The Issue The issue in this proceeding is whether the Agency for Health Care Administration's denial of Petitioners', Brookwood- Walton County Convalescent Center and Brookwood-Washington County Convalescent Center (Brookwood), interim rate request for general and professional liability insurance was proper and in keeping with state and federal laws and the rules and regulations governing Florida's Medicaid program.
Findings Of Fact Petitioners, Brookwood-Washington County Convalescent Center and Walton County Convalescent Center (Brookwood) are licensed nursing homes in the State of Florida. The Brookwood facilities have historically been high Medicaid providers. Both participate in the Florida Medicaid program. Washington County Convalescent Center is currently 90 percent Medicaid and Walton County Convalescent Center is 85 percent Medicaid. The statewide average for all nursing homes in Florida is 50-55 percent Medicaid. Such high Medicaid participation makes Brookwood extremely sensitive to changes in its allowable costs and its ability to recover those costs. Florida's Medicaid program is needs-based, providing nursing home care to persons eligible for such care who fall below a certain level of income and assets. Medicaid is a "prospective" reimbursement program in that reimbursement to a nursing home is based on the facility's cost history adjusted or inflated to approximate future costs. Adjustments are made and reimbursement rates are set based on a nursing home's cost report for allowable costs it has incurred in the past year. In determining allowable reimbursable costs, AHCA utilizes the Florida Title XIX Long-Term Care Reimbursement Plan, Version XIX, dated November 27, 1995 (Reimbursement Plan), the reimbursement principles of the Federal Medicare Program's Health Insurance Manual (also known as the Provider Reimbursement Manual, PRM, or HIM-15), and Generally Accepted Accounting Principles (GAAP) or accepted industry practice. In making determinations as to allowable reimbursable costs, one first looks to the Plan, then HIM-15 and finally, GAAP. With certain exceptions not relevant here, The Florida Medicaid program reimburses all allowable costs, as those costs are defined in the Reimbursement Plan and HIM-15. Premiums paid by a nursing home for liability insurance are an allowable cost under the Reimbursement Plan. Allowable costs are broken out in the categories of property, patient care, and operating expenses. As indicated, in determining the prospective rate, AHCA inflates the reported allowable costs in each category forward subject to various class ceiling limitations and target limitations. A class ceiling is an upper limit on the cost that will be reimbursed. A target limitation is a limit on the rate of increase of costs from year to year. In short, a nursing home provider may be under its class ceilings; however, any increase in its costs that exceeds a certain percentage amount will not be recognized for reimbursement purposes. After applying the inflation factor, the class ceilings and the target limitations to allowable costs, AHCA arrives at a per-patient, per-day rate that the nursing home will be paid during the next year. Because nursing home reimbursement is prospective and subject to target limits, a nursing facility might be unable to recover its allowable costs of providing services if it experiences unanticipated expenses that cause its allowable costs to unexpectedly rise. In such cases, the Plan has provisions that allow, under very limited circumstances, an interim rate adjustment for an unexpected increase in costs. Such interim rate increases are covered in Section IV.J. of the Plan. In 1999, Brookwood's liability insurance premium cost was $400,000 for its six Florida facilities and one North Carolina facility. In the year 2000, Brookwood's liability insurance premium cost increased to $4,000,000. Of that amount, the premium cost for Walton County Convalescent Center increased from $56,000 to $546,000 and the premium cost for Washington County Convalescent Center increased from $84,000 to $819,000. The premium increase occurred after Brookwood's rates had been set based on its 1999 insurance costs. Additionally, in September of 2000, Brookwood's liability insurer left the state. Brookwood has since been unable to obtain liability insurance for its Florida facilities. It was possible for Brookwood to self-insure, but it did not. Self-insurance is generally only feasible for facilities larger than Brookwood. However, the evidence did not demonstrate that Brookwood could not self-insure. On May 30, 2000, faced with this unforeseen increase in liability insurance premiums, Brookwood applied to AHCA for an interim rate effective retroactively to January 1, 2000. This was necessary because the large increase in costs would not be covered by the normal rate of inflation allowed by the department and the cost of the increase would not be recoverable through the normal prospective reimbursement methodology due to the lag time between the cost increase and the filing of the cost report. In addition, without an interim rate Brookwood would not receive an adjustment to its target rate, thereby, limiting reimbursement for any increased costs it did report on its cost reports. Brookwood only requested interim rates for these two facilities because its other four facilities were at or above the cost ceilings and could get no relief from an interim rate. In other words, for those four facilities, Medicaid will not participate in payment for the extra costs incurred by the increased liability insurance premiums. Even for the two facilities at issue here, if an interim rate is granted, AHCA will not reimburse for any costs that exceed the cost ceilings. The increase of premiums and subsequent pull out by several insurance companies were part of a reaction to increased loss in the area of nursing home liability. The crisis was, in part, due to an increase in civil litigation against nursing homes being brought under Sections 400.022 and 400.023, Florida Statutes. Indeed, Florida's rate of nursing home liability litigation is significantly above the national average. However, Florida's nursing home population is also significantly larger than the national average. However, the crisis was also due to many other factors which impact liability and rates in Florida. While there may be some debate about the causes of the increased litigation, there is no debate that the cost of liability insurance increased significantly over a short period of time with some insurance companies ceasing to write liability insurance for nursing homes in Florida. The Agency denied Brookwood's request because no new interpretation of law by the state or federal government pertaining to liability insurance had occurred which caused Brookwood's costs to increase. As indicated earlier, the Plan contains provisions that allow a nursing home participating in the Medicaid program to request an interim change in its reimbursement rate when it incurs costs resulting from patient care or operating changes made to comply with existing state regulations and such costs are at least $5,000 or one percent of its per diem. The language of Section IV.J.2 of the Estate's Long- Term Care Reimbursement Plan states that: J. The following provisions apply to interim changes in component reimbursement rates, other than through the routine semi- annual rate setting process. * * * 2. Interim rate changes reflecting increased costs occurring as a result of patient care or operating changes shall be considered only if such changes were made to comply with existing State or Federal rules, laws, or standards, and if the change in cost to the provider is at least $5000 and would cause a change of 1 percent or more in the provider's current total per diem rate. Other subsections of Section J of the Reimbursement Plan deal with new requirements or new interpretation of old requirements. Those subsections do not apply in this case. The term standards as used in Section J refers to standards in the Reimbursement Plan, Section IV titled "Standards," the standards of care and operation detailed by the Medicaid program in its provider handbooks and such standards as are detailed in the Code of Federal Regulations, and HCFA/HHS guidelines, as well as state statutes and rules. These standards are the usual or customary method or practice used by the nursing home industry to gain reimbursement from Medicaid. The term standards include reimbursement standards, methods or principles for medicaid providers. In essence, a nursing home would have to incur additional or new costs to receive an interim rate adjustment. Brookwood's increase in insurance premiums was such an increase in costs, which would be allowable subject to ceiling and target limitations. At the time of Brookwood's request, there was no specific requirement in the state Reimbursement Plan, state or federal law requiring that liability insurance be carried by a nursing home. Additionally, there was no change to the Reimbursement Plan, state, or federal law or regulation requiring that liability insurance be carried by a nursing home. On the other hand, the reimbursement standards or requirements set forth in HIM-15 make it clear that a prudent Medicaid provider is expected to carry liability insurance or self-insurance in order to be reimbursed for any uninsured losses. Specifically, Section 2160.2 of the Provider Reimbursement Manual states: Liability damages paid by the provider, either imposed by law or assumed by contract, which should reasonably have been covered by liability insurance, are not allowable. Section 2161 of HIM-15 states that the reasonable costs of such insurance are allowable. Section 2162.1 of HIM-15 states that losses in excess of the deductible or co-insurance are allowable costs so long as the amount of insurance was consistent with sound management practices. Section 2162.5 of HIM-15 recognizes the allowability of deductibles, so long as they do not exceed 10 percent of the entity's net worth or $100,000 per provider. It also states that if you set a deductible higher than those amounts (or assume all the risk), any losses exceeding the 10 percent or $100,000 will not be allowable as recognized costs. The general implication of these and other related sections of HIM-15 is that a prudent provider is expected to carry liability insurance or be self-insured. Thus, a provider will be reimbursed for the reasonable costs of liability insurance, any reasonable deductible, and any losses in excess of reasonable insurance coverage. These limitations on loss recovery or reimbursement are standards for purposes of determining whether a interim rate increase is allowable. These standards were in effect at the time Brookwood's premiums increased. Thus, in order to comply with Medicaid's reimbursement standards, Brookwood had to remain insured or self-insured. The choice of which type of insurance to utilize to meet the reimbursement standard is left to the provider. Brookwood reasonably chose to insure through an insurance company. Since Brookwood was required to make such a choice in order to comply or conform to Medicaid's reimbursement standards, Brookwood is entitled to an interim rate increase. However, the interim rate provisions of the Plan only recognize such rates submitted within 60 days prior to the date of the interim rate request. Based on this limitation, Petitioners' rate increase is limited to the increase in premium incurred 60 days prior to its interim rate request around May 30, 2000.
Recommendation Based upon the foregoing findings of fact and Conclusions of Law, it is RECOMMENDED that A final order be entered granting Brookwood's interim rate request limited to the 60 days prior to the initial rate request. DONE AND ENTERED this 31st day of September, 2001, in Tallahassee, Leon County, Florida. DIANE CLEAVINGER 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 21st day of September, 2001. COPIES FURNISHED: Steven A. Grigas, Esquire Agency for Health Care Administration 2727 Mahan Drive Fort Knox Building 3, Suite 3431 Tallahassee, Florida 32308-5403 Theodore E. Mack, Esquire Powell & Mack 803 North Calhoun Street Tallahassee, Florida 32303 Diane Grubbs, Agency Clerk Agency for Health Care Administration 2727 Mahan Drive Fort Knox Building 3, Suite 3431 Tallahassee, Florida 32308-5403 Julie Gallagher, General Counsel Agency for Health Care Administration 2727 Mahan Drive Fort Knox Building 3, Suite 3431 Tallahassee, Florida 32308-5403
The Issue This case involves an Administrative Complaint filed by the petitioner, State of Florida, Office of Treasurer/Insurance Commissioner, against James H. Bowling and Premium Budget Service, Inc., Respondents. The action is brought under the authority of Chapters 626 and 627, Florida Statutes. The petitioner is attempting to take disciplinary action against the licenses of the Respondents pertaining to their performance in insurance business transactions conducted in the State of Florida. Originally, the Administrative Complaint contained eight counts. At the commencement of the hearing, Count IV of the Administrative Complaint was dismissed. The remaining Counts I through VII accuse Respondent Bowling with a series of substantive violations related to his business transactions with individual customers with whom be allegedly was involved in the selling of insurance in the State of Florida. Specifically, Respondent Bowling is charged with: Receiving premiums or other funds belonging to insurers or others in transactions under his license which were trust funds received by him in a fiduciary capacity, which funds he failed to account for or pay to the insurer, insured or other persons entitled thereto in violation of Subsection 626.561(1), Florida Statutes. Willfully, under his license, circumventing the prohibitions of the Insurance Code, in violating of Sub section 626.611(4), Florida Statutes. Demonstrating a lack of fitness or trustworthiness to engage in the business of insurance, in violation of Subsection 626.611 (7), Florida Statutes. Demonstrating a lack of reasonable and adequate knowledge and technical competence to engage in the transactions authorized by the license or permit, in violation of Subsection 626.611(8), Florida Statutes. Engaging in fraudulent or dishonest practices in violation of Subsection 626.611(9), Florida Statutes. Misappropriating, converting or unlawfully withholding moneys belonging to insurers, insureds, beneficiaries or others received in the conduct of his business pursuant to license, in violation of Subsection 626.6II(10), Florida Statutes. In connection with the purported violation set forth in the aforementioned issue a., willfully violating an order, rule or regulation of the Insurance Department, or willfully violating provisions of the Insurance Code, contrary to Subsection 626.611(13), Florida Statutes. In connection with the purported violation set forth in the aforementioned issue a, violating provisions of the Insurance Code by an act contrary to Subsection 626.621(2), Florida Statutes. The Respondent, James H. Bowling, is accused through Count VIII of a violation of all those provisions set out in the accusations found in the statements a. through h. set out herein, related to remaining Counts I through VII and is an accusation that encompasses the cumulative effect of the violations in remaining Counts I through VII. If the Respondent, James H Bowling, is found to be guilty of the offenses set out in the Administrative Complaint, it is the petitioner's intention to revoke his license and eligibility for future licenses and/or to refuse the issuance of additional licenses as an insurance agent, or to impose as many lesser penalties as may be proper under the provisions of Sections 626.611, 626.621 and 626.681, Florida Statutes, and the Florida Insurance Code. Count VIII, related to the Respondent, Premium Budget Service, Inc., seeks to suspend or revoke its license as a premium finance company, and the basis for such action is premised upon the evidential facts alleged in remaining Counts I through VII and under authority of Subsection 627.832(1)(c), Florida Statutes.
Findings Of Fact THIS CAUSE comes on for consideration based upon the Administrative Complaint of petitioner, State of Florida, Office of Treasurer/ Insurance Commissioner, filed against James H. Bowling and Premium Budget Service, Inc., Respondents. The general details of the nature of the allegations may be found in the issues statement of this Recommended Order, and the particular allegations in each count will be discussed in the course of these findings of fact and the conclusions of law. The Petitioner, State of Florida, Office of Treasurer/Insurance Commissioner, is an agency of the State of Florida charged by statute with the duty to regulate the insurance industry in this state. The authority for such regulation, related to the case sub judice, is established in Chapters 626 and 627, Florida Statutes. The Respondent, James H. Bowling, is a licensed 2-20 insurance agent in the State of Florida, who holds such license with the permission of the Petitioner. Premium Budget Service, Inc., is licensed by the Petitioner pursuant to the provisions of Chapter 627, Florida Statutes. For the period January, 1975, to December, 1978, the Respondent, James H. Bowling, owned and operated as a licensed 2-20 insurance agent in the State of Florida, a company known as Atlas Insurance Agency, Inc. During that time, Bowling was the president of that corporation and was a 50 percent shareholder of its stock issue. Atlas had eight offices throughout Duva1 County, Florida, in which Bowling was transacting the business of the company. His specific function in connection with Atlas was that of the overall responsibility for the operation of Atlas insurance Agency, Inc., in managerial terms. In addition, Respondent Bowling served as the president of Premium Budget Service, Inc., during the period January, 1975, through December, 1978. This company was owned by Sandra R. Bowling, Respondent Bowling's wife. The business of Premium Budget Service, Inc., in the years in question was that of financing premium accounts to be paid by customers of Atlas Insurance Agency, Inc. to the company offering the insurance coverage. Under this arrangement, Premium Budget Service, Inc., financed the amount of the premium for insurance which was being handled by Atlas, and the customer agreed to pay back the amount of premium financed on an installment basis under terms and conditions of an installment contract. Some of the contracts which Premium Budget Service, Inc., had received from Atlas insurance Agency, Inc., for financing were subsequently assigned by Premium Budget to Devco Premium Finance Company. Devco, as a condition of the assignment, paid Premium Budget the amount of principal financed together with a transfer fee and was then reimbursed by the customer who made Installment payments of principal and interest to Devco on the amount of policy premium financed. This arrangement commenced in September, 1975, and was in operation during the pendency of some of the contracts which are at issue in this Administrative Complaint. The contracts which the Administrative Complaint focuses on were contracts involving customers through the Joint Underwriters Association program in Florida. The Joint Underwriters Association Is an organization made up of insurance companies who do business in the State of Florida in which members of the association have as their principal purpose the writing of insurance for high risk automobile drivers who operate automobiles in the State of Florida. Under this plan, Atlas insurance Agency, Inc., used United States Fidelity and Guaranty Company, hereinafter referred to as "U.S.F.&G.", as its servicing carrier in the time sequence relevant to this complaint. The first allegation in the Administrative Complaint concerns an insurance policy which Atlas sold to one Daniel Lashley. Lashley paid the full amount of the insurance premium by money order No. 1306407044 made out in the amount of $307. U.S.F.&G. issued policy No. 8-90-104607. This policy was issued after Atlas had mailed a down payment of $100 to U.S.F.&G. The check from Atlas was written on Bowling's signature. Lashley had paid the money order on April 4, 1977, and U.S.F.&G. had received the $100 deposit on April 28, 1977. The policy was mailed by U.S.F.&G. to Atlas on May 12, 1977, and the down payment check was deposited in the bank account of U.S.F.&G. on May 15, 1977. The effective date of the policy was April 8, 1977, to April 8, 1978. In addition, there was a premium billing requirement of $1.00 which Lashley paid on June 4, 1977. Apparently, this $1.00 payment was made to Atlas, because on November 23, 1977, a notice of termination was sent to Atlas and to David Lashley indicating an outstanding balance of $208. This notice was sent because U.S.F.&G. was unable to locate any payment other than the initial down payment of $100 which had been submitted with the application for policy; notwithstanding the fact that the total policy amount called for $308, which full amount should have been paid within thirty days of the date of issue of the policy. Final cancellation notice was mailed on December 21, 1977. This final cancellation notice was only forwarded to the agent, Atlas; however, on January 5, 1978, a notice was sent to Lashley indicating $103 earned premium due on the policy to keep the policy in effect until the end of the term. Lashley contacted the Florida Department of Insurance to determine why the policy had been cancelled and at that time he furnished proof of payment for the full amount of premium. An investigator with the Florida Department of Insurance contacted U.S.F. &G. who reinstated the policy on April 19, 1978, to be effective December 4, 1977. This reinstatement was made in spite of U.S.F.&G.'s records which showed no payment of the outstanding $208, nor contact from anyone connected with Atlas insurance Agency on the issue of why the policy had been cancelled. The Respondent, James H. Bowling, contended in the course of the hearing that a second check in connection with the Lashley premium had been forwarded to U.S.F.&G. on the Atlas account, check No. 19837, dated May 31, 1977. He also stated that his files indicated a notice of cancellation of November, 1977, to be effective December 4, 1977, but he took no action because a review of the file indicated that full payment had been received by U.S.F.&G., as evidenced by a memorandum from U.S.F.&G., indicating reinstatement and a note from an unnamed Atlas employee to the effect that the policy was to be reinstated, which led him to believe that someone in the Atlas office conferred with the U.S.F.&G. office and believed that the money on the second check of $208 had been found. Bowling's further explanation for the delayed payment of the balance of the policy was to the effect that normally on policies which were financed, only the initial installment was paid down and the balance paid at a later date, and he felt that one of his employees had treated the cash premium payment in Lashley's case in the same manner, by mistake. Testimony in the hearing established that certain checks forwarded to U.S.F. &G. had been mishandled, and those occurrences were happening around the time Lashley's's policy was purchased. Therefore, it has not been satisfactorily shown that the additional amount of $208 was not forwarded by a check dated May 31, 1977. Nonetheless, this does not excuse Atlas nor its managing agent, Bowling, from the necessity to forward all moneys received from Lashley on April 4, 1977, when it was received, and in one lump sum. Nor does It excuse the fact that even though Atlas knew of the cancellation in November/December of 1977, it left it to Lashley to take the initiative to rectify the problem, which was not accomplished until April, 1978; instead of immediately inquiring of U.S.F.&G. about the missing money when they were told of the problem. Accepting Bowling's representations that contacts were made with U.S.F.&G. on the subject of the Lashley account, it is apparent that those contacts took place after Lashley had set matters in motion. leading to the April, 1978, reinstatement. Count II of the Administrative Complaint involves a transaction between Atlas and a Bobby R. McGowan, Sr., to sell McGowan insurance policies. One of the policies was an automobile policy through U.S.F. &G. and a second was a personal effects policy through Parliament Insurance Company. The automobile policy was No. 8-90-056330 and the personal effects policy was No. PIM-18643. The premium on the automobile policy was $546 and the premium on the personal effects policy was $20. The terms of the policies ran from January 13, 1976, through January 13, 1977. There was a contract which McGowan entered into with Premium Budget Service, Inc. to finance the premiums due in the two policies. The total premium of both policies was $566, with a down payment of $198 from McGowan and an amount financed of $368. This contract was assigned to Devco Premium Finance Company in January, 1976. Devco paid for the assignment by having Respondent Bowling execute a sight draft which contained the amount due to Premium Budget on the McGowan account. This execution of the sight draft was on January 14, 1976, and it was honored by Devco on January 16, 1976. The proceeds pertaining to McGowan which were received by Premium Budget Service, Inc., were then transmitted by check to Atlas and Atlas at that point had the total premium amounts of $566. Atlas in turn forwarded $150 to U.S.F.&G by a check bearing Bowling's signature, which was deposited in the U.S.F.&G. account on June 2, 1976. In the interim, Devco requested a cancellation of U.S.F.&G.'s policy on McGowan and that request was made on March 10, 1976. The policy was cancelled and U.S.F. &G. returned $42 of unearned premiums to Devco. A notice of the cancellation was forwarded to Atlas and to McGowan. The reason for the cancellation action by Devco was related to McGowan's nonpayment on the installment contract to Devco. Devco claims to be short $361 in what should have been returned to them as unearned premiums. U.S.F. &G. did not forward that amount because they never received it from Atlas. Respondent, James H. Bowling, sent $366.63 to Devco on the McGowan account under check No. 18779 dated April 7, 1977, by his signature. Devco never received that amount and the cancelled check cannot be found, and Devco has never received its money. The reason for the delay in repaying Devco, according to the Respondent, was because he had an agreement with Devco in the person of their former owner, Doyle E. Varnes, to the effect that the premium money other than the necessary down payment would be held by Atlas, and if a policy was cancelled before it was issued, that the money other than the down payment would be sent by Atlas to Devco and not to U.S.F.&G.; otherwise, after issue the balance could go to the insurer. Varnes testified and did not acknowledge that agreement; additionally, any such agreement would be contrary to the requirement that the full amount of the premium be submitted by Atlas and, more importantly, Bowling's explanation about withholding moneys on this or any other case in which Devco paid Premium Budget for an assigned contract is not believable. Count III deals with a transaction in which Atlas sold Dorothy G. Morgan a policy from U.S.F.&G. This transpired in December, 1975. Dorothy G. Morgan made the down payment of $95, leaving an amount to be financed of $175 of the total premium of $270. This was an instance in which Premium Budget Service, Inc., assigned the contract to Devco under the same arrangement described in the transaction involving the customer, McGowan. On December 25, 1975, Bowling signed the draft for payment to Premium Budget. The term of the policy was December 15, 1975, to December 15, 1976, and the automobile insurance policy number was 8-90-49673. Atlas received the full amount of premium of $270, including the amount to be financed and paid $100 to U.S.F.&G. as a down payment deposited by U.S.F.&G. on May 20, 1976. After the down payment was mailed by a check drawn by Bowling on an Atlas bank account, Devco asked U.S.F.&G. to cancel the policy and a notice of cancellation was forwarded to Atlas and Morgan. This notice of cancellation, as all notices of cancellation involved in a transaction with U.S.F.&G. alluded to in this Administrative Complaint, contained a statement of the down payment amount and the outstanding premium amount. At that point of the notice of cancellation, U.S.F.&G. had not received the balance of the premium payments beyond the $100, the initial installment, and it did not return any moneys to Devco after the policy was cancelled because the amount of the earned premium was $109 which exceeded the amount of down payment by $9, leaving a negative balance. Devco was eventually paid the amount of money that it had outstanding, to-wit, the $170; by a check dated March 21, 1979, drawn on the account of The insurance Store, Inc. The draft on The Insurance Store, Inc., carries Respondent Bowling's signature and may be found as the Respondent's Exhibit No. 5 admitted into evidence. (Count IV had been dismissed prior to the hearing.) Count V involves the transaction between Atlas Insurance Agency, Inc., and one Willard I. Rader. This transaction involved the sale of an automobile policy through U.S.F.&G. with the premium amount of $370 which was subsequently adjusted to $428, policy No. 8-90-49616, and a personal effects policy through Parliament Insurance Company, No. PIM-232l3, with a premium of $20 produced by Atlas. The terms of the two policies were January 12, 1976, to January 12, 1977. The policies were assigned by Premium Budget Service, Inc., to Devco under the arrangement described above and on Bowling's signature to a draft dated January 14, 1976, which draft was honored by Devco on January 16, 1976. Premium Budget having received the proceeds from the assignment of the contract to Devco, paid Atlas moneys sufficient to leave Atlas with the full amount of the premium. In the beginning, the total premium for both policies was $390, with the down payment of $137, leaving $253 to be financed. Atlas forwarded $100 to U.S.F.&G.`s representative as a minimum down payment and U.S.F.&G. deposited that amount of money on June 21, 1976. U.S.F.&G. did not receive any further moneys from Atlas. Devco subsequently requested that the policy be cancelled and the policy was cancelled and Atlas and Radar were notified of the cancellation. U.S.F.&G. returned no money to Devco, in view of the fact that the earned premium was $177 and the amount of down payment was $100. On April 25, 1978, Atlas Insurance Agency, Inc., wrote a check under the signature of the Respondent, Bowling, in the amount of $270 which was paid to Devco. This $270 represented the balance of the premium down payment which should have been forwarded to U.S.F.&G. with the $100 down payment. The check may be found as the Respondent's Exhibit No. 6 admitted into evidence. Count VI involves the sale of an automobile policy by Atlas to Gerda M.Weidman. This policy was issued by U.S.F.&G. under No. 8-90-49695. The amount of premium was $184 which was later adjusted to the amount of $211. The term of the policy was from December 8, 1975, to December 8, 1976. The Weidman policy was financed to the extent of $120 of the original $184, the down payment being $64. The finance agreement was arranged by Premium Budget Service, Inc., who assigned the contract to Devco under terms described above. The sight draft was executed under Bowling's signature on December 9, 1975, and was honored by Devco, which assignment proceeds were transmitted through Premium Budget to Atlas, leaving Atlas with $184. Atlas transmitted $50 of that $184 as a down payment, instead of the proper amount of $184. This $50 amount was deposited by U.S.F.&G. on March 30, 1976. Devco had in February, 1976, requested the cancellation of the policy and the policy was cancelled with Atlas and Weidman being notified of the cancellation. U.S.F.&G. returned $9 of unearned premium to Devco. On April 25, 1978, a check was issued from Atlas Insurance Agency, Inc., to Devco in the amount of $134 under signature of James H. Bowling. This $134 represented the balance of the moneys due to Devco on the premium amount financed by Devco. The check in the amount of $134 may be found as Respondent's Exhibit No. 7 admitted into evidence. Count VII of the Administrative Complaint charges this Respondent, James H. Bowling, with violations connected with the sale of an automobile insurance policy by Atlas to one John K. Detmer. On May 5, 1977, John K. Detmer paid Atlas $210 as a down payment. An additional $428.08 was financed by Premium Budget Service, Inc., which amount reflected interest and other charges. The payment was for the purchase of a policy from U.S.F.&G., which issued policy No. 8-90-104724 effective May 8, 1977. The policy was issued after they received only $200 as a down payment, compared to the full amount of premium required, which would have been the $210 Detmer paid together with that portion of the $428.08 balance related to the premium. Detmer subsequently paid the entire amount required under the finance contract with Premium Budget Service, Inc. On November 21, 1977, U.S.F.&G. cancelled the policy after notifying Atlas and Detmer of the cancellation, in view of the fact that they had only received the $200 deposit and other moneys were due and owing on the premium. This policy has never been reinstated by U.S.F. &G. The Respondent claims that the additional amount of $399 was mailed to U.S.F.&G. under check No. 20512 from the account of Atlas drawn on July 13, 1977; however, U.S.F.&G. claims that they never received the additional payment. The Respondent's files indicate the cancellation notice and the effective date of that notice to be December 4, 1977, and a note that the policy was to be reinstated. There are no notes in the files with U.S.F.&G. of any conversation pertaining to the subject of reinstatement. Accepting the representation that the second check was forwarded on July 13, 1977; the Respondent, Bowling, as the managing agent of Atlas and Premium Budget, acted inappropriately in not forwarding the full amount of premium as one lump sum payment and in the task of following up the cancellation of the policy. Furthermore, even if it is assumed that there was some conversation between employees of Respondent Bowling's office and U.S.F.&G. and a note placed in the Atlas file to the effect that there would be reinstatement, there should have been a follow-up with Detmer to make certain that the policy had been reinstated, particularly since the cancelled check in the amount of $399 has never been returned and, had the policy been reinstated, it is reasonable to expect some notification memorandum would have been given such as was given in the Lashley matter. (Section 120.57, Florida Statutes, allows the parties to submit proposed findings of fact, conclusions of law and recommendations. The Respondents have availed themselves of that opportunity and those proposals have been reviewed prior to the rendition of this Recommended Order. To the extent that the proposals are not inconsistent with this Recommended Order, they have been taken into account and utilized in rendering the Recommended Order. To the extent that the proposals by the Respondents are inconsistent with this Recommended Order, they are hereby specifically rejected.)
Recommendation It is recommended that the license of the Respondent, James H. Bowling, to operate as a 2-20 insurance agent in the State of Florida be REVOKED. It is further recommended that the action against the license of Premium Budget Service, Inc., be DISMISSED DONE AND ENTERED this 6th day of August, 1979, in Tallahassee, Florida. CHARLES C. ADAMS Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301 (904) 488-9675 COPIES FURNISHED: Patrick F. Maroney, Esquire Office of Treasurer/Insurance Commissioner 428-A Larson Building Tallahassee, Florida 32301 John London Arnold, Esquire 919 East Adams Street Jacksonville, Florida 32202 =================================================================
Findings Of Fact The Respondent, Teresa Jean Watson, at all times material to this proceeding was licensed as an ordinary life agent, a disability insurance agent and a general lines insurance agent. She was the only general lines agent licensed to sell insurance at the T. J. Watson Insurance Agency, Inc. and all insurance sold by that firm at times pertinent hereto was sold and issued under authority of her license. During times material to this proceeding, Teresa Jean Watson sold insurance coverage under authority of her general lines license either as direct agent for various insurance companies for whom she was general agent or, on behalf of MacNeill and Son, Inc. (MacNeill), her managing agency, which represented various insurance companies for whom the Respondent wrote coverage. Between February 1st and February 15, 1982, a homeowner's insurance policy was sold to Tony and Martha Williams by the Respondent's agency under the authority of the Respondent's general lines insurance agent's license. That homeowner's policy required a premium of $211.00. The policyholder, Tony Williams, wrote two checks to the T. J. Watson Agency dated January 22, 1982 and February 12, 1982. Those two checks totalled $174.00. The checks were cashed by the Respondent's agency on January 26, 1982 and on February 6, 1982. The Independent Fire Insurance Company issued the policy to Tony and Martha Williams and on August 4, 1982 a representative of the Independent Fire Insurance Company wrote the Respondent to advise her that she owed that company a balance of $179.35, as of May 1982. Petitioner asserts that the $179.35 represents the amount of Tony Williams' premium owed to the insurer, less the Respondent's commission, which if added together would equal the $211.00 premium on the Williams' policy. Although it was established that $179.35 was owed by the Respondent to the Independent Fire Insurance Company, and never paid, it was not established that it represented the premium due specifically for the Williams' policy as was charged in count 1 of the Administrative Complaint. For instance, the checks paid by the Williamses to the Watson Agency total $174.00 and therefore there is a discrepancy between the total of those checks and the $179.35 amount Independent Fire Insurance company was owed by the Respondent. This fact coupled with the fact that the dates on the checks from the Williamses (January and February) substantially predate the May 1982 billing date to Respondent from Independent Fire, renders it unproven that the checks written to the Watson Agency which Respondent negotiated and retained the benefit of, related to the amount of unremitted premium owed by Respondent to the Independent Fire Insurance Company. In short, it was established that $174.00 was paid the Respondent and her agency by the Williamses. But, it was not established that the premium paid by the Williamses became misappropriated fiduciary funds converted by the Respondent to her own use and benefit. It was merely established that as of May 1982 the Respondent owed the Independent Fire Insurance Company $179.35 as a past-due account It was not established that the Williamses ever suffered a lapse of insurance coverage or were otherwise harmed by the Respondent's failure to pay Independent Fire the $179.35. Indeed, the $179.35 figure was not proven to be more than a mere debt owed by Respondent to Independent Fire Insurance Company. The figure was not shown to have been related to any particular policy. The Respondent and her insurance agency in the regular course of business wrote insurance coverage for companies represented by MacNeill and Son, Inc., the Respondent's managing agency. The regular business practice between the Respondent and MacNeill was for the Respondent to write coverage on behalf of insurers represented by MacNeill and to remit on a regular open account" basis insurance premiums due MacNeill on behalf of its insurance company principals on a monthly basis. The Respondent became delinquent in submitting premiums to MacNeill and Son in November 1981. After unsuccessful efforts to collect the delinquent premium funds from the Respondent, MacNeill and Son, Inc. suspended T. J. Watson Insurance Agency and the Respondent from writing further coverage for companies they represented in January 1982. The Respondent purportedly sold her agency to one Thomas Zinnbauer in December 1981, but had already fallen into a pattern of failing to remit insurance premiums over to MacNeill before that time. In any event, the purported sale to Thomas Zinnbauer was a subterfuge to avoid collection of delinquent premiums inasmuch as the Respondent held herself out, in correspondence with MacNeill, (See Petitioner's Exhibit 4) to be the president of the agency at least as late as April 1982 and, at that time and thereafter, the agency continued to sell insurance under the aegis of the Respondent's license. After the Respondent made up the delinquency in premium remissions to the MacNeill Agency that agency restored her underwriting authority in January 1982. Shortly thereafter however, the Respondent and the T. J. Watson Agency again became delinquent in remitting insurance premiums to the MacNeill Agency and followed a quite consistent pattern of failing to forward these fiduciary funds to MacNeill for some months. Ultimately the Respondent and her agency failed to forward more than $6500.00 in premium payment funds to MacNeill and Son, Inc. as was required in the regular course of business. MacNeill and Son, Inc. made repeated futile attempts to secure the misappropriated premium payments from the Respondent and her agency. MacNeill made several accountings of the amount of the acknowledged debt to the Respondent. The Respondent communicated with MacNeill concerning the delinquent premium payments and acknowledged the fact of the debt, but sought to reach an amicable arrangement for a repayment schedule. Re- payment was never made, however, and ultimately the Petitioner agency was informed of the deficiencies and prosecution resulted. The Respondent knew that the premiums had been collected by herself and her agency and had not been forwarded to those entitled to them. She knew of and actively participated in the improper withholding of the premium payments. This withholding and diversion of premium payments from the agency and companies entitled to them was a continuing pattern of conduct and Respondent failed to take action to halt the misappropriation of the premium payments. Further, it is established by the testimony of Matthew Brewer, who investigated the delinquent premium accounts for MacNeill, that Ms. Watson failed to advise MacNeill of the purported sale of her agency until November of 1982, almost a year after it is supposed to have occurred and then only in response to Brewer's investigation. When confronted by Mr. Brewer concerning the ownership of her agency Ms. Watson refused to tell him to whom she had sold the agency. When Mr. Brewer learned that Thomas Zinnbauer had apparently bought the agency from the Respondent Mr. Brewer conferred with him and he refused to release the agency records unless Ms. Watson gave her permission. This fact, together with the fact that Ms. Watson held herself out as president of the agency some four months after she had purportedly sold the agency to Zinnbauer, establishes that Respondent, by representing to Brewer and other personnel of MacNeill and Sons, Inc. that she had sold her agency, was attempting to evade liability for failure to forward the fiduciary premium funds obtained under the authority of her agent's license. As a result of the failure to forward the above- mentioned premium payments some of the insureds who had paid those premiums suffered lapses in coverage and cancellations of policies because MacNeill and Company and the insurers they represented believed that no premiums had ever been paid. Ultimately, MacNeill and Company learned that the premiums had been paid by the policyholders, but not remitted by the Respondent and her agency and undertook steps to reinstate coverage, but those policyholders in some instances had substantial periods of time when their coverage was lapsed due to the Respondent's failure to remit the premium funds to the managing agency and the insurance companies involved. MacNeill and Company ultimately reimbursed the appropriate insurers and insureds at its own expense, incurring substantial financial detriment as a result of the Respondent's failure to have premium payments obtained under her licensed authority properly forwarded. Had the insureds who had their policies cancelled suffered losses for which claims could have been filed during the period of the lapses of coverage, they could have encountered substantial financial difficulty.
Recommendation Having considered the foregoing Findings of Fact and Conclusions of Law, the evidence of record, the candor and demeanor of the witnesses and the pleadings and arguments of the parties, it is therefore recommended that the General Lines Insurance Agent's license of Respondent Teresa Jean Watson be revoked. DONE and ORDERED this 27th day of December, 1985, in Tallahassee, Florida. P. MICHAEL RUFF 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 27th day of December, 1985. APPENDIX RULING OF PETITIONER'S PROPOSED FINDINGS OF FACT: Accepted. Accepted, although the amount represented by the two subject checks totalled $174.00 instead of $175.00. Accepted. Rejected as not comporting with the competent, substantial credible evidence adduced. Rejected inasmuch as it was not established that the amount of $179.35 owed the Independent Fire Insurance Company represented the premium on the Williamses' insurance policy. Accepted. Accepted. Accepted. Accepted, although the last sentence in that Proposed Finding constitutes, in reality, mere argument of counsel. Accepted. Rejected as not comporting with the competent, substantial credible testimony and evidence actually before the Hearing Officer. Accepted. Accepted. Accepted. Accepted. Accepted. Accepted. RULINGS ON RESPONDENT'S PROPOSED FINDINGS OF FACT: Respondent submitted a post-hearing document entitled "Proposed Findings of Fact." There are few actual Proposed Facts in that one-and-a-half page pleading which is interlaced throughout with argument of counsel. However, to the extent the six paragraphs of that document contain Proposed Findings of Fact they are ruled on as follows: This Proposed Finding is rejected, but for reasons delineated in the above Conclusions of Law, Count 1 has been recommended to be dismissed anyway. This Finding is accepted but is immaterial and irrelevant to, and not necessary to, the Findings of Fact reached herein and the Conclusions of Law based thereon. Paragraph Number 3 does not really constitute a Proposed Finding of Fact or even multiple Proposed Findings of Fact in the same paragraph. In reality, it constitutes argument of Respondent's counsel concerning admissibility of certain documents into evidence which have already been ruled to be admissible by the Hearing Officer during the course of the hearing. To the extent that the last two sentences in the third paragraph of the Respondent's Proposed Findings of Fact are proposed findings of fact, they are accepted, but are immaterial, irrelevant and unnecessary to the findings of fact made herein and the conclusions predicated thereon and recommendation made herein. Rejected as not being in accordance with the competent, substantial credible testimony and evidence adduced. Rejected as constituting mere argument of counsel and not being in accordance with the competent, substantial, credible evidence adduced. Rejected as not in accordance with the competent, substantial, credible evidence presented as to Count 2. In reality, counsel obviously intended to refer to the two checks referenced in Count 1 of the complaint which has been recommended to be dismissed anyway. COPIES FURNISHED: Dennis Silverman, Esquire Department of Insurance 413-B Larson Building Tallahassee, Florida 32301 Mark A. Steinberg, Esquire Post Office Box 2366 Ft. Myers, Florida 33902 Bill Gunter Insurance Commissioner and Treasurer The Capitol Tallahassee, Florida 32301
Findings Of Fact Based upon my observation of the witnesses and their demeanor while testifying, the documentary evidence received and the entire record compiled herein, the following relevant facts are found. Respondent, John Roger Pascale, currently holds an insurance license issued by the Florida Department of Insurance (Petitioner), and is eligible for the issuance of further licenses. It is admitted that Respondent was a licensed general lines agent during times material to the Complaint allegations herein. Respondent, however, has voluntarily elected not to renew his license since September, 1980. By its five count Administrative Complaint dated June 13, 1980, Petitioner advised Respondent that it intended to revoke, refuse to issue or renew, or to impose lesser penalties as may be proper under the provisions of Sections 626.611 and 626.621, Florida Statutes. The main thrust of Count I is that Respondent committed the following violations: Received premiums or other funds belonging to insurers or others in transactions under his license which were trust funds received by him in a fiduciary capacity, which funds he failed to account for or pay to the insurer, insured or other persons entitled thereto in violation of Chapter 626.561(1), Florida Statutes. Lacked one or more of the qualifications for the license or permit as specified in the Insurance code in violation of Chapter 626.611(1), Florida Statutes. Willfully, under his license, circumvented the prohibitions of the insurance code. Chapter 626.611(4), Florida Statutes. Was willfully deceptive with regard to an insurance policy in violation of Section 626.611(5), Florida Statutes. Demonstrated a lack of fitness or trustworthiness to engage in the business of insurance contrary to the requirements contained in Chapter 626.611(7), Florida Statutes. Demonstrated a lack of reasonable and adequate knowledge and technical competence to engage in the transactions authorized by the license or permit. Chapter 626.611(8), Florida Statutes. Engaged in fraudulent or dishonest practices in violation of Chapter 626.611(9), Florida Statutes. Misappropriated, converted, or unlawfully withheld monies belonging to insurers, insureds, beneficiaries, or others and received in the conduct of business under his license. Chapter 626.611(10), Florida Statutes. Willfully violated an order, rule or regulation of the insurance department, or willfully violated a provision or provisions of the insurance code. Chapter 626.611(13), Florida Statutes. Withheld information from which the issuance of a license or permit could have been refused had it then existed and been known to the department contrary to the requirements of Chapter 626.621(1), Florida Statutes. Violated a provision of the insurance code contrary to Chapter 626.621(2), Florida Statutes. Violated a lawful order, rule, or regulation of the department in violation of Chapter 626.621(3), Florida Statutes. Has shown himself to be a source of injury or loss to the public or detrimental to the public interest in violation of Chapter 626.621(6), Florida Statutes. In support of the above allegations, Petitioner produced as its primary witness, Delores V. Cardet, who first purchased insurance from Respondent in November of 1977. The agent employed by Respondent with whom Ms. Cardet transacted business was Rigo Avila (Avila). (See Petitioner's Exhibit 1) Ms. Cardet's insurance application was transmitted to Lumberman's Insurance Company to effect the appropriate coverage. Her complaint against Respondent is that the wrong address was placed on her insurance application and that she was overcharged for insurance based on the premiums quoted by agent Avila. Respecting the allegation that agent Avila placed the wrong address on her insurance application, evidence indicates that when this matter was called to Respondent's attention, the matter was taken care of and Ms. Cardet subsequently received billing notices at the correct address. (Petitioner's Exhibit 3). During the time in which Ms. Cardet purchased insurance through Respondent's agency, she was employed as a manager for Beneficial Finance Company of Florida. As part of her employment duties, Ms. Cardet is involved in collections and has received management training from her employer. During the period in question Ms. Cardet had one address change. This change was properly brought to Respondent's attention and the change was effected without incident. Respondent quoted Ms. Cardet a total premium during 1978 of $699.00 whereas the insurer, Lumberman's Insurance Company, charged Ms. Cardet an annual premium of $677.00. The $22.00 overcharge represented the difference between the premium quoted by agent Avila and the actual premium charged. The excess was referred to the premium finance company (Sonny Financial Services) where it was handled as a credit toward the balance owed by Ms. Cardet. During 1979, Ms. Cardet was quoted a total annual premium of $797.00 for renewal of her insurance policy. Her policy reflects a premium of $662.00 plus two (2) motor club memberships for her two (2) vehicles at the rate of $50.00 each. The remaining difference of $35.00 was refunded from Kemper Insurance Company and forwarded to Sonny Financial Services as a credit toward the remaining balance of Ms. Cardet's premiums. 2/ Linda Manning, the underwriting service manager for Lumberman's Mutual Casualty Company, a subsidiary of the Kemper Insurance Group, acknowledged that in the insurance business, mistakes regarding insurance print-outs occur on a frequent basis. Ms. Manning services several hundred premium changes daily and testified that there are numerous reasons for an agency to give a prospective insured an improper quote. Among the reasons listed by Ms. Manning is the fact that drivers' records are not always available for a prospective insured and rate adjustments occur for various reasons. COUNT TWO The gravamen of Count Two is that Respondent's employees used an incorrect address when insurance was placed by Respondent's agency for Mr. Jeffrey Brown which resulted in the insured not getting a premium notice from the insurance company. It is also alleged that Respondent willfully listed an incorrect address for Mr. Brown in a lower rate territory which gave the insured the advantage of a lower premium. In support of the above allegations in Count Two, Petitioner introduced the testimony of Respondent's former spouse, Robin LaPlante. Ms. LaPlante's husband, Jeffrey Brown, purchased insurance through Respondent's agency on February 26, 1978. It is alleged that Respondent falsely indicated on the Brown application for automobile liability coverage with Lumberman's Mutual Casualty Company that Mr. Brown's address was in Lauderhill, Florida, whereas he actually resided in Miami, Florida. Ms. LaPlante's complaint with Respondent is that they sold a van, which was one of the two vehicles covered under the policy, and it took approximately nine (9) months before the van was deleted and a refund check was issued for termination of that coverage. Ms. LaPlante had no direct dealings with Respondent and/or his agents during the time in question. Respondent's dealings were with Ms. LaPlante's former husband, Jeffrey Brown, who did not appear to testify in these proceedings. COUNT THREE As amended by Order dated December 31, 1980, Count Three alleges that Respondent employed the services of someone other than his employees or himself to complete a portion of an insurance application; that the insured was sold membership in a motor club without his knowledge and consent and that the Respondent unlawfully endorsed a check payable to the insured from the insurance carrier to reinstate the insured's policy which had been cancelled by the insurance carrier. In support of Count Three, Petitioner presented the testimony of Stanley Friehofer. Friehofer went to Houston Motors in Dade County, Florida, for the purpose of purchasing a Subaru Brat. To do so, it was necessary for Friehofer to provide evidence of insurance on the vehicle in order to obtain financing through the dealership. Sam Houston, the salesman involved, arranged the financing on behalf of the automobile dealership. Friehofer had obtained an insurance quote from his stepmother who was also in the insurance business. After discussing the possibility of the stepmother's agency issuing a policy, Mr. Houston called Respondent, John Pascale, who was at the dealership on other matters, Respondent quoted a rate less than that quoted by Friehofer's stepmother. Friehofer paid Houston Motors $440.00 and was given an insurance binder by Sam Houston. (Petitioner's Exhibit 20). Friehofer was accompanied by his brother at Houston Motors. Also present at the time was Sam Houston. Friehofer testified that Sam Houston completed the entire insurance application and issued him the insurance binder 3/ Friehofer never received a policy for his insurance although he received a bill from Kemper Insurance Company of Orlando, Florida. (Petitioner's Exhibit 22). Friehofer noted three errors on his insurance application. Those errors were (1) his marital status (Friehofer is single), (2) the use of the vehicle was incorrectly noted, and (3) the premium quoted was the wrong amount. Friehofer also complained that he was incorrectly enrolled for membership in a motor club contrary to his consent. When Friehofer purchased the vehicle from Houston Motors, he was in the process of transferring from the Virgin Islands. Friehofer therefore used his brother's address on his insurance application. According to Friehofer, his first acquaintance with Respondent was during the taking of a deposition in this matter. Linda Manning confirmed the fact that Lumberman's Mutual charged Richard Friehofer a premium of $410.00 for insurance coverage to his vehicle. Friehofer received a cancellation notice dated April 30, 1979, from Kemper Insurance Company (Kemper) and was instructed by a Mr. Bell of Kemper to obtain "dual coverage" until Kemper could investigate the matter and refund the premiums expended by him to maintain dual coverage when the situation was resolved. Friehofer received an agency check from Respondent dated June 28, 1979. (Petitioner's Exhibit 23). Friehofer initiated the call to Kemper to advise that he intended to cancel his insurance which was effected by Respondent's agency. After Friehofer advised Kemper that he planned to cancel his coverage, he notified Respondent approximately four (4) days later. Respondent received a refund from Kemper and was unable to contact Friehofer. Respondent therefore endorsed the check and returned it to Kemper to reinstate the coverage. Respondent later learned of Friehofer's intention to, in fact, cancel the coverage and Respondent stopped payment on the check to Kemper. (See Respondent's Exhibit 1). Thereafter, Respondent refunded the premium paid from Kemper to Friehofer on June 28, 1979. (Respondent's Exhibit 13). COUNT FIVE 4/ Count Five charges Respondent with the sale of membership in a motor club to an insured and accuses the Respondent of misappropriating $38.00 of the insured's money. In support of this allegation, Petitioner introduced the deposition of Betty Monette. The thrust of this allegation is that Ms. Monette was quoted a renewal premium for her Personal Injury Protection (PIP) insurance coverage of $142.00. Thereafter, Respondent's employees determined that they could provide the same coverage through another carrier for $104.00. As a consequence, Respondent refunded the difference of $38.00 to Ms. Monette, however, the refund was accompanied by a transmittal which erroneously stated that the refund resulted from a cancellation of a motor club membership. Ms. Monette acknowledged having received the $38.00 refund, and the difference i.e. $104.00, coincides with the premium charged by Banker's Insurance for the PIP coverage. RESPONDENT'S DEFENSE Sam Houston is an official affiliated with Houston Motors. Houston contacted Respondent, who happened to be at the dealership attending to an unrelated business matter at the time the Friehofers were at the dealership to purchase a Subaru vehicle. Houston has not participated or otherwise benefited from insurance commissions derived by Respondent. Houston Motors has a policy of not being affiliated with insurance salesmen or other brokers based on legal requirements imposed upon the automobile dealerships. Houston was in charge of handling financing and insurance arrangements for purchasers of vehicles at the dealership when Stanley Friehofer purchased his vehicle from Houston Motors. Houston recalled copying basic pertinent data from a financing application onto an insurance application due to the rush that Respondent found himself in after he had quoted Friehofer a premium for coverage. Houston is not licensed to sell automobile or property insurance and is unfamiliar with the procedure of quoting premiums. When shown a copy of the insurance application executed on behalf of Friehofer, Houston recalled completing the name, address, company, telephone number, state, car information and lienholder on the insurance application. Houston was certain that he did not complete any item listed on page 2 of Petitioner's Exhibit 21 which was received in evidence herein. Houston is only licensed to sell credit life, accident and health insurance in connection with financing agreements. Houston finally recalled giving Friehofer a receipt for the $440.00 tendered for insurance premiums. Houston remembered that the Friehofer transaction was unique and to the best of his recollection, had not been previously handled by him in that fashion. Respondent, John R. Pascale, is, as stated herein, a licensed casualty, property agent who holds what is designated as a "220" license. Respondent received a bachelors degree in Business Administration from Pace University and has been involved in the insurance business since he was approximately nineteen (19) years old. Respondent started his first insurance agency in Florida during 1971, and the agency grew to five (5) offices employing approximately sixteen (16) to twenty (20) employees, presently. In response to the specific charges, Respondent had no personal dealing with Ms. Cardet on her purchase of insurance from the Pascale agency. The agent involved was Rigo Avila who was dismissed from Respondents employ on August 6, 1980. Respondent's agency files reflect that Ms. Cardet had several address changes during the three-year period in which she was insured with the assistance of Respondent's agency. Respondent countered the allegations that he incorrectly listed the wrong address for Ms. Cardet by assigning her to an area which charges lower premiums by asserting that there was no economic advantage to do this since the agency collects a commission on the amount of premiums charged. Thus, a lower premium nets the agency a lower commission. Therefore, during 1977, when Ms. Cardet was quoted a premium of $699.00, Kemper Insurance determined that the premium was approximately $677.00. A refund check was sent to Respondent which was forwarded to Segral Premium Finance Company for credit to Ms. Cardet's premium finance balance. Likewise, during 1978, Ms. Cardet was quoted a premium of $797.00 with a down payment of $300.00, with the balance financed over three (3) installments through a premium finance agency. Respondent was paid directly by the agency and the overcharge (alleged) represented a $100.00 motor club membership and a $35.00 refund which was remitted by the carrier. The refund was transferred to the premium finance agency for credit to Ms. Cardet's premium balance account. Sonny Financial Service received the $35.00 check in question. (See Respondent's Exhibits 2 and 3) Respondent acknowledged that it is an agency responsibility to correct an error once the agent learns of the error or through diligence, it is otherwise brought to the agent's attention. To correct errors, Respondent's agency usually amends the policy by means of a "declaration." Finally, Respondent acknowledged that the bookkeeping errors relative to the Cardet account had been the subject of a civil claim which was amicably settled in Ms. Cardet's behalf. (See Respondent's Exhibit 5 and 6) The insurance rates of residents in Lauderhill are generally less than the rates charged residents in Dade County. The producing agency has no control over a carrier's billing procedures. Respecting the allegations surrounding the Jeffrey Brown/Robin LaPlante matter, evidence reveals that Respondent sent policy changes per Jeffrey Brown's request to the carrier during April and September of 1978. (See Respondent's Exhibits 5 and 6) As to the allegations surrounding the Betty Monette incident, evidence revealed that Respondent was able to obtain the identical coverage through another carrier for Ms. Monette at a lower rate and thus was refunded $38.00 of a quoted $142.00 premium. The transmittal letter which accompanied the refund check, however, incorrectly stated that the $38.00 refund represented a credit for cancellation of a motor club membership. (Respondent's Exhibit 10) When all of these charges surfaced, Respondent attempted to get an understanding from his employee, Mr. Avila, who abandoned his employment with Respondent. However, Respondent did all that he could to effectively resolve the difficulties and terminated Avila's employment relationship by sending him a mailgram on August 6, 1980. (See Respondent's Exhibits 11 and 12) As to the allegations surrounding the Friehofer incident, Respondent was at Houston Motors in an effort to canvass and otherwise "drum up' additional business through the dealership. Respondent met Mr. Friehofer, quoted the insurance premium, explained the various coverages available, asked if there were questions and solicited Mr. Houston to complete the necessary basic data. Respondent acknowledged that it was not a good business practice for him to leave the insurance forms with Mr. Houston to complete, however, he considered the situation rare and unusual. He also felt that it was both an accommodation for Messrs. Houston and Friehofer. Respondent admitted that he benefited from the transaction by receiving the commission from the Friehofer insurance contract. Respondent completed the second sheet of the insurance application with the exception of the signature. (See Petitioner's Exhibit 21) Respondent did not leave any blank forms at the Houston agency or any other business enterprise. Respondent has not shared commissions received with any unlicensed or unemployed person who is not authorized to complete insurance forms. Respondent received the refund check from the Friehofer insurance application on June 20, 1979. He reviewed his file, and noted that there was no file notation regarding any intent by Mr. Friehofer to cancel his insurance coverage. He made an effort to contact Mr. Friehofer and learned that he was living with his brother-in-law in Miramar, Florida, and commuted on weekends to the Virgin Islands. He, therefore, redeposited the refund check to Kemper thinking that the policy had been erroneously cancelled. (See Petitioner's Exhibit 25 and Respondent's Exhibit 13)
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is, hereby, RECOMMENDED: That the Respondent be issued a letter of written reprimand cautioning him against the practice of allowing unlicensed or unauthorized persons to assist in completing forms which may be used to effect insurance coverage. In all other respects, it is RECOMMENDED that the complaint allegations filed herein be DISMISSED. RECOMMENDED this 25th day of March, 1981, in Tallahassee, Florida. JAMES E. BRADWELL 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 25th day of March, 1981.
The Issue Does Petitioner, Department of Financial Services (DFS), have authority to determine if Respondent, Alberto Luis Sotero (Mr. Sotero) and Respondent, FalconTrust Group, Inc. (FalconTrust), wrongfully took or witheld premium funds owed an insurance company while a civil action between the insurance company and Mr. Sotero and FalconTrust pends in Circuit Court presenting the same issues? Should the insurance agent license of Mr. Sotero be disciplined for alleged violations of Sections 626.561(1), 626.611(7), 626.611(10), 626.611(13), and 626.621(4), Florida Statutes (2007)?1. Should the insurance agency license of FalconTrust be disciplined for alleged violations of Section 626.561(1), 626.6215(5)(a), 626.6215(5)(d). 626.6215(5)(f), and 626.6215(5)(k), Florida Statutes?
Findings Of Fact Based on the testimony and other evidence presented at the final hearing and on the entire record of this proceeding, the following findings of fact are made: Mr. Sotero is licensed by DFS as an insurance agent in Florida and has been at all times material to this matter. He holds license number A249545. FalconTrust is licensed by DFS as an insurance agency in this state and has been at all times material to this matter. It holds license number L014424. Mr. Sotero is an officer and director of FalconTrust and held these positions at all times material to this proceeding. Mr. Sotero also controlled and directed all actions of FalconTrust described in these Findings of Fact. Zurich American Insurance Company is a commercial property and casualty insurance company. FalconTrust Commercial Risk Specialists, Inc., and Zurich-American Insurance Group entered into an "Agency-Company Agreement" (Agency Agreement) that was effective January 1, 1999. The Agency Agreement bound the following Zurich entities, referred to collectively as Zurich: Zurich Insurance Company, U.S. Branch; Zurich American Insurance Company of Illinois; American Guarantee and Liability Insurance Company; American Zurich Insurance Company; and Steadfast Insurance Company. The Agreement specified that FalconTrust was an "independent Agent and not an employee of the Company [Zurich.]". . .. The Agency Agreement also stated: All premiums collected by you [Falcontrust] are our [Zurich's] property and are held by you as trust funds. You have no interest in such premiums and shall make no deduction therefrom before paying same to us [Zurich] except for the commission if any authorized by us in writing to be deducted by you and you shall not under any circumstances make personal use of such funds either in paying expense or otherwise. If the laws or regulations of the above state listed in your address require you to handle premiums in a fiduciary capacity or as trust funds you agree that all premiums of any kind received by or paid to you shall be segregated held apart by you in a premium trust fund account opened by you with a bank insured at all times by the Federal Deposit Insurance Corporation and chargeable to you in a fiduciary capacity as trustee for our benefit and on our behalf and you shall pay such premiums as provided in this agreement. (emphasis supplied. The Agency Agreement commits Zurich to pay FalconTrust commissions "on terms to be negotiated . . . ." It requires FalconTrust to pay "any sub agent or sub producer fees or commissions required." The Agency Agreement also provides: Suspension or termination of this Agreement does not relieve you of the duty to account for and pay us all premiums for which you are responsible in accordance with Section 2 and return commissions for which you are responsible in accordance with Section 3 [the Commission section.] The Agency Agreement was for Mr. Sotero and Falcontrust to submit insurance applications for the Zurich companies to underwrite property and casualty insurance, primarily for long- haul trucking. The Agency Agreement and all the parties contemplated that Mr. Sotero and FalconTrust would deduct agreed-upon commissions from premiums and remit the remaining funds to Zurich. On September 14, 2000, Zurich and Mr. Sotero amended the Agency Agreement to change the due date for premium payments and to replace FalconTrust Group, Inc. (FalconTrust) for FalconTrust Commercial Risk Specialists, Inc., and to replace Zurich-American Insurance Group and Zurich Insurance Company, U.S. Branch, with Zurich U.S. Mr. Sotero and Zurich's authorized agent, Account Executive Sue Marcello, negotiated the terms of the commission agreement as contemplated in the Agency Agreement. Mr. Sotero confirmed the terms in a July 20, 1999, letter to Ms. Marcello. The parties agreed on a two-part commission. One part was to be paid from the premiums upon collection of the premiums. The second part, contingent upon the program continuing for five years, was to be paid by Zurich to Mr. Sotero and FalconTrust. The total commission was 20 percent. FalconTrust and Mr. Sotero were authorized to deduct 13 percent of the commission from premiums before forwarding them to Zurich. The remaining seven percent Zurich was to pay to Mr. Sotero and FalconTrust at the end of the program or after the fifth year anniversary date. The letter spelled out clearly that Zurich would hold the money constituting the seven percent and was entitled to all investment income earned on the money. The passage describing the arrangement reads as follows: Our total commission is 20 percent however Zurich will hold and retain the first 7 percent commission where they are entitle [sic] to earn investment income. I understand that FalconTrust will not benefit from this compounded investment income. However you mentioned you would increase our initial commission that is set at 13 percent currently from time to time depending on FalconTrust reaching their goals, but it will never exceed a total commission of 20 percent. It is to our understanding that the difference will be paid at the end of the program or after the fifth year anniversary date being 12/31/2005, but not earlier than five years. I do understand that if Zurich and/or FalconTrust cancels the program on or before the fourth year being 12/31/2004 that we are not entitle [sic] to our remaining commission that you will be holding. If the program is cancelled after 12/31/2004 by FalconTrust and/or Zurich it is understood that all commission being held will be considered earned. (emphasis added.) Until the program ended, the parties conducted themselves under the Agency Agreement as described in the letter. At some point the parties agreed to decrease the percentage retained by Zurich to five percent and increase the percentage initially paid to and kept by FalconTrust to 15 percent. During the course of the relationship FalconTrust produced approximately $146,000,000 in premiums for Zurich. At all times relevant to this matter, all premium payments, except for the portion deducted by sub-agents and producers before forwarding the payments to Mr. Sotero and FalconTrust were deposited into a trust account. The various sub-agents of FalconTrust collected premiums and forwarded them to FalconTrust, after deducting their commissions, which were a subpart of the FalconTrust 13 percent commission. FalconTrust in turn forwarded the remaining premium funds after deducting the portion of its 13 percent left after the sub-agent deduction. This was consistent with the Agency Agreement and accepted as proper by Zurich at all times. All parties realized that the held-back seven percent, later five percent, was money that Zurich would owe and pay if the conditions for payment were met. The parties conducted themselves in keeping with that understanding. Mr. Sotero and FalconTrust described the practice this way in their Third Amended Complaint in a court proceeding about this dispute: "In accordance with the Commission Agreement, Zurich held the contingency/holdback commission and received investment income thereon." (Emphasis supplied.) In 2006 Zurich decided to end the program. In a letter dated December 8, 2006, Tim Anders, Vice President of Zurich, notified Mr. Sotero that Zurich was terminating the Agency-Company Agreement of January 1, 1999. The letter was specific. It said Zurich was providing "notification of termination of that certain Agency-Company Agreement between Zurich American Insurance Company, Zurich American Insurance Co. of Illinois, American Guarantee and Liability Insurance Co., American Zurich Insurance Company, Steadfast Insurance Company . . . and FalconTrust Grup, Inc. . . ., dated January 1, 1999, . . .." Mr. Sotero wrote asking Zurich to reconsider or at least extend the termination date past the March 15, 2007, date provided in the letter. Zurich agreed to extend the termination date to April 30, 2007. At the time of termination FalconTrust had fulfilled all of the requirements under the Agency-Agreement for receipt of the held-back portion of the commissions. Mr. Sotero asked Zurich to pay the held-back commission amounts. He calculated the amount to exceed $7,000,000. Zurich did not pay the held- back commission amounts. As the program was winding down and the termination date approached, FalconTrust continued to receive premiums. As the Agency Agreement and negotiated commission structure provided, FalconTrust deducted its initial commission from the premium payments. But, reacting to Zurich's failure to begin paying the held back commission amounts, Mr. Sotero engaged in "self help." He deducted at least $6,000,000 from the premium payments from customers, received and deposited in the trust account. He took the money as payment from Zurich of earned and held back commissions.3 Nothing in the Agency Agreement or negotiated commission agreement authorized this action. In March of 2007, Mr. Sotero and FalconTrust also brought suit against Zurich in the Circuit Court for the Eleventh Judicial Circuit, Miami, Florida. The issues in that proceeding include whether Mr. Sotero and FalconTrust wrongfully took premiums and how much Zurich owes them for commissions. As of the final hearing, that cause (Case Number 07-6199-CA-01) remained pending before the court and set for jury trial in August 2010. There is no evidence of a final disposition. But the court has entered a partial Summary Judgment determining that FalconTrust wrongfully took premium funds for the commissions that it maintained Zurich owed. The court's Order concludes that the issue is not whether Zurich owed money to FalconTrust, but whether FalconTrust was entitled to take the funds when it did. Like the undersigned, the court determines that it was not. Between December 8, 2006, the date of the cancelation letter, and April 30, 2007, the program termination date, Mr. Sotero and FalconTrust did not remit to Zurich any of the approximately $6,000,000 in premium payments received. Despite not receiving premiums, Zurich did not cancel or refuse to issue the policies for which the premiums taken by Mr. Sotero and FalconTrust were payment. The policies remained in effect.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Financial Services suspend the license of Adalberto L. Sotero for nine months and suspend the license of FalconTrust Group, Inc. for nine months. DONE AND ENTERED this 15th day of October, 2010, 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 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 15th day of October, 2010.
The Issue Whether Respondents committed the violations alleged in the Administrative Complaints, and, if so, what penalties should be imposed on either or both of them.
Findings Of Fact Based on the oral and documentary evidence presented at the final hearing and on the entire record of this proceeding, the following findings of fact are made: Respondent, Eduardo Enrique Mendez ("Mendez"), at all times material to this matter, was a licensed insurance agent subject to the regulatory jurisdiction of the Petitioner. Petitioner issued Mendez license number A176292. Mendez is licensed as a 2-18 life and health agent and a 2-20 general lines agent for the sale of property and casualty. Mendez first started in the insurance business in 1969 while in Panamá. He came to the United States in 1988. In South Florida, he has been known as "Mr. Panama" in the insurance industry for approximately 20 years. Respondent, Insurance Resources of the Americas, Inc. ("Insurance Resources"), is and was, at all times material in this matter, a corporation registered as a Florida insurance agent subject to the regulatory jurisdiction of Petitioner, having been issued license number R054007. Mendez is the corporation's owner and president. Insurance Resources typically handles all kinds of property and casualty insurance, but for approximately the last six years has specialized in the used car dealer business by providing bonds for the car dealers to open their operation. Bass Underwriters ("Bass") is a managing general agent which works with insurance agents who purchase insurance for their customers. Bass has no direct relationship with the customers only with the retail agent who is responsible for collecting the premium. On January 22, 2003, Insurance Resources, as producer, and Bass signed a producer agreement which allowed Insurance Resources to sell insurance through Bass or certain carriers that Bass obtains as a wholesaler. Insurance Resources received commissions as compensation under the agreement. The agreement contained a provision which guaranteed the collection of additional premiums that might arise as a result of an audit of the insurance customers. The provision provided in relevant part: Producer shall be liable to Bass Underwriters, Inc. for the full amount of premium, fees and applicable sum taxes, less commission, including additional and/or adjustable premiums developed under audits or applicable rating plan on every insurance contract placed by Producer through Bass Underwriters, Inc. Producer shall remit Twenty Five Percent (25%) of the premium upon binding. The full amount of premium, fees and applicable state taxes, less commission is due to Bass Underwriters, Inc. not later than the 15th day of the first (1st) month after the effective date of such contract, audit, rating plan, or other adjustment. During the term of the producer agreement, three policies were issued that Bass determined additional premiums were owed by Insurance Resources. On June 29, 2005, Bass notified Insurance Resources by invoice that an additional premium was owed for the insured, L. Boulevard Café, in the amount of $6,955.00. L. Boulevard Cafe, a restaurant, obtained a Century Surety policy through Insurance Resources effective November 15, 2004. In making the application, the restaurant declared a certain amount of projected sales. The premium was based upon the total sales recorded by the customer. Century Surety did a self audit and determined that the amount of sales was significantly more than the coverage. Subsequently, the carrier went back and assessed additional premiums to make up the difference between the amount of coverage represented and the self reported amount, which totaled $6,955.00. Around August 2005, after receiving the Bass invoice with the additional premiums, Insurance Resources notified L. Boulevard Café about the invoice and explained that the additional insurance premium of $6,955.00 was owed because of the difference in the amount calculated from the audit. Mendez notified Rafael Garcia, prior owner of L. Boulevard Café, about the additional insurance premium but L. Boulevard Cafe was having financial problems. L. Boulevard Café never made the additional premium payment. On July 1, 2005, Bass notified Insurance Resources by invoice that an additional premium was owed for the insured, Winner's Circle, in the amount of $418.00. Winner's Circle obtained a XL Specialty Insurance Company policy through Insurance Resources effective May 23, 2005. An inspection was performed after the policy quote was bound and issued. The subsequent inspection concluded that the construction code of the building was different from the construction code represented on the application. The difference triggered a premium increase of $418.00. When Insurance Resources found out about the additional premium for Winner's Circle, Mendez sent an invoice explaining the increase and requesting payment. Winner's Circle refused to pay the amount because the policy was issued under a lower premium. Winner's Circle decided not to keep the policy when Respondent requested that they make payment of the additional premium amount and the balance of the premium on the policy. Payment was never made. The policy was cancelled. The account was credited and the final total owed was $160.40, which Bass became responsible for with the carrier. On July 11, 2005, Bass notified Insurance Resources by invoice that an additional premium was owed for the insured, Venecar, Inc., in the amount of $1,298.00. Venecar, a small used car dealership, obtained a Century Surety policy through Insurance Resources effective July 18, 2004. The insurance inspectors did an inspection after the policy was issued and determined that one more employee and driver than had been represented in the application existed and that employee generated a change in the rating for the premium, which Bass ultimately decided was an additional premium of $1,298.00. After Insurance Resources learned about the results of the inspection, Mendez called Bass and told Ms. Rodriguez, the accountant, that the premium increase of $1,298.00 was too high and could not be the proper rate for one driver because one driver should be around $400.00. Bass ignored Mendez's proposition. Subsequently, Mendez told Venecar about the outstanding premium amount owed and they refused to pay. Insurance Resources followed up and contacted Venecar several more times requesting the additional premium payment to no avail. Soon thereafter, Venecar closed. Mendez reported his efforts to Bass while he tried to collect the three changed premium amounts. Insurance Resources never collected the additional premium from L. Boulevard Café, Winner's Circle, or Venecar even though Mendez repeatedly sought to get the outstanding premiums from all three insured customers. Despite Respondents best efforts, they never received any of the additional premiums that accrued. Bass still expected Insurance Resources to pay the additional premiums pursuant to the producer agreement. On May 1, 2006, Bass sent Insurance Resources a statement of account. The invoice statement informed Insurance Resources that the premium due for the three different accounts totaled $8,021.39. The statement outlined the amount owed from each insured. After Bass made several demands for the three accounts, Bass submitted the account to collections and the matter ultimately ended in litigation. On November 5, 2007, a final judgment was entered against Insurance Resources in favor of Bass for the principal of $8,021.39, costs of $275.00, and prejudgment interest of $1,298.14, for a total of $9,594.53. The judgment remains unsatisfied. On February 15, 2008, Insurance Resources paid $1,919.00 on the judgment. On February 29, 2008, Insurance Resources paid $640.00 on the judgment. There is a balance owed of $7,035.53. Insurance Resources also had a relationship with AAPCO, a premium finance company that financed the balance of what an insured could not pay. Respondent Insurance Resources was an authorized entity to accept premium finance contracts utilizing AAPCO premium finance. Insurance Resources had the authority to write check drafts on AAPCO's bank account for the entire premium amount owed on a customer's insurance policy and remit it to the insurer. Respondent would then submit the policy application together with the premium down payment received from the consumer to AAPCO, which would finance the rest of the policy premium. In 2009, Insurance Resources was having problems financially. Mendez approached Mrs. Blanco, AAPCO's office manager, and told her Insurance Resources sales had dropped fifty percent. Mendez, on behalf of Insurance Resources requested to make a payment arrangement.1 Blanco refused to make any type of arrangements. She insisted that Insurance Resources pay everything up front. Mendez approached her several more times but she would not negotiate. At one point, Mendez even requested that AAPCO place the $4,000.00 in producers fees owed to Insurance Resources against the monies owed and she refused to pay Respondent the $4,000.00 In 2009, Mendez submitted three checks to AAPCO's as down payments for insureds' accounts. Check number 1347 was for $10,228.47. The check was from account number 2000034377804 Mr. Panama Inc.'s account. Check number 1342 was from the same account in the amount of $2,828.15. However, check number 159 was for $3,368.44 from Insurance Resources account number 2000040742805. Checks 1347, 1342, and 159 totaled approximately $16,425.00. The funds were intended to be premium down payments on insurance policies purchased by Florida insurance consumers. Insurance policies were issued for each of the checks for down payments for insured's accounts Insurance Resources submitted. AAPCO deposited the three checks and they were submitted to the bank for negotiation. Each check was returned for insufficient funds. AAPCO attempted to collect the money for the three checks that were returned for non-sufficient funds. AAPCO demanded payment of the funds and even called Mendez in an effort to collect the funds. Mendez admitted at hearing that the three checks bounced because he had used the funds for his business operating account since the business was doing bad financially. Insurance Resources had not yet repaid AAPCO their monies owed for the three checks. AAPCO has suffered a financial loss due to nonpayment. After nonpayment, AAPCO turned the matter over to AAPCO's legal department. After an investigation, Petitioner charged Respondents with numerous violations by separate Administrative Complaints dated April 21, 2010. The Charges: In Count I of the Administrative complaint filed against Mendez, Petitioner charges Mendez with violations of sections 626.561(1), 626.611(7), (9), (10), and 626.621(4), Florida Statutes, for failing to remit all premiums due to Bass. In Count II, Petitioner charges Mendez with violations of sections 626.561(1),626.611(7), 626.611(9) and (10), and 626.621(4) for submitting the three checks to AAPCO in payment of the policy down payment premiums that were returned for insufficient funds and not repaid after demand. In Count I of the Administrative complaint filed against Insurance Resources, Petitioner charges Insurance Resources with violation of sections 626.561(1),626.6251(5)(a),(d),(f),(j), and (k) for failing to remit all premiums due to Bass.2 In Count II Petitioner charges Insurance Resources with violations of sections 626.561(1), and 626.6251(5)(a),(d), (f),(j), and (k) for remitting three checks to AAPCO in payment of the policy down payment premiums that were returned for insufficient funds and not repaid after demand.
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 that: (a) finds Respondents not guilty as charged in Count I, of the Administrative Complaints; (b) finds Respondents guilty in Count II; (c) suspends Respondent Mendez's license for 12 months with reinstatement conditioned upon repayment to AAPCO; and (d) suspends Respondent Insurance Resources' license for three months with reinstatement conditioned upon repayment to AAPCO. DONE AND ENTERED this 28th day of February, 2011, in Tallahassee, Leon County, Florida. S JUNE C. MCKINNEY 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 28th day of February, 2011.
The Issue The issue in these consolidated cases is whether the Agency for Health Care Administration ("AHCA") properly disallowed Petitioners' expense for liability insurance and accrued contingent liability costs contained in AHCA's audit of Petitioners' Medicaid cost reports.
Findings Of Fact Based upon the oral and documentary evidence presented at the final hearing, and on the entire record of this proceeding, the following findings of fact are made: Petitioners operate licensed nursing homes that participate in the Florida Medicaid program as institutional providers. The 14 Palm Gardens facilities are limited liability companies operating as subsidiaries of New Rochelle Administrators, LLC, which also provides the facilities with management services under a management contract. AHCA is the single state agency responsible for administering the Florida Medicaid program. One of AHCA's duties is to audit Medicaid cost reports submitted by providers participating in the Medicaid program. During the audit period, Petitioners provided services to Medicaid beneficiaries pursuant to Institutional Medicaid Provider Agreements that they entered into with AHCA. The Provider Agreements contained the following relevant provision: (3) Compliance. The provider agrees to comply with local, state, and federal laws, as well as rules, regulations, and statements of policy applicable to the Medicaid program, including Medicaid Provider Handbooks issued by AHCA. Section 409.908, Florida Statutes (2002)1, provided in relevant part: Reimbursement of Medicaid providers.-- Subject to specific appropriations, the agency shall reimburse Medicaid providers, in accordance with state and federal law, according to methodologies set forth in the rules of the agency and in policy manuals and handbooks incorporated by reference therein. These methodologies may include fee schedules, reimbursement methods based on cost reporting, negotiated fees, competitive bidding pursuant to s. 287.057, and other mechanisms the agency considers efficient and effective for purchasing services or goods on behalf of recipients. . . . * * * (2)(a)1. Reimbursement to nursing homes licensed under part II of chapter 400 . . . must be made prospectively. . . . * * * (b) Subject to any limitations or directions provided for in the General Appropriations Act, the agency shall establish and implement a Florida Title XIX Long-Term Care Reimbursement Plan (Medicaid) for nursing home care in order to provide care and services in conformance with the applicable state and federal laws, rules, regulations, and quality and safety standards and to ensure that individuals eligible for medical assistance have reasonable geographic access to such care. . . . AHCA has adopted the Title XIX Long-Term Care Reimbursement Plan (the "Plan") by reference in Florida Administrative Code Rule 59G-6.010. The Plan incorporates the Centers for Medicare and Medicaid Services ("CMS") Publication 15-1, also called the Provider Reimbursement Manual (the "Manual" or "PRM"), which provides "guidelines and policies to implement Medicare regulations which set forth principles for determining the reasonable cost of provider services furnished under the Health Insurance for the Aged Act of l965, as amended." CMS Pub. 15-1, Foreword, p. I. The audit period in these cases spans two versions of the Plan: version XXIII, effective July 1, 2002, and version XXIV, effective January 1, 2003. It is unnecessary to distinguish between the two versions of the Plan because their language is identical as to the provisions relevant to these cases. Section I of the Plan, "Cost Finding and Cost Reporting," provides as follows, in relevant part: The cost report shall be prepared by a Certified Public Accountant in accordance with chapter 409.908, Florida Statutes, on the form prescribed in section I.A. [AHCA form 5100-000, Rev. 7-1-90], and on the accrual basis of accounting in accordance with generally accepted accounting principles as established by the American Institute of Certified Public Accountants (AICPA) as incorporated by reference in Rule 61H1-20.007, F.A.C., the methods of reimbursement in accordance with Medicare (Title XVIII) Principles of Reimbursement, the Provider Reimbursement Manual (CMS-PUB. 15-1)(1993) incorporated herein by reference except as modified by the Florida Title XIX Long Term Care Reimbursement Plan and State of Florida Administrative Rules. . . . Section III of the Plan, "Allowable Costs," provides as follows, in relevant part: Implicit in any definition of allowable costs is that those costs shall not exceed what a prudent and cost-conscious buyer pays for a given service or item. If costs are determined by AHCA, utilizing the Title XVIII Principles of Reimbursement, CMS-PUB. 15-1 (1993) and this plan, to exceed the level that a prudent buyer would incur, then the excess costs shall not be reimbursable under the plan. The Plan is a cost based prospective reimbursement plan. The Plan uses historical data from cost reports to establish provider reimbursement rates. The "prospective" feature is an upward adjustment to historical costs to establish reimbursement rates for subsequent rate semesters.2 The Plan establishes limits on reimbursement of costs, including reimbursement ceilings and targets. AHCA establishes reimbursement ceilings for nursing homes based on the size and location of the facilities. The ceilings are determined prospectively, on a semiannual basis. "Targets" limit the inflationary increase in reimbursement rates from one semester to the next and limit a provider's allowable costs for reimbursement purposes. If a provider's costs exceed the target, then those costs are not factored into the reimbursement rate and must be absorbed by the provider. A nursing home is required to file cost reports. The costs identified in the cost reports are converted into per diem rates in four components: the operating component; the direct care component; the indirect care component; and the property component. GL/PL insurance costs fall under the operating component. Once the per diem rate is established for each component, the nursing home's reimbursement rate is set at the lowest of four limitations: the facility's costs; the facility's target; the statewide cost ceiling based on the size of the facility and its region; or the statewide target, also based on the size and location of the facility. The facility's target is based on the initial cost report submitted by that facility. The initial per diem established pursuant to the initial cost report becomes the "base rate." Once the base rate is established, AHCA sets the target by inflating the base rate forward to subsequent six- month rate semesters according to a pre-established inflation factor. Reimbursement for cost increases experienced in subsequent rate semesters is limited by the target drawn from the base rate. Thus, the facility's reimbursement for costs in future rate semesters is affected by the target limits established in the initial period cost report. Expenses that are disallowed during the establishment of the base rate cannot be reclaimed in later reimbursement periods. Petitioners entered the Medicaid program on June 29, 2002. They filed cost reports for the nine- month period from their entry into the program through February 28, 2003. These reports included all costs claimed by Petitioners under the accrual basis of accounting in rendering services to eligible Medicaid beneficiaries. In preparing their cost reports, Petitioners used the standard Medicaid Cost Report "Chart of Accounts and Description," which contains the account numbers to be used for each ledger entry, and explains the meaning of each account number. Under the general category of "Administration" are set forth several subcategories of account numbers, including "Insurance Expense." Insurance Expense is broken into five account numbers, including number 730810, "General and Professional Liability -- Third Party," which is described as "[c]osts of insurance purchased from a commercial carrier or a non-profit service corporation."3 Petitioners' cost report stated the following expenses under account number 730810: Facility Amount Palm Garden of Clearwater $145,042.00 Palm Garden of Gainesville $145,042.00 Palm Garden of Jacksonville $145,042.00 Palm Garden of Largo $171,188.00 Palm Garden of North Miami $145,042.00 Palm Garden of Ocala $217,712.00 Palm Garden of Orlando $145,042.00 Palm Garden of Pinellas $145,042.00 Palm Garden of Port St. Lucie $145,042.00 Palm Garden of Sun City $145,042.00 Palm Garden of Tampa $145,042.00 Palm Garden of Vero Beach $217,712.00 Palm Garden of West Palm Beach $231,151.00 Palm Garden of Winter Haven $145,042.00 AHCA requires that the cost reports of first-year providers undergo an audit. AHCA's contract auditing firm, Smiley & Smiley, conducted an examination4 of the cost reports of the 14 Palm Gardens nursing homes to determine whether the included costs were allowable. The American Institute of Certified Public Accountants ("AICPA") has promulgated a series of "attestation standards" to provide guidance and establish a framework for the attestation services provided by the accounting profession in various contexts. Attestation Standards 101 and 601 set out the standard an accountant relies upon in examining for governmental compliance. Smiley & Smiley examined the Palm Gardens cost reports pursuant to these standards. During the course of the audit, Smiley & Smiley made numerous requests for documentation and other information pursuant to the Medicaid provider agreement and the Plan. Petitioners provided the auditors with their general ledger, invoices, audited financial statements, bank statements, and other documentation in support of their cost reports. The examinations were finalized during the period between September 28, 2006, and October 4, 2006. The audit report issued by AHCA contained more than 2,000 individual adjustments to Petitioners' costs, which the parties to these consolidated proceedings have negotiated and narrowed to two adjustments per Palm Gardens facility.5 As noted in the Preliminary Statement above, the first adjustment at issue is AHCA's disallowance of Palm Gardens' accrual of expenses for contingent liability under the category of GL/PL insurance, where Palm Gardens could not document that it had purchased GL/PL insurance. The second adjustment at issue is ACHA's disallowance of a portion of the premium paid by Palm Gardens for the Mature Care Policies. The total amount of the adjustment at issue for each facility is set forth in the Preliminary Statement above. Of that total for each facility, $18,849.00 constituted the disallowance for the Mature Care Policies. The remainder constituted the disallowance for the accrual of GL/PL related contingent liabilities. Janette Smiley, senior partner at Smiley & Smiley and expert in Medicaid auditing, testified that Petitioners provided no documentation other than the Mature Care Policies to support the GL/PL entry in the cost reports. Ms. Smiley testified that, during much of the examination process, she understood Petitioners to be self-insured. Ms. Smiley's understanding was based in part on statements contained in Petitioners' audited financial statements. In the audited financial statement covering the period from June 28, 2002, through December 31, 2002, Note six explains Petitioners' operating leases and states as follows, in relevant part: The lease agreement requires that the Company maintain general and professional liability in specified minimum amounts. As an alternative to maintaining these levels of insurance, the lease agreement allows the Company to fund a self-insurance reserve at a per bed minimum amount. The Company chose to self-insure, and has recorded litigation reserves of approximately $1,735,000 that are included in other accrued expenses (see Note 9). As of December 31, 2002, these reserves have not been funded by the Company. . . . The referenced Note nine, titled "Commitments and Contingencies," provides as follows in relevant part: Due to the current legal environment, providers of long-term care services are experiencing significant increases in liability insurance premiums or cancellations of liability insurance coverage. Most, if not all, insurance carriers in Florida have ceased offering liability coverage altogether. The Company's Florida facilities have minimal levels of insurance coverage and are essentially self-insured. The Company has established reserves (see Note 6) that estimate its exposure to uninsured claims. Management is not currently aware of any claims that could exceed these reserves. However, the ultimate outcome of these uninsured claims cannot be determined with certainty, and could therefore have a material adverse impact on the financial position of the Company. The relevant notes in Petitioner's audited financial statement for the year ending December 31, 2003, are identical to those quoted above, except that the recorded litigation reserves were increased to $4 million. The notes provide that, as of December 31, 2003, these reserves had not been funded by Petitioners. Ms. Smiley observed that the quoted notes, while referencing "self-insurance" and the recording of litigation reserves, stated that the litigation reserves had not been funded. By e-mail dated April 21, 2005, Ms. Smiley corresponded with Stanley Swindling, the shareholder in the accounting firm Moore Stephens Lovelace, P.A., who had primary responsibility for preparing Petitioners' cost reports. Ms. Smiley noted that Petitioners' audited financial statements stated that the company "chose to self-insure" and "recorded litigation reserves," then wrote (verbatim): By definition from PRM CMS Pub 15-1 Sections 2162.5 and 2162.7 the Company does in fact have self-insurance as there is no shifting of risk. You will have to support your positioning a letter addressing the regs for self-insurance. As clearly the financial statement auditors believe this is self- insurance and have disclosed such to the financial statement users. If you cannot support the funding as required by the regs, the provider will have to support expense as "pay as you go" in accordance with [2162.6] for PL/GL. * * * Please review 2161 and 2162 and provide support based on the required compliance. If support is not complete within the regulations, amounts for IBNR [incurred but not reported] will be disallowed and we will need to have the claims paid reports from the TPA [third party administrator] (assuming there is a TPA handling the claims processing), in order to allow any expense. Section 2160 of the Manual establishes the basic insurance requirement: A. General.-- A provider participating in the Medicare program is expected to follow sound and prudent management practices, including the maintenance of an adequate insurance program to protect itself against likely losses, particularly losses so great that the provider's financial stability would be threatened. Where a provider chooses not to maintain adequate insurance protection against such losses, through the purchase of insurance, the maintenance of a self-insurance program described in §2161B, or other alternative programs described in §2162, it cannot expect the Medicare program to indemnify it for its failure to do so. . . . . . . If a provider is unable to obtain malpractice coverage, it must select one of the self-insurance alternatives in §2162 to protect itself against such risks. If one of these alternatives is not selected and the provider incurs losses, the cost of such losses and related expenses are not allowable. Section 2161.A of the Manual sets forth the general rule as to the reimbursement of insurance costs. It provides that the reasonable costs of insurance purchased from a commercial carrier or nonprofit service corporation are allowable to the extent they are "consistent with sound management practice." Reimbursement for insurance premiums is limited to the "amount of aggregate coverage offered in the insurance policy." Section 2162 of the Manual provides as follows, in relevant part: PROVIDER COSTS FOR MALPRACTICE AND COMPREHENSIVE GENERAL LIABILITY PROTECTION, UNEMPLOYMENT COMPENSATION, WORKERS' COMPENSATION, AND EMPLOYEE HEALTH CARE INSURANCE General.-- Where provider costs incurred for protection against malpractice and comprehensive general liability . . . do not meet the requirements of §2161.A, costs incurred for that protection under other arrangements will be allowable under the conditions stated below. . . . * * * The following illustrates alternatives to full insurance coverage from commercial sources which providers, acting individually or as part of a group or a pool, can adopt to obtain malpractice, and comprehensive general liability, unemployment compensation, workers' compensation, and employee health care insurance protection: Insurance purchased from a commercial insurance company which provides coverage after a deductible or coinsurance provision has been met; Insurance purchased from a limited purpose insurance company (captive); Total self-insurance; or A combination of purchased insurance and self-insurance. . . . part: Section 2162.3 of the Manual provides: Self-Insurance.-- You may believe that it is more prudent to maintain a total self- insurance program (i.e., the assumption by you of the risk of loss) independently or as part of a group or pool rather than to obtain protection through purchased insurance coverage. If such a program meets the conditions specified in §2162.7, payments into such funds are allowable costs. Section 2162.7 of the Manual provides, in relevant Conditions Applicable to Self-Insurance.-- Definition of Self-Insurance.-- Self- insurance is a means whereby a provider(s), whether proprietary or nonproprietary, undertakes the risk to protect itself against anticipated liabilities by providing funds in an amount equivalent to liquidate those liabilities. . . . * * * Self-Insurance Fund.-- The provider or pool establishes a fund with a recognized independent fiduciary such as a bank, a trust company, or a private benefit administrator. In the case of a State or local governmental provider or pool, the State in which the provider or pool is located may act as a fiduciary. The provider or pool and fiduciary must enter into a written agreement which includes all of the following elements: General Legal Responsibility.-- The fiduciary agreement must include the appropriate legal responsibilities and obligations required by State laws. Control of Fund.-- The fiduciary must have legal title to the fund and be responsible for proper administration and control. The fiduciary cannot be related to the provider either through ownership or control as defined in Chapter 10, except where a State acts as a fiduciary for a State or local governmental provider or pool. Thus, the home office of a chain organization or a religious order of which the provider is an affiliate cannot be the fiduciary. In addition, investments which may be made by the fiduciary from the fund are limited to those approved under State law governing the use of such fund; notwithstanding this, loans by the fiduciary from the fund to the provider or persons related to the provider are not permitted. Where the State acts as fiduciary for itself or local governments, the fund cannot make loans to the State or local governments. . . . The quoted Manual provisions clarify that Ms. Smiley's message to Mr. Swindling was that Petitioners had yet to submit documentation to bring their "self-insurance" expenses within the reimbursable ambit of Sections 2161 and 2162 of the Manual. There was no indication that Petitioners had established a fund in an amount sufficient to liquidate its anticipated liabilities, or that any such funds had been placed under the control of a fiduciary. Petitioners had simply booked the reserved expenses without setting aside any cash to cover the expenses. AHCA provided extensive testimony regarding the correspondence that continued among Ms. Smiley, Mr. Swindling, and AHCA employees regarding this "self-insurance" issue. It is not necessary to set forth detailed findings as to these matters, because Petitioners ultimately conceded to Ms. Smiley that, aside from the Mutual Care policies, they did not purchase commercial insurance as described in Section 2161.A, nor did they avail themselves of the alternatives to commercial insurance described in Section 2162.A. Petitioners did not purchase commercial insurance with a deductible, did not self- insure, did not purchase insurance from a limited purpose or "captive" insurance company, or employ a combination of purchased insurance and self-insurance. Ms. Smiley eventually concluded that Petitioners had no coverage for general and professional liability losses in excess of the $25,000 value of the Mutual Care Policies. Under the cited provisions of the Manual, Petitioners' unfunded self- insurance expense was not considered allowable under the principles of reimbursement. Petitioners were uninsured, which led Ms. Smiley to further conclude that Section 2162.13 of the Manual would apply: Absence of Coverage.-- Where a provider, other than a governmental (Federal, State, or local) provider, has no insurance protection against malpractice or comprehensive general liability in conjunction with malpractice, either in the form of a limited purpose or commercial insurance policy or a self-insurance fund as described in §2162.7, any losses and related expenses incurred are not allowable. In response to this disallowance pursuant to the strict terms of the Manual, Petitioners contend that AHCA should not have limited its examination of the claimed costs to the availability of documentation that would support those costs as allowable under the Manual. Under the unique circumstances presented by their situation, Petitioners assert that AHCA should have examined the state of the nursing home industry in Florida, particularly the market for GL/PL liability insurance during the audit period, and further examined whether Petitioners had the ability to meet the insurance requirements set forth in the Manual. Petitioners assert that, in light of such an examination, AHCA should have concluded that generally accepted accounting principles ("GAAP") may properly be invoked to render the accrued contingent liabilities an allowable expense. Keith Parnell is an expert in insurance for the long- term care industry. He is a licensed insurance broker working for Hamilton Insurance Agency, which provides insurance and risk management services to about 40 percent of the Florida nursing home market. Mr. Parnell testified that during the audit period, it was impossible for nursing homes to obtain insurance in Florida. In his opinion, Petitioners could not have purchased commercial insurance during the audit period. To support this testimony, Petitioners offered a study conducted by the Florida Department of Insurance ("DOI") in 2000 that attempted to determine the status of the Florida long-term care liability insurance market for nursing homes, assisted living facilities, and continuing care retirement communities. Of the 79 companies that responded to DOI's data call, 23 reported that they had provided GL/PL coverage during the previous three years but were no longer writing policies, and only 17 reported that they were currently writing GL/PL policies. Six of the 17 reported writing no policies in 2000, and five of the 17 reported writing only one policy. The responding insurers reported writing a total of 43 policies for the year 2000, though there were approximately 677 skilled nursing facilities in Florida. On March 1, 2004, the Florida Legislature's Joint Select Committee on Nursing Homes issued a report on its study of "issues regarding the continuing liability insurance and lawsuit crisis facing Florida's long-term care facilities and to assess the impact of the reforms contained in CS/CS/CS/SB 1202 (2001)."6 The study employed data compiled from 1999 through 2003. Among the Joint Select Committee's findings was the following: In order to find out about current availability of long-term care liability insurance in Florida, the Committee solicited information from [the Office of Insurance Regulation, or] OIR within the Department of Financial Services, which is responsible for regulating insurance in Florida. At the Committee's request, OIR re-evaluated the liability insurance market and reported that there has been no appreciable change in the availability of private liability insurance over the past year. Twenty-one admitted insurance entities that once offered, or now offer, professional liability coverage for nursing homes were surveyed by OIR. Six of those entities currently offer coverage. Nine surplus lines carriers have provided 54 professional liability policies in the past year. Representatives of insurance carriers that stopped providing coverage in Florida told OIR that they are waiting until there are more reliable indicators of risk nationwide to re-enter the market. Among the Joint Select Committee's conclusions was the following: In the testimony the Committee received, there was general agreement that the quality of care in Florida nursing homes is improving, in large part due to the minimum staffing standards the Legislature adopted in SB 1202 during the 2001 Session. There was not, however, general agreement about whether or not lawsuits are abating due to the tort system changes contained in SB 1202. There was general agreement that the long-term care liability insurance market has not yet improved. After hearing the testimony, there is general agreement among the members of the Joint Select Committee that: * * * General and professional liability insurance, with actual transfer-of-risk, is virtually unavailable in Florida. "Bare- bones" policies designed to provide minimal compliance with the statutory insurance requirement are available; however, the cost often exceeds the face value of the coverage offered in the policy. This situation is a crisis which threatens the continued existence of long-term care facilities in Florida. To further support Mr. Parnell's testimony, Petitioners offered actuarial analyses of general and professional liability in long-term care performed by AON Risk Consultants, Inc. (AON) on behalf of the American Health Care Association. The AON studies analyzed nationwide trends in GL/PL for long-term care, and also examined state-specific issues for eight states identified as leading the trends in claim activity, including Florida. They provided an historical perspective of GL/PL claims in Florida during the audit period. The 2002 AON study for Florida was based on participation by entities representing 52 percent of all Florida nursing home beds. The study provided a "Loss Cost per Occupied Bed" showing GL/PL liability claims losses on a per bed basis. The 2002 study placed the loss cost for nursing homes in Florida at $10,800 per bed for the year 2001. The 2003 AON study, based on participation by entities representing 54 percent of Florida nursing home beds, placed the loss cost for nursing homes in Florida at $11,810 per bed for the year 2002. The studies showed that the cost per bed of GL/PL losses is materially higher in Florida than the rest of the United States. The nationwide loss per bed was $2,360 for the year 2001 and $2,880 for the year 2002. The GL/PL loss costs for Texas were the second-highest in the country, yet were far lower than the per bed loss for Florida ($5,460 for the year 2001 and $6,310 for the year 2002). Finally, Petitioners point to the Mature Care Policies as evidence of the crisis in GL/PL insurance availability. The aforementioned SB 1202 instituted a requirement that nursing homes maintain liability insurance coverage as a condition of licensure. See Section 22, Chapter 2001-45, Laws of Florida, codified at Subsection 400.141(20), Florida Statutes. To satisfy this requirement, Petitioners entered the commercial insurance market and purchased insurance policies for each of the 14 Palm Gardens facilities from a carrier named Mature Care Insurance Company. The policies carried a $25,000 policy limit, with a policy premium of $34,000. These were the kind of "bare bones" policies referenced by the Joint Select Committee's 2004 report. The fact that the policies cost more than they could ever pay out led Mr. Swindling, Petitioners' health care accounting and Medicaid reimbursement expert, to opine that a prudent nursing home operator in Florida at that time would not have purchased insurance, but for the statutory requirement.7 The Mature Care Policies were "bare bones" policies designed to provide minimal compliance with the statutory liability insurance coverage requirement. The policies cost Petitioners more than $37,000 in premium payments, taxes, and fees, in exchange for policy limits of $25,000. In its examination, AHCA disallowed the difference between the cost of the policy and the policy limits, then prorated the allowable costs because the audit period was nine months long and the premium paid for the Mature Care Policies was for 12 months. AHCA based its disallowance on Section 2161.A of the Manual, particularly the language which states: "Insurance premiums reimbursement is limited to the amount of aggregate coverage offered in the insurance policy." Petitioners responded that they did not enter the market and voluntarily pay a premium in excess of the policy limits. They were statutorily required to purchase this minimal amount of insurance; they were required to purchase a 12-month policy; they paid the market price8; and they should not be penalized for complying with the statute. Petitioners contend they should be reimbursed the full amount of the premiums for the Mature Care Policies, as their cost of statutory compliance. Returning to the issue of the contingent liabilities, Petitioners contend that, in light of the state of the market for GL/PL liability insurance during the audit period, AHCA should have gone beyond the strictures of the Manual to conclude that GAAP principles render the accrued contingent liabilities an allowable expense. Under GAAP, a contingent loss is a loss that is probable and can be reasonably estimated. An estimated loss from a loss contingency may be accrued by a charge to income. Statement of Financial Accounting Standards No. 5 ("FAS No. 5"), Accounting for Contingencies, provides several examples of loss contingencies, including "pending or threatened litigation" and "actual or possible claims and assessments." Petitioners assert that the contingent losses reported in their cost reports were actual costs incurred by Petitioners. The AICPA Audit and Accounting Guide for Health Care Organizations, Section 8.05, provides: The ultimate costs of malpractice claims, which include costs associated with litigating or settling claims, are accrued when the incidents that give rise to the claims occur. Estimated losses from asserted and unasserted claims are accrued either individually or on a group basis, based on the best estimates of the ultimate costs of the claims and the relationship of past reported incidents to eventual claims payments. All relevant information, including industry experience, the entity's own historical experience, the entity's existing asserted claims, and reported incidents, is used in estimating the expected amount of claims. The accrual includes an estimate of the losses that will result from unreported incidents, which are probable of having occurred before the end of the reporting period. Section 8.10 of AICPA Guide provides: Accrued unpaid claims and expenses that are expected to be paid during the normal operating cycle (generally within one year of the date of the financial statements) are classified as current liabilities. All other accrued unpaid claims and expenses are classified as non-current liabilities. As noted above, Petitioners' audited financial statements for the fiscal years ending December 31, 2002, and December 31, 2003, showed that the accrual was incurred and recorded by Petitioners during the audit period. Mr. Swindling prepared Petitioners' cost reports, based on information provided by Petitioners, including trial balances reflecting their costs, statistics on patient days, cost data related to square footage, and revenue information. Mr. Swindling advised Petitioners to include the accrued losses. He believed that the loss contingency was probable and could be reasonably estimated. The losses were probable because it was "a given in the state of Florida at that time period that nursing homes are going to get sued." Mr. Swindling testified that the accrual reflected a per bed loss amount of $1,750, which he believed to be a reasonable estimate of the contingent liabilities faced by Petitioners during the audit period. This amount was much less than the per bed loss indicated by the AON studies for Florida. Mr. Swindling used the criteria set forth in Section 8.05 of the AICPA Guide to establish the estimate. He determined that the lesser amount was adequate based on his discussions with Petitioners' management, who indicated that they had a substantial risk management program. Management also disclosed to Mr. Swindling that Petitioners' leases required $1,750 per bed in liability coverage. See Finding of Fact 22, supra. Mr. Swindling believed that the estimated loss per bed was reasonable based on the AON studies and his knowledge and experience of the state of the industry in Florida during the audit period, as further reflected in the DOI and Joint Committee on Nursing Homes materials discussed above. Mr. Swindling's opinion was that the provisions of the Manual relating to GL/PL insurance costs do not apply under these circumstances. The costs at issue in this proceeding are not general and professional liability insurance costs subject to CMS Pub. 15-1; rather, they are loss contingencies related to general and professional liability, including defense costs, litigation costs, and settlement costs. Mr. Swindling placed the loss contingency under number 730810, "General and Professional Liability -- Third Party" because, in the finite chart of accounts provided by Medicaid, that was the most appropriate place to record the cost.9 Despite the initial confusion it caused the agency's auditors, the placement of the loss contingency under number 730810 was not intended to deceive the auditors. Mr. Swindling opined that, under these circumstances, Sections 2160 through 2162 are in conflict with other provisions in the Manual relating to the "prudent buyer" concept, and further conflict with the Plan to the extent that the cited regulations "relate to a retrospective system as opposed to prospective target rate-based system." Mr. Swindling agreed that the application of Sections 2160 through 2162 to the situation presented by Petitioners would result in the disallowance of the loss contingencies. Mr. Swindling observed, however, that Sections 2160 through 2162 are Medicare regulations. Mr. Swindling testified that Medicare reimbursements are made on a retrospective basis.10 Were this situation to occur in Medicare -- in which the provider did not obtain commercial insurance, self-insurance, or establish a captive insurer -- the provider would be deemed to be operating on a pay-as-you-go basis. Though its costs might be disallowed in the current period, the provider would receive reimbursements in subsequent periods when it could prove actual payment for its losses. Mr. Swindling found a conflict in attempting to apply these Medicare rules to the prospective payment system employed by Florida Medicaid, at least under the circumstances presented by Petitioners' case. Under the prospective system, once the contingent loss is disallowed for the base period, there is no way for Petitioners ever to recover that loss in a subsequent period, even when the contingency is liquidated. During his cross-examination, Mr. Swindling explained his position as follows: . . . Medicare allows for that payment in a subsequent period. Medicaid rules would not allow that payment in the subsequent period; therefore you have conflict in the rules. When you have conflict in the rules, you revert to generally accepted accounting principles. Generally accepted accounting principles are what we did. Q. Where did you find that if there's a conflict in the rules, which I disagree with, but if there is a conflict in the rules, that you follow GAAP? Where did you get that from? I mean, we've talked about it and it's clear on the record that if there is no provision that GAAP applies, but where did you get that if there's a conflict? Just point it out, that would be the easiest way to do it. A. The hierarchy, if you will, requires providers to file costs on the accrual basis of accounting in accordance with generally accepted accounting principles. If there's no rules, in absence of rules -- and I forget what the other terms were, we read it into the record before, against public policy, those kind of things -- or in my professional opinion, if there is a conflict within the rules where the provider can't follow two separate rules at the same time, they're in conflict, then [GAAP] rules what should be recorded and what should be reimbursed. * * * Q. [T]he company accrued a liability of $2 million for the cost reporting period of 2002-2003, is that correct? A. Yes. * * * Q. Do you have any documentation supporting claims paid, actually paid, in 2002-2003 beyond the mature care policy for which that $2 million reserve was set up? A. No. Q. So what did Medicaid pay for? A. Medicaid paid the cost of contingent liabilities that were incurred by the providers and were estimated at $1,750 per bed. Generally accepted accounting principles will adjust that going forward every cost reporting period. If that liability in total goes up or down, the differential under [GAAP] goes through the income statement, and expenses either go up or they go down. It's self-correcting, which is similar to what Medicare is doing, only they're doing it on a cash basis. Mr. Swindling explained the "hierarchy" by which allowable costs are determined. The highest governing law is the Federal statutory law, Title XIX of the Social Security Act, 42 U.S.C. Subsection. 1396-1396v. Below the statute come the federal regulations for implementing Title XIX, 42 C.F.R. parts 400-426. Then follow in order Florida statutory law, the relevant Florida Administrative Code provisions, the Plan, the Manual, and, at the bottom of the hierarchy, GAAP. Mr. Swindling testified that in reality, a cost report is not prepared from the top of the hierarchy down; rather, GAAP is the starting point for the preparation of any cost report. The statutes, rules, the Plan and the Manual are then consulted to exclude specific cost items otherwise allowable under GAAP. In the absence of an applicable rule, or in a situation in which there is a conflict between rules in the hierarchy such that the provider is unable to comply with both rules, the provider should fall back on GAAP principles as to recording of costs and reimbursement. John A. Owens, currently a consultant in health care finance specializing in Medicaid, worked for AHCA for several years up to 2002, in positions including administrator of the audit services section and bureau chief of the Office of Medicaid Program Analysis. Mr. Owens is a CPA and expert in health care accounting and Medicare/Medicaid reimbursement. Mr. Owens agreed with Mr. Swindling that AHCA's disallowance of the accrued costs for GL/PL liability was improper. Mr. Owens noted that Section 2160 of the Manual requires providers to purchase commercial insurance. If commercial insurance is unavailable, then the Manual gives the provider two choices: self-insure, or establish a captive program. Mr. Owens testified that insurers were fleeing the state during the period in question, and providers were operating without insurance coverage. Based on the state of the market, Petitioners' only options would have been to self-insure or establish a captive. As to self-insurance, Petitioners' problem was that they had taken over the leases on their facilities from a bankrupt predecessor, Integrated Health Services ("IHS"). Petitioners were not in privity with their predecessor. Petitioners had no access to the facilities' loss histories, without which they could not perform an actuarial study or engage a fiduciary to set up a self-insurance plan.11 Similarly, setting up a captive would require finding an administrator and understanding the risk exposure. Mr. Owens testified that a provider would not be allowed to set up a captive without determining actuarial soundness, which was not possible at the time Petitioners took over the 14 IHS facilities. Thus, Petitioners were simply unable to meet the standards established by the Manual. The options provided by the Manual did not contemplate the unique market situation existing in Florida during the audit period, and certainly did not contemplate that situation compounded by the problems faced by a new provider taking over 14 nursing homes from a bankrupt predecessor. Mr. Owens agreed with Mr. Swindling that, under these circumstances, where the requirements of the Manual could not be met, Petitioners were entitled to seek relief under GAAP, FAS No. 5 in particular. In situations where a loss is probable and can be measured, then an accounting entry may be performed to accrue and report that cost. Mr. Owens concluded that Petitioners' accrual was an allowable cost for Medicaid purposes, and explained his rationale as follows: My opinion is, in essence, that since they could not meet -- technically, they just could not meet those requirements laid out by [the Manual], they had to look somewhere to determine some rational basis for developing a cost to put into the cost report, because if they had chosen to do nothing and just moved forward, those rates would be set and there would be nothing in their base year which then establishes their target moving forward. So by at least looking at a rational methodology to accrue the cost, they were able to build something into their base year and have it worked into their target system as they move forward. Steve Diaczyk, an audit evaluation and review analyst for AHCA, testified for the agency as an expert in accounting, auditing, and Medicaid policy. Mr. Diaczyk was the AHCA auditor who reviewed the work of Smiley & Smiley for compliance with Medicaid rules and regulations, and to verify the accuracy of the independent CPA's determinations. Mr. Diaczyk agreed with Mr. Swindling's description of the "hierarchy" by which allowable costs are determined. Mr. Diaczyk affirmed that Petitioners employed GAAP rather than Medicaid regulations in preparing their cost reports. Mr. Diaczyk testified regarding the Notes to Petitioners' audited financial statements, set forth at Findings of Fact 22-24, supra, which left AHCA's auditors with the understanding that Petitioners were self-insuring. Mr. Diaczyk pointed out that Section 2162.7 of the Manual requires a self- insurer to contract with an independent fiduciary to maintain a self-insurance fund, and that the fund must contain monies sufficient to cover anticipated losses. The fiduciary takes title to the funds, the amount of which is determined actuarially. Mr. Diaczyk explained that, in reimbursing a provider for self-insurance, Medicaid wants to make sure that the provider has actually put money into the fund, and has not just set up a fund on its books and called it "self-insurance" for reimbursement purposes. AHCA's position is that it would be a windfall for a provider to obtain reimbursement for an accrued liability when it has not actually set the money aside and funded the risk. Medicaid wants the risk transferred off of the provider's books and on to the self-insurance fund. Mr. Diaczyk testified as to the differing objectives of Medicaid and GAAP. Medicaid is concerned with reimbursing costs, and is therefore especially sensitive regarding the overstatement of costs. Medicaid wants to reimburse a provider for only those costs that have actually been paid. GAAP, on the other hand, is about report presentation for a business entity and is concerned chiefly with avoiding the understatement of expenses and overstatement of revenue. Under GAAP, an entity may accrue a cost and not pay it for years. In the case of a contingent liability, the entity may book the cost and never actually pay it. Mr. Diaczyk described the self-insurance and liquidation provisions of 42 C.F.R. Section 413.100, "Special treatment of certain accrued costs." The federal rule essentially allows accrued costs to be claimed for reimbursement, but only if they are "liquidated timely." Subsection (c)(2)(viii) of the rule provides that accrued liability related to contributions to a self-insurance program must be liquidated within 75 days after the close of the cost reporting period. To obtain reimbursement, Petitioners would have had to liquidate their accrued liability for GL/PL insurance within 75 days of the end of the audit period. Mr. Diaczyk also noted that, even if the 75-day requirement were not applicable, the general requirement of Section 2305.2 of the Manual would apply. Section 2305.2 requires that all short-term liabilities must be liquidated within one year after the end of the cost reporting period in which the liability is incurred, with some exceptions not applicable in this case. Petitioners' accrued liability for general and professional liability insurance was not funded or liquidated for more than one year after the cost reporting period. It was a contingent liability that might never be paid. Therefore, Mr. Diaczyk stated, reimbursement was not in keeping with Medicaid's goal to reimburse providers for actual paid costs, not for potential costs that may never be paid. Petitioners responded that their accrued liabilities constituted non-current liabilities, items that under normal circumstances will not be liquidated within one year. Mr. Parnell testified that there is great variation in how long it takes for a general and professional liability claim against a nursing home to mature to the point of payment to the claimant. He testified that a "short" timeline would be from two to four years, and that some claims may take from eight to eleven years to mature. From these facts, Petitioners urge that 42 C.F.R. Section 413.100 and Section 2305.2 of the Manual are inapplicable to their situation. As to Section 2305.2 in particular, Petitioners point to Section 2305.A, the general liquidation of liabilities provision to which Section 2305.2 provides the exceptions discussed above. The last sentence of Section 2305.A provides that, where the liability is not liquidated within one year, or does not qualify under the exceptions set forth in Sections 2305.1 and 2305.2, then "the cost incurred for the related goods and services is not allowable in the cost reporting period when the liability is incurred, but is allowable in the cost reporting period when the liquidation of the liability occurs." (Emphasis added.) Petitioners argue that the underscored language supports the Medicare/Medicaid distinction urged by Mr. Swindling. In its usual Medicare retroactive reimbursement context, Section 2305.2 would operate merely to postpone reimbursement until the cost period in which the liability is liquidated. Applied to this Medicaid prospective reimbursement situation, Section 2305.2 would unfairly deny Petitioners any reimbursement at all by excluding the liability from the base rate. Mr. Diaczyk explained that, where the Medicaid rules address a category of costs, the allowable costs in a provider's cost report are limited to those defined as allowable by the applicable rules. He stated that if there is a policy in the Manual that addresses an item of cost, the provider must use the Manual provision; the provider cannot use GAAP to determine that cost item. In this case, Mr. Diaczyk agreed with Ms. Smiley as to the applicable rules and the disallowance of Petitioners' contingent liability costs. According to Mr. Diaczyk, GAAP may be used only if no provisions farther up the chain of the "hierarchy" are applicable. In this case, the Medicaid rules specifically addressed the categories of cost in question, meaning that GAAP did not apply. Under cross-examination, Mr. Diaczyk testified that the accrual made by Petitioners in their cost reports would be considered actual costs under GAAP, "[a]ssuming that they had an actuarial study done to come up with the $1.7 million that they accrued." Mr. Diaczyk acknowledged that AICPA Audit and Accounting Guide for Health Care Organizations, Section 8.05, does not limit the provider to an actuarial study in estimating losses from asserted and unasserted claims. See Finding of Fact 49, supra, for text of Section 8.05. Mr. Diaczyk pointed out that the problem in this case was that Petitioners gave AHCA no documentation to support their estimate of the accrual, despite the auditor's request that Petitioners provide documentation to support their costs. Mr. Diaczyk's testimony raised a parallel issue to Mr. Swindling's concern that Medicaid's prospective targeting system permanently excludes any item of cost not included in the base rate. Mr. Swindling solved the apparent contradiction in employing Medicare rules in the Medicaid scenario by applying GAAP principles. Responding to the criticism that GAAP could provide a windfall to Petitioners by reimbursing them for accrued costs that might never actually result in payment, Mr. Swindling responded that GAAP principles would adjust the cost for contingent liabilities going forward, "truing up" the financial statements in subsequent reporting periods. This truing up process would have the added advantage of obviating the agency's requirement for firm documentation of the initial accrual. Mr. Swindling's "truing up" scenario under GAAP would undoubtedly correct Petitioners' financial statements. However, Mr. Swindling did not explain how the truing up of the financial statements would translate into a correction of Petitioners' reimbursement rate.12 If costs excluded from the base rate cannot be added to future rate adjustments, then costs incorrectly included in the base rate would also presumably remain in the facility's rate going forward.13 Thus, Mr. Swindling's point regarding the self-correcting nature of the GAAP reporting procedures did not really respond to AHCA's concerns about Petitioners' receiving a windfall in their base rate by including the accrual for contingent liabilities. On April 19, 2005, Petitioners entered into a captive insurance program. Petitioners' captive is a claims-made GL/PL policy with limits of $1 million per occurrence and $3 million in the aggregate. Under the terms of the policy, "claims-made" refers to a claim made by Petitioners to the insurance company, not a claim made by a nursing home resident alleging damages. The effective date of the policy is from April 21, 2005, through April 21, 2006, with a retroactive feature that covers any claims for incidents back to June 29, 2002, a date that corresponds to Petitioners' first day of operation and participation in the Medicaid program. The Petitioners' paid $3,376,906 for this policy on April 22, 2005. Mr. Parnell testified that April 2005 was the earliest time that the 14 Palm Gardens facilities could have established this form of insurance program. In summary, the evidence presented at the hearing regarding the contingent liabilities established that Petitioners took over the 14 Palm Gardens facilities after the bankruptcy of the previous owner. Petitioners were faced with the virtual certainty of substantial GL/PL expenses in operating the facilities, and also faced with a Florida nursing home environment market in which commercial professional liability insurance was virtually unavailable. Lacking loss history information from their bankrupt predecessor, Petitioners were unable to self-insure or establish a captive program until 2005. Petitioners understood that if they did not include their GL/PL expenses in their initial cost report, those expenses would be excluded from the base rate and could never be recovered. Petitioners' leases for the facilities required them to fund a self-insurance reserve at a per bed minimum amount of $1,750. Based on the AON studies and the general state of the industry at the time, Petitioners' accountant concluded that, under GAAP principles, $1,750 per bed was a reasonable, conservative estimate of Petitioners' GL/PL loss contingency exposure for the audit period.14 Based on all the evidence, it is found that Petitioners' cost estimate was reasonable and should be accepted by the agency. Petitioners included their GL/PL loss contingency expenses in their initial Medicaid cost report, placing those expenses under a heading indicating the purchase of insurance from a third party. The notes to Petitioners' audited financial statements stated that the facilities were "essentially self- insured." These factors led AHCA to request documentation of Petitioners' self-insurance. Petitioners conceded that they were not self-insured and carried no liability insurance aside from the Mature Care policies. The parties had little dispute as to the facts summarized above. The parties also agreed as to the applicability of the "hierarchy" by which allowable costs are determined. Their disagreement rests solely on the manner in which the principles of the hierarchy should be applied to the unique situation presented by Petitioners in these cases.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that AHCA enter a final order that allows Petitioners' accrual of expenses for contingent liability under the category of general and professional liability ("GL/PL") insurance, and that disallows the Mature Care policy premium amounts in excess of the policy limits, prorated for a nine- month period. DONE AND ENTERED this 24th day of October, 2008, in Tallahassee, Leon County, Florida. S LAWRENCE P. STEVENSON Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 24th day of October, 2008.
Findings Of Fact At all times pertinent to this proceeding Respondent, HOWARD P. HAUSER, was eligible for licensure and licensed in this state by the Florida Department of Insurance as a Life and Health Insurance Agent; General Lines Insurance Agent - Property, Casualty, Surety, and Miscellaneous Lines; and Legal Expense Insurance Agent. At all times pertinent hereto, Respondent was the registered agent and an officer or director of Hauser and Associates Insurance Agency, Incorporated of 7770 Davie Road Extension, Hollywood, Florida. Beginning on or about January 1, 1986, and continuing through August 31, 1987, Respondent represented to one of his clients that he had obtained insurance coverage for that client's three restaurants. This representation of coverage was false. Respondent received from the client insurance premium payments of $56,550.00, more or less, for the insurance of the client's three restaurants. These funds were obtained by Respondent under false pretenses. Respondent provided the mortgagee of one of the restaurants owned by his client with a document purporting to be a certificate of insurance on that restaurant from Scotsdale Insurance Company insuring the restaurant for the period December 11, 1985, to December 11, 1986. Respondent further provided the mortgagee with a declaration sheet stating that Protective Insurance Company would insure the restaurant from January 1, 1987, to January 1, 1990. Respondent falsified these declaration sheets. Respondent's client suffered no loss, other than the loss of his premium dollars, because of Respondent's misrepresentations as to coverage. Respondent was charged with one count of Grand Theft of the Second Degree, a second degree felony, based on the dealings with his client. Respondent entered a plea of nolo contendere to the charge of Grand Theft of the Second Degree. The Circuit Court, in and for Broward County, Florida, placed Respondent on probation for a period of three years and withheld adjudication of guilt. As a condition of the Order of Probation, the court required that Respondent make restitution to his client in the amount of $56,550.00 and further required that $15,000.00 be paid toward restitution on October 24, 1988, the date Respondent entered his plea of nolo contendere and the date the court entered the Order of Probation. Respondent made a restitution payment of $15,000.00 on October 24, 1988. Respondent has been licensed by Petitioner since April 1972. Although Petitioner has received other complaints about Respondent, no formal action has been previously taken against him. Respondent has been a good citizen, except for this misconduct, and a good family man. Respondent regrets his misconduct. Respondent timely requested a formal hearing after the Administrative Complaint was served upon him.
Recommendation Based on the foregoing findings of fact and conclusions of law it is RECOMMENDED that the Department of Insurance enter a final order which revokes all licenses issued by the Department of Insurance to Respondent, Howard Paul Hauser. DONE and ENTERED this 21st of July, 1989, in Tallahassee, Leon County, Florida. CLAUDE B. ARRINGTON Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 904/488-9675 Filed with the Clerk of the Division of Administrative Hearings this 21st day of July, 1989. APPENDIX The proposed findings addressed as follows: of fact submitted on behalf of Petitioner are 1. Addressed in paragraph 1. 2. Addressed in paragraph 2. 3. Addressed in paragraph 6. 4. Addressed in paragraph 3. 5. Addressed in paragraph 4. 6. Addressed in paragraphs 3-4. The proposed findings of fact submitted on behalf of Respondent are addressed as follows: Addressed in paragraph 9. Addressed in paragraph 6. Addressed in paragraph 6. Rejected as being unnecessary to the conclusions reached. Addressed in paragraph 7. Addressed in paragraph 5. Addressed in part in paragraph 7. Rejected in part as being speculative. Rejected as being a conclusion of law and not a finding of fact. COPIES FURNISHED: Robert G. Gough, Esquire, (at the hearing) and Charles Christopher Anderson, Esquire, (on the proposed recommended order) Office of Legal Services 412 Larson Building Tallahassee, Florida 32399-0300 Gary D. Weiner, Esquire, Glendale Federal Building Suite 209 901 Southeast 17th Street Fort Lauderdale, Florida 33316 Honorable Tom Gallagher State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, FL 32399-0300 Don Dowdell, General Counsel Department of Insurance and Treasurer The Capitol, Plaza Level Tallahassee, FL 32399-0300
The Issue The issue presented is whether Respondent, a licensed insurance agent, is guilty of violating the statutes regulating the conduct of an insurance agent, and if so, what disciplinary action should be taken against him, if any.
Findings Of Fact At all times material hereto, Respondent has been eligible for licensure and licensed as a life and health insurance agent and as a dental health care contract salesman. For many years, Respondent had also been licensed to solicit general lines -- property, casualty, surety, and miscellaneous lines -- insurance in this state. Respondent was unaware that this license expired on March 24, 1987. At all times material hereto, Respondent was, however, eligible for licensure as a general lines agent. At all times material hereto, Respondent was one of the officers of Johnson's Model City Insurance Agency #1, Inc., a Florida corporation. That corporation was involuntarily dissolved on November 4, 1988. On December 30, 1986, Respondent telephoned Petitioner to discuss the propriety of an insurance agent charging a consulting fee. Following that telephonic conversation, an attorney for Petitioner directed correspondence to Respondent confirming that telephone conversation, advising that a consulting fee could legally be charged under certain circumstances. Those circumstances included the use of a separate consulting contract between the agent and the insured so that the insured would fully understand that he or she was entering into a separate contract and paying a separate consideration in advance of the performance of consulting services. Additionally, the services rendered must be other than those normally provided by an insurance agent. Further, if a separate consulting contract were effectuated, an agent could set up a separate consulting corporation to enter into such contracts. Hartford Insurance Company sells automobile insurance in the State of Florida by use of a toll-free telephone number. People who know the telephone number can call Hartford directly, obtain a quote for automobile insurance, and purchase a policy directly from Hartford. Hartford has no insurance agents in the State of Florida and pays no commissions to insurance agents in Florida for the obtaining of automobile insurance customers. A person can obtain a quote in writing from the Hartford in advance of purchasing a policy. Sometimes, the quotation card and the policy are issued and mailed simultaneously by Hartford to its new insureds. On September 20, 1987, Patricia Moss telephoned J. M. C. Insurance Consultants pursuant to an ad in the telephone yellow pages. She inquired about obtaining automobile insurance to replace her current policy which would expire on September 22, 1987. She spoke with an employee named Betty who advised her that she could obtain replacement insurance at a cost of $927. Since the cost quoted to her was substantially lower than the prices she had been quoted by the other agencies she had consulted, Moss went to the offices of J. M. C. on September 21, 1987. Betty presented Moss with a number of documents to sign. She signed a Power of Attorney appointing Johnson's Model City Insurance, Inc., doing business as JMC Insurance Consultants as her attorney-in-fact to obtain insurance for her, specifically ratifying and confirming actions taken on her behalf by J. L. Johnson- consultant. She also executed an Agreement with Consultant specifying the services that JMC Insurance Consultants would perform on her behalf. She signed a further statement which provided that: "I understand that JMC Insurance is acting as Consultants for my insurance placement and is entitled to any and all consultation fees." She also signed a document written in boldfaced type which states: IMPORTANT NOTICE THIS LETTER IS TO INFORM YOU THAT JMC INSURANCE CONSULTANTS ARE NOT AGENTS NOR DO WE REPRESENT HARTFORD INSURANCE COMPANY IN ANY WAY WHATSOEVER. WE REPRESENT "YOU" THE CLIENT AND WE ACT IN YOUR BEHALF WITH THE RIGHT THAT YOU GIVE US THROUGH A POWER OF ATTORNEY. WE ENDEAVOR TO PLACE YOUR AUTO INSURANCE FOR YOU ON YOUR BEHALF. WE ARE YOUR CONSULTANT. IF YOU HAVE A PROBLEM PLEASE CALL US WE ARE HERE TO HELP AND ACT IN YOUR BEHALF. CALL US FIRST. LET US HANDLE IT. CLIENT. I HAVE READ AND I UNDERSTAND. Moss gave JMC Consultants a check in the amount of $262.50 for which she was given a receipt which carried the specific notation that the money she had paid was for an insurance consultant's fee. She was also given a small card entitled Insurance Identification Card on which Betty filled in information showing that she would be insured by Hartford effective on the following day and specifically describing the coverage provided, the automobile insured, and the name and address of Moss. Within a week she received directly from the Hartford an insurance policy for the benefits which she sought. The policy itself reflected that the premium for the policy was $632 and that she would be receiving a bill from Hartford for that amount. She telephoned Betty, demanding a refund of her $262.50, which demand was refused. Betty explained to her that the amount was for the consultant's fee for obtaining the low- cost coverage for Moss. Hartford's direct marketing program does allow people to purchase insurance on someone else's behalf utilizing a Power of Attorney. Although Hartford's records do not reflect a Power of Attorney from Moss to J. M. C. Consultants or Respondent, Hartford's records regarding their policyholder Moss are not accurate. For example, they erroneously reflect that they quoted a rate to Moss on September 15, a week before they received any contact on her behalf. Although Moss testified that Betty told her the $262.50 was the down payment on her insurance premium, her testimony is not credible in view of the numerous documents that she signed stating that she fully understood that Respondent was not an agent for Hartford, that Respondent would be acting on her behalf pursuant to the Power of Attorney and Consultant's Agreement which she had signed, and the other documents reflecting that the $262.50 was a consultant's fee which she was paying to Respondent to act on her behalf. Her testimony that she did not understand is refuted by the documents she signed saying that she did. There is no allegation that Moss, a retired registered nurse, was unable to read. Rather, it is concluded that Moss voluntarily chose to pay the Hartford premium plus Respondent's consulting fee since the total price for the two charges was still substantially less than she could have obtained insurance for from other sources. Allstate Insurance Company is an insurer which sells insurance policies through their agents in the State of Florida. It also has a division which participates in Florida's Joint Underwriting Association (hereinafter "FJUA"), a program through which high-risk drivers who cannot obtain insurance in the regular voluntary insurance market can obtain automobile insurance. Prior to the time that his general lines agent license expired, Respondent participated in that program and was assigned to write insurance for Allstate for policyholders participating in the program. The Producers Contract entered into between Respondent and the FJUA, which assigned him to Allstate Insurance Company, provided that it would automatically terminate if an agent's general lines license expired. On July 22, 1988, James Tillie came to the office of J. M. C. to procure automobile insurance for the van that he used in his business. After meeting with Respondent, Tillie gave Respondent a check in the amount of $204 as a down payment on an automobile insurance policy. The check was endorsed and deposited into the business bank account of J. M. C. Respondent gave James Tillie an automobile insurance binder which reflected that his insurance policy was to be issued through Allstate Insurance Company. Under the terms of Respondent's contract with the FJUA, Respondent was required to submit James Tillie's application and premium to Allstate within 24 hours. The FJUA application acts as a binder. Once the application is completed and the premium is paid to the agent, the insured has automatic coverage for 30 days during which time the carrier, Allstate in this case, can act on the application. There is no evidence as to when Respondent forwarded James Tillie's application to Allstate; however, Allstate has no record of ever receiving the application. Respondent did tell James Tillie that within a couple of months he would receive from Allstate his policy and instructions for payment of the balance of his premium. After a month or two had elapsed, James Tillie became concerned since he had not yet received his insurance policy. He contacted Respondent who assured him that he did have insurance coverage. Shortly thereafter, James Tillie received in the mail from Respondent a card entitled Insurance Identification Card. On that card information had been filled in showing a policy number, the effective date, the insurance company as Allstate Insurance Company, a description of the insured vehicle, and the name and address of James Tillie. This is not an official Allstate identification card, and no one purported it to be such. An official Allstate Insurance card is issued by Allstate as part of the policy issued by it. On September 23, 1988, Sina Tillie, James' mother, visited J. M. C. for the purpose of purchasing automobile insurance for her new automobile. Sina Tillie is an elderly person who had never before owned an automobile or possessed a driver's license. She wished to purchase insurance on a brand- new automobile. Sina Tillie gave Respondent $1,828 in cash as full payment of the policy's annual premium. Respondent gave her an insurance binder which reflected that her insurance was placed with Allstate. Allstate has no record of receiving Sina Tillie's application and premium from Respondent. Subsequently, Sina Tillie became concerned when she had not yet received her insurance policy. She asked her daughter to contact Respondent. Respondent advised her daughter not to worry. He then mailed to Sina Tillie an Insurance Identification Card similar to the one which he had provided to James Tillie reflecting James' coverage. He also telephoned Sina Tillie to assure her that if anything happened, all she would need to do would be to show the card saying that she was covered and to contact him. Since neither he nor his mother had received a policy from Allstate, James Tillie called Allstate. He did not know that there were, in effect, two Allstates. The Allstate office which he contacted was a regular Allstate office which markets insurance to customers who call or come in, and not an office affiliated with the FJUA program. The person with whom he spoke told him that neither he nor his mother were insured by Allstate and that the policy numbers reflected on the Insurance Identification Cards given by Respondent to James and his mother were not Allstate policy numbers, but rather were binder numbers. James Tillie then contacted Respondent who consistently maintained that both James and Sina were insured. Respondent contacted Allstate regarding James' and Sina's policies. James Tillie came to the office of J. M. C. and met with Respondent. He advised Respondent that he and his mother had obtained insurance elsewhere and requested refunds of the premiums that he and his mother had paid. Respondent told Tillie that he could not refund the premiums since both James and his mother were insured in exchange for those premiums. Respondent eventually told James Tillie that he would refund the premiums if the Tillies would sign releases. James Tillie maintained that he would sign releases only after he had received the refund of the premiums. The meeting ended in stalemate. James Tillie contacted Petitioner, and Petitioner contacted Respondent. Respondent maintained that he would refund the premiums in exchange for a release. Petitioner forwarded a copy of Respondent's letter to James Tillie. Respondent eventually made arrangements with James and his mother to refund the premiums in monthly payments since he did not have the money to refund the premiums in full. By the time of the final hearing in this cause, Respondent had only refunded the total amount of $600 to the Tillies. At the time that Respondent's general lines agent license with Integrity Insurance Company was cancelled on March 24, 1987, he believed that he was being re-licensed by Fortune Insurance Company. However, he never received a license for or from Fortune and never checked to ascertain why.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a Final Order be entered finding Respondent guilty of statutory violations as set forth in this Recommended Order and suspending Respondent's licensure and eligibility for licensure for a period of 60 days from the date of the Final Order entered in this cause. DONE and ENTERED this 13th day of June, 1990, at Tallahassee, Florida. LINDA M. RIGOT, 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 13th day of June, 1990. APPENDIX TO RECOMMENDED ORDER Petitioner's proposed findings of fact numbered 1-3, 7-9, 14-19, 21-26, and 28-32 have been adopted either verbatim or in substance in this Recommended Order. Petitioner's proposed findings of fact numbered 4-6, 10, 11, 13, 20, and 27 have been rejected as not being supported by the weight of the credible evidence in this cause. Petitioner's proposed finding of fact number 12 has been rejected as being unnecessary for determination of the issues in this cause. COPIES FURNISHED: James A. Bossart, Esquire Department of Insurance and Treasurer Division of Legal Services 412 Larson Building Tallahassee, Florida 32399-0300 Johnny L. Johnson 17120 Northwest 27th Avenue Opa Locka, Florida 33056 Honorable Tom Gallagher State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Don Dowdell, General Counsel Department of Insurance and Treasurer The Capitol, Plaza Level Tallahassee, Florida 32399-0300 =================================================================
