The Issue The issue in this case is whether Respondent condominium association should have assessed unit owners, in proportionate shares, to pay for the replacement of hurricane-damaged balcony screens, in accordance with Petitioner's policy that repair costs which do not exceed an insurance deductible are "costs of insurance" that must be paid as "common expenses" regardless of what the declaration of condominium provides concerning reconstruction or repair after a casualty.
Findings Of Fact Respondent Fountains South Condominium No. 3C Association, Inc. ("Association") is the entity responsible for operating the Fountains South Condominium No. 3C ("Condominium"). As such, the Association is subject to the regulatory jurisdiction of Petitioner Division of Florida Land Sales, Condominiums, and Mobile Homes ("Division"). The Condominium was created——and continues to be governed by——a Declaration of Fountains South Condominium No. 3C ("Declaration"), which instrument was recorded, in 1987, in the public records of Palm Beach County, Florida. On October 24, 2005, Hurricane Wilma struck Palm Beach County, causing damage to elements of the Condominium. The damaged property included some portions of the "Common Elements." Also damaged were some parts of the "Limited Common Elements." (The terms "Common Elements" and "Limited Common Elements" are defined in the Declaration, the relevant provisions of which will be set forth verbatim below. Generally speaking, though, the Common Elements comprise all of the property of which the Condominium is composed except for that included within the residential units. The Limited Common Elements, which are a subset of the Common Elements, consist of properties or structures whose use is reserved to a particular unit or units to the exclusion of other units.) Fulfilling a statutory obligation (that will be discussed in detail below), the Association had purchased property insurance to protect the Common Elements and Limited Common Elements. Issued by Nutmeg Insurance Company ("Nutmeg"), Policy No. SW 0000071 (the "Policy") provided coverage to the Association for loss or damage to property from multiple risks, including hurricanes. The premium for the Policy——the effective dates of which were from December 31, 2004 to December 31, 2005——was $395,000. The Policy provided for various deductibles depending on the cause of the covered loss. For loss or damage caused by a hurricane, the deductible was 5 percent of the value of the insured property. It is undisputed that, at the time of Hurricane Wilma, this deductible was approximately a quarter of a million dollars. Under the relevant provisions of the Policy, therefore, Nutmeg would not be obligated to indemnify the Association for any loss or damage caused by Hurricane Wilma unless and until the total losses from that particular occurrence exceeded (roughly) $250,000. The Association paid about $5,000 to repair the damage that Hurricane Wilma caused to the Common Elements, using funds on hand that had been saved for such contingencies. Because this expense was far below the applicable deductible, the Association did not submit a claim to Nutmeg. The Association's position regarding the damage to the Limited Common Elements, consistent with its longstanding view of such matters, was that the costs of repairing or replacing such properties should be borne by the respective unit owners to whose exclusive use the damaged elements were reserved. The Association based its position on a provision of the Declaration (which will be quoted below) that assigns the general responsibility for maintenance and repair of the units, together with the Limited Common Elements appurtenant thereto, to the respective unit owners. At the time of Hurricane Wilma, Haskell and Flora Ginns (the "Ginns") owned Unit No. 201 in the Condominium. (As of the final hearing, the Ginns were still the owners of this unit.) The hurricane caused damage both to their unit and to the screens surrounding the balcony outside their unit. It is undisputed that the balcony and screens appurtenant to the Ginns' unit are part of the Limited Common Elements. The Ginns submitted a claim for these losses to their insurer, Allstate Floridian Insurance Company ("Allstate"). By letter dated January 7, 2006, Allstate denied the portion of the Ginns' claim relating to the damaged screens, asserting that the screens were not covered property under the Ginns' policy because they were within the "insuring responsibility" of the Association. The Ginns did not protest Allstate's decision in this regard. (Allstate paid the full policy limit of nearly $30,000 on the Ginns' claim anyway; thus, its denial of coverage for the damaged screens actually had no effect on the reimbursement that the Ginns received from Allstate.) The Ginns then wrote a letter to the Association's president, Milton Kutzin, requesting that the Association pay to replace the damaged screens. Dated January 16, 2006,i the letter reads as follows: Dear Milton: As you may be aware, the screens on the deck of our condo were severely damaged because of Hurricane Wilma. According to the attached memo, the condo is responsible for replacing them. For your information, my insurance company, Allstate Floridian, has refused payment and has advised us that our condo association is responsible (by law) to replace them. We do have an estimate to replace the screens. I shall be happy to discuss this matter with you at any time. Please let me know approximately when this matter will be settled. (The "attached memo" to which the Ginns referred purports to be an undated letter from the Director of Maintenance of Versailles Court (evidently a residential community) to the homeowners of that project, clarifying the responsibilities of the homeowners, on the one hand, and their homeowners' association, on the other, vis-à-vis maintenance obligations. As far as the undersigned can tell, this Versailles Court memorandum has no bearing whatsoever on the issues at hand.) If the Association responded in writing to the Ginns' letter of January 16, 2006, the document is not in evidence. In any event, the Association refused to repair the screens surrounding the Ginns' balcony because (a) it believed that the Ginns were responsible, under the Declaration, for the cost of such repair and (b) the total losses to the Common Elements and Limited Common Elements (including the screens in question) did not come near the deductible under the Nutmeg Policy, meaning that there were no insurance proceeds to distribute to unit owners for repairs to Limited Common Elements. On January 18, 2006, the Ginns paid a company called Rainguard, Inc. either $1,100 or $1,200 to replace the damaged screens around "their" balcony.ii Meantime, on January 13, 2006, the Division rendered a Declaratory Statement in In Re Petition for Declaratory Statement of Plaza East Association, Inc., Docket No. 2005059934, Final Order No. BPR-2006-00239 (DBPR Jan. 13, 2006)(the "Plaza East Declaration"). In the Plaza East Declaration, the Division made a number of statements concerning the meaning and effect of certain provisions of the Florida Condominium Act ("Act") pertaining to the duties of condominium associations as they relate to property insurance. These statements will be examined in greater detail below. For now, it suffices to quote several sentences that form the core of the Division's policy regarding the scope of an association's "insuring responsibilities": As association is not required to insure 100% of the replacement cost of the condominium property, but must have adequate insurance to replace the property destroyed by a hurricane. The board may include reasonable deductibles in replacement value insurance policies. § 718.111(11)(a), Fla. Stat. A deductible amount is part of the cost of insurance and is a common expense for which reserves might be set aside. § 718.111(11), 718.115, Fla. Stat. As such, an association may not shift the cost of an insurance common expense to an individual unit owner as common expenses must be assessed in the proportions or percentages required under sections 718.104(4)(f), 718.116(9), Florida Statutes. [An association therefore] may not shift the cost of the deductible, a common expense, to only those unit owners whose windows were damaged by the insurable event such as a hurricane. Plaza East Declaration at 16 (emphasis added). The Plaza East Declaration reflected——and continues to be authoritative regarding——the Division's firmly fixed policy, which is that the deductible under a property insurance policy is a "cost" that an association must incur, using common funds collected through proportionate-share assessments. The Division's expert witness made this clear, giving the following testimony (which the undersigned accepts as credible) in deposition: Q. Doesn't [the] Plaza East [Declaration] declare that a deductible is a common expense? A. Well, it makes the deductible a common expense because insurance is a common expense and the deductible is just a part of the insurance purchase decision. * * * Q. Let me ask you this: Is there anything in [the Act] that clearly states that a casualty loss insurance deductible is a common expense? A. No, sir, there's nothing [in the statutes] that specifically says that. Q. But [the] Plaza East [Declaration] says that, doesn't it? A. Plaza East says that, yes, sir. Q. So that's a policy of the Department? A. Yes, sir, that is. Q. And it's a general policy, isn't it? A. Yes, sir. Q. And it's a general policy that would apply to any condominium in South Florida regardless of what the declaration of condominium said? A. Yes, sir. Q. And that's being applied in this case, isn't it? A. Yes, sir. Deposition of James T. Harrison, Jr. (10/29/07) at 20-21. At some point after the issuance of the Plaza East Declaration, the Ginns sought the Division's help in persuading the Association to reimburse them for the new screens. The Division informed the Ginns of the Plaza East Declaration. Armed with this information, the Ginns again pressed the Association to reimburse them for replacing the screens. The Association, again, declined. By letter dated May 3, 2006, the Ginns made a formal complaint to the Division regarding the Association's refusal to pay for the replacement of the screens. The Division acted promptly, completing its investigation into the matter on or before May 10, 2006. Siding with the Ginns, the Division demanded, in a letter dated May 22, 2006, that the Association either reimburse the Ginns or (possibly) be fined. Yet, the Association resisted. On July 28, 2006, the Division entered a Notice to Show Cause against the Association, charging as follows: Count 1: Respondent [Association], in violation of section 718.115(2), Florida Statutes, failed to asses unit owners in their proportionate shares for the common expense insurance deductible to repair damage to condominium property caused by a hazard to be insured by Respondent under section 718.111(11), Florida Statutes. The Respondent refused to treat the hurricane damage to the wrap-a-round deck and screens in unit #201 as a common expense covered by the association's policy under sections 718.111(11) and 718.115(1), Florida Statutes. Specifically, the Respondent failed to reimburse Haskell Ginns and Flora Ginns for damage sustained by Hurricane Wilma to their wrap-a-round screens. Since the May 22, 2006, warning letter, the complainants have replaced their wrap-a- round deck screens at a cost of $1,200.00 and have requested reimbursement from Respondent. The Association demanded a formal hearing.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Division enter a final order rescinding the Notice to Show Cause and exonerating the Association of the charge of failing to assess unit owners, in proportionate shares, to pay the cost of repairing or replacing Limited Common Elements damaged during Hurricane Wilma. DONE AND ENTERED this 10th day of January, 2008, in Tallahassee, Leon County, Florida. JOHN G. VAN LANINGHAM Administrative Law Judge Division of Administrative Hearings Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 10th day of January, 2008.
Findings Of Fact The Respondent, Emory Daniel Jones, was not involved or engaged in the insurance business prior to August, 1977. (Tr. 177.) In approximately August of 1977, United Sun Life Insurance Company (USL) hired Respondent as an agent. (Tr. 176, 177.) Respondent passed the insurance test administered by the State of Florida in August, 1977, and was scheduled for a seminar given by USL. (Tr. 178.) In late August, 1977, Respondent attended a three-day seminar established by USL for all its new agents. (Tr. 178.) At this seminar, USL taught the agents about a policy known as T.O.P. This was the only policy taught to the agents even though USL had other policies available. (Tr. 128.) The T.O.P. contract is a life insurance policy. This policy has two primary benefits. (Tr. 230, 231.) The first is the death benefit provided by all life insurance policies. Under the death benefit provision, the owner of the T.O.P. pays a premium to USL. When the insured dies, USL will pay the death benefit (money) to the beneficiary listed on the policy. (Tr. 128, 251.) The second major benefit provided by the T.O.P. is the life benefit feature. (Tr. 251.) The T.O.P. is an insurance policy which provides for the payment of dividends to the owner of the policy. The T.O.P contract states that the owner will share in the divisible surplus earnings of USL as determined by the Board of Directors. (Tr. 120; contract page 5, Exhibit #3.) The dividends were to be paid after the second year. (Tr. 129, 130.) The owner would participate in the divisible surplus earnings of USL through the payment of a dividend. (Tr. 129, 188.) As long as the T.O.P. was in effect, the owner would receive these dividends. USL developed a presentation to be given by the agents to prospective customers. This presentation was taught in the training session by USL. (Tr. 183, 249, 260, 270.) The agents were to memorize the presentation and were not to vary from the wording when they were attempting to sell the T.O.P. to prospective customers. (Tr. 185, 249.) The presentation taught by USL stressed the life benefit feature of the T.O.P. contract. (Tr. 251, 271.) The death benefit was only minimally covered because of the relatively high cost for the life insurance portion of the contract. This presentation further explained several features which made the T.O.P. contract life benefit provisions attractive to future customers: The T.O.P. contract owner was to participate in the divisible surplus earnings of USL. The only other persons that would also participate in the divisible earned surplus were the shareholders. (Tr. 196.) The T.O.P. contract was to be sold only to a limited number of people. After an undisclosed number of T.O.P. contracts were sold, the T.O.P. contract was to be taken off the market. (Tr. 234, 261, 276.) USL was not going to sell or issue any other policies which would participate in the divisible earned surplus of USL. (Tr. 234, 255, 261, 276.) USL would grow (increase its divisible earned surplus) by selling policies other than the T.O.P. contract. The more policies that were sold, the greater the divisible surplus earnings that would be available to the T.O.P. contract owners for dividends. (Tr. 196, 276.) Since the T.O.P. owners were limited and no other participating policies were to be issued, the T.O.P. owners would share in any increases in the divisible surplus earnings of USL. The greater the number of policies sold, the greater the dividends. The T.O.P. owners were then solicited to help the agents sell insurance policies of USL to their friends. This help would reduce the cost of advertising and increase the sales of insurance. The lower expenses and greater volume would mean more divisible surplus earnings in USL and greater dividends available to the T.O.P. owners. (Tr. 201.) To illustrate these points, USL taught the agents to draw circles representing other insurance policy owners. Lines were then drawn from these circles to the T.O.P. owner's circle. The lines between the circles represented the premiums paid on the other policies, which would increase divisible surplus earnings that would increase the dividends of the T.O.P. owners. (Tr. 196, 232, 263, 270.) USL taught the agents to illustrate the features of the life benefit by dollar signs. As the agent would talk about the other policies increasing the dividends to the T.O.P. owners, he was to increase the size of the dollar sign. (Tr. 233.) The whole emphasis of this presentation was on the participating feature. Another feature emphasized in the USL presentation was that the T.O.P. owner would participate in the divisible surplus earnings of USL as long as he was alive. Therefore, the agents were to stress that the T.O.P. owner should be a younger person in the family. If that person lived 70 years, then USL would pay dividends for 69 of those 70 years. This feature of the policy was stressed in the memorized presentation. (Tr. 204, 205, 232, 233, 252, 264, 270.) In late August of 1977, Respondent attended the training session and memorized the presentation. (Tr. 181, 184, 185.) At the end of the training session, USL reviewed the Respondent's presentation and found nothing wrong. (Tr. 187.) In late August of 1977, Respondent went into the field to sell the T.O.P. contract to potential customers. (Tr. 187.) Count I On September 7, 1977, Respondent met with Louis Charles Morrison and made the USL presentation on the T.O.P. policy to Morrison. Respondent made the presentation in the way he had been taught. Morrison was aware that he was purchasing an insurance policy. He was led to believe through USL's sales presentation as given by Respondent that the participating feature of the T.O.P. policy made this policy a good investment. Morrison concluded it was not a good investment because the dividends were not as great as he had anticipated they would be. Respondent's representations to Morrison with regard to the T.O.P. policy were not false. Count II On September 12, 1977, Respondent met with Fred Menk and gave to him the USL presentation on the T.O.P. policy. Respondent gave the presentation as he had been taught. Menk was aware that he was purchasing insurance. (Tr. 51.) Respondent made no representation about future dividends. (Tr. 59.) The interest rate was represented to increase as USL grew, which it did. (Tr. 59.) Menk was dissatisfied and felt the policy was misrepresented because he did not get the rate of return he had anticipated. (Tr. 59.) According to Menk, Respondent's representations made with regard to interest rate increases were accurate, and Respondent made no representations regarding future dividends. Count III Respondent met with Paul Loudin in September of 1978, and gave him the USL presentation on the T.O.P. policy as Respondent had been taught. Loudin was aware he was purchasing insurance. (Tr. 21, 26, 27, 31.) His interest was in life insurance and retirement compensation. (Tr. 36.) In part, Loudin's dissatisfaction was the belief he had lost his money because he did not receive a dividend on his first year's premium. The policy reflects that no dividends are payable in the first year. (Respondent's Exhibit #7.) A copy of the policy was provided to Loudin by Respondent. (Tr. 45.) Loudin also anticipated a dividend of 12 to 18 percent on his premiums based upon Respondent's general comments. However, he did not remember the exact conversation with Respondent. (Tr. 31, 32, 38, 39.) Loudin received a letter from USL which reflects a dividend history based upon an 18-year-old insured with an annual premium of $1,000 as follows: End of 2nd year $100.35 End of 3rd year 130.66 End of 4th year 162.86 The rate of return in the fourth year would be 11.6 percent on the fourth year's premium. The representations made to Loudin by Respondent were substantially true, or the relevant information was made available to Loudin by the Respondent. Count IV On November 30, 1977, Respondent met with Gayle Mason and gave the USL presentation on the T.O.P. policy as he had been taught. Mason knew she was purchasing insurance. (Tr. 107.) Respondent represented that the number of participants in the T.O.P. policy would be limited. (Tr. 108.) The current rate of return was taken by Respondent to be 11 percent, and it was represented that the return could be more. (Tr. 109.) Dividends were to be paid from surplus earnings. (Tr. 114.) Mason called the Better Business Bureau and the State Insurance Commissioner's office, and she was aware that USL was an insurance company and she was engaged in an insurance transaction. (Tr. 115.) Respondent represented that as USL grew, the dividends would increase. (Tr. 118.) Mason received a dividend in the second year in accordance with the policy. The representations made to Mason by Respondent were true or thought by Respondent to be true.
Recommendation Having found the Respondent, Emory Daniel Jones, not guilty of violating any of the statutes or rules as alleged, it is recommended that the Administrative Complaint against Respondent be dismissed. DONE and RECOMMENDED this 17th day of January, 1983, in Tallahassee, Leon County, Florida. STEPHEN F. DEAN, Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 17th day of January, 1981. COPIES FURNISHED: David A. Yon, Esquire Department of Insurance 413-B Larson Building Tallahassee, Florida 32301 Paul H. Bowen, Esquire 600 Courtland Street, Suite 600 Post Office Box 7838 Orlando, Florida 32854 The Honorable William Gunter State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, Florida 32301
Findings Of Fact Upon consideration of the oral and documentary evidence adduced at the hearing, the following facts are found: At all times relevant to this proceeding, the respondent Frank Cimino, Jr. was licensed as an ordinary life, ordinary life including disability and dental health plan insurance agent. Respondent was also the president and incorporator of National Consumer Investment Counselors, Inc., a Florida corporation doing business at Post Office Box 1520, Brandon, Florida. Charles R. Ritzi is an insurance salesman employed at National Consumer Investment Counselors, Inc., and respondent is his supervisor. On or about November 2, 1979, Mr. Ritzi went to the home of Edward Kimball for the purpose of discussing insurance with him. He received from Mr. Kimball his other existing insurance policies and took them back to his office to analyze and compare their benefits, costs and terms with a policy which could be provided by respondent's corporation. Among the policies taken was Mr. Kimball's State Farm Insurance Company "IRA" annuity policy number 4,664,836. Several days later, Mr. Ritzi and respondent returned to Mr. Kimball's residence. Mr. Kimball made a decision to purchase an insurance Policy from respondent and numerous forms were signed by Mr. Kimball. These forms were then taken back to respondent's office and processed. Mr. Kimball did not sign a cash surrender form for his State Farm "IRA" annuity policy and he did not intend for that policy to be cancelled. On December 6, 1979, the offices of State Farm Life Insurance Company received in the mail a cash surrender request form on Edward Kimball' s "IRA" annuity policy number 4,664,836. Mr. Kimball's name appeared on the signature line of the form. The form also contained a change of mailing address section in which had been written the respondent's business address. The form constitutes a request for a withdrawal of dividends and surrender of the policy. By the terms of the policy, only the owner of the policy may make such a request. The "IRA" annuity policy funds a retirement plan. If the request form had been processed, there would have been a penalty imposed by the Internal Revenue Service for a premature distribution of funds and the funds distributed would have been treated as ordinary income for tax purposes. State Farm sent a service agent to Mr. Kimball's residence and it was discovered that Mr. Kimball did not desire to give up his "IRA" policy number 4,664,836, and that he did not sign the cash surrender request form. A handwriting expert confirmed that the handwriting appearing on the line entitled "Signature of Policyowner" was not the signature of Mr. Kimball. It is concluded as an ultimate finding of fact that respondent or an employee acting under his supervision signed the name of Edward Kimball, Jr. appearing on the State Farm cash surrender form and transmitted sold form to State Farm without the knowledge or consent of Mr. Kimball, the policy owner. In February of 1980, respondent placed an advertisement in the East Hillsborough Edition of The Tampa Tribune, a newspaper with a circulation of approximately 36,000. The advertisement guaranteed the reader that: "...if you are insurable and own any personal, ordinary life insurance, regardless of the company, we can show you a method of rearranging your program in a way that will: Increase the amount of money which would be paid to your beneficiary in the event of your death. 2. Increase the amount of cash available for retirement [sic], 3. Retain all of your existing guarantees and benefits and 4. We can do all this with no increase in premium." The four guarantees mentioned in the advertisement may not be capable of performance in all life insurance policies. However, it is possible for a qualified agent to accomplish the four guarantees in personal ordinary cash value life insurance policies. The guarantees are made to those persons who are insurable and who own personal, ordinary life insurance.
Recommendation Based upon the findings of fact and conclusions of law recited herein, it is RECOMMENDED THAT: The charges in the Administrative Complaint relating to a Penn Mutual Life Insurance Whole Life Policy be dismissed; Count II of the Administrative Complaint relating to an advertisement appearing in The Tampa Tribune be dismissed; Respondent be found guilty of violating Florida Statutes, Sections 626.611(4),(5),(7),(9), and (13) and 626.9541(1)(f); and Pursuant to Section 626.611, Florida Statutes, the insurance licenses presently held by the respondent be suspended for a period of one (1) year. Respectfully submitted and entered this 6th day of February, 1981, in Tallahassee, Florida. DIANE D. TERMOR Hearing Officer Division of Administrative Hearings 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 6th day of February, 1981. COPIES FURNISHED: Richard P. Harris, Esquire Department of Insurance 428-A Larson Building Tallahassee, Florida 32301 Frank Cimino, Jr. Post Office Box 1520 Brandon, Florida 33511 Honorable Bill Gunter Office of Treasurer Insurance Commissioner The Capitol Tallahassee, Florida 32301
The Issue The issue for consideration is whether Respondent's licenses and eligibility for licensure as a life agent, a life and health agent, a general lines agent, a health agent and a dental health care contract salesman in Florida should be disciplined because of the matters set forth in the Administrative Complaint filed herein.
Findings Of Fact At all times pertinent to the matters in issue herein, the Department of Insurance and Treasurer was the state agency in Florida responsible for the licensing of insurance agents and regulation of the insurance industry in this state. Respondent, Michael Charles Peppe was and is currently licensed and eligible for licensure in Florida as a life insurance agent, a life and health insurance agent, a general lines agent and a health insurance agent. He was an officer and director of M. Peppe Agency, Inc., a Florida corporation. During the period in issue herein, Respondent's agency had a brokerage agreement with William Sanner and Mary Lou Sanner who were employed as sub- agents. Constance Abraham, an 85 year old widow first met William Sanner when she moved to Ft. Lauderdale, some 20 or so year ago. They were neighbors in the same apartment building. At that time she was insured with Mutual of Omaha and her policy was transferred to him, an agent for that company, for service. Over the years she purchased quite a bit of other insurance from him. They were all different kinds of health insurance policies and over time, she estimates, she purchased somewhere around 50 policies. During the period between 1985 and 1991, Mrs. Abraham purchased numerous health policies for both herself and her son through Mr. and Mrs. Sanner, though she does not recall ever having dealt with Mrs. Sanner. Records disclose that her coverage was placed with nine different companies and provided coverage in such areas as Medicare Supplement, nursing home insurance, cancer insurance, and hospital expense - indemnity insurance. Over the years approximately 60 policies were issued through Respondent's agency to either Mrs. Abraham or her son. The applications were taken by Sanner who would collect the initial premiums and forward both to Respondent's agency for processing to the various insurers. Some policies were signed by Sanner as agent of record and some were signed by Respondent in that capacity. Only a few were signed by Mrs. Sanner. Mrs. Abraham claims she didn't realize how much health insurance she had. Mr. Sanner would come to her apartment and talk to her about a new policy and she would abide by his advice. Her purchases amounted to approximately $20,000.00 per year in premiums which she would pay by check to Mr. Sanner. At no time did she ever deal with or meet the Respondent, Mr. Peppe. She did not question Sanner deeply about why he was selling her so much insurance. Whenever she asked about a new policy, he would usually have what appeared to he to be a good reason for it such as something was lacking in her coverage. Even when she recognized he was selling her duplicate coverage, he told her it was a good idea to have more. At no time did he or anyone else tell her she had too much insurance. Mrs. Abraham claims to know nothing about insurance herself. However, she was cognizant of the nature of the policies she had, utilizing without prompting the terms, "indemnity", "supplemental", and "accident." Mr. Sanner would come to her home at least once a month She trusted him to help her with her health insurance and would talk with him whenever a policy came up for renewal. On some occasions he would recommend she renew and on others would recommend she drop that policy in favor of another. At no time was she aware, however, of the fact that she was duplicating policies. She also claims she never had to tell Mr. Sanner what she wanted from her coverage. He always seemed to know and would handle not only the purchase of her policies but also the filing of her claims. She can recall no instance where she asked for any coverage and he tried to talk her out of it. Mrs. Abraham denies she was the person who complained to the Department. It was her daughter who noticed what was going on and took matters into her own hands. At no time did either Sanner or the Respondent attempt to contact her after the complaint was filed. Mrs. Abraham and her husband had four children. Her son, Lewis, who is somewhat retarded, lives with her and she also purchased some policies for him. Over the years she has had many occasions to file claims under her policies. It is important to her that she have protection to provide full time care if necessary because she has no family locally to provide that care for her. She had coverage that provided nursing care, a private room in the hospital, and some policies which provided for extended or nursing home care. She recognizes that such care is expensive and wanted enough policies to give her total coverage without out of pocket expense if the care was needed. She keeps track of the policies she has on her personal computer and has been doing so for some six or seven years. She apparently is sufficiently computer literate that she knows what she has and what she is doing. Mrs. Abraham owns a condominium at the Galt Ocean Mile apartment in Ft. Lauderdale. The $20,000.00 figure in policy premiums she mentioned were for her policies only. Those for her son were extra. She has sufficient income from stocks and bonds to pay her premiums, pay her mortgage, and still live comfortably. Her son has his own income from a trust fund and his own investments. At one point in time, when Mrs. Abraham had some recurring health problems and was in and out of hospitals regularly, she received in benefits far more than her actual expenses and made a tidy profit. Nonetheless, she adamantly disclaims she purchased the policies she had for that purpose claiming instead that she wanted merely that both she and her son be able to pay for the best medical care possible in the event it is needed. To that end, Lewis Abraham has filed very few claims against his carriers. Most, if not all, of the companies which provided the coverage for Mrs. Abraham and her son have limits on the amount of total coverage any one policy holder can have in any line of insurance. The limit is cumulative and not limited to policies with a specific company. Taken together, the policies in force for Mrs. Abraham in some cases exceeded that limit and had the insurers been made aware of the totality of her coverage, their policies would not have been issued. This information was not furnished to the companies, however, by either Sanner or Respondent. In addition, on many of the policies the mental condition of a policy holder must be disclosed if that person is retarded or not fully competent. Respondent did not know of Lewis' condition though Mr. Sanner was fully aware of it both as it related to his retardation and his drop foot. On none of the policy applications relating to him, however, was either ever mentioned. Some companies indicated that if Lewis's mental and physical condition had been properly disclosed on the application, they either would not have issued the coverage or, at least, would have referred the matter to the underwriter for further evaluation and a determination as to whether to issue the policy and if so, at what premium. Even more, Lewis' physical and mental condition may have caused the company to decline payment of a claim within two years of issuance of any policy actually written. Respondent received monthly statements from the various insurers with whom his agency did business detailing the transactions for that month. Commissions on each sale were paid by the insurers to Respondent's agency and thereafter, pursuant to an agreement between Respondent and Sanner, the commissions were divided. The commissions paid to Respondent's company by the insurers on all these policies amount to in excess of $18,000.00. Respondent asserts that Mrs. Abraham knew exactly what she was doing and was, in effect, conducting if not a scam, at least an improper business activity through the knowing purchase of duplicative policies and redundant coverage. This well may be true, but even if it is, Mr. Sanner was a knowing accomplice and participant. In addition, while it is accepted that Respondent might not know the status of every policy purchased through his agency or the total activity with any particular client, when his name appears as signatory on policy applications forwarded to a company for whom he accepts or solicits business, as here, it is hard to find he did not have at least a working familiarity with the business written by his sub-agents . This finding is supported by the analysis done of Respondent's pertinent activities here by Milton O. Bedingfield, a 39 year insurance agent and broker for 10 companies, a Certified Life Underwriter, and an expert in life and health insurance. Mr. Bedingfield concluded, after a review of all the policies written for the Abrahams through Respondent's agency, there was a gross oversale of policies and repeated omissions of pertinent information on policy applications. He found a duplication of benefits and overlapping coverage, all without legitimate purpose, especially for an 85 year old woman. Since the average hospital stay is less than 2 weeks, she would not likely benefit from her insurance for the stay. He could not see where Mrs. Abraham would get back in benefits what she has paid in premiums. In Mr. Bedingfield's opinion, this is the worst case of oversale he has seen in his 39 years in the insurance business. He contends the agent stands in almost a fiduciary capacity to his clients - especially the aged who rely on their agent to properly advise them on adequate coverage. There is often an element of fear involved that the unscrupulous agent can profit from. Here, he feels, Respondent's practice falls far short of the state's standard of acceptability on the sale of Medicare Supplemental insurance. On balance, however, Mr. Bedingfield does not know if all the policies he saw stayed in force throughout the period of the policy. Many could have lapsed or been cancelled. In all fairness, as well, where insurance is brokered, as here, the ultimate placing agent normally does not meet the client but must rely on what he is told by the offering agent.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is, therefore: RECOMMENDED that the Administrative Complaint filed against the Respondent in this case, Michael C. Peppe, be dismissed. RECOMMENDED this 11th day of December, 1992, in Tallahassee, Florida. ARNOLD H. POLLOCK 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 11th day of December, 1992. APPENDIX TO RECOMMENDED ORDER IN CASE NO. 92-2708 The following constitutes my specific rulings pursuant to Section 120.59(2), Florida Statutes, on all of the Proposed Findings of Fact submitted by the parties to this case. FOR THE PETITIONER: 1. & 2. Accepted and incorporated herein. Accepted and incorporated herein. - 9. Accepted and incorporated herein. Accepted and incorporated herein. & 12. Accepted and incorporated herein. 13. & 14. Accepted and incorporated herein. 15. - 18. Accepted and incorporated herein. Accepted. Accepted. & 22. Accepted. Rejected as not supported by evidence or record except for the fact that Respondent sign and processed applications and premium payments and received a financial benefit from the sales. Accepted. FOR THE RESPONDENT: Accepted so far as it relates Ms. Abraham was well informed and aware of her coverage. Not established, but insufficient evidence of actionable misconduct. Accepted. - 6. Not proper Findings of Fact but more Conclusions of Law. Accepted. Not a proper Findings of Fact. COPIES FURNISHED: James A. Bossart, Esquire Division of Legal Services 412 Larson Building Tallahassee, Florida 32399-0300 Thomas F. Woods, Esquire Gatlin, Woods, Carlson & Cowdrey 1709-D Mahan Drive Tallahassee, Florida 32308 Tom Gallagher State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Bill O'Neil General Counsel Department of Insurance The Capitol, PL-11 Tallahassee, Florida 32399-0300
The Issue The issues are whether Respondents offered and sold securities in Florida, in violation of the registration requirements of Section 517.07(1), Florida Statutes; offered and sold securities in Florida while Respondents were unregistered, in violation of Section 517.12(1), Florida Statutes; or committed fraud in the offer, sale, or purchase of securities in Florida, in violation of Section 517.301(1)(a), Florida Statutes. If so, an additional issue is the penalty to be imposed.
Findings Of Fact At all material times, Respondent James A. Torchia (Respondent) held a valid life and health insurance license. Respondent was the president and owner of Respondent Empire Insurance, Inc. (Empire Insurance), a now-dissolved Florida corporation. Empire Insurance was in the insurance business, and Respondent was its sole registered insurance agent. At no material time has Respondent or Empire Insurance held any license or registration to engage in the sale or offer for sale of securities in Florida. At no material time were the investments described below sold and offered for sale by Respondent or Empire Insurance registered as securities in Florida. These cases involve viaticated life insurance policies. A life insurance policy is viaticated when the policy owner, also known as the viator, enters into a viatical settlement agreement. Under the agreement, the viator sells the policy and death benefits to the purchaser for an amount less than the death benefit--the closer the viator is perceived to be to death, the greater the discount from the face amount of the death benefit. The viatical industry emerged to provide dying insureds, prior to death, a means by which to sell their life insurance policies to obtain cash to enjoy during their remaining lives. As this industry matured, brokers and dealers, respectively, arranged for the sale of, and bought and resold, life insurance policies of dying insureds. Prior to the death of the viator, these viaticated life insurance policies, or interests in such policies, may be sold and resold several times. In these cases, viators sold their life insurance policies to Financial Federated Title & Trust, Inc. (FinFed). Having raised money from investors, American Benefit Services (ABS) then paid FinFed, which assigned viaticated policies, or interests in the policies, to various trusts. The trusts held the legal title to the policies, and the trust beneficiaries, who are the investors from whom ABS had obtained the funds to pay FinFed, held equitable title to the policies. Sometimes in these cases, a broker or dealer, such as William Page and Associates, intervened between the viator and FinFed. At some point, though, ABS obtained money from investors to acquire policies, but did not pay the money to FinFed to purchase viaticated life insurance policies. The FinFed and ABS investment program eventually became a Ponzi scheme, in which investor payouts were derived largely, if not exclusively, from the investments of other investors. ABS typically acquired funds through the promotional efforts of insurance agents, such as Respondent and Empire Insurance. Using literature provided by ABS, these agents often sold these investments to insurance clients. As was typical, Respondent and Empire Insurance advertised the types of claims described below by publishing large display ads that ran in Florida newspapers. Among the ABS literature is a Participation Disclosure (Disclosure), which describes the investment. The Disclosure addresses the investor as a "Participant" and the investment as a "Participation." The Disclosure contains a Participation Agreement (Agreement), which provides that the parties agree to the Disclosure and states whether the investor has chosen the Growth Plan or Income Plan, which are described below; a Disbursement Letter of Instruction, which is described below; and a Letter of Instruction to Trust, which is described below. The agent obtains the investor's signature to all three of these documents when the investor delivers his check, payable to the escrow agent, to purchase the investment. The Disclosure states that the investments offer a “High Return”: “Guaranteed Return on Participation 42% at Maturity.” The Disclosure adds that the investments are “Low Risk”: “Secured by a Guaranteed Insurance Industry Receivable”; “Secured by $300,000 State Insurance Guarantee Fund”; “Short Term Participation (Maturity Expectation 36 Months)”; “Principal Liquid After One Year With No Surrender Charge”; “State Regulated Participation”; “All Transactions By Independent Trust & Escrow Agents”; and “If policy fails to mature at 36 months, participant may elect full return of principal plus 15% simple interest.” The Disclosure describes two alternative investments: the Growth Plan and Income Plan. For the Growth Plan, the Disclosure states: “At maturity, Participant receives principal plus 42%, creating maximum growth of funds.” For the Income Plan, the Disclosure states: “If income is desired, participation can be structured with monthly income plans.” Different rates of return for the Growth and Income plans are set forth below. For investors choosing the Income Plan, ABS applied only 70 percent of the investment to the purchase of viaticated life insurance policies. ABS reserved the remaining 30 percent as the source of money to "repay" the investor the income that he was due to receive under the Income Plan, which, as noted below, paid a total yield of 29.6 percent over three years. The Disclosure states that ABS places all investor funds in attorneys’ trust accounts, pursuant to arrangements with two “bonded and insured” “financial escrow agents.” At another point in the document, the Disclosure states that the investor funds are deposited “directly” with a “financial escrow agent,” pursuant to the participant’s Disbursement Letter of Instruction. The Disbursement Letter of Instruction identifies a Florida attorney as the “financial escrow agent,” who receives the investor’s funds and disburses them, “to the order of [FinFed) or to the source of the [viaticated insurance] benefits and/or its designees.” This disbursement takes place only after the attorney receives “[a] copy of the irrevocable, absolute assignment, executed in favor of Participant and recorded with the trust account as indicated on the assignment of [viaticated insurance] benefits, and setting out the ownership percentage of said [viaticated insurance] benefits”; a “medical overview” of the insured indicative of not more than 36 months’ life expectancy; confirmation that the policy is in full force and effect and has been in force beyond the period during which the insurer may contest coverage; and a copy of the shipping airbill confirming that the assignment was sent to the investor. The Disclosure states that the investor will direct a trust company to establish a trust, or a fractional interest in a trust, in the name of the investor. When the life insurance policy matures on the death of the viator, the insurer pays the death benefits to the trust company, which pays these proceeds to the investor, in accordance with his interest in the trust. Accordingly, the Letter of Instruction to Trust directs FinFed, as the trust company, to establish a trust, or a fractional interest in a trust, in the name of the investor. The Letter of Instruction to Trust provides that the viaticated insurance benefits obtained with the investor's investment shall be assigned to this trust, and, at maturity, FinFed shall pay the investor a specified sum upon the death of the viator and the trustee's receipt of the death benefit from the insurer. The Disclosure provides that, at anytime from 12 to 36 months after the execution of the Disclosure, the investor has the option to request ABS to return his investment, without interest. At 36 months, if the viator has not yet died, the investor has the right to receive the return of his investment, plus 15 percent (five percent annually). The Disclosure states that ABS will pay all costs and fees to maintain the policy and that all policies are based on a life expectancy for the viator of no more than 36 months. Also, the Disclosure assures that ABS will invest only in policies that are issued by insurers that are rated "A" or better by A.M. Best "at the time that the Participant's deposit is confirmed." The Disclosure mentions that the trust company will name the investor as an irrevocable assignee of the policy benefits. The irrevocable assignment of policy benefits mentioned in the Disclosure and the Disbursement Letter of Instruction is an anomaly because it does not conform to the documentary scheme described above. After the investor pays the escrow agent and executes the documents described above, FinFed executes the “Irrevocable Absolute Assignment of Viaticated Insurance Benefits.” This assignment is from the trustee, as grantor, to the investor, as grantee, and applies to a specified percentage of a specific life insurance policy, whose death benefit is disclosed on the assignment. The assignment includes the "right to receive any viaticated insurance benefit payable under the Trusts [sic] guaranteed receivables of assigned viaticated insurance benefits from the noted insurance company; [and the] right to assign any and all rights received under this Trust irrevocable absolute assignment." On its face, the assignment assigns the trust corpus-- i.e., the insurance policy or an interest in an insurance policy--to the trust beneficiary. Doing so would dissolve the trust and defeat the purpose of the other documents, which provide for the trust to hold the policy and, upon the death of the viator, to pay the policy proceeds in accordance with the interests of the trust beneficiaries. The assignment bears an ornate border and the corporate seal of FinFed. Probably, FinFed intended the assignment to impress the investors with the "reality" of their investment, as the decorated intangible of an "irrevocable" interest in an actual insurance policy may seem more impressive than the unadorned intangible of a beneficial interest in a trust that holds an insurance policy. Or possibly, the FinFed/ABS principals and professionals elected not to invest much time or effort in the details of the transactional documentation of a Ponzi scheme. What was true then is truer now. Obviously, in those cases in which no policy existed, the investor paid his money before any policy had been selected for him. However, this appears to have been the process contemplated by the ABS literature, even in those cases in which a policy did exist. The Disbursement Letter of Instruction and correspondence from Respondent, Empire Insurance, or Empire Financial Consultant to ABS reveal that FinFed did not assign a policy, or part of a policy, to an investor until after the investor paid for his investment and signed the closing documents. In some cases, Respondent or Empire Insurance requested ABS to obtain for an investor a policy whose insured had special characteristics or a investment plan with a maturity shorter than 36 months. FinFed and ABS undertook other tasks after the investor paid for his investment and signed the closing documents. In addition to matching a viator with an investor, based on the investor's expressed investment objectives, FinFed paid the premiums on the viaticated policies until the viator died and checked on the health of the viator. Also, if the viator did not die within three years and the investor elected to obtain a return of his investment, plus 15 percent, ABS, as a broker, resold the investor's investment to generate the 15 percent return that had been guaranteed to the investor. Similarly, ABS would sell the investment of investors who wanted their money back prior to three years. The escrow agent also assumed an important duty--in retrospect, the most important duty--after the investor paid for his investment and signed the closing documents; the escrow agent was to verify the existence of the viaticated policy. Respondent and Empire Insurance sold beneficial interests in trusts holding viaticated life insurance policies in 50 separate transactions. These investors invested a total of $1.5 million, nearly all of which has been lost. Respondent and Empire Insurance earned commissions of about $120,000 on these sales. Petitioner proved that Respondent and Empire Insurance made the following sales. Net worths appear for those investors for whom Respondent recorded net worths; for most, he just wrote "sufficient" on the form. Unless otherwise indicated, the yield was 42 percent for the Growth Plan. In all cases, investors paid money for their investments. In all cases, FinFed and ABS assigned parts of policies to the trusts, even of investors investing relatively large amounts. On March 21, 1998, Phillip A. Allan, a Florida resident, paid $69,247.53 for the Growth Plan. On March 26, 1998, Monica Bracone, a Florida resident with a reported net worth of $900,000, paid $8000 for the Growth Plan. On April 2, 1998, Alan G. and Judy LeFort, Florida residents with a reported net worth of $200,000, paid $10,000 for the Growth Plan. In a second transaction, on June 8, 1998, the LeForts paid $5000 for the Growth Plan. In the second transaction, the yield is 35 percent, but the Participation Agreement notes a 36-month life expectancy of the viator. The different yields based on life expectancies are set forth below, but, as noted above, the standard yield was 42 percent, and, as noted below, this was based on a 36-month life expectancy, so Respondent miscalculated the investment return or misdocumented the investment on the LeForts' second transaction. On April 29, 1998, Doron and Barbara Sterling, Florida residents with a reported net worth of $250,000, paid $15,000 for the Growth Plan. In a second transaction, on August 14, 1998, the Sterlings paid $100,000 for the Growth Plan. The yield for the second transaction is 35 percent, and the Participation Agreement notes that the Sterlings were seeking a viator with a life expectancy of only 30 months. When transmitting the closing documents for the second Sterling transaction, Respondent, writing ABS on Empire Insurance letterhead, stated in part: This guy has already invested with us (15,000) [sic]. He gave me this application but wants a 30 month term. Since he has invested, he did some research and has asked that he be put on a low T-cell count and the viator to be an IV drug user. I know it is another favor but this guy is a close friend and has the potential to put at least another 500,000 [sic]. If you can not [sic] do it, then I understand. You have done a lot for me and I always try to bring in good quality business. If this inventory is not available, the client has requested that we return the funds . . . In a third transaction, on February 24, 1999, the Sterlings paid $71,973 for the Growth Plan. The yield is only 28 percent, but the Participation Agreement reflects the typical 36-month life expectancy for the viator. Although the investors would not have received this document, Respondent completed an ABS form entitled, "New Business Transmittal," and checked the box, "Life Expectancy 2 years or less (28%). The other boxes are: "Life Expectancy 2 1/2 years or less (35%)" and "Life Expectancy 3 years or less (42%)." On May 4, 1998, Hector Alvero and Idelma Guillen, Florida residents with a reported net worth of $100,000, paid $6000 for the Growth Plan. In a second transaction, on October 29, 1998, Ms. Guillen paid $5000 for the Growth Plan. In a third transaction, on November 30, 1998, Ms. Guillen paid $5000 for the Growth Plan. For this investment, Ms. Guillen requested an "IV drug user," according to Respondent in a letter dated December 1, 1998, on Empire Financial Consultants letterhead. This is the first use of the letterhead of Empire Financial Consultants, not Empire Insurance, and all letters after that date are on the letterhead of Empire Financial Consultants. In a fourth transaction, on January 29, 1999, Ms. Guillen paid $15,000 for the Growth Plan. On April 23, 1998, Bonnie P. Jensen, a Florida resident with a reported net worth of $120,000, paid $65,884.14 for the Growth Plan. Her yield was 35 percent, but the Participation Agreement reflects a 36-month life expectancy. On May 20, 1998, Michael J. Mosack, a Florida resident with a reported net worth of $500,000, paid $70,600 for the Income Plan. He was to receive monthly distributions of $580.10 for three years. The total yield, including monthly distributions, is $20,883.48, which is about 29.6 percent, and the Participation Agreement reflects a 36-month life expectancy. On May 27, 1998, Lewis and Fernande G. Iachance, Florida residents with a reported net worth of $100,000, paid $30,000 for the Growth Plan. On June 3, 1998, Sidney Yospe, a Florida resident with a reported net worth of $1,500,000, paid $30,000 for the Growth Plan. The yield is 35 percent, and the Participation Agreement reflects a 30-month life expectancy. On June 12, 1998, Bernard Aptheker, with a reported net worth of $100,000, paid $10,000 for the Growth Plan. The yield is 35 percent, but the Participation Agreement reflects a 36-month life expectancy. On June 10, 1998, Irene M. and Herman Kutschenreuter, Florida residents with a reported net worth of $200,000, paid $30,000 for the Growth Plan. The yield is 35 percent, but the Participation Agreement reflects a 36-month life expectancy. On June 9, 1998, Daniel and Mary Spinosa, Florida residents with a reported net worth of $300,000, paid $10,000 for the Growth Plan. The yield is 35 percent, but the Participation Agreement reflects a 36-month life expectancy. On June 5, 1998, Pauline J. and Anthony Torchia, Florida residents with a reported net worth of $300,000 and the parents of Respondent, paid $10,000 for the Growth Plan. The yield is 35 percent, but the Participation Agreement reflects a 36-month life expectancy. On June 29, 1998, Christopher D. Bailey, a Florida resident with a reported net worth of $500,000, paid $25,000 for the Growth Plan. The yield is 35 percent, but the Participation Agreement reflects a 36-month life expectancy. In a second transaction on the same day, Mr. Bailey paid $25,000 for the Growth Plan. Petitioner submitted documents concerning a purported purchase by Lauren W. Kramer on July 21, 1998, but they were marked "VOID" and do not appear to be valid. On July 22, 1998, Laura M. and Kenneth D. Braun, Florida residents with a reported net worth of $150,000, paid $25,000 for the Growth Plan, as Respondent completed the Participation Agreement. However, the agreement calls for them to receive $205.42 monthly for 36 months and receive a total yield, including monthly payments, of 29.6 percent, so it appears that the Brauns bought the Income Plan. In a second transaction, also on July 22, 1998, the Brauns paid $25,000 for the Growth Plan. On January 20, 1999, Roy R. Worrall, a Florida resident, paid $100,000 for the Income Plan. The Participation Agreement provides that he will receive monthly payments of $821.66 and a total yield of 29.6 percent. On July 16, 1998, Earl and Rosemary Gilmore, Florida residents with a reported net worth of $250,000, paid $5000 for the Growth Plan. In a second transaction, on February 12, 1999, the Gilmores paid $20,000 for the Growth Plan. The yield is 28 percent, but the Participation Agreement reflects a 36-month life expectancy. The New Business Transmittal to ABS notes a life expectancy of two years or less. On July 14, 1998, David M. Bobrow, a Florida resident with a reported net worth of $700,000 on one form and $70,000 on another form, paid $15,000 for the Growth Plan. The yield is 35 percent, but the Participation Agreement reflects a 36-month life expectancy. In a second transaction, on the same day, Mr. Bobrow paid $15,000 for the Growth Plan. On July 27, 1998, Cecilia and Harold Lopatin, Florida residents with a reported net worth of $300,000, paid $10,000 for the Growth Plan. On July 30, 1998, Ada R. Davis, a Florida resident, paid $30,000 for the Income Plan. Her total yield, including monthly payments of $246.50 for three years, is 29.6 percent. In a second transaction, on the same day, Ms. Davis paid $30,000 for the Income Plan on the same terms as the first purchase. On July 27, 1998, Joseph F. and Adelaide A. O'Keefe, Florida residents with a net worth of $300,000, paid $12,000 for the Growth Plan. On August 5, 1998, Thurley E. Margeson, a Florida resident, paid $50,000 for the Growth Plan. On August 19, 1998, Stephanie Segaria, a Florida resident, paid $20,000 for the Growth Plan. On August 26, 1998, Roy and Glenda Raines, Florida residents, paid $5000 for the Growth Plan. The yield is 35 percent, but the Participation Agreement reflects a 36-month life expectancy. The New Business Transmittal to ABS notes a life expectancy of 30 months or less. In a second transaction, on the same day, the Raineses paid $5000 for the Growth Plan. The yield is 35 percent, but the Participation Agreement reflects a 36-month life expectancy, although, again, the New Business Transmittal notes the life expectancy of 30 months or less. On November 24, 1998, Dan W. Lipford, a Florida resident, paid $50,000 for the Growth Plan in two transactions. In a third transaction, on January 13, 1999, Mr. Lipford paid $30,000 for the Growth Plan. On December 1, 1998, Mary E. Friebes, a Florida resident, paid $30,000 for the Growth Plan. On December 4, 1998, Allan Hidalgo, a Florida resident, paid $25,000 for the Growth Plan. On December 17, 1998, Paul E. and Rose E. Frechette, Florida residents, paid $25,000 for the Income Plan. The yield, including monthly payments of $205.41 for three years, is 29.6 percent. On December 26, 1998, Theodore and Tillie F. Friedman, Florida residents, paid $25,000 for the Growth Plan. On January 19, 1999, Robert S. and Karen M. Devos, Florida residents, paid $10,000 for the Growth Plan. On January 20, 1999, Arthur Hecker, a Florida resident, paid $50,000 for the Income Plan. The yield, including a monthly payment of $410.83 for 36 months, is 29.6 percent. On February 11, 1999, Michael Galotola, a Florida resident, paid $25,000 for the Growth Plan. In a second transaction, on the same day, Michael and Anna Galotola paid $12,500 for the Growth Plan. On November 3, 1998, Lee Chamberlain, a Florida resident, paid $50,000 for the Growth Plan. On December 23, 1998, Herbert L. Pasqual, a Florida resident, paid $200,000 for the Income Plan. The yield, including a monthly payment of $1643.33 for three years, is 29.6 percent. On December 1, 1998, Charles R. and Maryann Schuyler, Florida residents, paid $10,000 for the Growth Plan. Respondent and Empire Insurance were never aware of the fraud being perpetrated by FinFed and ABS at anytime during the 38 transactions mentioned above. Respondent attempted to verify with third parties the existence of the viaticated insurance policies. When ABS presented its program to 30-40 potential agents, including Respondent, ABS presented these persons an opinion letter from ABS's attorney, stating that the investment was not a security, under Florida law. Respondent also contacted Petitioner's predecessor agency and asked if these transactions involving viaticated life insurance policies constituted the sale of securities. An agency employee informed Respondent that these transactions did not constitute the sale of securities.
Recommendation RECOMMENDED that Petitioner enter a final order: Finding James A. Torchia and Empire Insurance, Inc., not guilty of violating Section 517.301(1), Florida Statutes; Finding James A. Torchia guilty of 38 violations of Section 517.07(1), Florida Statutes, and 38 violations of Section 517.12(1), Florida Statutes; Finding Empire Insurance, Inc., guilty of 38 violations of Section 517.07(1), Florida Statutes, and 38 violations of Section 517.12(1), Florida Statutes, except for transactions closed on or after December 1, 1998; Directing James A. Torchia and Empire Insurance, Inc., to cease and desist from further violations of Chapter 517, Florida Statutes; and Imposing an administrative fine in the amount of $120,000 against James A. Torchia. DONE AND ENTERED this 19th day of May, 2003, in Tallahassee, Leon County, Florida. ROBERT E. MEALE Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 19th day of May, 2003. COPIES FURNISHED: Honorable Tom Gallagher Chief Financial Officer Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300 Mark Casteel, General Counsel Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300 Fred H. Wilsen Senior Attorney Office of Financial Institutions and Securities Regulation South Tower, Suite S-225 400 West Robinson Street Orlando, Florida 32801-1799 Barry S. Mittelberg Mittelberg & Nicosia, P.A. 8100 North University Drive, Suite 102 Fort Lauderdale, Florida 33321
The Issue The issues to be resolved in this proceeding concern whether the Respondent has violated various provisions of the Florida Insurance Code as alleged in an Amended Order to Show Cause and, if so, what penalty, if any, is warranted.
Findings Of Fact The Petitioner is an agency of the State of Florida charged with licensing and regulating viatical settlement providers in the State of Florida. The Respondent, Future First Financial Group, Inc., is licensed by the State of Florida as a viatical settlement provider. Its President and Chief Executive Officer is Mr. Randy Stelk. A viatical settlement contract involves the sale of a life insurance policy's benefits in exchange for an immediate discounted cash settlement to the original policy holder. A Florida resident "viator" (the insured) desiring to enter into a viatical settlement contract, acts through a Florida licensed broker, who provides the policy information to licensed viatical settlement providers like the Respondent, for subsequent re-sale of policy benefits to purchasers. Future First was initially licensed as a viatical settlement provider on December 26, 1997. The initial regulation of viatical settlement providers in the State of Florida by the Petitioner began at approximately the time Future First initially became licensed. Consolidated findings concerning Counts 1, 3, 4, 6, 7, 12, 15, 16, 20, 22, 28, 29, 34, 35, 36, 38, 39, 41, 43, 44, and 45: Future First was a licensee of and regulated by the Department of Insurance at all times pertinent hereto. The health status representations on the exhibits (referenced in the Department's Proposed Recommended Order) concerning each of these counts, which are the insurance policy applications in question in these counts, are materially inconsistent with the health status representations related to the later viatical settlement agreements contained in the other exhibits so referenced as to each of the above-enumerated counts. These latter exhibits constitute the showing of actual medical condition to the Respondent by the insureds or viators in each transaction referenced in these counts. The overall effect of this showing is to indicate to the Respondent that the viators in question in these counts were HIV positive or had the disease AIDS, along with related diseases and medical conditions, contrary to the representations initially made to the insurance companies issuing the subject policies, in the insurance policy applications referenced in these counts, wherein the viators represented that they suffered from none of the medical diseases or conditions referenced in those application forms, including AIDS. All the exhibits referenced in these counts came from the business files of Future First and were supplied to the Department by Future First upon the Department's request during the investigation process. These material inconsistencies should have caused Future First to be on notice or to know or believe that the viators in question in these counts had made or indeed may have made fraudulent or material misrepresentations on their insurance policy applications. Subsection 626.989(6), Florida Statutes, requires Department licensees to report to the Department any knowledge or belief that a fraudulent insurance practice, as defined in Section 817.234, Florida Statutes, had been or was being committed. Subsection 817.234(3), Florida Statutes, specifically prohibits the presentation of false, incomplete or misleading information in support of an insurance application or the concealing of any fact material to the application. Thus Subsection 817.234(3), supra, specifically prohibits the very act strongly suggested by the evidence presented in the exhibits supportive of the above-referenced counts of the Amended Order. Future First made no reports to the Department concerning these matters until it contends it first became aware of these inconsistencies in health status representations upon receipt of the Order to Show Cause and later the Amended Order to Show Cause. Consolidated Findings of Fact Concerning Counts 2, 5, 8, 9, 10, 11, 13, 14, 17, 18, 19, 23, 24, 27, 30, 31, 32, 33, 40, and 42: The facts established as to these counts are much the same as those referenced above. The health status representations on the insurance policy applications in question and in evidence (exhibit numbers cited in the Proposed Findings as to these counts in the Petitioner's Proposed Recommended Order) are materially inconsistent with the health status representation on the other exhibits which consist generally of the various documents of health or medical information provided to the Respondent by the viators in question, when the transactions leading to the viatical settlement agreements at issue were being entered into and finalized. The commonality among all of these counts as well as the counts in the above Findings of Fact (Part A above) consist of the viator's having been diagnosed with HIV or AIDS and/or related medical conditions sometime in the past prior to executing the insurance policy applications at issue and then responding in the negative on relevant questions on those policy applications, the overall effect of which was to deny the HIV positive test result, the HIV infection and the diagnosis of AIDS and related medical conditions. The viators at issue then openly revealed these conditions and the dates of the relevant diagnoses, all of which pre-dated the insurance policy applications, in the medical status representations they made to the Respondent and which were also revealed in the medical records provided to the Respondent at some point prior to the issuance of the Order to Show Cause and Amended Order. The health status representations made by the viators at these two different, germane points in time are materially inconsistent. Those material inconsistencies reasonably should have caused Future First and its operating officers to be on notice, to know or to believe that the viators made or may have made fraudulent or material misrepresentations on their insurance policy applications. Moreover, the evidence, as to these counts delineated in Part B above, shows that Future First was actually informed specifically that the policies in question had been rescinded by the insurers because the viators had made material misrepresentations on their policy applications. Exhibits such as the Future First policy summary forms show that Future First had been informed of the policy recisions as to the Counts referenced in Part B above. All of the documents constituting the Department's exhibits supportive of these findings, and the policy summary forms included, were found within the business files of Future First and were supplied to the Department by Future First upon its request during the investigative phase of this prosecution. Subsection 626.989(6), Florida Statutes, requires Department licensees to report to the Department any knowledge or belief that a fraudulent insurance practice as defined in Section 817.234, Florida Statutes, had been or was being committed. Subsection 817.234(3), Florida Statutes, specifically prohibits the presentation of false, incomplete or misleading information in support of an insurance application or the concealing of any fact material to the application. Thus, Subsection 817.234(3), supra, specifically prohibits the acts suggested by the documentary evidence presented by the Department, which supports the Findings of Fact herein. Future First made no report on these matters concerning the viators and policies to the Department, prior to the investigatory audit. Additional Findings of Fact Concerning Counts 2, 5, 41, 42, 43, and 44: Concerning Count 2, Exhibits 15 through 17 are viatical settlement purchase agreements entered into between Future First and various viatical settlement purchasers. These agreements represent to those purchasers that the policies, which are the subject of the agreements, are beyond the contestability period (typically two years) during which an insurer company may rescind its policy. The settlement purchase agreements specify that the "contestability period" runs for two years from the date of policy issuance. Exhibit 2 shows, however, that the policy in question was issued on January 22, 1998, and Exhibits 15 through 17, the agreements, were entered into in February, March and April of 1998, well before the January 22, 2000, conclusion of the contestability period. Future First thus had within its possession, in its files, the documents and information to show that the policies were not beyond contestability when the interests in those policies were sold to the investors or viatical settlement purchasers. The purchasers, by initialing the relevant portion of their purchase agreements had indicated and contracted for the purchase of non-contestable policies or policies which had survived the two-year contestable period before being purchased by these investors or viatical settlement purchasers. The vice-president in charge of underwriting, Mr. Sweeney, under the business practices of Future First, essentially made all the calculations and decisions involved in negotiating and effecting the settlement purchase agreements with the investors and the viatical settlement agreements with the original viators or insureds. As an experienced insurance executive and underwriter who had all of the relevant documents available to him, he is chargeable with knowledge that the policies he and Future First were conveying to the settlement purchasers were still within the contestability period, despite his being on documentary notice that the investors had contracted to purchase only non-contestable policies. The officers and directors of the Respondent allowed him to have this independence of action, freedom of conduct and bargaining power on behalf of Future First and therefore, Future First, the corporation, is chargeable with the conduct it allowed him to engage in, even assuming, arguendo, that no other officer, director or employee of the company knew of the relevant details of these transactions. Thus Future First misrepresented to its investors that the policies were beyond contestability when in fact they were not. It thus is chargeable with knowingly selling interests in contestable policies to investors, who had specifically contracted for the purchase for non-contestable policies. This misrepresentation was material to the purchases because the insurers' ability to rescind the policies during contestability, thereby destroying the very instrument securing the purchasers' investment, was not made known to those purchasers. The potential destruction of that instrument and the consequent loss of the investment to the purchaser is material to any reasoned decision to invest. CEO Randy Stelk's testimony at hearing to the effect that computer input error had caused contestable policies to be inadvertently sold to purchasers who contractually specified a non-contestable policy is rebutted by Future First's own documents from its records which correctly and explicitly identify the policy as contestable. See Exhibits 11a and 11f, at pages 1 and 4, and Exhibit 24, all of which correctly identify the policy as contestable. Exhibit 24 specifically notes the dates at which the policy was projected to emerge from its contestability period. Thus this documented evidence, together with the evidence of Mr. Sweeney's close and direct involvement with arranging for the transactions and making decisions as to which policies to sell to which investors belies Mr. Stelk's testimony in this regard. Concerning Count 5, Exhibits 50, 54, 55, 56 and 57, are viatical settlement purchase agreements which inter alia represented to the respective viatical settlement purchasers that the policy in question was beyond the contestability period during which an insurer may rescind the policy. The "contestability period" runs for two years from the date of policy issuance. However, Exhibit 39, shows that the policy in question was issued on February 3, 1998, and Exhibits 50, 54, 55, 56 and 57, were respectively entered into in February of 1998, well prior to the February 3, 2000, end of the contestability period. Here again, Future First's own records, which correctly and explicitly identify this policy as contestable also specifically note, at Exhibits 42d and 46, the date at which the policy was projected to emerge from the contestability period. The purchase agreements referenced above clearly show that the investors contemplated and contracted to purchase a non-contestable policy. These documents clearly were available to Mr. Sweeney and to Future First at the time Mr. Sweeney was making the underwriting decisions and entering into the agreements with the investors, and consequently this knowledge is chargeable to him and to Future First. Again Mr. Stelks' testimony that computer input error had caused inadvertent sale of contestable policies to purchasers who had contractually specified non-contestable policies is rebutted by Future First's own records, the evidence concerning Future First business practices and specifically Mr. Sweeney's underwriting methods and conduct. Thus, Mr. Stelk's testimony in this regard is not credited. Thus, it is inferred that Future First, through Mr. Sweeney, knowingly represented to investors that the policies were beyond contestability when they were not and such a representation was material to the purchase because the insurers' ability to rescind a policy during contestability and destroy the very instrument securing the investment was not made known to the purchaser. The potential destruction of that instrument and the consequent loss of investment is material to any reasoned decision to invest. Concerning Count 41, the fifth page of Exhibit 428, contains a paragraph entitled "Incontestability" which establishes that the life insurance policy in question was subject to a two-year contestability period, during which the insurer could rescind the policy. Exhibits 446, 447, 448, 449, 450 and 451, are all viatical settlement purchase agreements through which the viatical settlement investors purchased an interest in the death benefit of the life insurance policy in question. Each of those purchase agreements contains a standard section entitled "Minimum Criteria" which is initialed by the purchaser, thereby indicating the purchaser's decision to purchase an interest only in a policy which was beyond contestability. Future First nonetheless placed all of those investors' monies into the policy in question (See Exhibit 428) while it was still within the two-year contestability period without informing the purchasers of that fact. Future First had the policy in its possession and necessarily had to have a copy of it in possession in order to purchase the policy from the viator, which it did in July of 1998. It thus knew the policy was still within its contestability period when interest in it were sold to the purchasers in question. The same reasons found with regard to Counts 2 and 5 prevail here with regard to Mr. Sweeney's involvement. The documents were in Future First's possession and within its knowledge such that the circumstantial evidence clearly shows that Future First is chargeable with knowledge or belief that it sold contestable policies to investors who had no reason to believe they were purchasing contestable policies. Concerning Count 42, Exhibit 453 is dated March 24, 1998, and is a viatical settlement purchase agreement between Future First and the viatical settlement purchaser named therein. The agreement contains the same initialed provision found with regard to the agreements in Counts 2, 5 and 41, indicating the purchasers' decision to invest only in a policy which was beyond the two-year contestability period. The agreement bears the designation "PRA 58075" in the lower left hand corner of the first page (purchaser number). Exhibit 459 is a letter dated May 21, 1998, authorizing Charles R. Sussman, Trustee for the Fidelity Trust (identified in numerous exhibits, including 454 in this count, as the escrow agent used by Future First for viatical settlement contract transactions), to wire funds from that trust to Compass Bank for the purchase of an interest in the death benefits of the Farmers New World Life Insurance policy on the viator named therein, which purchase was accomplished through the execution of Exhibit 454 on June 6, 1998. Among the PRA numbers identified in Exhibit 459, is 58075, corresponding to Exhibit 453, the above-referenced purchase contract. Exhibit 455 is an internally prepared Future First document that clearly states that the life insurance policy in question was still well within its contestability period on May 21, 1998. The exhibits thus establish that Future First represented to the investor that the policy it would purchase with his funds was beyond contestability when, because of the unequivocal documents in its possession, Future First had to have known, through Mr. Sweeney, that it was not. Indeed all of those exhibits were found within the business files of Future First and Future First stipulated that included in those exhibits are its purchase request agreements that contain the contestability provision in question. Exhibits 462 and 463 establish that the Manhattan National Life Insurance policy referenced in those exhibits was issued on March 28, 1998. Exhibit 465, establishes that the Manhattan National Life Insurance policy was purchased by Future First on June 22, 1998. Exhibit 468, establishes that on July 1, 1998, purchaser 58075's funds were used to purchase an interest in that Manhattan National Life Insurance policy obviously well within the two-year contestability period since the policy was only issued on March 28, 1998. This was despite an express representation otherwise in the viatical settlement purchase agreement. Exhibits 471 and 472, show that the Manhattan National Life Insurance policy was rescinded during the contestability period in September 1998. Exhibit 473 establishes that Future First decided to switch the viatical settlement purchaser's funds out of the Manhattan National Life Insurance policy into a John Hancock Life Insurance Company policy. However, it did not inform the purchaser that the Manhattan National Life Insurance policy had been rescinded during its contestability period. Exhibits 485 and 486, establish that the Lincoln Benefit Life Insurance policy referenced therein was issued on January 23, 1998. Exhibit 487 establishes that the Lincoln Benefit Life Insurance policy was purchased by Future First in November of 1998, using the purchaser's funds referenced in Exhibits 488 and 489. Among those purchaser's funds were those of Purchaser 58075. Thus, Purchaser 58075's monies were used to purchase an interest in the death benefit of the Lincoln Benefit Life Insurance policy in question. Despite the "beyond contestability" representation made in the viatical settlement purchase agreement between Purchaser 58075 and Future First, Future First placed that purchaser's money into the Lincoln Benefit Life Insurance policy while it was still in its contestability period. Future First's own records refute Mr. Stelk's testimony that computer input error caused inadvertent sales of contestable policies to purchasers who had specified, contractually, their desire for non-contestable policies. The documents from Future First's own records in evidence, explicitly identify this policy as contestable and that the purchasers involved had desired non- contestable policies. In light of the foregoing reasons found as fact as to Counts 2, 5 and 41, which are adopted as to Count 42, Future First is chargeable with knowledge that it was selling contestable policies to purchasers who had specified contractually their wish and intent to purchase non-contestable policies. Count 43 involves the sale by Future First of interests in the death benefits of J.C. Penny Life Insurance Company Policy No. 25184/74L40L3762 in January of 1998, to three different viatical settlement purchasers. This is evidenced by Exhibits 498, 499 and 500, the respective settlement purchase agreements. Each of those purchase agreements includes a provision that required the purchase of an interest only in a policy which was beyond contestability. Exhibits 494, 496, 498, 499 and 500, together however, show that the interest in the policy sold to those purchasers were sold while the policy was still contestable, without informing the purchasers. All of these exhibits came from the business files or records of Future First and Future First stipulated that included in those exhibits are the purchase request agreements that contain the provisions restricting purchases to policies which were beyond the two-year contestability period. In light of the findings made as to Counts 2, 5, 41 and 42, next above, it is determined that Future First, the Respondent, is charged with knowledge that it, and specifically its vice-president in charge of underwriting, Mr. Sweeney, sold those policies which were still contestable to the relevant purchasers; that those purchasers had specified in their purchase agreements their intent to purchase only policies which were uncontestable and that it had not so informed those purchasers. Count 44, concerns a viatical settlement purchase agreement entered into by Future First on March 24, 1998, relating to the sale and purchase of an interest in the death benefit of an insurance policy. See Exhibit 510, in evidence. That agreement represented to the purchaser that the interest to be purchased was to be from a policy which was beyond the two- year contestability period. See Exhibits 508 and 510. However, the policy selected for investment for that purchaser by Future First was not beyond contestability. Exhibit 506, obtained from Future First's own files, clearly shows that the issuance date of the policy was May 6, 1998, and Exhibits 504, 508 and 510 considered together, indicate that the policy was sold to that purchaser while it was still contestable. Future First thus subjected the purchaser's investment to the undisclosed risk of rescission of the policy. The existence of such a risk would certainly be material to that investor's decision about whether to so invest. Thus by investing the purchaser's funds in a contestable policy instead of an uncontestable policy, without advising that investor of such a deviation from their contractual agreement, is, in effect, a material misrepresentation in that transaction. For the reasons found as to Counts 2, 5, 41, 42 and 43 above, Future First is chargeable with knowledge that the policy was contestable and that it had invested the purchaser's funds in a contestable policy when it was contractually bound to only invest that purchaser's funds in an uncontestable policy, as established by the terms of the viatical settlement purchase agreement. Future First's business practices. Future First conducts its business in various states through representatives resident in such states known as viatical settlement brokers. Viatical settlement brokers gather all relevant information, including available medical information and usually provide it to various viatical settlement providers in order to solicit multiple bids on a particular policy. Future First does not solicit viators itself. During the time period relevant to the allegation in the Amended Order, when Future First initially received a package from a broker, it was divided into its insurance and medical components. The insurance component was provided to Mr. William Sweeney, Future First's Vice-President of Underwriting. The medical component was provided to a nurse on the staff with Future First for initial medical review and then forwarded to Future First's independent medical consultant, Dr. Michael Duffy. During the time period relevant to the Amended Order, Future First offered a one, two or three-year viatical purchase program. That is, viators must have a certified life expectancy of one, two or three years in order to qualify with Future First. After Dr. Duffy reviewed a particular file and the viator was deemed qualified as to one of the three available programs, Dr. Duffy would certify and assign a life expectancy to the viator and return the file to Mr. Sweeney. Life expectancy estimates are inherently subject to many variables, are unpredictable and constitute a risk to the purchaser. Mr. Sweeney's responsibilities included verification that the insurance information provided with any particular file was correct and complete (including insurance policy applications), that the policy actually existed and was in force, that premiums were paid up to date, that the insurance company had the appropriate rating, as well as conducting other verifications. Before a policy was approved for purchase, it was Mr. Sweeney's ultimate responsibility, pursuant to Future First's existing corporate policy, to compare the date of initial diagnosis of a potential viator's medical condition to the insurance policy application to look for any inconsistencies. Mr. Sweeney next completed a "file summary cover sheet" referencing certain information and verifications and attached it to the file. Mr. Sweeney was essentially a "one-man operation" in exclusive control of Future First's underwriting department and was ultimately responsible for deciding whether or not Future First would offer to bid on a particular policy. Future First's business operations in effect at the time relevant to the Amended Order were so compartmentalized that other officers or employees at Future First might not know any details associated with Mr. Sweeney's activities. After Mr. Sweeney authorized Future First to bid on a particular policy, the file was transferred to the bidding department. The bidding department did not re-visit or otherwise question Mr. Sweeney's decision to bid on a particular policy, but only reviewed the cover sheet to establish a bid price. If documentation was missing from any file, it was Mr. Sweeney's responsibility to contact the broker to request the missing documents. All viatical settlement brokers with whom Future First did business in Florida were required to be licensed by the Petitioner. Future First currently no longer conducts business with the broker "Funds For Life" because that particular broker dealt solely in "contestable" policies and Future First no longer purchases such policies, at least since the Petitioner's audit. Future First no longer has a business relationship with the Texas-based broker "Southwest Viatical," in part because Southwest Viatical routinely failed to provide complete documentation to Future First, including the insurance applications of viators. Southwest Viatical was specifically requested to provide insurance policy applications regarding the relevant policies referred to in the Amended Order but refused to do so. Most of the Southwest Viatical files purchased by Future First did not include insurance applications at the time of purchase. The insurance applications were ultimately obtained by Future First, however, at some point prior to the 1999 audit by the Petitioner. Future First became concerned about the character of individuals associated with Southwest Viatical and when requested by Southwest Viatical to forward commission funds to an offshore account, Future First declined to do so and immediately ceased doing business with Southwest Viatical. Future First cooperated thoroughly with Texas authorities in their investigation of Southwest Viatical, ultimately culminating, as a direct result of Future First's assistance, with the apprehension and subsequent incarceration of two principals of Southwest Viatical. During the period of time alleged in the Amended Order Future First received, on the average, between 400 and 600 policies per month from brokers requesting a bid. Future First rejected and never bid on the majority of policies referred to it by Southwest Viatical. On the average, Future First ultimately purchased approximately 25 percent of the policies submitted to it for a bid. Mr. Sweeney was primarily responsible for communicating with brokers as to all aspects of a potential viatical settlement transaction and to request all required documentation, including insurance policy applications. During the course of Mr. Stelk's affiliation with Future First he personally became familiar with the handwriting of William F. Sweeney. It is Mr. Sweeney's initials which appear on the cover sheets entered into evidence by the Petitioner, exemplified by Petitioner's Exhibit 4a. All the remaining "cover sheet" exhibits of the Petitioner contain the initials "WFS" on the top right hand corner which are Mr. Sweeney's initials. Mr. Sweeney is not currently an officer, director or employee of Future First because he was removed from any position with the Respondent corporation by order of the Petitioner. No other officers, directors or employees of the Respondent have been subject to a similar removal order, nor has Future First itself. The criminal proceedings currently pending against the Respondent are the direct result of Mr. Sweeney's activities while employed by Future First. The Petitioner's lead investigator reviewing Future First's business activities recommended that individual charges only be brought against Mr. Sweeney and against no other individual employed by or affiliated with the Respondent. Future First has a business relationship with licensed life insurance agents and/or securities brokers throughout the United States to solicit funds from individuals for ultimate purchase of viatical settlements. Those licensed individuals present an approved Purchase Request Agreement (PRA) to a potential purchaser to discuss the various Future First programs available and to help the purchaser finalize a PRA. Depending on what state the purchaser resided in, the purchaser would then issue a check either to Future First directly or to the Fidelity Trust (Future First's escrow agent), to be held until such time as Future First could purchase from a viator a policy matching the program desired by that purchaser. Thereafter, a formal "closing" would occur when the purchaser was, where appropriate, made a beneficiary on one or more insurance policies; all verifications and notifications to the insurance company and other entities were completed; an attorney and the trustee, would approve all aspects of the transaction within their purview, and a copy of the closing package would be sent to the purchaser for his or her records. After the closing, Future First would engage Life Watch Services, Inc., an unaffiliated company, to monitor the health status of the viator on a monthly basis in order that all appropriate actions may be taken at the time of the viator's death, so that the policy benefits may be promptly paid to the purchaser. Future First initially engaged in the purchase of contestable policies only after being approached by groups of agents with potential purchasers willing to assume the risk associated with contestable policies. Understanding the risk associated with such policies, Future First reserved 20 percent of its potential profit from such transactions and placed those funds in trust in a "Guaranty Fund" in the event that an insurance company rescinded a policy within the contestable period. In the event an insurer rescinded a contestable policy, Future First purchased a new policy for its customer out of the Guaranty Fund, at no additional cost to the customer. No purchaser ever lost any "investment time" if a policy was rescinded by an insurance company because that purchaser would be provided a new policy involving a viator with the same ultimate remaining life expectancy. Thus, without any prompting by a governmental authority, Future First made the business decision to voluntarily exceed the protections of Florida law by establishing the Guaranty Fund in order to purchase replacement policies for its customers if the initial policy was rescinded by the insurer. The Guaranty Fund was also utilized to make the purchaser whole even when an insurance company cancelled or non- renewed an insurance policy on an entire group, or if a new insurance carrier for a particular group later reduced the benefit level assigned to the purchaser. The Guaranty Fund was also used for the benefit of purchasers if a viator as a member of an employer group, quit his or her job and the viator exercised a statutory right to have the group policy benefits converted to an individual policy. Because benefit levels on such individual policies are typically lower, the Guaranty Fund was used to purchase additional insurance benefits to assign to the purchaser. Additionally, if a policy lapsed for any reason, the Guaranty Fund was used to procure a new policy or policies in order that the purchaser would be fully protected according to the terms of the PRA. No policy purchased by Future First has ever lapsed for failure of Future First to pay the premium. Funds from the Guaranty Fund have been used to purchase new policies when a viator committed suicide and the insurance company later rescinded the policy, as well. The Guaranty Fund maintained by Future First existed to cover other contingencies beyond just the possible recession of insurance policies because of the misrepresentation of the viator discovered by the insurer within the contestable period. Future First, through use of the Guaranty Fund, has replaced approximately 17 million dollars in face value of insurance policies, equating to about 12.4 million dollars in direct cost to Future First and, as a result, no Future First purchaser has ever been harmed. The 12.4 million dollars used to purchase replacement policies would otherwise have been retained by Future First as profit. Today Future First does not purchase contestable policies in the regular course of its business. The only exception to that occurs when an insured group undergoes a carrier change and a new contestable period is automatically instituted by the new carrier. There is no prohibition in Florida either presently or during the times relevant to the Amended Order, against the purchase of contestable policies by a viatical settlement provider. The recission of the contestable policies at issue in fact immediately followed an inquiry from the Department of Insurance to the insurers, which alerted them that the Department suspected fraud in the inception of the policies. That is, it suspected fraud on the part of the viators or insureds on those policies, not Future First. Future First immediately utilized the Guaranty Fund and began replacing the policies. None of the rescinding insurers have accused Future First of any complicity in any alleged fraud with respect to the policies referenced in the Amended Order, nor has the Department of Insurance alleged any such fraud against Future First. All but one or two of the rescinded policies have been replaced and the purchasers made whole, pursuant to the terms of their original PRA. One of the two policies not fully replaced as of the date of the hearing was being contested by Future First as to the legality of the insurance company's rescission, and Future First will replace the policy, if needed, at such time as that legal issue is resolved. Of all the policies at issue in the Amended Order, including, as well, any replacement policy subsequently purchased by Future First with money from the Guaranty Fund, only one or two contestable periods had not expired as of the date of the hearing. Those contestable periods were to expire thirty to sixty days after the date of the final hearing in this matter. Future First regularly monitors and verifies the status of all policies assigned to its purchasers, including the status of all replacement policies. The direct costs to Future First to purchase replacement policies for the rescinded policies referenced in the amended order was approximately $1.5 million dollars paid out of the Guaranty Fund. Since its initial licensure in the State of Florida, Future First has cooperated with the Petitioner concerning pending legislation, rule development and other contacts with the Petitioner agency. It has cooperated fully with the Petitioner when the audit of Future First occurred in February of 1999, provided all requested information and documentation and made all personnel available to confer with examiners in a full and frank manner. In the course of the four-week on-site audit, Mr. Stelk personally met with the Petitioner's examiners once or twice a week to discuss the Petitioner's suggestions for improving compliance. The Petitioner issued a draft "Report of Examination" as a result of its audit on August 5, 1999. It contained suggestions, comments and recommendations which had been discussed during Future First's staff meetings with the examiners. Future First addressed many of the Petitioner's concerns raised in the Report of Examination (report) and implemented certain suggested changes in its business practices. Mr. Stelk directed that a formal response to the report be filed, addressing the specific points raised by the Petitioner and explaining any corrective action taken where applicable. Future First viewed certain of the findings and suggestions made at the earlier meetings and later contained in the draft report as potentially helpful to its business. It therefore implemented those suggestions even before receiving the draft of the report. Certain suggestions in the report of such as a request to formalize a refund policy, were not strictly required by a controlling statute. However, Future First nonetheless voluntarily implemented such a refund policy. Future First has cooperated with all governmental agencies interested in reviewing its files at all times during the course of its licensure as a viatical settlement provider and during the course of the relevant investigations. There has been no allegation or suggestion that it has in any way altered any documents, tampered with its files or that any information was purposely missing. The Respondent contends that the Petitioner had no knowledge as to when any particular documents were received into Future First's files, including insurance applications, medical diagnosis information or other documents and has conceded that some policy applications or medical documentations may not have been received until after the bid process and viatical transactions in some cases were actually closed. Thus, Future First would not have been able to compare documents to detect possible fraud as to those situations. Therefore, Future First could not have been guilty of fraud or misrepresentation to its purchasers as to such transactions and files if it had no documentation at the point of the transaction being closed to indicate to it that possible insurance fraud in the inducement, by a viator, had occurred. In point of fact the Petitioner is not accusing Future First of fraud. However, as of the time of the audit in February 1999, because of the discussions and information it received at meetings with Department agents and employees, and certainly as to formal notification on August 5, 1999 in the Department's report, the Respondent knew that many insurance applications in its files had medical diagnosis information or disclosures by viators which were at odds with the medical information it obtained in the viatical settlement and contracting process. It still failed to report that knowledge (and indeed circumstantial evidence clearly indicates that at least Mr. Sweeney had that knowledge even before the February 1999 audit, as to many of the files). Future First still did not report potential fraud on the part of viators to the Department that it obviously had knowledge of until it began to actually report it in a formal way, after the first Show Cause Order was served (January 2000). It is also clear that the Department knew about this inconsistent medical information and probable insurance fraud by the time of its February 1999 audit. In November of 2000, as part of its efforts to cooperate with the requirements of the Department and the relevant statutes and rules, Future First filed an Anti-Fraud Education and Training Plan (Plan) with the Department, Division of Insurance Fraud. Neither Future First nor any of its representatives received any notice from the Department that the Plan was in any way deficient or otherwise non-compliant with Florida law. It has implemented that Plan and adherence to it has had a positive effect on Future First's business. The Anti-Fraud Plan stresses that Future First will not bid on a policy for purposes of viatical settlement unless the viator's insurance application is present in the file at or before the time of the bid. Future First's corporate policy, even prior to the implementation of the Anti-Fraud Plan has been that the insurance application must be reviewed and compared with available medical documentation for any inconsistencies prior to bidding on a policy. It is also apparent, however, that Mr. Sweeney and those under his direction and control apparently did not do so in many cases. During the course of the investigation, the "free- form" stage of this proceeding and the formal stage of this proceeding, Future First has made numerous form and other filings with the Petitioner seeking approval in connection with a new PRA and various other purchaser disclosures required by recent amendments to Florida Statutes. After comments and questions from the Department, resulting in some revisions to such documents, the new PRA and disclosure documents were approved by the Department, approval of the last document being obtained in April 2001. The Respondent, by its involvement through Mr. Stelk with the Viatical Life Settlement Association of American and the National Association of Insurance Commissioners, has made a bonafide effort to gain knowledge of specific, appropriate business practices of other viatical settlement providers doing business in the United States as well as in Florida. Unlike certain other viatical settlement providers operating in Florida and elsewhere, Future First has never made premium payments on insurance policies out of the personal checking accounts of officers, directors or employees, has never instructed viators not to contact insurance companies and has never required viators to sign undated, change-of-ownership forms for filing with the insurer after the contestability period expired for any reason whatever, including as part of an effort to conceal from an insurance company the fact that an insurance policy was subject to viatical settlement. No such activity or effort to conceal has been alleged. (Compare, Accelerated Benefits Corporation documents in evidence pursuant to the Petitioner's Motion for Official Recognition). On March 19, 2000, February 8, 2001, and March 6, 2001, Future First filed with the Department identifying information and documents pursuant to the requirements of Subsection 626.989(6), Florida Statutes, to the effect that fraud may have been involved in the procurement of all of the rescinded insurance policies referenced in the Show Cause Order and the Amended Order. The three separate fraud notifications constitute the Respondent's Exhibits 7, 8 and 9 and correspond to the time period shortly after service of the initial Show Cause Order and the Amended Show Cause Order.
Findings Of Fact The Respondent is, and at all times material to the allegations in the Administrative Complaint, was a licensed ordinary life insurance salesman in the State of Florida. He first became licensed in 1977, and went to work initially for Occidental Life Insurance Company in Orlando, Florida. After approximately three to four weeks with Occidental Life, he went to work for Lincoln National Life and was transferred to St. Petersburg, where he worked for about three or four months selling health insurance and some life insurance as a rider to the health insurance policies. After leaving Lincoln National Life, he left the insurance business and went to work for a sign company. He worked for no further insurance companies before he joined Coordinated Planning Associates (hereinafter referred to as COPA). He went to work for COPA in April of 1979. In July, 1980, Mr. Wheeler was terminated by COPA and he then became employed by United Companies Life, his present employer. In June or July of 1979, Mr. Wheeler contacted James and Ruby Clinton about purchasing insurance from him. He met with them in their home to discuss his product. At that time, Mr. and Mrs. Clinton had four policies in effect. (See Petitioner's Exhibits 8, 9, 10, and 11.) One policy covered Mr. Clinton and had a rider for his wife, and the other three policies were on each of their three children. When there was an initial contact made by Mr. Wheeler with the Clintons, Mr. Clinton informed Mr. Wheeler that they had more insurance than they could afford. Prior to purchasing insurance from Mr. Wheeler, the Clintons showed Mr. Wheeler their policies, and he went through the policies and explained to the Clintons that he could obtain the same or better coverage from his company for less premium. He also informed them that they could obtain coverage for the children by paying a set premium per year per child per thousand dollars of coverage. After the Clintons purchased their policy from Mr. Wheeler, Mrs. Clinton actually requested insurance on the children, and Mr. Wheeler came by their home once again to pick up the $4.00 payment or deposit for the additional coverage for the children. At the time that Mr. Wheeler sold the new insurance policy to Mr. and Mrs. Clinton, no replacement form was prepared or shown to the Clintons. The Clintons were not knowledgeable in insurance matters and relied upon Mr. Wheeler's representations as to the comparative coverages of his company's policy and their existing policies. The coverage under the policy sold by Mr. Wheeler to the Clintons was not the same or better coverage than those which existed under the policies which were replaced. The policies replaced were whole life policies and covered the entire family. The program being sold by Mr. Wheeler was a retirement savings plan with a term insurance rider and was intended to only supplement and not replace existing coverage. Mr. Wheeler was aware that the Clintons intended to cancel their existing policies and replace them with the policy which he was selling. Mr. Wheeler testified regarding the Clintons on direct examination as follows: Q. Did they mention anything about re- placing their insurance? A. No. They insinuated that yes, they were going to drop it because they needed the money. The original reason we were there was because they needed money, and that's why we were there. And if they could get a good deal on their insurance, or if they could buy a good program and they could turn the other in and get money for it, that's what they were interested in. In fact, Mr. Wheeler's wife actually picked up the existing policies and took care of mailing them to the company after their cancellation. In October of 1979, Mr. Wheeler met with Gary and Darlene Davis of Orlando, Florida, for the purpose of attempting to sell life insurance to them. At the time that they were approached by Mr. Wheeler, Mr. and Mrs. Davis had three life insurance policies issued by Prudential Life Insurance Company in effect. Mr. Wheeler was made aware of these three policies. During the course of the sales presentation, the Respondent went through the existing policies and compared some of the benefits with those of the ITT policy he was attempting to sell. He represented to the Davises that the ITT policy would provide them with better coverage for the entire family for less premium than they were paying for the existing policies. Mr. Wheeler was informed by the Davises that they intended to cancel their existing policies when they purchased the ITT coverage. When Mr. Wheeler met with Mrs. Davis, she showed him the insurance policies on her and her husband. The policy on Mr. Davis had a rider for the children and Mrs. Davis's policy contained an IRA. Mr. Wheeler represented to Mrs. Davis that the COPA program would give her family these same benefits plus a cancer policy for less money. He explained to Mrs. Davis that he could charge a lower premium because he was not an insurance man per se and that because of this his company did not have to pay high commissions like Prudential. He also explained that he worked more with helping people with their finances than with selling insurance and was salaried. In fact, Mr. Wheeler was an insurance salesman working on commissions. The COPA program did not contain an IRA and the cheaper insurance was a term rider not whole life. The basic COPA program which Mr. Wheeler sold to the Davises also did not contain coverage for the Davis children. The true reason the premium was lower was because of the different coverage and different type of insurance. The ITT policy sold to the Davises in fact did not provide the same coverage as that of the policies which were cancelled by the Davises at the time of purchasing the ITT policy. The ITT policy specifically did not provide coverage for the Davis' children, and as a result of this lack of coverage, Mr. and Mrs. Davis were unable to recover any insurance proceeds after their daughter's death during the coverage period of the ITT policy. The ITT policy was a retirement plan designed to supplement existing life insurance and was not intended as a complete life insurance program for a family. Mrs. Davis understood the ITS policy to contain an IRA as part of the policy. The evidence was unclear as to whether Mr. Wheeler actually represented that it contained an IRA or whether he represented that there was a tax benefit within the retirement savings program which the Davises interpreted to mean an IRA. It was clear, however, that Mr. and Mrs. Davis were not knowledgeable in matters of insurance and relied upon the expertise and representations of Mr. Wheeler in cancelling their existing policies and replacing them with the ITT policy. No replacement form comparing the coverage of the existing policies and the ITT policy was prepared or presented to the Davises at the time that they purchased the ITT policy. Mr. Wheeler admitted that he filled out the applications on behalf of the Davises and the Clintons. Question No. Nine on the application forms for ITT of both the Clintons and the Davises asked whether the proposed policies were being issued in a replacement situation. This question on both applications was answered "No" by Mr. Wheeler. Question No. One of the agent's report reads: "Will insurance on any proposed insured now applied for replace or change any life insurance or annuity?" This question was answered "No" on the agent's report for both the Davises and the Clintons. The signature block of the agent's report reflected that they were prepared by Mr. Richard Wheeler. The Respondent admitted that he customarily intentionally avoided information from prospects which might reveal to him the fact that insurance was being replaced and did so in this instance. When Mr. Wheeler began with COPA, he received two weeks' training. The training was designed to teach the "canned" presentation which COPA salesmen were required to use. This presentation was prepared by the more experienced and more knowledgeable officers and managers of COPA. This same presentation was utilized by Mr. Wheeler in the sales presentation to the Clintons and Davises. There was no training regarding replacement of other insurance. Sometime in 1980, after the sales to the Clintons and Davises, Mr. Wheeler was informed by another COPA employee, Greg Gustin, as to particular representations within the canned presentation Mr. Gustin considered to be false. Sometime after this, Mr. Wheeler discussed this with Mr. Larry Taylor of COPA and an official of ITT Life Insurance Company. When Mr. Wheeler tried to change the presentation to eliminate the misrepresentations, he was fired. This occurred July 17, 1980. Mr. Wheeler claimed ignorance of the misleading nature of the canned presentation prior to his discussions with Mr. Gustin. However, Mr. Wheeler admitted that he had intentionally avoided getting information from customers which indicated they were going to cancel their existing policies. The sales presentation also stated "Let me assure you I am not here to sell you anything. Mr. Wheeler's only purpose for visiting these people was to sell them insurance. Mr. Wheeler sold approximately 250 policies while with COPA and has continued to sell life insurance since leaving COPA in July, 1980. The two complaints which are the subject of this administrative proceeding were the only two complaints made against Mr. Wheeler. Since going to work for United Companies Life, Mr. Wheeler has been trained in using replacement forms and now uses those forms whenever his policy replaces existing insurance.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is hereby RECOMMENDED: 1. That the Department of Insurance enter a final order suspending Respondent's license for a period of 30 days. This case is more appropriately a case for a civil fine or probation. However, a violation of Florida Statute Section 626.611 involves a mandatory suspension. There are strong mitigating factors which justify that the mandatory suspension be of short duration. At the tinge the sales were made to Mr. and Mrs. Clinton and Mrs. and Mrs. Davis, the Respondent was relatively new in the insurance business. Upon being employed by COPA, he was given a prepared sales presentation to memorize and use in each sales contact. This presentation was prepared by the officers and managers of COPA who were more experienced and more knowledgeable than Mr. Wheeler about insurance matters. Mr. Wheeler later tried to change the presentation and was fired as a result. These incidents occurred in 1979 and since that time Mr. Wheeler has continued to work as a licensed insurance salesman with no complaints or evidence of violations of the Florida Statutes or Rules of the Department of Insurance. The circumstances giving rise to the violations and the fact that the Respondent was advised by more experienced and knowledgeable individuals clearly bear upon the appropriateness of the particular penalty assigned. See, Drew v. Insurance Commissioner and Treasurer, 330 So.2d 794 (Fla. 1st DCA 1976). RECOMMENDED this 11 day of April, 1983, in Tallahassee, Florida. MARVIN E. CHAVIS Hearing Officer Division of Administrative Hearings 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 12th day of April, 1983. COPIES FURNISHED: David A. Yon, Esquire Legal Division Department of Insurance 413-B Larson Building Tallahassee, Florida 32301 Paul H. Bowen, Esquire Swann & Haddock, P.A. Post Office Box 7838 Orlando, Florida 32854 Honorable William Gunter State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, Florida 32301
The Issue Did Mr. Carter violate sections 627.4554(4)(a), 627.4554(4)(c)2., 626.611(5), 626.611(7), 626.611(9), 626.611(13), 626.621(2), 626.621(6), 626.9541(1)(a)1., and 626.9541(1)(e)1., Florida Statutes (2006, 2009, 2010); section 626.9521(2), Florida Statutes (2006, 2010); sections 626.9541(1)(k)2., 626.9541(1)(l), and 626.9521(2), Florida Statutes (2009, 2010); section 626.621(9), Florida Statutes (2010); and Florida Administrative Code Rule 69B-215.210? If so, what discipline should be imposed?
Findings Of Fact At all times material to this proceeding, the Legislature has vested the Department with the authority to administer the disciplinary provisions of Chapter 626, Florida Statutes. § 20.121(2)(g) and (h)1.d., Fla. Stat. (2011). At all times material to his proceeding, Mr. Carter was licensed by the Department as a Florida life (including variable annuity) agent (2-14), life including variable annuity and health agent (2-15), life insurance agent (2-16) and life and health agent (2-18). He has been appointed as an agent for several different life insurance companies, including Allianz, EquiTrust and Great American, but not RiverSource. Counts I through V--W.K. and J.K. 2006, J.K. and W.K., and the MasterDex 10 J.K. was born in 1937 in Madrid Spain, where she finished high school. Spanish is J.K.'s native tongue. She cannot write in English and does not speak or understand English well. When J.K. was 17, she met W.K., a member of the United States' armed services. They married in Spain. Six months after the marriage, the newlyweds moved to Brooklyn, New York, W.K.'s home. They later relocated to Florida. W. K. constructed a mall in New Port Richey containing 18 stores that included a restaurant and a frame shop. J.K. ran the frame shop. Wal-Mart eventually bought the mall. By 2006, J.K. and W.K. had accumulated approximately two million dollars in brokerage investments. Until the decline of his health and mental faculties in 2008, W.K. handled all financial matters for the couple. J.K. did not understand them or have any interest in them. In 2006, J.K. and W.K. met Mr. Carter, who began marketing annuities to them. J.K.'s testimony demonstrated that her memory was significantly impaired. That fact, combined with the fact that W.K. had died several years before the hearing, limit the ability to determine what representations Mr. Carter made to J.K. and W.K. or what information or instructions they gave him. On July 25, 2006, W.K. applied for a MasterDex 10 annuity policy from Allianz Life Insurance Company of North America. He paid an initial premium of $603,470.34 for the policy. W.K. was 73 years old at the time. W.K. obtained the money to fund the policy from the couple's Merrill Lynch brokerage account. Mr. Carter knew this. As part of the annuity application process, Mr. Carter submitted an Allianz "Product Suitability Form" for W.K. Completion of the form is a prerequisite to processing the application and issuing the policy. The stated purpose of the form is "to confirm that your [the applicant's] annuity purchase suits your current financial situation and long-term goals." The form, signed by W.K. and Mr. Carter, stated that an annuity was the source of the funds for payment of the annuity's premium. This statement was not accurate. Mr. Carter knew that it was not accurate. Signing and submitting the application with the suitability form containing this known incorrect statement was a willful deception by Mr. Carter with regard to the policy. Signing and submitting the application with the suitability form containing this known incorrect statement was a dishonest practice in his conduct of the business of insurance. The suitability form also indicated that W.K. expected the annuity to provide him a steady stream of income in six to nine years. Allianz accepted the application and issued the policy. Mr. Carter received a commission of $66,381.73. The MasterDex 10 is a complex financial product with many difficult to understand restrictions, conditions, interest options, bonuses, penalties, and limitations. The MasterDex 10 that W.K. and J.K. purchased paid interest linked to the performance of the Standard and Poors 500 stock market index. It also guaranteed interest of at least one percent. A "Nursing Home Benefit" was one of the options the MasterDex 10 provided. The "benefit" permitted the policy holder to receive payments of the full "annuitization" value of the policy over a period of five years or more if the holder was confined to a nursing home for 30 out of 35 consecutive days. The "annuitization value" is the maximum value that the policy can reach. It is the total of all payments that would be made to the holder if he either (1) let the premium and interest earned accumulate for a minimum of five contract years and then took ten years of interest only payments, followed by a lump sum payment of the annuitization value or (2) equal payments of principal and interest over ten or more years. Policy holders could make additional premium payments to increase the policy value. The policy also permitted limited withdrawals without penalty. After holding the policy for 12 months after the most recent premium payment, a holder could, without penalty, withdraw up to ten percent of the premium paid once a year until a maximum of 50 percent of the premium had been withdrawn. This meant that after one year passed, W.K. could make five annual withdrawals of $60,347.03. The policy also provided for loans on the annuity. In the years following this transaction, Mr. Carter maintained contact with W.K. and J.K. by periodically asking them to join him at a restaurant for lunch. Decline of W.K.'s Health While visiting his mother in Greece in 2008, W.K. fell and hit his head. Afterwards his health declined. On June 3, 2008, W.K. was diagnosed with Alzheimer's disease and determined to be unable to make sound financial and medical decisions. From June 2008, forward, J.K. was very worried about W.K.'s health, caring for him, and making him as comfortable as possible. On November 5, 2008, W.K., at Mr. Carter's suggestion, executed a Durable Power of Attorney, prepared for her by a lawyer, giving J.K. broad authority to act on his behalf in financial matters. At some point, W.K. was admitted to the Bear Creek Skilled Nursing Center and resided there for a period of time. On April 4, 2010, he was discharged from Bear Creek. W.K. resided in Bear Creek for a period of time. Although there is some hearsay evidence about when W.K. entered Bear Creek, the evidence does not corroborate direct evidence or hearsay evidence that would be admissible over objection in circuit court, sufficient to prove when W.K. entered Bear Creek. Consequently, the evidence does not establish the length of time that W.K. spent in the facility and does not establish that W.K. would have been eligible for the "Nursing Home Benefit" described in paragraph 16. After W.K. returned home in April, J.K. engaged an enterprise called "Granny Nannies" to provide caretakers at home. The services cost approximately $12,000 per month. During this period J.K.'s health also declined markedly. Among other things, she had appendicitis and breast cancer. Treatment of the cancer required chemotherapy, which left her in pain and exhausted. During this time Mr. Carter obtained a copy of the power of attorney executed by W.K. in favor of J.K. On June 18, 2010, the court appointed Paula Rego as guardian for W.K and J.K. with authority to act on their behalf in all matters affecting property rights. On November 26, 2010, W.K. died in hospice care after a short hospital stay. The Events of 2010 In December 2009, J.K. met with insurance sales agents and sisters Kimberly Trotter and Chandra Valdez. J.K. had responded to a mail solicitation by them. During the meeting, J.K. and Mss. Trotter and Valdez realized that J.K. knew them because J.K. and W.K. had rented space to the sisters' parents. Capitalizing on the connection and J.K.'s concerns about paying the monthly costs of care for W.K., Ms. Trotter and Ms. Valdez began providing financial advice and marketing annuity products that they sold. They advocated liquidating W.K.'s and J.K.'s existing annuities, including the MasterDex 10. In December 2009, Ms. Trotter and Ms. Valdez sold W.K. and J.K. two annuities with Great American for approximately $661,098. On January 28, 2010, W.K. authorized J.K. and Ms. Trotter to access policy information. In January 2010, Ms. Trotter attempted to liquidate the MasterDex 10 policy and transfer the funds to Great American. Allianz notified Mr. Carter of this in February 2010. He intervened to stop the transfer. On March 3, 2010, Allianz received another request to liquidate the MasterDex 10 from J.K. Allianz sent her what it calls a "conservation letter." The purpose of the letter is to "conserve" the business with the company. The letter also identified needed information, including a copy of J.K.'s power of attorney for W.K. On March 4, 2010, Allianz notified Mr. Carter of the liquidation request. He contacted J.K. and began a successful effort to obtain a letter asking to reverse the liquidation. On March 17, 2010, Ms. Trotter or Ms. Valdez again convinced J.K. to liquidate the MasterDex 10 funds and transfer them to Great American. Again Mr. Carter acted to stop the liquidation. On March 23, 2010, J.K. signed a letter written by Mr. Carter asking for William Pearson to be her new financial advisor. Mr. Carter sent the letter to RiverSource, a company that issued another annuity policy of J.K's. J.K. did not know who Mr. Pearson was. She only signed the letter because Mr. Carter told her that it would help her save money. On March 26, 2010, J.K. submitted a liquidation request form for the MasterDex 10 signing it on behalf of herself and W.K. J.K. submitted the request at the urging of Ms. Trotter and/or Ms. Valdez. Allianz received the request on March 31, 2010. It began processing the full liquidation of the annuity policy. On April 1, 2010, Mr. Carter sent Allianz a letter saying that J.K. did not want to liquidate W.K.'s MasterDex 10 policy. The letter claimed that this was the second time that competing agents had tried to cancel the policy. Allianz reinstated the policy. On April 1, 2010, Mr. Carter sent a handwritten letter to Great American stating that J.K. did not want the MasterDex 10 policy canceled. The letter refers to having previously provided the power of attorney. Mr. Carter signed the letter. J.K. signed the letter on behalf of W.K. and herself. On April 7, 2010, Great American received a typewritten letter addressed to "To Whom It May Concern" stating that J.K. and W.K. wanted to transfer their funds to Great American since "December and January" and that J.K. did not see Mr. Carter on April 1 and did not sign a letter that he sent. On April 9, 2010, Mr. Carter wrote and sent a letter, signed by J.K. at his request, asking Great American to cancel the policies sold by Ms. Trotter and Ms. Valdez and waive all surrender charges. The letter states that J.K. is fighting cancer and that the agents forced her to sign the policy documents. Mr. Carter included with the letter a Withdrawal/Surrender Request Form completed by him and signed by J.K. On April 23, 2010, Mr. Carter wrote a letter to Allianz stating that J.K. needed more than ten percent of the value of the MasterDex 10 policy (the penalty-free withdrawal permitted) to provide the funds needed to take care of W.K. The letter states that W.K. and J.K. wished to change ownership of the policy to J.K. only and then to fully surrender the policy. Mr. Carter's letter is signed by J.K. on her behalf and on behalf of W.K. Mr. Carter enclosed forms with the same date, which he prepared for J.K.'s signature, requesting the change of ownership and liquidation. Allianz sent J.K. a letter, with a copy to Mr. Carter, on April 29, 2010, identifying alternatives to liquidating MasterDex 10 for getting the money needed to care for W.K. The Allianz letter also disclosed that liquidating the policy would result in a substantial loss of money. In part, the letter stated: We understand you wish to surrender your annuity policy. As we review your request, we want to be certain you are aware of all the alternatives that are available to you. This information can help you make an informed decision based on your best financial interests. It is possible for you to access a portion of your policy's value while your policy remains in deferral. This would allow its value to continue to grow tax-deferred, and still provide the cash you need. Your annuity may permit you to take a free withdrawal, policy loan, or partial surrender. Finally, it's important to realize exactly how much you will be giving up should you decide to fully surrender your policy. Your policy's current Accumulation Value is $751,566.07 and its Surrender Value is $585,014.49. By surrendering your policy now, you are giving up the difference between these two values [$166,551.58]. Any one of these options could provide you with needed cash while allowing you to receive your full accumulation value in cash after your policy's 10-year surrender charge period. The letter provided a ten-day period, called a conservation period, during which J.K. could withdraw her request to liquidate the policy. Mr. Carter called Allianz on April 30, 2010, and spoke to Amber Hendrickson. In the recording of the conversation, Mr. Carter sounds agitated and speaks forcefully. J.K. participated in the telephone call. She is quiet and deferential. In the call, J.K. waives the ten-day "conservation" period. Mr. Carter insists that Allianz process the surrender swiftly. Allianz processed the liquidation of the MasterDex 10 on April 30, 2010. It wired funds from the liquidated annuity to J.K.'s Regions Bank account the same day. On April 30, 2010, J.K. signed a check for $475,000 to EquiTrust Life Insurance Company to purchase an annuity. Mr. Carter wrote the check. Also on April 30, 2010, J.K. signed an EquiTrust annuity application completed by Mr. Carter. The form indicates that the policy is not replacing an existing annuity contract. This is not an accurate representation. On April 30, 2010, Mr. Carter also completed an Annuity Suitability Questionnaire for J.K. to sign and submit with the EquiTrust application. He indicated that J.K. had income from a pension. Mr. Carter knew that this was not accurate. Mr. Carter also indicated that J.K.'s income was adequate to cover all expenses, including medical. He knew this was not accurate because he was fully aware of the cost of W.K.'s caregivers and J.K.'s concern about them. The form, as completed by Mr. Carter, is misleading about the source of the funds for purchase of the annuity. He made the technically correct representation that the funds come from a checking account. But the funds were from the liquidation of the MasterDex 10 and were placed in the checking account the same day the application was completed. The funds were actually from the liquidation of the MasterDex 10 annuity. The form also stated that the proposed annuity would not replace any product. Mr. Carter knew this was not accurate also. He knew that the EquiTrust annuity was replacing the MasterDex 10, albeit in a lower amount, because J.K. kept some cash and lost a good deal of money in surrender costs. A letter Mr. Carter sent to EquiTrust on August 16, 2010, when it was investigating complaints about J.K.'s purchase of the annuity, demonstrates that he knew the EquiTrust annuity was replacing the MasterDex 10. Mr. Carter's letter described the surrender and purchase this way: "An amount of $475,000 was placed into the EquiTrust Annuity (Market Power Bonus Index's Fixed account), the remaining balance of $110,038.75 was sent to her checking account, plus two other accounts valued at $50,000 that were closed, and a Jefferson National check that wasn't cashed for $3,500." Also, on April 23, 2010, J.K. signed, on behalf of herself and W.K., a Surrender/Withdrawal Request to RiverSource asking for the full withdrawal of the net accumulation value of their annuity contract with RiverSource. RiverSource sent J.K. a check for $26,430.07. It deducted $2,158.32 for a withdrawal charge and $295.98 for a "rider charge" from the full value of $28,884.37. On May 5, 2010, EquiTrust received J.K.'s policy application documents and check. EquiTrust required additional documents including a financial needs analysis form. Mr. Carter sought an exception to the requirement for a financial needs analysis form. He did not receive the exception. On May 6, 2010, Mr. Carter sent EquiTrust the required financial needs analysis form. He completed the form for J.K., who was 72 at the time. J.K. also signed this form. The form repeats some of the incorrect statements of the previous forms. It is also includes additional incorrect statements. The instructions for the section about "Replacements" states, "complete if an existing life insurance policy or annuity contract will be used to fund this product." Mr. Carter checked "no" as the response to the question: "Is the agent assisting you with this annuity purchase the same agent on the life insurance policy or annuity contract being replaced?" This indicates he is aware that the policy replaces the MasterDex 10. The response was also a representation that he knew to be false, because he was the agent on the policy being replaced. Mr. Carter also indicated on the needs analysis form that the source of funds for the EquiTrust annuity purchase was "Stocks/Bonds/Mutual Funds." Mr. Carter knew that this representation was not correct. It was also inconsistent with the statement on the suitability questionnaire that the funds came from a checking account. On May 18, 2010, J.K. signed a letter, written by Mr. Carter, asking for William Pearson to be her new financial advisor. Mr. Carter sent the letter to Genworth, a company holding another annuity policy of J.K's. J.K. did not know who Mr. Pearson was and only signed the letter because Mr. Carter told her that it would help her save money. J.K. signed a letter, dated May 20, 2010, instructing EquiTrust to cancel the annuity she had with it. On May 23, 2010, Mr. Pearson submitted a form, signed by J.K., using the power of attorney, asking Genworth to liquidate an annuity held for W.K. On May 26, 2010, EquiTrust received the request to cancel J.K.'s policy and advised Mr. Carter. On May 31, 2010, Mr. Carter sent EquiTrust a letter saying that J.K. did not want to cancel and enclosed a letter he prepared, dated May 26, 2010, and signed by J.K. asking EquiTrust to withdraw the cancelation request. The letter also stated that an agent who provided her untruthful information initiated the request. On June 2, 2010, at Mr. Carter's urging, J.K. sent EquiTrust a letter saying she wanted to keep the EquiTrust policy. On June 2, 2010, Mr. Carter sent, by facsimile, a letter written by him and signed by J.K. asking Great American to make Peter Gotsis her annuity agent. J.K. did not know Peter Gotsis and only signed the letter because Mr. Carter asked her to. On June 29, 2010, EquiTrust received a check for an additional $90,302.19 premium for J.K.'s policy. In July 2010, with the assistance of employees at her bank and others, J.K. contacted an attorney. The attorney, Joan Hook, contacted Mr. Carter and the various companies with annuities. Due to the efforts of Ms. Hook, J.K.'s guardian, Ms. Rego, Ms. Karen Ortega of the Department, and others, the series of transactions were undone and J.K. returned to her position before the liquidation of the MasterDex 10 annuity. From December 2010 forward, it was clear to Mr. Carter or anyone else having regular dealings with J.K. that she is confused, uninformed about financial matters, compliant, reasoning poorly, and not capable of making sound decisions. J.K.'s testimony demonstrated that her memory was significantly impaired. That fact combined with the fact that W.K. died several years before the hearing, makes it impossible to determine what representations Mr. Carter made to W.K. and J.K. and to determine what information or instructions they gave him. Much of the evidence related to Counts I through V is hearsay evidence that would not be admissible over objection in a civil action. In addition, there is no expert testimony evaluating the facts of record and analyzing the suitability of the investments advocated by Mr. Carter. Also, there is no evidence of the life expectancy of W.K. and J.K., which is an important factor in evaluating suitability of annuity products. Consequently, the record is inadequate for determining the reasonableness or suitability of the various products promoted by Mr. Carter or of the liquidation of the MasterDex 10. Mr. Carter willfully misrepresented information with regard to the applications for the Allianz and the EquiTrust annuities. This was dishonest. In the process, Mr. Carter also demonstrated a lack of trustworthiness to engage in the business of insurance. These willful misrepresentations were false material statements knowingly delivered to Allianz and EquiTrust. Count VI--G.D. and K.D. G.D. lives in New Port Richey, Florida, where she moved from New York about 40 years ago. She was born on January 17, 1935, and has a ninth-grade education. G.D. had worked as a courier. Her investment experience consists of funding certificates of deposit (CDs), placing money in a mutual fund, and purchasing a Transamerica annuity. She is frugal and a conservative investor. G.D. is married to K.D. who was born April 12, 1927. Both are retired. G.D. met Mr. Carter in January 2010, when she responded to a postcard that he sent suggesting that he could save her money on taxes on social security payments. At that time, G.D. was 75 years old and K.D. was 83. G.D. was and is in bad health due to having suffered four strokes. She had difficulty speaking to Mr. Carter during his sales presentations. G.D. and K.D. disclosed to Mr. Carter that their total monthly family income, including social security and K.D.'s pension income, was approximately $2,400.00. They also disclosed that their assets included approximately $325,000.00 in CDs held with Suncoast Schools Federal Credit Union. G.D. and K.D. each owned an annuity, one with Hartford and one with Transamerica, which they told Mr. Carter about. Together, the annuities had a value of approximately $85,000. G.D. and K.D. also had approximately $66,000 in a money market account. Mr. Carter convinced G.D. and K.D. to liquidate their CDs to purchase two Allianz annuities called a MasterDex 10 Plus. One required payment of a $38,219.39 premium. The other required payment of a $287,365.00 premium. The couple applied for the annuities for G.D., with K.D. as the beneficiary, because he was the older of the two. Mr. Carter completed the applications, which they signed. Part six of the applications is titled: "Replacement (this section must be completed)." It asks two questions. The first is: "Do you have existing life insurance or annuity contracts?" Mr. Carter checked "no" as an answer. This was not correct, and he knew it. The second question asks: "Will the annuity contract applied for replace or change existing contract or policies?" This Mr. Carter correctly answered "no." Section six also asks for the amount of coverage in force. Mr. Carter did not provide this information. Mr. Carter also completed the Florida Senior Consumer Suitability Form Questionnaire for G.D. and K.D., which they signed. The form accurately reflects the couple's net worth, liquid assets, and income. It reports correctly that they owned or had owned CDs, fixed annuities, and variable annuities. The completed form also accurately reflects the couple's desire for guaranteed income. The form discloses that the annuity must be owned a minimum of 15 years to receive its maximum value. The MasterDex 10 Plus annuity is a complicated financial product with a ten percent "bonus" that the buyer does not receive unless she holds the policy for 15 years. In fact, holding the policy for 15 years is the only way to get the full benefit of the policy. While money may be withdrawn earlier, that results in losses of the benefits and in some cases penalties. For instance, if a policy holder chooses to liquidate the policy, the value she receives is only 87.5 percent of the premium paid with one percent interest for the period held. These provisions have a substantial financial effect on the benefits of the annuity. For example, in the fifth year, the cash surrender value of the $38,219.49 premium policy is $36,027.00. About ten months after purchasing the annuities, G.D. and K.D. began having second thoughts about the purchase of the annuities. G.D. consulted with the financial advisor "Wayne" at her bank. G.D. later concluded that she had also misunderstood the interest rate. Mr. Carter had shown her sales material with the ten percent "bonus," which generated a high interest rate of 13.3 percent for one year. But G.D. did not understand that the interest rate only applied in one year, and the money was not immediately available. On November 17, 2010, G.D., with Wayne's help, composed a complaint letter to Allianz that summarized her complaints and requested that her premium payments be returned without fees. On November 28, 2010, Carter responded with a letter to Allianz defending his annuity sales. On December 17, 2010, Allianz's employee, Mary Lou Fleischacker, advised G.D. by letter that the "free look" period for cancelling the contracts had passed. But Fleischacker did request further information about the sales. By two letters dated January 10, 2011, Allianz advised G.D. that she would suffer over $80,000 in penalties if she canceled the contracts. G.D.'s efforts to terminate the annuities prompted Carter to come uninvited into G.D.'s home and insistently demand that G.D. telephone Allianz and cancel her attempt to rescind the contracts. He also asked her, without explanation, to wait one week before liquidating the policies. G.D. refused. Carter repeatedly telephoned G.D. and returned uninvited to the house several times making the same demand. G.D. refused to answer her door. Mr. Carter came to G.D.'s daughter's house uninvited one evening, told her that her mother was going to lose a lot of money, and revealed her mother's financial matters to her. Mr. Carter demanded that G.D.'s daughter deliver to her mother for signature a letter he wrote rescinding the liquidation requests. G.D.'s daughter agreed to get Carter to leave. G.D.'s daughter feared for her mother's safety because of Mr. Carter's harassing telephone calls to her and her mother. She urged her mother to call the police. G.D. called the police and a New Port Richey officer told Mr. Carter to cease the harassment, and then filed a report on January 13, 2011. Mr. Carter did not contact G.D. or her daughter after that. Eventually, with the assistance of Department Investigator Ortega, G.D. was able to obtain the return of her funds from Allianz. There is no expert testimony evaluating the facts of record and analyzing the suitability of the investments advocated by Mr. Carter. Also, there is no evidence of the life expectancy of G.D. and K.D., which is an important factor in evaluating suitability of annuity products. Consequently, the record is inadequate for determining the reasonableness or suitability of the liquidation of the CDs and purchase of the MasterDex 10 Plus annuities as promoted and sold by Mr. Carter. Mr. Carter willfully misrepresented information with regard to the applications for the MasterDex 10 Plus annuity. This was dishonest. In the process, Mr. Carter also demonstrated a lack of trustworthiness to engage in the business of insurance. These willful misrepresentations were false material statements knowingly delivered to Allianz. Mr. Carter's repeated, persistent, and overbearing efforts to require G.D. to speak with him about the cancelation and withdraw it demonstrate a lack of fitness to engage in the business of insurance. Count VII--G.B. G.B. was born on January 14, 1930. She has a high school education. G.B. worked at and retired from Lucent Technology wiring telephone boards. She receives a small pension. Her husband, K.B., managed their financial affairs before he died ten years ago. Before K.B.'s death, the couple maintained investment accounts with Schwab. After K.B.'s death, Schwab employee, Barry Tallman, recommended that G.B. seek financial advice from Christopher Trombetta, CPA. She did so. Mr. Carter and a colleague, Christopher Drew, met with G.B. on June 29, 2010. She was 70 years old, timid, and easily confused. G.B. had responded to a promotional postcard she received from them purporting that the law governing taxes on social security income had changed and that they could lower her taxes. Mr. Carter was the person who presented G.B. information and persuaded her to purchase an annuity in the course of a meeting that lasted one to two hours. The evidence does not permit a determination of what representations and information Mr. Carter presented in his sales meeting with G.B. Her memory of the meeting was not distinct. She was confused about the meeting and did not remember facts precisely or explicitly. Mr. Carter completed applications for EquiTrust annuity products. G.B. signed the applications. Mr. Carter also completed financial needs analyses. G.B. signed them also. A box that asks if the applicant is aware that the annuity may be "a long-term contract with substantial penalties for early withdrawal" was checked "yes." The form also accurately represented that the source of funds for the annuity premium was stocks, bonds, or mutual funds. The other representations in the form were accurate. Mr. Carter persuaded G.B. to purchase two EquiTrust Market Power Plus annuities. G.B. signed two EquiTrust annuity contracts ending with 29F (E-29F) and 30F (E-30F). The initial premium for E-29F was $458,832.71. The initial premium for E-30F was $118,870.34. Both annuities were designed to provide G.B. with income in 2036. The funds for the premium came from the liquidation of her stock brokerage account. Both contracts had 20 percent surrender charges for the first two years of ownership. G.B. could not have surrendered the contract with its full financial benefits without a penalty until she was 95 years old. Mr. Carter delivered the annuity contracts to G.B. on August 6, 2010. The contracts provided G.B. the right to cancel the annuity by returning it within 15 days of the date she received it. Soon afterwards, Barry Tallman notified G.B. that her Schwab accounts had been liquidated. Transamerica Agent William Pearson had liquidated the accounts to transfer the money for purchase of the EquiTrust annuities. She was surprised. G.B. grew concerned about the annuities and consulted Mr. Trombetta and a financial advisor named Judith Gregory on September 20, 2010. With their assistance, G.B. wrote a complaint letter to EquiTrust asserting that Mr. Carter had assured her, among other things, that the annuities would protect her money should she enter a nursing home. G.B. wanted to cancel the annuities and have her full premium returned. G.B.'s letter to EquiTrust said, "I do not want any calls or visits from the agent or the agent's office." Mr. Carter learned of the effort to cancel the annuities. On November 15, 2010, at Mr. Carter's suggestion, he and Mr. Drew returned to G.B.'s home uninvited and unannounced. Mr. Carter insisted on entering and speaking to G.B. Mr. Carter began loudly and forcefully arguing with G.B. She telephoned Mr. Trombetta and asked that he speak to Mr. Carter. Mr. Carter yelled at Mr. Trombetta. Mr. Trombetta credibly describes part of the conversation as follows: And before I could barely get that out, Rick exploded on me. He snapped and he started cursing up and down. F'n me up one side and down the other. And "you don't F'n know what you are talking about. You don't care about this person. You don't f'n know what you are doing;" and this and that. When G.B. returned to the telephone to speak with Mr. Trombetta, he advised her to call the police if Mr. Carter did not leave her house within five minutes. Mr. Carter and Mr. Drew left. EquiTrust eventually returned over $600,000 to G.B. There is no expert testimony evaluating and analyzing the suitability of the investments advocated by Mr. Carter. Also, there is no evidence of G.B.'s life expectancy which is an important factor in evaluating suitability of annuity products. Consequently, the record is inadequate for determining the reasonableness or suitability of the two annuities Mr. Carter sold G.B. Mr. Carter's conduct, in his unannounced visit to G.B. to try to persuade her to change her plans to liquidate the annuities and his conversation with Mr. Trombetta, demonstrated a lack of fitness to engage in the business of insurance.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Financial Services enter a final order revoking the licenses of Richard Edward Carter. DONE AND ENTERED this 28th day of November, 2012, in Tallahassee, Leon County, Florida. S JOHN D. C. NEWTON, II 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 28th day of November, 2012.
The Issue The issue to be resolved in this proceeding concerns whether the Petitioner, as beneficiary of her deceased father's State of Florida life insurance policy, is entitled to a benefit of $10,000 or $2,500, and is related to how notice of a change in coverage amount and premium was provided to the decedent.
Findings Of Fact At the time of his death on November 29, 2008, Maurice Adkins was covered by the state life insurance plan, as a retired employee of the State of Florida. The Petitioner, Justina Mullennix, is the daughter of Mr. Adkins and is the beneficiary of any life insurance benefits paid or payable from the state life insurance plan on account of the death of her father. Effective January 1, 2000, the coverage for retirees was increased to $10,000.00. The premium for this coverage was $4.20 per month. The DSGI prepared a letter dated July 31, 2006, to notify the retirees that effective January 1, 2007, the life insurance benefit options provided to retirees would change. The changes allowed retirees to elect one of the following options: $2,500 benefit for a monthly premium of $ 4.20. $10,000 benefit for a monthly premium of $35.79. Termination of coverage. The letter dated July 31, 2006, informed retirees that their life insurance premium would remain the same, but that their coverage would be reduced to $2,500, unless they elected coverage in the amount of $10,000 and elected to pay the higher premium. The letter advised the retirees they could change their election up to and including January 19, 2007. Mike Waller, an employee of the DSGI, maintains benefits data for the People First/Division of State Group Insurance. In July 2006, Mr. Waller was asked to prepare a file containing the names and mailing addresses of all retirees who were covered by life insurance. Mr. Waller created the file, prepared in July 2006, to use in a "mail merge," to send all retirees a copy of the letter dated July 31, 2006. In preparing the file containing the mailing addresses of retirees covered by life insurance, Mr. Waller used the addresses of record that he maintained. In July 2006, the address of record for Mr. Adkins was 2877 Belair Road E., Jacksonville, Florida 32207, and was included in the file. Mr. Waller prepared the file and on July 3, 2006, delivered it to Dick Barnum and Thomas Lockeridge. Thomas Lockeridge delivered the file to Laura Cutchen, another employee of the DSGI. The DSGI contracted with Pitney Bowes to mail the letter of July 31, 2006, to all retirees. After obtaining copies of the letter from the print shop of the DSGI, Ms. Cutchen delivered the letters and the file containing names and addresses of retirees to Pitney Bowes to assemble. The letters dated July 31, 2006, in envelopes addressed to each retiree who carried life insurance at the time, were delivered to the U.S. Post Office, accompanied by Ms. Cutchen. The State of Florida first class mailing permit had been applied to each envelope. The letter dated July 31, 2006, was mailed to Mr. Adkins at the Belair address. The return address on the envelope containing the letter was the Division of State Group Insurance, 4050 Esplanade Way, Ste. 215, Tallahassee, Florida, 32399-0949. The letter was not returned to the Division. The letters that were returned to the DSGI were processed by Janice Lowe, an employee of the DSGI. Each letter that was returned to the Division of State Group Insurance was handled in one of two ways: a) if the envelope showed a different address on a yellow sticker applied by the US Postal Service (USPS), the letter was re-mailed to that address; b) if the returned envelope did not provide a different address, a manual search of the database of the Division of Retirement was made, a copy of the print screen showing the address in the Retirement database was made, if different from that on the database of the Division of State Group Insurance, and the original envelope and letter were placed in another envelope and mailed to the address from the Division of Retirement database. A copy of each Retirement screen that was accessed by Ms. Lowe was printed and inserted in alphabetical order in a binder. For every person whose letter was returned, and for which there was not another address, there would have been a Retirement print screen. The absence of a Retirement print screen indicates that the initial letter was not returned. There is no retirement print screen for Mr. Adkins, indicating that the letter to him dated July 31, 2006, was not returned to the DSGI. DMS has contracted with Convergys, Inc., to provide human resources management services, including assisting in the administration of employee benefits. Convergys primarily performs these tasks through an on-line system known as “People First.” Prior to Convergys assuming responsibility for the administration of benefits, DSGI maintained benefits information in the Cooperative Personnel Employment System (COPES). When Convergys assumed responsibility for the management of benefits, the benefits information from COPES was imported into the Convergys People First System. People First became the system of record for the DSGI beginning January 1, 2005. People First and the Division of Retirement do not share databases and each maintains its own database of names and addresses. Once a year the DSGI must hold Open Enrollment for the health program. § 110.123(3)(h)5, Fla. Stat.; Fla. Admin. Code R. 60P-1.003(16). Open Enrollment is the period designated by the DMS during which time eligible persons may enroll or change coverage in any state insurance program. Prior to Open Enrollment each year, the DSGI provides employees and retirees a package that explains the benefits and options that are available for the next plan year. The 2006 Open Enrollment period, for the 2007 Plan Year, ran from September 19, 2006, through October 18, 2006. During open enrollment for Plan Year 2007, the People First Service Center was charged with the responsibility of sending open enrollment packages to State of Florida retirees and other employees. People First mailed Mr. Adkins’s Open Enrollment Package to the 2877 Belair Road E., Jacksonville, Florida 32207 address, on September 3, 2006. The Open Enrollment Package for Plan Year 2007 was mailed by People First through the U.S. Post Office, first class postage paid. The Open Enrollment Package mailed to Mr. Adkins, for 2006 Open Enrollment, was not returned to People First. The Open Enrollment Package mailed to Mr. Adkins on September 3, 2006, contained Mr. Adkins’s 2007 Benefits Statement; a letter from John Mathews, former Director of the DSGI; "Information of Note"; a Privacy Notice; Notice Regarding Prescription Coverage; and a 2007 Benefits Guide. The Information of Note included the following statement: Retiree Life Insurance For Plan Year 2007, those currently enrolled with retiree life insurance may elect to retain the current $4.20 premium for a benefit of $2,500, retain the current benefit of $10,000 for a premium of $35.79, or cancel coverage. If no change is made during open enrollment, participation will continue at the $4.20 premium level. Neither Mr. Adkins nor anyone on his behalf affirmatively elected to continue $10,000.00 in life insurance coverage during the enrollment period in 2006 and 2007. Because the election was not made, at the death of Mr. Adkins, the benefit paid to the Petitioner was $2,500.00. Prior to January 1, 2007, the Life Insurance Trust Fund was used to augment the premiums paid by retirees for life insurance. The premium paid by the retirees did not support a $10,000 coverage level. In year 2006, the DSGI determined that the money in the life insurance trust fund, used to augment the retiree’s benefits from years 2000 through 2007, would not be available after 2007. Beginning January 1, 2007, the change in life insurance coverage was made because the funds in the Life Insurance Trust Fund were no longer available to augment the premium payment required to maintain a benefit level of $10,000.00, for a payment of $4.20 per month by the retirees. In 2006, the DSGI determined that the then-current life insurance premium of $4.20 would support a benefit of $2,500, and that the $10,000 benefits would cost $35.79. The notices provided by the July 31, 2006, letter and the 2006 Open Enrollment Package were sufficient notices of the increase in premium in that they provided a reasonable opportunity within which to make a selection of the level of coverage. On December 30, 1997, the Division of Retirement received a written notice of change of address for Mr. Adkins. The new address was 217 Skye Dr. W, Jacksonville, Florida 32221. Although Mr. Adkins had changed his address with the Division of Retirement, he did not notify the DSGI. A change of address with one division does not automatically change addresses in the other. The two divisions have different databases. During no time relevant to these proceedings have the two divisions shared databases. The DSGI, through People First, used the database of the Division of Retirement to send the 2004 Benefits Statement as an experiment to determine whether DSGI undeliverable returns would decrease. The same database was also used for the mailing of the letter dated September 2, 2003. However, neither DSGI nor People First changed its database after the 2004 Benefits Statement was sent and subsequent information was mailed to the DSGI address of record, based upon the COPES system. Therefore, the letter dated July 31, 2006, and the 2006 Open Enrollment Package for the Plan Year 2007, were mailed to the same Belair address, the address of record. A change of address for Mr. Adkins was not made in the database of the DSGI until December 1, 2008, when People First was provided a change of address. The only change of address that the Petitioner has alleged, was the one provided by Mr. Adkins to the Division of Retirement (only) in 1997.
Recommendation Having considered the foregoing Findings of Fact, Conclusions of Law, the evidence of record, the candor and demeanor of the witnesses and the pleadings of the parties, it is RECOMMENDED that a Final Order be entered by the Department of Management Services, Division of State Group Insurance, dismissing the petition in its entirety. DONE AND ENTERED this 22nd day of January, 2010, in Tallahassee, Leon County, Florida. S P. MICHAEL RUFF 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 22nd day of January, 2010. COPIES FURNISHED: Sonja P. Mathews, Esquire Department of Management Services Office of the General Counsel 4050 Esplanade Way, Suite 260 Tallahassee, Florida 32399 Justina Mullennix 1217 Skye Drive West Jacksonville, Florida 32221 John Brenneis, General Counsel Division of Management Services 4050 Esplanade Way Tallahassee, Florida 32399-0950
