The Issue The issue in this case is whether disciplinary action should be taken against Respondents' mortgage brokerage licenses for the reasons set forth in the Order to Cease and Desist, Administrative Complaint and Notice of Rights filed by Petitioner on January 18, 1989 (the "Administrative Complaint".) The Administrative Complaint alleges that Respondents violated the following statutory and rule provisions: Section 494.055(1)(b), Florida Statutes, by charging borrowers closing costs that were in excess of the actual amount incurred by the mortgagor; Section 494.08(3), Florida Statutes, and Rule 3D- 40.008(9), Florida Administrative Code, by charging excess brokerage fees; Section 494.055(1)(b), Florida Statutes, by engaging in deceit, misrepresentation, negligence or incompetence in mortgage financing transactions and for breach of the fiduciary duty of a broker as a result of the manner in which escrow accounts were handled; Section 494.055(1)(h), Florida Statutes, due to the misuse, misapplication or misappropriation of funds, mortgage documents or other property entrusted to Respondents as a result of the excess charges assessed to borrowers and the misuse of monies in the escrow accounts; Rule 3D- 40.006(6)(a), Florida Administrative Code, for failing to maintain trust, servicing and escrow account records in accordance with good accounting practices; and Section 494.0393(2), Florida Statutes by failing to operate the company under the full charge, control and supervision of a principle who is a licensed mortgage broker.
Findings Of Fact At all times pertinent hereto, Respondent All States Mortgage and Investment Corporation ("All States Mortgage") was licensed by the Department as a mortgage brokerage company having been issued License Number HB-592582215. All States Mortgage had its principle place of business in Davie, Florida. All States Mortgage did not typically engage in traditional "mortgage broker functions." Instead, it generally worked with other mortgage brokers in providing funds for loans brought to All States Mortgage by other brokers. At all times pertinent hereto, Respondent, Lynn F. Smith ("Smith") was a licensed mortgage broker having been issued License Number HA-265-72-0045. Smith was the principle mortgage broker for All States Mortgage. Smith has been the principle mortgage broker for All States Mortgage since its inception and has been registered with the Department as a licensed mortgage broker since before a license was issued to All States Mortgage. In addition to being the principle broker for All States Mortgage, Smith was an officer and director of the company and had responsibility for the direction, control, operations and management of the company. In May of 1988, Respondents were affiliated with a licensed consumer finance company known as All States Finance Company. Currently, both All States Mortgage and All States Finance are inactive and an application has been filed to transfer the license of All States Mortgage to a new company known as All States Financial Services. As a result of an audit and examination conducted by the Department in May, 1988, it was determined that one client of All States Mortgage, Donald Salvog, was charged a brokerage fee in excess of the maximum allowable fee under Chapter 494. After notification by the Department, Respondents admitted that they inadvertently charged an excess fee to Mr. Salvog and Respondents immediately proceeded to refund the excess of $82.63 to the customer. There is no evidence that Respondents charged any other customers with a brokerage fee in excess of the maximum allowed under Chapter 494. In a number of the individual mortgage transactions in which it was involved, Respondents charged a standard credit report fee of $25.00 to the borrowers. The following chart reflects the individual loan files where such a fee was charged and the total amount of the invoices in the respective loan file to support the charges. Borrower's Name Cost per Closing Stmt. Cost per Invoices Roland Sagraves $25.00 $3.25 John Murphy $25.00 $3.25 Donald Salvog $25.00 $2.95 Harry Walley $25.00 $2.57 Raymond Parker $25.00 $5.14 Shateen/Lawrence $25.00 $5.75 James Arnold $25.00 $3.94 Richard Pope $25.00 $5.04 James Smith $25.00 $6.50 9. In four of the nine customer files listed in Findings of Fact 8 above, a "standard factual" credit report was included in the file. The typical cost for a "standard factual" is $45.00. No invoices were included in those files to reflect this cost. In obtaining credit reports for an individual mortgage transaction, Respondents did not generally order a credit report from an existing service. Instead, All States Mortgage had an on-line computer terminal with a direct phone modem linked to the individual credit reporting agency's computer data base. An employee of All States Mortgage, usually Burton Horowitz, used this computer link-up to conduct a credit report on the borrower. "Standard Factual" reports were ordered from existing services as necessary to supplement the computer search. The standard $25.00 fee charged by All States Mortgage was based upon an estimate of the overhead and indirect costs associated with producing credit reports in this manner. The overhead and indirect costs involved in obtaining credit reports as described in Findings of Fact 10 include the cost of leasing the equipment, the labor involved in obtaining the computer report (it typically takes an operator 30 minutes to obtain the credit reports) and the cost of the materials involved in producing a copy of the report. The standard $25.00 fee charged by All States Mortgage was not based on a specific allocation of the indirect costs associated with producing a particular report, but, instead, was simply based upon an estimate of the costs involved. During the course of its operations, All States Mortgage would periodically receive funds that were to be held in escrow. These escrow funds were kept in an interest-bearing account that was used by All States Mortgage and All States Finance. (This account is hereinafter referred to as the "Commingled Account.") The escrow funds in this Commingled Account were mixed with other funds of All States Mortgage as well as money belonging to All States Finance. Respondents contend that the escrow funds were commingled with the other funds because the companies had only one interest bearing account and that account had limited check writing ability. Respondents transferred money between the interest bearing Commingled Account and their other operating accounts on a continuous basis. At the end of each month, Respondents attempted to perform a reconciliation as to the escrow balances in the Commingled Account. On several occasions during the period from July 1987 through May 1988, the balance in the Commingled Account was less than the total funds that Respondents were supposed to be holding in escrow. No evidence was introduced to indicate that Respondents' handling of the escrow funds and/or the Commingled Account ever resulted in a loss to any of their borrowers or customers. Thus, while the evidence does indicate that, on occasion, the balance of the Commingled Account was less than the funds that should have been in escrow, the difference on each occasion was ultimately corrected in the reconciliation process. Respondents failed to use good accounting principles in the handling of the escrow funds. The Department has not adopted any rules requiring a mortgage broker to handle escrow funds in a separate account. Prior to the initiation of this Administrative Complaint, Respondents were never informed that they were required to do so. The Department's examiners prepared a schedule indicating that Respondents had diverted some of the escrow funds to their own use. However, that schedule includes several loans that had already been sold to another company on the date listed. Thus, the schedule does not accurately reflect the funds that should have been in escrow on any particular day. Although Respondent Lynn Smith was only in the office approximately fifteen percent (15%) of the time while the Department's examiners were conducting their audit in May of 1988, insufficient evidence was introduced to establish the charge that Smith was not fully supervising or controlling the actions of the employees of All States Mortgage. The unrefuted testimony of Smith indicates that she often worked non-regular hours, that she reviewed all the documents for every transaction in which All States Mortgage was involved and she supervised the work of all of the employees of the company. Extenuating circumstances in May of 1988 caused her to be out of the office more than usual during regular business hours. However, this fact alone is insufficient to establish the charge that she was not fully supervising or controlling the actions of the company.
Recommendation Based upon the foregoing Findings of Facts and Conclusions of Law it is, it is RECOMMENDED that the Department of Banking and Finance enter a final order finding the Respondents guilty of violating Sections 494.055(1)(b), (d), (f), (h) and (k) and issue a reprimand to the Respondents and impose a fine of one thousand five dollars ($1,500.00). DONE and ORDERED this 9th day of July, 1990, in Tallahassee, Florida. J. STEPHEN MENTON Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, FL 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 9th day of July, 1990.
Findings Of Fact At all times material to this case, and at the time of the hearing, Charles Joseph Maher ("Respondent") was licensed in Florida as a life and health agent and general lines agent, doing business as "Maher Insurance". Medford On or about December 13, 1989, the Respondent completed an application for insurance and received a check in the amount of $557.00 from Kenneth Medford of North Fort Myers, Florida for automobile insurance to be issued by Atlanta Casualty Company. The check was made payable to the insurer. Although Mr. Medford testified that the Respondent told him the coverage would be bound, the insurance application clearly provides that the coverage was not bound at the time the application was completed. The Respondent mailed the application and check to Atlanta Casualty Company. Neither the application nor the check were received by Atlanta Casualty Company. There is no evidence that the Respondent mishandled the application and check or converted said funds to his own use. The check tendered by Mr. Medford has never been deposited and has never cleared the Medford checking account. Grandpa's Cycle Center On or about October 24, 1990, the Respondent received a check in the amount of $482.50 from Grandpa's Cycle Center of Fort Myers, Florida, constituting the estimated down payment on liability insurance to be issued by Bankers Insurance Company through the Florida Joint Underwriters Association. The actual down payment on the liability insurance was $250.00 which was remitted in the due course of business by the Respondent to Bankers Insurance Company. The policy was subsequently issued. A representative of the Respondent thereafter contacted Grandpa's Cycle Center and informed the insured that a refund of the excess down payment was due to the insured. The insured directed the Respondent's representative to retain the excess pending further direction. In part due to other matters not addressed by the Administrative Complaint filed in this case, the business relationship between the Respondent and the insured became somewhat strained and the insured terminated the relationship. On or about January 3, 1991, the Respondent tendered a check for $355.00 to the insured. The Respondent identified the total amount tendered to include a refund of $232.50 excess down payment and the remainder as "return premium" for a policy which had apparently been cancelled in August, 1990.
Recommendation Based on the foregoing, it is hereby RECOMMENDED that the Department of Insurance enter a Final Order dismissing the complaint filed against Charles Joseph Maher. DONE and RECOMMENDED this 9th day of February, 1993, in Tallahassee, Florida. WILLIAM F. QUATTLEBAUM Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 9th day of February, 1993. APPENDIX TO RECOMMENDED ORDER, CASE NO. 92-0490 The following constitute rulings on proposed findings of facts submitted by the parties. Petitioner The Petitioner's proposed findings of fact are accepted as modified and incorporated in the Recommended Order except as follows: 3-4, 7. Rejected, not supported by the greater weight of the evidence. Respondent The Respondent's proposed findings of fact are accepted as modified and incorporated in the Recommended Order except as follows: 3(a)-(k), 5(a)-(m). Rejected as cumulative or unnecessary except as otherwise adopted in this Recommended Order. COPIES FURNISHED: Tom Gallagher State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Bill O'Neil, General Counsel Office of State Treasurer The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Lisa Santucci, Esq. Division of Legal Services 412 Larson Building Tallahassee, FL 32399-0300 Charles J. Maher Post Office Box 1420 Fort Myers, Florida 33902-1420
The Issue The issues in this case are whether Respondents violated Subsections 626.611(7), 626.611(9), 626.611(10), and 626.611(13), Florida Statutes (2008),1 and, if so, what discipline should be imposed.
Findings Of Fact At all times material to the allegations in the Administrative Complaints, Mr. Holliday, III, was a licensed Florida surplus lines (1-20) agent, a life and health (2-18) agent, a general lines (property and casualty) (2-20) agent, an independent adjuster (5-20), and agent in charge at International Brokerage and Surplus Lines, Inc. (IBSL). Mr. Holliday, III, had been associated with IBSL since its inception in 1993. At all times material to the allegations in the Administrative Complaint, Mr. Holliday, IV, was licensed in Florida as a general lines (2-20) agent. At all times material to the allegations in the Administrative Complaint, Mr. Holliday, III, and Mr. Holliday, IV, were officers and owners of IBSL. Most recently, Mr. Holliday, III, was the secretary of IBSL. He handled the underwriting and risk placement for the agency. From approximately March 1993 to April 2009, Mr. Holliday, IV, was the president of IBSL. As president of IBSL, Mr. Holliday, IV's, duties included signing agreements which established IBSL's business function as that of a general managing agent and signing agreements which empowered IBSL to collect premiums on behalf of insureds. IBSL ceased doing business on May 1, 2009. In the insurance industry, a common method of procuring insurance involves a retail producer, a wholesale broker, and a program manager. A customer desiring insurance contacts its local insurance agent, which is known as a retail producer, and applies for insurance. The retail producer has a producer agreement with a wholesale broker, who has a producer agreement with a program manager. The program manager represents insurance companies. The retail producer sends the customer's application to the wholesale broker, and the wholesale broker contacts the program manager and forwards the application to the program manager. The program manager will provide a quote if the insurance company is willing to insure the customer. The quote is passed back to the customer via the wholesale broker and the retail producer. If the customer decides to take the insurance, the program manager will issue a binder to the wholesale broker, who will submit the binder to the retail producer. The wholesale broker will issue an invoice for the premium to the retail producer. The program manager pays a commission to the wholesale broker pursuant to its producer agreement with the wholesale broker, and the wholesale broker pays a commission to the retail producer pursuant to its producer agreement with the retail producer. When the retail producer sends the premium payment to the wholesale broker, the retail producer will deduct its commission. The wholesale broker sends the premium amount to the program manager less the wholesale broker's commission. If the customer is unable to pay the entire amount of the premium, part of the premium may be financed through a premium finance company. The premium finance company may pay the premium to the retail producer or to the wholesale broker. International Transportation & Marine Agency, Inc. (ITMA), is a program manager and is engaged in the business of selling, brokering, and servicing certain lines of policies of insurance written or issued by insurance companies. ITMA is a program manager for Pennsylvania Manufacturers Insurance Association (Pennsylvania Manufacturers), an insurance company. IBSL, a wholesale broker, entered into a producer's contract with ITMA on January 4, 2008. Wimberly Agency, Incorporated (Wimberly), is a retail producer located in Ringgold, Louisiana. In 2008, Wimberly had a producer's agreement with IBSL. Carla Jinks (Ms. Jinks) is the administrative manager for Wimberly. In October 2008, R.L. Carter Trucking (Carter) was a customer of Wimberly and applied for motor truck cargo insurance with Wimberly. Wimberly submitted an application to IBSL and requested that coverage be bound effective October 28, 2008, for Carter. IBSL contacted ITMA and received a binder for a policy with Pennsylvania Manufacturers. The cost of the policy was $9,500.00 plus a policy fee of $135.00 for a total of $9,635.00. Carter paid Wimberly $2,500.00 as a down payment and financed the remainder of the cost with Southern Premium Finance, LLC, who paid the financed portion directly to Wimberly. Wimberly deducted a ten percent commission of $950.00 and sent the remainder, $8,635.00 to IBSL. The check was deposited to IBSL's clearing account. On January 22, 2009, Carter contacted Ms. Jinks and advised that he had received a notice of cancellation effective January 22, 2009, due to non-payment to Pennsylvania Manufacturers. On the same date, Ms. Jinks received a facsimile transmission from IBSL, attaching the notice of cancellation and stating: "There was some confusion with the payment we send [sic] and we are working on getting it reinstated." There were some e-mails between Wimberly and Mr. Holliday, III, concerning the placement of coverage with another company. IBSL was unable to place coverage for Carter. By e-mail dated January 30, 2009, Ms. Jinks advised Mr. Holliday, III, that she had been able to place coverage for Carter and requested a return of the premium paid on a pro rata basis. She advised Mr. Holliday, III, that the return premium should be $7,651.35. By e-mail dated January 30, 2009, Mr. Holliday, III, stated: We will tender the return as quickly as it is processed by accounting. I do sorely regret the loss of this account, and our inability to get the Travelers quote agreed on a timely basis. By February 19, 2009, Wimberly had not received the return premium from IBSL. Ms. Jinks sent an e-mail to Mr. Holliday, III, on February 19, 2009, asking that the return premium be rushed to Wimberly so that it could be used to pay for the replacement policy. As of the date of Ms. Jinks' deposition on November 16, 2009, neither Mr. Holliday, III; Mr. Holliday, IV; nor IBSL had given the return premium to Wimberly. K.V. Carrier Services, Inc. (K.V.), is a retail producer located in Medley, Florida. In 2007, K.V. and IBSL entered into a business arrangement with IBSL. Under the arrangement, K.V. was the retailer, IBSL was the wholesale broker, ITMA was the program manager, and Pennsylvania Manufacturers was the insurance company. K.V. collected the down payments for the policy premiums from its customers and sent the down payments to IBSL. The remainder of the premiums were financed by financing companies, who sent the remainder of the premiums to IBSL. IBSL was supposed to send the monies paid for the premiums to ITMA. The following customers made down payments to K.V. and financed the remainder of their premiums with a financing company. E & E Trucking Service OD Transport, Inc. Fermin Balzaldua Eduardo Bravo Carlos Ramirez Edwin Bello Janet Rodriguez UTL, Inc. Prestige Transport USA JNL Transportation, Inc. Valdir Santos DJ Express PL Fast Carrier Ysis Transport K.V. sent the down payments for these customers to IBSL. The financing company sent the remainder of the premiums for these customers to IBSL. The total amount of premiums sent to IBSL for these customers was $19,768.45. IBSL did not send the premium payments for these customers to ITMA. The policies for these customers were cancelled for non-payment. K.V. found another company that was willing to insure K.V.'s customers. K.V. paid the down payments for the new policies from its own funds, hoping that IBSL would repay the finance company with any unearned premiums that would be returned to IBSL as a result of the cancellations. ITMA sent an invoice called an Account Current Statement to IBSL for the business conducted in the month of November 2008. The total amount owed to ITMA was listed as $55,116.32. The invoice included the premium for the policy issued for Carter, less IBSL's commission. The premiums for the policies issued to Eduardo Bravo; Fermin Bazaldua; JNL Transportation, Inc.; Janet Rodriguez; OD Transport, Inc.; and Prestige Transport USA were also included in the Account Current Statement for the business that IBSL conducted in November. IBSL was required to pay the $55,116.32 by December 15, 2008, but did not do so. ITMA received a check from IBSL dated December 31, 2008, for $25,000.00. A notation on the check indicated that it was a partial payment for the November business. The check was unallocated, meaning IBSL did not state to which premiums the partial payment should be applied. Mr. Holliday, III, claimed that IBSL had sent a bordereaux along with the check showing to which policies the payment applied. Mr. Holliday, III's, testimony is not credited. Donald Kaitz (Mr. Kaitz), the president of ITMA, communicated with one of the Respondents, who advised Mr. Kaitz that he needed another week or so to collect some premiums from his retail producers. On January 12, 2009, ITMA received a telephone call from IBSL, stating that IBSL could not pay the balance owed to ITMA and that ITMA should take whatever action it felt necessary. As a result of the communication from IBSL, ITMA issued notices of policy cancellation on all applicable policies listed in the Account Current Statement which was to be paid on December 15, 2008. Copies of the cancellation notices were sent to the insureds and IBSL. ITMA issued pro rata return premiums based on the number of days that each policy had been in effect. The return premiums were sent to IBSL by a check for $18,790.06. Additionally, ITMA sent IBSL a list of the policies that had been cancelled, showing the earned premiums which had been deducted from the $25,000.00. IBSL received and retained a net of $30,116.32, which was owed to ITMA. This amount is derived by deducting the $25,000.00, which IBSL sent to ITMA, from the $55,116.32, which was owed to ITMA. By letter dated April 2, 2009, IBSL sent K.V. a check for $524.80, which stated: We have totaled all amounts owing to IBSL by KV Carrier Service, and we have totaled all pro rated commissions owing by IBSL to KV Carrier Services for the benefit of your clients and have included our check # 1025 in the final amount of $524.80 to settle the account. All net unearned premiums for other than unearned commissions which are funded herein you must contact the insurance carriers involved and request payment under the provisions of Florida Statutes #627.7283. Federal Motor Carriers Risk Retention Group, Incorporated (FMC), is an insurance company, which sells commercial auto liability insurance, specifically targeted to intermediate and long-haul trucking companies. CBIP Management, Incorporated (CBIP), is a managing general underwriter for FMC. FMC had an agreement effective June 1, 2008, with IBSL, allowing IBSL to act as a general agent for FMC. As a general agent for FMC, IBSL was given the authority to accept risk on behalf of FMC. IBSL was given a fiduciary responsibility to accept insurance applications, provide quotes, and bind coverage. Once IBSL binds a policy for FMC, FMC issues a policy and is responsible for the risk. IBSL would receive the down payment from the retail agency, and, in most cases, the finance company would pay the balance of the premium directly to IBSL. The agreement between FMC and IBSL provided that IBSL was to provide FMC a monthly report of premiums billed and collected, less the agreed commission. The report was due by the 15th of the month following the reported month. In turn, FMC was to issue a statement for the balance due, and IBSL was required to pay the balance due within 15 days of the mailing of the statement following the month in which the policy was written. In August 2008, FMC began to notice that IBSL was selling premiums lower than FMC's rating guidelines. IBSL owed FMC approximately $186,000.00, which was due on August 15, 2008. IBSL sent FMC a check, which was returned for insufficient funds. FMC contacted IBSL and was assured that the check was returned due to a clerical error and an error by the bank. Assurances were given to FMC that funds would be transferred to FMC the following day; however, FMC did not receive payment until five days later. In September 2008, Joseph Valuntas (Mr. Valuntas), the chief operating officer for FMC, paid a visit to Mr. Holliday, III, and Mr. Holliday, IV. Mr. Valuntas expressed his concerns about the delay in receiving payment in August. He also pointed out that IBSL had taken some risks which were not rated properly and that there were some risks in which IBSL was not following the underwriting guidelines. After his visit with the Hollidays, Mr. Valuntas wrote a letter to IBSL, restricting IBSL to writing in Florida and limiting the amount of gross written premium to no more than $100,000.00 per month. IBSL did not adhere to Mr. Valuntas' instructions. An example of IBSL's conduct involved the writing of a policy for Miami Sunshine Transfer, which is a risk category designated as public delivery. Public delivery was not a standard that FMC insured and, as such, was not covered by FMC's reinsurance. Beginning on or about September 21, 2008, FMC began getting complaints from policyholders and retail agents about cancellations of policies that had been paid timely and in full. Although the retail agents had paid the premiums in full to IBSL, IBSL had not forwarded the premiums to FMC. By October 2008, IBSL owed FMC approximately $120,000.00 in past due premiums. FMC officially terminated the IBSL agreement in October 2008. IBSL sued FMC for breach of contract. On December 22, 2008, FMC received a check from IBSL in the amount of $25,122.80, but IBSL did not specify what premiums were being paid by the check. From February 1, 2006, through November 20, 2008, IBSL had a business relationship with Markel International Insurance Company Limited (Markel), an entity for which IBSL was writing insurance. IBSL was a coverholder for Markel, meaning that IBSL could produce insurance business for Markel and had the authority to collect and process premiums and bind insurance on Markel's behalf. Once the premiums were collected by IBSL, they were to be reported to Markel, and, within a maximum of 45 days, IBSL was to remit to Markel the aggregate gross written premiums less IBSL's commission. T. Scott Garner (Mr. Garner) is an expert auditor and financial analyst who currently works for Northshore International Insurance Services (Northshore), an insurance and reinsurance consulting firm. Markel retained Mr. Garner to determine the amount of money that IBSL should have sent to Markel for business transacted by IBSL for the period between February 1, 2006, and November 20, 2008. In doing his analysis, Mr. Garner used the bordereauxs which IBSL prepared and provided to Markel. Bordereauxs are monthly billing reports or accounts receivable reports. Mr. Garner also used data from Omni, which is a software system that was used by IBSL. Mr. Garner used the following procedure to determine what IBSL owed Markel. He determined how much risk IBSL wrote during the time period, that is, the gross written premium. He identified the amount of money that Markel had received from IBSL for the time period. Next he determined the amount that should have been received from IBSL, the gross written premiums minus IBSL's commissions. He compared what should have been remitted to Markel with the amount that was actually received by Markel. Based on his analysis, Mr. Garner calculated that IBSL owed Markel $1,208,656.61. Mr. Garner's analysis is credited. Respondent submitted a FSLSO Compliance Review Summary, which was done by the Florida Surplus Lines Office. At the final hearing, Mr. Holliday, III, viewed the report to mean that Markel was incorrect in the amount of money that was owed to it by IBSL. The report does not indicate that the policies on which the premium variances were noted were policies issued by Markel. Additionally, in his review, Mr. Garner eliminated duplicate transactions in determining the amount owed to Markel. The report did give a long list of policies, which should have been reported to Florida Surplus Lines Office, but IBSL had failed to report the policies.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a final order be entered finding that Respondents committed the violations alleged in Counts I through V of the Administrative Complaints, dismissing Count VI of the Administrative Complaints, and revoking the licenses of Respondents. DONE AND ENTERED this 15th day of October, 2010, in Tallahassee, Leon County, Florida. S SUSAN B. HARRELL Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 15th day of October, 2010.
The Issue Whether Respondent has violated Section 627.8405, Florida Statutes.
Findings Of Fact Respondent, Capital National Financial Corporation (Capital), is transacting the business of insurance premium financing pursuant to a certificate of authority issued by the Petitioner, Florida Department of Insurance (Department). The Department is responsible for regulating the premium finance business affairs of Capital. On August 30, 1994, the Department issued a Notice of Intent to Non- renew Capital's certificate of authority to transact premium financing in Florida pursuant to Section 627.829, Florida Statutes. As authority for issuing the Notice of Intent to Non-renew, the Department cited two grounds. First, the Department alleged that Capital was illegally financing the purchase of automobile club memberships in conjunction with an insurance transaction, a violation of Section 627.8405, Florida Statutes. Second, the Department alleged that Capital was utilizing a form in conjunction with the premium financing transaction without the requisite Departmental approval, a violation of Section 627.838, Florida Statutes. The parties have stipulated that the only issue to be determined is whether there was a violation of Section 627.8405. Capital finances insurance premiums and has agreed to collect installment payments for automobile club memberships which the insurance agent sells to the customer when the customer is buying automobile insurance. The customer makes a down payment on the automobile club membership. Capital does not advance the remainder of the membership cost to the insurance agent. The customer executes a billing service disclosure form. The billing service disclosure form contains the following language: In conjunction with your insurance, you have purchased through your insurance agent the supplemental service disclosed above. The amount which you are charged for this supplemental service, after deduction of any down payment which you have paid, will be divided equally into monthly installments payable to Capital National Financial Corporation due at the same time, and in addition to, your monthly installment payable to Capital National for the financing of the purchase of your insurance. Capital National is acting as a collection agent for your insurance agent and is not charging any interest or other fee for collecting and processing the amount due for your purchase of this supplemental service. The monthly installment you will pay for the supplemental service will be added to the payment amount for your insurance and this aggregate amount will be reflected on your payment coupon. However, your insurance can not be cancelled by reason of your failure to pay the amount of the monthly installment attributable to the purchase of the supplemental service. The billing service disclosure form used by Capital is executed by the customer on the same day the premium finance agreement is executed. The billing disclosure form is a separate document from the premium finance agreement.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a final order be entered finding that Capital National Financial Corporation did not violate Section 627.8405, Florida Statutes. DONE AND ENTERED this 8th day of January, 1996, in Tallahassee, Leon County, Florida. SUSAN B. KIRKLAND Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 8th day of January, 1996. APPENDIX TO RECOMMENDED ORDER, CASE NO. 95-1944 To comply with the requirements of Section 120.59(2), Florida Statutes, the following rulings are made on the parties' proposed findings of fact: Petitioner's Proposed Findings of Fact. Paragraphs 1-4: Accepted in substance. Paragraphs 5-19: Rejected as unnecessary. Paragraph 20: Rejected as not supported by the record. Capital disputes that they are "financing" the automobile club fees. Paragraphs 21-23: Accepted in substance. Paragraphs 24-29: Rejected as unnecessary. Respondent's Proposed Findings of Fact. Paragraphs 1-4: Accepted in substance. Paragraphs 5-6: Rejected as unnecessary. Paragraphs 7-11: Accepted in substance. Paragraphs 12-13: Rejected as unnecessary. COPIES FURNISHED: Alan J. Leifer, Esquire Department of Insurance/Legal Services East Gaines Street Tallahassee, Florida 32399-0333 Alberto R. Cardenas, Esquire Matias R. Dorta, Esquire Tew & Garcia-Pedrosa South Biscayne Boulevard Miami, Florida 33131-4336 Bill Nelson State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Dan Sumner Acting General Counsel Department of Insurance The Capitol, PL-11 Tallahassee, Florida 32399
Findings Of Fact Respondent has been licensed by Petitioner as a physician in the State of Florida and has, at all times pertinent to this proceeding, held license number ME0030090. Andy Moya, a law enforcement investigator with the Division of Insurance Fraud of the Florida Department of Insurance, conducted an investigation of Respondent's billings to insurance companies. As a result of this investigation, Mr. Moya executed a probable cause affidavit that led to Respondent's arrest on multiple counts, including four counts of grand theft. Grand theft is a third degree felony. On June 12, 1991, Respondent was arrested pursuant to the arrest warrant that had been obtained by Mr. Moya. On October 8, 1991, Respondent freely and voluntarily entered a plea of nolo contendre to four counts of grand theft. The presiding circuit judge accepted Respondent's plea of nolo contendre, withheld adjudication of guilt, placed the Respondent on probation for a period of five years, and ordered Respondent to pay the Department of Insurance the sum of $1,000.00 and the State Attorney's office the sum of $750.00. A condition of Respondent's probation was that under no circumstances could he bill insurance companies for services he performed. All billings to insurance companies would have to be done by someone over whom Respondent had no control. A plea of nolo contendre to four counts of grand theft for billing insurance carriers for services not rendered is directly related to the practice of medicine. The following facts underlie the criminal charges to which Respondent entered a plea of nolo contendre. PATIENT #1 AND PATIENT #2 Patient #1 and #2 were in a car accident in Hialeah, Florida, and subsequently were referred to Respondent by attorney Richard H. Reynolds. Respondent billed U.S. Security Insurance Company, Inc., a total of $1,995.00 for treating Patient #1 on 41 different dates from January 17, 1990, through May 2, 1990. Patient #1 later testified that she had been treated by Respondent on no more than ten different dates. Respondent assigned to Patient #1 a disability rating of five to six percent permanent/partial impairment. Patient #1 later denied under oath that any disability resulted because of the accident. Respondent billed U.S. Security Insurance Company, Inc., a total of $2,195.00 for treating Patient #2 on 46 different dates from January 17, 1990, through May 7, 1990. Patient #2 later testified that she had been treated by Respondent on no more than ten different dates. Respondent assigned to Patient #2 a disability rating of five to six percent permanent/partial impairment. Patient #2 later denied under oath that any disability resulted because of the accident. On October 25, 1990, Respondent authenticated his medical records and billings on Patient #1 and Patient #2 and affirmed to Mr. Moya that these documents were correct. Respondent's medical records and billings for Patient #1 and Patient #2 were fraudulent. PATIENT #3 On July 13, 1990, Patient #3 was in a car accident. On July 27, 1990, an attorney referred Patient #3 to Respondent. Several days after July 27, 1990, Patient #3 visited Respondent (or any other doctor following the accident) for the first time. Respondent subsequently billed U.S. Security Insurance, Inc., for services rendered to Patient #3 on July 20, 23, 25, and 27, 1990. These billings, in the approximate amount of $300.00, were fraudulent in that they were for services purportedly rendered on dates before Respondent first saw this patient. PATIENT #4 Respondent billed Allstate Insurance Company for services that Respondent purportedly rendered to Patient #4 as follows: office visit on June 26, 1990, and physiotherapy treatments on June 26, 28, and 29, and July 3, 5, 6, and 9, 1990. These billings were fraudulent in that Patient #4 was hospitalized at Coral Gables Hospital from June 26, 1990, to July 11, 1990. Respondent did not provide the services for which he billed Allstate Insurance Company during June and July 1990. On February 6, 1991, Respondent signed an affidavit that provided, in pertinent part, as follows: I have read the attached medical report and bill for services rendered to [Patient #4]. I declare that the treatments indication on the attached medical report and bill for services were provided by me on the dates listed and that the treatment and services rendered were reasonable and necessary with respect to the bodily injury sustained. Respondent's billings for Patient #4, in the approximate amount of $300.00, were fraudulent and the affidavit he signed on February 6, 1991, was untrue. Respondent was born in Cuba and graduated from the University of Havana School of Medicine in 1962. Respondent testified at the formal hearing that he was born on May 26, 1919, but the application for licensure submitted by Respondent reflects that Respondent was born May 26, 1924. There was no explanation for this discrepancy. Respondent has been licensed as a physician in the State of Florida since 1977. There was no evidence that Respondent has been previously disciplined by Petitioner. At the time of the formal hearing, Respondent was practicing medicine with Dr. Antonio Ramirez, M.D. Dr. Ramirez is a physician licensed to practice medicine in the State of Florida. Dr. Ramirez was also educated in Cuba, and had known Respondent since the 1970s. Dr. Ramirez is of the opinion that the services rendered by Respondent have been satisfactory. Respondent has no responsibility for submitting bills to patients or to insurance companies.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Petitioner enter a final order which finds that Respondent committed the acts alleged in the Administrative Complaint and which revokes Respondent's license to practice medicine in the State of Florida. DONE AND ORDERED this 7th day of February, 1994, in Tallahassee, Leon County, Florida. CLAUDE B. ARRINGTON Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 7th day of February, 1994. COPIES FURNISHED: Carlos J. Ramos, Esquire Department of Business and Professional Regulation 1940 North Monroe Street, Suite 60 Tallahassee, Florida 32399-0792 Manuel F. Fente, Esquire 1835 West Flagler Street, Suite 201 Miami, Florida 33135 Dr. Marm Harris, Executive Director Department of Business and Professional Regulation 1940 North Monroe Street Tallahassee, Florida 32399-0770 Jack McRay, General Counsel Department of Business and Professional Regulation 1940 North Monroe Street Tallahassee, Florida 32399-0792
The Issue At issue in this proceeding is whether proposed Florida Administrative Code Rule 69O-125.005 is an invalid exercise of delegated legislative authority.
Findings Of Fact Petitioners AIA is a trade association made up 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. 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 companies in regulatory and legislative matters throughout the United States, including Florida. PCI is a national trade association of property and casualty insurance companies consisting of 1,055 members. PCI members include mutual insurance companies, stock insurance companies, and reciprocal insurers that write property and casualty insurance in Florida. PCI members annually write approximately $15 billion in premiums in Florida. PCI participated in the OIR's workshops on the Proposed Rule. PCI's assistant vice president and regional manager, William Stander, testified that if the Proposed Rule is adopted, PCI's member companies would be required either to withdraw from the Florida market or drastically reorganize their business model. FIC is an insurance trade association made up of 39 insurance groups that represent approximately 250 insurance companies writing all lines of insurance. All of FIC's members are licensed in Florida and write approximately $27 billion in premiums in Florida. FIC has participated in rule challenges in the past, and participated in the workshop and public hearing process conducted by OIR for this Proposed Rule. FIC President Guy Marvin testified that FIC's property and casualty members use credit scoring and would be affected by the Proposed Rule. A substantial number of Petitioners' members are insurers writing property and casualty insurance and/or motor vehicle insurance coverage in Florida. These members use credit-based insurance scoring in their underwriting and rating processes. They would be directly regulated by the Proposed Rule in their underwriting and rating methods and in the rate filing processes set forth in Sections 627.062 and 627.0651, Florida Statutes. Fair Isaac originated credit-based insurance scoring and is a leading provider of credit-based insurance scoring information in the United States and Canada. Fair Isaac has invested millions of dollars in the development and maintenance of its credit-based insurance models. Fair Isaac concedes that it is not an insurer and, thus, would not be directly regulated by the Proposed Rule. However, Fair Isaac would be directly affected by any negative impact that the Proposed Rule would have in setting limits on the use of credit-based insurance score models in Florida. Lamont Boyd, a manager in Fair Isaac's global scoring division, testified that if the Proposed Rule goes into effect Fair Isaac would, at a minimum, lose all of the revenue it currently generates from insurance companies that use its scores in the State of Florida, because Fair Isaac's credit-based insurance scoring model cannot meet the requirements of the Proposed Rule regarding racial, ethnic, and religious categorization. Mr. Boyd also testified that enactment of the Proposed Rule could cause a "ripple effect" of similar regulations in other states, further impairing Fair Isaac's business. The Statute and Proposed Rule During the 1990s, insurance companies' use of consumer credit information for underwriting and rating automobile and residential property insurance policies greatly increased. Insurance regulators expressed concern that the use of consumer credit reports, credit histories and credit-based insurance scoring models could have a negative effect on consumers' ability to obtain and keep insurance at appropriate rates. Of particular concern was the possibility that the use of credit scoring would particularly hurt minorities, people with low incomes, and young people, because those persons would be more likely to have poor credit scores. On September 19, 2001, Insurance Commissioner Tom Gallagher appointed a task force to examine the use of credit reports and develop recommendations for the Legislature or for the promulgation of rules regarding the use of credit scoring by the insurance industry. The task force met on four separate occasions throughout the state in 2001, and issued its report on January 23, 2002. The task force report conceded that the evidence supporting the negative impact of the use of credit reports on specific groups is "primarily anecdotal," and that the insurance industry had submitted anecdotal evidence to the contrary. Among its nine recommendations, the task force recommended the following: A comprehensive and independent investigation of the relationship between insurers' use of consumer credit information and risk of loss including the impact by race, income, geographic location and age. A prohibition against the use of credit reports as the sole basis for making underwriting or rating decisions. That insurers using credit as an underwriting or rating factor be required to provide regulators with sufficient information to independently verify that use. That insurers be required to send a copy of the credit report to those consumers whose adverse insurance decision is a result of their consumer credit information and a simple explanation of the specific credit characteristics that caused the adverse decision. That insurers not be permitted to draw a negative inference from a bad credit score that is due to medical bills, little or no credit information, or other special circumstances that are clearly not related to an applicant's or policyholder's insurability. That the impact of credit reports be mitigated by imposing limits on the weight that insurers can give to them in the decision to write a policy and limits on the amount the premium can be increased due to credit information. No evidence was presented that the "comprehensive and independent investigation" of insurers' use of credit information was undertaken by the Legislature. However, the other recommendations of the task force were addressed in Senate Bills 40A and 42A, enacted by the Legislature and signed by the governor on June 26, 2003. These companion bills, each with an effective date of January 1, 2004, were codified as Sections 626.9741 and 626.97411, Florida Statutes, respectively. Chapters 2003-407 and 2003-408, Laws of Florida. Section 626.9741, Florida Statutes, provides: The purpose of this section is to regulate and limit the use of credit reports and credit scores by insurers for underwriting and rating purposes. This section applies only to personal lines motor vehicle insurance and personal lines residential insurance, which includes homeowners, mobile home owners' dwelling, tenants, condominium unit owners, cooperative unit owners, and similar types of insurance. As used in this section, the term: "Adverse decision" means a decision to refuse to issue or renew a policy of insurance; to issue a policy with exclusions or restrictions; to increase the rates or premium charged for a policy of insurance; to place an insured or applicant in a rating tier that does not have the lowest available rates for which that insured or applicant is otherwise eligible; or to place an applicant or insured with a company operating under common management, control, or ownership which does not offer the lowest rates available, within the affiliate group of insurance companies, for which that insured or applicant is otherwise eligible. "Credit report" means any written, oral, or other communication of any information by a consumer reporting agency, as defined in the federal Fair Credit Reporting Act, 15 U.S.C. ss. 1681 et seq., bearing on a consumer's credit worthiness, credit standing, or credit capacity, which is used or expected to be used or collected as a factor to establish a person's eligibility for credit or insurance, or any other purpose authorized pursuant to the applicable provision of such federal act. A credit score alone, as calculated by a credit reporting agency or by or for the insurer, may not be considered a credit report. "Credit score" means a score, grade, or value that is derived by using any or all data from a credit report in any type of model, method, or program, whether electronically, in an algorithm, computer software or program, or any other process, for the purpose of grading or ranking credit report data. "Tier" means a category within a single insurer into which insureds with substantially similar risk, exposure, or expense factors are placed for purposes of determining rate or premium. An insurer must inform an applicant or insured, in the same medium as the application is taken, that a credit report or score is being requested for underwriting or rating purposes. An insurer that makes an adverse decision based, in whole or in part, upon a credit report must provide at no charge, a copy of the credit report to the applicant or insured or provide the applicant or insured with the name, address, and telephone number of the consumer reporting agency from which the insured or applicant may obtain the credit report. The insurer must provide notification to the consumer explaining the reasons for the adverse decision. The reasons must be provided in sufficiently clear and specific language so that a person can identify the basis for the insurer's adverse decision. Such notification shall include a description of the four primary reasons, or such fewer number as existed, which were the primary influences of the adverse decision. The use of generalized terms such as "poor credit history," "poor credit rating," or "poor insurance score" does not meet the explanation requirements of this subsection. A credit score may not be used in underwriting or rating insurance unless the scoring process produces information in sufficient detail to permit compliance with the requirements of this subsection. It shall not be deemed an adverse decision if, due to the insured's credit report or credit score, the insured continues to receive a less favorable rate or placement in a less favorable tier or company at the time of renewal except for renewals or reunderwriting required by this section. (4)(a) An insurer may not request a credit report or score based upon the race, color, religion, marital status, age, gender, income, national origin, or place of residence of the applicant or insured. An insurer may not make an adverse decision solely because of information contained in a credit report or score without consideration of any other underwriting or rating factor. An insurer may not make an adverse decision or use a credit score that could lead to such a decision if based, in whole or in part, on: The absence of, or an insufficient, credit history, in which instance the insurer shall: Treat the consumer as otherwise approved by the Office of Insurance Regulation if the insurer presents information that such an absence or inability is related to the risk for the insurer; Treat the consumer as if the applicant or insured had neutral credit information, as defined by the insurer; Exclude the use of credit information as a factor and use only other underwriting criteria; Collection accounts with a medical industry code, if so identified on the consumer's credit report; Place of residence; or Any other circumstance that the Financial Services Commission determines, by rule, lacks sufficient statistical correlation and actuarial justification as a predictor of insurance risk. An insurer may use the number of credit inquiries requested or made regarding the applicant or insured except for: Credit inquiries not initiated by the consumer or inquiries requested by the consumer for his or her own credit information. Inquiries relating to insurance coverage, if so identified on a consumer's credit report. Collection accounts with a medical industry code, if so identified on the consumer's credit report Multiple lender inquiries, if coded by the consumer reporting agency on the consumer's credit report as being from the home mortgage industry and made within 30 days of one another, unless only one inquiry is considered. Multiple lender inquiries, if coded by the consumer reporting agency on the consumer's credit report as being from the automobile lending industry and made within 30 days of one another, unless only one inquiry is considered. An insurer must, upon the request of an applicant or insured, provide a means of appeal for an applicant or insured whose credit report or credit score is unduly influenced by a dissolution of marriage, the death of a spouse, or temporary loss of employment. The insurer must complete its review within 10 business days after the request by the applicant or insured and receipt of reasonable documentation requested by the insurer, and, if the insurer determines that the credit report or credit score was unduly influenced by any of such factors, the insurer shall treat the applicant or insured as if the applicant or insured had neutral credit information or shall exclude the credit information, as defined by the insurer, whichever is more favorable to the applicant or insured. An insurer shall not be considered out of compliance with its underwriting rules or rates or forms filed with the Office of Insurance Regulation or out of compliance with any other state law or rule as a result of granting any exceptions pursuant to this subsection. A rate filing that uses credit reports or credit scores must comply with the requirements of s. 627.062 or s. 627.0651 to ensure that rates are not excessive, inadequate, or unfairly discriminatory. An insurer that requests or uses credit reports and credit scoring in its underwriting and rating methods shall maintain and adhere to established written procedures that reflect the restrictions set forth in the federal Fair Credit Reporting Act, this section, and all rules related thereto. (7)(a) An insurer shall establish procedures to review the credit history of an insured who was adversely affected by the use of the insured's credit history at the initial rating of the policy, or at a subsequent renewal thereof. This review must be performed at a minimum of once every 2 years or at the request of the insured, whichever is sooner, and the insurer shall adjust the premium of the insured to reflect any improvement in the credit history. The procedures must provide that, with respect to existing policyholders, the review of a credit report will not be used by the insurer to cancel, refuse to renew, or require a change in the method of payment or payment plan. (b) However, as an alternative to the requirements of paragraph (a), an insurer that used a credit report or credit score for an insured upon inception of a policy, who will not use a credit report or score for reunderwriting, shall reevaluate the insured within the first 3 years after inception, based on other allowable underwriting or rating factors, excluding credit information if the insurer does not increase the rates or premium charged to the insured based on the exclusion of credit reports or credit scores. The commission may adopt rules to administer this section. The rules may include, but need not be limited to: Information that must be included in filings to demonstrate compliance with subsection (3). Statistical detail that insurers using credit reports or scores under subsection (5) must retain and report annually to the Office of Insurance Regulation. Standards that ensure that rates or premiums associated with the use of a credit report or score are not unfairly discriminatory, based upon race, color, religion, marital status, age, gender, income, national origin, or place of residence. Standards for review of models, methods, programs, or any other process by which to grade or rank credit report data and which may produce credit scores in order to ensure that the insurer demonstrates that such grading, ranking, or scoring is valid in predicting insurance risk of an applicant or insured. Section 626.97411, Florida Statutes, provides: Credit scoring methodologies and related data and information that are trade secrets as defined in s. 688.002 and that are filed with the Office of Insurance Regulation pursuant to a rate filing or other filing required by law are confidential and exempt from the provisions of s. 119.07(1) and s. 24(a), Art. I of the State Constitution.3 Following extensive rule development workshops and industry comment, proposed Florida Administrative Code Rule 69O-125.005 was initially published in the Florida Administrative Weekly, on February 11, 2005.4 The Proposed Rule states, as follows: 69O-125.005 Use of Credit Reports and Credit Scores by Insurers. For the purpose of this rule, the following definitions apply: "Applicant", for purposes of Section 626.9741, F.S., means an individual whose credit report or score is requested for underwriting or rating purposes relating to personal lines motor vehicle or personal lines residential insurance and shall not include individuals who have merely requested a quote. "Credit scoring methodology" means any methodology that uses credit reports or credit scores, in whole or in part, for underwriting or rating purposes. "Data cleansing" means the correction or enhancement of presumed incomplete, incorrect, missing, or improperly formatted information. "Personal lines motor vehicle" insurance means insurance against loss or damage to any motorized land vehicle or any loss, liability, or expense resulting from or incidental to ownership, maintenance or use of such vehicle if the contract of insurance shows one or more natural persons as named insureds. The following are not included in this definition: Vehicles used as public livery or conveyance; Vehicles rented to others; Vehicles with more than four wheels; Vehicles used primarily for commercial purposes; and Vehicles with a net vehicle weight of more than 5,000 pounds designed or used for the carriage of goods (other than the personal effects of passengers) or drawing a trailer designed or used for the carriage of such goods. The following are specifically included, inter alia, in this definition: Motorcycles; Motor homes; Antique or classic automobiles; and Recreational vehicles. "Unfairly discriminatory" means that adverse decisions resulting from the use of a credit scoring methodology disproportionately affects persons belonging to any of the classes set forth in Section 626.9741(8)(c), F.S. Insurers may not use any credit scoring methodology that is unfairly discriminatory. The burden of demonstrating that the credit scoring methodology is not unfairly discriminatory is upon the insurer. An insurer may not request or use a credit report or credit score in its underwriting or rating method unless it maintains and adheres to established written procedures that reflect the restrictions set forth in the federal Fair Credit Reporting Act, Section 626.9741, F.S., and these rules. Upon initial use or any change in that use, insurers using credit reports or credit scores for underwriting or rating personal lines residential or personal lines motor vehicle insurance shall include the following information in filings submitted pursuant to Section 627.062 or 627.0651, F.S. A listing of the types of individuals whose credit reports or scores the company will use or attempt to use to underwrite or rate a given policy. For example: Person signing application; Named insured or spouse; and All listed operators. How those individual reports or scores will be combined if more than one is used. For example: Average score used; Highest score used. The name(s) of the consumer reporting agencies or any other third party vendors from which the company will obtain or attempt to obtain credit reports or scores. Precise identifying information specifying or describing the credit scoring methodology, if any, the company will use including: Common or trade name; Version, subtype, or intended segment of business the system was designed for; and Any other information needed to distinguish a particular credit scoring methodology from other similar ones, whether developed by the company or by a third party vendor. The effect of particular scores or ranges of scores (or, for companies not using scores, the effect of particular items appearing on a credit report) on any of the following as applicable: Rate or premium charged for a policy of insurance; Placement of an insured or applicant in a rating tier; Placement of an applicant or insured in a company within an affiliated group of insurance companies; Decision to refuse to issue or renew a policy of insurance or to issue a policy with exclusions or restrictions or limitations in payment plans. The effect of the absence or insufficiency of credit history (as referenced in Section 626.9741(4)(c)1., F.S.) on any items listed in paragraph (e) above. The manner in which collection accounts identified with a medical industry code (as referenced in Section 626.9741(4)(c)2., F.S.) on a consumer's credit report will be treated in the underwriting or rating process or within any credit scoring methodology used. The manner in which collection accounts that are not identified with a medical industry code, but which an applicant or insured demonstrates are the direct result of significant and extraordinary medical expenses, will be treated in the underwriting or rating process or within any credit scoring methodology used. The manner in which the following will be treated in the underwriting or rating process, or within any credit scoring methodology used: Credit inquiries not initiated by the consumer; Requests by the consumer for the consumer's own credit information; Multiple lender inquiries, if coded by the consumer reporting agency on the consumer's credit report as being from the automobile lending industry or the home mortgage industry and made within 30 days of one another; Multiple lender inquiries that are not coded by the consumer reporting agency on the consumer's credit report as being from the automobile lending industry or the home mortgage industry and made within 30 days of one another, but that an applicant or insured demonstrates are the direct result of such inquiries; Inquiries relating to insurance coverage, if so identified on a consumer's credit report; and Inquiries relating to insurance coverage that are not so identified on a consumer's credit report, but which an applicant or insured demonstrates are the direct result of such inquiries. The list of all clear and specific primary reasons that may be cited to the consumer as the basis or explanation for an adverse decision under Section 626.9741(3), F.S. and the criteria determining when each of those reasons will be so cited. A description of the process that the insurer will use to correct any error in premium charged the insured, or in underwriting decision made concerning the insured, if the basis of the premium charged or the decision made is a disputed item that is later removed from the credit report or corrected, provided that the insured first notifies the insurer that the item has been removed or corrected. A certification that no use of credit reports or scores in rating insurance will apply to any component of a rate or premium attributed to hurricane coverage for residential properties as separately identified in accordance with Section 627.0629, F.S. Insurers desiring to make adverse decisions for personal lines motor vehicle policies or personal lines residential policies based on the absence or insufficiency of credit history shall either: Treat such consumers or applicants as otherwise approved by the Office of Insurance Regulation if the insurer presents information that such an absence or inability is related to the risk for the insurer and does not result in a disparate impact on persons belonging to any of the classes set forth in Section 626.9741(8)(c), This information will be held as confidential if properly so identified by the insurer and eligible under Section 626.9711, F.S. The information shall include: Data comparing experience for each category of those with absent or insufficient credit history to each category of insureds separately treated with respect to credit and having sufficient credit history; A statistically credible method of analysis that concludes that the relationship between absence or insufficiency and the risk assumed is not due to chance; A statistically credible method of analysis that concludes that absence or insufficiency of credit history does not disparately impact persons belonging to any of the classes set forth in Section 626.9741(8)(c), F.S.; A statistically credible method of analysis that confirms that the treatment proposed by the insurer is quantitatively appropriate; and Statistical tests establishing that the treatment proposed by the insurer is warranted for the total of all consumers with absence or insufficiency of credit history and for at least two subsets of such consumers. Treat such consumers as if the applicant or insured had neutral credit information, as defined by the insurer. Should an insurer fail to specify a definition, neutral is defined as the average score that a stratified random sample of consumers or applicants having sufficient credit history would attain using the insurer's credit scoring methodology; or Exclude credit as a factor and use other criteria. These other criteria must be specified by the insurer and must not result in average treatment for the totality of consumers with an absence of or insufficiency of credit history any less favorable than the treatment of average consumers or applicants having sufficient credit history. Insurers desiring to make adverse decisions for personal lines motor vehicle or personal lines residential insurance based on information contained in a credit report or score shall file with the Office information establishing that the results of such decisions do not correlate so closely with the zip code of residence of the insured as to constitute a decision based on place of residence of the insured in violation of Section 626.9741(4)(c)(3), F.S. (7)(a) Insurers using credit reports or credit scores for underwriting or rating personal lines residential or personal lines motor vehicle insurance shall develop, maintain, and adhere to written procedures consistent with Section 626.9741(4)(e), F.S. providing appeals for applicants or insureds whose credit reports or scores are unduly influenced by dissolution of marriage, death of a spouse, or temporary loss of employment. (b) These procedures shall be subject to examination by the Office at any time. (8)(a)1. Insurers using credit reports or credit scoring in rating personal lines motor vehicle or personal lines residential insurance shall develop, maintain, and adhere to written procedures to review the credit history of an insured who was adversely affected by such use at initial rating of the policy or subsequent renewal thereof. These procedures shall be subject to examination by the Office at any time. The procedures shall comply with the following: A review shall be conducted: No later than 2 years following the date of any adverse decision, or Any time, at the request of the insured, but no more than once per policy period without insurer assent. The insurer shall notify the named insureds annually of their right to request the review in (II) above. Renewal notices issued 120 days or less after the effective date of this rule are not included in this requirement. The insurer shall adjust the premium to reflect any improvement in credit history no later than the first renewal date that follows a review of credit history. The renewal premium shall be subject to other rating factors lawfully used by the insurer. The review shall not be used by the insurer to cancel, refuse to renew, or require a change in the method of payment or payment plan based on credit history. (b)1. As an alternative to the requirements in paragraph (8)(a), insurers using credit reports or scores at the inception of a policy but not for re-underwriting shall develop, maintain, and adhere to written procedures. These procedures shall be subject to examination by the Office at any time. The procedures shall comply with the following: Insureds shall be reevaluated no later than 3 years following policy inception based on allowable underwriting or rating factors, excluding credit information. The rate or premium charged to an insured shall not be greater, solely as a result of the reevaluation, than the rate or premium charged for the immediately preceding policy term. This shall not be construed to prohibit an insurer from applying regular underwriting criteria (which may result in a greater premium) or general rate increases to the premium charged. For insureds that received an adverse decision notification at policy inception, no residual effects of that adverse decision shall survive the reevaluation. This means that the reevaluation must be complete enough to make it possible for insureds adversely impacted at inception to attain the lowest available rate for which comparable insureds are eligible, considering only allowable underwriting or rating factors (excluding credit information) at the time of the reevaluation. No credit scoring methodology shall be used for personal lines motor vehicle or personal lines residential property insurance unless that methodology has been demonstrated to be a valid predictor of the insurance risk to be assumed by an insurer for the applicable type of insurance. The demonstration of validity detailed below need only be provided with the first rate, rule, or underwriting guidelines filing following the effective date of this rule and at any time a change is made in the credit scoring methodology. Other such filings may instead refer to the most recent prior filing containing a demonstration. Information supplied in the context of a demonstration of validity will be held as confidential if properly so identified by the insurer and eligible under Section 626.9711, F.S. A demonstration of validity shall include: A listing of the persons that contributed substantially to the development of the most current version of the method, including resumes of the persons, if obtainable, indicating their qualifications and experience in similar endeavors. An enumeration of all data cleansing techniques that have been used in the development of the method, which shall include: The nature of each technique; Any biases the technique might introduce; and The prevalence of each type of invalid information prior to correction or enhancement. All data that was used by the model developers in the derivation and calibration of the model parameters. Data shall be in sufficient detail to permit the Office to conduct multiple regression testing for validation of the credit scoring methodology. Data, including field definitions, shall be supplied in electronic format compatible with the software used by the Office. Statistical results showing that the model and parameters are predictive and not overlapping or duplicative of any other variables used to rate an applicant to such a degree as to render their combined use actuarially unsound. Such results shall include the period of time for which each element from a credit report is used. A precise listing of all elements from a credit report that are used in scoring, and the formula used to compute the score, including the time period during which each element is used. Such listing is confidential if properly so identified by the insurer. An assessment by a qualified actuary, economist, or statistician (whether or not employed by the insurer) other than persons who contributed substantially to the development of the credit scoring methodology, concluding that there is a significant statistical correlation between the scores and frequency or severity of claims. The assessment shall: Identify the person performing the assessment and show his or her educational and professional experience qualifications; and Include a test of robustness of the model, showing that it performs well on a credible validation data set. The validation data set may not be the one from which the model was developed. Documentation consisting of statistical testing of the application of the credit scoring model to determine whether it results in a disproportionate impact on the classes set forth in Section 626.9741(8)(c), A model that disproportionately affects any such class of persons is presumed to have a disparate impact and is presumed to be unfairly discriminatory. Statistical analysis shall be performed on the current insureds of the insurer using the proposed credit scoring model, and shall include the raw data and detailed results on each classification set forth in Section 626.9741(8)(c), F.S. In lieu of such analysis insurers may use the alternative in 2. below. Alternatively, insurers may submit statistical studies and analyses that have been performed by educational institutions, independent professional associations, or other reputable entities recognized in the field, that indicate that there is no disproportionate impact on any of the classes set forth in Section 626.9741(8)(c), F.S. attributable to the use of credit reports or scores. Any such studies or analyses shall have been done concerning the specific credit scoring model proposed by the insurer. The Office will utilize generally accepted statistical analysis principles in reviewing studies submitted which support the insurer's analysis that the credit scoring model does not disproportionately impact any class based upon race, color, religion, marital status, age, gender, income, national origin, or place of residence. The Office will permit reliance on such studies only to the extent that they permit independent verification of the results. The testing or validation results obtained in the course of the assessment in paragraphs (d) and (f) above. Internal Insurer data that validates the premium differentials proposed based on the scores or ranges of scores. Industry or countrywide data may be used to the extent that the Florida insurer data lacks credibility based upon generally accepted actuarial standards. Insurers using industry or countrywide data for validation shall supply Florida insurer data and demonstrate that generally accepted actuarial standards would allow reliance on each set of data to the extent the insurer has done so. Validation data including claims on personal lines residential insurance policies that are the result of acts of God shall not be used unless such acts occurred prior to January 1, 2004. The mere copying of another company's system will not fulfill the requirement to validate proposed premium differentials unless the filer has used a method or system for less than 3 years and demonstrates that it is not cost effective to retrospectively analyze its own data. Companies under common ownership, management, and control may copy to fulfill the requirement to validate proposed premium differentials if they demonstrate that the characteristics of the business to be written by the affiliate doing the copying are sufficiently similar to the affiliate being copied to presume common differentials will be accurate. The credibility standards and any judgmental adjustments, including limitations on effects, that have been used in the process of deriving premium differentials proposed and validated in paragraph (i) above. An explanation of how the credit scoring methodology treats discrepancies in the information that could have been obtained from different consumer reporting agencies: Equifax, Experian, or TransUnion. This shall not be construed to require insurers to obtain multiple reports for each insured or applicant. 1. The date that each of the analyses, tests, and validations required in paragraphs (d) through (j) above was most recently performed, and a certification that the results continue to be applicable. 2. Any item not reviewed in the previous 5 years is unacceptable. Specific Authority 624.308(1), 626.9741(8) FS. Law Implemented 624.307(1), 626.9741 FS. History-- New . The Petition 1. Statutory Definitions of "Unfairly Discriminatory" The main issue raised by Petitioners is that the Proposed Rule's definition of "unfairly discriminatory," and those portions of the Proposed Rule that rely on this definition, are invalid because they are vague, and enlarge, modify, and contravene the provisions of the law implemented and other provisions of the insurance code. Section 626.9741, Florida Statutes, does not define "unfairly discriminatory." Subsection 626.9741(5), Florida Statutes, provides that a rate filing using credit reports or scores "must comply with the requirements of s. 627.062 or s. 627.0651 to ensure that rates are not excessive, inadequate, or unfairly discriminatory." Subsection 626.9741(8)(c), Florida Statutes, provides that the FSC may adopt rules, including standards to ensure that rates or premiums "associated with the use of a credit report or score are not unfairly discriminatory, based upon race, color, religion, marital status, age, gender, income, national origin, or place of residence." Chapter 627, Part I, Florida Statutes, is referred to as the "Rating Law." § 627.011, Fla. Stat. The purpose of the Rating Law is to "promote the public welfare by regulating insurance rates . . . to the end that they shall not be excessive, inadequate, or unfairly discriminatory." § 627.031(1)(a), Fla. Stat. The Rating Law provisions referenced by Subsection 626.9741(5), Florida Statutes, in relation to ensuring that rates are not "unfairly discriminatory" are Sections 627.062 and 627.0651, Florida Statutes. Section 627.062, Florida Statutes, titled "Rate standards," provides that "[t]he rates for all classes of insurance to which the provisions of this part are applicable shall not be excessive, inadequate, or unfairly discriminatory." § 627.062(1), Fla. Stat. Subsection 627.062(2)(e)6., Florida Statutes, provides: A rate shall be deemed unfairly discriminatory as to a risk or group of risks if the application of premium discounts, credits, or surcharges among such risks does not bear a reasonable relationship to the expected loss and expense experience among the various risks. Section 627.0651, Florida Statutes, titled "Making and use of rates for motor vehicle insurance," provides, in relevant part: One rate shall be deemed unfairly discriminatory in relation to another in the same class if it clearly fails to reflect equitably the difference in expected losses and expenses. Rates are not unfairly discriminatory because different premiums result for policyholders with like loss exposures but different expense factors, or like expense factors but different loss exposures, so long as rates reflect the differences with reasonable accuracy. Rates are not unfairly discriminatory if averaged broadly among members of a group; nor are rates unfairly discriminatory even though they are lower than rates for nonmembers of the group. However, such rates are unfairly discriminatory if they are not actuarially measurable and credible and sufficiently related to actual or expected loss and expense experience of the group so as to assure that nonmembers of the group are not unfairly discriminated against. Use of a single United States Postal Service zip code as a rating territory shall be deemed unfairly discriminatory. Petitioners point out that each of these statutory examples describing "unfairly discriminatory" rates has an actuarial basis, i.e., rates must be related to the actual or expected loss and expense factors for a given group or class, rather than any extraneous factors. If two risks have the same expected losses and expenses, the insurer must charge them the same rate. If the risks have different expected losses and expenses, the insurer must charge them different rates. Michael Miller, Petitioners' expert actuary, testified that the term "unfairly discriminatory" has been used in the insurance industry for well over 100 years and has always had this cost-based definition. Mr. Miller is a fellow of the Casualty Actuarial Society ("CAS"), a professional organization whose purpose is the advancement of the body of knowledge of actuarial science, including the promulgation of industry standards and a code of professional conduct. Mr. Miller was chair of the CAS ratemaking committee when it developed the CAS "Statement of Principles Regarding Property and Casualty Insurance Ratemaking," a guide for actuaries to follow when establishing rates.5 Principle 4 of the Statement of Principles provides: "A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk." In layman's terms, Mr. Miller explained that different types of risks are reflected in a rate calculation. To calculate the expected cost of a given risk, and thus the rate to be charged, the insurer must determine the expected losses for that risk during the policy period. The loss portion reflects the risk associated with an occurrence and the severity of a claim. While the loss portion does not account for the entirety of the rate charged, it is the most important in terms of magnitude. Mr. Miller cautioned that the calculation of risk is a quantification of expected loss, but not an attempt to predict who is going to have an accident or make a claim. There is some likelihood that every insured will make a claim, though most never do, and this uncertainty is built into the incurred loss portion of the rate. No single risk factor is a complete measure of a person's likelihood of having an accident or of the severity of the ensuing claim. The prediction of losses is determined through a risk classification plan that take into consideration many risk factors (also called rating factors) to determine the likelihood of an accident and the extent of the claim. As to automobile insurance, Mr. Miller listed such risk factors as the age, gender, and marital status of the driver, the type, model and age of the car, the liability limits of the coverage, and the geographical location where the car is garaged. As to homeowners insurance, Mr. Miller listed such risk factors as the location of the home, its value and type of construction, the age of the utilities and electrical wiring, and the amount of insurance to be carried. 2. Credit Scoring as a Rating Factor In the current market, the credit score of the applicant or insured is a rating factor common to automobile and homeowners insurance. Subsection 626.9741(2)(c), Florida Statutes, defines "credit score" as follows: a score, grade, or value that is derived by using any or all data from a credit report in any type of model, method, or program, whether electronically, in an algorithm, computer software or program, or any other process, for the purpose of grading or ranking credit report data. "Credit scores" (more accurately termed "credit-based insurance scores") are derived from credit data that have been found to be predictive of a loss. Lamont Boyd, Fair Isaac's insurance market manager, explained the manner in which Fair Isaac produced its credit scoring model. The company obtained information from various insurance companies on millions of customers. This information included the customers' names, addresses, and the premiums earned by the companies on those policies as well as the losses incurred. Fair Isaac next requested the credit reporting agencies to review their archived files for the credit information on those insurance company customers. The credit agencies matched the credit files with the insurance customers, then "depersonalized" the files so that there was no way for Fair Isaac to know the identity of any particular customer. According to Mr. Lamont, the data were "color blind" and "income blind." Fair Isaac's analysts took these files from the credit reporting agencies and studied the data in an effort to find the most predictive characteristics of future loss propensity. The model was developed to account for all the predictive characteristics identified by Fair Isaac's analysts, and to give weight to those characteristics in accordance to their relative accuracy as predictors of loss. Fair Isaac does not directly sell its credit scores to insurance companies. Rather, Fair Isaac's models are implemented by the credit reporting agencies. When an insurance company wants Fair Isaac's credit score, it purchases access to the model's results from the credit reporting agency. Other vendors offer similar credit scoring models to insurance companies, and in recent years, some insurance companies have developed their own scoring models. Several academic studies of credit scoring were admitted and discussed at the final hearing in these cases. There appears to be no serious debate that credit scoring is a valid and important predictor of losses. The controversy over the use of credit scoring arises over its possible "unfairly discriminatory" impact "based upon race, color, religion, marital status, age, gender, income, national origin, or place of residence." § 626.9741(8)(c), Fla. Stat. Mr. Miller was one of two principal authors of a June 2003 study titled, "The Relationship of Credit-Based Insurance Scores to Private Passenger Automobile Insurance Loss Propensity." This study was commissioned by several insurance industry trade organizations, including AIA and NAMIC. The study addressed three questions: whether credit-based insurance scores are related to the propensity for loss; whether credit- based insurance scores measure risk that is already measured by other risk factors; and what is the relative importance to accurate risk assessment of the use of credit-based insurance scores. The study was based on a nationwide random sample of private passenger automobile policy and claim records. Records from all 50 states were included in roughly the same proportion as each state's registered motor vehicles bear to total registered vehicles in the United States. The data samples were provided by seven insurers, and represented approximately 2.7 million automobiles, each insured for 12 months.6 The study examined all major automobile coverages: bodily injury liability, property damage liability, medical payments coverage, personal injury protection coverage, comprehensive coverage, and collision coverage. The study concluded that credit-based insurance scores were correlated with loss propensity. The study found that insurance scores overlap to some degree with other risk factors, but that after fully accounting for the overlaps, insurance scores significantly increase the accuracy of the risk assessment process. The study found that, for each of the six automobile coverages examined, insurance scores are among the three most important risk factors.7 Mr. Miller's study did not examine the question of causality, i.e., why credit-based insurance scores are predictive of loss propensity. Dr. Patrick Brockett testified for Petitioners as an expert in actuarial science, risk management and insurance, and statistics. Dr. Brockett is a professor in the departments of management science and information systems, finance, and mathematics at the University of Texas at Austin. He occupies the Gus S. Wortham Memorial Chair in Risk Management and Insurance, and is the director of the university's risk management and insurance program. Dr. Brockett is the former director of the University of Texas' actuarial science program and continues to direct the study of students seeking their doctoral degrees in actuarial science. His areas of academic research are actuarial science, risk management and insurance, statistics, and general quantitative methods in business. Dr. Brockett has written more than 130 publications, most of which relate to actuarial science and insurance. He has spent his entire career in academia, and has never been employed by an insurance company. In 2002, Lieutenant Governor Bill Ratliff of Texas asked the Bureau of Business Research ("BBR") of the University of Texas' McCombs School of Business to provide an independent, nonpartisan study to examine the relationship between credit history and insurance losses in automobile insurance. Dr. Brockett was one of four named authors of this BBR study, issued in March 2003 and titled, "A Statistical Analysis of the Relationship between Credit History and Insurance Losses." The BBR research team solicited data from insurance companies representing the top 70 percent of the automobile insurers in Texas, and compiled a database of more than 173,000 automobile insurance policies from the first quarter of 1998 that included the following 12 months' premium and loss history. ChoicePoint was then retained to match the named insureds with their credit histories and to supply a credit score for each insured person. The BBR research team then examined the credit score and its relationship with prospective losses for the insurance policy. The results were summarized in the study as follows: Using logistic and multiple regression analyses, the research team tested whether the credit score for the named insured on a policy was significantly related to incurred losses for that policy. It was determined that there was a significant relationship. In general, lower credit scores were associated with larger incurred losses. Next, logistic and multiple regression analyses examined whether the revealed relationship between credit score and incurred losses was explainable by existing underwriting variables, or whether the credit score added new information about losses not contained in the existing underwriting variables. It was determined that credit score did yield new information not contained in the existing underwriting variables. What the study does not attempt to explain is why credit scoring adds significantly to the insurer's ability to predict insurance losses. In other words, causality was not investigated. In addition, the research team did not examine such variables as race, ethnicity, and income in the study, and therefore this report does not speculate about the possible effects that credit scoring may have in raising or lowering premiums for specific groups of people. Such an assessment would require a different study and different data. At the hearing, Dr. Brockett testified that the BBR study demonstrated a "strong and significant relationship between credit scoring and incurred losses," and that credit scoring retained its predictive power even after the other risk variables were accounted for. Dr. Brockett further testified that credit scoring has a disproportionate effect on the classifications of age and marital status, because the very young tend to have credit scores that are lower than those of older people. If the question is simply whether the use of credit scores will have a greater impact on the young and the single, the answer would be in the affirmative. However, Dr. Brockett also noted that young, single people will also have higher losses than older, married people, and, thus, the use of credit scores is not "unfairly discriminatory" in the sense that term is employed in the insurance industry.8 Mr. Miller testified that nothing in the actuarial standards of practice requires that a risk factor be causally related to a loss. The Actuarial Standards Board's Standard of Practice 12,9 dealing with risk classification, states that a risk factor is appropriate for use if there is a demonstrated relationship between the risk factor and the insurance losses, and that this relationship may be established by statistical or other mathematical analysis of data. If the risk characteristic is shown to be related to an expected outcome, the actuary need not establish a cause-and-effect relationship between the risk characteristic and the expected outcome. As an example, Mr. Miller offered the fact that past automobile accidents do not cause future accidents, although past accidents are predictive of future risk. Past traffic violations, the age of the driver, the gender of the driver, and the geographical location are all risk factors in automobile insurance, though none of these factors can be said to cause future accidents. They help insurers predict the probability of a loss, but do not predict who will have an accident or why the accident will occur. Mr. Miller opined that credit scoring is a similar risk factor. It is demonstrably significant as a predictor of risk, though there is no causal relationship between credit scores and losses and only an incomplete understanding of why credit scoring works as a predictor of loss. At the hearing, Dr. Brockett discussed a study that he has co-authored with Linda Golden, a business professor at the University of Texas at Austin. Titled "Biological and Psychobehavioral Correlates of Risk Taking, Credit Scores, and Automobile Insurance Losses: Toward an Explication of Why Credit Scoring Works," the study has been peer-reviewed and at the time of the hearing had been accepted for publication in the Journal of Risk and Insurance. In this study, the authors conducted a detailed review of existing scientific literature concerning the biological, psychological, and behavioral attributes of risky automobile drivers and insured losses, and a similar review of literature concerning the biological, psychological, and behavioral attributes of financial risk takers. The study found that basic chemical and psychobehavioral characteristics, such as a sensation-seeking personality type, are common to individuals exhibiting both higher insured automobile losses and poorer credit scores. Dr. Brockett testified that this study provides a direction for future research into the reasons why credit scoring works as an insurance risk characteristic. 3. The Proposed Rule's Definition of "Unfairly Discriminatory" Petitioners contend that the Proposed Rule's definition of the term "unfairly discriminatory" expands upon and is contrary to the statutory definition of the term discussed in section C.1. supra, and that this expanded definition operates to impose a ban on the use of credit scoring by insurance companies. As noted above, Section 626.9741, Florida Statutes, does not define the term "unfairly discriminatory." The provisions of the Rating Law10 define the term as it is generally understood by the insurance industry: a rate is deemed "unfairly discriminatory" if the premium charged does not equitably reflect the differences in expected losses and expenses between policyholders. Two provisions of Section 626.9741, Florida Statutes, employ the term "unfairly discriminatory": (5) A rate filing that uses credit reports or credit scores must comply with the requirements of s. 627.062 or s. 627.0651 to ensure that rates are not excessive, inadequate, or unfairly discriminatory. * * * (8) The commission may adopt rules to administer this section. The rules may include, but need not be limited to: * * * (c) Standards that ensure that rates or premiums associated with the use of a credit report or score are not unfairly discriminatory, based upon race, color, religion, marital status, age, gender, income, national origin, or place of residence. Petitioners contend that the statute's use of the term "unfairly discriminatory" is unexceptionable, that the Legislature simply intended the term to be used and understood in the traditional sense of actuarial soundness alone. Respondents agree that Subsection 626.9741(5), Florida Statutes, calls for the agency to apply the traditional definition of "unfairly discriminatory" as that term is employed in the statutes directly referenced, Sections 627.062 and 627.0651, Florida Statutes, the relevant texts of which are set forth in Findings of Fact 18 and 19 above. However, Respondents contend that Subsection 626.9741(8)(c), Florida Statutes, calls for more than the application of the Rating Law's definition of the term. Respondents assert that in the context of this provision, "unfairly discriminatory" contemplates not only the predictive function, but also "discrimination" in its more common sense, as the term is employed in state and federal civil rights law regarding race, color, religion, marital status, age, gender, income, national origin, or place of residence. At the hearing, OIR General Counsel Steven Parton testified as to the reasons why the agency chose the federal body of law using the term "disparate impact" as the test for unfair discrimination in the Proposed Rule: Well, first of all, what we were looking for is a workable definition that people would have some understanding as to what it meant when we talked about unfair discrimination. We were also looking for a test that did not require any willfulness, because it was not our concern that, in fact, insurance companies were engaging willfully in unfair discrimination. What we believed is going on, and we think all of the studies that are out there suggest, is that credit scoring is having a disparate impact upon various people, whether it be income, whether it be race. . . . Respondents' position is that Subsection 626.9741(8)(c), Florida Statutes, requires that a proposed rate or premium be rejected if it has a "disproportionately" negative effect on one of the named classes of persons, even though the rate or premium equitably reflects the differences in expected losses and expenses between policyholders. In the words of Mr. Parton, "This is not an actuarial rule." Mr. Parton explained the agency's rationale for employing a definition of "unfairly discriminatory" that is different from the actuarial usage employed in the Rating Law. Subsection 626.9741(5), Florida Statutes, already provides that an insurer's rate filings may not be "excessive, inadequate, or unfairly discriminatory" in the actuarial sense. To read Subsection 626.9741(8)(c), Florida Statutes, as simply a reiteration of the actuarial "unfair discrimination" rule would render the provision, "a nullity. There would be no force and effect with regards to that." Thus, the Proposed Rule defines "unfairly discriminatory" to mean "that adverse decisions resulting from the use of a credit scoring methodology disproportionately affects persons belonging to any of the classes set forth in Section 626.9741(8)(c), F.S." Proposed Florida Administrative Code Rule 69O-125.005(1)(e). OIR's actuary, Howard Eagelfeld, explained that "disproportionate effect" means "having a different effect on one group . . . causing it to pay more or less premium than its proportionate share in the general population or than it would have to pay based upon all other known considerations." Mr. Eagelfeld's explanation is not incorporated into the language of the Proposed Rule. Consistent with the actuarial definition of "unfairly discriminatory," the Proposed Rule requires that any credit scoring methodology must be "demonstrated to be a valid predictor of the insurance risk to be assumed by an insurer for the applicable type of insurance," and sets forth detailed criteria through which the insurer can make the required demonstration. Proposed Florida Administrative Code Rule 69O-125.005(9)(a)-(f) and (h)-(l). Proposed Florida Administrative Code Rule 69O-125.005(9)(g) sets forth Respondents' "civil rights" usage of the term "unfairly discriminatory." The insurer's demonstration of the validity of its credit scoring methodology must include: [d]ocumentation consisting of statistical testing of the application of the credit scoring model to determine whether it results in a disproportionate impact on the classes set forth in Section 626.9741(8)(c), F.S. A model that disproportionately affects any such class of persons is presumed to have a disparate impact and is presumed to be unfairly discriminatory.11 Mr. Parton, who testified in defense of the Proposed Rule as one of its chief draftsmen, stated that the agency was concerned that the use of credit scoring may be having a disproportionate effect on minorities. Respondents believe that credit scoring may simply be a surrogate measure for income, and that using income as a basis for setting rates would have an obviously disparate impact on lower-income persons, including the young and the elderly. Mr. Parton testified that "neither the insurance industry nor anyone else" has researched the theory that credit scoring may be a surrogate for income. Mr. Miller referenced a 1998 analysis performed by AIA indicating that the average credit scores do not vary significantly according to the income group. In fact, the lowest income group (persons making less than $15,000 per year) had the highest average credit score, and the average credit scores actually dropped as income levels rose until the income range reached $50,000 to $74,000 per year, when the credit scores began to rise. Mr. Miller testified that a credit score is no more predictive of income level than a coin flip. However, Respondents introduced a January 2003 report to the Washington State Legislature prepared by the Social & Economic Sciences Research Center of Washington State University, titled "Effect of Credit Scoring on Auto Insurance Underwriting and Pricing." The purpose of the study was to determine whether credit scoring has unequal impacts on specific demographic groups. For this study, the researchers received data from three insurance companies on several thousand randomly chosen customers, including the customers' age, gender, residential zip code, and their credit scores and/or rate classifications. The researchers contacted about 1,000 of each insurance company's customers and obtained information about their ethnicity, marital status, and income levels. The study's findings were summarized as follows: The demographic patterns discerned by the study are: Age is the most significant factor. In almost every analysis, older drivers have, on average, higher credit scores, lower credit-based rate assignments, and less likelihood of lacking a valid credit score. Income is also a significant factor. Credit scores and premium costs improve as income rises. People in the lowest income categories-- less than $20,000 per year and between $20,000 and $35,000 per year-- often experienced higher premiums and lower credit scores. More people in lower income categories also lacked sufficient credit history to have a credit score. Ethnicity was found to be significant in some cases, but because of differences among the three firms studied and the small number of ethnic minorities in the samples, the data are not broadly conclusive. In general, Asian/Pacific Islanders had credit scores more similar to whites than to other minorities. When other minority groups had significant differences from whites, the differences were in the direction of higher premiums. In the sample of cases where insurance was cancelled based on credit score, minorities who were not Asian/Pacific Islanders had greater difficulty finding replacement insurance, and were more likely to experience a lapse in insurance while they searched for a new policy. The analysis also considered gender, marital status and location, but for these factors, significant unequal effects were far less frequent. (emphasis added) The evidence appears equivocal on the question of whether credit scoring is a surrogate for income. The Washington study seems to indicate that ethnicity may be a significant factor in credit scoring, but that significant unequal effects are infrequent regarding gender and marital status. The evidence demonstrates that the use of credit scores by insurers would tend to have a negative impact on young people. Mr. Miller testified that persons between ages 25 and 30 have lower credit scores than older people. Petitioners argue that by defining "unfairly discriminatory" to mean "disproportionate effect," the Proposed Rule effectively prohibits insurers from using credit scores, if only because all the parties recognize that credit scores have a "disproportionate effect" on young people. Petitioners contend that this prohibition is in contravention of Section 626.9741(1), Florida Statutes, which states that the purpose of the statute is to "regulate and limit" the use of credit scores, not to ban them outright. Respondents counter that if the use of credit scores is "unfairly discriminatory" toward one of the listed classes of persons in contravention of Subsection 626.9741(8)(c), Florida Statutes, then the "limitation" allowed by the statute must include prohibition. This point is obviously true but sidesteps the real issues: whether the statute's undefined prohibition on "unfair discrimination" authorizes the agency to employ a "disparate impact" or "disproportionate effect" definition in the Proposed Rule, and, if so, whether the Proposed Rule sufficiently defines any of those terms to permit an insurer to comply with the rule's requirements. Proposed Florida Administrative Code Rule 69O-125.005(2) provides that the insurer bears the burden of demonstrating that its credit scoring methodology does not disproportionately affect persons based upon their race, color, religion, marital status, age, gender, income, national origin, or place of residence. Petitioners state that no insurer can demonstrate, consistent with the Proposed Rule, that its credit scoring methodology does not have a disproportionate effect on persons based upon their age. Therefore, no insurer will ever be permitted to use credit scores under the terms of the Proposed Rule. As discussed more fully in Findings of Fact 73 through 76 below, Petitioners also contend that the Proposed Rule provides no guidance as to what "disproportionate effect" and "disparate impact" mean, and that this lack of definitional guidance will permit the agency to reject any rate filing that uses credit scoring, based upon an arbitrary determination that it has a "disproportionate effect" on one of the classes named in Subsection 626.9741(8)(c), Florida Statutes. Petitioners also presented evidence that no insurer collects data on race, color, religion, or national origin from applicants or insureds. Mr. Miller testified that there is no reliable independent source for race, color, religious affiliation, or national origin data. Mr. Eagelfeld agreed that there is no independent source from which insurers can obtain credible data on race or religious affiliation. Mr. Parton testified that this lack of data can be remedied by the insurance companies commencing to request race, color, religion, and national origin information from their customers, because there is no legal impediment to their doing so. Mr. Miller testified that he would question the reliability of the method suggested by Mr. Parton because many persons will refuse to answer such sensitive questions or may not answer them correctly. Mr. Miller stated that, as an actuary, he would not certify the results of a study based on demographic data obtained in this manner and would qualify any resulting actuarial opinion due to the unreliability of the database. Petitioners also object to the vagueness of the broad categories of "race, color, religion and national origin." Mr. Miller testified that the Proposed Rule lacks "operational definitions" for those terms that would enable insurers to perform the required calculations. The Proposed Rule places the burden on the insurer to demonstrate no disproportionate effect on persons based on these categories, but offers no guidance as to how these demographic classes should be categorized by an insurer seeking to make such a demonstration. Petitioners point out that even if the insurer is able to ascertain the categories sought by the regulators, the Proposed Rule gives no guidance as to whether the "disproportionate effect" criterion mandates perfect proportionality among all races, colors, religions, and national origins, or whether some degree of difference is tolerable. Petitioners contend that this lack of guidance provides unbridled discretion to the regulator to reject any disproportionate effect study submitted by an insurer. At his deposition, Mr. Parton was asked how an insurer should break down racial classifications in order to show that there is no disproportionate effect on race. His answer was as follows: There is African-American, Cuban-American, Spanish-American, African-American, Haitian- American. Are you-- you know, whatever the make-up of your book of business is-- you're the one in control of it. You can ask these folks what their ethnic background is. At his deposition, Mr. Parton frankly admitted that he had no idea what "color" classifications an insurer should use, yet he also stated that an insurer must demonstrate no disproportionate effect on each and every listed category, including "color." At the final hearing, when asked to list the categories of "color," Mr. Parton responded, "I suppose Indian, African-American, Chinese, Japanese, all of those."12 At the final hearing, Mr. Parton was asked whether the Proposed Rule contemplates requiring insurers to demonstrate distinctions between such groups as "Latvian-Americans" and "Czech-Americans." Mr. Parton's reply was as follows: No. And I don't think it was contemplated by the Legislature. . . . The question is race by any other name, whether it be national origin, ethnicity, color, is something that they're concerned about in terms of an impact. What we would anticipate, and what we have always anticipated, is the industry would demonstrate whether or not there is an adverse effect against those folks who have traditionally in Florida been discriminated against, and that would be African-Americans and certain Hispanic groups. In our opinion, at least, if you could demonstrate that the credit scoring was not adversely impacting it, it may very well answer the questions to any other subgroup that you may want to name. At the hearing, Mr. Parton was also questioned as to distinctions between religions and testified as follows: The impact of credit scoring on religion is going to be in the area of what we call thin files, or no files. That is to say people who do not have enough credit history from which credit scores can be done, or they're going to be treated somehow differently because of that lack of history. A simple question that needs to be asked by the insurance company is: "Do you, as a result of your religious belief or whatever [sect] you are in, are you forbidden as a precept of your religious belief from engaging in the use of credit?" When cross-examined on the subject, Mr. Parton could not confidently identify any religious group that forbids the use of credit. He thought that Muslims and Quakers may be such groups. Mr. Parton concluded by stating, "I don't think it is necessary to identify those groups. The question is whether or not you have a religious group that you prescribe to that forbids it." Petitioners contend that, in addition to failing to define the statutory terms of race, color, religion, and national origin in a manner that permits insurer compliance, the Proposed Rule fails to provide an operational definition of "disproportionate effect." The following is a hypothetical question put to Mr. Parton at his deposition, and Mr. Parton's answer: Q: Let's assume that African-Americans make up 10 percent of the population. Let's just use two groups for the sake of clarity. Caucasians make up 90 percent. If the application of credit scoring in underwriting results in African-Americans paying 11 percent of the premium and Caucasians paying 89 percent of the premium, is that, in your mind, a disproportionate affect [sic]? A: It may be. I think it would give rise under this rule that perhaps there is a presumption that it is, but that presumption is not [an irrebuttable] one.[13] For instance, if you then had testimony that a 1 percent difference between the two was statistically insignificant, then I would suggest that that presumption would be overridden. This answer led to a lengthy discussion regarding a second hypothetical in which African-Americans made up 29 percent of the population, and also made up 35 percent of the lowest, or most unfavorable, tier of an insurance company's risk classifications. Mr. Parton ultimately opined that if the difference in the two numbers was found to be "statistically significant" and attributable only to the credit score, then he would conclude that the use of credit scoring unfairly discriminated against African-Americans. As to whether his answer would be the same if the hypothetical were adjusted to state that African-Americans made up 33 percent of the lowest tier, Mr. Parton responded: "That would be up to expert testimony to be provided on it. That's what trials are all about."14 Aside from expert testimony to demonstrate that the difference was "statistically insignificant," Mr. Parton could think of no way that an insurer could rebut the presumption that the difference was unfairly discriminatory under the "disproportionate effect" definition set forth in the proposed rule. He stated that, "I can't anticipate, nor does the rule propose to anticipate, doing the job of the insurer of demonstrating that its rates are not unfairly discriminatory." Mr. Parton testified that an insurer's showing that the credit score was a valid and important predictor of risk would not be sufficient to rebut the presumption of disproportionate effect. Summary Findings Credit-based insurance scoring is a valid and important predictor of risk, significantly increasing the accuracy of the risk assessment process. The evidence is still inconclusive as to why credit scoring is an effective predictor of risk, though a study co-authored by Dr. Brockett has found that basic chemical and psychobehavioral characteristics, such as a sensation-seeking personality type, are common to individuals exhibiting both higher insured automobile losses and poorer credit scores. Though the evidence was equivocal on the question of whether credit scoring is simply a surrogate for income, the evidence clearly demonstrated that the use of credit scores by insurance companies has a greater negative overall effect on young people, who tend to have lower credit scores than older people. Petitioners and Fair Isaac emphasized their contention that compliance with the Proposed Rule would be impossible, and thus the Proposed Rule in fact would operate as a prohibition on the use of credit scoring by insurance companies. At best, Petitioners demonstrated that compliance with the Proposed Rule would be impracticable at first, given the current business practices in the industry regarding the collection of customer data regarding race and religion. The evidence indicated no legal barriers to the collection of such data by the insurance companies. Questions as to the reliability of the data are speculative until a methodology for the collection of the data is devised. Subsection 626.9741(8)(c), Florida Statutes, authorizes the FSC to adopt rules that may include: Standards that ensure that rates or premiums associated with the use of a credit report or score are not unfairly discriminatory, based upon race, color, religion, marital status, age, gender, income, national origin, or place of residence. Petitioners' contention that the statute's use of "unfairly discriminatory" contemplates nothing more than the actuarial definition of the term as employed by the Rating Law is rejected. As Respondents pointed out, Subsection 626.9741(5), Florida Statutes, provides that a rate filing using credit scores must comply with the Rating Law's requirements that the rates not be "unfairly discriminatory" in the actuarial sense. If Subsection 626.9741(8)(c), Florida Statutes, merely reiterates the actuarial requirement, then it is, in Mr. Parton's words, "a nullity."15 Thus, it is found that the Legislature contemplated some level of scrutiny beyond actuarial soundness to determine whether the use of credit scores "unfairly discriminates" in the case of the classes listed in Subsection 626.9741(8)(c), Florida Statutes. It is found that the Legislature empowered FSC to adopt rules establishing standards to ensure that an insurer's rates or premiums associated with the use of credit scores meet this added level of scrutiny. However, it must be found that the term "unfairly discriminatory" as employed in the Proposed Rule is essentially undefined. FSC has not adopted a "standard" by which insurers can measure their rates and premiums, and the statutory term "unfairly discriminatory" is thus subject to arbitrary enforcement by the regulating agency. Proposed Florida Administrative Code Rule 69O-125.005(1)(e) defines "unfairly discriminatory" in terms of adverse decisions that "disproportionately affect" persons in the classes set forth in Subsection 626.9741(8)(c), Florida Statutes, but does not define what is a "disproportionate effect." At Subsection (9)(g), the Proposed Rule requires "statistical testing" of the credit scoring model to determine whether it results in a "disproportionate impact" on the listed classes. This subsection attempts to define its terms as follows: A model that disproportionately affects any such class of persons is presumed to have a disparate impact and is presumed to be unfairly discriminatory. Thus, the Proposed Rule provides that a "disproportionate effect" equals a "disparate impact" equals "unfairly discriminatory," without defining any of these terms in such a way that an insurer could have any clear notion, prior to the regulator's pronouncement on its rate filing, whether its credit scoring methodology was in compliance with the rule. Indeed, Mr. Parton's testimony evinced a disinclination on the part of the agency to offer guidance to insurers who attempt to understand this circular definition. The tenor of his testimony indicated that the agency itself is unsure of exactly what an insurer could submit to satisfy the "disproportionate effect" test, aside from perfect proportionality, which all parties concede is not possible at least as to young people, or a showing that any lack of perfect proportionality is "statistically insignificant," whatever that means. Mr. Parton seemed to say that OIR will know a valid use of credit scoring when it sees one, though it cannot describe such a use beforehand. Mr. Eagelfeld offered what might be a workable definition of "disproportionate effect," but his definition is not incorporated into the Proposed Rule. Mr. Parton attempted to assure the Petitioners that OIR would take a reasonable view of the endless racial and ethnic categories that could be subsumed under the literal language of the Proposed Rule, but again, Mr. Parton's assurances are not part of the Proposed Rule. Mr. Parton's testimony referenced federal and state civil rights laws as the source for the term "disparate impact." Federal case law under Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e-2, has defined a "disparate impact" claim as "one that 'involves employment practices that are facially neutral in their treatment of different groups, but that in fact fall more harshly on one group than another and cannot be justified by business necessity.'" Adams v. Florida Power Corporation, 255 F.3d 1322, 1324 n.4 (11th Cir. 2001), quoting Hazen Paper Co. v. Biggins, 507 U.S. 604, 609, 113 S. Ct. 1701, 1705, 123 L. Ed. 2d 338 (1993). The Proposed Rule does not reference this definition, nor did Mr. Parton detail how OIR proposes to apply or modify this definition in enforcing the Proposed Rule. Without further definition, all three of the terms employed in this circular definition are conclusions, not "standards" that the insurer and the regulator can agree upon at the outset of the statistical and analytical process leading to approval or rejection of the insurer's rates. Absent some definitional guidance, a conclusory term such as "disparate impact" can mean anything the regulator wishes it to mean in a specific case. The confusion is compounded by the Proposed Rule's failure to refine the broad terms "race," "color," and "religion" in a manner that would allow an insurer to prepare a meaningful rate submission utilizing credit scoring. In his testimony, Mr. Parton attempted to limit the Proposed Rule's impact to those groups "who have traditionally in Florida been discriminated against," but the actual language of the Proposed Rule makes no such distinction. Mr. Parton also attempted to limit the reach of "religion" to groups whose beliefs forbid them from engaging in the use of credit, but the language of the Proposed Rule does not support Mr. Parton's distinction.
