STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

PARTIAL FINAL ORDER

On August 8 and 9, 2006, an administrative hearing in these consolidated cases was convened in Tallahassee, Florida, before Lawrence P. Stevenson, Administrative Law Judge, Division of Administrative Hearings.

APPEARANCES

For Petitioners: Cynthia S. Tunnicliff, Esquire in Case Nos. Brian A. Newman, Esquire

05-1012RP and Pennington, Moore, Wilkinson, 05-2803RP Bell & Dunbar, P.A.

215 South Monroe Street, Second Floor Tallahassee, Florida 32302-2095

For Petitioner: Glenda L. Thornton, Esquire in Case No. Foley & Lardner, LLP

06-2036RU 106 East College Avenue, Suite 900

Tallahassee, Florida 32301

For Respondents: S. Marc Herskovitz, Esquire

Elenita Gomez, Esquire Jeffrey Joseph, Esquire

Department of Financial Services, Division of Legal Services

612 Larson Building

200 East Gaines Street Tallahassee, Florida 32399-4206

STATEMENT OF THE ISSUE

At issue in this proceeding is whether Respondents may, by way of an "Informational Memorandum" issued on May 22, 2006, require Florida property and casualty insurers to comply with proposed Florida Administrative Code Rule 69O-125.005, prior to the proposed rule's adoption, or whether the "Informational Memorandum" constitutes an invalid unpromulgated rule.

PRELIMINARY STATEMENT

On March 18, 2005, the Florida Insurance Council, Inc., the American Insurance Association, and the Property and Casualty Insurers Association of America (collectively referenced herein as "Petitioners") filed a Petition to Determine the Invalidity of Proposed Rules (the "Petition"). The Petition challenges

proposed Florida Administrative Code Rule 69O-125.005, promulgated by the Office of Insurance Regulation ("OIR"), as an invalid exercise of delegated legislative authority. The proposed rule purports to implement the provisions of Section 626.9741, Florida Statutes, created by Section 3,

Chapter 2003-407, Laws of Florida, regarding the use of credit reports and credit scores by insurers.

The case was given DOAH Case No. 05-1012RP and assigned to the undersigned on March 23, 2005. On March 31, 2005, Petitioners filed a Motion for Leave to File an Amended Petition, which sought to amend the Petition to add the National Association of Mutual Insurance Companies as a Petitioner.

Without objection, the motion was granted by Order dated April 7, 2005.

In order to cure a procedural objection raised by Petitioners, OIR presented proposed Florida Administrative Code Rule 69O-125.005 to the Financial Services Commission ("FSC") for its approval on June 16, 2005. The FSC approved the proposed rule, which was re-published as a proposed rule on

July 1, 2005. Petitioners filed a second Petition to Determine the Invalidity of a Proposed Rule on August 3, 2005. The case was given DOAH Case No. 05-2803RP. On August 9, 2005, Petitioners filed a Motion to Consolidate, which was granted by Order dated August 10, 2005.

Motions for summary final order were filed by both Petitioners and Respondents. Respondents' motion was denied by Order dated September 16, 2005. Petitioners' motion was denied

by Order dated September 19, 2005. Pursuant to the parties agreement in a status report dated September 26, 2005, the case was set for hearing on December 12 through 14, 2005.

By Order dated December 5, 2005, the undersigned denied Petitioners' Motion to Compel Deposition Answers by Respondents' witnesses Howard Eagelfeld and Steve Parton. Petitioners' Motion for a Stay Pending Certiorari Review of the Order was granted on December 5, 2005. The First District Court of Appeal issued its opinion in Florida Insurance Council, Inc., et al. v. Office of Insurance Regulation and Financial Services Commission, No. 1D06-

35 (Fla. 1st DCA May 8, 2006). By order dated June 16, 2006, the stay was lifted in these cases.

On May 22, 2006, OIR issued "Informational Memorandum

OIR-06-10M" (the "Memorandum"), the text of which is set forth in full below. The import of the Memorandum is to inform all Florida property and casualty insurers that FSC had authorized OIR to begin implementation of the provisions of proposed Florida Administrative Code Rule 69O-125.005, beginning September 1, 2006, for all property and casualty insurers making a new rate, rule, or underwriting guideline filing making use of credit reports, and beginning December 1, 2006, for all property and casualty insurers using credit reports.

On May 30, 2006, Petitioners filed a Motion for Leave to File an Amended Petition, in order to challenge the Memorandum as an invalid agency statement meeting the definition of a rule. On June 12, 2006, Petitioner Fair Isaac Corporation ("Fair Isaac") filed a Petition Challenging as Non-Rule Policy the Memorandum

("Fair Isaac Petition"), which was assigned DOAH Case No. 06- 2036RU. Also on June 12, 2006, Fair Isaac filed a Petition to Intervene in consolidated DOAH Case Nos. 05-1012RP and 05-2803RP, for the purpose of raising its challenge to the Memorandum in the ongoing proceedings. On June 14, 2006, Petitioners moved to consolidate DOAH Case No. 06-2036RU with DOAH Case Nos. 05-1012RP and 05-2803RP.

By order dated June 16, 2006, Petitioners' Motion for Leave to File an Amended Petition was granted. By order dated

July 10, 2006, DOAH Case No. 06-2036RU was consolidated with DOAH Case Nos. 05-1012RP and 05-2803RP. Because this consolidation had the effect of making Fair Isaac a party to these proceedings for the limited purpose of pursuing its challenge to the Memorandum, there was no need to rule on Fair Isaac's Petition to Intervene.

The consolidated cases were set for hearing on August 8 through 10, 2006. The hearing was held on August 8 and 9, 2006. At the close of the hearing, Petitioners noted the virtual certainty that the September 1, 2006, effective date of the Memorandum would occur before a comprehensive final order could be issued in these cases. Petitioners requested that an order be entered prior to September 1, 2006, to address the limited question of OIR's authority to implement the requirements of proposed Florida Administrative Code Rule 69O-125.005 before these cases are resolved and the proposed rule is either invalidated, or finally adopted pursuant to Subsection 120.54(3)(e), Florida Statutes (2006).1

Petitioners' request was granted and a schedule was established for the parties to brief the issue. Petitioners' timely filed their brief, styled as a "Motion for Summary Final Order Finding the Agency Statement Violates Section 120.54(1)(a)," on August 16, 2006. Respondents timely filed their Response on August 22, 2006.

FINDINGS OF FACT

1. Petitioners are associations of insurance companies doing business in Florida. Cecil Pearce, vice president of the southeast region of the American Insurance Association ("AIA"), testified that AIA is a trade association composed of 40 groups of insurance companies. AIA member companies annually write

   $6 billion in property, casualty, and automobile insurance in Florida. AIA's primary purpose is to represent the interests of its member insurance groups in regulatory and legislative matters throughout the United States, including Florida.

2. Neil Aldridge, vice president for state legislative and regulatory affairs for the National Association of Mutual Insurance Companies ("NAMIC"), testified that NAMIC is a trade association consisting of 1,430 members, mostly mutual insurance companies. NAMIC member companies annually write $10 billion in property, casualty, and automobile insurance in Florida. NAMIC represents the interests of its member insurance groups in regulatory and legislative matters throughout the United States, including Florida.

3. A substantial number of Petitioners' members are insurers writing property and casualty insurance and/or motor

   vehicle insurance coverage. These members use credit scoring in their underwriting and rating process, and, therefore, would be directly regulated by proposed Florida Administrative Code

   Rule 69O-125.005. Petitioners' members would be required to comply with the proposed rule in their underwriting and rating methods and in the rate filing process required by Sections

   627.062 and 627.0651, Florida Statutes.

4. Petitioners have alleged and offered evidence that the rule would have the practical effect of prohibiting the use of credit reports or credit scoring by property and casualty insurers in the State of Florida. They have further alleged and offered evidence that such a prohibition would have a direct and substantial impact on their manner of doing business in this state.

5. On May 22, 2006, the OIR issued the Memorandum, which states:

   The purpose of this Memorandum is to notify Florida property and casualty insurers that on January 31, 2006, the Financial Services Commission approved for final adoption Rule 69O-125.005, Use of Credit Reports and Credit Scores by Insurers, F.A.C. The rule details the information that an insurer must submit to the Office regarding their use of credit reports and credit scores and requires insurers to demonstrate that their use of credit reports and credit scores does not unfairly discriminate against insureds because of their race, color, religion, marital status, age, gender, income, national origin, or place of residence.

   
   

   The rule is currently being challenged by the Florida Insurance Council, the American Insurance Association, the Property and Casualty Insurers of America, and the National Association of Mutual Insurance Companies (Petitioners). In light of the

   delays associated with the ongoing litigation and the potential ongoing harm to consumers resulting from the use of credit reports and credit scores by insurers, the Financial Services Commission has authorized the Office to begin implementation of the provisions of the rule.

   
   

   Beginning September 1, 2006, all Florida property and casualty insurers making a new rate, rule, or underwriting guideline filing that uses, is in anyway [sic] subject to, or is based upon, credit reports, or credit scores will be required to demonstrate that their credit scoring methodology does not disproportionately affect persons of any race, color, religion, marital status, age, gender, income, national origin, or place of residence.

   
   

   By December 1, 2006, all Florida property and casualty insurers that use credit reports or credit scores for rates, rules, or underwriting purposes are required to provide appropriate information sufficient to demonstrate that their credit scoring methodology does not disproportionately affect persons of any race, color, religion, marital status, age, gender, income[,] national origin, or place of residence.

   
   

6. Proposed Florida Administrative Code Rule 69O-125.005, as approved by the FSC, was published on July 1, 2005, well before the issuance of the Memorandum.

   CONCLUSIONS OF LAW

7. The Division of Administrative Hearings has jurisdiction over the subject matter and parties to this proceeding. § 120.54 and 120.56, Fla. Stat.

8. An association has standing to challenge the validity of

   
   

   a proposed rule on behalf of its members "when that association fairly represents members who have been substantially affected by the rule." Florida Home Builders v. Department of Labor and

   Employment Security, 412 So. 2d 351, 352 (Fla. 1982). To establish "associational standing," an association "must demonstrate that a substantial number of its members, although not necessarily a majority, are 'substantially affected' by the challenged rule. Further, the subject matter of the rule must be within the association's general scope of interest and activity, and the relief requested must be of the type appropriate for a trade association to receive on behalf of its members." Id. at 353-354. This standard was reaffirmed in NAACP, Inc. v. Florida Board of Regents, 863 So. 2d 294 (Fla.

   2003).

   
   

9. In the instant case, AIA and NAMIC have established their standing under the associational standard set forth in Florida Home Builders. A substantial number of their members would be directly regulated by the proposed rule. Their general scope of interest and activity is to represent their members' interests in regulatory and legislative matters in Florida. The proposed rule falls within the ambit of their representation of their members, and a declaration of the proposed rule's invalidity is appropriate relief for a trade association to receive on behalf of its members.

10. For purposes of this Partial Final Order, it is sufficient that AIA and NAMIC have established their standing. The standing of the remaining Petitioners will be addressed in

    the Final Order on the substance of proposed Florida Administrative Code Rule 69O-125.005, when the undersigned will have the benefit of the hearing transcript and the proposed final orders of the parties.

11. At issue is whether the FSC had the lawful authority to direct the OIC to begin implementation of proposed Florida Administrative Code Rule 69O-125.005 while Petitioners' challenge to that proposed rule is still pending, and before the proposed rule has been finally adopted pursuant to Subsection 120.54(3), Florida Statutes.

12. Subsection 120.52(15), Florida Statutes (2006), defines "rule", in relevant part, as "each agency statement of general applicability that implements, interprets, or prescribes law or policy or describes the procedure or practice requirements of an agency." Proposed Florida Administrative Code Rule 69O-125.005 unquestionably meets the quoted definition of a "rule."

13. The Memorandum, which would apply the proposed rule's provisions to "all Florida property and casualty insurers making

    a new rate, rule, or underwriting guideline filing that uses, is in anyway [sic] subject to, or is based upon, credit reports or credit scores" on September 1, 2006, also meets the quoted definition. The Memorandum is an agency statement of general

    applicability to the class of persons regulated by the agency, and it prescribes law, or policy to the regulated entities.

14. The challenge to the Memorandum is brought pursuant to Subsections 120.56(1)(a) and (4)(a), Florida Statutes. Subsection 120.56(1)(a), Florida Statutes, provides:

    Any person substantially affected by a rule or a proposed rule may seek an administrative determination of the invalidity of the rule on the ground that the rule is an invalid exercise of delegated legislative authority.

    
    

15. Subsection 120.56(4)(a), Florida Statutes, provides:

    
    

    Any person substantially affected by an agency statement may seek an administrative determination that the statement violates s. 120.54(1)(a). The petition shall include the text of the statement or a description of the statement and shall state with particularity facts sufficient to show that the statement constitutes a rule under s.

    120.52 and that the agency has not adopted the statement by the rulemaking procedure provided by s. 120.54.

16. It is undisputed that FSC and OIR did not adopt the Memorandum by the rulemaking procedure provided by Section 120.54, Florida Statutes. As authority for using the Memorandum to give effect to the proposed rule, without the need to adopt the Memorandum through the rulemaking procedure of Section 120.54, OIR cites Subsection 120.56(4)(e)1., Florida Statutes:

    If, prior to a final hearing to determine whether all or part of any agency statement violates s. 120.54(1)(a), an agency publishes, pursuant to s. 120.54(3)(a), proposed rules that address the statement, then for purposes of this section, a presumption is created that the agency is

    acting expeditiously and in good faith to adopt rules that address the statement, and the agency shall be permitted to rely upon the statement or a substantially similar statement as a basis for agency action if the statement meets the requirements of s. 120.57(1)(e).

    
    

17. OIR states that its actions comport with the language of Subsection 120.56(4)(e)1., Florida Statutes. Its proposed rule was clearly published prior to the final hearing to determine whether the Memorandum violates Subsection 120.54(1)(a), Florida Statutes, and, therefore, the agency enjoys the "expeditious action and good faith" presumption that permits reliance on the Memorandum as a basis for agency action.

18. Petitioners argue that OIR's position is misplaced because the intent of Subsection 120.56(4)(e), Florida Statutes, is to encourage agencies to engage in rulemaking when their

    non-rule policies have been challenged, not to authorize the implementation of a proposed rule by agency statement once the proposed rule has been challenged. In other words, Subsection 120.56(4)(e)1., Florida Statutes, would permit reliance on the Memorandum only if the Memorandum had been issued before the publication of the proposed rule.

19. OIR contends that it is irrelevant that the Memorandum was issued after the rulemaking process commenced. As the court stated in Osceola Fish Farmers v. Division of Administrative Hearings, 830 So. 2d 932, 934 (Fla. 4th DCA 2002):

    [T]he plain language of section 120.56(4)(e) allows the agency to avoid an adverse ruling in a section 120.56(4) proceeding (and presumably attorney's fees and costs) if, prior to entry of a final order in the case, the agency initiates the rulemaking process and proceeds expeditiously to rule adoption.

    
    

20. OIR states that rulemaking commenced prior to the holding of a final hearing and the entry of a final order, and it therefore, cannot be disputed that the agency has made a good faith effort to initiate rulemaking and is proceeding expeditiously to rule adoption.

21. Petitioners also cite Osceola Fish Farmers to support their position:

    When section 120.54(1)(a) is read together with section 120.56(4), it becomes clear that the purpose of a section 120.56(4) proceeding is to force or require agencies into the rule adoption process. It provides them with incentives to promulgate rules through the formal rulemaking process.

    
    

    830 So. 2d at 934.

22. Further supporting Petitioners' position that Subsection 120.56(4)(e)1., Florida Statutes, contemplates a definite sequence of agency statement followed by rulemaking is the following language from Jenkins v. State, 855 So. 2d 1219, 1230 (Fla. 1st DCA 2003):

    Section 120.56(4)(e) states that an agency "shall be permitted to rely upon" an unpromulgated rule... if it is substantially similar to a subsequent similar rule promulgated under section 120.57(1)(e). (emphasis added)

    
    

23. The issue of sequence was not before the Jenkins court, but the court's statement is nonetheless significant as an indication of the proper interpretation of the law. Both Osceola

    Farmers and Jenkins emphasize that the intent of the statute is to force agencies into the rulemaking process. This intent would in no way be served by turning the statute into a mechanism for implementing a proposed rule that has already been published and is under challenge pursuant to Subsection 120.56(2), Florida Statutes.

24. OIR contends that "there is no prohibition in the whole of Chapter 120, Florida Statutes, against reliance upon a yet unadopted rule during the pendency of the rulemaking process." OIR overlooks a basic tenet of administrative law: an administrative agency is a creature of statute, and can only do what it is authorized to do by the Legislature. Ocampo v. Department of Health, 806 So. 2d 633, 634 (Fla. 1st DCA 2002); Florida Department of Insurance and Treasurer v. Bankers Insurance Company, 694 So. 2d 70, 71 (Fla. 1st DCA 1997). The absence of a statutory prohibition on a certain agency action does not establish the authority to take it.

25. Despite OIR's contention, the structure of the rulemaking process establishes that proposed rules cannot take effect until they have been adopted. Subsection 120.54(3)(e)6., Florida Statutes (2006), provides, in relevant part: "The

    proposed rule shall be adopted on being filed with the Department of State and become effective 20 days after being filed "

26. Subsection 120.54(3)(e)3., Florida Statutes, provides:

    
    

    At the time a rule is filed, the agency shall certify that the time limitations

    prescribed by this paragraph have been complied with, that all statutory rulemaking requirements have been met, and that there is no administrative determination pending on the rule. (emphasis added)

    
    

27. If proposed rules are challenged pursuant to Subsection 120.56(2), Florida Statutes, "the period during which a rule must be filed for adoption is extended to 60 days after the administrative law judge files the final order with the clerk or until 60 days after subsequent judicial review is complete." § 120.54(3)(e)2., Fla. Stat.

28. The quoted provisions of Section 120.54(3)(e), Florida Statutes, plainly contemplate that a proposed rule may not be adopted until it is filed, that it may not be filed until the agency can certify that no administrative determination is pending on the rule, and that the timing of the filing is extended until 60 days after any Subsection 120.56(2), Florida Statutes, challenge has been finally resolved. FSC and OIR have cited no statute that gives them the authority to override these clear statutory requirements by the simple expedient of issuing a Memorandum.

29. OIR complains that it commenced rulemaking near the end of 2003, and nearly three years later is still engaged in the process. OIR implicitly contends that this delay justifies the admittedly "unusual" step of issuing the Memorandum to give effect to its stalled rule. This contention is unpersuasive.

If the delay in the rule adoption process caused by Petitioners' challenge has caused a genuine danger to the public health, safety, or welfare, the agency has resort to the emergency rulemaking procedures set forth in Subsection 120.54(4), Florida Statutes.

FINAL ORDER

Based on the foregoing Findings of Fact and Conclusions of Law, it is

ORDERED that Informational Memorandum OIR-06-10M, issued by the Office of Insurance Regulation on May 22, 2006, constitutes an unpromulgated rule and that OIR shall immediately discontinue reliance on the Memorandum to implement the provisions of proposed Florida Administrative Code Rule 69O-125.005.

DONE AND ORDERED this 5th day of September, 2006, in Tallahassee, Leon County, Florida.

S

LAWRENCE P. STEVENSON

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 the Clerk of the Division of Administrative Hearings this 5th day of September, 2006.

ENDNOTE

1/ Unless otherwise indicated, all references to the Florida Statutes shall be to the 2006 version.

COPIES FURNISHED:

Cynthia S. Tunnicliff, Esquire Brian A. Newman, Esquire Pennington, Moore, Wilkinson,

Bell & Dunbar, P.A.

215 South Monroe Street, Second Floor Tallahassee, Florida 32302-2095

Raquel Rodriguez, General Counsel Office of the Governor

The Capitol, Suite 209 Tallahassee, Florida 32399-0001

Richard Tritschler, General Counsel Department of Agriculture

and Consumer Services

The Capitol, Plaza Level 10 Tallahassee, Florida 32399-0810

Glenda L. Thornton, Esquire Foley & Lardner, LLP

106 East College Avenue, Suite 900 Tallahassee, Florida 32301

Patricia Gleason, General Counsel Department of Legal Affairs

The Capitol, Plaza Level 01 Tallahassee, Florida 32399-1050

S. Marc Herskovitz, Esquire Elenita Gomez, Esquire Jeffrey Joseph, Esquire

Department of Financial Services

Division of Legal Services 612 Larson Building

200 East Gaines Street Tallahassee, Florida 32399-4206

Tom Gallagher, Chief Financial Officer Department of Financial Services

The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300

Kevin M. McCarty, Commissioner Department of Financial Services

200 East Gaines Street Tallahassee, Florida 32399-4206

Steven H. Parton, General Counsel Department of Financial Services Financial Services Commission

200 East Gaines Street Tallahassee, Florida 32399-4206

NOTICE OF RIGHT TO JUDICIAL REVIEW

A party who is adversely affected by this Final Order is entitled to judicial review pursuant to Section 120.68, Florida Statutes. Review proceedings are governed by the Florida Rules of Appellate Procedure. Such proceedings are commenced by filing the original Notice of Appeal with the agency Clerk of the Division of Administrative Hearings and a copy, accompanied by filing fees prescribed by law, with the District Court of Appeal, First District, or with the District Court of Appeal in the Appellate District where the party resides. The notice of appeal must be filed within 30 days of rendition of the order to be reviewed.

Docket for Case No: 05-002803RP

Orders for Case No: 05-002803RP