The Issue The issues are whether Respondent, by entering a plea of nolo contendere to a misdemeanor charge of conspiracy to commit workers' compensation fraud, demonstrated a lack of fitness and trustworthiness to sell insurance in violation of Section 626.611(7), Florida Statutes, and if so, what penalty should be imposed.
Findings Of Fact At all times relevant to this proceeding, Respondent was eligible for licensure and licensed in the following areas: (a) as a health insurance agent; (b) as a life insurance agent; (c) as a life and health insurance agent; (d) as a life, health, and variable annuity agent; (e) as a surplus lines insurance agent; and (f) as a general lines insurance agent. In June 1992, the insurance agency that Respondent worked for was purchased by another insurance agency. Ronald Palmerton was a client of the owner of Respondent's former employer. Mr. Palmerton held a workers' compensation policy issued by Liberty Mutual Insurance Company (Liberty Mutual). After the owner of Respondent's former employer left the new agency, Respondent handled Mr. Palmerton's requests for additional insurance with Liberty Mutual. Respondent was never paid a commission for any work performed on Mr. Palmerton's behalf. Even so, Respondent's testimony that Mr. Palmerton was not up front with information that he provided to Respondent and that Respondent never told Mr. Palmerton that he could avoid his workers' compensation experience modification if he started another company is not persuasive. In a Fourth Amended Information dated April 16, 2001, Respondent and Mr. Palmerton, were charged in the Circuit Court of the First Judicial District, in and for Escambia County, Florida, Case No. 99-2081 CF, with several felony and misdemeanor violations. Specifically, Respondent was charged as follows: (a) with racketeering, a first-degree felony in violation of Section 895.03, Florida Statutes; (b) with conspiracy to commit racketeering, a first-degree felony in violation of Sections 895.03(4) and 777.04(3), Florida Statutes; and (c) conspiracy to commit workers' compensation fraud, a misdemeanor in violation of Sections 440.37(4) and 777.04(3), Florida Statutes. The misdemeanor criminal charge was based on allegations that, beginning on April 4, 1993, Respondent and Mr. Palmerton did unlawfully and knowingly conspire to commit workers' compensation fraud by knowingly making false or misleading oral or written statements and representations and/or knowingly omitting or concealing material information required by Section 440.381, Florida Statutes. According to the Fourth Amended Information, the purpose of the conspiracy was to avoid or diminish the amount of payment of any workers' compensation premiums to be paid by Mr. Palmerton and/or his related companies to a carrier or self-insurance fund. The criminal trial was scheduled for April 16, 2001. On April 12, 2001, the State of Florida offered a plea agreement to Respondent. Respondent initially refused the offer but changed his mind after learning that Mr. Palmerton had agreed to plead guilty to felony charges for perjury and racketeering, with a sentence for 18 months' house arrest and 15 years of probation. Respondent understood that Mr. Palmerton would testify against Respondent if he elected to proceed to trial. On April 16, 2001, Respondent entered into a Plea Agreement in which he agreed to plead no contest to one count of conspiracy to commit workers' compensation fraud, a first-degree misdemeanor. The agreement included a provision for a sentence of one year of probation. Under the agreement, a sentence of nine months' incarceration in the Escambia County jail would be suspended pending Respondent's successful completion of all terms and conditions of probation. The agreement also provided that Respondent's probation would include the payment of any restitution ordered by the Court during a subsequent hearing. On April 16, 2001, the Court adjudicated Respondent guilty, withholding imposition of sentence and placing Respondent on one year of probation. The terms of Respondent's probation included, but are not limited to, the following: payment of a fine and court costs in the amount of $1,000; payment of the costs of prosecution in the amount of $5,000; and (c) payment of restitution as determined at a subsequent hearing. A few days after being adjudicated guilty, Respondent contacted Petitioner's staff to determine the effect of his nolo contendere plea to a misdemeanor offense on his licensure status. Petitioner's staff subsequently informed Respondent that a misdemeanor offense would not result in an automatic suspension of an insurance license. On April 11, 2002, the Court conducted a restitution hearing. During the hearing, the State of Florida and Respondent agreed and stipulated to the entry of a restitution order and judgment satisfactory to the victim, Liberty Mutual. On June 3, 2002, the Court entered a Restitution Order and Judgment against Respondent. The Order required Respondent to pay restitution in the amount of $225,000. Pursuant to the Order, Respondent and Mr. Palmerton are jointly and severally liable for payment of the restitution, with Respondent receiving credit toward the total obligation for $200,000 previously paid by Mr. Palmerton and $10,000 paid by Respondent on April 11, 2002. As such, the effective amount of the Restitution Order and Judgment was a $15,000 balance due from Respondent. In June 2002, Petitioner issued a renewal notice for Respondent's surplus lines insurance license. The notice requested the appointing insurance company or agency to certify that Respondent had not pled guilty, or nolo contendere to, or had not been found guilty of a felony since originally being appointed by the appointing entity. The notice did not inquire whether Respondent had pled guilty, or nolo contendere to, or found guilty of a misdemeanor. At the time of the formal hearing, Respondent and Mr. Palmerton were still jointly and severally obligated to pay $15,000 in unpaid restitution. Respondent had successfully completed his probation in all other respects. During the hearing, Petitioner denied any wrong doing in relation to the misdemeanor offense to which he pled no contest. Specifically, Respondent denied that he ever intended to assist Mr. Palmerton in any type of scheme to defraud or otherwise do harm to Liberty Mutual. Respondent's testimony in this regard in not persuasive. Respondent has been a licensed insurance agent for 32 years. Prior to the instant proceeding, Respondent's insurance licenses have not been the subject of a disciplinary proceeding or lawsuit. Liberty Mutual did not name Respondent as a party in its civil suit against Mr. Palmerton. Instead, Respondent cooperated with and testified on behalf of Liberty Mutual in that proceeding. Until Respondent committed the offense at issue here, his reputation in the insurance community indicates that he was an honest and trustworthy agent.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED: That Petitioner enter a final order imposing a six-month suspension of Respondent's insurance licenses. DONE AND ENTERED this 28th day of October, 2002, in Tallahassee, Leon County, Florida. SUZANNE F. HOOD 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 October, 2002. COPIES FURNISHED: James A. Bossart, Esquire Department of Insurance Division of Legal Services 200 East Gaines Street, Room 612 Tallahassee, Florida 32399-0333 Thomas E. Wheeler, Jr., Esquire Post Office Box 12564 Pensacola, Florida 32573-2564 Honorable Tom Gallagher State Treasurer/Insurance Commissioner Department of Insurance The Capitol, Plaza Level 02 Tallahassee, Florida 32399-0300 Mark Casteel, General Counsel Department of Insurance The Capitol, Lower Level 26 Tallahassee, Florida 32399-0307
The Issue The issues are whether Respondents offered and sold securities in Florida, in violation of the registration requirements of Section 517.07(1), Florida Statutes; offered and sold securities in Florida while Respondents were unregistered, in violation of Section 517.12(1), Florida Statutes; or committed fraud in the offer, sale, or purchase of securities in Florida, in violation of Section 517.301(1)(a), Florida Statutes. If so, an additional issue is the penalty to be imposed.
Findings Of Fact At all material times, Respondent James A. Torchia (Respondent) held a valid life and health insurance license. Respondent was the president and owner of Respondent Empire Insurance, Inc. (Empire Insurance), a now-dissolved Florida corporation. Empire Insurance was in the insurance business, and Respondent was its sole registered insurance agent. At no material time has Respondent or Empire Insurance held any license or registration to engage in the sale or offer for sale of securities in Florida. At no material time were the investments described below sold and offered for sale by Respondent or Empire Insurance registered as securities in Florida. These cases involve viaticated life insurance policies. A life insurance policy is viaticated when the policy owner, also known as the viator, enters into a viatical settlement agreement. Under the agreement, the viator sells the policy and death benefits to the purchaser for an amount less than the death benefit--the closer the viator is perceived to be to death, the greater the discount from the face amount of the death benefit. The viatical industry emerged to provide dying insureds, prior to death, a means by which to sell their life insurance policies to obtain cash to enjoy during their remaining lives. As this industry matured, brokers and dealers, respectively, arranged for the sale of, and bought and resold, life insurance policies of dying insureds. Prior to the death of the viator, these viaticated life insurance policies, or interests in such policies, may be sold and resold several times. In these cases, viators sold their life insurance policies to Financial Federated Title & Trust, Inc. (FinFed). Having raised money from investors, American Benefit Services (ABS) then paid FinFed, which assigned viaticated policies, or interests in the policies, to various trusts. The trusts held the legal title to the policies, and the trust beneficiaries, who are the investors from whom ABS had obtained the funds to pay FinFed, held equitable title to the policies. Sometimes in these cases, a broker or dealer, such as William Page and Associates, intervened between the viator and FinFed. At some point, though, ABS obtained money from investors to acquire policies, but did not pay the money to FinFed to purchase viaticated life insurance policies. The FinFed and ABS investment program eventually became a Ponzi scheme, in which investor payouts were derived largely, if not exclusively, from the investments of other investors. ABS typically acquired funds through the promotional efforts of insurance agents, such as Respondent and Empire Insurance. Using literature provided by ABS, these agents often sold these investments to insurance clients. As was typical, Respondent and Empire Insurance advertised the types of claims described below by publishing large display ads that ran in Florida newspapers. Among the ABS literature is a Participation Disclosure (Disclosure), which describes the investment. The Disclosure addresses the investor as a "Participant" and the investment as a "Participation." The Disclosure contains a Participation Agreement (Agreement), which provides that the parties agree to the Disclosure and states whether the investor has chosen the Growth Plan or Income Plan, which are described below; a Disbursement Letter of Instruction, which is described below; and a Letter of Instruction to Trust, which is described below. The agent obtains the investor's signature to all three of these documents when the investor delivers his check, payable to the escrow agent, to purchase the investment. The Disclosure states that the investments offer a “High Return”: “Guaranteed Return on Participation 42% at Maturity.” The Disclosure adds that the investments are “Low Risk”: “Secured by a Guaranteed Insurance Industry Receivable”; “Secured by $300,000 State Insurance Guarantee Fund”; “Short Term Participation (Maturity Expectation 36 Months)”; “Principal Liquid After One Year With No Surrender Charge”; “State Regulated Participation”; “All Transactions By Independent Trust & Escrow Agents”; and “If policy fails to mature at 36 months, participant may elect full return of principal plus 15% simple interest.” The Disclosure describes two alternative investments: the Growth Plan and Income Plan. For the Growth Plan, the Disclosure states: “At maturity, Participant receives principal plus 42%, creating maximum growth of funds.” For the Income Plan, the Disclosure states: “If income is desired, participation can be structured with monthly income plans.” Different rates of return for the Growth and Income plans are set forth below. For investors choosing the Income Plan, ABS applied only 70 percent of the investment to the purchase of viaticated life insurance policies. ABS reserved the remaining 30 percent as the source of money to "repay" the investor the income that he was due to receive under the Income Plan, which, as noted below, paid a total yield of 29.6 percent over three years. The Disclosure states that ABS places all investor funds in attorneys’ trust accounts, pursuant to arrangements with two “bonded and insured” “financial escrow agents.” At another point in the document, the Disclosure states that the investor funds are deposited “directly” with a “financial escrow agent,” pursuant to the participant’s Disbursement Letter of Instruction. The Disbursement Letter of Instruction identifies a Florida attorney as the “financial escrow agent,” who receives the investor’s funds and disburses them, “to the order of [FinFed) or to the source of the [viaticated insurance] benefits and/or its designees.” This disbursement takes place only after the attorney receives “[a] copy of the irrevocable, absolute assignment, executed in favor of Participant and recorded with the trust account as indicated on the assignment of [viaticated insurance] benefits, and setting out the ownership percentage of said [viaticated insurance] benefits”; a “medical overview” of the insured indicative of not more than 36 months’ life expectancy; confirmation that the policy is in full force and effect and has been in force beyond the period during which the insurer may contest coverage; and a copy of the shipping airbill confirming that the assignment was sent to the investor. The Disclosure states that the investor will direct a trust company to establish a trust, or a fractional interest in a trust, in the name of the investor. When the life insurance policy matures on the death of the viator, the insurer pays the death benefits to the trust company, which pays these proceeds to the investor, in accordance with his interest in the trust. Accordingly, the Letter of Instruction to Trust directs FinFed, as the trust company, to establish a trust, or a fractional interest in a trust, in the name of the investor. The Letter of Instruction to Trust provides that the viaticated insurance benefits obtained with the investor's investment shall be assigned to this trust, and, at maturity, FinFed shall pay the investor a specified sum upon the death of the viator and the trustee's receipt of the death benefit from the insurer. The Disclosure provides that, at anytime from 12 to 36 months after the execution of the Disclosure, the investor has the option to request ABS to return his investment, without interest. At 36 months, if the viator has not yet died, the investor has the right to receive the return of his investment, plus 15 percent (five percent annually). The Disclosure states that ABS will pay all costs and fees to maintain the policy and that all policies are based on a life expectancy for the viator of no more than 36 months. Also, the Disclosure assures that ABS will invest only in policies that are issued by insurers that are rated "A" or better by A.M. Best "at the time that the Participant's deposit is confirmed." The Disclosure mentions that the trust company will name the investor as an irrevocable assignee of the policy benefits. The irrevocable assignment of policy benefits mentioned in the Disclosure and the Disbursement Letter of Instruction is an anomaly because it does not conform to the documentary scheme described above. After the investor pays the escrow agent and executes the documents described above, FinFed executes the “Irrevocable Absolute Assignment of Viaticated Insurance Benefits.” This assignment is from the trustee, as grantor, to the investor, as grantee, and applies to a specified percentage of a specific life insurance policy, whose death benefit is disclosed on the assignment. The assignment includes the "right to receive any viaticated insurance benefit payable under the Trusts [sic] guaranteed receivables of assigned viaticated insurance benefits from the noted insurance company; [and the] right to assign any and all rights received under this Trust irrevocable absolute assignment." On its face, the assignment assigns the trust corpus-- i.e., the insurance policy or an interest in an insurance policy--to the trust beneficiary. Doing so would dissolve the trust and defeat the purpose of the other documents, which provide for the trust to hold the policy and, upon the death of the viator, to pay the policy proceeds in accordance with the interests of the trust beneficiaries. The assignment bears an ornate border and the corporate seal of FinFed. Probably, FinFed intended the assignment to impress the investors with the "reality" of their investment, as the decorated intangible of an "irrevocable" interest in an actual insurance policy may seem more impressive than the unadorned intangible of a beneficial interest in a trust that holds an insurance policy. Or possibly, the FinFed/ABS principals and professionals elected not to invest much time or effort in the details of the transactional documentation of a Ponzi scheme. What was true then is truer now. Obviously, in those cases in which no policy existed, the investor paid his money before any policy had been selected for him. However, this appears to have been the process contemplated by the ABS literature, even in those cases in which a policy did exist. The Disbursement Letter of Instruction and correspondence from Respondent, Empire Insurance, or Empire Financial Consultant to ABS reveal that FinFed did not assign a policy, or part of a policy, to an investor until after the investor paid for his investment and signed the closing documents. In some cases, Respondent or Empire Insurance requested ABS to obtain for an investor a policy whose insured had special characteristics or a investment plan with a maturity shorter than 36 months. FinFed and ABS undertook other tasks after the investor paid for his investment and signed the closing documents. In addition to matching a viator with an investor, based on the investor's expressed investment objectives, FinFed paid the premiums on the viaticated policies until the viator died and checked on the health of the viator. Also, if the viator did not die within three years and the investor elected to obtain a return of his investment, plus 15 percent, ABS, as a broker, resold the investor's investment to generate the 15 percent return that had been guaranteed to the investor. Similarly, ABS would sell the investment of investors who wanted their money back prior to three years. The escrow agent also assumed an important duty--in retrospect, the most important duty--after the investor paid for his investment and signed the closing documents; the escrow agent was to verify the existence of the viaticated policy. Respondent and Empire Insurance sold beneficial interests in trusts holding viaticated life insurance policies in 50 separate transactions. These investors invested a total of $1.5 million, nearly all of which has been lost. Respondent and Empire Insurance earned commissions of about $120,000 on these sales. Petitioner proved that Respondent and Empire Insurance made the following sales. Net worths appear for those investors for whom Respondent recorded net worths; for most, he just wrote "sufficient" on the form. Unless otherwise indicated, the yield was 42 percent for the Growth Plan. In all cases, investors paid money for their investments. In all cases, FinFed and ABS assigned parts of policies to the trusts, even of investors investing relatively large amounts. On March 21, 1998, Phillip A. Allan, a Florida resident, paid $69,247.53 for the Growth Plan. On March 26, 1998, Monica Bracone, a Florida resident with a reported net worth of $900,000, paid $8000 for the Growth Plan. On April 2, 1998, Alan G. and Judy LeFort, Florida residents with a reported net worth of $200,000, paid $10,000 for the Growth Plan. In a second transaction, on June 8, 1998, the LeForts paid $5000 for the Growth Plan. In the second transaction, the yield is 35 percent, but the Participation Agreement notes a 36-month life expectancy of the viator. The different yields based on life expectancies are set forth below, but, as noted above, the standard yield was 42 percent, and, as noted below, this was based on a 36-month life expectancy, so Respondent miscalculated the investment return or misdocumented the investment on the LeForts' second transaction. On April 29, 1998, Doron and Barbara Sterling, Florida residents with a reported net worth of $250,000, paid $15,000 for the Growth Plan. In a second transaction, on August 14, 1998, the Sterlings paid $100,000 for the Growth Plan. The yield for the second transaction is 35 percent, and the Participation Agreement notes that the Sterlings were seeking a viator with a life expectancy of only 30 months. When transmitting the closing documents for the second Sterling transaction, Respondent, writing ABS on Empire Insurance letterhead, stated in part: This guy has already invested with us (15,000) [sic]. He gave me this application but wants a 30 month term. Since he has invested, he did some research and has asked that he be put on a low T-cell count and the viator to be an IV drug user. I know it is another favor but this guy is a close friend and has the potential to put at least another 500,000 [sic]. If you can not [sic] do it, then I understand. You have done a lot for me and I always try to bring in good quality business. If this inventory is not available, the client has requested that we return the funds . . . In a third transaction, on February 24, 1999, the Sterlings paid $71,973 for the Growth Plan. The yield is only 28 percent, but the Participation Agreement reflects the typical 36-month life expectancy for the viator. Although the investors would not have received this document, Respondent completed an ABS form entitled, "New Business Transmittal," and checked the box, "Life Expectancy 2 years or less (28%). The other boxes are: "Life Expectancy 2 1/2 years or less (35%)" and "Life Expectancy 3 years or less (42%)." On May 4, 1998, Hector Alvero and Idelma Guillen, Florida residents with a reported net worth of $100,000, paid $6000 for the Growth Plan. In a second transaction, on October 29, 1998, Ms. Guillen paid $5000 for the Growth Plan. In a third transaction, on November 30, 1998, Ms. Guillen paid $5000 for the Growth Plan. For this investment, Ms. Guillen requested an "IV drug user," according to Respondent in a letter dated December 1, 1998, on Empire Financial Consultants letterhead. This is the first use of the letterhead of Empire Financial Consultants, not Empire Insurance, and all letters after that date are on the letterhead of Empire Financial Consultants. In a fourth transaction, on January 29, 1999, Ms. Guillen paid $15,000 for the Growth Plan. On April 23, 1998, Bonnie P. Jensen, a Florida resident with a reported net worth of $120,000, paid $65,884.14 for the Growth Plan. Her yield was 35 percent, but the Participation Agreement reflects a 36-month life expectancy. On May 20, 1998, Michael J. Mosack, a Florida resident with a reported net worth of $500,000, paid $70,600 for the Income Plan. He was to receive monthly distributions of $580.10 for three years. The total yield, including monthly distributions, is $20,883.48, which is about 29.6 percent, and the Participation Agreement reflects a 36-month life expectancy. On May 27, 1998, Lewis and Fernande G. Iachance, Florida residents with a reported net worth of $100,000, paid $30,000 for the Growth Plan. On June 3, 1998, Sidney Yospe, a Florida resident with a reported net worth of $1,500,000, paid $30,000 for the Growth Plan. The yield is 35 percent, and the Participation Agreement reflects a 30-month life expectancy. On June 12, 1998, Bernard Aptheker, with a reported net worth of $100,000, paid $10,000 for the Growth Plan. The yield is 35 percent, but the Participation Agreement reflects a 36-month life expectancy. On June 10, 1998, Irene M. and Herman Kutschenreuter, Florida residents with a reported net worth of $200,000, paid $30,000 for the Growth Plan. The yield is 35 percent, but the Participation Agreement reflects a 36-month life expectancy. On June 9, 1998, Daniel and Mary Spinosa, Florida residents with a reported net worth of $300,000, paid $10,000 for the Growth Plan. The yield is 35 percent, but the Participation Agreement reflects a 36-month life expectancy. On June 5, 1998, Pauline J. and Anthony Torchia, Florida residents with a reported net worth of $300,000 and the parents of Respondent, paid $10,000 for the Growth Plan. The yield is 35 percent, but the Participation Agreement reflects a 36-month life expectancy. On June 29, 1998, Christopher D. Bailey, a Florida resident with a reported net worth of $500,000, paid $25,000 for the Growth Plan. The yield is 35 percent, but the Participation Agreement reflects a 36-month life expectancy. In a second transaction on the same day, Mr. Bailey paid $25,000 for the Growth Plan. Petitioner submitted documents concerning a purported purchase by Lauren W. Kramer on July 21, 1998, but they were marked "VOID" and do not appear to be valid. On July 22, 1998, Laura M. and Kenneth D. Braun, Florida residents with a reported net worth of $150,000, paid $25,000 for the Growth Plan, as Respondent completed the Participation Agreement. However, the agreement calls for them to receive $205.42 monthly for 36 months and receive a total yield, including monthly payments, of 29.6 percent, so it appears that the Brauns bought the Income Plan. In a second transaction, also on July 22, 1998, the Brauns paid $25,000 for the Growth Plan. On January 20, 1999, Roy R. Worrall, a Florida resident, paid $100,000 for the Income Plan. The Participation Agreement provides that he will receive monthly payments of $821.66 and a total yield of 29.6 percent. On July 16, 1998, Earl and Rosemary Gilmore, Florida residents with a reported net worth of $250,000, paid $5000 for the Growth Plan. In a second transaction, on February 12, 1999, the Gilmores paid $20,000 for the Growth Plan. The yield is 28 percent, but the Participation Agreement reflects a 36-month life expectancy. The New Business Transmittal to ABS notes a life expectancy of two years or less. On July 14, 1998, David M. Bobrow, a Florida resident with a reported net worth of $700,000 on one form and $70,000 on another form, paid $15,000 for the Growth Plan. The yield is 35 percent, but the Participation Agreement reflects a 36-month life expectancy. In a second transaction, on the same day, Mr. Bobrow paid $15,000 for the Growth Plan. On July 27, 1998, Cecilia and Harold Lopatin, Florida residents with a reported net worth of $300,000, paid $10,000 for the Growth Plan. On July 30, 1998, Ada R. Davis, a Florida resident, paid $30,000 for the Income Plan. Her total yield, including monthly payments of $246.50 for three years, is 29.6 percent. In a second transaction, on the same day, Ms. Davis paid $30,000 for the Income Plan on the same terms as the first purchase. On July 27, 1998, Joseph F. and Adelaide A. O'Keefe, Florida residents with a net worth of $300,000, paid $12,000 for the Growth Plan. On August 5, 1998, Thurley E. Margeson, a Florida resident, paid $50,000 for the Growth Plan. On August 19, 1998, Stephanie Segaria, a Florida resident, paid $20,000 for the Growth Plan. On August 26, 1998, Roy and Glenda Raines, Florida residents, paid $5000 for the Growth Plan. The yield is 35 percent, but the Participation Agreement reflects a 36-month life expectancy. The New Business Transmittal to ABS notes a life expectancy of 30 months or less. In a second transaction, on the same day, the Raineses paid $5000 for the Growth Plan. The yield is 35 percent, but the Participation Agreement reflects a 36-month life expectancy, although, again, the New Business Transmittal notes the life expectancy of 30 months or less. On November 24, 1998, Dan W. Lipford, a Florida resident, paid $50,000 for the Growth Plan in two transactions. In a third transaction, on January 13, 1999, Mr. Lipford paid $30,000 for the Growth Plan. On December 1, 1998, Mary E. Friebes, a Florida resident, paid $30,000 for the Growth Plan. On December 4, 1998, Allan Hidalgo, a Florida resident, paid $25,000 for the Growth Plan. On December 17, 1998, Paul E. and Rose E. Frechette, Florida residents, paid $25,000 for the Income Plan. The yield, including monthly payments of $205.41 for three years, is 29.6 percent. On December 26, 1998, Theodore and Tillie F. Friedman, Florida residents, paid $25,000 for the Growth Plan. On January 19, 1999, Robert S. and Karen M. Devos, Florida residents, paid $10,000 for the Growth Plan. On January 20, 1999, Arthur Hecker, a Florida resident, paid $50,000 for the Income Plan. The yield, including a monthly payment of $410.83 for 36 months, is 29.6 percent. On February 11, 1999, Michael Galotola, a Florida resident, paid $25,000 for the Growth Plan. In a second transaction, on the same day, Michael and Anna Galotola paid $12,500 for the Growth Plan. On November 3, 1998, Lee Chamberlain, a Florida resident, paid $50,000 for the Growth Plan. On December 23, 1998, Herbert L. Pasqual, a Florida resident, paid $200,000 for the Income Plan. The yield, including a monthly payment of $1643.33 for three years, is 29.6 percent. On December 1, 1998, Charles R. and Maryann Schuyler, Florida residents, paid $10,000 for the Growth Plan. Respondent and Empire Insurance were never aware of the fraud being perpetrated by FinFed and ABS at anytime during the 38 transactions mentioned above. Respondent attempted to verify with third parties the existence of the viaticated insurance policies. When ABS presented its program to 30-40 potential agents, including Respondent, ABS presented these persons an opinion letter from ABS's attorney, stating that the investment was not a security, under Florida law. Respondent also contacted Petitioner's predecessor agency and asked if these transactions involving viaticated life insurance policies constituted the sale of securities. An agency employee informed Respondent that these transactions did not constitute the sale of securities.
Recommendation RECOMMENDED that Petitioner enter a final order: Finding James A. Torchia and Empire Insurance, Inc., not guilty of violating Section 517.301(1), Florida Statutes; Finding James A. Torchia guilty of 38 violations of Section 517.07(1), Florida Statutes, and 38 violations of Section 517.12(1), Florida Statutes; Finding Empire Insurance, Inc., guilty of 38 violations of Section 517.07(1), Florida Statutes, and 38 violations of Section 517.12(1), Florida Statutes, except for transactions closed on or after December 1, 1998; Directing James A. Torchia and Empire Insurance, Inc., to cease and desist from further violations of Chapter 517, Florida Statutes; and Imposing an administrative fine in the amount of $120,000 against James A. Torchia. DONE AND ENTERED this 19th day of May, 2003, in Tallahassee, Leon County, Florida. ROBERT E. MEALE Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 19th day of May, 2003. COPIES FURNISHED: Honorable Tom Gallagher Chief Financial Officer Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300 Mark Casteel, General Counsel Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300 Fred H. Wilsen Senior Attorney Office of Financial Institutions and Securities Regulation South Tower, Suite S-225 400 West Robinson Street Orlando, Florida 32801-1799 Barry S. Mittelberg Mittelberg & Nicosia, P.A. 8100 North University Drive, Suite 102 Fort Lauderdale, Florida 33321
Findings Of Fact Based upon the testimony of the witnesses and the documentary evidence received at the hearing, the following findings of fact are made: At all times material to the allegations of this case, Respondent is and has been licensed in the State of Florida as a life and health insurance agent and as a general lines insurance agent. On December 3, 1990, Respondent received an application for workers' compensation and employers' liability insurance from Emma Ware, corporate secretary for Abel Towing Service, Inc. Also at that time, Respondent received a check from the company in the amount of $817.00 which represented the premium due from the insured for the coverage sought. The check described above, which was made payable to A.B.C. Insurance Agency, was deposited by Respondent into an account for ABC Enterprises, Inc. on or about December 5, 1990. On December 3, 1990, Respondent issued to Lennon Ware, as the insured, a certificate of insurance indicating that the insured had obtained workers' compensation and employers' liability insurance effective 12/3/90 and that the company affording coverage was NCCI. NCCI does not afford workers' compensation insurance through authorized agents such as the Respondent. Consequently, the Respondent, or any other licensee, may not bind coverage on behalf of NCCI. NCCI receives applications for insurance, such as from Abel Towing and, when complete, assigns the insurance coverage to one of several companies in the assigned risk group. NCCI operates under plan guidelines to provide insurance for entities that cannot obtain coverage from the voluntary market. NCCI administers the assignment to insurance companies, and acts as the middle man to collect the premium. NCCI does not, itself, provide the insurance coverage. After December 3, 1990, based upon the certificate of insurance issued by Respondent, Emma Ware and Lennon Ware operated under the mistaken assumption that their company, Abel Towing Services, Inc. had obtained workers' compensation and employers' liability insurance. On January 29, 1991, an employee of Abel Towing was injured on the job and taken to a hospital for treatment. In connection with that injury, a claim was submitted to Respondent for payment under the insurance coverage presumed to be in effect. On or about February 5, 1991, Respondent forwarded an application for insurance coverage on behalf of Abel Towing to NCCI. That application was incomplete as it did not contain the company's form 941, federal quarterly tax reports, for the year 1990. NCCI returned the application as incomplete and advised Respondent as to the forms required for binding coverage. In response to requests from Respondent, Emma Ware delivered copies of Abel Towing's tax reports to Respondent in February, 1991. Respondent failed to timely forward the completed application to NCCI to secure an insurance binding date of February 7, 1991. Respondent then forwarded the application to NCCI in March, 1991. In order to secure a binding date of March 5, 1991, Respondent was required to have the application package completed by and postmarked to NCCI by March 20, 1991. Again, the information submitted by Respondent on behalf of Abel Towing was incomplete. Ultimately, the insurance was not bound and effective according to NCCI until March 27, 1991. Respondent failed to inform Abel Towing or the Wares that the insurance application had been returned by NCCI. Respondent failed to timely act to procure insurance for Abel Towing and the Wares in December, 1990. Respondent failed to timely procure insurance for Abel Towing and the Wares in January, 1991, when she became aware of the injury to one of Abel Towing's employees. NCCI allows fifteen days from the first receipt of an application for insurance within which to correct deficiencies or provide information needed to complete an application. If provided within the time line, NCCI will honor the original date and bind the insurance effective at that time. Respondent did not forward any insurance application to NCCI on behalf of the Wares or Abel Towing in December, 1990. ABC Enterprises, Inc. is not the corporate name under which Respondent does insurance business.
Recommendation Based on the foregoing, it is recommended that the Department of Insurance and Treasurer enter a final order finding that the Respondent has violated Section 626.611, Florida Statutes, and suspending her licenses for a period of six months. RECOMMENDED this 14th day of April, 1992, in Tallahassee, Leon County, Florida. JOYOUS D. PARRISH Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32301 (904)488-9675 Filed with the Clerk of the Division of Administrative Hearings this 14th day of April, 1992. APPENDIX TO RECOMMENDED ORDER, CASE NO. 91-7566 RULINGS ON THE PROPOSED FINDINGS OF FACT SUBMITTED BY THE PETITIONER: 1. Paragraphs 1 through 19 are accepted with the deletion of the phrase "Pursuant to the reapplication of February 26, 1991," found in paragraph 13. That phrase is rejected as contrary to the weight of the evidence or irrelevant. RULINGS ON THE PROPOSED FINDINGS OF FACT SUBMITTED BY THE RESPONDENT: None submitted. COPIES FURNISHED: Joseph D. Mandt Division of Legal Services Department of Insurance and Treasurer 412 Larson Building Tallahassee, Florida 32399-0300 Janet Joyce Buck 6102 Walbridge Street Orlando, Florida 32809 Hon. Tom Gallagher State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Bill O'Neil General Counsel Department of Insurance and Treasurer Division of Legal Services The Capitol, Plaza Level Tallahassee, Florida 32399-0300
The Issue Whether proposed rules promulgated by the Florida Department of Insurance related to sale of insurance products by agents affiliated with financial institutions are an invalid exercise of delegated legislative authority.
Findings Of Fact The Florida Department of Insurance is responsible for regulation of insurance transactions in the State of Florida. On January 29, 1997, the Department of Insurance issued a notice to interested parties of a rules workshop to address "parity" of insurance regulation. The workshop was conducted on February 21, 1997. The Department of Insurance published the final rule proposal on May 23, 1997. A public hearing was conducted on June 19, 1997. The record of the public hearing remained open until June 25, 1997, for submission of written comments. A Notice of Change was published on July 18, 1997. A Second Notice of Change was published on August 8, 1997. The Petitioners timely filed petitions challenging the proposed rules. All parties have standing to participate in this proceeding. As set forth in the rule proposal, the purpose and effect of the proposed rules is as follows: Section 626.5715, Florida Statutes, requires the Department to adopt rules to assure parity of regulation in this state of insurance transactions as between an insurance agency owned by or an agent associated with a federally chartered financial institution, an insurance agency owned by or an agent associated with a state- chartered financial institution, and an insurance agency owned by or an agent associated with an entity that is not a financial institution. (Emphasis supplied.) The summary portion of the published rule proposal states that the "proposed rules implement standards to provide parity pursuant to Section 626.5715, Florida Statutes." Section 626.5715, Florida Statutes, the "parity statute," provides as follows: The department shall adopt rules to assure the parity of regulation in this state of insurance transactions as between an insurance agency owned by or an agent associated with a federally chartered financial institution, an insurance agency owned by or an agent associated with a state-chartered financial institution, and an insurance agency owned by or an agent associated with an entity that is not a financial institution. Such rules shall be limited to assuring that no insurance agency or agent is subject to more stringent or less stringent regulation than another insurance agency or agent on the basis of the regulatory status of the entity that owns the agency or is associated with the agent. For the purposes of this section, a person is "associated with" another entity if the person is employed by, retained by, under contract to, or owned or controlled by the entity directly or indirectly. This section does not apply with respect to a financial institution that is prohibited from owning an insurance agency or that is prohibited from being associated with an insurance agent under state or federal law. (Emphasis supplied.) The word "parity" is not defined in the statute. Webster's Dictionary defines "parity" as "[t]he quality or state of being equal or equivalent." Pursuant to the specific statute requiring the Department to adopt rules, the Department's authority to adopt rules related to this issue is limited to those rules which provide for equivalent regulation of insurance transactions without regard to ownership or affiliation of the insurance agent or agency. Rule 4-224.002 (Settings and Circumstances) Proposed Rule 4-224.002 provides as follows: 4-224.002 Setting and Circumstances of Insurance Transactions. The setting and circumstances in which insurance transactions occur shall be structured so as to avoid deception as to, and to assist the consumer in understanding, the nature of the product sold, the identity of the insurer, and the identity and representative capacity of the insurance agent. When an agent is transacting insurance, any business cards and stationery used shall reflect his status as an insurance agent. Other materials used in insurance transactions which address the representative capacity of the agent shall identify the individual as an insurance agent. The published rule proposal indicates that Proposed Rule 4-224.002, Florida Administrative Code, is specifically authorized by Section 624.308, Florida Statutes, and implements Sections 624.307, 626.5715, 626.951, 626.9521, 626.9541, 626.9561 and 626.9611, Florida Statutes. Section 624.308, Florida Statutes, provides the Department with the general authority to adopt "reasonable rules necessary to effect any of the statutory duties of the department...." and states that willful violation of Department rules may result in a range of penalties including revocation of licensure. Section 624.307, Florida Statutes, generally sets forth the powers and duties of the Department. Section 626.5715, Florida Statutes, the "parity" statute, provides as set forth herein. Section 626.951, Florida Statutes, is the "declaration of purpose" for the Unfair Insurance Trade Practices Act, and in part states as follows: The purpose of this part is to regulate trade practices relating to the business of insurance in accordance with the intent of Congress as expressed in the Act of Congress of March 9, 1945 (Pub. L. No. 15, 79th Congress), by defining, or providing for the determination of, all such practices in this state which constitute unfair methods of competition or unfair or deceptive acts or practices and by prohibiting the trade practices so defined or determined. Section 626.9521, Florida Statutes, prohibits and penalizes unfair methods of competition and unfair or deceptive acts or practices and provides penalties. Section 626.9541, Florida Statutes, addresses "unfair methods of competition and unfair or deceptive acts" and provides as follows: UNFAIR METHODS OF COMPETITION AND UNFAIR OR DECEPTIVE ACTS.--The following are defined as unfair methods of competition and unfair or deceptive acts or practices: Misrepresentations and false advertising of insurance policies.--Knowingly making, issuing, circulating, or causing to be made, issued, or circulated, any estimate, illustration, circular, statement, sales presentation, omission, or comparison which: Misrepresents the benefits, advantages, conditions, or terms of any insurance policy. Misrepresents the dividends or share of the surplus to be received on any insurance policy. Makes any false or misleading statements as to the dividends or share of surplus previously paid on any insurance policy. Is misleading, or is a misrepresentation, as to the financial condition of any person or as to the legal reserve system upon which any life insurer operates. Uses any name or title of any insurance policy or class of insurance policies misrepresenting the true nature thereof. Is a misrepresentation for the purpose of inducing, or tending to induce, the lapse, forfeiture, exchange, conversion, or surrender of any insurance policy. Is a misrepresentation for the purpose of effecting a pledge or assignment of, or effecting a loan against, any insurance policy. Misrepresents any insurance policy as being shares of stock or misrepresents ownership interest in the company. False information and advertising generally.--Knowingly making, publishing, disseminating, circulating, or placing before the public, or causing, directly or indirectly, to be made, published, disseminated, circulated, or placed before the public: In a newspaper, magazine, or other publication, In the form of a notice, circular, pamphlet, letter, or poster, Over any radio or television station, or In any other way, an advertisement, announcement, or statement containing any assertion, representation, or statement with respect to the business of insurance, which is untrue, deceptive, or misleading. Defamation.--Knowingly making, publishing, disseminating, or circulating, directly or indirectly, or aiding, abetting, or encouraging the making, publishing, disseminating, or circulating of, any oral or written statement, or any pamphlet, circular, article, or literature, which is false or maliciously critical of, or derogatory to, any person and which is calculated to injure such person. Boycott, coercion, and intimidation.-- Entering into any agreement to commit, or by any concerted action committing, any act of boycott, coercion, or intimidation resulting in, or tending to result in, unreasonable restraint of, or monopoly in, the business of insurance. False statements and entries.-- Knowingly: Filing with any supervisory or other public official, Making, publishing, disseminating, circulating, Delivering to any person, Placing before the public, Causing, directly or indirectly, to be made, published, disseminated, circulated, delivered to any person, or placed before the public, any false material statement. Knowingly making any false entry of a material fact in any book, report, or statement of any person, or knowingly omitting to make a true entry of any material fact pertaining to the business of such person in any book, report, or statement of such person. Stock operations and advisory board contracts.--Issuing or delivering, promising to issue or deliver, or permitting agents, officers, or employees to issue or deliver, agency company stock or other capital stock, benefit certificates or shares in any common- law corporation, or securities or any special or advisory board contracts or other contracts of any kind promising returns or profits as an inducement to insurance. Section 626.9561, Florida Statutes, authorizes the Department to "investigate the affairs of every person involved in the business of insurance in this state in order to determine whether such person has been or is engaged in any unfair method of competition or in any unfair or deceptive act or practice. " Section 626.9611, Florida Statutes, provides for the adoption of Department rules as follows: 626.9611 Rules.--The department may, in accordance with chapter 120, promulgate reasonable rules as are necessary or proper to identify specific methods of competition or acts or practices which are prohibited by s. 626.9541 or s. 626.9551, but the rules shall not enlarge upon or extend the provisions of ss. 626.9541 and 626.9551. (Emphasis supplied.) Proposed Rule 4-224.002 is an invalid delegation of legislative authority. The proposed rule exceeds the Department specific grant of rulemaking authority which is limited in this case to those rules which provide for equivalent regulation of insurance transactions without regard to ownership or affiliation of the insurance agent or agency. The rule does not provide parity of regulation. Proposed Rule 4-224.002 is an invalid exercise of delegated legislative authority because it is vague, fails to establish adequate standards for agency decisions and vests unbridled discretion in the agency. The proposed rule provides no information as to how an insurance transaction may be "structured" so as to "avoid deception" of the purchaser. The determination of whether an insurance transaction has been "structured" to "avoid deception" is at the discretion of the Department. The proposed rule provides no standards for Department decisions which will be made under the rule. The proposed rule provides no assistance or information to regulated parties as to what types of transaction structures are prohibited or acceptable, other than to require that the agent be identified as such during the insurance transaction. Proposed Rule 4-224.002 is an invalid exercise of delegated legislative authority because it is not supported by competent substantial evidence. Neither the testimony of the Department's witnesses, nor the research information offered by the Department in support of the proposed rule, are sufficient to support validation of this rule. The evidence fails to establish the existence of substantial consumer confusion regarding marketing of insurance products by financial institutions. The Department cites a previous administrative action related to the sale of insurance products in a financial institution as evidence that consumer confusion exists. The Department also cites another administrative action where the agency prosecuted an insurer for the misleading sale of insurance products. The evidence establishes that the cited cases were prosecuted under currently existing rules and regulations and does not establish the validity of the proposed rules at issue in this proceeding. The existence of other rules relating to manner and means of insurance product sales is insufficient to establish the validity of the proposed rules at issue in this case. Rule 4-224.004 (Underwriting of Insurance- Authorization Required) Proposed Rule 4-224.004 provides: No entity which is not licensed as an insurer by the Department shall directly or indirectly assume the obligation to provide the benefits of an insurance contract, or otherwise transact insurance as an insurer in this state. As identified in the published rule proposal, Proposed Rule 4-224.004, Florida Administrative Code, is specifically authorized by Section 624.308, Florida Statutes, and implements Sections 624.11, 624.401, 626.5715, 626.051 and 628.151(1), Florida Statutes. Section 624.308, Florida Statutes, provides general rulemaking authority to the Department. Section 624.11, Florida Statutes, prohibits any person from transacting insurance in Florida without complying with the provisions of the Insurance Code, and provides for operation of "risk retention groups" pursuant to law. Section 624.401, Florida Statutes, requires each insurer to obtain a certificate of authority from the Department in order to conduct business either directly or indirectly, and provides that failure to obtain a certificate is a third degree felony. The section also provides for preemption by the state of the field of regulating insurers and their agents and representatives from local regulation. Section 626.5715, Florida Statutes, the "parity" statute, provides as set forth herein. Section 626.051, Florida Statutes, provides a definition of "life agent." Section 628.151(1), Florida Statutes, provides as follows: No domestic insurer shall engage directly or indirectly in any business other than the insurance business and business activities reasonably and necessarily incidental to such insurance business. At the hearing, the Department's witness testified that the proposed rule was in response to comments offered by participants in the rulemaking proceeding suggesting that recent court decisions would permit financial institutions to act as insurers and to assume the obligations of insurance contracts. Proposed Rule 4-224.004 is an invalid exercise of delegated legislative authority because it exceeds the specific grant of rulemaking authority which is limited in this case to those rules which provide for equivalent regulation of insurance transactions without regard to ownership or affiliation of the insurance agent or agency. The proposed rule does not implement, interpret or make specific any provision of Florida law. Proposed Rule 4-224.004 is an invalid exercise of delegated legislative authority because it is not supported by competent substantial evidence. Anecdotal recollections of comments made by unidentified persons during rulemaking workshops do not constitute competent substantial evidence. Rule 4-224.007 (Primary Agent) Proposed Rule 4-224.007 provides: Each agency location where a licensed and appointed insurance agent is engaged in transactions with respect to insurance products shall be considered an insurance agency for purposes of Section 626.592, Florida Statutes. In those instances where an agent legally conducts insurance transactions at two or more agency locations, a separate primary agent need not be designated at each location, provided that no insurance transactions shall occur at any location when the agent is not present, and no unlicensed employee at the location has engaged in insurance activities requiring licensure. In those instances the agent shall be responsible for insurance transactions occurring at each location and one location shall be designated as the primary location. As identified in the published rule proposal, Proposed Rule 4-224.007, Florida Administrative Code, is specifically authorized by Section 624.308, Florida Statutes, and implements Sections 626.5715, 626.031, 626.041, 626.0428, 626.051, 626.062, 626.094, 626.112, 626.592, Florida Statutes. Section 624.308, Florida Statutes, sets forth the general rulemaking authority of the Department. Section 626.5715, Florida Statutes, the "parity" statute, provides as set forth herein. Section 626.031, Florida Statutes, provides a definition of "agent." Section 626.041, Florida Statutes, provides a definition of "general lines agent." Section 626.0428, Florida Statutes, provides limitations on the activities of agency personnel as follows: 626.0428 Agency personnel powers, duties, and limitations.-- An individual employed by an agent or agency on salary who devotes full time to clerical work, with incidental taking of insurance applications or quoting or receiving premiums on incoming inquiries in the office of the agent or agency, is not deemed to be an agent, customer representative, or solicitor if his or her compensation does not include in whole or in part any commissions on such business and is not related to the production of applications, insurance, or premiums. No employee of an agent or agency may bind insurance coverage unless licensed and appointed as a general lines agent or customer representative. No employee of an agent or agency may initiate contact with any person for the purpose of soliciting insurance unless licensed and appointed as a general lines agent, customer representative, or solicitor. Section 626.051, Florida Statutes, provides a definition of "life agent." Section 626.062, Florida Statutes, provides a definition of "health agent." Section 626.094, Florida Statutes, provides a definition of "insurance agency" as follows: 626.094 "Insurance agency" defined.--An "insurance agency" is a business location at which an individual, firm, partnership, corporation, association, or other entity, except for an employee of the individual, firm, partnership, corporation, association, or other entity, and other than an insurer as defined by s. 624.03 or an adjuster as defined by s. 626.101, engages in any activity or employs individuals to engage in any activity which by law may be performed only by a licensed insurance agent or solicitor. (Emphasis supplied.) Section 626.112, Florida Statutes, requires licensure of agents, agencies and related personnel. Section 626.592, requires the designation of "primary agents" as follows: 626.592 Primary agents.-- On or before January 1, 1990, and annually thereafter, each person operating an insurance agency and each location of a multiple location agency shall designate a primary agent for each insurance agency location and shall file the name of the person so designated, and the address of the insurance agency location where he or she is primary agent, with the Department of Insurance, on a form approved by the department. The designation of the primary agent may be changed at the option of the agency and any change shall be effective upon notification to the department. For the purpose of this section, a "primary agent" is the licensed agent who is responsible for the hiring and supervision of all individuals within an insurance agency location who deal with the public in the solicitation or negotiation of insurance contracts or in the collection or accounting of moneys from the general public. An agent may be designated as primary agent for only one insurance agency location. For the purpose of this section, an "insurance agency" is a location where any agent is engaged in the business of insurance. The department may suspend or revoke the license of the primary agent if an insurance agency employs any person who has had a license denied or any person whose license is currently suspended or revoked. However, when a person has been denied a license for failure to pass a required examination, he or she may be employed to perform clerical or administrative functions for which licensure is not required. The primary agent in an unincorporated agency, or the primary agent in an incorporated agency in which no officer, director, or stockholder is an agent, shall be responsible and accountable for the acts of salaried employees under his or her direct supervision and control, while acting on behalf of the agency. Nothing in this section shall be construed to render any person criminally liable or subject to any disciplinary proceedings for any act unless such person personally committed or knew or should have known of such act and of the facts constituting a violation of this chapter. The department may suspend or revoke the license of any agent who is employed by a person whose license is currently suspended or revoked. No insurance agency location shall conduct the business of insurance unless a primary agent is designated at all times. Failure to designate a primary agent as required under this section shall constitute grounds for requiring that the agency obtain a license in accordance with ss. 626.112 and 626.172. Any insurance agency may request, on a form prescribed by the department, verification from the department of any person's current licensure status. If a request is mailed to the department within 5 working days after the date an agent is hired, and the department subsequently notifies the agency that an employee's license is currently suspended, revoked, or has been denied, the license of the primary agent shall not be revoked or suspended if the unlicensed person is immediately dismissed from employment as an insurance agent with the agency. (emphasis supplied) Proposed Rule 4-224.007 is an invalid exercise of delegated legislative authority because it exceeds the grant of rulemaking authority provided in Section 626.5715, Florida Statutes. The proposed rule does not provide parity of regulation. The proposed rule is not limited to assuring that no insurance agency or agent is subject to more stringent or less stringent regulation than another insurance agency or agent on the basis of the regulatory status of the entity that owns the agency or is associated with the agent. Proposed Rule 4-224.007 is an invalid exercise of delegated legislative authority because it enlarges, modifies and contravenes the specific provisions of law implemented. The proposed rule specifically states that "where an agent legally conducts insurance transactions at two or more agency locations, a separate primary agent need not be designated at each location. " Section 626.592, Florida Statutes, requires the designation of a primary agent for each insurance agency location. An insurance agency is defined as a location where any agent is engaged in the business of insurance. No insurance agency location can conduct the business of insurance unless a primary agent is designated at all times. A primary agent may be so designated for only one insurance agency location. The Department has no authority to waive the requirements of Section 626.592, Florida Statutes. Further, the proposed rule permits an agent to designate one location of several as a "primary location." There is no statutory authorization for designation of a "primary location." Proposed Rule 4-224.007 is an invalid exercise of delegated legislative authority because it is not supported by competent substantial evidence. The only testimony regarding this proposed rule relates to the alleged expense involved in requiring separate primary agent designation for some banks which may choose to offer insurance products. The testimony is not persuasive and does not constitute competent substantial evidence supporting the rule. Rule 4-224-012 (Coercion) Proposed Rule 4-224.012 provides: 4-224.012 Coercion No person shall by words, actions, or distribution of written materials require or imply that the purchase of insurance by a borrower or prospective borrower from a particular agent, agency, insurer or other entity is required as a condition of, or will influence the terms or conditions of, the lending of money or the extension of credit. To the extent that insurance may permissibly be marketed in connection with or in conjunction with any activities described in this section; The agent shall disclose at or before the initial discussion or in response concerning insurance coverage required or offered in connection with a loan or credit application, that: the purchase of insurance from any particular source is not a condition to the provision of, and will not affect the terms of, any loan of money or extension of credit; Insurance is available through agent not associated with a lender or creditor; and The choice of another insurance provider will not affect decisions relating to or terms of any loan or credit extension. 1. A written disclosure which addresses the elements of paragraph (a) above shall be provided to the consumer in a separate documents on Form DI4- (rev /97) or Form DI4- (rev /97) [sic] which are adopted and incorporated herein by reference, or on another form approved in advance by the Department that provides equivalent disclosure, at or before the time the consumer completes an application or enrollment form or otherwise applies for coverage. 2. One copy of the form signed by the consumer shall be retained by the agent. The requirements of this rule 4-224.012 are inapplicable to credit insurance for which disclosures provided satisfy the disclosure requirements for excluding the premium of charge for insurance from the finance charge pursuant to Federal Truth in Lending Regulation Z, Section 12 CFR 226.4(d)(1) and (2), which is adopted incorporated herein by reference. As identified in the published rule proposal, Proposed Rule 4-224.012, Florida Administrative Code, is specifically authorized by Sections 624.308 and 626.9611, Florida Statutes, and implements Sections 626.5715, 626.051, 626.9541, 626.9551, and 626.9641, Florida Statutes. Section 624.308, Florida Statutes, provides the Department's general rulemaking authority. Section 626.9611, Florida Statutes, provides the Department's authority to adopt rules pursuant to Section 120, Florida Statutes, which specifically identify prohibited methods of competition, but limits such rules to those acts prohibited under Sections 626.9541 and 626.9551. Section 626.5715, Florida Statutes, the "parity" statute, provides as set forth herein. Section 626.051, Florida Statutes, defines "life agent." Section 626.9541, Florida Statutes, addresses "unfair methods of competition and unfair or deceptive acts" and is set forth herein. Section 626.9551, Florida Statutes, addresses the issue of coercion or "favoritism" and provides as follows: 626.9551 Favored agent or insurer; coercion of debtors.-- No person may: Require, as a condition precedent or condition subsequent to the lending of money or extension of credit or any renewal thereof, that the person to whom such money or credit is extended, or whose obligation the creditor is to acquire or finance, negotiate any policy or contract of insurance through a particular insurer or group of insurers or agent or broker or group of agents or brokers. Unreasonably disapprove the insurance policy provided by a borrower for the protection of the property securing the credit or lien. For purposes of this paragraph, such disapproval shall be deemed unreasonable if it is not based solely on reasonable standards, uniformly applied, relating to the extent of coverage required by such lender or person extending credit and the financial soundness and the services of an insurer. Such standards shall not discriminate against any particular type of insurer, nor shall such standards call for the disapproval of an insurance policy because such policy contains coverage in addition to that required. Require, directly or indirectly, that any borrower, mortgagor, purchaser, insurer, broker, or agent pay a separate charge in connection with the handling of any insurance policy required as security for a loan on real estate or pay a separate charge to substitute the insurance policy of one insurer for that of another. This paragraph does not include the interest which may be charged on premium loans or premium advances in accordance with the security instrument. Use or disclose information resulting from a requirement that a borrower, mortgagor, or purchaser furnish insurance of any kind on real property being conveyed or used as collateral security to a loan, when such information is to the advantage of the mortgagee, vendor, or lender, or is to the detriment of the borrower, mortgagor, purchaser, or insurer, or the agent or broker, complying with such a requirement. The department may investigate the affairs of any person to whom this section applies to determine whether such person has violated this section. If a violation of this section is found to have been committed knowingly, the person in violation shall be subject to the same procedures and penalties as provided in ss. 626.9571, 626.9581, 626.9591, and 626.9601. Section 626.9641, Florida Statutes, sets forth a series of standards known as Policyholder's Bill of Rights and provides as follows: 626.9641 Policyholders, bill of rights.-- The principles expressed in the following statements shall serve as standards to be followed by the department in exercising its powers and duties, in exercising administrative discretion, in dispensing administrative interpretations of the law, and in promulgating rules: Policyholders shall have the right to competitive pricing practices and marketing methods that enable them to determine the best value among comparable policies. Policyholders shall have the right to obtain comprehensive coverage. Policyholders shall have the right to insurance advertising and other selling approaches that provide accurate and balanced information on the benefits and limitations of a policy. Policyholders shall have a right to an insurance company that is financially stable. Policyholders shall have the right to be serviced by a competent, honest insurance agent or broker. Policyholders shall have the right to a readable policy. Policyholders shall have the right to an insurance company that provides an economic delivery of coverage and that tries to prevent losses. Policyholders shall have the right to a balanced and positive regulation by the department. This section shall not be construed as creating a civil cause of action by any individual policyholder against any individual insurer. Proposed Rule 4-224.012 is an invalid exercise of delegated legislative authority because it exceeds the Department's grant of rulemaking authority. Such authority is limited to those rules which provide for equivalent regulation of insurance transactions without regard to ownership or affiliation of the insurance agent or agency. The evidence fails to establish that this rule provides for parity of insurance regulation. Proposed Rule 4-224.012 is an invalid exercise of delegated legislative authority because it enlarges the specific provisions of law being implemented. The rule mandates a statement of disclosure for which there is no statutory requirement. The statutes cited as being implemented by this proposed rule clearly prohibit coercive activities, but do not impose any disclosure requirement as would be required by the rule. Proposed Rule 4-224.012 is an invalid exercise of delegated legislative authority because there is no competent substantial evidence supporting the rule. The Department asserts that research indicates consumers can be, and are, coerced into purchasing insurance products by lenders during credit transactions. The Department also cites a previous administrative action prosecuted under existing statutes as evidence that coercion occurs. The evidence offered by the Department, including the testimony of the Department's witnesses, fails to support the assertion that coercion by financial institutions in the sale of insurance products is a substantial problem. Neither the cited research nor the related testimony by the Department's witnesses was persuasive. The greater weight of the evidence, including the testimony of Dr. Michael White, establishes that there is little empirical evidence of coercion in the sale of insurance products by financial institutions. As additional support for the rule, the Department offered testimony related to the existence of other regulatory disclosure rules and of model language adopted by the National Association of Insurance Commissioners. Neither the other rules or the model language establish that the proposed coercion rule meets the current requirements of law. Other disclosure regulations were adopted prior to recent amendments to Chapter 120, Florida Statutes, the Administrative Procedures Act (APA), which altered the "reasonableness" standard under which such rules could have been appropriate. The relevant model language of the NAIC has not been adopted by the Florida legislature. Rule 4-224.013 (Remedies) Proposed Rule 4-224.013 provides as follows: 4-224.013 Remedies Any person violating the provisions of the Insurance Code implemented by this rule chapter shall be subject to the issuance of a Cease and Desist Order in accordance with the provisions of Sections 624.310(3) and 626.9581, Florida Statutes, and to the imposition of an administrative penalty pursuant to Sections 624.310(5) and 626.9521, Florida Statutes, and to such other sanctions or proceedings as are authorized by the Florida Insurance Code. If the majority owner, partner, manager, director, officer or other person who manages or controls an insurance agency violates any provision of the Insurance Code or any department rule, or knowingly permits violation of any requirement of these rules by an agent or employee of the agency, the agency must obtain a license as an insurance agency in accordance with the provisions of Section 626.112(8), Florida Statutes. As identified in the published rule proposal, Proposed Rule 4-224.013, Florida Administrative Code, is specifically authorized by Section 624.308, Florida Statutes, and implements Sections 624.310, 624.4211, 646.418, 626.5715, 626.051, 626.112, 626.9521 and 626.9581. Section 624.308, Florida Statutes, provides the Department with general rulemaking authority. Section 624.310, Florida Statutes, provides the Department with enforcement and prosecutorial powers for violations of the Insurance Code, including cease and desist orders, administrative fines, and removal of "affiliated parties." Section 624.4211, Florida Statutes, provides for imposition of administrative fines in lieu of other disciplinary penalties. Section 624.418, Florida Statutes, provides suspension or revocation of certificates of authority for certain violations and other conditions. Section 626.5715, Florida Statutes, the "parity" statute, provides as set forth herein. Section 626.051, Florida Statutes, provides a definition of "life agent." Section 626.112, Florida Statutes, provides for licensure of agencies, agents and other representatives. Section 626.9521, Florida Statutes, prohibits and penalizes unfair methods of competition and unfair or deceptive acts or practices which are statutorily defined or determined pursuant to Sections 626.951 and 626.9651, Florida Statutes. Section 626.9581, Florida Statutes, provides the Department with the ability to issue cease and desist orders related to the commission of unfair or deceptive acts or practices or the unlawful transaction of insurance, and states as follows: 626.9581 Cease and desist and penalty orders.--After the hearing provided in s. 626.9571, the department shall enter a final order in accordance with s. 120.569. If it is determined that the person charged has engaged in an unfair or deceptive act or practice or the unlawful transaction of insurance, the department shall also issue an order requiring the violator to cease and desist from engaging in such method of competition, act, or practice or the unlawful transaction of insurance. Further, if the act or practice is a violation of s. 626.9541 or s. 626.9551, the department may, at its discretion, order any one or more of the following: Suspension or revocation of the person's certificate of authority, license, or eligibility for any certificate of authority or license, if he or she knew, or reasonably should have known, he or she was in violation of this act. Such other relief as may be provided in the insurance code. The Department presented no evidence with respect to Proposed Rule 4-224.013. The Department asserts only that the proposed rule is intended to provide notice to non-traditional sellers of insurance that a violation of the Insurance Code will subject them to the penalties set forth in the Insurance Code. Proposed Rule 4-224.013 is an invalid exercise of delegated legislative authority because it is redundant and unnecessary. The rule does not implement, interpret or make specific any provision of Florida law. There is no competent substantial evidence which establishes the validity of the proposed rule. Rule 4-224.014 (Confidential Information) Proposed Rule 4-224.014 provides: 4-224.014 Confidential Information Obtaining confidential information for a stated purpose unrelated to the transaction of insurance when it is known that the information will or may be used for purposes of marketing insurance, and when the insurance-related purpose is not disclosed, constitutes a deceptive statement or omission and is an unfair and deceptive act or practice under the provisions of the Unfair Insurance Trade practices Act, Part X, Chapter 626, Florida Statutes. (2)(a) Any entity which is a non-insurance transaction obtains confidential information concerning an individual or entity where it is known the information will be used by an affiliate insurance agent or agency for purposes of marketing insurance, or where it is known or reasonably should be known that there is a present intent or plan to use such information in such a manner, shall conspicuously and clearly disclose that fact to the person at the time the information is obtained and the consumer should be afforded an opportunity to object to the utilization of such information. (b) If the disclosure is not provided on a separate form, it must be made on a document signed by the person, in which case the disclosure shall be made in a larger type size than that used elsewhere in the document, or in a manner that is otherwise clearly distinguishable from the remaining text of the document, and must appear immediately adjacent to the person's signature. If the disclosure is made on a separate form and if information obtained as a result of future transaction may be used for marketing purpose; The disclosure shall clearly reflect such fact, and After a period of three years a new disclosure form must be provided if additional confidential information is secured and this paragraph is not complied with. (3)(a) Insurance agents and insurance companies are prohibited under the Insurance Code from engaging in practices which are injurious to policyholders or the public. (b) Use of confidential information concerning any person for purposes of marketing insurance when the person has directed that the information not be used for such purposes entails conduct which is injurious to policyholders or the public. (4) For purposes of this rule 4-224.014, confidential information is information pertaining to an individual or entity that is generally not available, provided that in no event shall the name, address, or telephone number or any person be considered confidential. As identified in the published rule proposal, Proposed Rule 4-224.013, Florida Administrative Code, is specifically authorized by Section 624.308, Florida Statutes, and implements Sections 624.418(1)(b), 626.5715, 626.621(6), 626.9541(1), 626.9611 and 626.964(1), Florida Statutes. Section 624.308, Florida Statutes, provides the Department's general rulemaking authority. Section 624.418, Florida Statutes, provides suspension or revocation of certificates of authority for certain violations and other conditions. Subsection (1)(b) specifically provides for such penalties where the insurer is using such methods and practices in the conduct of its business as to render its further transaction of insurance in this state hazardous or injurious to its policyholders or to the public. Section 626.5715, Florida Statutes, the "parity" statute, provides as set forth herein. Section 626.621(6), Florida Statutes, sets forth grounds for denial or suspension of licensure, and provides as follows: 626.621 Grounds for discretionary refusal, suspension, or revocation of agent's, solicitor's, adjuster's, customer representative's, service representative's, managing general agent's, or claims investigator's license or appointment.--The department may, in its discretion, deny an application for, suspend, revoke, or refuse to renew or continue the license or appointment of any applicant, agent, solicitor, adjuster, customer representative, service representative, managing general agent, or claims investigator, and it may suspend or revoke the eligibility to hold a license or appointment of any such person, if it finds that as to the applicant, licensee, or appointee any one or more of the following applicable grounds exist under circumstances for which such denial, suspension, revocation, or refusal is not mandatory under s. 626.611: * * * (6) In the conduct of business under the license or appointment, engaging in unfair methods of competition or in unfair or deceptive acts or practices, as prohibited under part X of this chapter, or having otherwise shown himself or herself to be a source of injury or loss to the public or detrimental to the public interest. Section 626.9541, Florida Statutes, addresses "unfair methods of competition and unfair or deceptive acts" and is set forth herein. Section 626.9611, Florida Statutes, provides the Department's authority to adopt rules pursuant to Section 120, Florida Statutes, which specifically identify prohibited methods of competition, but limits such rules to those acts prohibited under Sections 626.9541 and 626.9551. Section 626.9641(1), Florida Statutes, is the "Policyholder's Bill of Rights" and is set forth herein. Proposed Rule 4-224.014 is an invalid exercise of delegated legislative authority because it exceeds the Department's grant of rulemaking authority. The evidence fails to establish that the cited statutes provide the Department with the authority to prohibit the collection or utilization of information. The proposed rule exceeds the Department's specific grant of rulemaking authority which is limited in this case to those rules which provide for equivalent regulation of insurance transactions without regard to ownership or affiliation of the insurance agent or agency. Proposed Rule 4-224.014 is an invalid exercise of delegated legislative authority because it is vague, fails to establish adequate standards for agency decisions and vests unbridled discretion in the agency. The rule states that collection of information "when it is known that the information will or may be used for purposes of marketing insurance, and when the insurance-related purpose is not disclosed, constitutes a deceptive statement or omission. " The phrase "when it is known that the information...may be used" is vague and requires a post-collection determination of the intent of the data collector at the time the information was gathered. Further, proposed definition of "confidential information" as that which is "generally not available" is vague. The vagueness of the rule results in a lack of adequate standards for decision making and vests unbridled discretion in the Department. Proposed Rule 4-224.014 is an invalid exercise of delegated legislative authority because it is not supported by competent substantial evidence. The testimony related to this proposed rule consisted primarily of an analysis of the statutory support for the rule. The evidence is insufficient to establish that the undisclosed collection of information which may be used at some time in a non-insurance setting constitutes an unfair or deceptive trade practice. There is no statutory provision which prohibits or restricts the sharing of information between a financial institution and an affiliated insurance agency. There is evidence that such prohibition as the Department intends to impose by this rule may violate the federal Fair Credit Reporting Act, 12 U.S.C. 1681t(b)(2), and the state Banking Code, Section 655.059(2)(b), Florida Statutes.
The Issue Whether Respondent committed the violations alleged in the Administrative Complaint and, if so, what penalties should be imposed.
Findings Of Fact Based upon the evidence adduced at hearing and the record as a whole, the following findings of fact are made: Respondent's Licensure and Work History Respondent is now, and has been at all times material to the instant case, licensed by Petitioner as a general lines (property and casualty) insurance agent. At no time material to the instant case has he been licensed as a surplus lines agent. In the 30 plus years that he has been in the insurance business, no licensing agency has taken any disciplinary action against him. From January of 1997 until July of 1997 (which includes the entire period during which the events described in the Administrative Complaint took place), Respondent worked as an insurance agent for Braishfield of Florida, Inc. (Braishfield), an insurance agency/brokerage firm. (In July of 1997, he started his own insurance agency/brokerage firm, Bandel and Associates, which he still operates.) The Saxony Condominium Association The Saxony Condominium Association (Association) consists of the owners of the 672 units (located in 14 buildings) in the "Saxony" section of the Kings Point condominium development in Delray Beach. The development is approximately seven to ten miles from the Atlantic Ocean. For the past six years, Elinor Lichten has been the president of the Association. The Association's Insurance Committee In August of 1992, before Ms. Lichten became president of the Association, Hurricane Andrew made landfall in the South Florida area and caused extensive property damage. In the years that followed, the premiums that the Association paid for insurance increased dramatically. In February of 1996, in an effort to contain these escalating insurance costs, the Association formed an insurance committee. Ms. Lichten named Dan Miller to serve as the chairman of the committee. Mr. Miller appointed the remaining members on the committee. Ed Greenbaum was among those Mr. Miller appointed to the committee. Ms. Lichten was not a voting member of the committee, although she did attend some (but not all) of the committee's meetings. The Association's Fireman's Fund Policies At the time the insurance committee was formed, the Association was insured by Fireman's Fund. It obtained this insurance coverage through Sedgwick James of Florida, Inc. (Sedgwick). The insurance agent who represented Sedgwick in its dealings with the Association was J. Simione. In October of 1996, the Association received a notice that the Fireman's Fund policies would not be renewed. Upon receiving the notice, Ms. Lichten telephoned Mr. Simione, who advised her that he was "negotiating to reinstate that policy and that in all probability it would be reinstated." Mr. Simione subsequently contacted Ms. Lichten and advised her that the negotiations had been successful. The Fireman's Fund policies were thereafter renewed. The renewed policies had an effective date of December 1, 1996, and an expiration date of December 1, 1997. The Association agreed to the renewal notwithstanding the renewed policies' high premiums and deductibles. Members of the insurance committee, who had met with Mr. Simione "between three to five times" prior to the renewal of the policies, had advised the committee members that there were no better options available and that they should "be absolutely delighted [to] have the coverage [they] had since insurance companies were not renewing policies." When they asked Mr. Simione to "find [a] layered program [for the Association, like those other condominium associations in the area had] where the [risk] is divided so that the premiums are reduced," Mr. Simione told them that it "wasn't possible," explaining that "all of the layering programs [they] had referred to had since fallen apart." The Insurance Committee's Discussions with Respondent Following the renewal of the Fireman's Fund policies, members of insurance committee, at the direction Mr. Miller, "start[ed] to interview" other insurance agents "to see whether or not Mr. Simione's comment to [them concerning the unavailability of a layered program for the Association] had any validity." Respondent was the second agent to be "interview[ed]." He was initially contacted by Ed Greenbaum, who told him that the insurance committee "was very upset by the current coverage package they had" and wanted to see if "there was something better." Respondent spoke subsequently with both Mr. Greenbaum and Mr. Miller. Following this conversation, he sent Mr. Greenbaum the following letter, dated February 23, 1997: It was pleasure talking to you and Dan Miller and I appreciate your candor. Based on the information you provided on the phone, it appears the premiums and deductibles that are currently in force are excessive. My comment is based on what is available in the marketplace today. It appears that the earliest I can sit down and discuss this with the board is in May. My recommendation is that we move our meeting up to March or April. This will enable us to obtain the best possible terms and conditions as we will have ample time prior to the beginning of the hurricane season. The association has nothing to lose and potentially a lot to gain. My evaluation requires a minimum amount of time. After our meeting and a review of the current program and losses, I will be in a position to confirm in writing what improvements can be made. I look forward to hearing from you. Respondent provided the "marketing person" at Braishfield with the information he had been provided by Mr. Greenbaum and Mr. Miller concerning the Association's insurance needs and loss history. The "marketing person" thereupon canvassed the market to determine if there were any alternatives to the Fireman's Fund policies. Such canvassing revealed that there did exist an alternative to the Fireman's Fund policies, in the form of a layered program in which three of the participating insurers were not "authorized insurers," as that term is used in Florida's "Surplus Lines Law." The "marketing person" prepared the following "Statement of Diligent Effort" for Respondent's signature as the "producing agent": Pursuant to [sic] Section 626.914(4), Florida Statutes, requires producing agents to document that a diligent effort has been made to place a risk with at least three (3) authorized insurers prior to contacting a surplus lines agent to export the risk in the surplus lines market. The following form, prescribed by the Department, must be completed IN FULL for each risk. Name of person contacted and telephone number are MANDATORY. COUNTY OF RISK: Palm Beach County NAME OF INSURED: Saxony A-N Condominium Association TYPE OF COVERAGE: Property AUTHORIZED INSURER #1 NAME- Hartford Insurance TELEPHONE NUMBER- 800-824-1732 PERSON CONTACTED- Ben Wilson DATE OF CONTACT- March 21, 1997 REASON FOR DECLINATION- Type of Risk/Property Location AUTHORIZED INSURER #2 NAME- General Accident Ins. TELEPHONE NUMBER- 407-660-1985 PERSON CONTACTED- Bob Rayser DATE OF CONTACT- March 21, 1997 REASON FOR DECLINATION- Type of Risk/Property Location AUTHORIZED INSURER #2 NAME- RISCORP TELEPHONE NUMBER- 800-226-7472 PERSON CONTACTED- Bryan Flowers DATE OF CONTACT- March 21, 1997 REASON FOR DECLINATION- Risk does not qualify for program Respondent signed this "Statement of Diligent Effort" on the line provided for the "[s]ignature of [p]roducing [a]gent." He did so in good faith based upon the representations made to him by the "marketing person." In April of 1997, Respondent met with members of the insurance committee and Ms. Lichten at Mr. Miller's residence to discuss the possibility of the Association obtaining, through Braishfield, the layered program of insurance described above to replace the Fireman's Fund policies that were then in effect. Respondent, on behalf of Braishfield, made a "conceptual" proposal at the meeting. After the meeting, Respondent sent the following letter, dated April 16, 1997, to Dan Miller: It was a pleasure meeting with you and the committee and again I want to apologize for arriving late. Per our discussions, we will provide our final proposal after receiving written confirmation regarding the three year loss history for property and liability. Our proposal will be effective June 1, however we will use whatever date is acceptable to the committee. We anticipate, it will take us approximately two weeks from the time we go into the marketplace until everything is finalized. It appears, there is minimal exposure for equipment, such as heating, cooling and electrical systems. Consequently, we will not include machinery and equipment breakdown in our final proposal. I strongly recommend that you obtain an updated appraisal on your buildings as it is extremely important that your replacement cost reflect today's cost. This will eliminate any potential coinsurance or under insurance problem in the event of a loss. I look forward to working with you and the committee and being appointed as your broker to assist you in all your insurance needs. In May of 1997, Respondent, on behalf of Braishfield, presented a detailed formal written proposal (Braishfield's Written Proposal) to the Association. Braishfield's Written Proposal contained an "Executive Summary" which read as follows: Executive Summary Per our conceptual proposal and correspondence of April 16, we are pleased to present our final program including terms and conditions. Our proposal is based on information provided by the Insurance Committee on policies that are currently in force. Our comparison of coverages incorporates this information. The differences are what we believe to be the key or salient features of each program. The bottom line is, we are offering a substantial premium savings, significantly lower deductibles with comparable coverage. Our recommendation is to appoint Braishfield of Florida as your broker to place all coverage in effect as soon as possible. The "final program" referenced in the "Executive Summary" was a layered program. The "[p]articipating [c]arriers" in the program and their "Best's Ratings" were listed as follows in Braishfield's Written Proposal: PARTICIPATING CARRIERS Property Insurance Carriers Best's Rating Lexington Insurance A++15 General Star Insurance A++7 Royal Surplus Lines A-7 General Liability/Crime New Hampshire Insurance A++15 Directors & Officers Liability Chubb Insurance Group A++15 Umbrella Liability Great American Insurance A+11 The three "carriers" providing "property insurance" coverage were not "authorized insurers," within the meaning of the "Surplus Lines Law." The "[b]enefits of the Braishfield [p]roposed [p]rogram [o]ver [c]urrent [p]rogram" were described in Braishfield's Written Proposal as follows: A Premium Savings of $42,529 Annually.* No Coinsurance Penalty. A 2% Deductible per building as respect to the perils of wind and hail. A $5,000,000 limit for Excess Liability A $5,000 AOP Deductible * Our premium savings is based on the following: Company Coverage Premiums Fireman's Fund Package $144,071 Fireman's Fund Umbrella $2,168 TOTAL $146,239 $ 12,966 (Agent's Fee) TOTAL $159,205 Proposal Cancellation Date June 1, 1997 Pro Rata Return Premium- $79,761 Short Rate Return Premium- $71,801 NOTE: A $1,000,000 Umbrella would produce a further savings of $3,395 Braishfield's Written Proposal also contained a "Program Comparison," which provided as follows: Coverage Current Proposed Program Program $20,454,000 Blanket As Per Limit on Schedule Real and Personal Property Coinsurance Yes No Demolition $250,000 Cost Law & $5,000,000 $500,000 Ordinance Deductible -Wind 3% of $20,454,00 2% Per Building -AOP $10,000 $5,000 Valuation Replacement Cost Re- Placement Cost Unnamed Yes See Note Storm Deductible Umbrella $1,000,00 $5,000,000 Limit NOTE: Our comparison does not include unnamed storm wind coverage. This will be discussed during the presentation. Respondent met with the committee members and Ms. Lichten for about eight hours on or about May 6, 1997. At the meeting, he explained Braishfield's Written Proposal in detail and answered questions. On or about May 9, 1997, Respondent sent the following letter to Mr. Miller for the insurance committee's consideration: The benefits to the association under Braishfield's proposal are: A $5,000 AOP deductible Significantly lower premium No co-insurance penalty A superior wind deductible in the event of a catastrophe such a hurricane. The elimination of any rate increase in 1997 even if this is a bad year for the insurance industry. Outstanding insurance service will include a renewal strategy meeting 120 days prior to expiration. This meeting will disclose options, market conditions and pricing projections. This will allow the committee to act proactively instead of reactively in the best interest of the association. -$5,000,000 Umbrella. One other point to consider involves the payment of premium. If you cancel the Fireman's Fund Package policy on June 1, the earned premium is estimated to be $72,035. If you include a short rate penalty this increases to $79,239. Including the May installment the association has paid $96,165. The difference or the return premium due the association is $24,130 which should be refunded within 60 days. Since you have paid more premium than is earned no payment should be made for June. This enables the association to apply June's payment of $12,015 toward the down payment under Braishfield's program of $26,557.16. The net amount the association has to come up with is $14,542.16. I trust this will be helpful to the committee. It has not been shown that that Respondent at any time knowingly provided the Association (through its officers and representatives) with any false or misleading information or that he knowingly, with the intent to deceive, hid any information from the Association. He disclosed, among other things, that Braishfield's proposed layered program, unlike the Fireman's Fund policies, included "unauthorized insurers" and explained the differences between "unauthorized" and "authorized" insurers. In explaining these differences, he talked about the Florida Insurance Guaranty Act, which protects those insured by "authorized insurers" in the event of insurer insolvency, but does not offer similar protection to those insured by "unauthorized insurers." Respondent also advised that the mid- term cancellation of the Fireman's Fund policies would result in a "short rate" penalty and, in addition, he discussed how Braishfield's proposed layered program would be financed and the interest rates that would be charged. The Association's Acceptance of Braishfield's Written Proposal The insurance committee brought Braishfield's Written Proposal before the Association's board of directors, which voted 15 to 14 in favor of accepting the proposal and replacing the Fireman's Fund policies with the layered program proposed by Braishfield. Post-Acceptance Activities After learning of the results of the vote, Respondent sent the following letter, dated May 27, 1997, to Mr. Miller: I was delighted to hear that the board has made their decision in favor of Braishfield. If we are looking at a May 31, 1997, effective date it is essential that the following matters be addressed immediately: The original finance agreement signed in the appropriate places indicated by "x." A check in the amount of $26,557.67 should be made payable to Braishfield of Florida for the down payment. Both the finance agreement and the check must be available to be picked up by me prior to May 31, 1997. A broker of record letter naming Braishfield on the Director's and Officer's liability policy must be executed and signed. The specific policy number should be included in the caption. A sample letter was included in our final proposal. We will be sending you a completed statement of values form which will require signature of a board or insurance committee member. I have taken the liberty of drafting a letter advising the agent to cancel all coverages effective May 31, 1997. Included is a request to confirm the return premium due the association as well as any unearned fee that will be returned. This letter should be written on Saxony letterhead and signed by you or the President of the association. In accordance with Respondent's suggestion, Ms. Lichten sent the following letter, dated May 28, 1997, to Mr. Simione: Re: Fireman's Commercial Insurance Pkg. Policy #S15MZX80662013 Fireman's Umbrella Insurance Policy #XSC 00074217738 Dear Mr. Simione: Effective May 31, 1997, please cancel above captioned policies. The Saxony Board of Directors at a Special Meeting held on May 27, 1997 voted to appoint a new agent. Please acknowledge the above cancellation in writing and also confirm the return premium due under each policy, including any penalty. Confirmation of any unearned brokerage fee should also be included. All calculations should be based on a May 31, 1997 cancellation date. Thank you for your cooperation and consideration you have given Saxony over the past few years. The following day, May 29, 1997, Ms. Lichten sent the following letter, with the described enclosures, to Respondent: Enclosed herewith please find the following: Duly signed Finance Agreement for our Insurance as agreed upon. Check #001 payable to Braishfield of Florida date May 28, 1997 drawn on Sun Trust in the amount of $26,557.67, which represents our down payment. Please send us [a] letter acknowledging receipt of the above together with [a] letter indicating that we will indeed have insurance as we agreed to commencing May 31, 1997. Looking forward to working with you. That same day, May 29, 1997, Respondent sent Ms. Lichten "copies of binders confirming coverage effective May 31, 1997 as per [Braishfield's] May 6th proposal." On June 5, 1997, Ms. Lichten sent Mr. Simione a signed (by Ms. Lichten) and dated (May 29, 1997) "Cancellation Request/Policy Release" form formally requesting cancellation of the Fireman's Fund policies, effective May 31, 1997. On or about June 20, 1997, Ms. Lichten was sent a Certificate of Insurance "certify[ing] that the policies listed [which had been described in Braishfield's Written Proposal] ha[d] been issued to the [Association] for the policy period indicated [May 31, 1997, to May 31, 1998]." On or about June 30, 1997, the appraiser that the Association had hired (Allied Appraisal Service) completed the "updated appraisal on [the Association's] buildings" that Respondent had recommended. Respondent reviewed the appraisal report and prepared a written analysis of the report, which he subsequently discussed with the members of the insurance committee and Ms. Lichten. In his written analysis, Respondent stated, among other things, the following: This proposal analyzes the appraisal made by Allied Appraisal Service on June 30, covering the building and surrounding improvements at Saxony "E," Delray Beach, Florida 33446. The purpose is two fold. To ascertain if the values being reported to the insurance companies reflect as closely as possible the exposure at risk. This includes the impact on coverages such as limits and deductibles. The other area is the premium which includes various options. The property coverage is underwritten in a layered program using three companies. The total limit of coverage is $20,454,000, which is subject to a sublimit per building of $1,461,000. Based on the updated appraisal, the 100% replacement cost on buildings and improvements is $24,561,978 which breaks down to $1,754,427 per building. These amounts were arrived at by eliminating and or reducing those items that were not the responsibility of the association. Other adjustments were made regarding contingencies and contractor's profit which should be discussed. The breakdown is provided on Exhibit I attached. The difference or the amount of increase required to comply with the appraisal is $4,107,978. The change in values increases the wind deductible from $29,220 to $35,088 per building. On or about July 18, 1997, Respondent (who, by this time, had left the employ of Braishfield and had started his own insurance agency/brokerage firm) sent Ms. Lichten a letter, which read as follows: Per our meeting with the insurance committee on Wednesday, July 16, it was recommended the building values be amended based on the property appraisal made by Allied Appraisal Service[] on June 30, 1997. The 100% replacement value including improvements is $24,561,978. The total amount of insurance in force is $20,454,000. The net result is a[n] increase of $4,107,978. Also included in the appraisal is the cost to change certain items revised by current building codes. This is known as law or ordinance coverage. We recommend an increase in the limit by $850,000 to $1,350,000 to cover the additional exposure. Both of the above increases place the property insurance in compliance with the appraisal. The underwriter has agreed to provide blanket coverage using 90% coinsurance. The blanket amount excluding law or ordinance coverage is $22,105,760. This is an improvement over the existing program as the blanket amount would apply to any one loss and the basis for determining the premium would be significantly less. Using an effective date of July 31, the additional premium including taxes and fees is $8,446.20. In addition to the improvement in coverage and key deductibles, our program provides a net savings in excess of $34,000 a year over the Fireman's Fund policy. The changes that Respondent had recommended based upon the "updated Appraisal" were "bound," as Respondent advised Ms. Lichten by the following letter dated August 12, 1997: This will confirm that effective July 31, the following changes have been bound: The total insurable value increased to $22,105,780. The Law or Ordinance coverage increased to $1,350,000. Coverage is on a blanket basis. The coinsurance clause has been amended to 90%. The 2% wind deductible per building is increased to $31,580. All of these changes were based on the property appraisal made by Allied Appraisal Service on June 30, with some exceptions, such as Misc. & Contingencies and Overhead/Profits. It was agreed by the insurance committee not to include these items. Attached is our invoice amount of $8,446.20 representing the additional premium due hereunder. Please make your check payable to Braishfield of Florida and send it to me. In October of 1997, Respondent submitted a renewal proposal to the Association. The proposal was accepted and renewed coverage was bound, effective December 1, 1997, for a period of three years.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department issue a final order dismissing the Administrative Complaint issued against Respondent. DONE AND ENTERED this 7th day of July, 2000, in Tallahassee, Leon County, Florida. STUART M. LERNER 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 7th day of July, 2000.
The Issue Whether the School Board of Broward County's award of a contract for Excess General and Auto Liability insurance coverage to United National Insurance Company is barred because of illegality?
Findings Of Fact The Parties Ranger Insurance Company, Petitioner, is the holder of a Certificate of Authority dated September 9, 1996 and issued by the Department of Insurance and Bill Nelson, Insurance Commissioner and Treasurer. Good through June 1, 1997, the certificate authorizes Ranger to write in a number of lines of insurance business, including, Private Passenger Auto Liability, Commercial Automobile Liability, Private Passenger Automobile Auto Physical Damage, Commercial Auto Physical Damage and Other Liability. As such, Ranger is an "authorized" or "admitted" insurer in the State of Florida. L.B. Bryan & Company, Alexander & Alexander, Inc., and Benefactor Financial Group, Inc., is a joint venture and co- petitioner with Ranger in this proceeding through whom Ranger proposed to procure the Excess General and Auto Liability (“Excess GL/AL”) coverage. A timely proposal under Request for Proposal 97- 072S was submitted to the School Board of Broward County by the petitioners to provide the Excess GL/AL Insurance Coverage sought by the RFP. United National Insurance Company is an "eligible" surplus lines insurer, approved by the Florida Department of Insurance to transact all surplus lines coverages in the State of Florida and licensed as such. The Department has notified insurance agents of United Nation's eligibility as a surplus lines insurer since 1978. It is the insurer of the Excess General and Excess Auto Liability insurance coverage awarded by the School Board under RFP 97-072S. Arthur J. Gallagher & Company ("Gallagher,") is the eighth largest insurance broker in the world. It has four sales offices, nine service offices, and approximately 150 employees in the State of Florida alone. The office from which it conducted business related to this proceeding is in Boca Raton, Florida, an office for which Area President David L. Marcus is responsible. Gallagher submitted a timely proposal (the "Gallagher proposal,") in response to the RFP on behalf of United National. The School Board of Broward County is the authority that operates, controls, and supervises all free public schools in the Broward County School District, "[i]n accordance with the provisions of s. (4)(b) of Article IX of the State Constitution ...". Section 230.03(2), F.S. In accord with its powers, the School Board may contract directly to purchase insurance. It is not required by its purchasing rules to use a competitive bidding or procurement process to purchase insurance. Nonetheless, on Friday, April 26, 1996, it issued a request for proposals, the RFP at issue in this proceeding, for insurance coverages including for Excess GL/AL insurance coverages. Siver Insurance Management Consultants Siver Insurance Management Consultants ("Siver,") are the drafters of RFP 97-072S. The School Board relied on Siver to draft the RFP, particularly its technical sections. Technical review of the proposals made under the RFP was conducted by Siver. And Siver put together for the School Board's use a summary of the policies proposed by both United National and Ranger. The summary was considered by the School Board's Evaluation Committee when it evaluated the competing proposals. The determination of whether the competing proposers were properly licensed was made by Siver. The School Board's Evaluation Committee, indeed the School Board, itself, played no role in determining the licensing credentials of the proposers while the proposals were under consideration. Under the arrangement between Siver and the School Board, however, the School Board retained the primary responsibility for administering the RFP. The RFP Request for Proposal 97-072S was mailed to 324 vendors (prospective proposers) the same day as its issuance, April 26, 1996. None of the vendors knew the contents of the RFP until it was issued. The RFP sought proposals for seven coverages, each of which was severable from the remainder of the coverages and was allowed to be proposed separately. The scope of the request was described in the RFP as follows: The School Board of Broward County, Florida ... is seeking proposals for various insurance coverages and risk management services. To facilitate distribution of the underwriting data and the requirements for each of the coverages, this consolidated Request for Proposals ... has been prepared. However, each of the coverages is severable and may be proposed separately. The following are included: Boiler & Machinery Excess General and Automobile Liability Excess Workers' Compensation School Leaders Errors & Omissions Crime Including Employee Dishonesty - Faithful Performance, Depositor's Forgery Claim and Risk Management Services (Including Managed Care Services) Statutory Death Benefits Petitioner's Ex. 1, pg. I-1. Since the seven coverages are severable and no proposer had to submit a proposal on all seven coverages, one way of looking at RFP 97-072S is as a consolidated RFP composed of seven, separate proposals, each for a different type of insurance coverage. Of the 324 vendors to whom the RFP was sent, only two, Gallagher, on behalf of United National, and Ranger, through the action of the joint venture, submitted proposals with respect to the Excess GL/AL coverages. Reasons for Using an RFP The School Board, under the auspices of Siver, chose to seek insurance coverage through an RFP rather than an Invitation to Bid, or what is colloquially referred to as a "straight bid," for a number of reasons. As one familiar with RFPs and Invitations to Bid might expect, the School Board and Siver were attracted to the RFP by the increased flexibility it offered in the ultimate product procured in comparison to the potentially less flexible product that would be procured through an invitation to bid. More pertinent to this case, however, Siver chose to use an RFP for the School Board in this case because "as explained ... by the Department of Insurance over the ... years, while there may... [be a] prohibition against any surplus lines agents submitting a straight bid, there would not be a prohibition against a ... [surplus lines] agent responding to a request for proposal " (Tr. 149.) The RFP approach was not chosen, however, in order to avoid any legal requirement or to circumvent the Insurance Code. As explained by Mr. Marshall, the approach was born of hard reality: Id. [O]ne of the primary motivations [for using an RFP rather than an Invitation to Bid] was to allow us [The School Board and Siver] to consider surplus lines companies because of the fact that very often they were the only insurers that would respond on the number of coverages and clients that we were working for. The Insurance Code and the Surplus Lines Law The Insurance Code in Section 624.401, Florida Statutes, requires generally that an insurer be authorized by the Department of Insurance (the "Department,") to transact business in the State of Florida before it does so: (1) No person shall act as an insurer, and no insurer or its agents, attorneys, subscribers, or representatives shall directly or indirectly transact insurance, in this state except as authorized by a subsisting certificate of authority issued to the insurer by the department, except as to such transactions as are expressly otherwise provided for in this code. One place in the code where transactions are "expressly otherwise provided for ...," is in the Surplus Lines Law, Section 626.913 et seq., Florida Statues. The purposes of the law are described as follows: It is declared that the purposes of the Surplus Lines Law are to provide for orderly access for the insuring public of this state to insurers not authorized to transact insurance in this state, through only qualified, licensed, and supervised surplus lines agents resident in this state, for insurance coverages and to the extent thereof not procurable from authorized insurers, who under the laws of this state must meet certain standards as to policy forms and rates, from unwarranted competition by unauthorized insurers who, in the absence of this law, would not be subject to similar requirements; and for other purposes as set forth in this Surplus Lines Law. Section 626.913(2), F.S. Surplus lines insurance is authorized in the first instance only if coverages cannot be procured from authorized insurers: If certain insurance coverages of subjects resident, located, or to be performed in this state cannot be procured from authorized insurers, such coverages, hereinafter designated "surplus lines," may be procured from unauthorized insurers, subject to the following conditions: The insurance must be eligible for export under s. 626.916 or s. 626.917; The insurer must be an eligible surplus lines insurer under s. 626.917 or s. 626.918; The insurance must be so placed through a licensed Florida surplus lines agent; and The other applicable provisions of this Surplus Lines Law must be met. Section 626.915, Florida Statutes, and then only subject to certain other conditions: No insurance coverage shall be eligible for export unless it meets all of the following conditions: The full amount of insurance required must not be procurable, after a diligent effort has been made by the producing agent to do so, from among the insurers authorized to transact and actually writing that kind and class of insurance in this state ... . Surplus lines agents must verify that a diligent effort has been made by requiring a properly documented statement of diligent effort from the retail or producing agent. However, to be in compliance with the diligent effort requirement, the surplus lines agent's reliance must be reasonable under the particular circumstances surrounding the risk. Reasonableness shall be assessed by taking into account factors which include, but are not limited to, a regularly conducted program of verification of the information provided by the retail or producing agent. Declinations must be documented on a risk-by-risk basis. It is not possible to obtain the full amount of insurance required by layering the risk, it is permissible to export the full amount. Section 626.916, F.S. Authorized vs. Unauthorized Insurers Unlike authorized insurers, unauthorized insurers do not have their rates and forms approved by the Department of Insurance, (the "Department.") Similarly, unauthorized insurers are not member of the Florida Insurance Guaranty Association, which guarantees payment of claims if an insurer becomes insolvent. Unauthorized insurers may qualify to transact Florida insurance business under the Surplus Lines Law and so, for purposes of the Surplus Lines Law, be considered "eligible" to transact surplus lines business in Florida. When a Surplus Lines insurer is eligible, Department of Insurance employees refer to the insurer in Surplus Lines terms as "authorized," a term in everyday English that is synonymous with "eligible." But an eligible surplus lines insurer remains an "unauthorized" insurer when compared to an "authorized" insurer for purposes of the Insurance Code and that part of the code known as the Surplus Lines Law. Submission and Review of Proposals Both L.B. Bryan & Company, Alexander & Alexander, Inc., and Benefactor Financial Group, Inc., (the "Joint Venture") and Gallagher submitted timely proposals with regard to Excess GL/AL coverage in response to the RFP. The Joint Venture's proposal was submitted, of course, on behalf of Ranger, an authorized insurer, and Gallagher's was submitted on behalf of United National, an insurer eligible to transact insurance in the State of Florida as a surplus lines insurer but otherwise an unauthorized insurer. The School Board's Insurance Evaluation Committee met on May 30, 1996, to evaluate proposals received pursuant to the RFP. Although briefly discussed by the Evaluation Committee, the issue of proper licensing was not determined independently by the committee. Instead of making that determination, the committee turned to its insurance consultant, Siver. Siver had determined that both proposers, Ranger and United National, were properly licensed for purposes of responding to the RFP and being considered by the committee. Siver communicated that determination to the committee. The committee relied on Siver's determination. Aside from receiving Siver's determination of proper licensing when "briefly discussed" (Tr. 108,) the Evaluation Committee did not address whether either Ranger or United National were properly licensed. Certainly, no issue of whether Ranger should take precedence over United National by virtue that it was an authorized insurer when United National was an unauthorized insurer and a mere eligible Surplus Lines insurer was ever discussed by the committee. In evaluating the proposals, the Committee awarded 73 points to the Gallagher proposal and 69 points to the Ranger proposal. Points were awarded on the basis of three criteria or in three categories: Qualifications (20 points maximum); Scope of Coverages/Services Offered (30 points maximum); and, Points for Projected Costs (50 points maximum.) The Ranger proposal outscored the Gallagher proposal in the "projected cost" category, 50 to 23, but it scored lower in the "qualifications" category, 14 versus 20 for Gallagher, and significantly lower in the "scope of coverages" category, five points versus 30 for Gallagher. The United National coverage was more than twice as costly as Ranger's, a $491,000 annual premium as opposed to Ranger's $226,799, which explains the points awarded in the "projected cost" category. The Gallagher proposal received more points than the Ranger proposal in the "qualifications" category because United National has provided the School Board with Excess GL/AL coverage for a number of years and Ranger has never provided the School Board with such coverage. The Ranger proposal fell so drastically short of the Gallagher proposal in the "scope of coverages/services offered" category primarily because of an athletic participation exclusion appearing in a rider to the specimen policy appearing in its proposal. Ranger had intended to cover athletic participation and the rider was included with the Ranger proposal in error. Ranger notified the School Board of its intent immediately after the tabulations were released. Nonetheless, the Evaluation Committee was never informed of the error and no attempt was made by the School Board to negotiate with Ranger to improve the coverages offered, despite authority in the RFP for the School Board to negotiate with any of the proposers. (The language used in the RFP is "with one or more" of the proposers.) The Ranger proposal also fell short of the Gallagher proposal in the "scope of coverages/service offered" category because the Gallagher proposal was made in several ways. One way was as to only Excess GL/AL coverage. Another way included School Leaders' Errors and Omissions ("E & O") coverage. The E & O coverage was offered by United National in the Gallagher proposal together with the Excess GL/AL coverage in a "combined lines" package, similar to United National coverages already existing for the School Board. Furthermore, the Ranger proposal expressly excluded coverage for Abuse and Molestation, a needed coverage due to the School Board's prior claims history. On June 5, 1996, the Evaluation Committee submitted its recommendations to the School Board's Purchasing Department. With regard to GL/AL coverage, the Evaluation Committee recommended the purchase of the GL/AL/E & O "combined lines" coverage offered by Gallagher through United National. The School Board posted its Proposal Recommendation/Tabulations adopting the recommendation, two days later, on June 7, 1996. Ranger Seeks Redress from the Department Following the School Board's award, Ranger, thinking that it should have received the award under the RFP as the only authorized insurer to submit a proposal for Excess GL/AL coverage, sought redress from the Department. On June 14, 1996, Ranger personnel met with the head of the Department's Surplus Lines Section, Carolyn Daniels, alleging a violation of the Insurance Code's Surplus Lines Law. On June 18, 1996, Ranger reiterated its complaint in writing and asked Ms. Daniels to find a violation that day. On June 24, 1996, Ranger, now through its attorneys, met with Ms. Daniels and her supervisor. Again, on July 4, 1996, Ranger's attorneys wrote to Ms. Daniels, further pleading for her to find a violation and asking for an administrative hearing if Ms. Daniels did not find in favor of the Ranger position. On a fifth attempt, Ranger wrote Ms. Daniels on July 11, 1996, requesting that she adopt Ranger's position. Ms. Daniels reviewed Ranger's five complaints with her supervisor, the Chief of the Bureau of Property and Casualty Solvency and Market Conduct. In a letter dated August 14, 1996, to the School Board's Purchasing Agent, Ms. Daniels announced her determination: I did not find any evidence to indicate that Mr. David L. Marcus of Arthur J. Gallagher & Company or United National Insurance Company violated the Surplus Lines Law in providing a quote for the School Board. Intervenor's Ex. No. 2. Ms. Daniel's determination was based on a number of factors, including the School Board's position in the transaction as an "informed consumer," (Tr. 422-423,) and that the School Board had possessed a United National policy for 13 years. But, the determination was primarily based on the fact that Gallagher had received three declinations from authorized insurers to provide Excess GL/AL coverage and so had performed that which was required prior to deciding that the coverage was eligible for export and provision by a surplus lines insurer: due diligence. Due Diligence Section 626.916(1)(a), Florida Statutes, provides, [n]o insurance coverage shall be eligible for export unless it meets ... the following condition[]: ... [t]he full amount of insurance required must not be procurable, after a diligent effort has been made by the producing agent to do so, from among the insurers authorized to transact and actually writing that kind and class of insurance in this state, and the amount of insurance exported shall be only the excess over the amount so procurable from authorized insurers. (e.s.) The statute goes on to require that the diligent effort, "be reasonable under the particular circumstances surrounding the export of that particular risk." Reasonableness is assessed by taking into account factors which include, but are not limited to, a regularly conducted program of verification of the information provided by the retail or producing agent. Declinations must be documented on a risk-by- risk basis. Section 626.916(1)(a), F.S. "'Diligent effort' means seeking coverage from and having been rejected by at least three authorized insurers currently writing this type of coverage and documenting these rejections." Section 626.914(4), F.S. Under this definition, the "producing agent should contact at least three companies that are actually writing the types of clients and the business in the area [that they are] wanting to write." (Tr. 268.) A specific form to help insurance agents document their three rejections is adopted by Department rule. The rule provides: When placing coverage with an eligible surplus lines insurer, the surplus lines agent must verify that a diligent effort has been made by requiring from the retail or producing agent a properly documented statement of diligent effort on form DI4-1153 (7/94), "Statement of Diligent Effort", which is hereby adopted and incorporated by reference. Rule 4J-5.003(1), F.A.C. Fully aware of the requirement for documentation of diligent effort to find authorized insurers, and cognizant that it would be unlikely that an authorized insurer could be found based on experience, Gallagher began soliciting proposals for coverage in the middle of April, 1996, several weeks before the School Board had issued the RFP. In fact, at the time that Gallagher started soliciting bids, the School Board had not yet assembled or distributed the underwriting data needed by bidders. Nonetheless, with good reason based on experience, Gallagher expected that the School Board would seek a "combined lines" package of GL/AL/E & O coverages like the School Board then received through United National, and that it would be unlikely that an authorized insurer would step forward to propose coverage. Gallagher, therefore, used the policy form current in April of 1996, that is the form providing Excess GL/AL/E & O coverage in a "combined lines" package, "as an example of what the School Board had been looking for this type of program and seeking a program similar to that and similar in coverage." (Tr. 242.) But it also sought Excess GL/AL without combination with E & O coverage. As Mr. Marcus testified, when seeking coverage from authorized insurers beginning in April of 1996, Gallagher "would be looking at a variety of different ways, whether they were package or not." (Tr. 243.) One authorized insurer, Zurich-American, declined to quote because it could not offer a combined line SIR program (a package of excess general liability and excess auto liability coverages) as requested by the RFP. Furthermore, the School Board risk was too large for Zurich-American to handle. A second authorized insurer, American International Group, declined to quote due to the School Board's adverse loss experience. A third authorized insurer, APEX/Great American, declined to provide a quote to Gallagher due to the large size of the School Board account. The responses of these three authorized insurers were listed in a Statement of Diligent Effort provided to Ms. Daniels, which she considered in determining that Gallagher and Mr. Marcus had committed no violation of the Surplus Lines Law. Gallagher also provided Ms. Daniels with a second Statement of Diligent Effort. The statement documented the attempt to attract quotes by adding a school leaders errors and omission component to the Excess GL/AL coverage. It, too, was used by Ms. Daniels in making her determination of no violation of the Surplus Lines Law by Gallagher. The same three insurers refused to quote for the "combined lines" program. Attempts by other Authorized Insurers Gallagher requested that any responses to its requests for quotes be submitted by May 10, 1996, so that it could prepare and submit its proposal by the RFP's deadline for submission of original proposals by all vendors, 2:00 p.m. May 16, 1996. One insurer, Discover Re/USF&G attempted to submit a quote on May 15, 1996, one day before the RFP deadline but five days after May 10. By then, Gallagher had already started printing its 625 page proposal. Furthermore, the company failed to provide the required policy forms until the day after the School Board's deadline for filing proposals. Coregis Insurance Company offered coverage of up to $700,000 for each claim and for each occurrence, but like Discover Re/USF&G, failed to provide the required policy forms until after the RFP deadline. Furthermore, definitive coverage under the Coregis policy would only be provided on the condition that the Florida Legislature pass a Legislative Claims bill, a limiting condition not authorized in the RFP or requested by Gallagher. American Home Assurance Company never responded to Gallagher with the School Board's required quote or policy forms. Rather, the company merely provided an "indication" that the company declined to provide a quote. An "indication" consists of an approximate premium rate, without any terms or conditions. A "quote," on the other hand, includes the terms and conditions of a policy. The Department places with the producing agent the responsibility of determining whether an insurer's communication constitutes and "indication" or a "quote." An agent, according to Ms. Daniels, can only violate the Surplus Lines Law if the agent receives a reliable quote. Gallagher even requested a quote from Ranger, despite never having been appointed to transact insurance on its behalf. But Ranger declined. In response to a request by Gallagher's minority business partner, McKinley Financial Services, Ranger, through E. Michael Hoke on American E & S letterhead, wrote in a letter dated May 6, 1996, "[w]e have received a prior submission on this account so we are returning the attached." Intervenor's Ex. No. 7. The Petition Ranger's petition for formal administrative hearing is the letter dated June 19, 1996, to the Director of Purchasing for the School Board under the signature of E. Michael Hoke, CPCU, Assistant Vice President of AES/Ranger Insurance Company. The letter asks its readers to "bear[] in mind we are not attorneys," p. 1 of the letter, before it outlines three protest issues. The third protest issue is the one about which Ms. Daniels made her determination that no violation of the statute had been committed by Gallagher or its employees: "3) Florida Statute 626.901 (Representing or aiding unauthorized insurer prohibited)." The other two issues deal not with the propriety of Gallagher's actions but the legality of the School Board's award to an unauthorized insurer, United National, when coverage was available from an authorized insurer, Ranger: Florida Statute 626.913 (Surplus Lines Law). . . Our Position * * * Ranger Insurance Company is an admitted authorized insurer ... Its proposal for excess general and auto liability is proof that the Board requested coverage was procurable. United National Insurance Company is an unauthorized insurer under the laws of the State of Florida ... . The United National Insurance Company proposal and/or its offer to extend it's current policies appear to us as "unwarranted competition." Ranger Insurance Company is protected from unwarranted competition from United National Insurance Company in accordance with the Florida Statute 626.913. Florida Statute 626.913 (Eligibility for Export) ... Our Position * * * Ranger Insurance Company is an admitted authorized insurer under the laws of the State of Florida. ... It's proposal for excess general and auto liability is proof that the Board requested amounts were available. The proposal and/or contract extensions offered by United National are for the full amount of coverage sought and not excess over the amount procurable from Ranger, an authorized insurer. The petition, therefore, set in issue not just whether Gallagher acted illegally but whether the School Board acted illegally when it made the award to United National, an unauthorized insurer when Ranger, an authorized insurer, had also submitted a proposal. Extension As soon as the School Board was made aware of the Ranger protest, it extended the existing insurance contracts procured under RFP 92-080S, awarded approximately five years earlier. The extension was on a month-to-month basis until resolution of the protest. The extension was necessary to avoid a lapse in the School Board's coverage during this proceeding.
Recommendation Based on the foregoing, it is, hereby, RECOMMENDED: That the award to United National under the Gallagher proposal in response to RFP 97-072S be rescinded. DONE AND ENTERED this 28th day of January, 1997, in Tallahassee, Florida. DAVID M. MALONEY Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (904) 488-9675 SUNCOM 278-9675 Fax Filing (904) 921-6847 Filed with the Clerk of the Division of Administrative Hearings this 28th day of January, 1997. COPIES FURNISHED: Paul R. Ezatoff, Esquire Christopher B. Lunny, Esquire Katz, Kutter, Haigler, Alderman, Marks, Bryant & Yon, P.A. Post Office Box 1877 Tallahassee, Florida 32302-1877 Edward J. Marko, Esquire Robert Paul Vignola, Esquire Office of the School Board Attorney K.C. Wright Administrative Building 600 Southeast Third Avenue - 11th Floor Fort Lauderdale, Florida 33301 A. Kenneth Levine, Esquire Blank, Risby and Meenan, P.A. Post Office Box 11068 Tallahassee, Florida 32302-3068 Dr. Frank Petruzielo, Superintendent Broward County School Board 600 Southeast Third Avenue Fort Lauderdale, Florida 33301-3125
The Issue Should discipline be imposed by Petitioner against Respondent's insurance agent licenses, life including variable annuity (2-14), and general lines (2-20), pursuant to Chapters 624 and 626, Florida Statutes (2004)?
Findings Of Fact Stipulated Facts Respondent is licensed by Petitioner as a life including variable annuity (2-14) and a general lines (2-20) insurance agent and has been issued license D029506. During the time referenced in the Administrative Complaint, Respondent was licensed as a customer representative (4-40) and a life including variable annuity (2-14) agent. The Department has jurisdiction over Respondent's insurance licenses and appointments. At all times relevant to the dates and occurrences referenced in the Administrative Complaint, Respondent was employed or affiliated with Direct General Insurance Agency, Inc., a Tennessee corporation, doing business in Florida as Florida No-Fault Insurance Agency (Cash Register). Additional Facts: At times relevant to the case Respondent held his life including variable annuity license (2-14) under an appointment with Direct Life Insurance Company. At times relevant to the case Respondent had a customer representative license (4-40) under appointment with Direct General Insurance Agency, Inc. At present Respondent continues to hold the life including variable annuity license (2-14) under an appointment with Direct General Life Insurance Company. At present he has a general lines license property and casualty license (2-20) under appointments with Direct General Insurance Company and American Bankers Insurance Company of Florida. On February 8, 2005, Brandi Dean called Cash Register to receive a quote for the purchase of basic automobile insurance coverage. She was provided a quote at that time. On February 8, 2005, Brandi Dean, went to the Cash Register to purchase basic automobile insurance coverage. She had done business with the insurance agency before. Her policy with Direct General Insurance Company was Policy No. FLCR162714439, as reflected in Petitioner's Exhibit numbered 15, with a scan cover sheet entitled "Renewal Auto." On February 8, 2005, Ms. Dean purchased automobile insurance coverage that would be effective from February 10, 2005 through February 10, 2006. She was charged $316 for property damage liability (PD) and $216 for basic injury protection (PIP) for a total of $532, with a $25 policy fee. The application information within the exhibit reflects the customer's name, signature, and initials in various places. On February 8, 2005, Ms. Dean was provided another form referred to as an Explanation of Policies, Coverages and Cost Breakdown (including non-insurance products). Petitioner's Exhibit numbered 16. She signed that document. It reflected the auto policy coverage information. It also set forth under a category referred to as optional policies, the purchase of Lloyd's Accident Medical Protection Plan for $110. Petitioner's Exhibit numbered 17 is additional information concerning the Accident Medical Protection Plan application by the customer signed by her. It details a $110 annual premium for individual coverage of $1,000 medical expense, and 125/day-365 day hospital coverage. Within that same exhibit there is a form signed by the customer titled 100% certain underwriters @ Lloyd's/London (DB/33) Accident Medical Protection Plan. This reflects $110 cost, $125 daily coverage and the total annual benefit of $45,625. Petitioner's Exhibit numbered 18 is a scan cover sheet entitled Renewal Finance with Premium Finance Agreement Information in association with Direct General Financial Services, Inc., in which the customer Ms. Dean paid $69.63 down, financed $599.82, with a total price of $748.61 when considering the annual percentage rate for financing. This document in totality was initialed and signed by Ms. Dean. Ms. Dean was provided a receipt for her cash down-payment on the purchase. Petitioner's Exhibit numbered 14. Petitioner's Exhibit numbered 19 is an Insurance Premium Financing Disclosure Form signed by the customer, reflecting the cost of the automobile insurance and the hospital indemnity plan, the amount of total cost and includes the policy fee for the automobile insurance, document stamp tax, the down payment, and the total amount financed $599.82. Ms. Dean was left with the impression that she had only purchased automobile insurance. She believed that the monthly payments for the financing were only in relation to automobile insurance. Ms. Dean does not recall having the accidental medical protection plan explained to her as to its terms. She does not recall anyone explaining that it was an optional plan unassociated with automobile insurance. She told the agent that she dealt with that she was only interested in purchasing the state-required automobile insurance coverage. Had she realized that she was purchasing optional accident medical protection, not part of the automobile insurance purchase, she would have declined the optional policy. Ms. Dean does recall that the agent she dealt with made some brief explanation about the documents involved in the transaction but not every page was explained. Ms. Dean recalls explanations about the automobile policy but nothing about optional coverage. Ms. Dean glanced over the documents but did not read every word included in the documents. Ms. Dean does not recall whom she dealt with on February 8, 2005. Otherwise, the record does not reflect the person who sold the automobile insurance and accidental medical protection plan to her at that time. At times relevant, Denise Daley Turnbull worked at Cash Register. She was a customer representative license (4- 40), appointed by Direct General Insurance Agency, Inc. On March 24, 2005, William L. Green, Jr., came to Cash Register to purchase automobile insurance. He dealt with Ms. Turnbull. He made a $170.02 down payment for his purchases, as reflected in Petitioner's Exhibit numbered 4, which is a receipt provided to Mr. Green. A scan cover sheet related to an auto policy purchased, together with the application information for the automobile insurance purchased through Direct General Insurance Company is found within Petitioner's Exhibit numbered Mr. Green purchased automobile insurance for property damage liability (PD) in the amount of $590 and basic personal injury protection (PIP) for $370, with a $25 policy fee, totaling $985. He signed and initialed parts of the forms in association with the automobile insurance. Ms. Turnbull also signed forms in association with the automobile insurance. Petitioner's Exhibit numbered 6 is an explanation of policies, coverages and cost breakdown (including non-insurance products) reflecting the overall purchases by Mr. Green. He signed that form. It relates the automobile insurance purchase. It also relates the purchase of an American Bankers Travel Protection Plan for $60, a Lloyd's Accidental Medical Protection Plan for $110 and life insurance of $98. With fees and other costs the total purchase was $1270.99. Of relevance here, Petitioner's Exhibit numbered 9 is a scan cover sheet in relation to the life policy signed by Ms. Turnbull. It also includes application information to Direct Life Insurance Company with certain questions reflected that were initialed by the purchaser. Mr. Green signed the application. Respondent also signed the application, as well as printing his name and insurance license number on the form. Petitioner's Exhibit numbered 10 is a scan cover sheet for a New Finance with Direct General Financial Services, Inc., which reflects a $162.03 down-payment, $1105.17 in amount financed, with a $129 finance charge. The total sales price for all purchases was $1396.20, to include the life insurance with Direct Life Insurance Company. Mr. Green signed the premium finance agreement. Petitioner's Exhibit numbered 11 is a copy of the Insurance Premium Finance Disclosure Form signed by Mr. Green. Ms. Turnbull has no recollection of the Respondent's participation in the sale of the life insurance policy to Mr. Green. She does recall that Respondent was in the insurance agency office when the life insurance was purchased. She recognizes Respondent's signature in association with the life insurance application and purchase. Mr. Green had no intention of purchasing life insurance when he went to Cash Register on March 24, 2005. He recalls dealing with Ms. Turnbull. No one else sat with Mr. Green and explained policy information to him. Specifically, Respondent did not sit with Mr. Green and offer explanations about the policy. Mr. Green did not see Respondent sit with Ms. Turnbull and Respondent remained silent while she sold the life policy. Had Mr. Green realized that he was purchasing life insurance he would have declined the opportunity.
Recommendation Upon consideration of the facts found and the conclusions of law reached, it is RECOMMENDED: That Petitioner enter a final order finding a violation under Count I as set forth in the conclusions of law, dismissing Count II and suspending Respondent's license for six months for the violation. DONE AND ENTERED this 7th day of May, 2007, in Tallahassee, Leon County, Florida. S CHARLES C. ADAMS 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 7th day of May, 2007. COPIES FURNISHED: William Gautier Kitchen, Esquire Gregg Marr, Esquire Department of Financial Services Division of Legal Services 200 East Gaines Street Tallahassee, Florida 32399-0333 L. Michael Billmeier, Jr., Esquire Galloway, Brennan and Billmeier, P.A. 240 East Fifth Avenue Tallahassee, Florida 32303 Michael L. Rothschild, Esquire Larry S. Davis, P.A. 1926 Harrison Street Hollywood, Florida 33020 Honorable Alex Sink Chief Financial Officer Department of Financial Services The Capitol, Level 11 Tallahassee, Florida 32399-0300 Daniel Sumner, General Counsel Department of Financial Services The Capitol, Level 11 Tallahassee, Florida 32399-0307
The Issue The issue is whether Respondent is guilty of transacting insurance business in violation of Sections 626.611 and 626.621, Florida Statutes, and, if so, what penalty should be imposed.
Findings Of Fact Respondent is licensed as a general lines insurance agent, holding license number A274461. He has been so licensed for over 20 years. The record discloses no previous discipline. Respondent bought L.N.V., Inc., d/b/a Federal Insurance (Federal Insurance), when he first became licensed in Florida. Respondent has retained ownership control of Federal Insurance since its purchase, except for a one-year period starting in June 2002, when Federal Insurance sold its assets to an unrelated party. However, after the party defaulted on its purchase obligations, Federal Insurance recovered the assets. Prior to June 2002, Respondent was, at all material times, the sole shareholder, the president, and a director of Federal Insurance. The acts and omissions alleged in Counts I, II, IV, and VII took place during this time period. After June 2003, Respondent's formal roles with Federal Insurance became less clear, although he continued to run the daily operations of the business and control the corporation. At minimum, though, Respondent was the Agency Owner from May 20, 2003, through November 7, 2003, and November 25, 2003, through December 29, 2003, according to the Agency Location Report, which is part of Petitioner Exhibit 2. The acts and omissions alleged in Counts V and VI took place, at least in part, during these time periods. Without doubt, regardless of his formal roles after June 2003, Respondent personally committed the acts and omissions that are the subject of Counts V and VI. Michael Smith is a licensed property and casualty insurance agent. He is also licensed to sell life and health insurance. He has held insurance licenses since 1983. Mr. Smith has been employed by Federal Insurance twice: from the late 1980s to the mid-1990s and 1999-2001. At all material times, Nicholas Polyviou, d/b/a Polyviou Corporation, was a self-employed manufacturer of office furniture. Mr. Polyviou did his insurance business at Federal Insurance where he dealt with Michael Smith. On October 13, 1999, Mr. Polyviou visited Michael Smith at Federal Insurance to purchase workers' compensation and liability insurance. Mr. Polyviou completed an application for workers' compensation insurance and delivered four Notices of Election to be Exempt, which had already been filled out and signed by Mr. Polyviou and the other three employees who were the subjects of the notices. The notices represented elections by qualified persons not to be covered by workers' compensation. To process the Notices of Election to Be Exempt and file them with the Division of Workers' Compensation, Federal Insurance charged Mr. Polyviou $75 per form, for a total of $300. The $75 fee per form consisted of a $50 fee charged by the Division of Workers' Compensation to file the notices and a $25 fee charged by Federal Insurance to process the notices and send them to the Division of Workers' Compensation. However, Federal Insurance never sent these notices to the Division of Workers' Compensation. Eventually, following an audit, Mr. Polyviou was assessed about $20,000 in unpaid workers' compensation premiums for these four individuals. Mr. Polyviou's injury was considerably less than $20,000 because the other three employees were ineligible to elect out of coverage in the first place. At all material times, David Wagner was self-employed in landscape maintenance. On August 21, 2000, Mr. Wagner visited Mr. Smith at Federal Insurance to purchase workers' compensation insurance. Mr. Wagner completed an application for workers' compensation insurance and delivered a Notice of Election to be Exempt, which had already been filled out and signed by Mr. Wagner. Respondent notarized the Notice of Election to be Exempt. To process the Notice of Election to Be Exempt and file them with the Division of Workers' Compensation, Federal Insurance charged Mr. Wagner $75. The $75 fee consisted of a $50 fee charged by the Division of Workers' Compensation to file the notice and a $25 fee charged by Federal Insurance to file the notice. However, Federal Insurance never filed the notice with the Division of Workers' Compensation. Eventually, an audit uncovered the absence of a filed notice, but the workers' compensation insurer and Petitioner were able to give effect to the notice, as of the date that it should have been filed, so that Mr. Wagner was not subject to any fines, fees, or penalties. Mr. Smith and other Federal Insurance employees described the office procedures at the time of the Polyviou and Wagner transactions. After completing the applications and notices and collecting the customers' checks, Mr. Smith typically placed the documents and checks in a basket where employees not performing other tasks would process the notices and payments, prepare checks for deposit, prepare money orders, and mail completed packages to the Division of Workers' Compensation. Because the Division of Workers' Compensation required the payment of filing fees by money order, not corporate check, Federal Insurance would not know if the Division of Workers' Compensation had received a package. On August 28, 2000--one week after the Wagner transaction--Evelyn Grenyer visited Mr. Smith at Federal Insurance to purchase renter's insurance. She informed Mr. Smith that all correspondence had to be mailed to a post office box, not her street address. Mr. Smith agreed to do so. Ms. Grenyer paid Federal Insurance a premium of $242.17. Over the next several days, Mr. Smith called Ms. Grenyer with questions about her residence, but he consistently assured her that she had insurance. In May 2001, Ms. Grenyer's home was robbed of property worth $2000. When she called Federal Insurance, she learned that she had not been insured because they had been unable to find her residence. Someone at Federal Insurance explained that they had sent mail to her residence, rather than, as instructed, her post office box, and the mail had been returned. Mr. Smith testified that Federal Insurance submitted the premium of $202.64 to the renter's insurance company. He thought that the difference may have been a charge to inspect the house. When the insurer required additional information, Federal Insurance attempted to contact Ms. Grenyer through her street address, rather than, as instructed, by her post office box. When she did not respond, the insurer canceled coverage, as of October 18, 2000, and refunded $149.53 of the premium to Federal Insurance, by check dated November 14, 2000. Federal Insurance deposited the check to its account. Only after Ms. Grenyer contacted Federal Insurance about the loss did it issue a check, in the same amount and dated May 10, 2001, to Ms. Grenyer. Obviously, no one at Federal Insurance visited the residence or tried calling Ms. Grenyer, whose phone number had not changed for five years and was in the records of Federal Insurance. Ms. Grenyer never recovered any insurance proceeds for the $2000 loss that she suffered. From 1995-1998, Federal Insurance employed Juan C. Montoya as an insurance agent. On January 22, 1998, Federal Insurance designated Mr. Montoya as the primary agent of Federal Insurance. In May 1998, Mr. Montoya's employment with Federal Insurance terminated. Federal Insurance failed to designate a new primary agent until July 9, 2001. For nearly three years, Federal Insurance operated without a designated primary agent. A few months after selling the insurance business, Respondent filed a notice with Petitioner, on September 25, 2002, identifying JEMS Services, 4207 Lake Avenue, West Palm Beach, as his new principal business address. When filing the notice, Respondent knew that he did not intend to transact insurance business at the JEMS Services address. In fact, Respondent used the JEMS Services address without the consent of the insurance agent conducting insurance business at that address. JEMS Services is an insurance agency owned by Janet Travieso-Otero, a friend of Respondent and his wife. Ms. Travieso-Otero never gave Respondent permission to use her address as his principal business address. Respondent has never been employed by JEMS Services, nor has he ever transacted business from this address, which has never been the principal business address of Respondent or any insurance business that he has owned or operated. Respondent accused Ms. Travieso-Otero of lying when she testified that she had never told Respondent that he could use her business as his principal place of business. To the contrary, Respondent is lying, and, even if he were not lying, Respondent intentionally provided Petitioner an incorrect business address. With Mr. Montoya and Ms. Travieso-Otero, Respondent has used friends and business associates, without their knowledge, to satisfy regulatory requirements. At all times during which Mr. Montoya was designated as the primary agent, including while he was employed by Federal Insurance, Respondent was the primary agent because Respondent, not Mr. Montoya, was responsible for the supervision of the insurance agents and their hiring and firing. The common thread in both situations is that Respondent, not someone on his behalf, has intentionally filed false information with Petitioner. Petitioner's expert witness, Wilford Ghioto, testified about Respondent's obligations. Mr. Ghioto, who has considerable relevant experience in the retail property-and- casualty insurance business, described the procedures that his office followed when processing and filing Notices of Election to be Exempt from workers' compensation insurance coverage. In particular, the insurance agent, but not the supervising agent, was responsible to ensure that the completed package was mailed to the proper location, and the supervising agent, if aware of any problems with an insurance agent, opened all of the insurance agent's mail to discover any problems. The supervising agent also ensured that the office routinely ran account receivable reports to find any money due an insured.
Recommendation It is RECOMMENDED that the Department of Financial Services enter a final order dismissing Counts I-IV, finding Respondent guilty of Counts V-VII, imposing an administrative fine of $1250, and suspending Respondent's license for six months. DONE AND ENTERED this 20th day of July, 2004, in Tallahassee, Leon County, Florida. ROBERT E. MEALE Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 20th day of July, 2004. COPIES FURNISHED: Gregg S. Marr David J. Busch Division of Legal Services Department of Financial Services 612 Larson Building 200 East Gaines Street Tallahassee, Florida 32399-0333 Orrin R. Beilly Law Office of Orrin R. Beilly Citizens Building, Suite 705 105 South Narcissus Avenue West Palm Beach, Florida 33401 Honorable Tom Gallagher Chief Financial Officer Department of Financial Services The Capital, Plaza Level 11 Tallahassee, Florida 32399-0300 Pete Dunbar, General Counsel Department of Financial Services The Capital, Plaza Level 11 Tallahassee, Florida 32399-0300
The Issue Whether the Petitioner's application of January 11, 1991, for examination as a general lines agent should be granted.
Findings Of Fact Petitioner Paul L. Kornya was licensed in 1974 as a general lines insurance agent in the State of Florida. Prior to 1984, Respondent Department of Insurance had taken no formal disciplinary action against the Petitioner. In 1983, while licensed as an insurance agent and employed in the capacity of office manager for the Milton Carpenter Insurance Agency, Petitioner established a demand deposit account in the name of "Atlantic Association Insurance" and listed himself as the sole signatory and beneficiary on the account. Petitioner thereafter wrote four unauthorized checks on the Milton Carpenter Agency Account totaling $47,132.14 made payable to Atlantic Association Insurance and deposited them into his demand deposit account. In order to conceal his activity, the Petitioner altered the payee of the checks. In a prior administrative case (Case No. 84-L-4085F), Petitioner admitted misappropriating and converting the funds. In 1983, while licensed as an insurance agent and employed in the capacity of office manager for the Milton Carpenter Insurance Agency, Petitioner wrote two unauthorized checks on the Milton Carpenter Agency Account totaling $3,455 made payable to Blinder, Robinson and Co., Inc., Investment Bankers. In order to conceal his activity, the Petitioner listed an agency account code designated for miscellaneous companies on said checks. In a prior administrative case (Case No. 84-L- 4085F), Petitioner admitted misappropriating and converting the funds which were used for Petitioner's personal stock purchases. In 1984, a judgement in the amount of $52,013.35 was entered against Petitioner in the case styled Milton Carpenter Insurance, Inc., a Florida Corporation, and Cincinnati Insurance Company vs. Paul L. Kornya, Case No. 84-3235 CA(L)A, Fifteenth Judicial Circuit Court, Palm Beach County, Florida. On October 31, 1985, the Department entered a Final Order revoking Petitioner's license qualifications and eligibility for licensure for a period of two years, based upon the misappropriation and conversion of said funds. By application signed December 16, 1987 and filed December 28, 1987, Petitioner submitted an application for examination as a general lines insurance agent. By Insurance Commissioner Bill Gunter's letter to the Petitioner of February 29, 1988, the Department requested that the Petitioner submit certain certificates of employment to verify his prior experience. The letter stated that, "[t]o qualify for this examination through experience you must have completed within the past 4 years, at least 1 year of substantially full-time responsible duties as the bona fide employee of an agent or insurer. Your duties during this time must have been in all lines of property, casualty, surety, health and marine insurance. ... One certificate should be completed by you and the other by your employer." The Petitioner claims to have submitted said employment certificates shortly following the Department's request. However, the Department's files do not contain the documents or any other response to the letter, and there is no evidence beyond Petitioner's testimony to support the claim. By letter of March 17, 1988, Department representative Franklin Thompson again requested the experience information cited in the February 29 letter or in the alternative, that Petitioner submit proof that a course of education had been completed. The letter further stated that "we will need a statement from Milton Carpenter Insurance Inc. Agency of Belle Glade, Florida stating that any and all indebtedness you may have had relative to their firm has been satisfied". Both the February 29 and March 17 letters provided that failure to file the information within 30 days from the date of each letter is grounds for denial of the application. Three months passed following the March 17 letter to the Petitioner. According to the records of the Department, no response to either letter was received. On June 17, 1988, the Petitioner's December 1987 application was closed by the Department based upon the failure of Petitioner to submit the previously requested information. By letter of June 23, 1988, the Petitioner advised the Department that the indebtedness was not to the Milton Carpenter Insurance Agency, but was to Cincinnati Insurance Company, which had insured the Carpenter agency against such losses. The letter further stated that approximately $5,000 had been repaid to the Cincinnati Insurance Company. By letter of August 3, 1988, Department representative Thompson wrote, "[t]he information you have furnished has been thoroughly reviewed. It appears that your indebtedness with Milton Carpenter Insurance has been assigned to Cincinnati Insurance Company. Please request that Cincinnati Insurance Company furnish us with a statement indicating that all of your indebtedness to their company has been satisfied". The letter stated that failure to respond within 30 days from the date of the letter was grounds for denial of the application. The evidence does not explain the reason for Mr. Thompson's letter of August 3, 1988. Given the June 17 closure of the pending application based upon the Petitioner's failure to supply additional information, the information furnished apparently consisted of the Petitioner's untimely filed letter of June 23. As of August 3, no pending application existed. In any event, the Petitioner did not respond to the August 3 request. By second application signed October 31, 1989, and filed November 3, 1989, Petitioner submitted an application for examination as a general lines insurance agent. By undated letter, Department representative Thompson again requested Petitioner to submit either certificates of employment to verify his prior experience or proof of completion of certain educational requirements, and further requested a reply to the letter of August 3, 1988 seeking statement from Cincinnati Insurance Company indicating that "all of your indebtedness to their company has been satisfied". Again the letter provides that failure to furnish the requested information within 30 days would result in the file being closed. 1/ The Petitioner, subsequent to the undated letter and prior to February 2, 1990, submitted said certificates of employment. Early in 1990, the Petitioner's application file was assigned to Department representative, Patricia Lehman. On February 2, 1990, Ms. Lehman informed that Petitioner that his certificates of employment were not acceptable, and that he would be required to complete a 240 hour educational requirement. Further, Ms. Lehman's letter provided that, "[i]n addition, you will need to furnish us with a certified letter from Cincinnati Insurance Company that you have made full restitution or a certified copy of the written agreement between you and the party(s) involved that you are making restitution satisfactory to all parties concerned. The information you sent to us is not certified and reflects no signatures". Beginning February 26, 1990, Mr. Kornya took and completed the 240 hour insurance course as identified in the Department's previous communications. The $595 course met for six weeks, five days each week, from 8:00 a.m. to 5:00 p.m. On September 17, 1990, the pending application was closed by the Respondent based upon the failure of Petitioner to submit the previously requested information. There is no evidence that Petitioner submitted evidence of completing the educational requirement. On or about January 8, 1991, Petitioner entered into an restitution agreement with Cincinnati Insurance Company setting forth a payment schedule which requires that Petitioner make a payment of $300 each month to the Cincinnati Insurance Company in order to eventually satisfy the entire $52,013.35 judgement against him. By application signed January 11, 1991, and filed January 16, 1991, Petitioner submitted an application for examination as a general lines agent. By memorandum of February 18, 1991, to her superior, Bob Stewart, Ms. Lehman recommended that the Petitioner's application be denied. Specifically, her memo provides as follows: Mr. Kornya's license qualification and eligibility for licensure were revoked by the Department in 1985 for the mishandling of funds in a fiduciary capacity. It does not appear Mr. Kornya attempted to make restitution until the signed Agreement in 1991. He has demonstrated lack of fitness and trustworthiness to engage in the business of insurance. Therefore pursuant to Sections 626.611(1) (7) , [sic] 626.641(2) and 626.731(1), I recommend his application be denied. Although Ms. Lehman's memo states that "[i]t does not appear Mr. Kornya attempted to make restitution until the signed Agreement in 1991", prior to the January 8, 1991 execution of the restitution agreement, the Petitioner had paid $12,237.94 to Cincinnati Insurance Company realized from the sale of vehicles and real estate. The executed copy of the restitution agreement reflects that such funds were paid, although the agreement fails to indicate when the payment was made. The payment was applied towards interest which had accumulated on the judgement, not towards the $52,013.35 principle judgement amount. At the time of the hearing, the restitution payments were current (although Petitioner did not make the $300 payment due in April, but paid $600 in May.) As of the date of hearing, approximately $49,913 remained to be paid to Cincinnati Insurance Company to satisfy the judgement. Although at the time of the hearing, a letter allegedly from Cincinnati Insurance Company indicated that they had not received documentation of Petitioner's compliance with paragraph five of the restitution agreement (a requirement that Petitioner purchase a life insurance policy naming the insurer as irrevocable beneficiary), said policy was purchased on January 9, 1991. By letter of March 1, 1991, the Department denied the application, based on an application of the statutory sections cited in Ms. Lehman's memo. On June 21, 1991, the Department issued an amended letter of denial. 2/ In the amended letter of denial, the Department cites the prior misappropriation of funds, the unsatisfied judgement, and the 1985 revocation of licensure and eligibility for licensure, which "circumstances surrounding that revocation still exist". The letter cites Sections 626.611(1), (4), (7), (9), (10) and (13), section 626.641(2), and section 626.731(1) Florida Statutes, as the statutory basis for the denial. The evidence fails to establish that any representative of the Department of Insurance, at any time, informed or assured the Petitioner that, upon his completion of the course of education and upon the execution of the restitution agreement between Cincinnati Insurance Company and the Petitioner, his application for examination for licensure as a general lines insurance agent would be approved. The Petitioner has been acquainted with his current employer, Samuel Jokich, for approximately six years. Mr. Jokich employs the Petitioner as a "Colorado Prime" freezer beef salesman. According to Mr. Jokich, the Petitioner is "extremely trustworthy" and of good character. The Petitioner had not disclosed to Mr. Jokich, and Mr. Jokich was not otherwise aware, that the Petitioner had taken approximately $52,000 from the Milton Carpenter Insurance Agency. Mr. Jeffrey Hooker, an independent insurance agent in Belle Glade and childhood friend of the Petitioner's, is aware of the Petitioner's misappropriation and conversion of approximately $52,000 from the Milton Carpenter Insurance Agency. However, Mr. Hooker stated that he would trust the Petitioner and "try to help him any way I could". Mr. Hooker desires to become partners with the Petitioner in a proposed insurance agency in Ft. Myers. Mr. Kenneth Snyder, a field representative for CNA Insurance Company, has known the Petitioner for approximately eight years. He believes the Petitioner to be of "good character" with "solid morals". Although Mr. Snyder was aware that the Petitioner had taken some funds from the Milton Carpenter Insurance Agency, he was unaware of the amount of said funds. Mr. Snyder stated that he would be willing to enter into a business relationship were the Petitioner to become licensed as a general lines agent.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is hereby RECOMMENDED that the Department of Insurance enter a Final Order denying the application of Paul L. Kornya to sit for examination for licensure as a general lines insurance agent. DONE and RECOMMENDED this 23rd day of January, 1992, in Tallahassee, Florida. WILLIAM F. QUATTLEBAUM Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, FL 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 23rd day of January, 1992.
