implemented those suggestions even before receiving the draft of the report. Certain suggestions in the report of such as a request to formalize a refund policy, were not
strictly required by a controlling statute. However, Future First nonetheless voluntarily implemented such a refund policy.
Future First has cooperated with all governmental agencies interested in reviewing its files at all times during the course of its licensure as a viatical settlement provider and during the course of the relevant investigations. There has been no allegation or suggestion that it has in any way altered any documents, tampered with its files or that any information was purposely missing.
The Respondent contends that the Petitioner had no knowledge as to when any particular documents were received into Future First's files, including insurance applications, medical diagnosis information or other documents and has conceded that some policy applications or medical documentations may not have been received until after the bid process and viatical transactions in some cases were actually closed. Thus, Future First would not have been able to compare documents to detect possible fraud as to those situations. Therefore, Future First could not have been guilty of fraud or misrepresentation to its purchasers as to such transactions and files if it had no documentation at the point of the transaction being closed to indicate to it that possible insurance fraud in the inducement, by a viator, had occurred. In point of fact the Petitioner is not accusing Future First of fraud.
However, as of the time of the audit in February 1999, because of the discussions and information it received at meetings with Department agents and employees, and certainly as to formal notification on August 5, 1999 in the Department's report, the Respondent knew that many insurance applications in its files had medical diagnosis information or disclosures by viators which were at odds with the medical information it obtained in the viatical settlement and contracting process. It still failed to report that knowledge (and indeed circumstantial evidence clearly indicates that at least Mr. Sweeney had that knowledge even before the February 1999 audit, as to many of the files). Future First still did not report potential fraud on the part of viators to the Department that it obviously had knowledge of until it began to actually report it in a formal way, after the first Show Cause Order was served (January 2000). It is also clear that the Department knew about this inconsistent medical information and probable insurance fraud by the time of its February 1999 audit.
In November of 2000, as part of its efforts to cooperate with the requirements of the Department and the relevant statutes and rules, Future First filed an Anti-Fraud Education and Training Plan (Plan) with the Department, Division of Insurance Fraud. Neither Future First nor any of its representatives received any notice from the Department that the
Plan was in any way deficient or otherwise non-compliant with Florida law. It has implemented that Plan and adherence to it has had a positive effect on Future First's business.
The Anti-Fraud Plan stresses that Future First will not bid on a policy for purposes of viatical settlement unless the viator's insurance application is present in the file at or before the time of the bid.
Future First's corporate policy, even prior to the implementation of the Anti-Fraud Plan has been that the insurance application must be reviewed and compared with available medical documentation for any inconsistencies prior to bidding on a policy. It is also apparent, however, that
Mr. Sweeney and those under his direction and control apparently did not do so in many cases.
During the course of the investigation, the "free- form" stage of this proceeding and the formal stage of this proceeding, Future First has made numerous form and other filings with the Petitioner seeking approval in connection with a new PRA and various other purchaser disclosures required by recent amendments to Florida Statutes. After comments and questions from the Department, resulting in some revisions to such documents, the new PRA and disclosure documents were approved by the Department, approval of the last document being obtained in April 2001. The Respondent, by its involvement
through Mr. Stelk with the Viatical Life Settlement Association of American and the National Association of Insurance Commissioners, has made a bonafide effort to gain knowledge of specific, appropriate business practices of other viatical settlement providers doing business in the United States as well as in Florida.
Unlike certain other viatical settlement providers operating in Florida and elsewhere, Future First has never made premium payments on insurance policies out of the personal checking accounts of officers, directors or employees, has never instructed viators not to contact insurance companies and has never required viators to sign undated, change-of-ownership forms for filing with the insurer after the contestability period expired for any reason whatever, including as part of an effort to conceal from an insurance company the fact that an insurance policy was subject to viatical settlement. No such activity or effort to conceal has been alleged. (Compare, Accelerated Benefits Corporation documents in evidence pursuant to the Petitioner's Motion for Official Recognition).
On March 19, 2000, February 8, 2001, and March 6, 2001, Future First filed with the Department identifying information and documents pursuant to the requirements of Subsection 626.989(6), Florida Statutes, to the effect that fraud may have been involved in the procurement of all of the
rescinded insurance policies referenced in the Show Cause Order and the Amended Order. The three separate fraud notifications constitute the Respondent's Exhibits 7, 8 and 9 and correspond to the time period shortly after service of the initial Show Cause Order and the Amended Show Cause Order.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction of the subject matter of and the parties to this proceeding. Subsections 120.569 and 120.57(1), Florida Statutes.
The Amended Order cites numerous provisions of Chapter 626, Florida Statutes (the insurance code), which the Respondent is alleged to have violated. In essence the allegations amount to three general categories: (1) That the Respondent knew or should have known that certain documents in its possession may have been fraudulently completed by the insured viators and yet the Respondent offered such policies for sale to its investors, thus allegedly exhibiting untrustworthiness or incompetence; (2) That the Respondent failed to report alleged fraudulent activities of such insureds to the Petitioner in accordance with Subsection 626.989(6), Florida Statutes; and (3) that the Respondent purchased certain contestable policies on behalf of its customers in contravention of expressed contractual provisions wherein the customers stipulated that they only
wanted incontestable policies, thus allegedly exhibiting untrustworthiness or incompetence.
The violations and statutory provisions which support them, with which the Respondent is charged, are penal in nature. See School Board of Pinellas County v. Noble, 384 So. 2d 205,
206 (Fla. 1st DCA 1980). Such penal statutes must be strictly construed in favor of a Respondent and any ambiguities must be construed in the Respondent's favor. City of Miami Beach v. Galbut, 626 So. 2d 192, 194 (Fla. 1993). The violations charged, if proven, could result in the suspension or revocation of a valuable professional license and must be supported by clear and convincing evidence. See Department of Banking and Finance v. Osborne Stern and Company, et al., 670 So. 2d 932, 935 (Fla. 1996); Ferris v. Turlington, 510 So. 2d 292 (Fla. 1987). The grounds proven must also be specifically alleged in the Administrative Complaint. See Kinney v. Department of State, 501 So. 2d 129, 133 (Fla. 5th DCA 1987).
Jurisdiction
The Respondent contends that Subsections 626.99245(1) and (2), Florida Statutes, limit the jurisdiction and regulatory authority of the Petitioner over viatical settlement providers concerning transactions with purchasers and viators (respectively) who reside outside of the State of Florida. The Respondent contends that these Subsections state that the laws
of the jurisdiction where the purchaser or viator reside, and not Florida law, govern those transactions. Moreover, if a particular state has no statute regarding viatical settlement providers, the provider must disclose to the purchaser and viator that no state's law (including Florida's law) governs that transaction. The Respondent then contends that only Counts 2, 3, 5, 22-24, 29, 39, and 41-44 of the Amended Order affirmatively demonstrate that the viator, or at least the viatical settlement purchaser, were Florida residents at the time of the transactions in question and that thus, as to the other Counts in the Amended Order, the Petitioner has no jurisdiction to discipline the Respondent's license, based upon the allegations of those other Counts.
The Respondent's point in this regard is not apropos to the operative facts and law involved in and governing this proceeding. Subsection 626.99245(1), Florida Statutes, does indeed indicate that a viatical settlement purchase agreement entered into with a purchaser who is a resident of another state is "governed in the effectuation of that viatical settlement purchase agreement by the statutes and regulations of the purchaser's state of residence." (Emphasis supplied). Subsection 626.99245(2), Florida Statutes, in turn, concerns a viatical settlement provider licensed in this state who enters into a viatical settlement contract with the viator who is a
resident of another state that has also enacted statutes or adopted regulations governing viatical settlement contracts in that other state. This provision states that viatical settlement contracts with residents of a foreign state ". . . shall be governed in the effectuation of contracts by the statutes and regulations of the viators' state of residence."
The factual and legal issues involved in this proceeding do not concern at all the question or issues concerning the effectuation of the viatical settlement agreements or the effectuation of the viatical settlement contracts with viators. The issues herein do not relate to interpretation or enforcement of those contracts. The questions in this proceeding rather concern what acts or conduct the Respondent may have engaged in, or failed to engage in, with the information and knowledge it had in its files concerning the insurance policies and related documents obtained because it had entered into such viatical settlement purchase agreements or viatical settlement contracts. We are not concerned in this proceeding with the question as to whether the contracts were effectuated or the manner in which they were effectuated nor with issues concerning how to interpret the relevant agreements or contracts. Thus, Subsections 626.99245(1) and (2), Florida Statutes, have no application to the factual and legal issues raised in this proceeding and the Department does indeed have
jurisdiction to apply Florida law to the factual and legal issues raised by the Amended Show Cause Order, as does the undersigned.
Analysis of Alleged Violations of Subsections 626.611(7) and (13), Florida Statutes, Allegations.
The Petitioner has charged the Respondent as to each Count of the Amended Order with violating Subsections 626.611(7) and (13), Florida Statutes. Those provisions apply by their terms to insurance agents or other representatives of insurance companies. They state in pertinent part:
The department shall deny an application for, suspend, revoke, or refuse to renew or continue the license or appointment of any applicant, agent, title agency, solicitor, adjuster, customer representative, service representative, or managing general agent, and it shall suspend or revoke the eligibility to hold a license or appointment of any such person, if it finds that as to the applicant, licensee, or appointee any one or more of the following applicable grounds exist:
(7) Demonstrated lack of fitness and trustworthiness to engage in the business of insurance. . . .
(13) Willful failure to comply with, or willful violations of, any proper order or rule of the department or willful violation of any provision of this code (Emphasis supplied).
However, there is no statutory provision in the viatical settlement act, or anywhere in Section 626.611, Florida Statutes, applying the prohibitions contained in that section to
viatical settlement providers. Indeed, Section 626.99285, entitled "Applicability of Insurance Code" (to the viatical settlement act) specifically references only Sections 624.310, 626.901 and 626.989, Florida Statutes, and generally references "other applicable provisions cited in the insurance code. . .," as the only provisions of the insurance code applicable to viatical settlement providers.
No other provision in the insurance code making Subsections 626.611(7) and (13), Florida Statutes, applicable to viatical settlement providers has been found. Indeed, Section 626.022, Florida Statutes, defining the scope of Chapter 626, Part I (and containing Section 626.611, Florida Statutes) does not include viatical settlement providers within its ambit. Accordingly, in light of the strict construction which must be applied to penal statutes such as these, and in the absence of any provision within the viatical settlement act or the insurance code generally incorporating and applying Section 626.611, Florida Statutes, to viatical settlement providers, the Petitioner may not discipline the Respondent for allegedly violating Subsections 626.611(7) and (13), Florida Statutes. Even assuming arguendo that these provisions apply (and that the Respondent was engaging in the "business of insurance"), to the Respondent, the Petitioner did not establish a "demonstrated lack of fitness or trustworthiness" to engage in the business of
insurance or any willful violation on the part of the Respondent.
Analysis of Subsection 626.621(6), Florida Statutes Allegations
Counts 2, 5, 36, 38-44, of the Amended Order charge Future First with violating Subsection 626.621(6), Florida Statutes. Section 626.621, Florida Statutes, is also found in Part I of Chapter 626, Florida Statutes. Accordingly, based on the same reasoning applied above to Subsection 626.611(7) and (13), Florida Statutes, discussed above, the Petitioner may not discipline the Respondent for allegedly violating Subsection 626.621(6), Florida Statutes.
Additionally, a review of the 2000 version of this statute, when compared with the 2001 version, makes clear that this statutory section was never intended to apply to viatical settlement providers. The year 2000 version of this provision states in pertinent part:
(6) In the conduct of business under the license or appointment, engaging in unfair methods of competition or in unfair or deceptive acts or practices, as prohibited under part IX of this chapter, or having otherwise shown himself or herself to be a source of injury or loss to the public or detrimental to the public interest.
* * *
1 Note. - redesignated as Part IX to conform to the transfer of SS. 626.941-626.045, comprising former Part IX, by 98-89.
It would appear, without the footnote referenced in this provision, that this Subsection cross-references the current Part X of the Florida Insurance Code, which encompasses the viatical settlement act. However, a reading of the footnote, as well as reviewing the re-numbering over the past several years of the various "parts" of Chapter 626, Florida Statutes, reveals that this Subsection actually cross-references the Unfair Insurance Trade Practices Act (the former Part X) and not the viatical settlement act (the current Part X).
Footnote number one then alerts the reader that there was a re-numbering of Part X in 1998. A review of Subsection 626.621(6), Florida Statutes, and of Parts IX, X, and XI, from 1997 to the present, reveals that in 1997, Part IX regulated Healthcare Risk Managers, and was comprised of Sections 626.941- 626.945, Florida Statutes. Part X was designated the "Unfair Insurance Trade Practices Act," and Part XI the Viatical Settlement Act. At that time, Subsection 626.621(6), Florida Statutes, did not contain any footnote.
As footnote number one indicates, the former Part IX (Healthcare Risk Managers) was deleted and Part IX was renumbered. As a result, Parts X (Unfair Insurance Trade Practices Act) and Part XI (Viatical Settlement Act) were
re-numbered by the Statutory Revision Committee as new Part IX (Unfair Insurance Trade Practices Act) and new Part X (Viatical
Settlement Act), respectively, and the footnote to Subsection 626.621(6), Florida Statutes, was inserted in the 1999 version of the Florida Statutes. The current version of the statute makes clear that the intended reference was not to the Viatical Settlement Act, but instead to the Unfair Insurance Trade Practices Act. For this separate and independent reason, Subsection 626.621(6), Florida Statutes, has no applicability to viatical settlement providers, and the Respondent cannot be charged with violating it. Moreover, even if Subsection 626.621(6), Florida Statutes, did apply to the Respondent, it is clear from the facts adduced at hearing that none of Respondent's purchasers or customers were damaged or suffered any loss whatever under the terms of their contracts with the Respondent. Construing that statute strictly, such loss or damage is a required element of such a violation, and has not been established by the Petitioner in this case. The Guaranty Fund referenced in the above Findings of Fact, established by the Respondent, protected the Respondent's customers to the full extent of their contractual rights under the evidence in this case.
Analysis of Unfair Trade Practices Allegations:
Counts 2, 5, 36 and 38 through 44, charge Future First with violating Subsections 626.9927(1), 626.9541(1)(a), 626.9541(1)(e), and 626.9521, Florida Statutes. The Petitioner
has conceded in its Proposed Recommended Order that the evidence adduced does not support the Department's allegations relative to these violations of the so-called "Unfair Insurance Trade Practices Act" alleged in Counts 36, 38, 39, 40, 42 and 45. The reference to Count 45 is apparently a scrivener's error in that Count 45 does not contain such charges, rather Count 44 does, as do Counts 43, 41, and Counts 2 and 5. The allegations in Counts
2, 5, 31, 43 and 44, which numbers were not referenced in the Petitioner's concession, are identical charges and were the subject of evidence essentially identical in quantity, quality and weight. Consequently, it is determined that the evidence adduced does not support the Department's allegations regarding the purported violations of the "Unfair Insurance Trade Practices Act" with regard to Counts 2, 5, 36, 38, 39, 40, 41, 42, 43 and 44, and these Counts should be dismissed.
Analysis of alleged Section 626.989, Florida Statutes Violations:
In all Counts of the Amended Order the Petitioner has alleged that Future First violated Subsection 626.989(6), Florida Statutes. Section 626.9925, Florida Statutes, makes this Section applicable to viatical settlement providers. Subsection 626.989(6), Florida Statutes is entitled "Investigation by Department or Division of Insurance Fraud; Compliance; Immunity; Confidential Information; Reports to
Division; Division Investigator's Power of Arrest," and it provides that any:
. . . person licensed under the Code, or an employee thereof, having knowledge or who believes that a fraudulent insurance act or practice which, upon conviction, constitutes a felony or a misdemeanor under the Code, or under S.817.234 is being or has been committed shall send to the Division of Insurance Fraud a report or information pertinent to such knowledge or belief and such additional information relative hereto as the Department may require (emphasis supplied).
The term "Fraudulent Insurance Act" is defined as follows:
For the purposes of this Section, a person commits a "fraudulent insurance act" if the person knowingly and with intent to defraud presents, causes to be presented, or prepares with knowledge or belief that it will be presented, to or by an insurer, self-insurer, self-insurance fund, servicing corporation, purported insurer broker, or any agent thereof, any written statement as part of, or in support of, an application for the issuance of, or the rating of, any insurance policy, or a claim for payment or other benefit pursuant to any insurance policy, which the person knows to contain materially false information concerning any fact material thereto or if the person conceals, for the purpose of misleading another, information concerning any fact material thereto.
Subsection 626.989(1), Florida Statutes (2001).
Thus, under the above-quoted statutory authority, a person licensed under the Code who has knowledge or who believes
that a fraudulent insurance act or practice may have been
committed or is being committed is required to report the matter to the Department's Division of Insurance Fraud. Absent a direct statement or admission by a licensee, knowledge or belief is difficult to directly prove. Circumstantial evidence can, however, be used to show such knowledge or belief. In the situation at hand, certainly Mr. Sweeney, the primary actor in underwriting decisions and a vice-president of the Respondent corporation, as found above, certainly is chargeable with knowledge of what was in his own files which he used to make underwriting and viatical settlement contract decisions. A reasonable person in his position certainly would have generated a belief that representations made by a viator, in inducing an insurer to issue an insurance policy, to the effect that he or she had never been diagnosed with HIV or AIDS and who, upon negotiating a viatical settlement agreement with
Mr. Sweeney, made essentially an opposite representation that, indeed, he or she had been diagnosed with HIV or AIDS, amounted to a misrepresentation designed to induce issuance of the insurance coverage.
The Respondent maintains that since penal statutes are to be strictly construed most beneficial to a Respondent, that the Respondent must be proven to have known that all of the elements of fraud were present in the "Fraudulent Insurance Act or Practice" which the above statute would require to be
reported. The undersigned is of the opinion that a fair reading of the above statutory authority does not require that such a Respondent must first definitively identify and decide that all of the elements of common law fraud are present, since the statute's requirement is expressed in terms of a licensee who has knowledge or "who believes" that the tainted act or practice has occurred should report it. The use of the term "believes" by the Legislature would indicate that a reasonably informed, subjective opinion by a licensee, chargeable with knowledge of the provisions of the insurance code, could make a layman's decision that such a wrongful act or practice had occurred without of necessity arriving at a legal conclusion that all of the elements of fraud were actually present. This belief is buttressed by the presence in Section 626.989, Florida Statutes, of the civil immunity and confidentiality provisions designed to protect such a reporter. From these one can infer a Legislative intent that the driving purpose of this statutory provision is that potentially wrongful acts be reported so that the Department can use its investigative expertise to determine if fraud was actually committed in a legal sense, while the reporter's identity and rights are protected by the confidentiality and immunity provisions in the meantime. Thus, protection of the reporter from liability through these provisions in Subsection 626-989(4)(c), Florida Statutes, would
seem to be a valid Legislative purpose designed to encourage the reporting of perceived or "believed" wrongful acts without requiring that all legal elements of fraud be established by the reporter, so that the public can ultimately be protected by the Department.
Further, although knowledge or belief can be inferred from the circumstantial evidence represented by the inconsistent medical status documents which were in the Respondent's files and at the disposal of at least Mr. Sweeney, in fact, the Respondent was on actual notice as to the inconsistent medical representations contained in its files with regard to the allegations and the evidence presented concerning Counts 2, 5, 8, 9, 10, 11, 13, 14, 17, 18, 19, 23, 24, 27, 30, 31, 32, 33, 40 and 42. As to those Counts, the insurance policies, related to the viatical settlements referenced in those Counts, were rescinded by the insurance companies because they gained knowledge of the fraudulent or potentially fraudulent representations of the viators involved. They submitted documents to the Respondent notifying the Respondent of those rescissions. Thus when those documents were filed with the Respondent by the insurance carriers involved the Respondent had actual knowledge of the misrepresentations.
The Petitioner did not prove exactly when those notices were received by the Respondent nor did it prove when
the inconsistent medical documents which belie the original representations made in the policy applications were received, as to the other Counts in the Amended Order to Show Cause.
However, in any event, they were received sometime before the audit was performed in February of 1999. At some indefinite time before that month, Mr. Sweeney and the Respondent had the knowledge which they could have reported to the Department and failed to do so. Moreover, they had actual knowledge of the inconsistent medical information and therefore potential fraud in February 1999, and approximately six months later on August 5, 1999, they received formal written notice from the Department of those facts. However, no report was made to the Department in accordance with the above-cited statutory
authority until the first Show Cause Order was issued in January 2000, and over the ensuing months, ending in the last date above mentioned in 2001, after the Amended Show Cause Order was filed.
Thus, the Respondent did not report this knowledge or belief, which it certainly is chargeable with, given the above Findings of Fact, for a substantial number of months after it clearly had the knowledge. The Petitioner contends that there is no time limit by which such reports should be made because the Legislature amended the statute to remove the former 60-day time period requirement for making such reports of known or believed fraud and that thus, legally the reports could be made
at any time. Thus, in a de novo context such as this, when the proceeding before the undersigned is designed to formulate final agency action, the Respondent would contend that, with no 60-day time limit remaining in the statute, and with final agency action not yet formulated or recommended by a Recommended Order, that the reports were timely.
That position, however, would seem to be more supportive of mitigation of the offense of "non-reporting" rather than being totally exculpatory. The fact remains that the unrefuted evidence, culminating in the above Findings of Fact shows that for a substantial period of time after it surely had knowledge or belief that such wrongful conduct had occurred on the part of the viators, the Respondent failed to report those matters.
It is worth pointing out also, that although the Respondent should report such perceived wrongful conduct or "believed" wrongful conduct, even if it could not have concluded that all of the elements of fraud were present that, indeed in this situation the Respondent should have been able to discern most or all of the elements of common law fraud. There was, in its records, a clear indication of (1) a false statement of fact by the viators; (2) known by the viators to be false at the time it was made (as evidenced by the fact that they changed their representation concerning the diagnosis of HIV or AIDS when the
viatical settlements were negotiated); (3) the representations were made for the purpose of inducing an act in reliance thereon (the act of issuance of the insurance policy by the insurers);
(4) action by the insurers in reliance on the correctness of those representations (self-evident by the issuance of the insurance policies); and (5) resulting damage to the insurers. Although there is no evidence, of actual damage, to the insurers because those instances when the insurers detected the misrepresentations resulted in rescission of the policies before any monies had to be paid out, a sophisticated observer like the Respondent could have foreseen that there were at least present the element of prospective damages to the insurers. They were legally liable on the policies until rescission and, in most cases, had the two-year incontestability period elapsed without the fraud being detected they would have been liable to pay the benefits under the terms of the policy contracts.
Thus, although the Respondent was under a duty to report, even though it may not have been able to perceive all of the elements of common law fraud, the evidence shows that a licensee, chargeable with knowledge of the insurance code by its officers, directors and staff, could quite readily form a belief that fraud in the legal sense was present based upon the documents in its files and in evidence in this case. Thus the Respondent has violated Subsection 626.989(6), Florida Statutes.
The violation should be mitigated by the fact that it did report the wrongful acts or fraudulent representations during the de
novo stage of this proceeding before final agency action and cooperated freely with the Department throughout the investigation and "free-form' stage of this proceeding.
Sub-Section 626.9914(1)(b) Violations:
Each Count of the Amended Order charges the Respondent with violating the above-cited provision. That subsection prohibits a viatical settlement provider from engaging in fraudulent or dishonest practices, or otherwise having been shown to be untrustworthy or incompetent. The Petitioner, in essence, appears to proceed on a theory that the Respondent is "untrustworthy" because it accepted policies for re-sale to its customers when it knew, or should have known, that the policies may have been procured by fraudulent means. Alternatively, the Respondent, if it had no knowledge of such potential fraud or, even if it did, did not act to report it to the Department or to inform its customers, must therefore be at least "incompetent." These frailties would also apply, according to the Petitioner's theories of the case, to the Respondent's entry into agreements with its investors involving policies which were still within the contestable period, despite instructions in the customer's contracts by the customers to the contrary.
Initially, it is concluded that although the Amended Order cites certain statutory provisions referencing "fraudulent" practices, the Respondent has not been proven to have engaged in any fraudulent practices itself and indeed none have been specifically alleged by the Petitioner. In any event, the required inherent element of "deceitful intent" was not established by the Petitioner in this case. Brod v. Jernigan,
188 So. 2d 575 (Fla. 2nd DCA 1966). The fact that the Respondent established the Guaranty Trust Fund to protect its investors or customers from losses caused by rescissions of policies or conversions of policies to policies of lesser payable benefits, shows that although the Respondent may have behaved in an untrustworthy or incompetent manner in the above found and concluded particulars, that it harbored no deceitful or dishonest intent and committed no overtly "dishonest practices." Moreover, the Petitioner's counsel stipulated at hearing that it was not asserting that the Respondent committed any fraudulent activity.
The Petitioner makes the point that the viatical settlement business is a relatively young industry. Future First kept itself informed of the trends and changing business standards in the industry and its business practices have evolved accordingly, along with Florida law regarding viatical settlements. Parenthetically, it is worthy of note that some of
its business practices have evolved with the impetus provided by the Department evidenced in the record of this proceeding. It is clear that, during Mr. Sweeney's tenure as Vice-President for Insurance Underwriting, some potentially harmful lapses in procedures occurred and the Respondent, in accordance with the above Findings of Fact, is chargeable with knowledge and belief concerning the inconsistent documents upon which the charges are based. Since those incorrect and in some instances illegal procedures have been revealed, however, the Respondent has cooperated fully with the Department and has done more than is required to protect the public and its customers.
Indeed, before this prosecution was ever commenced and with the start of its doing business in Florida, Future First had done more to protect clients than other viatical settlement providers by instituting the Guaranty Trust Fund. Further, the Petitioner's own witness, Mr. Grenier, a Department employee, testified that it was solely the actions of
Mr. Sweeney from which the charges against Future First should derive. Since Mr. Sweeney's departure the Respondent has continued to cooperate with the Petitioner. It has adopted stricter controls regarding its purchasing procedures, revised its customer disclosures, developed and implemented a comprehensive anti-fraud plan and initiated other business practices which the Petitioner has reviewed and approved, even
throughout the pendency of these proceedings. As a general rule now, as allowed by law, Future First no longer purchases contestable policies for re-sale to customers. The Respondent has discontinued relationships with brokers who deal in such policies and has cooperated with the Petitioner and other agencies in helping to put disreputable brokers out of business.
Moreover, since its initial licensure, the Respondent has used the Guaranty Fund to purchase replacement policies on an as-needed basis, in order to prevent any harm or injury to customers due to rescinded policies, as found above. This expenditure by the Respondent was made from funds which would otherwise have been distributed as profit to the shareholders and the amount of such lost profits was substantial, as found above.
Therefore, the Respondent has no apparent financial or other motivation or incentive to knowingly purchase policies which may have been initially procured through fraudulent means. As to each and every policy referred to in the Amended Order the customers have been fully protected. Thus, to a significant extent, the Respondent has acted responsibly in its business affairs and, in a prospective sense, has affirmatively demonstrated fitness, trustworthiness and competence to continue to hold a viatical settlement license in Florida. Its less-
than-adequate trustworthiness and competence prior to 1999, during Mr. Sweeney's tenure, has been remedied.
Finally, even though the Respondent is guilty of some of the violations alleged, revocation or suspension of the professional license involved is not warranted where there has been no evidence of financial loss on the part of any individual resulting from the activity complained of and where there is no clear and convincing evidence that the public prospectively will be at risk by continued licensure. In Brod v. Jernigan, supra, the court held that in a licensure discipline action involving a real estate broker where no member of the public was hurt or prejudiced by the act of the Respondent that suspension of the license was not warranted. The court in that case recognized that where the potent administrative weapons of revocation or suspension of a license are possessed by a regulating agency, with broad discretionary powers in regulating a business, that power should always be reasonably and sparingly used. Id. at
581. Such power should be focused on the truly dishonest and unscrupulous licensee who cheats or swindles. Such a serious penalty should not be imposed against a licensee who merely commits a wrongful or negligent act but without any fraudulent, dishonest or deceptive intent and which results in no harm to the members of the public or company served by that licensee. See Pauline v. Borer, 274 So. 2d 1 (Fla. 1973); Munch v.
Department of Business and Professional Regulation, Division of Real Estate, 592 So. 2d 1136, 1144, 1145 (Fla. 1st DCA 1992).
See also Subsection 626.9917(2), Florida Statutes (providing for administrative fines and penalties, for both willful and non- willful conduct, in lieu of the suspension or revocation of a viatical settlement provider's license).
112. Accordingly, having considered the foregoing Findings of Fact, Conclusions of Law, the evidence of record, the candor and demeanor of the witnesses and the pleadings and arguments of the parties, it is, therefore,
RECOMMENDED that a final order be entered by the Petitioner, the Department of Insurance, finding that the Petitioner has violated Subsection 626.989(6), Florida Statutes, and Subsection 626.9914(1)(b), Florida Statutes, by being untrustworthy and incompetent in the above particulars and in the pertinent time periods referenced in the above Findings of Fact and Conclusions of Law only, and that its licensure be placed on probationary status for a period of two-years, conditioned on such reporting requirements to the Department concerning its operations as the Department shall reasonably require and, that it be assessed a fine in the amount of
$10,000.00.
DONE AND ENTERED this 18th day of February, 2002, in Tallahassee, Leon County, Florida.
P. MICHAEL RUFF Administrative Law Judge
Division of Administrative Hearings The DeSoto Building
1230 Apalachee Parkway
Tallahassee, Florida 32399-3060
(850) 488-9675 SUNCOM 278-9675
Fax Filing (850) 921-6847 www.doah.state.fl.us
Filed with Clerk of the
Division of Administrative Hearings this 18th day of February, 2002.
COPIES FURNISHED:
Michael H. Davidson, Esquire Department of Insurance
200 East Gaines Street 612 Larson Building
Tallahassee, Florida 32399-0333
Steven M. Malono, Esquire Pennington, Moore, Willkinson,
Bell & Dunbar, P.A. Post Office Box 10095
215 South Monroe Street, Second Floor Tallahassee, Florida 32302-2095
Mark Casteel, General Counsel Department of Insurance
The Capitol, Lower Level 26 Tallahassee, Florida 32399-0307
Honorable Tom Gallagher
State Treasurer/Insurance Commissioner The Capitol, Plaza Level 02 Tallahassee, Florida 32399-0300
NOTICE OF RIGHT TO SUBMIT EXCEPTIONS
All parties have the right to submit written exceptions within
15 days from the date of 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 | Document | Summary |
|---|---|---|
| May 17, 2002 | Agency Final Order | |
| Feb. 18, 2002 | Recommended Order | Violation established because Respondent failed to report apparent fraud on application by violators; wrong to sell policies to viatical purchasers/investors which were still contestable. No suspension or revocation (no deceitful intent). |
